A genuinely good employment report this morning — adding jobs like it’s 1999, and some actual wage growth, finally.

But — you knew there would be a but — good news can turn into bad news if it encourages complacency.

There will, predictably, be calls to respond to the good news by normalizing monetary policy, raising interest rates soon. And we will want to raise rates off zero at some point. But it’s important to say that (a) we are still highly uncertain about the underlying strength of the economy (b) the risks remain very asymmetric, with much more danger from tightening too soon than from tightening too late.

On (a), the uncertainty comes in several dimensions. We don’t know how long the good news on jobs will continue; we don’t know how far we are from full employment; we don’t know how high interest rates should go even when we do get to full employment.

On (b), we know how to deal with above-target inflation; it’s a problem, but not a trap. But if you get into a trap like Japan’s, or that which the euro area already seems to be in, getting out is very hard. You really don’t want to risk tightening too soon, and finding yourself desperately trying to get traction in a zero-rate environment.

One related point: there may be some tendency to say that things are really good, because we can count on falling oil prices to give the economy a big boost. But as I suggested yesterday, that’s not as clear as you might think. And I was happy to see the much more detailed analysis from Dave Altig at the Atlanta Fed making basically the same point. Once you take into account the effects of falling oil prices on energy investment, the stimulative effects of the fall look weaker, maybe even nonexistent.

So still: the Fed should wait until it sees the whites of inflation’s eyes — and by inflation I mean inflation clearly above 2 percent, and if I had my way higher than that.

I may be doing some media where people will ask me about what the oil plunge means for the US economy, so I thought I’d spend a bit of time figuring out what if anything I might say that’s interesting. And it does seem to me that there’s a bit more to the story than a casual pass might suggest.

The big news prior to the plunge was, of course, fracking and all that, which has abruptly reversed the long slide in domestic production:

Photo

You might think that this surge in production, by reducing imports, has left the US relatively insulated from oil shocks. But we do need to remember that on the eve of the latest plunge real oil prices were very high by historical standards, so that oil imports as a share of GDP remained quite high — in fact, early OPEC high:

Photo

So the economic impact might be bigger than you think. But shale has in some important ways arguably changed the nature of that impact.

Because we once again have a significant sized domestic oil industry, falling prices now create losers as well as winners within the US. The gains from falling prices exceed the losses, and if the marginal propensity to spend is similar that should tell the tale for aggregate demand. In fact, in the old days when domestic oil largely meant Texas billionaires and all that, it was reasonable to argue that the internal redistribution further increased demand when oil fell.

But fracking (which I really wish WordPress would stop correcting to “tracking”) means that some of the producers are very different; and among other things, they’re engaged in a lot of investment spending. So you could make the case that falling oil is less expansionary than it used to be, and even, possibly, that it’s contractionary.

This is just a, um, crude first pass. But there may be more here than the pure terms of trade effect.

I’ve been getting correspondence from people saying that I need to respond to Tom Edsall channeling Chuck Schumer on how health reform was a mistake, Obama should have focused on the economy.

The thing is, I responded to this argument four years ago, and everything I said then still applies. When people say that Obama should have “focused” on the economy, what, specifically, are they saying he should have done? Enacted a bigger stimulus? Maybe he could have done that at the very beginning, but that wouldn’t have conflicted with the effort to pass health reform — and anyway, I don’t hear many of the “focus” types saying that. So what do they mean? Obama should have gone around squinting and saying “I’m focused on the economy”? What would that have done?

Look, governing is not just theater. For sure the weakness of the recovery has hurt Democrats. But “focusing”, whatever that means, wouldn’t have delivered more job growth. What should Obama have done that he actually could have done in the face of scorched-earth Republican opposition? And how, if at all, did health reform stand in the way of doing whatever it is you’re saying he should have done?

I have seen no answer to these questions.

I’m at a Columbia conference on that topic, giving a talk tonight; my slides are here (pdf). My basic point is that we need to get beyond reduced-form correlations between inequality and growth, and a few samples of things we might do.

