Monthly Archives: September 2013

So what if I told you the more expansionary monetary policy is, the smaller the Fed’s expected balance sheet will be. And, more curiously, the smaller the Fed’s expected balance sheet will be, the more expansionary current policy will become. These two forces build off each other into perfectly expansive monetary policy. Let me explain why.

Consider two policies. In one, the Fed continues to buy n dollars of Treasuries and mortgage backed securities each month until its expected loss – at any arbitrary sensitivity to deviation from its dual mandate – is minimized. In the other, the Fed continues to buy n dollars of assets each month but, at the end of the year if its target is missed, n becomes kn. This continues ad infinitum.

You would be mistaken to think these policies are functionally equivalent even in the first year. Even though the monetary base would be the same at month 12 under both, inflation would be higher and unemployment lower under the second. Markets know that if the Fed misses its target, purchases will increase substantially in pace next year, which would drive money demand down in the latter months of the year after it becomes clear the Fed’s mandate is missed.

Of course, since deviation from the Fed’s target is falling more rapidly under the latter policy, the expected time of exit from monetary stimulus is also smaller. If k is large enough, markets would expect the Fed to “taper” purchases before the end of year one.

Hence the expected size of the Fed’s balance sheet is smaller under the more aggressive policy, for some parameters and n.

This deals with almost all the “negative” aspects of quantitative easing suggested by other critics. When more is less, its safer to do more. The scarcity of safe assets, as many worry, would be significantly lower if the Fed’s balance sheet was smaller. Therefore we should be talking about increasing the extent of purchases to the level where people expect a taper because of too much inflation. It’s like walking in a circle.

But the expansionary nature of this is greater still. Paul Krugman, and most Keynesians, correctly worry that expansionary policy isn’t determined by the size of the Fed’s current balance sheet, but expectations of the terminal money base. That is, because Krugman among others believe markets believe the Fed will vacuum money out of the system in the future, there’s a de facto floor on money demand.

Let’s say the Fed can’t really change expectations of its long run “sensibilities” (tolerance of inflation, etc.) without regime change. (This is a point deeply felt in the work of Christina Romer who should be our next chairwomen of the Federal Reserve). That’s not a perfectly true statement, and the expectations channel of monetary policy is still intact, but it still poses an important “drag” on the efficacy of monetary policy. This implies the market would expect a contraction in future money base proportional with the size of the balance sheet. However, if the expected balance sheet at the end of stimulus is smaller, so too is the expectation of future tightness.

So I don’ t think people like Krugman get it all right when they write that quantitative easing works only through signals of “willingness to be easy”. That’s part of it, but more aggressive quantitative easing not only signals a “willingness” on side of the Fed, but more bullish expectations on part of the market that the Fed won’t tighten, not because it doesn’t want to, but because  it doesn’t have to.

In fact, there’s a sweet spot where if k is high enough, markets won’t expect any contraction in money base at all, because the period of expansion would cause inflation so quickly that the Fed can slowly exit its stimulus program without a bloated balance sheet at all.

Because tapering quantitative easing won’t end it completely, there’s a good chance the Fed’s balance sheet is going to end up far larger than it needs to be. It’s about time for the hawks to call for aggressive easing.


A surprising number of people tell me that quantitative easing is deflationary. Their reasons and political affiliations are diverse but, a comment like this left on Scott Sumner’s blog, captures that sentiment well:

Why would investors be convinced of inflation? Mortgage rates going down and longer term rates going down as a result of QE might not be enough to make people confident at all. Maybe prices go down instead of up because of lower interest costs. The private sector may want to deleverage so lower rates might not help at all.

Economics is all about identifying the “perverse consequences” of straightforward policy. So it’s also remarkably easy to contrive an example where something like quantitative easing – through various effects, expectations, etcetera – ends up making “prices go down instead of up because of lower interest costs”. Normally you’d argue back with empirical evidence to the contrary. 

But that quantitative easing can be inflationary isn’t even about economics. It’s about physics. 

