Sorry about radio silence — family stuff and textbook deadlines fell in on me. But I would like to get in something about Greenspan’s new book.

It is, you won’t be surprised to learn, a really terrible book on multiple levels. No acceptance of responsibility for anything; he retails the same old Big Lie about how Fannie and Freddie somehow coerced Wall Street into making bad loans; etc., etc..

But I wanted to take on one point in particular: Greenspan thinks he has discovered a new law: transfers to individuals, even if fully paid for with taxes, reduce national savings one for one. You can bet that this claim will soon be popping up on the right as an established fact.

What drives Greenspan’s conclusion is mainly the sharp drop in overall saving during the Great Recession, combined with a temporary spike in transfers as a share of GDP, partly because of unemployment and food stamps, partly because GDP fell. But he wants us to see it as a long-term phenomenon, and of course as a reason to weaken the safety net.

The obvious answer is to look cross-country: European nations have much bigger welfare states than we do; do they have lower savings? No.

A quick-and-dirty version: I compare social expenditures as a share of GDP (from the OECD Factbook) with national savings rates for 2010 (from the IMF WEO database). It looks like this:

Strange to say, countries like Germany, Sweden, and France, with their big welfare states, actually save more than we do.

The 50th anniversary issue of the New York Review of Books is out. My review of Bill Nordhaus is one of the pieces.

The NYRB is an amazing story. It was founded during a newspaper strike that had closed the NY Times, which among other things meant no book review, which was just killing authors. So Bob Silvers and Barbara Epstein started putting out a substitute, relying on the goodwill of their literary friends to do the job — the old joke that it’s “the New York review of each others’ books” has a lot of truth to it, but in a good way. And it was so good that it has become an institution — one that I’m grateful to have some connection with.

Oh, dear. I’m starting to notice a shift in the scare talk. Cries that we’re about to turn into Greece, Greece I tell you are getting a bit fainter, maybe because of what I’ve been writing. But taking their place are dire warnings that we’re endangering the dollar’s role as a reserve currency.

Urk. People who talk like this generally have no idea what they mean — that is, they have no idea what the dollar’s role really is, what might endanger that role, and why it matters (to the extent it does). In fact, I’d suggest that there’s almost a Godwin-like principle here, which is that any extended economic discussion ends up with people invoking the need to defend the dollar’s international role — which is in effect a concession that they’ve lost the rest of the argument.

So, what is the dollar’s international role? It is, in a sense, to other currencies the way money is to other assets, filling to some extent the classic three functions of medium of exchange, unit of account, and store of value. In talking about these roles you also want to distinguish between the role in private decisions and the role in official actions. So you get a matrix that looks like this:

Roles of the dollar

The dollar is, first of all, a vehicle currency (mainly in the interbank market) thanks to thick markets: if a bank wants to convert bolivars into zlotys, it will generally trade the bolivars for dollars, then the dollars for zlotys, rather than try to find someone wanting to make the reverse trade. It is the currency many though by no means all international transactions are invoiced in. And to some extent people hold dollars or dollar-denominated assets because the dollar is more liquid than other currencies.

Meanwhile, governments trying to prop their currencies up or hold them down often do so with trades against the dollar, even if they’re trying to affect some other exchange rate, again because of those thick markets. Some countries peg to the dollar, although not too many these days. And governments hold dollar-denominated reserves.

To some extent the dollar’s role here reflects self-sustaining increasing returns: people use dollars because the markets are thicker and more liquid, and the markets are thicker and more liquid because people use dollars. This circular nature of the position also arguably means that historical accident matters: the pound remained the world’s leading currency long after Britain had ceased to be the world’s leading economy (although Britain did do a lot of trade, so the case isn’t actually all that clear.) The same factor suggests that a temporary period of inflation or instability could dethrone the dollar more or less permanently.

But is this something we should worry about? First of all, it’s hard to see who really poses a threat to the dollar. You need free movement of capital, which rules out China for now, and deep financial markets; the euro used to look like a viable alternative, but its bond markets are now fragmented along national lines, which makes it much less plausible.

And even if the dollar loses some of its dominance, why should we get bent out of shape? There is no evidence that America is able to borrow dramatically more cheaply because of the dollar’s role (and anyway more foreign borrowing is not necessarily a good thing.) You often hear claims that we’ve only been able to run persistent trade deficits because of the special role of the dollar; this is just false, since other countries like Britain and Australia have been able to do the same thing.