I’m actually a skeptic on the inequality-is-bad-for-performance proposition — not hard line against it, but worried that the evidence for some popular stories is weaker than I’d like. It’s important to realize that even the absence of a relationship is a big change from conventional wisdom; but how much do we really know for the opposite case?

Six years and counting since we hit the zero lower bound, Keynesian macroeconomics has been quite successful. It predicted low inflation despite huge increases in the monetary base, low interest rates despite big budget deficits, severe negative output effects from fiscal austerity; and if you don’t think these predictions mean anything, go back and look at the ridicule heaped on those of us making them at the time. But anti-Keynesians won’t take yes for an answer. Partly this involves claiming that Keynesians said things they never did.

But it also involves invoking Warren Harding. Seriously.

Two things to say about the bizarre citation of the 1921 economic recovery as somehow refuting everything we’ve learned about macroeconomics since then. First, we’ve already been over this, here and here. The 1921 thing is of no use precisely because it looks like the kinds of recession where the Fed creates a slump with tight money, then relents; the whole point about 2007 onwards — predicted in advance — is that it was a postmodern recession caused by private-sector overreach, and therefore much harder to end. Anyone trotting out 1921 at this late date, with no reference to the discussion we’ve already had on the subject, is just lazy.

Second, there is a familiar phenomenon here, in which a certain kind of would-be economic expert loves to cite the supposed lessons of economic experiences that are in the distant past, and where we actually have only a faint grasp of what really happened. Harding 1921 “works” only because people don’t know much about it; you have to navigate through some fairly obscure sources to figure out that it’s a tight-money recession that ended when the Fed reversed course. And the same goes even more strongly — let’s say, XII times as strongly — when, say, Ron Paul starts telling us about the Emperor Diocletian. The point is that the vagueness of the information, and even more so what most people know about it, lets such people project their prejudices onto the past and then claim that they’re discussing the lessons of experience.

Photo

I know all you young whippersnappers don’t remember ancient history, but a long time ago, in a galaxy far, far away — well, actually, in 2011, and right here on planet Earth — oil and other commodity prices were rising, not falling. As a result, headline inflation was running fairly high. Some of us argued that core inflation was a much better guide to monetary policy, and the Fed agreed; but inflationistas were going wild, and in Europe the ECB decided, disastrously, to raise interest rates.

So now that oil is plunging, the same people who saw rising oil as a reason to raise rates should see falling oil as a reason for expansionary policy, right?

Why, no. They’re telling us not to pay attention to low headline inflation, which they say is just oil (although it isn’t), and anyway, falling oil prices are a stimulus.

So when oil is going up, it’s a reason to tighten policy, and when it’s going down, it’s a reason not to loosen policy.

And people wonder why I talk about sadomonetarism.

Dean Baker is annoyed, and rightly so, at claims that Keynesians failed to predict the slow recovery. Dean and I were both tearing our hair out in early 2009, warning that the Obama stimulus was too small and too short-lived.

But actually it’s worse than that. Samuelson is taking the fact that this business cycle didn’t look like previous cycles as evidence that we don’t understand macroeconomics, so we shouldn’t even try to help the economy. But I was predicting a protracted jobless recovery long before the recession was official, and explained carefully why.

But then I also fairly often get comments along the lines of “If you’re so smart, how come you didn’t see the housing bubble”, when I not only did see it (although Dean saw it much earlier), but got a lot of flak for daring to raise questions about the Bush Boom.

Well, I guess you can’t expect people to be aware of what I was saying, seeing as how I only write for an obscure publication nobody has heard of.

Link replaced

A new paper by Marion Fourcade, Etienne Ollion, and Yann Algan on the structure of academic economics (pdf) is getting a fair bit of attention among people I talk to. The tone is rather jaundiced, but that’s surely a defensible attitude, and everything substantive it says about economics rings true from my own experience; I’m glad to see that quantitative analysis confirms what I thought.

