Noah Smith: These are the Econ Blogs You Need to Read tumblr_inline_njzxa37r491r57lmx.png

Link to Noah’s article on Bloomberg View

In his article “These are the Econ Blogs You Need to Read,” Noah Smith has some kind words to say about me and this blog:

The Dreamers
Confessions of a Supply-Side Liberal, by Miles Kimball: My doctoral adviser has recently become one of the most interesting and original occupants of the blogosphere. His favorite topics include monetary policy – where he champions unconventional ideas such as electronic money, federal lines of credit, and a U.S. sovereign-wealth fund – and education, where he urges a rethink of our basic values and approaches. As the grandson of a prophet of the Mormon church, he also has a deep interest in religion.

Leaving this aside, Noah gives a very useful tour of the economics blogosphere. This is an article I will send my students to help them find their way in the econ blogosphere.

Reihan Salam: Miles Kimball’s Quixotic but Interesting Tax Proposal tumblr_inline_n9ynuiuqq21r57lmx.png

Link to Reihan Salam’s National Review essay "Miles Kimball’s Quixotic but Interesting Tax Proposal"

I was pleased to belatedly run across Reihan Salam’s discussion of my proposal to provide key public goods with a minimum of tax distortion by expanding the non-profit sector rather than expanding government. In Reihan’s article, “Miles Kimball’s Quixotic but Interesting Tax Proposal,” Reihan says it might not curtail growth in government spending, but then continued:

What Kimball’s proposal does do, however, is address the normative demands made by egalitarians for higher taxes on the affluent (the notion of paying your fair share) while not directly addressing this structural dynamic. This is arguably a feature of Kimball’s proposal and not a bug, as it undermines the most potent case for higher taxes (the rich should bear more of the burden of making the investments we need to help vulnerable people flourish) without effectively rewarding public sector inefficiency. 

Unfortunately, as Kimball would surely acknowledge, this proposal is wildly unrealistic, in no small part because it would drive a shift in resources from the public sector to civil society organizations that will embrace a wide variety of business models, not all of which will be incumbent-friendly. And over time, one assumes that incumbents will work to stymie empowering innovations in this space that prove threatening. That doesn’t change the fact that Kimball’s proposal is extremely interesting. 

Here is a Twitter discussion I had with Reihan about this, without realizing he had written a whole article. 

Paul Krugman: The Monetary Fever Swamps

This piece is interesting in its own right, but I was also happy to see that Paul Krugman flagged my post “Contra John Taylor” again. The earlier occasion was Paul’s piece “Calvinist Monetary Economics.”

Paul also flagged me one other time, when I critiqued John Taylor and his coauthors on another related count. Here is that Krugman post: “Stimulus Derangement Syndrome." 

Virginia Postrel: Libertarian or Supply-Side Liberal?

As an admirer of well-written nonfiction books and their authors, Virginia Postrel is someone who was famous to me before I ever started blogging. So I was delighted to have some interactions with her since I started blogging, especially on Twitter. One of the first interactions was when  she said in the comments to Tyler Cowen’s post, “Reminiscences of Miles Kimball, and others” (near the bottom) that she wondered if I was dead, since as she later tweeted to me, Tyler’s post sounded a bit like an obituary.

It was nice to have Virginia say in that exchange she was glad I was not dead, but I was even more pleased to see her review-in-a-tweet of my post “Safe, Legal, Rare and Early.” She tweeted:

Safe, Legal, Rare and Early: Thoughtful & true post on abortion by @mileskimball

I am on the waiting list at the library for her latest book, The Power of Glamour, about which Tyler Cowen says:

Her best and most compelling book. It is wonderfully researched, very well written, the topic is understudied yet of universal import, and the accompanying visuals are striking.

Wikipedia currently says that Virginia “is an American political and cultural writer of broadly libertarian, or classical liberal, views.” But I am wondering if maybe she is at heart a Supply-Side Liberal

On cultural issues, the dominant thread on this blog so far has been it focus on John Stuart Mill's On Liberty. (I give the links to relevant posts in “John Stuart Mill’s Brief for Freedom of Speech” and “John Stuart Mill’s Brief for Individuality.”) But there are also many other posts on my Religion, Humanities and Science sub-blog (linked at my sidebar) that address cultural issues. 

