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DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

Federal Reserve Bank of Boston
60th Economic Conference
The Elusive “Great” Recovery: Causes and Implications for Future Business Cycle Dynamics

Abstract: How has macroeconomic policy been different in this recovery? In banking and regulatory policy, it has been distinguished from earlier patterns—or from what we thought earlier patterns implied for a shock this large and this persistent—in a relative unwillingness to apply the “penalty rate” part of the Bagehot Rule and in a slowness to restructure housing finance that are, for me at least, different than I had expected. In fiscal policy, the prolonged reign of austerity in an environment in which both classical and Keynesian principles suggest that it is time to run up the debt is surprising and unexpected, to me at least. In monetary policy it is more difficult to say what has been different and surprising in this recovery. There have been so many aspects of monetary policy and our expectations of what policy would be during a prolonged excursion to the zero lower bound that it is hard enough merely to say what monetary policy has been, and too much to ask how it has been different from whatever baseline view of what the policy rule would be that we ought to have held back in 2008.

Current Links

Most-Recent Must-Reads:

• Neil Irwin: Britain’s Economy Was Resilient After ‘Brexit.’ Its Leaders Learned the Wrong Lesson: "The British currency is plummeting again...
• John Hempton: Twitter Buyout Rumours: "Twitter is [a] wildly addictive... chaotic world full of trolls, useless information, porn-spam and videos of kittens... [that] is... for sale...
• Matthew Yglesias: We Still Haven’t Recovered: "The long-term structural decline of American men’s attachment to the labor market is an interesting and important issue, [but] it’s not really an alternative to the theory that current low participation rates reflect an overall weak labor market...
• Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: "The global financial crisis has permanently lowered the path of GDP in all advanced economies...
• Anat R. Admati et al.: The Leverage Ratchet Effect: "Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics...

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CAPE, Future Expected Equity Returns, the Equity Premium, and Market Timing

I think this, by the very sharp Justin Lahart is badly framed.

Shiller's CAPE a hair over 27 is telling us that if we buy the S&P Composite and hold it to infinity, we can expect a real return to average 5%/year ±, where the ± can, of course, be substantial. But there is also a reasonable chance that in the next five years the CAPE valuation ratio will revert to 20--in which case you lose 25% on top of that if you have to sell then. And there is some chance that in the next ten years the CAPE will kiss the 15 it kissed in 2009--which means that if you have to sell then you could lose 45%.

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: References

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

George Akerlof, William Dickens, and George Perry (1996): The Macroeconomics of Low Inflation https://www.brookings.edu/wp-content/uploads/1996/01/1996a_bpea_akerlof_dickens_perry_gordon_mankiw.pdf

Walter Bagehot (1873): Lombard Street: A Description of the Money Market http://www.gutenberg.org/ebooks/4359

Laurence Ball (2014): The Case for a Long-Run Inflation Target of Four Percent https://www.imf.org/external/pubs/ft/wp/2014/wp1492.pdf

Laurence Ball (2016): The Fed and Lehman Brothers http://www.econ2.jhu.edu/People/Ball/Lehman.pdf

Bank of America Merrill Lynch (2016): Fed Watch https://research1.ml.com/Archive/11648932.pdf

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Conclusion

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

Thus we are left where we are today. We have essentially a full recovery as far as the unemployment rate is concerned. We have a half-recovery as far as the rise-of-the-robots-corrected prime-age employment rate is concerned.

It would be very rash to say that we have confidence that the economy is near full employment right now. But it would also be very rash to have confidence that the missing prime-age workers will appear in the labor force without a very high-pressure economy indeed.

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Monetary Policy: Options at the Zero Lower Bound

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

But there is more to monetary policy than just interest rate policy constrained by the zero lower bound. There had been substantial thought back before 2008 about what to do at the zero lower bound. It is not that economists had a consensus on what the policy rule was, or would be. But there were definite points of view as to what the policy rule at the zero lower bound should be.

