Monthly Archives: May 2013

Yesterday, most of us heard the Munk Debate between Paul Krugman and George Papandreou arguing for “higher taxes on the rich” with Newt Gingrich and Art Laffer arguing against. I was up between 4:30 and 6:00 AM (India time) excited to watch it, and did learn a thing or two. But it was ultimately hackneyed and political. Little in the debate transcended above what we might expect in a conversation between Bill Clinton and Ronald Reagan. This isn’t to say it was bad, but it tells us something about one of America’s most interesting questions.

The debate over income taxation is over. It’s boring, saturated, and predictable. And that’s because we’ve been hearing the same arguments since JFK. A lot of the big debate in economics is rich and novel today. Liquidity traps in the West, exotic monetary policies, and capital liberalization offers room to test theory unlike ever before.

The Munk Debate yesterday is not. And this isn’t just because I’ve kept my ear to the debate: this is stuff Americans hear on Fox or MSNBC every day. I don’t want to comment on points within the debate at all but on the question itself:

  1. What exactly does it mean to “tax the rich” ? It’s the kind of question we expect on primetime news, but between four statesman and scholars, the lack of specification fails to create valuable discussion. We’re talking within a bad paradigm of income, corporate, and capital taxes. No room for fresh discussion.
  2. In my head, I define taxing the rich as the percentage of revenues derived from some top n%But this is also a fail definition, without more moderator guidance, because we expect the percentage of pretax income going to said n% to be increasing.
  3. I know Matt Yglesias, myself, and a few other proponents of a land value tax are sick of hearing whether people earning more than whatever the top bracket is (400k-ish?) should be taxed at 35% or 39%. Or whether revenue is maximized at 50% or 70% It’s stale.
  4. There was barely an ounce of discussion about getting rid of the corporate tax.

So this is the curse of four smart people discussing “taxing the rich” without a more engaged moderator. We revert to discussing within the paradigm of an income-dominated tax code, which regresses to the “Democrat vs. Republican” debate. Not because the debaters aren’t creative, but because this conversation is so molded into our sociopolitical memory.

I also think the academic debate on the subject of income taxes is nearing its peak. On the left we know that revenue-maximizing tax rates hover around 80%. On the right we know that taxes always cost jobs, and that every dollar raised in revenue is one step closer to communism.

Some debates are fantastic to hear on screen. Others are better over the blogosphere and other more careful media, wherein authors can carefully deliberate caveats and creative exceptions. Income tax is one such debate.

…Scott Sumner believes that arguments against austerity are not just wrong, but impossible:

1.  The eurozone needs to move away from austerity to boost growth.

2.  The ECB cannot do monetary stimulus because of its inflation mandate.

Statement 2 might be false, in which case the ECB should do monetary stimulus to boost growth.  Or it may be true, in which case ending austerity will not boost growth (due to monetary offset.)  But either way, the European consensus seems to be making an EC101-level error in logic. How a continent of 500 million highly educated people could make such a costly error without almost anyone noticing is beyond my comprehension.

He’s right that there is a paradox, operating under only the two given statements. But there’s an important third: (3) The ECB cannot do monetary stimulus because it can’t convince anyone that it can do monetary stimulus. One of the more glaring flaws of liberal commentators is to suggest that monetary policy has failed because even a puffed-up monetary base hasn’t resulted in robust growth. However, that’s not the key transmission mechanism at play, indeed there are two shining examples to the contrary: consider Switzerland and Japan. The former is (surprisingly) rather subdued in monetarist discussions (or perhaps I don’t have a close-enough ear to the debate).

Remember in 2010/11 when everyone was scared the Swiss franc’s (CHF) rapid appreciation would turn into a deflationary spiral? Indeed, as the Swiss National Bank’s (SNB) purchase of foreign reserves failed to depreciate the CHF sufficiently, we were all worried that the central bank is fundamentally limited in its capacity to effect aggregate demand.

But then, one fine day, the SNB promised it would keep the CHF at 0.83 Euros – no questions asked. And, as if by magic, this worked. Monetarists have argued for some time the driving force behind central bank policy is its message not necessarily action thereof. Naturally, if action is not sufficiently coincident with message, credibility is threatened – but that’s another story. By targeting a Euro exchange rate, the SNB emphasized its ability to mint currency at will, assuaging market worries with regard to deflation. Policy was no longer tethered to ownership of foreign reserves. Problem solved.