By the way, I discussed the relationship between my own views and Libertarianism a bit in my “Libertarianism, a US Sovereign Wealth Fund, and I.”

David Beckworth: "Miles and Scott's Excellent Adventure"

Link to the post on David Beckworth’s blog

David Beckworth was kind enough to give me permission to mirror this post as a guest post on this blog. Here it is:

A journalist recently reminded me of how important the blogosphere has become for shaping conversations on macroeconomic policy. Everything from TARP to shadow banking to quantitative easing have been vetted in the blogosphere over the past few years. Often these conversations have influenced policymaking. Paul Krugman recently commented on this development:

[T]here has been a major erosion of the old norms. It used to be the case that to have a role in the economics discourse you had to have formal credentials and a position of authority; you had to be a tenured professor at a top school publishing in top journals, or a senior government official. Today the ongoing discourse, especially in macroeconomics, is much more free-form…at this point the real discussion in macro, and to a lesser extent in other fields, is taking place in the econoblogosphere…

Alex Tabarrok made a similar point at an AEA meeting when he said the blogosphere has become the “first place for policy debate and policy development.” There are many examples of this, but here I want to recognize two potential solutions to the zero lower bound (ZLB) problem that got a wide hearing because of the blogosphere. These solutions were not new, but because of blogging and the personalities behind them, they became more widely understood and influenced policy.

The two solutions are implementing negative policy interest rates via electronic money and nominal GDP level targeting (NGDPLT). Miles Kimball pushed the former while Scott Sumner was behind the latter. Both individuals first pushed these ideas in the blogosphere. Miles Kimball’s idea spread rapidly from his blog to other media outlets to central banks where he made multiple presentations to monetary authorities. Arguably, the Fed and ECB officials began talking more seriously about negative interest rates because of his efforts. Scott Sumner’s relentless efforts for NGDPLT also began on his blog and are considered by many to be the reason the Fed finally did QE3, a large scale-asset purchasing program tied to the state of the economy.  Miles and Scott’s success is a testament to their hard work, but also to disruptive technology that is the blogosphere.

I bring up their contributions, because they provide a nice conclusion to my previous two posts that looked at the ZLB. In those posts I looked at the claim that slump has persisted for so long because the nominal short-term natural interest rate has been negative while the actual short-term interest rate has been stuck near zero. It is stuck near zero because individuals would rather hold paper currency at zero percent than to invest their money at a negative interest rate. The ZLB is preventing short-term interest rates from reaching their output-market clearing level. The long slump is the result. Miles and Scott both have a solution for this problem. Unsurprisingly, both view the ZLB as a self-imposed constraint that can be easily fixed.

There are two key parts to Miles Kimball’s solution. The first part is to make electronic money or deposits the sole unit of account. Everything else would be priced in terms of electronic dollars, including paper dollars. The second part is that the fixed exchange rate that now exists between deposits and paper dollars would become variable. This crawling peg between deposits and paper currency would be based on the state of the economy. When the economy was in a slump and the central bank needed to set negative interest rates to restore full employment, the peg would adjust so that paper currency would lose value relative to electronic money. This would prevent folks from rushing to paper currency as interest rates turned negative. Once the economy started improving, the crawling peg would start adjusting toward parity. More details on his proposal can be found here.

There is much to like about his proposal. It is effectively how a free-banking, profit maximizing system would solve the ZLB, as shown by JP Koning. Holding risk constant, it would move all interest rates down and maintain spreads so that financial intermediation would not be disrupted. It would also eliminate the illusion that liquid short-term debt contracts are risk-free. Most importantly, it would allow short-tern nominal interest rates to better track their natural interest rate level. (1)

The figure below shows how how Miles Kimball’s solution would provide an escape route from the ZLB problem. It shows a situation where there is a negative output gap and anegative short-turn nominal natural interest rate. Miles would have the Fed would lower its policy interest rate down to the natural interest level at time t. The output gap would start to close and consequently, the natural interest rate would start to rise. The Fed would follow suit and start raising its policy interest rate in line with the natural rate. Eventually, the economy would return to full employment and the nominal interest rates would settle at their long-run values (which typically are positive). The escape from the ZLB would be complete. (2) tumblr_inline_mztx0byPDC1r57lmx.png

Scott Sumner’s solution to the ZLB provides another escape route from the ZLB. His approach is to “shock and awe” the economy with a regime change to monetary policy that would catalyze a sharp recovery. This recovery would pull the natural interest rate back into positive territory and eliminate the ZLB problem. Scott would implement his “shock and awe” program by having the Fed announce a NGDPLT (or total dollar spending target) and credibly committing to do whatever it takes to make it happen.