What is true is that the large holdings of US currency outside the United States — largely in the form of $100 bills, held for obvious reasons — represent, in effect, a roughly $500 billion zero-interest loan to America. That’s nice, but even in normal times it’s only worth around $20 billion a year, or roughly 0.15 percent of GDP. And anyway, the euro has done well on that front too. If you like, South American drug lords hold dollars, Russian beeznessmen hold euros, and in both cases it’s a trivial subsidy to rich, huge economies.

The bottom line is that while saying “the international role of the dollar” sounds very sophisticated and important, the more you know about all this the less you care. This is simply not a big deal.

A correspondent writes, in regard to my note on economics as science (or not), that the rise of empirical work is not entirely a good thing:

As the Taliban wing of the economic profession got more and more stronghold of standard macro, I think that many reasonable people and students) simply retreated into safer territory where the question were smaller and well defined and lots of data. Why bother arguing about macro when large fraction of that crowd, if not screaming, was really not willing to engage in a serious discussion and refusing to even read the relevant work? Easier, then, to change the conversation into something more pleasant.

Good point. I’d add that unless you at least try to think in terms of a broader model, all the empirical work in the world can’t answer some questions — and you can all too easily draw the wrong conclusions. Take Chetty’s very example, the effects of unemployment insurance. He reports evidence that extended benefits have only a small effect on the time people spend searching for work. But suppose the result went the other way; would that say that UI was hurting employment? Not necessarily, and I’d say not at all: right now the economy is constrained not by a lack of willing workers but by a lack of demand, so that making workers more choosy about accepting jobs would, to a first approximation, have no effect at all on overall employment.

And interpreting the micro results on job search as having a one-to-one impact on the macro outcome is a classic case of implicit theorizing, which is what people who imagine themselves to just be looking at the facts often do.

So yes, there is a dark side to all this data-driven work; data are good, but not if they’re used to dodge the core issues.

The two Nicks, Crafts and Wolf, have a piece right up my alley: they argue that the cutting edge of Britain’s Industrial Revolution, the cotton textile industry, benefited hugely from agglomeration. Indeed, it was very concentrated in a small area:

What’s great about this, aside from the fact that I heart economic geography, is that the classic story of comparative advantage in trade is Ricardo’s example of English cloth being traded for Portuguese wine; now Crafts and Wolf suggest, in effect, that at least some of England’s comparative advantage in cloth came from external economies, not underlying national characteristics.

I think you would probably want to argue that increasing returns played only a limited role here in shaping the pattern of international trade, as opposed to the location of industry within Britain. That is, it’s a case of what I call increasing returns in a comparative advantage world. But it’s interesting to at least contemplate the possibility that but for the accidents of history, cotton cloth might have been made by the banks of the Tagus rather than in the region of the Mersey.

Hmmm:

NPR media reporter David Folkenflik writes in his forthcoming book Murdoch’s World that Fox News’ public relations staffers used an elaborate series of dummy accounts to fill the comments sections of critical blog posts with pro-Fox arguments.

In a chapter focusing on how Fox utilized its notoriously ruthless public relations department in the mid-to-late 00’s, Folkenflik reports that Fox’s PR staffers would “post pro-Fox rants” in the comments sections of “negative and even neutral” blog posts written about the network. According to Folkenflik, the staffers used various tactics to cover their tracks, including setting up wireless broadband connections that “could not be traced back” to the network.

I think one can safely assume that Fox News wasn’t the only organization employing sock puppets. Some commenters on various blogs, including this one, are pretty obviously professional trolls. I’ve banned some of them — and banned what were obviously the same people coming back under a variety of names.

In general, if your reaction to some comments is that nobody could really be that stupid, it may be that you are just underestimating the power of stupidity — but it may also be that nobody is, in fact, that stupid, but that someone has been employed to play stupid for fun and profit.

Raj Chetty stands up valiantly for the honor of his and my profession, arguing that economics is too a science in which careful research is used to falsify some hypotheses and lend credibility to others. And in many ways I agree: there is a lot of good research in economics, maybe more than ever as the focus has shifted somewhat from theoretical models loosely inspired by observation — which, as he suggests, was my forte — to nitty-gritty empirical work.