The story of Abenomics is so saturated in today’s blogosphere that I’ll avoid any serious detail. But its victory doesn’t stem from any action as much as Shinzo Abe’s perseverance and conviction, bordering on a threat to central bank independence itself. Markets didn’t soar soon after his expected victory because he got together with the Bank of Japan (BoJ) to print some of ’em yens. Rather, his party’s overwhelming victory suggested that he could and would threaten BoJ incompetence and hence independence if necessary. Remember, the BoJ had actually tried “exotic” action before, but no one believed it would credibly tolerate inflation. We (and I mean liberals) want to measure monetarism by how fast a man’s feet are moving and how long his strides are (monetary base and interest rates). We tend to ignore whether he’s running on ice (BoJ pre Abe), gravel (SNB), or a vertical hill (ECB).

But the problems facing SNB and BoJ are very different from the Fed. And still more different from the ECB. Both SNB/BoJ (and the Fed too) are national banks. Even if central bank independence is far more cemented today than during the disaster of Arthur Burns, it’s clear that political forces play a big role. The primary concern of SNB and BoJ is economic prosperity in their respective countries. If the Fed was ever hurting America, Congress would step in. Neither are not crippled by a fallacy of composition.

The ECB faces distributional and compositional challenges: Germans are unwilling to tolerate above-trend inflation to help their Greek “kin”. Markets understand this political, cultural, and social bind and are hence unwilling to believe that the ECB can optimize long-run growth for the Eurozone as a whole.

But wait, “whatever it takes” you say? The ECB – as the chief guardian of, well, the Euro – credibly promised to stabilize markets (and, ipso facto, did) last summer when it seemed EZ breakup was a serious possibility. I, perhaps counterintuitively, argue that this betrays its fundamental flaw. Eurozone nations are now thrust into an uncomfortable purgatory. If political situations deteriorate so as to threaten ECB’s existence, the bank promises to keep the currency together. But it cannot credibly commit to an economically optimal policy, Maastricht be damned. In this sense, it’s a little like a gold standard.

So far, nothing refutes Sumner’s paradox that if the ECB holds fast to its inflation target fiscal expansion will be offset. And if the ECB governors were an open market incentivized by their vote, he would still be right. But they’re not. There’s a difference between consciously taking inflationary action by increasing the target and not doing anything if just Germany overheats. With a growing consensus in the German political elite that a devastated generation of Southern European youth is not a good thing, to say the least, there is reason to believe central banks will not fully offset expansionary policy. This is irrational – but until unless ECB policy is decided on a thick and open market, we’ll have to deal with that.

The American problem is different still, a profound mismanagement of expectations. Ben Bernanke did not even attempt to convince the market that the Fed can do anything. About the Fiscal Cliff he had to say:

I hope it won’t happen, but if the fiscal cliff occurs, as I’ve said many times, I don’t think the Fed has the tools to offset that event

And about the sequester?

Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.

Suffice to say a non-negligent portion of the market does not believe the Federal Reserve can, has, or will offset fiscal consolidation. That the sequester was a random surprise just further seeds this belief. In this world, fiscal expansion is not self-defeating.

So far we have:

  • SNB/BoJ that successfully controlled expectations: +1 for market monetarism.
  • ECB which can only commit to keeping the EZ in a perpetual purgatory: -999 for the idea behind a common currency in a non-OCA. (If you’re a monetarist, -999 for not listening to Milton Friedman)
  • The Fed which mismanaged expectations royally: -1 for fiscal consolidation (= +1 for stimulus)

And there’s one more. The Bank of England whose erstwhile boss Mervyn King advocated austerity, and argued that he could and would offset negative effects on growth. He couldn’t or the MPC wouldn’t. So:

  • The Bank of England managed expectations and promised monetary offset. It did not work: -0.5 for market monetarism.

Look, the key insight monetarists have suggested is that interest rates at the ZLB and a nominal GDP target is sort of analogous to an appreciating currency against depleting bank reserves and an exchange rate target. But the complexity of fiscal expansion (read: uncertainty) and inability to set the right expectations underscore the staying power of fiscal policy.

There’s also another facet of monetary offset that is little talked about in monetarist circles, presumably because of a libertarian bent thereof. Government purchases represent real goods with distributional value for the poor. The discussion of quantity has drowned the eminently more important quality of government goods and services. Low interest rates are a good time as ever to engage in large endeavors with positive spillovers – a smart power grid, and vast investment in basic research.