I count six different currents of thought about what monetary policy would, or ought, to do were the economy to hit the zero lower bound in a serious way:

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Monetary Policy: The Flexible Yardstick of the Taylor Rule

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

The consensus for interest rate policy as an aspect of monetary policy back in 2007 was some version of Taylor’s (1993, 1999) interest rate rule (cf. also: Henderson and McKibbin (1993)): the first in time of Taylor’s two contributions to our thinking about stabilization policy that have shaped economists’ thinking about the areas that are the subject of this essay more powerfully, perhaps, than contributions by any other living economist. The basic idea is that good monetary policy should follow—and that in some eras in which policy has been relatively successful monetary policy has followed—closely upon a simple interest rate feedback rule according to which the Federal Reserve sets the short-term safe real interest rate in responses to differences of actual inflation from its target rate, differences of actual GDP from potential, (perhaps) the level the underlying Wicksellian neutral real interest rate, and the level of the inflation target (Higgins (2016)).

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Monetary Policy: Policy Choices since 2008

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

What have those monetary policy choices been since the start of 2008?

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Monetary Policy: Choosing the Inflation Target

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

At least since the start of the 1970s, the principal focus on monetary policy here in the United States has been inflation control. That focus is dominated by the experience of the 1970s; by the high cost in terms of unemployment, lost production, and slack in the early 1980s to eliminate the inflation of the 1970s; and by the subsequent belief on the part of nearly everyone associated with the Federal Reserve system that the anchoring of inflation at a relatively low level is an achievement that is very valuable, was very expensive to buy, and must not be risked.

The post-1984 “Great Moderation” era was thus extremely gratifying to a Federal Reserve that had been profoundly shaken by economic outcomes between 1970 and 1984. The low level and low volatility of inflation, combined with the “divine coincidence” of Blanchard and Gali (2007) that this seemed to bring with it low real-side cyclical volatility as well, convinced many that some sort of sweet spot had been attained.

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Fiscal Policy

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

The near-consensus policy rule for fiscal policy’s countercyclical role back in 2008 was simple: it had none. Automatic stabilizers were allowed to function, were even encouraged, and it seemed harmless to allow congress to make its overwhelming and very popular votes to extend the term of unemployment insurance in high unemployment states during recessions and in the early stages of recovery.

But Taylor (2000) serves as a powerful and eloquent marker of the crystallization of opinion that fiscal policy should be set according to “classical” principles: rightsizing the state, levying taxes efficiently, and achieving long run fiscal balance, with countercyclical fiscal policy was to be restricted to automatic stabilizers. Why? For three reasons:

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Banking/Regulatory Policy

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

The effects of the housing bubble on the stock of residential capital appear to be a triangle with a base four years wide and a height of 2%-points of GDP. That is 4%-point-years of GDP’s worth of excess residential construction: that is roughly $600B.

Not all of that excess construction was debt-financed. But some of the 16%-point years of GDP’s worth of residential construction that would have been undertaken in any event were financed in an unusually debt-heavy manner given the extraordinary lax housing lending standards of the mid-2000s. And many homeowners with substantial and rising equity took advantage of the configuration of asset prices and lending standards to use their homes as giant ATMs (Greenspan and Kennedy (2005, 2007). But much lending, even at the margin, was of high quality—safe in the absence of a major depression.

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?: Introduction

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

Federal Reserve Bank of Boston
60th Economic Conference
The Elusive “Great” Recovery: Causes and Implications for Future Business Cycle Dynamics

Introduction: The shocks of 2008-9 put us in the extreme lower tail of the distribution—or at least of what was thought to be the distribution—of macroeconomic outcomes.