But while there are clearly scientific elements in economics, a lot of economists aren’t behaving like scientists. Look at Chetty’s examples of scientific work that informs current policy debates:

Consider the politically charged question of whether extending unemployment benefits increases unemployment rates by reducing workers’ incentives to return to work. Nearly a dozen economic studies have analyzed this question by comparing unemployment rates in states that have extended unemployment benefits with those in states that do not. These studies approximate medical experiments in which some groups receive a treatment — in this case, extended unemployment benefits — while “control” groups don’t.

These studies have uniformly found that a 10-week extension in unemployment benefits raises the average amount of time people spend out of work by at most one week. This simple, unassailable finding implies that policy makers can extend unemployment benefits to provide assistance to those out of work without substantially increasing unemployment rates.

Other economic studies have taken advantage of the constraints inherent in a particular policy to obtain scientific evidence. An excellent recent example concerned health insurance in Oregon. In 2008, the state of Oregon decided to expand its state health insurance program to cover additional low-income individuals, but it had funding to cover only a small fraction of the eligible families. In collaboration with economics researchers, the state designed a lottery procedure by which individuals who received the insurance could be compared with those who did not, creating in effect a first-rate randomized experiment.

The study found that getting insurance coverage increased the use of health care, reduced financial strain and improved well-being — results that now provide invaluable guidance in understanding what we should expect from the Affordable Care Act.

OK, he’s right that these two examples show how evidence could be used to inform policy debate (although understanding the effects of unemployment insurance, I would argue, requires embedding it in a macro story about how the number of jobs is determined.) But are such results actually being used to inform policy debate? Have conservative economists like Casey Mulligan said “OK, we were wrong to argue that extended unemployment benefits are the cause of high unemployment”? Have economists who oppose Obamacare said, “OK, we were wrong to say that Medicaid hurts its recipients?”

You know the answer.

And it’s not just policy debates. Whole subfields of economics, notably but not only business-cycle macro, have spent decades chasing their own tails because too many economists refuse to accept empirical evidence that rejects their approach.

The point is that while Chetty is right that economics can be and sometimes is a scientific field in the sense that theories are testable and there are researchers doing the testing, all too many economists treat their field as a form of theology instead.

As some readers may have guessed, a number of my recent blog posts have in effect been notes on the way toward my paper and presentation here. I have gotten somewhat obsessed with the question of whether a Greek-style crisis is possible for a country like the United States, and with the amazing way that the conviction that it is has taken root among policy elites without, as far as I can tell, any attempt to explain the actual mechanism.

And by the way: yes, a decade ago I expressed similar worries. But when I learn new things, I change my views. What do you do?

So let me add another piece, partly as a way to make sure that I don’t forget about it in my own writing, and let’s talk about contemporary Japan.

First of all, compare and contrast. Here, again, is Erskine Bowles warning, in March 2011, that terrible things will happen if China stops buying our bonds:

[T]his is a problem we’re going to have to face up to. It may be two years, you know, maybe a little less, maybe a little more. But if our bankers over there in Asia begin to believe that we’re not going to be solid on our debt, that we’re not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.

But just a few months earlier Japan was also worried about Chinese purchases of their debt — worried not that China would stop buying, but about the effects of China starting to buy:

Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.

Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.

Funny: Japan didn’t seem to think that China was doing it a favor by buying its debt, even though Japan has a much higher debt ratio than we do. And for these purposes, Japan looks a lot like us: it’s an advanced nation that borrows in its own currency and finds monetary policy constrained by the zero lower bound.

It’s instructive here to look at Japan’s real effective exchange rate since the beginning of the economic crisis:

Bank for International Settlements

You can see why Japan was complaining about the high value of the yen. What was causing that? Not so much Chinese purchases, I’d argue, as ingrained deflation. Once the whole advanced world found itself with zero nominal interest rates, Japan — where people had come to expect deflation at around 1 percent a year, compared with expectations of around 2 percent inflation in the US and elsewhere — was offering higher real interest rates than its counterparts. The result was a strong yen, which was exactly what a liquidity-trap economy didn’t need.