Their basic point is that successful economists tend to be intellectually arrogant because they live in a social setup that is very hierarchical, with steep gradients of prestige, widespread agreement about what constitutes good work and who is doing it, and pretty big rewards by professorial standards for climbing to the top of the heap. Quite. I’ve played that game and lived that life; I’ve even written about it. My observations may be somewhat out of date, because while I’ve kept my academic ties I spend more and more of my time in my second career as indie music critic public intellectual. But maybe I can still add a bit to the description, and also talk about how all of this bears on some recent controversies.

So, academic economics is indeed very hierarchical; but I think it’s important to understand that it’s not a bureaucratic hierarchy, nor can status be conferred by crude patronage.

The profession runs on reputation — basically the shared perception that you’re a smart guy. But how do you get reputation? Not by having a chair at a major school; that helps your visibility, but doesn’t protect you from being perceived as none too bright (in fact, even past work doesn’t do that — you hear younger economists wondering how that guy wrote those papers.) Nor does having the support of a powerful person do very much; you can be the favorite student of the top person in your subfield, but that won’t do more than get your foot in the door.

Instead, reputation comes out of clever papers and snappy seminar presentations. There are problems with that, which I’ll get to. But the point for now is that while it may seem like a vague concept, within each subfield everyone knows who the top guns are, and there’s a very steep slope downward from the few people at the very pinnacle and the next level. In my original home field, international trade, we used to joke that senior hires were difficult because there were only four people in the top ten.

I’m doing some work on matters European, which should see the light of day shortly, and for future reference I want to post a simple chart. It makes the same point already made by Francesco Saraceno and Simon Wren-Lewis, but in a more stripped-down and possibly clearer (?) way.

The point is a simple but important one: at this point any European imbalances associated with the surge in capital flows to the periphery after the formation of the euro have been worked off via extremely painful and costly disinflation. If we look at the whole period from 1999 to the present, most of Europe has had cost growth and inflation just about consistent with the ECB’s long-standing just-under-2 percent inflation target. There’s just one big outlier:

Photo

At this point the European imbalance problem is a German problem, caused by Germany’s persistent failure to have wage and price increases in line with what the euro requires. This German undervaluation is in turn exporting deflation to the rest of Europe. By contrast, France, Spain, and even Italy have been playing by the rules.

Sorry, family stuff was going on and I completely forgot to post last night. Meanwhile, Switzerland is about to vote on a proposal to keep 20 percent of its enormous reserves in gold which can never be sold.

If the referendum fails, I propose that the Swiss National Bank buy some stones from Yap instead; they can be sunk in Lake Geneva.

So in honor of the Swiss, here’s First Aid Kit:

For years those of us pointing to low interest rates as evidence that fiscal scolds were all wrong met, over and over again, one stock answer: those low rates were meaningless, because the Fed was buying up government bonds and keeping rates artificially low. There was a big logical problem with that story: How can the Fed do that without causing inflation? There was also the fact that rates failed to spike when the Fed temporarily ended QE in 2011 — one big thing I got right and Bill Gross got wrong. But the story line has persisted nonetheless.

So the Fed ended QE last month. And today long-term rates settled at 2.18 percent, far below historical norms.

Maybe rates weren’t artificially low, after all?

Simon Wren-Lewis says most of what needs to be said about Tyler Cowen’s attempted riposte to my post about Keynes rising. I’d add that Cowen seems to have missed my point; I wasn’t talking about the merits of the Keynesian case, which I believe have always been overwhelming, but about the way macroeconomics is discussed in the media and among VSPs in general. My sense is that this is shifting in a Keynesian direction, while Cowen is arguing (wrongly, I’d say) that it shouldn’t shift because of Osborne or something. Wrong answer to the wrong question.

But I’d like to hone in on something else Simon notices: the reference to the “so-called liquidity trap.” This is something I still find, although less so: assertions that there is something odd or suspect about claims that the rules of economics change when policy interest rates hit the zero lower bound.