The lower-tailness of the outcome of the past decade consists of three factors:

Must-Read: I have never thought that this graph is fair. "College tuition and fees" have skyrocketed in significant part because government subsidies have been withdrawn. (This withdrawal is, I think, a huge mistake.) Medical care costs have exploded because (a) our medical system is uniquely inefficient and (b) medicine today does so much more. Rich people at least would rather have today's medicine at today's nominal cost than 1960 medicine at its nominal cost--suggesting that from some points of view medical cost inflation has been negative:

Noah Smith: Don't Be So Sure the Big Tech Breakthroughs Are Behind Us: "Timothy B. Lee used to be one of the most ardent techno-optimists. But he’s had a bit of a conversion...

Procrastinating on October 12, 2016

Over at Equitable Growth: Must-Reads:

• Aimee Donnellan: Hard Brexit to cost 2,000 Goldman Jobs: Wall Street giant to shift third of City staff if single market access is lost...
• Neil Irwin: Britain’s Economy Was Resilient After ‘Brexit.’ Its Leaders Learned the Wrong Lesson: "The British currency is plummeting again...
• John Hempton: Twitter Buyout Rumours: "Twitter is [a] wildly addictive... chaotic world full of trolls, useless information, porn-spam and videos of kittens... [that] is... for sale...
• Matthew Yglesias: We Still Haven’t Recovered: "The long-term structural decline of American men’s attachment to the labor market is an interesting and important issue, [but] it’s not really an alternative to the theory that current low participation rates reflect an overall weak labor market...
• Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: "The global financial crisis has permanently lowered the path of GDP in all advanced economies...
• Anat R. Admati et al.: The Leverage Ratchet Effect: "Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics...
• Nick Bunker: [A Nobel Prize for modeling contracts - Equitable Growth][]
• Nick Bunker: [Do extended U.S. unemployment insurance benefits reduce employment? - Equitable Growth][]

Must-Read: Anat R. Admati et al.: The Leverage Ratchet Effect: "Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics...

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: "The global financial crisis has permanently lowered the path of GDP in all advanced economies...

I am not sure that this is right. But it is very interesting... (Live from the Republicans' Self-Made Trump Hell)

Martin Longman: Paul Ryan’s Speakership Will End: "Robert Costa and Phillip Rucker['s]... latest... strikes me as completely delusional...

Why are American white men so easily grifted?

26 days left

— McKay Coppins (@mckaycoppins) October 12, 2016

Joe: Twitter Spam: "I'm buried under ads for laundry detergent. My problem is that I follow Charles Stross. I don't have a problem with porno spam on Twitter... (Comment of the Day)

Trump: Is There Any Method Here?

Perhaps Trump is not sane.

Perhaps there is no method here at all. Perhaps Trump thinks that he is likely to win.

But perhaps there is a method here. And perhaps Paul Ryan, Mitch McConnell, Mike Pence and many others will rue their decision to come crawling back to Trump yesterday.

WTF?!?! (Live from the Republicans' Self-Made Trump Hell)

Insightus: NC’s 2016 Voter Turnout (through 10 October):

Paul Ryan still endorses Donald Trump for President. As Josh Barro says: Trump only takes your dignity if you give it to him... (Live from the Republicans' Self-Made Trump Hell)

Donald Trump: Twitter:

The very foul mouthed Sen. John McCain begged for my support during his primary (I gave, he won), then dropped me over locker room remarks!

Disloyal R's are far more difficult than Crooked Hillary. They come at you from all sides. They don’t know how to win - I will teach them!

Must-Read: Matthew Yglesias: We Still Haven’t Recovered: "The long-term structural decline of American men’s attachment to the labor market is an interesting and important issue, [but] it’s not really an alternative to the theory that current low participation rates reflect an overall weak labor market...

Must-Read: John Hempton: Twitter Buyout Rumours: "Twitter is [a] wildly addictive... chaotic world full of trolls, useless information, porn-spam and videos of kittens... [that] is... for sale...