This amounts to the Fed committing to a permanent expansion of the monetary base, if needed. That is, a NGDPLT creates the expectation that if the market itself does not self correct through a higher velocity of base money, then the Fed will raise theamount of monetary base as needed to hit higher level of NGDP. If credible, this becomes a self-fulfilling expectation with the market itself doing most of the heavy lifting. In other words, the regime changewould spark a major portfolio rebalancing away away from highly liquid, low-yielding assets towards less liquid, higher yielding assets. The portfolio rebalancing would raise asset prices, lower risk premiums, increase financial intermediation, spur more investment spending, and ultimately catalyze a robust recovery in aggregate demand. It would be similar in spirit to what monetary policy portion of Abenomics is now doing in Japan.

The figure below shows how Scott’s solution would provide an escape route from the ZLB. Like before, the figure shows a negative output gap and short-run nominal natural interest rate that is negative. At time t, Scott would have the Fed introduce NGDPLT. The output gap would begin shrinking and put upward pressure on the natural interest rate. Eventually the natural interest rate would broach zero and the Fed would have to start raising its policy rate in line with it. Finally the economy would return to full employment and the natural interest rate to its long-run positive value. The escape from the ZLB would be complete.

So these are the two solutions to the ZLB problem. They have received a wide hearing and to some extent influenced policymaking because of Miles and Scott’s efforts in the blogosphere. Thanks to this disruptive technology and the conversations it started the world is a better place.

1. Bill Woolsey has a similar proposal. He wouldtransfer paper currency production to private banks and allow them to determine whether they want to produce paper money. Private banks would then determine the exchange rate between deposits and paper currency. 

2. To be clear, Scott Sumner would do away with interest rate targeting altogether and his push for NGDPLT is more than about escaping the ZLB. It is about setting up a credible and effective target for monetary policy. I too am a big proponent of NGDPLT for this reason.

Noah Smith: Heroes of Blogging

This was a very interesting post by Noah, even before he added me, as explained in these two tweets.

Noah says some very nice things about me. I thought about copying them out here, but that thought triggered (at least temporarily) even my sorely underdeveloped inhibitions about bragging; so you will have to click the link in the post title to see them, along with Noah’s other Heroes of blogging.

Let me say conversely that Noah is definitely one of my blogging heroes. In fact, there is no blog I would rather read than Noah’s.

The Most Popular Quartz Stories of 2013

Noah’s and my column “There’s one key difference between kids who excel at math and those who don’t” was apparently the 2d most popular article on Quartz in 2013. Take a look at the rest of the list as well. There are many other interesting articles. 

Noah tweeted this tongue-in-cheek reaction to the news:

What?? 2nd place is the first loser! DAMN YOU, BEES!!! *shakes fist*

Dylan Matthews: The Only Kid's Book You Need to Understand the Federal Reserve tumblr_inline_my9mmwPnf01r57lmx.png

I was delighted to see Dylan Matthews featuring in Wonkblog the children’s monetary policy storybook Donna D'Souza and I put together. Dylan accompanied the storybook with these very kind words:

Miles Kimball is one of the most consistently creative economists working these days, and so it’s our luck that he’s taken to writing for a popular audience. His latest work is a foray into kid’s lit, summarizing the basics of how central banks respond to economic downturns in a children’s coloring book (see above).

I have made an effort to promote our storybook in a new medium: with my daughter Diana’s technical assistance, I made and posted three YouTube videos of the storybook:

The Red Banker on Supply-Side Liberalism

Icon  for the  Red Banker blog  (which also appears in Wikipedia article on the  “Commercial Revolution” )

Icon for the Red Banker blog (which also appears in Wikipedia article on the “Commercial Revolution”)

Frederic Mari blogs as the Red Banker. He gives a positive take on my first post “What is a Supply-Side Liberal?” in his post “Supply Side Liberalism: The Interesting Case of Dr. Kimball and Mr. Miles.” However, Frederic questions whether limited government is politically possible, saying

People oppose government spending but support all of its public good provision.

