Mankiw Reality-Disconnect of the Day

From an outpost on the narrow edge of the fever swamp:

Woodward seems to believe that if we had a President more like Bill Clinton, a fiscal deal could have been struck. President Obama is described as distainful of schmoozing with other pols, as mishandling the negotiation process, and as unwilling to move sufficiently toward the political center to get a deal done. One gets the sense that the Democratic President who signed the 1996 welfare reform would have more easily reached a compromise with House Republicans.
This story brought to my mind recent research by Baker, Bloom, and Davis, which suggests that policy uncertainty has impeded the economic recovery. If Baker et al. are right that uncertainty depresses the economy, and if Woodward is right that the uncertainty we now face with the upcoming "fiscal cliff" is attributable mostly to the inability of Barack Obama to work with Congress, then the implication is clear: The meagerness of this recovery is not simply a hangover from a financial crisis, but rather a reflection of a fundamental political failure. The price of politics, indeed. [link and emphasis added]

There are several obvious rebuttals to this idea; my favorite comes to us via the Heritage Foundation. Take it away, Senator:

If you didn't immediately recognize him, that was Senator McConnell of Kentucky, the Minority Leader. That these people are continually reelected is testament to the validity of Jay Gould's Law.

Relentless Decency

Paul Krugman:

Macroeconomic Morality 

A brief postscript to today’s column: contrary to what some people may think, I don’t regard anyone who disagrees with me as necessarily a mendacious idiot. Economics is hard, and people will disagree. Sometimes people will give advice with the best of intentions that turns out, in hindsight, to have been disastrous; that’s a tragedy but not a sin.

But here’s what is indeed a sin: choosing your position based on what is personally convenient.

I may make jokes along the way – I kind of need to in order to stay sane – but the stuff I write about is extremely serious; there’s a vast human tragedy taking place, and anyone who has the ear of the public has a duty to make a good-faith effort to get it as right as he can.

Yet all too many players in this game, very much including economists and public officials, very obviously haven’t been making that good faith effort. They’ve seized on dubious arguments, touted obviously weak evidence as definitive, looked for excuses either not to act themselves or for their friends not to act. And invariably the thrust of these bad arguments is to comfort the comfortable and give them license to afflict the afflicted.

I like to think that I have enough integrity to change my views when it becomes clear that they were wrong. Maybe, maybe not — although it’s probably worth pointing out that I didn’t believe in the liquidity trap and was pretty down on old-fashioned Keynesianism until 1998, when a hard look at Japan and an attempt to understand what was happening there led me to change my mind. Anyway, I try, because the ideas of economists and political philosophers matter.

And too many people aren’t trying, which is, as I said, a sin.

Dr Krugman has been hammering this point home of late. Economics really shouldn't be like this; it's almost a science, after all. But if, as Dr Krugman laments, so many are so determined to blind themselves to the facts, either out of corporate fealty or out of simple ignorance, valuable resources are diverted to debunking curious claims. It's bad enough that charlatans and shills scream for our attention; the true shame is that our best minds must occupy themselves with such nonsense.

Yann Giraud:

Yet, the same Paul Samuelson had written to his friend Alvin Hansen a couple of years before, in the midst of the Phillips curve controversy, the following sentence: "Milton F. is a bloody nuisance. In the end he is not right in his provocative stands, but it takes valuable time rebutting his arguments." He even added: "Having just returned from UCLA where (as in Virginia and Washington) the place is jumping with energetic libertarian nuts, I realize that so much of one's scientific life has to be occupied in sterile debate." [emphasis added]

What We Talk About When We Talk About Savings

Alan Greenspan, 1966:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

(Aside: Is it any wonder that this guy oversaw the regressive policies that led to the 2008 financial crisis?)


It is important, when we discuss anything related to the Income-Expenditure Model, to clearly define 'savings.' 'Saving' is a flow, that is, an amount over time, usually expressed (in the U.S.) in dollars per (time period), or as a rate, such as percentage of income. 'Savings' is a stock, that is, an accounting measure, or a lump sum.

When a household consumes less than they earn, we say that they have saved a portion of the earnings. Implicit in nearly every macroeconomic model of this action is the idea that this amount of money is then either entrusted to a financial intermediary in the form of a savings account, certificate of deposit, mutual fund, etc., or used to purchase assets such as shares of stock, government or corporate bonds, land, etc.

The household that saves, therefore, becomes one or both of two types of economic actor. Those with savings accounts, certificates of deposit, or bonds are lenders who earn a rate of return (interest) on the funds they lend. Those with assets such as land earn a rate of return (plus capital gain) on the assets they (directly or indirectly) possess. Well-chosen assets and financial instruments will earn a rate of return over and above the rate of inflation.

What the macro models don't generally assume is that 'savings' take the form of banknotes under the mattress. While this activity does fit the broad definition of 'saving,' there exist no models where widespread hoarding benefits the macroeconomy. In normal times, an increase in the demand for financial assets will lead to a decrease in consumption but also to an increase in business investment via a healthy and functioning financial sector. In a downturn, however, such demand for financial assets can be very large, as households seek a cushion against uncertainty. Such a demand can drive interest rates to a lower bound, creating a friction, as a glut of available funds cannot be loaned at any interest rate.

The savings that Mr Greenspan was worried about in the above quote is hoarded funds, or mattress money. Such is always the fear of those who ideologically oppose inflation. The missing part of the argument is why such hoarding ought to be encouraged, as it serves no observable social function. If people derive utility from sleeping on a bed of banknotes, then that is their choice. Why policymakers should bend over backward to accommodate such foolishness is unclear.

If Romney Has Any Other Godchildren, They Must Be Breathing Easier...

...or at least they no longer have to sleep with one eye open.


A man for all seasons, so to speak. To cop a line from Brad DeLong, no one has any business supporting, defending, or voting for this clown. Even entrenched power, his natural constituency, should be wary of him by now.