All wealth, including the Fed’s balance sheet, is a claim on future returns from land, labor, and capital. Therefore, when the Fed purchases assets, it is increasing its claim on future output, denominated in some nominal aggregate. As the Fed continues its purchases, literally only two things can happen: we get inflation, or violate the Laws of Physics. 

Imagine that quantitative easing is not inflationary and the rate at which the Fed’s balance sheet grows exceeds the income deflator. Not too long from now, the Fed’s claim on future income will exceed what is physically and scientifically possible under standard physical laws.

The real value of the Fed’s claim on future activity is limited by inflation. And since we can’t violate physics, it stands to reason that quantitative easing must cause inflation. Think about it this way. Imagine the government cut every existing tax and met its obligations by printing money. Either we get inflation, thereby foiling the plan, or we find a way to finance the world’s biggest army, most extensive insurer, most expensive healthcare system, and strictest jailor with pieces of paper. 

Or, as Scott Sumner puts it, prices will either increase, or the Fed will own the universe. I honestly prefer the latter. 

Matt Yglesias writes that paper money kills economies because it institutes an effective lower bound on interest rates, the primary instrument of monetary policy. People like Miles Kimball have long argued that the “zero lower bound” and, hence, liquidity trap is basically a “policy choice” – a consequence of our cash economy. That is to say, under an electronic money system, we can easily implement negative nominal interest rates, giving monetary policy infinite power at all times.

The best way to think about this is imagine we all had dollar bills whose purchasing power was proportional to the length of the note, and the government can change the rate at which the note evaporates at will. If the rate of paper evaporation is increased, money demand will fall as consumers and investors across the world will throw cash for goods, services, and assets propping up a rapid recovery. In fact, the government doesn’t even have to increase the rate of evaporation, as long as it merely announces a credible intention to do so in the future.

But central banks can’t credibly announce the coming of negative interest rates, not the least because it isn’t physically possible in our current paradigm. Does that mean paper money is killing the economy…? I think not, for several reasons. Primarily, paper electronic money would be a superior choice to current monetary policy (and I, personally, have no animus towards accepting the future. Note that I’ve always hated carrying around cash, and don’t even have a wallet, so I love my electronic money, also known as Visa. But a lot of people use cash, and this would distributionally hurt them the most). But what we might call “conventionally unconventional” policies of quantitative easing are not out of steam.

Even Paul Krugman, the high priest of “monetary policy probably can’t gain traction in a liquidity trap”, agrees this has nothing to do with economic constraints of monetary policy as much as the conservatism of the central banking profession. That is to say, no one believes the central bank is sufficiently radical. In which case, we ask, what exactly is the point of militating for the abolishment of paper money – which is a far more radical experiment altogether?

Kimball – and maybe Yglesias – might argue that bringing it to the front of economic dialogue will make it easier for future crises to be handled effectively. But that would suppose getting rid of paper money is somehow fundamentally better than other unconventional options – given central banks were the right level of radical. We must make this stipulation because it makes no sense comparing a world where we are too timid to follow the policies proposed by Scott Sumner or Paul Krugman, but crazy enough to burn away paper.

And this contention is questionable at best. For example, even with negative interest rates, the central bank would need to set some sort of policy target. A lot of bloggers and forward-thinking economists like the idea of a nominal income target. I think Paul Krugman prefers a 4% inflation target (I don’t really know). If the latter – a higher inflation target – was the “optimal” solution between the two, then electronic money is most likely superior. The only point of a higher inflation target is to vastly reduce the risk of future recessions driving the equilibrium interest rate to the point of liquidity trap (and maybe reducing the effect of wage rigidities, but nominal targeting would accomplish this as well), and there’s some evidence that this is not optimal. (Edit: though still far, far better than current policy).

For reasons noted here, I don’t think a higher inflation target is superior to nominal income level targeting. In this case, it’s worth wondering whether negative interest rates really add a whole lot to the monetary policy arsenal, again, provided, markets didn’t think the central bank was skittish about its policies. The answer, I expect, is a probable “no” for reasons listed below:

  • A nominal income target works as much through expectations of action as much as action. So once such a regime is credibly instituted, money velocity is unlikely to fall as much as it did even during a pretty serious crash. This doesn’t require lower interest rates.
  • proper quantitative easing plan can very easily provide above expectations with adequate firepower. What would such a plan look like? A symmetric Evans Rule. That is, for every month that the Federal Reserve misses its nominal income target, the scale of asset purchases are increased by some percent n. The exponential growth here would immediately convince investors that inflation is coming, stabilizing nominal income growth.