The expectations channel is a powerful mechanism, rusted by the compositional structure of the European Central Bank. The efficient market hypothesis suggests where exists irrationality, there exists a free lunch. A less than rigorous application might be between national fiscal planners and the European Central Bank.

Brad DeLong sends us to a fantastic paper from University of Massachusetts-Amherst economist Arindrajit Dube. This, in the wake of a powerful essay from Miles Kimball and (undergraduate!) Yichuan Wang, we learn two things:

  • Quartz publishes important empirical findings. (!)
  • There is not “even a shred of evidence […] for a negative effect of government debt on growth”.

We are approaching a new consensus, among serious people and clowns alike. The narrative – whether Keynesian or not – for the past two years has been a reluctant understanding that debt can have a adverse effect on level of GDP. The argument for immediate stimulus derived from the idea of hysteresis and liquidity traps rather than a rejection of long-term consequences from deficits, per se. Indeed, in my most popular blog post, I maintain that “It is of unimpeachable importance that the USA pay down its debt in the long-run.” I’m still wedded to this idea, but I would replace “unimpeachable” with “probable”. I am less confident that debt, even by itself, negatively effects growth. Indeed, in the long-run, we must all be agnostic. From where does this new consensus emerge?

Enter Dube. The central argument submitted by Keynesian critics such as Paul Krugman regarding the Reinhart-Rogoff result was the chance, indeed likelihood, of reverse causality. That is, R-R all but explicitly argued that high levels of debt are causally-linked with lower growth rates. The theoretical provisions included:

  • The idea that as the debt-to-annual-GDP ratio increases, interest payments will eat a greater portion of national output, and hence constrain investment. This is an argument I’ve empirically-questioned before.
  • The idea that as the debt-to-annual-GDP ratio increases, bond markets will perceive a positive feedback loop between further deficits and growing interest rates and will hence be unwilling to lend at any but exorbitant yields. The empirical doubts here are self-evident.

It is curious that no one until now has so thoroughly thrashed this idea, empirically, as Dube has just done. His insight was to delineate the empirical presentation of the two causal levers: (A) higher debt causes lower GDP and (B) lower GDP causes higher debt. The mathematical tautology that RR casually ignore is that, as Brad DeLong and Larry Summers to not tire of noting, ratios must have both a numerator (debt) and denominator (GDP).

Dube suggests, rather convincingly, that if (A) is true, current debt levels will be correlated with future growth rates and that if (B) is true, current debt levels will be correlated with past growth rates. And yet:

ImageWe do not see any  association – let alone threshold! – with regard to the debt-to-annual GDP ratio and the 5-year forward growth rate (light bar). Or take:


The correlation with past growth (i.e. slow growth causes debt) is far tighter than the corollary. It is noted several times in the paper that the very tight association for past, present, and future growth to debt correlations exist only at very low levels of debt. Perhaps it is because the sample for such is far smaller, and hence less diverse across economic structures, when debt is so low, indeed such is the exception not the rule.

Nagging at me, however, is that the empirics in this study look forward and backward only by 5 years. That is, I am curious how the relative correlation between past, present, and future growth with debt changes if the increment were changed to 1 year. To 10. And 50. The statistical and intellectual validity of very high increments are limited by the fact that:

  • The international economic structure can change wildly over long times.
  • There is very little theoretical reason to believe that debt levels in 1900 affect us today.
  • There is even less reason to believe growth rates in 1900 affect debt today.
  • Path dependency and serial correlation of GDP will make this a very noisy set.

In other words, the economic “long run” is not readily defined.

But “5” is still an arbitrary number. The bond vigilante theory would be quick-acting, suggesting we should employ a smaller increment. To put it crudely, the causality may be “diluted” by other complex factors with a large window. Further, low growth today effects the debt-to-annual-GDP ratio most importantly (by tautology) today, and decreases in causal importance – ignoring serial correlation – over a larger window.

Therefore, it might be interesting to see a correlation that defines the window by a weighted average of the association over a set of years, decreasing by some “discount” rate by year.

Here’s why this is important. There may be a certain “discount rate” – for wont of a less confusing term – or simple window period at which the relative correlation between lever (A) and lever (B) are very different. There would be substantial econometric and theoretical value in understanding the parameters for which (A) is most easily defended and, too, rejected.

