Midwest Progress

Hi guys, this are going well on my end. Hopefully you’ve been reading my pieces in the Monkeycage, if not you should (here’s my latest)!

As of now, I have am starting a new (hopefully semi permanent) gig that doesn’t allow their employees to blog their views. His means that, for now, Midwest Progress has to come to a halt. Not sure when it will be back, but thank you for reading thus far. If anything changes, you’ll be the first to know.

I should still be doing the whole non partisan political science-y thing over at the Monkeycage, but we’ll have to see what my (hopefully) new employer has to say in this regard.

Thanks for reading,

Jonathan R.

Direct quote, from a 1997 Wall Street Journal piece archived at Hoover. I couldn’t make this up.

Reviving Japan

by Milton Friedman

Nobel laureate and Hoover fellow Milton Friedman gives the Bank of Japan step-by-step instructions for resuscitating the Japanese economy. A monetary kiss of life.

---

A decade of inept monetary policy by the Bank of Japan deserves much of the blame for the current parlous state of the Japanese economy. That decade followed a period of excellent monetary policy. In 1973, the Bank of Japan reacted to an accelerating rise in inflation by bringing monetary growth down to nearly 10 percent a year from over 25 percent in the course of less than two years. It also announced an explicit policy of controlling monetary growth.

As the chart shows, after a lag of a year, nominal income decelerated sharply and then, after another year, so did inflation, from more than 20 percent to single digits. Monetary growth continued to decline unevenly for nearly another decade and then stabilized. Inflation followed suit, falling to less than 3 percent annually for years on end. After a brief recession in 1974, real growth resumed at a respectable and fairly steady rate, averaging nearly 4 percent a year from 1977 to 1987. Those were the golden years.

The Bubble Economy

Then, at the Louvre conference in February 1987, the assembled leaders agreed to stabilize the foreign exchange value of the dollar. Japan, as its part of the deal, bought dollars, in the process creating yen. The resulting acceleration in monetary growth led to higher inflation and, initially, to higher real growth. The most notable result was the “bubble economy,” an explosion in the prices of land, stocks, and other assets; the Nikkei stock index more than doubled in three years.

The Bank of Japan reacted belatedly in 1990, reducing monetary growth from 13 percent to less than 3 percent in the first year of the new policy and to negative rates in the second—too much of a good thing. Tight money was spectacularly effective; the stock market, and also nominal income growth, plunged. Low inflation turned into actual deflation by 1994. Monetary growth has recovered since but remains at the lowest level of the postwar period.

The table compares the past five years with a five-year period a decade earlier, during Japan’s golden years. Seemingly small numerical differences are enough to convert a healthy economy into a sick one.

Increase the Money Supply

The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve.

…FOR BETTER OR WORSE
 Annual change:
  Golden
Period
2Q1982-
2Q1987 Troubled
Times 
2Q1982- 
2Q1987 

---

 Money ^a 8.2% 2.1% 
 Income ^b 5.0% 1.3% 
 Prices ^c 1.7% 0.2% 
 Output ^d 3.3% 1.0% 

---

 ^a M2+CD’s for year earlier than indicated period.
 ^b GDP in current prices.
 ^c Implicit GDP deflator.
 ^d GDP in constant prices
 Source: Hoover Analytics

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

The Interest Rate Fallacy

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

Japan’s recent experience of three years of near zero economic growth is an eerie, if less dramatic, replay of the great contraction in the United States. The Fed permitted the quantity of money to decline by one-third from 1929 to 1933, just as the Bank of Japan permitted monetary growth to be low or negative in recent years. The monetary collapse was far greater in the United States than in Japan, which is why the economic collapse was far more severe. The United States revived when monetary growth resumed, as Japan will.

The Fed pointed to low interest rates as evidence that it was following an easy money policy and never mentioned the quantity of money. The governor of the Bank of Japan, in a speech on June 27, 1997, referred to the “drastic monetary measures” that the bank took in 1995 as evidence of “the easy stance of monetary policy.” He too did not mention the quantity of money. Judged by the discount rate, which was reduced from 1.75 percent to 0.5 percent, the measures were drastic. Judged by monetary growth, they were too little too late, raising monetary growth from 1.5 percent a year in the prior three and a half years to only 3.25 percent in the next two and a half.

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

---

Milton Friedman, recipient of the 1976 Nobel Memorial Prize for economic science, was a senior research fellow at the Hoover Institution from 1977 to 2006. He passed away on Nov. 16, 2006. He was also the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976, and a member of the research staff of the National Bureau of Economic Research from 1937 to 1981.