Here I wished he had discussed my central proposal for keeping the burden of taxation down while providing abundant public goods: a public contribution system that raises taxes rates, but lets people avoid 100% of the extra taxes by making charitable donations focused on doing things the government might otherwise have to do. These two posts lay out how a public contribution system would work: 

Also, my post 

is best understood in this context.

I discuss a few other ideas for how to reduce the burden of taxation based on the ways in which human psychology departs from over-simplified views of homo economicus in this popular post: 

The bottom line is this: In my book, it isn’t Supply-Side Liberalism without a serious effort to lower the burden of taxation for any given level of revenue, using everything we know about human nature.

Top 200 Influential Economics Blogs: Aug 2013 | Onalytica Indexes

Confession of a Supply-Side Liberal is ranked 61st in this list of influential economics blogs. That seem pretty good to me, since the readership of my columns on Quartz itself would not be counted. On that score, note that at the end of June 2012, just a month after I started blogging, Confessions of a Supply-Side Liberal was ranked 31st. 

On the decline in ranking since the last list, Andreea Moldovan makes this note:

We have recently added some very well-known and influential blogs such as EconomixFT Alphaville and Vox, causing most blogs to go down in ranking.

Noah Smith Joins My Debate with Paul Krugman: Debt, National Lines of Credit, and Politics

Update: You can see what I have to say in the wake of Thomas Herndon, Michael Ash and Robert Pollin’s critique of Carmen Reinhart and Ken Rogoff's work on national debt and growth in my column “An economists mea culpa: I relied on Reinhart and Rogoff.” (You can see my same-day reaction here.) Also, on the substance, see Owen Zidar’s nice graph in his post “Debt to GDP & Future Economic Growth.” I sent a query to Carmen Reinhart and Ken Rogoff about whether any adjustments are needed to the two figures from the paper with Vincent Reinhart that I display below, but have not yet received a reply to that query. I think that covers most of the issues that recent revelations raise.

Note that I have revised “What Paul Krugman got wrong about Italy’s economy.” This post is now the go-to source for what I originally said there, relying on “Debt Overhangs, Past and Present” (which has Vincent Reinhart as a coauthor along with Carmen Reinhart and Ken Rogoff). My original passage is in an indented block a little above the colorful pictures your eye will be drawn to below.

In a world where people wrote frankly, Noah Smith has written the response to my Quartz column “What Paul Krugman got wrong about Italy’s economy” that Paul Krugman should have written: 

instead of what Paul actually wrote in response to my column:

(The brief summary of my column is that electronic money could help the UK and the Federal Lines of Credit could help both Italy and the UK stimulate their economies without the problems that might arise from adding substantially to their debt by a simple increase in government spending, as indicated by my original title: “How Italy and the UK Can Stimulate Their Economies Without Further Damaging Their Credit Ratings.”)

Noah follows an earlier Paul Krugman column “Debt, Spreads and Mysterious Omissions,” in using the graph above to distinguish between Italian debt and US or UK or Japanese debt by pointing out that individual euro-zone countries are not able to borrow in their own currency in the same way the US, the UK or Japan can. Paul used this distinction to minimize the danger to the US of high debt levels; here is the first sentence of “Debt, Spreads and Mysterious Omissions”

Binyamin Applebaum reports on a new paper by Greenlaw et al alleging that bad things will happen to America, because debt over 80 percent of GDP leads to high interest rates, and is skeptical – but not skeptical enough. 

Paul explains that an important argument that the US may be OK revolves around the suggestion that Japan can get away with the debt levels at the rightmost extreme of the graph above because: 

…what really matters is borrowing in your own currency – in which case the US and the UK are, in terms of borrowing costs, like Japan rather than Greece. That’s certainly what the De Grauwe (pdf) analysis suggests.

Even the quickest look at the data suggests that there’s something to this argument; for example, taking data from the paper itself, and dividing the countries into euro and non-euro, we get a scatterplot like this:

There is no hint in Paul’s earlier piece, “Debt, Spreads and Mysterious Omissions” of a claim that we should not worry about high debt levels for euro-zone countries, and even less reason to worry about US debt. A reader could be forgiven for coming away from “Debt, Spreads and Mysterious Omissions” thinking Paul thought that maybe high debt levels might be worrisome for countries that cannot borrow in their own national currency (such as Greece and Italy), but not for countries that can borrow in their own currency.  