A note of caution. There is a big obstacle in understanding the mechanism of causation between debt and GDP that is too little discussed. See:


I’m sure you’ve seen this graph a million times. Note how slow-changing it is. Both Kimball-Wang and Dube note this as a forgone conclusion, rather than as a warning sticker on their results. Unlike unemployment or GDP growth rates, which vary as a nice and bumpy business cycle, the above ratio hardly changes, and does so slowly. There are periods of secular decline (1950-1980) and secular ascent (1980-2000). There are no trends.

This means comparisons on different levels of debt take place on very different economic structures. When we talk about the America with 30% debt-to-annual-GDP (the first bin in R-R), we’re talking about an America before modern floating exchange rates, strong unions, extremely high taxes, and declining inequality – each of which adjusts the causal mechanism in question.

Therefore the ultimate lesson from any of the RR-smashers cannot be that debt does not hinder growth. Rather, it reinforces the econometric difficulty of answering such a question. It is often said that macroeconomists are deprived of a scientific lab. However, those studying business cycles and Okun’s Law can may control for factors within the relatively short 15-year time period, wherein the grand structure of the economy is unchanged.

RR, Kimball-Wang, and Dube face the more Sisyphean task of comparing economic structure over the longest of runs. Even the most sophisticated statistical techniques cannot erase the ferment economies undergo.

But I said a new consensus was emerging. No longer can even serious conservative commenters so easily claim to care about “growth” and simultaneously extoll the importance of balanced-budgets. RR, to their silent chagrin, have served, serve, and will continue to serve as the intellectual firepower for causal lever (A). But liberals no longer need to uncomfortably point to hysteresis and the liquidity trap.

It is no longer self-evident based on theoretical whims that debt causes low growth. As a profession, economists will emerge as formally agnostic on this question. And it will be their responsibility to inform politicians of this evolution and hence to propose an economic vision that is not held captive by one little ratio, but perhaps more ambitious goals: to remain the world’s richest and most innovative economy in the face of incredible competition.

Alex Tabarrok links to a quirky proposal from EJMR:

I have a new paper that I consider my best work. For a variety of reasons, the marginal return professionally for this paper is very small for me. But I think it has an excellent shot a top
journal, I would estimate 1/3 at the AER (I have published there before). So I am offering it for sale. Here are the details:

1. This paper is not yet posted on my website. It has not been circulated and I have not yet presented it.

2. The paper is applied micro although I will sell it to anyone.

3. Email bids to Use a fake account and make sure to send no revealing information.

4. Your bid is for an AER or QJE. If it ends in Restud, you pay 65%. If it ends in the Journal of Labor Economics, Journal of Public Economics, or EJ, you pay 35%. Other journals are negotiable. You can choose the submission path as long as it starts with one of the top journals.

5. I will contact the winning bid (or highest real bid) to arrange an in person meeting in Philly at the meetings. We will never leave a paper trail.

6. Half of payment is due with a revise and resubmit. I will also make the needed changes. The final half is due with final acceptance.

7. Spare me any discussion of the ethics here. I am dead serious and I will not be commenting further on this thread.

I want to respond only to point (7). At first, I thought the ethics were disgusting. Very similar, indeed, to fraudulent data in the natural sciences. In a systematic sense, I think I was right. The impetus for both purchasing quality papers and cheating on empirics is to elevate one’s stature in a profession that is deeply-wedded to journal output. “Publish or perish”, they say.

But in and of itself, this is better approximated by the more interesting and “grey” debate behind payola. As an up-and-coming musician, I can pay a prominent radio jockey to play my record during their normal hours. The ethical “questionability” comes because, traditionally, the audience (and, for that matter, radio station) isn’t informed of this transaction; they believe they are listening to something “picked” by the RJ himself.

There are a few important criteria for success. For one, the audience can’t suspect the RJ is engaging in such practices; why would we voluntarily listen to an advertisement? Further, the music itself cannot be too bad. That is, audience members must be convinced the record in question would be part of a natural playlist designed by the RJ.

The ethics here are not as clear. There is a principal-agent problem between the RJ and his station (where his immediate and sustained profit might, in the long-run, ruin general credibility of the host). But this can be solved if the station is made aware of any such transactions. This could even allow them to pay the RJ at a lower wage rate, increasing overall welfare. Something feels “wrong”, but we are always free to switch to another radio station that we believe plays better music.