---

Reprinted from the Wall Street Journal, December 17, 1997, from an article entitled “Rx for Japan: Back to the Future.” Used with permission. © Dow Jones & Company, Inc. All rights reserved.

Hi readers! As you all may know a month or two ago I announced that I would be writing a couple of columns a month for a website called The Politicizer. This has been an awesome opportunity and a few other columns are in the work (around my already busy school and research schedule). I have stumbled upon another blogging related opportunity that was too good to pass up.

John Sides over at The Monkey Cage, my favorite political blog on the planet, offered me a gig as an editorial assistant, writing up a couple of posts and managing some of the social media infrastructure of the blog. The Monkey Cage is a blog about politics maintained by a group of political scientists, focusing on spreading the wealth of knowledge that political science research has to offer on the latest news and happenings on the blogosphere and politics. I’m writing two features, one on visual representations of data, and a weekly roundup of political science research related to current events. And to boot, the blog was named the Best Blog of 2010 by The Week Magazine, and is read by lots of important people (ie not me!). I couldn’t be more excited.

To be clear, I’ll still be posting here occasionally, as always, and will continue to plug along over at The Politicizer. This is just another endeavor!

From Gary Burtless of Brookings (via Mark Thoma)

If managers thought taxes or regulatory costs might go up in the future, wouldn’t it make sense to take advantage of today’s low taxes and lower burdens to invest and hire today?  According to the “uncertainty” argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018.  Shouldn’t they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?

The “tax uncertainty” and “regulatory uncertainty” arguments would make more sense if, say, taxes were already high and might be going higher or regulatory burdens were heavy and might be getting heavier. But when taxes are at a 60-year low and the regulations are pretty much the same as they were in the 1990s boom, the argument makes no sense at all.  As we used to say down on the farm, you should “make hay while the sun shines.” In other words, if you think it’s going to rain later in the week, it strengthens the case for cutting and baling right now.

The odd thing is, when businesses are asked why they’re not expanding, “high taxes” and “heavy regulatory burdens” and “tax uncertainty” don’t feature as prominent answers.  They mostly say they don’t see good prospects for extra sales.  But right-wing economists have their talking points, even if they make little sense, and they’re sticking with ‘em.  Another of their favorites is “… executives tell me they can’t find good candidates for the job openings they have.”  Don’t get me started on that one.

Conservatives tout studies by two academic labor economists William Wascher of the Federal Reserve Board and David Neumark of the University of California-Irvine to counter liberal claims by liberal activists and left leaning academic economists that the minimum wage does not cause diemployment effects (as neoclassical economic theory would suggest it does).

That is exactly what happened in the National Review Online’s blog: The Corner today in the wake of the announcement that the President will be nominating Alan Krueger to be the new chair of the CEA. The NRO is apparently still bitter about Krueger’s work with David Card in the early nineties that showed a slight increase in employment in New Jersey after a minimum wage was implemented in New Jersey but not in Pennsylvania. The blog carries out the tired battle that was resolved a couple decades if not a decade ago in several journal articles and books (though Neumark and Wascher do have a new book out on the minimum wage) that Dean Baker successfully rebuffs, here.

However, rarely are Neumark and Wascher ever asked by journalists and bloggers what the actual conclusions of their study are. Good thing the ol’ UCI Youtube account did! What Neumark said was:

Even if there are disemployment effects, it is not the central policy question. One could imagine a situation where a minimum wage increase cost some workers some jobs somewhere but delivered a lot of benefits…if 10 workers lost their jobs but 1000 families were lifted out of poverty we’d probably say that’s a pretty good trade off. Every government regulation probably cost someone somewhere a job, it doesn’t mean we should do it, it just means we should be thinking about the tradeoffs.

Hardly sounds like an equivocal anti-minimum wage stance now does it?

Today, the Wall Street Journal is reporting that President Obama is going to nominate Alan Krueger, former Assistant Secretary for Economic Policy at the Treasury Department and famed labor economist (in the Department at Princeton) to chair the Council of Economic Advisors.

Some diligent readers may remember that back in October I wrote a post entitled: The Case for Alan Krueger. Though I was recommending Krueger take the vacated NEC position Larry Summer left, this is just as good with Austan Goolsbee having left already. The great thing I mentioned before: Krueger has already been confirmed in the past, hopefully he gets a smooth confirmation now.