The only reason we would need negative interest rates under a nominal income target is if quantitative easing was somehow less welfare efficient than negative interest rates. This is likely to be the case if the central bank was forced to inject liquidity via the purchase of many private assets. However, with government debt levels where they are, this is not a significant concern, and can always be fixed with the issuance of higher maturity debt.

Another contention might be that it is easier to implement a “rules based” rather than “discretionary” monetary policy with the ability to vary interest rates below zero. While there is a sense that quantitative easing is discretionary, that only has to do with the conservative nature of the Federal Reserve, and there’s no reason why following a Taylor Rule when rates exceed zero, and an “exponential growth of asset purchases” when rates fall below zero is any more discretionary. It’s just as algorithmic, but with one extra condition. Die hard monetarists even want to institute a “nominal income prediction market” which would remove the discretionary element of maintaining the rule entirely.

Michael Woodford or Paul Krugman’s preferred monetary policy – “credibly promising to be irresponsible” – might be better achieved under negative interest rates but, even then, that’s not a clear conclusion. If central banks can’t credibly commit to keep interest rates at zero for a long time due to institutional conservatism, I’m not sure how we could a) abolish paper money, and b) credibly convince the market that we’ll bring them below zero for long enough. That the Bank of Japan increased interest rates whenever the economy was just about to recover is an example of this difficulty.

Anyway, if Bernanke could somehow promise that interest rates will be zero on January 01, 2017 there’s a very good chance we’d hit escape velocity from the liquidity trap. And that’s a less radical promise than getting rid of paper money altogether. (Can you imagine what Austrians and their ilk who dominate America’s policy minds on both sides of the aisle would say about NEGATIVE interest rates?) By the time we reach a political consensus that paper money is archaic, we’ll have a far better monetary policy to begin with by virtue of the fact that it is less radical. (Not to mention the fact that in modern markets simply holding a foreign currency won’t be a bad choice, either).

I sometimes feel arguments for a negative interest rate are substituted in place of arguments for a better policy target. But the latter is the important debate, and the former is only a tool to achieve the latter. If an optimal target necessitated negative interest rates, I’d be writing about them every day. But I’ve yet to see an argument why a nominal income level target requires negative interest rates. Importantly, the central bank can technically levy a penalty on excess reserves which has the same benefits.

Paper money is killing the economy, but so is central bank conservatism. The former is just a symptom, the latter a disease.

Nicholas Kristof argues in Sunday’s New York Times, that an American intervention in Syria is the least-bad option. He makes an argument that embodies “just war theory” – bellum iustum – thoroughly surveyed and summarized by Neta C. Crawford (excerpt):

In sum, although just war theory has evolved, its key elements remain consistent. War is just if the cause and intention are just: namely, self-defense and the promotion of peace. War should be a last resort; it should be undertaken by competent authorities only if there is a possibility of success and if the overall good of the war will outweigh the harm it does. War must also be con- ducted justly: unnecessary violence should be avoided, and non- combatants should not be deliberately targeted.

But America’s intention is not just. At least not by the metric stipulated by Kristof or (most) just war theorists. As Kristof sees the story, it is America’s moral duty to help the abused and blighted:

If we were fighting against an incomparably harsher dictator using chemical weapons on our own neighborhoods, and dropping napalm-like substances on our children’s schools, would we regard other countries as “pro-peace” if they sat on the fence as our dead piled up?