The analogy is a little tenuous, but informative. In place of the music are the paper purchaser’s academic credentials. That is, a five year-old will not credibly convince anyone that he’s penned a prodigious paper; in the same way my singing will not be aired on primetime radio for any sum of money. The audience is academic economists. The buyer himself (separate from his credentials) is the musician, and the authentic author the RJ. The act of being published in a famous journal is tantamount to one’s music being “picked” by a popular RJ. (They are both effectively credentials).

The transaction is almost certainly socially efficient (there are externalities of the ethical kind which I will discuss shortly). The marginal benefit of fame and fortune from a “top pub” for the genuine author is clearly dominated by that of a potential buyer, who himself will have to be smart enough to pull it off. So no one totally undeserving is going to get a free paper. That is, if you think devious academics are deserving to begin with, but that’s another story that… I’m about to discuss.

The obvious externality isn’t – as some on MarginalRevolution threads have suggested – the “honest” grad student who won’t be able to get his paper published because someone deviously bought the paper. The journal editors select the best papers on the quality of the work (though apparently “prestigious” authors get a leg-up, but clearly Larry Summers won’t be purchasing a paper from hormonal idiots on EJMR).

The external cost, rather, is the potential academic and professional success that is derived from this paper. From two talented candidates for tenure-track at a top college, other things equal, the position will be allocated to the one with a fancy paper in AER. But in a perfectly competitive and ideal academic job market, the non-talented but “credentialed” economist will immediately be excluded in favor the better person. Therefore, this is an indictment of the system itself – which places undue regard on publications and citations – rather than the microcosmic act of trading papers for cash.

But the system can also save itself. Let’s assume “publish or perish” is a fair constraint. Therefore, if a relatively untalented grad student lands a too good job because he purchased this paper, he will become all but irrelevant if he does not continue to publish. If this is true, and he is actually untalented, he will be forced to write more papers.

Let’s now stipulate that there are a group of very smart people who derive very little marginal benefit from publishing an economics paper. Maybe they’re brilliant, but not interested in the subject. Maybe they’re working in other fields. Maybe they’re Paul Krugman and have decided the New York Times is more influential than AER. These highly potential minds, then, are not devoting themselves to good research because incentives are misaligned. However, if there emerges a demand for high-quality papers – because there is a captive demand among the untalented who entered academia on false credentials – then these people will reenter active scholarship because the updated marginal benefit now exceeds all costs.

Therefore, there is reason to believe research output would increase.

A final externality is that eventually, if this system becomes sufficiently pervasive, credentials will loose all value. That’s not a good thing, but also not different from payola. But there’s also good reason to believe life cycle factors will prevent this from “taking over” the profession. It is unlikely that older economists will derive much value from buying papers because the discounted future value from the paper is small (they’re well into their careers). Further, if they have not done something brilliant thus far, they will be under scrutiny from peers who are surprised (Dr. Yitang Zhang at your service).

The union of the sets of people who (a) care about getting published in AER (b) are young (c) can afford a lot of money (d) do not consider it unethical (e) want a career relevant to economics and (f) are sufficiently smart to credibly convince the community that it is their work is small. The externality is non-linear in nature. That is it will “suddenly” become a problem if everyone’s doing it.

But by definition everyone is not. And therefore I believe paper payola is economically, socially, and intellectually beneficial. Flame me.

P.S.:  I retrospectively add (from my comment on MR):

I would add this is a self-correcting system in the classical sense. If the erosion of credential value (as inevitably happens if this paper sale becomes larger and more pervasive) is large, the value of buying a paper will collapse. And if that collapses, people will regain faith in the value of credentials. And the rest is history (repeated).

In fact, this brings curious contradiction to the application of “you make the system, the system makes you” type criticism to purchasing papers. The more you purchase papers, the more you disincentivize others from doing the same. Negative feedback cleanup!

P.P.S.: I’m not covering my ass. Of the six mentioned sets, I believe I fall in only 1.5. I will leave it as an exercise for the reader to figure which.

The common tale of inequality in modern America starts in the 1970s. The disintegration of labor unions, foreign competition, or any melange of factors exert a downward pressure on working-class wages. But in the standard narrative, the last quarter of the 20th century is a good time for women. Rapid female entry into the labor force meant less of Peggy the Secretary and more of Peggy the Copy Chief. Graphs like this certainly corroborate that story:


But that’s only part of the whole picture. The dynamics of inequality within male and female decompositions tell another story. Rather than use the standard Gini as a measure, I’ve created a time-series (from BLS data) with the ratio of the difference between mean and median incomes to the total mean income (call it mean-median, or MM, inequality). This captures “inequality” pretty well. Think about a bar with ten average guys, all earning between $40,000 and $60,000. Let’s say the mean and median are $50,000. Now imagine Steve Jobs enters the room. The median earnings would barely increase, but the mean would skyrocket beyond belief.

