Tuesday, November 26, 2013

John Maynard Keynes

The Economist posts its beautiful 1946 obituary of John Maynard Keynes, which begins:
The sudden death of Lord Keynes on Easter morning has removed a great man. In turn civil servant, pamphleteer, don and college bursar, editor, company chairman, patron of the arts, government spokesman and adviser, member of the Upper House—he touched no career that he did not brilliantly adorn. More than any other man of his time he had the power to arouse informed opinion to the acceptance of novel proposals and if the public mind is better prepared in this country than in many others to face the problems of the period that is now opening, Keynes can claim far more than one man’s share of the credit. The story is told that when he was appointed a director of the Bank of England, he was accused by a friend of turning orthodox in his old age and replied, with his perfect self-assurance, “You are wrong. Orthodoxy has caught up with me.” What would have been conceit in another was the simple truth in his case. He had the gift that comes only to real leaders, of being well ahead of his generation and yet able to pull it along behind him. For this, more than intellect and more than lucidity are needed—though Keynes had both in plenty. He had also the integrity of the philosopher and, when he wished, the fervour of the prophet.
Cardiff Garcia brings my attention to Robert Skidelsky's memoir of writing his Keynes biography, which concludes:
"But, soon or late, it is ideas, not vested interests, which are dangerous for good or ill," Keynes wrote, in one of his most famous passages. I have often puzzled about the word "dangerous". Keynes was a most careful user of words. How can ideas be dangerous for good? A more obvious word would be "powerful"; the thought behind it being that ideas have a stronger influence on events, for good or bad, than have interests. And this is how the passage is usually interpreted. But the word "dangerous" adds a subtlety characteristic of Keynes: the thought that ignorance is dangerous, but that knowledge, too, is dangerous, because it tempts to hubris - the usurpation by men of divine powers - whose inevitable fruit is nemesis. That Keynes great revolutionary manifesto, The General Theory of Employment, Interest and Money should have ended on this oblique note of warning is striking testimony to a greatness that transcended economics. An intellect that could soar, seemingly without limit, accepted the discipline of earth- bound limits in the management of human affairs. This is the Keynes I love, and whose personality and achievements I have tried to convey.

Sunday, November 24, 2013

Signs of a Supply Shock off Monterrey?

The Times reports:
Humpback whales, pelicans and sea lions are all common summer sights off the Monterey coast, with its nutrient-rich waters. But never that anyone remembers have there been this many or have they stayed so long, feeding well into November.

“It’s a very strange year,” said Baldo Marinovic, a research biologist with the Institute for Marine Sciences at the University of California, Santa Cruz. 

What has drawn the animals is a late bloom of anchovies so enormous that continuous, dense blankets of the diminutive fish are visible on depth sounders. The sea lions, sea birds and humpbacks (which eat an average of two tons of fish a day) appear to have hardly made a dent in the population. Last month, so many anchovies crowded into Santa Cruz harbor that the oxygen ran out, leading to a major die-off.
I immediately thought of the Phillips curve shifting down (as in a positive 'supply shock').  I've discussed why anchovies matter for inflation previously.  I'm not sure they really do (and in the long run its only the money supply that matters of course), but its a fun example for macro students.

Friday, November 22, 2013

Stagflation: The Final Frontier?

In my twitter feed this afternoon... The Wrath of (Mervyn) King?

Tuesday, November 12, 2013

The Making of the CPI

The Washington Post's Emily Wax-Thibodeaux follows Caren Gaffney, one of the BLS' "Economic Assistants" who gather the raw data for the consumer price index:
On this recent day, Gaffney will be on the road for nearly eight hours in her beat-up 2003 Honda Pilot, driving across vast stretches of Virginia, from county to county, on a mission to hunt down prices of three American staples: gas, sugar and beer.
As Gaffney demonstrates at stop after stop, there’s more to price checking than tallying up numbers.
“A good EA is face to face with the product, is picking things up, is looking at every label,” she says. “The tiniest mistake can throw off the data. You have to be on your feet mentally.”
To ensure the integrity of the information, price checkers have to make sure they’re comparing not just apples with apples but also, for instance, organic Fuji apples with organic Fuji apples.
As the story notes, the process is labor-intensive (there are 428 economic assistants roaming the country) which means that the cost of constructing the CPI should rise over time relative to goods and services subject to more efficiency gains - i.e., Baumol's cost disease applies.  But good data is undoubtedly worth it.

Friday, November 1, 2013

Germany's Turn

The US Treasury:
Within the euro area, countries with large and persistent surpluses need to take action to boost domestic demand growth and shrink their surpluses. Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. 
That is from the semi-annual "Report to Congress on International Economic and Exchange Rate Policies" (pdf).

Typically the headline from such reports is about China, as the US criticizes its policy of intervening to keep the RMB undervalued to support a trade and current account surplus, but stops short of officially declaring it a "currency manipulator" which could trigger a conflict (which some, like Paul Krugman, have said the US should be willing to start).

The shift in focus to Germany is a sign the policy discussion is catching up to reality.  Although it is still intervening in the foreign exchange market, China has allowed a significant appreciation of the RMB (and even more in real terms) over the past several years and its current account surplus has narrowed.  That said, its "rebalancing" is still far from complete - consumption remains very low as a share of GDP; the decrease in the share of net exports seems to have been made up for by an increase in investment rather than consumption (with the usual caveat that the data are less than perfect..).

The biggest threat to the world economy now is a crisis in Europe, and while the ECB has managed to calm (for now at least) fears of a dramatic collapse, the Euro-area economy is still in lousy shape, which is a tragedy for the millions unemployed there, and a drag on economic activity in the rest of the world.

The Treasury is correct that Germany's current account surplus plays a role - stronger demand growth in Germany would help the suffering "periphery" of Europe (Spain, Italy, etc..) by creating more demand for their exports.  But Germany continues to be in denial, as Bloomberg reports:
Germany today reiterated its rejection of the Treasury report, saying it doesn’t merit criticism. “There are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy,” Finance Ministry spokesman Martin Kotthaus told reporters in Berlin. 
The difficulty, in part, comes from the moralistic connotations of some of the language used to discuss international flows.  That is, Germany is running a current account "surplus" which results from a high level of "savings", and saving and having a surplus sound like the results of virtuous behavior (while having deficits and low savings connote profligacy).  So the idea that German economic policy is part of the problem is a hard sell to politicians, commentators and voters (and even some economists who should know better).  But it takes two to have an imbalance.  Or as Karl Whelan put it on Twitter:

One thing that is lost is that the current account surplus implies a lower standard of living for German citizens because it means they get to consume less of what they make.  In the second quarter of 2013, private consumption accounted for only 57% of Germany's GDP (via OECD), which is pretty low (in the US, which tends to be on the high side, its around 70%).  While exporting always seems to sound great to everyone, every BMW that is exported to the US is one less BMW that a German gets to drive (and the surplus implies that Germany is getting pieces of paper - not Mustangs - in return).  In the case of China, policies that led to a high share of exports could be defended as a development strategy - while this meant that the level of consumption was lower at any point in time, it may have generated a higher growth rate.  Its harder to apply such a rationale to a relatively high-income country like Germany.

However, though I don't agree with FT columnist Gideon Rachman's defense of Germany, he is correct that the Treasury's timing is poor (the report is required by law), coming on the heels of the reports that the US might have been spying on Angela Merkel, and that episodes like the debt ceiling wrangle seriously damage US economic policy credibility. 

The Economist's "Charlemagne" has a nice column this week on subject.

Update: See also Paul Krugman.