Francis Wilkinson: Trump Vanquished His Rivals for the GOP's Soul: "This was not the way to go if Trump wants to defeat Clinton... (Live from the Republicans' Self-Made Trump Hell)

When the history of American politics is written, it will prominently remember John McCain saying: "Why is Chelsea Clinton so ugly? Because her father is Janet Reno!"... (Live from the Republicans' Self-Made Hell of Trump)

... But it will also remember this:

In any other year, either (a) Trump's claim not to have paid federal income taxes for twenty years or (b) the shutdown of Trump's flagship Trump Taj Mahal would be leading the news tonight... (Live from the Republicans' Self-Made Trump Hell)

Dan Drezner: How Donald Trump’s Fall Matters:

The events... were bad news for Trump... [and] worse news for America... (Live from the Republicans' Self-Made Trump Hell)

No. Neither Dean Baquet or the bulk of the staff of the New York Times know what their jobs are or how to do them. Why do you ask? (Live from the Journamalists' Self-Made Trump Hell)

Steve M.: Jim Rutenberg: Laziest Reporter Alive:

Here's Jim Rutenberg, the man picked to replace David Carr as media critic of The New York Times, with the laziest take imaginable on the subject of Donald Trump...

Weekend Reading: Ted Cruz: The Real Story

As Josh Barro likes to say: "Trump only takes your dignity if you voluntarily give it to him..."

I do not like Ted Cruz. I don't like anybody who ever found Donald Trump "refreshing". I don't like people who have expressed sympathy for Ted Cruz. I do not like his negotiating strategy. I am disappointed that somehow his Republican colleagues failed to managed to convince Ted Cruz that the negotiating strategy of 'we will blow up the country unless you change the laws in ways we like' is a losing strategy in a country in which it is considered a bad thing to give in to blackmail. I always found it curious that there were Senators Cruz and Lee--and fifty Republicans in the House--who thought that their constituents cared so little about the well-being of the country that would applaud threats of ‘we will damage the country unless you change the laws in ways we like’. And I thought it was remarkable that Cruz thought he would be the beneficiary of drenching America with gasoline and getting out the lighter in order to attempt to generate peak wingnut.

And for anyone who thinks Ted Cruz would in any sense have been a preferable candidate than Trump, I want you to remember this. And recognize: nobody was willing to lift their procedural little finger to give Ted Cruz any more time to blather further:

Weekend Reading: Ted Cruz: The Real Story: "Mr. President, there is a reason the American people are fed up with Washington...

Comment of the Day: Charles Steindel: Alan Greenspan Misjudged the Risks: "Agreed. I attended a number of FOMC meetings during the Greenspan era (not that one)...

Comment of the Day: Question for Trumpists: Okay. I take it that you are sure that Trump didn't mean it about the sexual assault as an everyday thing--that he wasn't really boasting about being an Arnold Schwarzenegger whom you would not get into an elevator with. I take it that you are confident that he was just winding up Billy Bush in order to make him feel small just because that was fun.

So why are you so sure that Trump is not doing the same thing to you--winding you up to make you feel small just because he finds it fun?

Or, if you are not sure that that is not what he is doing, why are you taking it?

There does seem to be a strong difference in reactions among white men of my acquaintance between those who are relatively secure in their lives--whose reaction to Trump is "what is this BS!?"--and those who are not--who seem to take Trump as the leader they have been looking for to tell them what to do in large part because he makes them feel smaller and more like, as he calls them, losers:

Altoid: Pussy Grabs Back: "'Nobody respects women more than me'--Glenn Beck made it his laugh line of the morning...

DRAFT: Advice to the Less-Deplorable Non-Pussy-Grabbing Republicans

It is still too early to give you well-meaning advice to those Republicans who will seek to make their party less deplorable after November 2016. It is not, however, too early for us to think about what constructive advice we might give after November 2008.

It seems to me that those seeking to remove the basket of deplorables from the Republican Party--so that the Republican Party consists of several very different baskets rather than its current one basket--have two tasks:

Paul Campos: A little story about Paul Ryan and the right wing epistemic bubble: "I wanted to pass along this tiny bit of internet ethnography... (Live from the Republicans' Self-Made Hell)

Weekend Reading: Harold Nicolson (1936): The Via Media Between War and Dishonour...