That is, the mean is sensitive to large outliers – and we’ve had more of those in America, lately. Take a look:


This gives another context to the first graph. The position of the median female has increased relative to male salaries not necessarily because of more education and entry into the labor force, but the decline of the median man relative to the mean man. (Actually, there is no such thing as the “mean” man, but you get my point).

In the 1960s, the median income was more than 95% of the mean income. Today, it’s a bit less than 70% for males and females. Eyeballing the graph (not a statistically rigorous exercise, I know) there seems to have been a rapid jump in the secular ascent of male inequality around 1994: curiously the year NAFTA came into effect. It’s harder to draw conclusions about female income dynamics. But here’s an interesting correlation:


Correlation is not causation, but data seems to suggest that the improved position of female workers today derives in large part from increasing mean-median inequality within male workers. Note that over the time period considered, female inequality shows only a bare increase and the difference rises almost entirely from increasing male inequality. At this point, some of you might be wondering whether my “definition” of inequality is appropriate to begin with. Gini is more statistically sophisticated, and Theil better still. So I checked historical Gini coefficients against what I call an “I-factor”, where

i = (male share of labor force)*(MM-inequality for men) + (female share of labor force)*(MM-inequality for women)

Unsurprisingly, i correlates pretty decently with Gini:


Clearly it’s a good fit, so we have good reason to expect that MM inequality represents a decent idea of male and female income discrepancies, at least to the extent that Gini is a sufficient measure. I’ve inserted a linear trendline, though it does seem either some form of an s-curve would be more accurate or there’s a cut at i > 0.20.

There are no big conclusions here. Just some easy, spreadsheet regressions. But it suggests the standard story of inequality deserves another examination. Has the position of the median female worker increased any? As Larry Summers likes to say (in relation to the vaunted debt-to-annual-GDP measure) ratios have the unfortunate habit of needing a denominator. In the female-male income ratio, the emphasis has been too focused on the rise of the numerator, that the deep relative stagnation of the latter is forgotten.

Indeed, a remarkable chunk of the ratio can be explained by increase in male MM-inequality. As a group, females fare a lot better today than during Don Draper’s age. But the inequality within hasn’t fallen, and is only recently comparable to that of men. Yet, despite any of the million factors we believe increased overall inequality, female income discrepancies have at least resisted any upward trend.

But, if nothing else, we’re finally living in a world where inequality is spread equally.

Ed Luce is bullish that his old boss Larry Summers is the slight favorite in the race to head the Federal Reserve. This is a perplexing proposition, not only because it’s counterintuitive to everything we’d expect, but also because suggested criticisms against Summers (in short, arrogance) are really of no issue and obscure more legitimate concerns.

It almost goes without saying that Yellen is far more established as a academic and policymaker insofar as monetary policy. All we need is a quick Google search to see the extent to which this is (perceived to be) the case. As former Treasury chief and NEC chairman – and in general a brilliant academic – Summers is the more eminent personality: yielding 6,310,000 search hits to Yellen’s 467,000.

But change the query to “[Larry Summers/Janet Yellen] monetary policy”, Yellen comes ahead at 206,000 to Summers’ 131,000. Now I’m not suggesting this is a particularly smart way to judge scholarship on a subject, but it gives a very visceral sense of Yellen’s online footprint insofar as monetary policy is concerned. Moreover, Yellen’s hits are almost entirely pages that are really concerned with relevant policy.

Deriving from his comparative fame, even Larry Summers’ “monetary policy” search hits are of no relevance. At the top are links to his Wikipedia entry, a brilliant profile comparing Larry Summers and Glen Hubbard, something about healthcare, and Now please don’t get me wrong. Summers’ is probably one of the smartest economic policymakers alive today and would make great choice for central banker. But Yellen’s history and deep erudition in this subject – as well as a functioning understanding that “full employment” is 50% of the Fed’s mandate, not just scribbles on a paper – are unquestionably in her favor.