As you can see, however, more recently the yen has declined steeply. What’s that about? The answer is, Abenomics, which has successfully, at least for now, convinced investors that the Bank of Japan has changed its spots and will keep the pedal to the metal for a long time even after moderate inflation sets in.

And think about it: what Abenomics is trying to do, although it’s not stated that way, is reduce investor confidence in Japanese bonds — it’s trying to convince buyers of JGBs that the value of those bonds will in fact be eroded by inflation, not swelled by deflation. So far, it has succeeded.

So has this loss of confidence led to rising Japanese interest rates and a recession? Well, no:

So Japan has, in effect, engineered the very kind of loss in confidence that politicians in the US and the UK warn, in dire terms, will be our doom unless we cut social programs. And it has been an unambiguous good thing for the Japanese economy.

Now, I’m sure many people will argue that a Chinese loss of confidence in America would play out very differently. But why, exactly? Show me the model — and don’t tell me that it must be true because those great experts in open-economy macroeconomics Erskine Bowles or Admiral Mullen say so.

Here’s Erskine Bowles in March 2011:

[T]his is a problem we’re going to have to face up to. It may be two years, you know, maybe a little less, maybe a little more. But if our bankers over there in Asia begin to believe that we’re not going to be solid on our debt, that we’re not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.

Strange to say, however, neither Bowles nor anyone else of similar views has, as far as I can tell, actually done what he urged: “stop and think for a minute what happens if they just stop buying our debt.” They just assume that it would be catastrophic, without laying out any kind of model of how that would work.

I, on the other hand, have worked out two models, one ad hoc and the other a more buttoned-down New Keynesian-type model — and they just don’t support Bowles’s worries.

Some commenters here have declared it obvious that a cutoff of Chinese funds would drive up interest rates, saying that it’s just supply and demand. That struck me, because it’s exactly what George Will said when I tried to argue, back in 2009, that budget deficits need not lead to high interest rates when the economy is depressed. And in fact the argument that foreigners will reduce their lending to us, sending rates higher, and shrinking the economy even though we have our own currency and monetary policy is, when you think about it, more or less isomorphic to the famously wrong argument that fiscal expansion is contractionary, because it will drive up interest rates.

I am, by the way, grateful to those commenters — thinking about the equivalence of the China-debt and deficit-interest fallacies nudged me into a better, simpler formulation of my NK model, which I’ll say more about in a few days. And my model-building has, in turn, given me a new way to talk about what’s going on.

So, here we go. Start from the observation that the balance of payments always balances:

Capital account + Current account = 0

where the capital account is our sales of assets to foreigners minus our purchases of assets from foreigners, and the current account is our sales of goods and services (including the services of factors of production) minus our purchases of goods and services. So in the hypothetical case in which foreigners lose confidence and stop buying our assets, they’re pushing our capital account down; as a matter of accounting, then, our current account balance must rise.

But what’s the mechanism? (Remember the fallacy of immaculate causation.) The answer is, it depends on the currency regime.

If you’re Greece, the way it works is indeed that interest rates soar, depressing demand and compressing imports until the current account has risen enough; unfortunately, demand for domestic goods falls too, so you have a nasty slump.

But if you’re America or Britain, the central bank sets interest rates, and under current conditions that means holding them at zero. So what happens instead is that your currency depreciates, making exporters and import-competing industries more competitive. The effect on the economy as a whole is therefore expansionary, not contractionary.

Things might be different if the private sector had large debts in foreign currency, as was true in Asia in the 90s. But it doesn’t.

So the conventional wisdom about how we have to fear a Chinese bond-buying strike just doesn’t make sense — and in fact it falls down in exactly the same way as fallacious arguments about the harm done by fiscal deficits in a depressed economy; basically, Erskine Bowles is making the same error as whatshisname.

You may find it hard to believe that so many important and influential people could be dead wrong about the basic economics of our situation. But as far as I can tell, this is simply something “everyone knows”, and none of them have ever thought it through.

Steven Pearlstein reads Alan Greenspan’s new book, and discovers that Greenspan believes that he bears no responsibility for all the bad things that happened on his watch — and that the solution to financial crises is, you guessed it, less government.