Noah joins Paul in taking me to task for relying too much on Carmen Reinhart, Vincent Reinhart and Ken Rogoff’s paper  “Debt Overhangs, Past and Present”:

Krugman has a good point: The “90%” thing is not well established; it is obviously just Reinhart and Rogoff eyeballing some sparse uncontrolled cross-country data and throwing out an off-the-cuff figure that got big play precisely because it was simple and (to deficit scolds) appealing. The 90% number alone is not a justification for worrying about debt.

But unlike Paul, Noah notes that all I need to argue for the main point of my column is that less debt is better than more debt:

But I feel that this argument over debt levels is mostly a distraction. The important thing, which is being overlooked, is that Miles has come up with a really interesting policy tool to increase the amount of stimulus per unit of debt incurred. That tool is Federal Lines of Credit, or FLOCs - basically, the idea that government should lend people money directly.

Paul is so used to–and intent on–arguing that getting out of recessions is so important that it is worth incurring additional debt to do so, that he seems to miss my point that it is possible to stimulate economies to escape recessions while incurring much less debt than a straight increase in government spending would incur.

I am actually on record agreeing with Paul (and Noah) that the Great Recession was so serious that it was worth a massive increase in debt to escape it if that were the only available way to stimulate the economy. In “What Should the Historical Pattern of Slow Recoveries after Financial Crises Mean for Our Judgment of Barack Obama’s Economic Stewardship”:

So the fact that Barack did not push for a bigger stimulus package really is an indictment of his economic leadership. According to the reported statement by Larry Summers, it was a political judgement that a bigger stimulus was not politically feasible. I am not at all convinced that a bigger stimulus was politically impossible. It would not have been easy, I’ll grant that, but I was amazed that Barack managed to get Obamacare through. If, instead, Barack had used his political capital and the control the Democrats had over both branches of Congress during his first two years for a bigger stimulus, couldn’t he have done more? …

Notice that in all of this, I am treating a larger stimulus of a conventional kind as the best among well-discussed policy options when Barack took office in 2009. So I am backing up Paul Krugman’s criticisms of Barack’s policies at the time. However, given what we know now we could do even better, as I discuss in my post “About Paul Krugman: Having the Right Diagnosis Does Not Mean He Has the Right Cure.”

 A similar judgment might well hold for Italy, as Paul argued in “Austerity, Italian Style” (the piece that kicked off this current debate with Paul), except: 

  1. We all agree that Italy’s debt problem is worse than the debt problem for the US. 
  2. Much more importantly, a policy option (National Lines of Credit) is now on the table (at least for discussion in the op/ed pages) that could stimulate the Italian economy with much less addition to debt than a straight increase in spending–a policy option that was not on the table for the US in 2009.

Astute readers will have noticed that in “What Should the Historical Pattern of Slow Recoveries after Financial Crises Mean for Our Judgment of Barack Obama’s Economic Stewardship” I relied on a stylized fact from Carmen Reinhart and Ken Rogoff’s book This Time is Different: Eight Centuries of Financial Folly. If I am led astray, it is because of my enormous respect for Ken Rogoff’s judgment, but in this case, I would be very surprised if Paul had not at some point in his New York Times columns relied on the Reinhart and Rogoff stylized fact that recessions have tended to last a long time after financial crises in more or less the same way I did. (Though I know Ken Rogoff, I don’t think I have ever been fortunate enough to meet either Carmen or Vincent Reinhart yet.) But of course, the meaning of the Reinhart and Rogoff stylized fact that across many countries recessions have historically lasted a long time after financial crises is just as much up for grabs as the meaning of the Reinhart, Reinhart and Rogoff stylized fact that across many countries GDP growth has been low during periods when debt to GDP ratios have been high.

For the record, despite, Paul’s title “Another Attack of the 90% Zombie,” I do not think I unduly emphasized the 90% figure itself. Here is what I actually wrote: 

And national debt beyond a certain point can be very costly in terms of economic growth, as renowned economists Carmen ReinhartVincent Reinhart, and Kenneth Rogoff convincingly show in their National Bureau of Economic Research Working Paper “Debt Overhangs, Past and Present.”