But, his straw men considerations against Summers’ are more curious still:

Which leaves Mr Summers. I should disclose that I once worked for him (and that he writes regularly for the Financial Times) but I have not spoken to him for this column. People’s chief concern is rightly about his emotional quotient rather than his IQ. No one has any doubt on the latter. Since the Fed chairman’s job is to build consensus among sometimes fragile egos, Mr Summers’ abrasiveness would count fatally against him, critics argue. Such worries are exaggerated. Even if he has greatly mellowed in recent years, as his friends insist, charm is overrated. He would make a bad choice as a mediator in Syria. Fortunately, a Fed chairman faces lesser diplomatic challenges. The most important quality is intellectual leadership – something Mr Summers would offer in greater abundance than the others.

The only time the Fed Chair really has to deal with irrational babies is Congressional testimony. Indeed if Michelle Bachmann wins in 2014 said Chair will have to deal with some “fragile egos”. However, I can’t help but think Luce floats the “emotional” counterpoint only as a way to make light of other, realworries (which I will get to later). I cannot imagine any FOMC member actually balking against Summers’ stature. Surely these are the most preeminent monetary economists of our age. To think that Summers’ emotions will get in the way of governance is remarkably absurd. (And seriously, as far as arrogance is concerned, does anyone think Larry Summers actually believes he’s that much smarter than, say, Narayana Kocherlakota?)

Which is why this op-ed is a highly biased argument. Luce is arguing against a straw man. Larry Summers’ felicity with debate is well-known. Indeed Ron Suskind in his Confidence Men speaks of Summers’ influence in the Obama administration in much a similar tone as Walter Isaacson does Steve Jobs. Persuasive men, the both of them, seem to be gifted with what Isaacson dubbed a “reality distortion field”. And, by the way, he doesn’t have much of a problem admitting when he was wrong. (Indonesia).

So clearly I think Summers is a gifted scholar. For one, it’s kind of funny Yellen’s experience in the central banking system is taken as a bygone conclusion, with far more emphasis on Summers’ “intellectual leadership”. The question is “to whom”. You take a few smart and relatively well-educated people. You put Larry Summers and Janet Yellen in a room with them. There’s probably a very good chance Summers would come out as the “more impressive” character.

But you take two, highly-competent economists, and I’m willing to bet they’re equally confident in Yellen’s intellectual leadership. Now let’s actually talk policy, for a second. I won’t dwell on this because Yellen’s monetary credentials have been discussed in great depth for a while. She’s the rare Fed Official who actually seems to realize that inflation targeting is a disaster, and has endorsed a nominal spending target in all but name. (Christina Romer, my preferred option, has explicitly supported the same).

I don’t even know Larry Summers’ opinion on NGDP targeting  – the hottest thing in monetary policy. It’s understandable for a standing Fed official to be muted on revolutionary policy changes. Indeed a single utterance can rock the markets. But it is curious that Summers has not in his astute punditry post-NEC discussed the option much, especially for a leading contender.

No doubt, Larry Summers strikes me as the guy that can read all the new literature on the topic in a night, and have a clearer opinion than anyone else over coffee next morning. But, just like the Google search hits, it betrays a curious hush on monetary affairs. In what capacity will Barack Obama choose Summers over Yellen?

And here, I submit, Ron Suskind gives us an answer. It is clear that over all the politics and drama in Obama’s first two years, the two men shared a special relationship, with deep mutual respect. Luce knows better than I whether Obama’s respect for Summers will play a more important role than past scholarship.

But I must disagree with Tyler Cowen. This is not a particularly insightful expose on Larry Summers’ chances at the Federal Reserve, unless I’m missing something big. Luce can tell us that Larry Summers’ emotions are fine, or that “worries about Mr Summers’ Senate hearings are also overblown”. Indeed. I like Luce a lot (his work on India is brilliant) but to generate an op-ed solely from the weakest presentation of criticism and ignore the repository of Yellen’s work, quipping “when Wall Street predicts something will happen in Washington, it is often wise to bet on the opposite” does not seem like the debating strategy his old boss would encourage.

Ashoka Mody, the former IMF mission chief to Germany and Ireland, is bearish on global growth prospects in the near-future. I’m by nature optimistic, but Mody makes some fair points:

Europe’s extensive regional and global trade networks mean that its internal problems are impeding world trade and, in turn, global economic growth. In 2012, world trade expanded by only 2.5%, while global GDP grew at a disappointing 3.2% rate.

Periods in which trade grows at a slower pace than output are rare, and reflect severe strain on the global economy’s health. While the trauma is no longer acute, as it was in 2009, wounds remain – and they are breeding new pathologies. Unfortunately, the damage is occurring quietly, enabling political interests to overshadow any sense of urgency about the need to redress the global economy’s intensifying problems.