For posterity:

Sadly, I received news today (a little late I may add, due to college mid-term examinations), that Alan Krueger is stepping down as Assistant Secretary of the Treasury for economic policy.

I have been working on a couple of posts (this being the first one) of people who I believe that the Obama administration should consider bringing onto replace high level departures in key advisory roles. The most important position being left vacant right now is the chairman of the NEC, being vacated by Larry Summers in the next coming months.

You see I had a perfect plan laid out. Krueger has already been confirmed by the Senate in his current role in Treasury, he is from within the system, and though the NEC is not a senate confirmable position, it would be comfortable to see some continuity within the administration. Alas, the news that Krueger will be stepping down is unfortunate. Krueger would not only be a good choice because of his existence within the policy structure in the Obama administration, he is extremely smart and astute.

I can think of many economists who would have been better to choose as head of the NEC from the outset of the Obama administration (Joseph Stiglitz would have been my choice), but Krueger would have been a very good post midterms chair of the NEC. He is an expert on social insurance, education, and most importantly income inequality. There has been considerable concern that income inequality not only causes financial crises, but was behind the latest recession in very prominent ways.

Krueger’s expertise in social insurance, programs like the minimum wage, food stamps, as well as other important parts of the social safety net is exactly the person who needs to have the President’s ear. Krueger’s close relationship with Geitner is a plus, which could go along way towards a more congenial and productive debate on economic policy than the Summers/Geithner relationship that has been the talk of the town amongst economic policy wonks.

Alan Krueger is a smart economist, well versed and respected for his pioneering work in labor economics, not a firebrand liberal, and not a politician like Summers, who is willing to lowball stimulus estimates. He is a smooth talker with clear ideas, and Princeton should be glad to have him back. America, should be sad to see him go.

Some people might argue that’s because Wells is a gentrifier, tapping reservoirs of wealth to magically alleviate previously intractable problems. But that’s not the case. She’s actually lived in the District since 1983, and had been on the Hill for 20 years before taking on the Cluster School. She may share a skin color with a lot of D.C.’s gentrifiers, but her federal-government CV wouldn’t necessarily look so out of place in some of the tree-lined African American neighborhoods in Wards 5, Ward 7, and even Ward 8. Nor would her politics: She’s an avowed admirer of Diane Ravitch, perhaps the highest-profile critic of Rhee.

This comes from an article in the Washington City Paper, about the increasing involvement of family and parent advocates in DC Public Schools, specifically in the Capitol Hill area. The author of the piece, Jonetta Rose Barras, attempts to make the case in a very opinion filled article that what is happening in the Capitol Hill area is not gentrification, but wholesale school improvement from concerned parents.

What Barras is completely wrong about is that she makes the illogical argument that because the pedigree of the organizer of the parents, EPA scientist and parent advocate Suzanne Wells, is similar to black residents of DC and has lived in the area for quite some time that what she is doing is not gentrifying. Ms. Barras should have read a semi-recent City Paper piece about the black gentrification of Anacostia. Though Wells is a long time resident, what she is doing is gentrification plain and simple. Gentrification is self interest in its purest form. No one should fault Wells for wanting the best for her children and the neighborhoods children, but no one should make claims that what she is doing isn’t gentrification. What is a major concern that Ms. Barras should have brought up is about resource allocation. One of the many problems of gentrification is that the market allocates resources inefficiently. In simpler terms, philanthropists and others may have helped schools in need of more assistance, instead they are giving to the Capitol Hill cluster. Again, its up to interpretation as to whether this is a bad thing or not, but let’s not beat around the bush, gentrification is gentrification whether you’re black or white, a new resident or an old one, young or old.

Mike Konczal: Preach, preach!

I imagine that every day Kocherlakota interviews people – from banking, from the top 1%, from the corporate offices of our largest firms – who will kindly explain to him that the problem in the economy is that they just don’t get their demands answered quickly enough.  If only they paid even less in taxes, if only regulations were weakened further, if only every pet demand they ever wanted was granted, then they would allow the economy to take off.

How often does he hear the opposite?  How often do the unemployed disrupt his speeches, chanting about how they aren’t on a magical vacation but instead desperate to find a job?  How often do students show up in huge numbers in his office explaining they they are terrified of entering this terrible job market, a job market likely to scar their careers for decades, instead of apathetic losers who’d rather just play on facebook all day enjoying their “z”?   Maybe it is time that changed.