Indeed, if this was President Obama’s principal charge for war I might have been on the fence. Claims that America cannot help are very unfounded. If the world’s largest army better funded than the next infinity combined cannot stop one pathetic dictator in his tracks and halt a civil war, I do not know what it can do. But the domestic, political, economic and, most importantly, human costs of that are too high to maintain. More likely we will engage in a stripped down mission focused primarily on keeping our threats credible and “maintaining international norms” – whatever the hell this is. (In reality, the administration’s intentions likely includes a more complex understanding of international relations with the Middle East. No doubt this does not principally concern the welfare of Syrian people per se) The life and liberty of the Syrian people will play no role in the calculus for war design and, hence, when there emerges a future tradeoff between political needs and Syrian success, we will always choose the former: for we have demonstrated that America’s threats are credible.

There is a deeper reason why intervention is not just. Here’s Crawford:

Jus ad bellum also contends that war must be the last resort, which entails a search for options other than the use of military force, and the patient application of the nonmilitary methods that might be successful. Force becomes acceptable, in this view, only when other methods will not work. The criterion is clear, but deceptively so. How can we know that all options were tried before force was used?

Sometimes it is clear that war is the last resort. Though I have to hark back 1861 to think of an example to this effect. The reason we definitely do not know that this is a war of last resort today again goes back to Obama’s stated intention of maintaining international norms and credibility. Credibility requires that once Assad crossed the “red line”, America attack promptly. Not in ten years. And certainly not after onerous diplomacy. So we can be somewhat certain – given the incentives and stated objectives of the Obama administration – that non-military action was not sufficiently pursued.

Most importantly, as Crawford accepts, just war requires a likelihood of success. Not the best chance of success, as Kristof suggests. Not a possibility, but a probability. And this has not been demonstrated by the administration or its unholy alliance with war hawks – one in which humanitarian journalists like Kristof do not belong. Extraordinary actions require extraordinary evidence.

Kristof makes a good case that Obama is logical in his case for war. That makes it justified, not just.

Economics and liberal philosophy intersect on the question of liberty. The economist might argue that minimum wage laws reduce welfare by banning Pareto dominant transactions between two agents that would make each better off without leaving anyone else for the worse. The philosopher might argue that it is our freedom to work for whichever wage rate we command: surely volunteerism should not be banned?

A similar and more resonant argument emerges in the market for sex: banning it is not just illiberal, but destroys value created in a transaction that makes both solicitor and prostitute the worse off without bettering anyone else, so long as the activity is private and unseen. This is an overwhelmingly popular argument among intellectuals, left and right, but faces severe limits. Indeed, much of the argument falls prey to what we might call the fallacy of marginalism or confusing marginal benefit with average benefit.

I am not arguing that prostitution should be illegal, per se, but want to provide a framework that will be more amenable to modern liberals and libertarians than the moralistic nonsense offered by social conservatives and can hopefully extend that reasoning to more salient topics like minimum wage, immigration control, and other illiberal regulation.

First, let’s state the philosophical argument, or what Kaushik Basu calls the “principle of free contract”

which asserts that when two or more consenting adults agree to a contract or an exchange that has no negative externalities on uninvolved individuals, then government has no reason to intervene and prohibit such a transaction. This principle is the product of two more fundamental ideas: the Pareto principle and consumer sovereignty. The Pareto principle asserts that if a change is such that at least one party is better off and others are no worse off, then that change is desirable. Consumer sovereignty asserts that each (adult) individual is the arbiter of that individual’s own welfare.

(I have not read this particular Basu paper, but enjoy his phrase and definition of free contract from his book Beyond the Invisible Hand – a book I read a long time ago, which inspired my love for economics.)

Therefore, if we aggregate over all such transactions, welfare and social good is maximized if and only if humans are free to contract. For this reason, economists are far less critical of moneylending at obscene – “usurious” – interest rates. But once we consider social norms the principle of free contract (PFC) is on substantially weaker footing.

Let’s use an example of prostitution to see how. Using a story from a TV favorite, The West Wing, imagine a young women paying her law school tuition through weekend prostitution. There is nothing morally repulsive about this scenario by itself, and it is a commendably efficient way to earn good money on a law student’s (presumably) busy schedule. To make the logical structure of the argument a little more transparent, let’s suppose Laurie – the prostitute – was actually using the money not to get through law school, but for LSAT prep to get into law school. This is not structurally different, but more intuitively forceful.