Where do the United Kingdom and Italy stand in relation to the 90% debt to GDP ratio Reinhart, Reinhart and Rogoff identify as a threshold for trouble? (It is important to realize that their 90% threshold is in terms of gross government debt. That is, it does not net out holdings by other government agencies. )

In context in relation to Italy, this means “Surely, in practice, some level of the existing debt to GDP ratio for Italy should make us worry about adding to Italy’s national debt. Can we get some idea of whether we should worry about Italian debt or not?”

Let’s look at Reinhart, Reinhart and Rogoff’s stylized fact about debt to GDP ratios and realized economic growth in a little more detail to see if there is enough suggestive evidence that we should be concerned about adding to Italy’s national debt. Here is Diagram 1 from “Debt Overhangs, Past and Present”:  

In this sample of 26 high-debt episodes, there has never been a case when a country had both a debt/GDP ratio higher than 90% and high real interest rates beat its own national GDP growth rate average during that period of time. Figure 4 gives more detail for specific episodes:

Niklas Blanchard writes this about “Debt Overhangs, Past and Present” in his post in this debate with Krugman (see this full account of my discussion with Niklas):

There is a lot not to like about the Reinhart, Reinhart, and Rogoff study, and Krugman nails much of it; it doesn’t deal with causation. I’m actually kind of confused as to why Miles mentions the study (although he may enlighten me in the comments). However; more importantly, it doesn’t specify 90% debt: GDP as a regime change to a new steady state, or as a transitory experience resulting from something like a recession, or a war. In normal times, the regime change itself is the cause of the turbulence, not the subsequent destination (like going over a waterfall). There is ample evidence that suggests that countries with high transitory debt loads are able to deal with them without incident — provided they return to robust nominal growth. Japan deals with it’s sky-high debt load through financial repression and ultra-tight monetary policy. The cost of this type of action is that the government steals wealth from households.

In retrospect, I should have avoided the word “threshold,” with its suggestion of a sudden change. I never intended to suggest there was a sudden regime shift. Of course, the 90% debt/GDP ratio is a somewhat arbitrary level that Carmen, Vincent and Ken use to cut their data. But, looking at the whole set of 26 historical episodes above that debt/GDP ratio, there seems ample grounds to be worried about the effects additional national debt might have on Italy’s situation–and I don’t think it is amiss to be worried about the effects additional national debt might have on the situation in the UK or the US. There is no evidence from a randomized controlled trial available for the effects of national debt. So I don’t know how to judge whether we should be worried about the effects of national debt for countries in various situations other than from theory–which I will leave for other posts and columns–or by trying to glean what insights we can from case studies (which is what attempts to find natural experiments would be in terms of sample size), from exercises like the one Carmen, Vincent and Ken conducted in “Debt Overhangs, Past and Present,” or from correlations such as those shown in Paul’s graph above, which suggests that we should be more worried about high debt/GDP ratios for countries that cannot borrow in their own national currency.

Unlike Paul, Noah grapples with my National Lines of Credit proposal–or “Federal Lines of Credit” for the US. (You can see my posts on Federal Lines of Credit collected in my Short-Run Fiscal Policy sub-blog: Noah writes:

However, I do have some skepticism about FLOCs. First of all, there is the idea that much of the “deleveraging” we see in “balance sheet recessions” may be due to behavioral effects, not to rational responses to a debt-deflation situation. People may just switch between “borrow mode” and “save mode”. In that case, offering them the chance to take on extra debt is not going to do much. Second, and more importantly, I worry that FLOCs might draw money away from infrastructure spending and other government investment, which I think is an even more potent method of stimulus; govt. investment, like FLOC money, is guaranteed to be spent at least once, but unlike FLOCs it can increase public good provision, which is a supply-side benefit.

In answer to Noah’s first bit of skepticism, the main point of National Lines of Credit is to encourage more spending by that fraction of the population that will spend as a result of being able to borrow more, without adding to the national debt by sending checks to people like those in “save mode” who won’t spend any more. If people don’t draw on their lines of credit from the government, it doesn’t add to the national debt. And even if people draw on their lines of credit from the government to pay off more onerous debt, this is likely to both (a) make them better credit risks–that is, more likely to have the means to pay the government back and so not add to the national debt and (b) make them feel more secure, and so possibly get them to switch at least a little bit from “save mode” to “spend mode.”