But even the world’s most dynamic emerging markets – including China, Brazil, and India – are experiencing a sharp deceleration that cannot be ignored.

Consider India, where growth is now running at an annualized rate of 4.5%, down from 7.7% annual growth in 2011. To be sure, the IMF projects that India’s economy will rebound later in 2013, but the basis for this optimism is unclear, given that all indicators so far suggest another dismal year.


Indeed, as the effects of stimulus programs wear off, new weaknesses are emerging, such as persistent inflation in India and credit misallocation in China. Given this, the notion that emerging economies will recapture the growth levels of the bubble years seems farfetched.

It’s very easy to read the facts above as a gloomy predicament the global economy, but I think that interpretation betrays a somewhat obsolete late-20th Century understanding of growth: the primacy of free trade. I’m a strong proponent of trade liberalization, and don’t doubt it has a big role to play in the coming decades, but it by the fact cannot be as earthmoving as it was.

A little history, first. Consider the economic dynamic in the late ’70s, when the South Korean miracle was well underway. While Korea trumped America in growth rate, America’s total growth in real terms was greater than Korea’s. The large income gap meant Americans could easily absorb Korean exports, and Korea could focus on exports rather than domestic consumption.

When there’s one very rich country and many poorer ones, liberalization leads to bountiful dividends. But three things are very different today:

  • China’s total growth, in absolute terms, is greater than America’s.
  • The trade-oriented miracles of the 20th Century were relatively unpopulated. China, India, and Brazil represent a much bigger chunk of the world and its economy. There is no way their growth can continue to be financed by rich-world imports.
  • Trade as a per cent of global GDP has boomed, as the world liberalized. There are diminishing returns to further specialization. No doubt free markets are a good thing, but we’ve eaten most of our free lunch. (For example, tariff barriers around the world have plummeted since the ’60s).

For this reason when Mody defines “severe strain on the global economy’s health” as “periods in which trade grows at a slower pace than output”, the economy will be tautologically unhealthy. Imports and exports can only reach a certain level before facing diminishing marginal returns, issues of national sovereignty, and optimal specialization.

Consider China, which represents a staggering proportion of all global growth and is the primary trader with a majority of countries. Government officials are acutely aware that to advance development, China will have to move to a domestic consumption, rather than investment and trade, oriented economy. In the process, China’s exports and imports might both fall – keeping its very strong balance constant – while domestic consumption increases rapidly. Global output would increase more than otherwise, ceteris paribus, and trade would fall.

And this isn’t necessarily a bad thing. A pessimist’s read of Mody’s passage is as the end of liberalization. But an optimist sees that trade as a low hanging fruit has, largely, been eaten – but many useful reforms remain. Capital market liberalization at the top of this list. Both India and particularly China have hinted at freer financial markets. I would be curious what Indian indicators, exactly, suggest “another dismal year”. Surely its deficits and balance of payments aren’t desirable, but in recent years India’s growth rate has shown some volatility. There’s no reason to believe next year’s growth won’t be much higher as North American growth accelerates.

India and China both have remarkable room for institutional improvements. Regulatory and labor deregulation in the former, and democratic pulses in the latter are bound to increase investor confidence and potential for future growth. Indian workers are also profoundly unproductive. Usually because capital intensity is dismal (anecdotally, when we stayed in Goa, India’s richest state, the autumn leaves strewn across our lawn were picked up by the hand one-by-one, not even a simple, Medieval, rake). But this is a good thing, supply-side reforms have a long way to go which, if done correctly, will temper inflationary pressures.

India will also be joining the relatively small club of countries offering inflation-protected government securities. This will substantially decrease the trade deficit from imported gold, and allow savings to be allocated towards productive ends. Further, while in hopes of American and European revival I would support fiscal stimulus, I don’t know whether I accept Mody’s suggestion for rich-world fiscal policy as global revival.

American and European debts are to a large extent financed by emerging economies. Rather, growing countries like India should structurally reform its central banking system and institutionalize independence; thereby decreasing perceived risk of government default. Today, the Reserve Bank of India is by many considered complicit in runaway deficits. Credible government policy would reduce long-run yields, and hence improve prospects for economic growth.

At this point in American recovery, growth should be financed by minting all the money that’s fit to print. Perhaps we need a New York Times op-ed on this.