Laurie is now better off and ready to crack any exam and interview thrown at her as a result of elite prep classes affordable only to the few. However, seats at the top law schools are effectively zero sum: Laurie’s acceptance translates almost directly into her colleague’s rejection. This makes the application pool just a little more competitive on the margin. Now imagine a girl who just barely made it into law school without prep classes and, like Laurie, can neither afford to pay for elite classes or work in a normal job to finance resulting loans.

This girl, and everyone like her, will now be rejected because they only just made it. They would each all make it were they to also engage in a low time, high reward activity like prostitution. This argument continues: in the real world only several times because markets are not perfect, but theoretically ad infinitum.

Eventually, everything would be okay if all concerned were morally okay with prostitution. But Laurie is, let’s say, atheist – all of her compatriots that are practicing Catholics, Muslims, or just were morally uncertain about prostitution would be left behind. We know that within a capitalist system that those who do not work hard are left behind, and that is its greatest strength. But the assumption that contracts do not carry externalities is violated when others – to maintain the same standard of living – are compelled to do something that is against their moral code.

This argument can be terribly abused. I can stipulate it is against my moral code to work more than ten hours a week, and hence the government should ban everyone from doing so. That would be dumb, economically and morally, because most people do not hold this view.

But this is a more tenuous argument relative to prostitution. How many parents would say they are okay with their children participating in sex markets – with full and total consent – so that everyone else is better off, as liberal economic theory stipulates. My guess would be very few.

The side effect of free contract is forced homogeneity of the most aggressive principles.

In the sense of a “Protestant work ethic” that can be good, even great, by making once lazy and poor countries rich and prosperous – to summarize the nuances of economic history in five words!

The macroeconomist might say that both marginal and average welfare increase under free contract. Certainly if, between two convenience stores, the one owned by a hardworking immigrant stays open twenty-four hours, and the other closes at eight, competition will buoy per capita GDP, providing an illusion of a richer society. In reality, the microeconomist will reply, total utility – which is the cause of contention – is a tradeoff between work (dollars) and leisure. The higher GDP of the harder working country may not reflect a similarly higher utility if the value of leisure is high.

In fact, working hours are the clearest example of capitalism homogenizing the aggressive behaviors of hard work. This is most evident in the comparison of two similar economic structures – the United States and Europe – where the former is far richer by per capita GDP and works far harder whereas the latter is riddled with required vacations and regulated work hours. The United States being the more capitalist if the two, work ethic diffuses more rapidly from those innately or morally predisposed to such and those compelled into such through competition. But GDP does not account for the value of reading Shakespeare alone or watching NFL with your friends.

We can make this argument within the neoclassical structure as well by reconsidering the definition of “free”. If we no longer assume that the existence of choice implies the void of compulsion, it becomes clear that most contracts may not be free. For example, if I am providing my family a lifestyle commensurate with an income of $50,000 a year, and an immigrant moves and undercuts my prices, I can either choose to work the same hours for less income. But social commitments and a responsibility to family will encourage me to sacrifice leisure instead. Then, we may say, externalities exist to every contract making the idea of aggregated free contract a red herring in the case for liberalism.

Undercutting my personal wage rate is formally the same as working harder: indeed, if I choose to work for $4 instead of $8, hourly, I must spend twice as much time to maintain the same lifestyle.

This line of argument not only challenges the economic assumption that free contract is everywhere and always superior but also redefines the frame of a philosopher’s case for liberty. That is, under social obligations, am I really free to work less in the face of competition?

Ultimately, it is unlikely this argument can – or even should – change the mind of economists for most things. I, myself, am not convinced, but rather outlining what started out as a Devil’s Advocate case against prostitution or drug legality. In any case, for issues of social importance like prostitution, it bears (I think) significantly on the idea of externalities from the economic and social, rather than physical, outcomes of a contract. By definition, these are largely removed from standard economic analysis, but still follow similar principles of welfare and utility maximization.