On infrastructure spending, I should say more clearly than I have in the past that spending more on fixing roads and bridges would likely be an excellent idea for the US on its own terms, because of the supply-side benefits. But if it crowded out a Federal Lines of Credit program, one has to consider that Federal Lines of Credit can get more than a dollar’s worth of first-round addition to aggregate demand (which is then multiplied by whatever Keynesian multiplier is out there) per dollar budgeted for loan losses, while spending on infrastructure gives exactly one dollar worth of first-round addition to aggregate demand (which is then multiplied by whatever Keynesian multiplier is out there) per dollar budgeted for that spending. The spending on roads and bridges has to have enough of a positive effect on later productivity and tax revenue to outweigh its less potent stimulus per dollar budgeted. The other big problem with additional infrastructure spending is that, alas, it cannot be turned on and off quickly. The legal, administrative and regulatory process for spending on roads and bridges is just too slow to be of much help in short recessions, or if one wants to hasten a recovery that has already built up a good head of steam. So our current situation is one of the few in which spending on roads and bridges would be a fast enough mode of stimulus. Most of the time, roads and bridges should be seen primarily as a valuable supply-side measure when infrastructure is in the state of disrepair seen in the US.  

I said that Noah, unlike Paul, grapples with my National Lines of Credit proposal. Indeed, Paul shows no evidence of having read the second half of my article. One theory is that he really didn’t read the second half. Most favorably, Paul could be saving discussion of Federal Lines of Credit (and electronic money, which I also discuss in “What Paul Krugman got wrong about Italy’s economy”) for other posts. The most intriguing theory (that is not as positive as the idea that Krugman posts on FLOC’s and electronic money are coming, and one that I would not give all that high a probability to) is that Paul likes my proposals enough that he wanted to point people to those proposals, and too much to criticize them, but thinks they are too controversial to implicitly endorse by discussing them without criticizing them. If so, I am grateful to Paul for that backhanded support. Noah has a theory (that does does not preclude this theory that Paul is intentionally flagging my proposals while keeping some distance): 

That said, I think the FLOC idea is an interesting one. Why have most stimulus advocates ignored it? My guess is that this is about politics. In an ideal world, pure technocrats (like Miles) would advise politicians in an honest, forthright fashion as to what was best for the country, and the politicians would take the technocrats’ advice. In the real world, it rarely works that way. For every technocrat who just wants to increase efficiency, there’s a hundred hacks and politicos who are only thinking about distributional issues - grabbing a bigger slice of the pie. These hacks are very willing to use oversimplified narratives and dubious sound bytes to embed their ideas in the public mind. And that kind of thing really seems to be effective.

This means that politics’ response to policy is highly nonlinear - give the enemy an inch, and they take a mile. It also means the response is highly path-dependent; precedent matters.

So Krugman et al. may be ignoring FLOCs and other stimulus engineering tricks because of political concerns. If they concede for a moment that debt is scary, it will just shift the Overton Window toward Republican types who are deeply opposed to any sort of stimulus, and would oppose Miles’ FLOCs just as lustily as they opposed the ARRA.

In other words, finding optimal, first-best technocratic solutions might be far less important than simply embedding “AUSTERITY = BAD!!!” in the public consciousness.

My own politics are more centrist (to the extent they fit within the US political debate at all. (See my post “What is a Partisan Nonpartisan Blog?” as well as the mini-bio at my sidebar and Noah’s early review of my blog, “Miles Kimball, the Supply-Side Liberal.”) From that point of view, I have argued in “Preventing Recession-Fighting from Becoming a Political Football” (my response to the Mike Konczal post criticizing Federal Lines of Credit that Noah mentions) that Federal Lines of Credit have substantial political virtues in providing a way out of the current political deadlock between the Republican and Democratic parties over economic policy.

Many thanks to Noah for clarifying this debate with Paul, as well as to Niklas Blanchard, whose two bits I discussed in my post a few days ago, and to Paul himself for engaging with me in debate, at least at one level.

Update: With Noah’s permission, let me share an email exchange about the post above:

Miles: Did you like my response? 

Noah: I did! It was quite thorough.