Harold Nicolson (1936): Germany and the Rhineland: "What are we to do? We are between two incompatible rights...

...I think I can indicate how far in my own conscience, and within the orbit of my own knowledge and experience, a middle way, a way between war and dishonour, can be found.

I think in the first place we must convince the French that we are not dealing with a reasonable person [in Hitler], that we are dealing with somebody who is a pathological neurotic. I think we should say to the French:

We quite agree with you about all this, but we have got to treat these people carefully, or they will do something mad.

The Hon. Member for Epping, October 5, 1938

This speech is usually summed up in the quote (that I believe to be fake) that: "France and Britain had to choose between war and dishonour. They chose dishonour and will have war!"

That "war and dishonour" phrase is, I think, actually that of Sir Harold Nicolson on the Rhineland.

Nevertheless, the speech has, I think, great wisdom on when to evade and kick the can down the road, and when to take a stand on principle. Here is the Hon. Member for Epping:

Winston S. Churchill: On the Policy of His Majesty's Government: "If I do not begin this afternoon by paying the usual, and indeed almost invariable, tributes to the Prime Minister...

...for his handling of this crisis, it is certainly not from any lack of personal regard. We have always, over a great many years, had very pleasant relations, and I have deeply understood from personal experiences of my own in a similar crisis the stress and strain he has had to bear; but I am sure it is much better to say exactly what we think about public affairs, and this is certainly not the time when it is worth anyone's while to court political popularity.

Live from America's Better Self: Recent polls:

The men we see on TV think it was even. The women we see on TV... have at least half gotten there by telling the men we see on TV what they want to hear. Don't let what they say erase what you saw on Sunday night...

No. As a rule, neither the bosses nor the reporters of the Washington Post have any idea how to do their job, or what their job is. Why do you ask?

Steve M.: What Country Have You Been Living in?: "I'm told that yesterday's events are unprecedented in American politics... Dan Balz... (Live from the Journamalists' Self-Made Trump Hell)

Must-Read: Aimee Donnellan: Hard Brexit to cost 2,000 Goldman Jobs: Wall Street giant to shift third of City staff if single market access is lost...

Jonathan Last: The Debate's Biggest Loser Was the GOP: "[Trump did not implode. He wasn't 'good', or attractive, or knowledgeable. He was coarse and whiny and unpleasant. He lied constantly... (Live from the Republicans' Self-Made Trump Hell)

A right-wing in-the-tank hyena finds nobody on the Republican side worthy of being in the tank for, and so speaks truth:

Jennifer Rubin: [Second Debate: The End of Trump?][]: "His staff and any Republicans still on board deserve the blistering loss that awaits them in November and the professional humiliation that goes with enabling a creep... (Live from the Republicans' Self-Made Trump Hell)

No. Dean Baquet and the New York Times staff have no idea what their job is, or how to do it. Why do you ask? (Live from the Journamalists' Self-Made Hell)

Tom Scocca: Twitter:

So awful for the two candidates to have both been so tawdry and hostile pic.twitter.com/D5LJt7llGA

— Tom Scocca (@tomscocca) October 10, 2016

Links for the Week of October 9, 2016

Most-Recent Must-Reads:

• Anne Laurie: Open Thread: Obama Is Doing What He Knows: "Back when presidential candidate Barack Obama was demonstrating what many of his biggest fans...
• Ryan Avent: Welcome to a World without Work: "The digital revolution alters work in three ways... automation... globalisation... productivity...