I have touched, but not discussed, some philosophical pondering for another day. For one, what exactly constitutes “freedom”? This question has compelling implications, particularly so in markets for organs, surrogate mothers, and even plain, old, work.

Jeffrey Dorfman, somehow a professor at the University of Georgia, has the scoop in Forbes India. Normally, it’s not even worth writing about articles that are misleading and profoundly confused. But when it comes from someone of supposed repute making the worst possible argument a rejoinder can be important. I’m writing this post as much for the pro-Austerians as the pro-Keynesians. It would be smart for the anti-stimulus crowd to disavow the worst arguments made to their effect, like this from Dorfman.

First, I ask the Forbes editors, how they used literally the same title for two, entirely different articles:



(Both are bad; the latter is infinitely superior to the former. And what’s with the asymmetric punctuation?)

Of course, when an article starts with a moral, economic, social, political, and philosophical absolute like “Government spending cannot generate economic growth” we already know a train wreck is en route. No meta-rational person could possibly write something so absolute. (Frequent readers know that I don’t discount supply-side factors at all, and have written about their recent importance contra singly-demand side theories). More refined believers of Say’s Law sometimes criticize Keynesians for misrepresenting the idea as simply as “supply creates its own demand”. (David Glasner, by the way, has some of the best analysis of Say’s Law in a sensible context). But here’s Dorfman claiming the Keynesian caricature:

You cannot buy a product unless somebody has manufactured it and is ready to sell. If supply is unchanged, an increase of demand results in bidding among buyers and higher prices. More demand without more supply does no good. Therefore, economic policy should focus on the supply side, encouraging businesses to invest and create.

Several things here confuse me. I was taught that aggregate nominal demand is the sum of consumption, investment, and government purchases. It would seem to me that “encouraging businesses to invest” would then constitute “aggregate demand”. Was I taught wrong? More likely, “encouraging businesses to invest” – as demand side a phenomenon as that may be – is just code for tax cuts and deregulation. (The former of which, by the way, is stimulus spending!)

More importantly, unless one rejects wage rigidity completely and absolutely “higher prices” are exactly what the economy needs. Then again it is entirely possible the writer believes that “aggregate supply is always an everywhere a vertical phenomenon”.

And then comes the kicker:

The only problem with these arguments is that all the purported facts are misstated. In reality, few countries in Europe have reduced government spending. For those that have, growth is generally better than it is in countries that have continued to expand government spending.

Data on 30 European countries from Eurostat, the official statistics agency of the EU, show that only eight countries cut government spending between 2008 and 2012. Of the eight, only Iceland and Ireland faced significant outside pressure to impose austerity. The others are Bulgaria, Latvia, Lithuania, Hungary, Poland and Romania.

Many countries that have purportedly tried austerity and failed are not on the above list. Greece, Spain, Italy and Portugal increased state spending. Italy is the only one of those four whose hike in government spending (4.1 percent) is below the EU average of 4.9 percent over 2008-2012. Greece (8.3 percent), Spain (13.3 percent) and Portugal (5.8 percent) were more profligate than the average European government.

Aside from the fact that austerity must be measured on potential output – as elusive a statistic as that may be – it’s inane to write that there was no outside pressure for spending cuts. Here’s a nice (graphically, tragic otherwise) diagram from Reuters for Greece:


“Agreed with the EU, ECB, and IMF”, by the way, should be interpreted as “outside pressure”. A smart “real” indicator for austerity would be public sector disemployment. And that’s been tried across the pond here in the United States, by the way, not to any great avail. (Of course, the titling of this article suggests I do not share the same definition of “try” and its derivatives).

We continue:

Eurostat also contains data on GDP growth rates from 2008 to 2011 (2012 data are not ready for all countries). In terms of GDP growth only two of the eight countries that practised austerity were below average: Iceland and Ireland. Iceland had a meltdown of its banking system, so it is a special case. Ireland had a big real estate bubble that popped, causing a bank crisis and enormous government deficits. Both were among countries with the severest recessions.