What Pearlstein doesn’t mention, but I think is important, is Greenspan’s amazing track record since leaving office — a record of being wrong about everything, and learning nothing therefrom. It is, in particular, more than three years since he warned that we were going to become Greece any day now, and declared the failure of inflation and soaring rates to have arrived already “regrettable.”

The thing is, Greenspan isn’t just being a bad economist here, he’s being a bad person, refusing to accept responsibility for his errors in and out of office. And he’s still out there, doing his best to make the world a worse place.

The other day Sean Hannity featured some Real Americans telling tales of how they have been hurt by Obamacare. So Eric Stern, who used to work for Brian Schweitzer, had a bright idea: he actually called Hannity’s guests, to get the details.

Sure enough, the businessman who claimed that Obamacare was driving up his costs, forcing him to lay off workers, only has four employees — meaning that Obamacare has no effect whatsoever on his business. The two families complaining about soaring premiums haven’t actually checked out what’s on offer, and Stern estimates that they would in fact see major savings.

You have to wonder about the mindset of people who go on national TV to complain about how they’re suffering from a program based on nothing but what they think they heard somewhere. You might also wonder about what kind of alleged news show features such people without any check on their bona fides. But then again, consider the network.

Antonio Fatas, citing new work by Andy Rose (pdf), suggests that currency regimes don’t really matter — in particular that membership in the euro has not really been a special problem for peripheral countries.

Challenging preconceptions is always good, and this is a serious debate. I am still, however, very much on the other side. I’d argue two points.

First, nominal wage stickiness — the key argument for the virtues of floating exchange rates — is an overwhelmingly demonstrated fact. Rose doesn’t offer reasons why this doesn’t matter; he just offers a reduced-form relationship between currency regimes and economic performance, and fails to find a significant effect. Is this because there really is no effect, or because his tests lack power?

Second, there is the very striking empirical observation that debt levels matter much less for countries with their own currency than for those without. Here’s one view of the relationship between debt levels and borrowing costs (data from Greenlaw et al):

And here’s another view of the same data, with euro members identified:

It sure looks as if debt matters only for those on the euro, doesn’t it? For what it’s worth, here’s a regression of interest rates on debt that uses a dummy for euro membership, and allows an interaction between that dummy and debt:

Indeed: debt only seems to matter for euro nations.

So I don’t buy the notion that the currency regime is irrelevant. But clearly the Rose results need to be taken seriously, and we have to figure out why he finds what he does.

Yes — if back in 2007 you denied the existence of liquidity traps, that is, denied that the zero lower bound on short-term interest rates places limits on monetary policy, you should long since have acknowledged that you were very, very wrong:

Since late 2007 the monetary base has risen more than 300 percent, while GDP and consumer prices have risen less than 20 percent. And no, the disconnect is not all due to the 0.25 percent interest rate the Fed pays on reserves.

You can argue that the Fed could have done more — it could have expanded its balance sheet even further, and/or moved into riskier assets, and/or done more to change expectations. But I don’t see how you can deny that making monetary policy effective has been far harder since we hit the ZLB than it was before, and that this retroactively casts great doubt on Friedman’s claims that the Fed could easily have prevented the Great Depression.

Their album is just out — and it’s really, really good. (But where’s “Genevieve”?) I was worried that it would be overproduced, but while it’s different from the live performances, it’s different in a good way, with the voices even more gorgeous.

Still, the live performances are a joy:

Matthew Yglesias notes an uptick in Very Serious People warning that China might lose confidence in America and start dumping our bonds. He focuses on China’s motives, which is useful. But the crucial point, which he touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds — in fact, it would probably be good for America.

But, you say, wouldn’t China selling our bonds send interest rates up and depress the U.S. economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work.

Think about it: China selling our bonds wouldn’t drive up short-term interest rates, which are set by the Fed. It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy those bonds up.

It’s true that China could, possibly, depress the value of the dollar. But that would be good for America! Think about Abenomics in Japan: its biggest success so far has been driving down the value of the yen, helping Japanese exporters.

But, you say, Greece. Well, Greece doesn’t have its own currency or monetary policy; capital flight there led to a fall in the money supply, which wouldn’t happen here.

The persistence of scaremongering about Chinese confidence is a remarkable thing: it continues to be what Very Serious People say, even though it literally makes no sense at all. As Dean Baker once put it, China has an empty water pistol pointed at our head.