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Most-Recent Links:

• Katie J.M. Baker: Shit Storm in Academia as Professors Receive Packets Of Poop: "This is about trying to embarrass me,” [Brian Leiter] said. “This isn’t about the recipients [of the shit]...”
• Brian Leiter: [Law School Reports][]: "Crazy [Paul] Campos... certainly did his best to incite hatred and calumny against many academics, including Dan Markel. But it seems a stretch to connect this blog comment with the heinous crime! One wonders how the reporter dug this up out of the bowels of cyberspace?..."
• David Weigel: Roy Blunt
• Mike the Mad Biologist: How Do Republicans ‘Distance Themselves’ From The Majority Of GOP Voters?:

Ezra Klein: Notes on the Garbage Fire: "This is so much crazier than anything I ever imagined I would see... that I legitimately don’t know how to process it... (Live from the Republicans' Self-Made Trump Hell)

Kevin Drum: In Which I Take a Second Look at Hillary Clinton's Paid Speeches: "There's just nothing here that's plausibly damaging even when it's run through the Donald Trump alternate universe pie hole... (Live from America's Better Self)

...It's also worth noting that this is apparently the worst, most banker-sympathetic stuff they could find out of thousands of pages of speeches to bankers. If anything, this suggests that Clinton hasn't privately said much of anything that's especially friendly to Wall Street.

Procrastinating on October 9, 2016

Over at Equitable Growth: Must-Reads:

• Robert Waldmann: Benchmark, Model, and Hypothesis: "I imagine hopes followed by disappointments in the following order...
• Tad Friend: Sam Altman’s Manifest Destiny: "Altman dropped by my apartment one Saturday to discuss how tech was transforming our view of who we are...
• Jason Furman: The New View of Fiscal Policy and Its Application: "A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles...
• Noah Smith: Freedom of Speech in the Digital Age: "Speech that disseminates ideas is more valuable than speech whose purpose is to intimidate others...
• Ryan Avent: Welcome to a World without Work: "The digital revolution alters work in three ways... automation... globalisation... productivity...
• Anne Laurie: Open Thread: Obama Is Doing What He Knows: "Back when presidential candidate Barack Obama was demonstrating what many of his biggest fans...
• Larry Summers: Voters Sour on Traditional Economic Policy: "It is untenable to ignore public sentiment...
• IMF: Fiscal Policy in the New Normal - Equitable Growth
• Nick Bunker: Why do long-term unemployed Americans face difficulties finding jobs? - Equitable Growth
• Nick Bunker: Weekend reading: “Antitrust in the 21st Century” edition - Equitable Growth
• Equitable Growth: Equitable Growth’s Jobs Day Graphs: September 2016 Report Edition - Equitable Growth

Must-Read: Larry Summers: Voters Sour on Traditional Economic Policy: "It is untenable to ignore public sentiment...

Liveblogging Post-War October 9, 1946: Eleanor Roosevelt

Eleanor Roosevelt: My Day:

Both the President and Paul Porter of the OPA have very courageously explained to the people of the country why we are at present having a shortage of meat. Incidentally, I was amused yesterday to read of a Kansas farmer who said that he and his family were quite well off and had no desire to visit the cities, which had a meat famine. So the whole country is not starving!

Liveblogging World War I: October 8, 1916: Luftstreikrafte

The History Place: [ World War I Timeline][]:

October 8, 1916 - The German Air Force (Luftstreikrafte) is founded as various aerial fighting groups are merged.

Liveblogging Postwar: October 7, 1946: Mr. Justice Jackson

by Mr. Justice Jackson: Report to the President:

I have the honor to report as to the duties which you delegated to me on May 2, 1945 in connection with the prosecution of major Nazi war criminals.

The International Military Tribunal sitting at Nurnberg, Germany on 30 September and 1 October, 1946 rendered judgment in the first international criminal assizes in history. It found 19 of the 22 defendants guilty on one or more of the counts of the Indictment, and acquitted 3. It sentenced 12 to death by hanging, 3 to imprisonment for life, and the four others to terms of 10 to 20 years imprisonment.

Must-Read: Anne Laurie: Open Thread: Obama Is Doing What He Knows: "Back when presidential candidate Barack Obama was demonstrating what many of his biggest fans...