This is called making exceptions when your theory fails. Of course, more than eight countries practiced austerity and this makes no sense to begin with since countries that practiced austerity might have stronger fundamentals – like the United Kingdom compared to Greece. And, since the author is from Georgia, I wonder which other country had a “meltdown of its banking system” and “a big real estate bubble that popped” thereby “causing a bank crisis and enormous government deficits”. But this line of argument would suggest Dorfman agrees that random correlations do not suggest causation.

He, surprise, does not:

As further evidence, the correlation between government spending growth and GDP growth is negative (–0.14) for these 30 European countries, meaning they move oppositely—higher government spending growth leads to lower GDP growth. If Keynesians were correct—that government spending increased growth—the correlation would be positive.

I actually wasn’t planning on writing this post until I read this paragraph. This was written by an economics PhD who teaches America’s tuition-paying students. And we’re talking about the University of Georgia, a taxpayer funded, research university. For one, citing a slope without a relevant r squared or a regression without a p value should be illegal. But slightly deeper statistical analysis isn’t even my point. Even if Dorfman doesn’t agree, were he to be making the best possible case against stimulus, would it not be worth at least noting the possibility that countries that engaged in deeper austerity had stronger fundamentals? That countries which couldn’t as rapidly curtail deficits had structural differences that makes said observation entirely useless?

Or, more importantly and subtly, while everyone (actually, read the article and scratch that) knows that “correlation does not imply causation”, few people really, intuitively accept that causation doesn’t imply correlation. I’ve discussed this in some more detail previously, but there is no reason to accept that Keynesians would only be right if “the correlation [was] positive”. By the way, to challenge your priors, check out Australia, which weathered the recession far better than any other country, and its government spending.

But, hey:

The Europe-wide negative correlation between government-spending growth and GDP growth, combined with the fact that three of the four countries with the best GDP growth tried austerity, suggests that austerity has some empirical support in Europe. This brief look at the data is not enough to prove austerity works, but it certainly has not been the widespread failure Keynesians claim.

A “Europe-wide negative correlation”, of course, is filler talk since it makes no sense to regress statistics randomly across a complex system that is the European economy. For example, the United States “tried austerity” and did way better than many European economies. Does this mean sequestration worked? Not really – just that hiking interest rates in the depth of a recession is really dumb. Not to mention the extremely small sample size.

If only economic zombie theories were as small in number as the extent of the data sets used thereof.

I’m sorry. Is Forbes trying to laugh at its Indian audience?

The latter half of the 20th century was a great time for American liberalism. Our big, but more or less market oriented, government – for the first time – used public policy as a means of substantially curbing inequality across the country. The story of postwar America was of the middle-class autoworker living a good life.

There are economic reasons to doubt that we’re reaching a crescendo in the era of increased polarization: skill-biased technological change being key among them. But the more pressing issue is social, political and, unfortunately, broadly unmentioned. Perhaps the ferment in economic structure due to automotive and other technology played an important role in creating the new middle-class.

However, it is indisputable that Roosevelt, Truman, and Eisenhower era policies of very high taxes and public spending played an even more important role. Most Americans today cannot comprehend the extent to which the Federal Government was involved with economic life just two generations ago.

In a democratic society, this implied incredible political will to create progressive institutions. I have little doubt that if we wanted to, policy could cure inequality with a broad enough mandate – like that given to Roosevelt.

But this obscures something important. The Great Recession might have been the worst economic event in American history since the Great Depression. But it wasn’t the Great Depression. Living standards for the median and poor in America might be at their relative minimum since the Great Depression. But not their absolute minimum.

To understand the difference between then and now, citing GDP per capita is just not enough, because the mean blurs tail skews. In 1933, the average income for the bottom 90% was less than $7,000 dollars. In other words the average Chinese (who is very poor, by the way) lives much better today than most Americans did then.

The political will in a democratic society to vote to eat, be clothed, and provide for your children is very strong.

The equivalent figure today is over $30,000. Sure the rich today are unimaginably wealthier – but that doesn’t change the evaporation of fundamental want.

This is to say that we may never again see the political will from the country as a whole necessary to employ policy to curb inequality. This is to say that the Kuznets Curve for inequality in democracies might well be bimodal.