I think the criticisms of FLOCs are still basically three:
Criticism 1 (mine): There is a limited amount of political will for increased spending. And because of the supply-side benefits of infrastructure, that finite will is better spent on infrastructure even than on the most cost-effective pure stimulus.
Criticism 2 (Mike Konczal’s): FLOCs have different distributionary consequences than other stimulus approaches, since FLOC borrowers will be responsible for repaying the stimulus borrowing, not taxpayers.
Criticism 3 (Mike Konczal’s): It will be very difficult to handle the inevitable FLOC defaults. Whether they are forgiven or collected aggressively, it will make some people very angry.
Criticism 4 (everyone else’s): FLOCs may get good “bang for the buck”, but they won’t get much bang in total, because people are in “deleveraging” (or “balance sheet rebuilding”) mode.
I think that these are not inconsiderable obstacles to the FLOC idea…
Miles: I don’t understand 4. Here is what I think it means. FLOC’s can be scaled up to get more impact, but they will have decreasing returns since people have consumption that is concave in amount of credit provision. Even though the costs are also concave in the headline amount of credit provision, this means that a FLOC program can only be so big. So ideally we want other things as well–infrastructure and electronic money.  Sounds good.  
On 1, I would be glad if the debate were between FLOC’s and infrastructure spending.  
On 2 and 3, Mike only gets one of these at a time at full force: making the amount of credit provision proportional to last-years adjusted gross income dramatically reduces the repayment problem (and the size of the program can be adjusted to compensate for the lower MPC), but this makes it distributionally less favorable.  
Noah: No, I think you may be misunderstanding 3. No matter how much FLOC lending is done, x% of people will default on their FLOC loans. What the government then does to that x% - cancels their debt, sues them, or refers them to collections agencies - is going to be a political bone of contention. It’s an image problem (evil govt. suckering people into borrowing money they can’t afford to pay back), not an efficiency problem.

Miles: I agree. That is why FLOC’s need to be paired with National Rainy Day Accounts that most likely make it unnecessary to ever use FLOC’s again after the first time.

I added the link about National Rainy Day Accounts just now. As a conceptually similar idea to FLOC’s and National Rainy Day Accounts for individuals, see what I have to say about helping the states spend more now (to stimulate the economy) and less later in “Leading States in the Fiscal Two Step.”

Niklas Blanchard Defends Me Against the Wrath of Paul Krugman, Despite My Lack of Nuance

In response to my latest Quartz column

Paul wrote a post

taking aim at my reliance on Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff’s paper “Debt Overhangs, Past and Present.” I plan to write a reply to Paul at some point. In the meanwhile,  I appreciate Niklas Blanchard coming to my defense in his post

Not surprisingly, I like Niklas’s post. But Niklas also takes me to task for my reliance on the paper “Debt Overhangs, Past and Present.” (Update: Niklas tweeted that his title about lack of nuance was directed at Paul, not me. I interpreted it as my not being careful enough in my discussion of Reinhart, Reinhart and Rogoff.) Among other discussions about the interaction with Paul, you can see my attempt to justify myself to Niklas in these storified tweets:  

For the record, here is the passage in question in my post:

And national debt beyond a certain point can be very costly in terms of economic growth, as renowned economists Carmen ReinhartVincent Reinhart, and Kenneth Rogoff convincingly show in their National Bureau of Economic Research Working Paper “Debt Overhangs, Past and Present.”

Where do the United Kingdom and Italy stand in relation to the 90% debt to GDP ratio Reinhart, Reinhart and Rogoff identify as a threshold for trouble? 

For comparison, here is the abstract for “Debt Overhangs, Past and Present”

We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.

Postscript: In this context I love Noah Smith’s Twitter homepage illustration

John Taylor is Wrong: The Fed is Not Causing Another Recession

Here is a link to my 13th column on Quartz: “John Taylor is wrong: The Fed is not causing another recession.” It is the two-paragraph précis of yesterday’s post “Contra John Taylor.”

Twitter provided some reviews of these two pieces that I liked. Here are a few:

Reihan Salam: "Miles Kimball on How Electronic Currency Could Yield True Price Stability"

In his November 6, 2012 post on National Review Online, Reihan Salam begins this way:

Miles Kimball has written a stimulating, and quite convincing, short article for Quartz arguing that governments should swap electronic currency for physical currency as the “unit of account,” i.e., as the “yardstick for prices and other economic values.” While paper currency could be retained for everyday transactions, its value would fluctuate relative to  the electronic currency that would serve as an anchor.

And I especially like his later phrase:

Kimball’s discussion is nuanced…

In addition to his November 26 post, Reihan also tweeted this today:

I’m a big fan of the @mileskimball to replace paper money with electronic money as the unit of account: …