I can see how someone could have had that attitude in 2008 or even 2009, although not if he or she had paid any attention to Japan. But at this point we’ve been at the zero lower bound for six years; we’ve seen a 400 percent rise in the monetary base without a takeoff in inflation; we’ve seen record peacetime deficits go along with record low long-term interest rates. Liquidity trap economics aren’t a speculative hypothesis at this point, they’re the world we’ve been living in for years. How can that go unnoticed?

But there’s a lot of denial out there. Recently David Glasner deconstructed a WSJ op-ed calling for a return to the gold standard, which was as out of touch as you might expect. But what got me was the approving citation of Robert Mundell from 1971 (!) declaring that the Keynesian model was irrelevant to modern economies because it assumed pessimistic expectations and rigid wages. Right: no pessimism out there these days. And no sticky wages; oh, wait:

Photo

I mean, seriously, at this point even long-time skeptics about short-run wage and price stickiness are coming around in the face of overwhelming evidence.

Oh, and treating the monetary approach to the balance of payments as the epitome of modern macroeconomics is just hilarious. That was the new thing when I was an undergraduate econ major; to the extent that it was any use at all, its usefulness was restricted to countries with independent currencies but fixed exchange rates. It has been pretty much irrelevant since the collapse of Bretton Woods and is almost completely forgotten among serious international economists.

The resistance of much economic discussion to the facts of the world around us — the facts in front of our noses — is quite extraordinary, particularly if you compare it with what happened in the 1970s. The 70s of legend — the era of stagflation and all that — lasted maybe 7 years, from around 1973 to 1979 or 1980. Yet that stretch of time is constantly cited to this day as having refuted everything we supposedly knew about macroeconomics. So here we are, 40 years later, after six-plus years at the ZLB, with sticky prices and wages all around, etc., etc., and a large number of economic commentators haven’t noticed a thing.

There’s a new paper out of China, claiming that more than a third of investment spending since 2008 was wasted. It’s a claim that resonates, given what we know about corruption, ghost cities, and all that. But as SR of The Economist points out, the paper itself doesn’t actually do what it claims. It doesn’t at all show that there has been a lot of waste — in fact, the data it cites are perfectly consistent with no waste at all.

Why do we care? Well, for one thing economics should be done right regardless. But the waste claims will also, of course, be used as a club to beat Keynesian fiscal policy. So you should know that anyone citing this estimate is actually revealing that he either doesn’t understand growth economics or doesn’t care.

What the paper does is look at the ratio of capital added to economic growth — the so-called incremental capital output ratio. It finds that the ICOR has been lower in recent years than it was in the past, and attributes all of the shortfall to waste.

But what if there were no waste at all? What if China were simply engaged in capital deepening? What would we expect to see in that case? The answer is, exactly what we do see. The ICOR data say nothing at all about waste.

Think about a standard production function (Figure 1), and imagine that the Chinese economy is moving up and to the right on that curve, from A to B to C, as it accumulates capital.

Photo

In that case the economy does face diminishing returns, but that’s what is supposed to happen.

What the “$6.8 trillion in waste” paper does, however, is in effect to insist that the accumulation of capital in moving from B to C should yield the same increase in output per unit of capital as the accumulation from A to B. Graphically (Figure 2), it’s drawing a line from A to B and extrapolating it, then claiming that any shortfall from that extrapolation represents waste:

Photo

Once you think about it that way, you see that it’s obviously silly. Diminishing returns are not the same as waste.

Now, I’m not claiming that there’s no waste in China; I’m sure there’s plenty. And at that point we need to get into the question of what would have happened to those resources otherwise; if they would have been unemployed, wasteful spending is better than no spending. But that’s all a different discussion, to which the $6.8 trillion estimate makes no contribution.

Julia Belluz has a nice piece about weight loss, which a lot of us will be thinking about tomorrow morning. Two things really resonated: The absence of any well-defined best diet, and the importance of tracking.

As it happens — and at the severe risk of providing too much information — I have some recent experience along those lines. Yes, I’ve lost a fair bit of weight over the past two years (no special forcing event, just the approach of the big six-oh), and learned a few things about myself along the way. (Minor note: media outlets that like to run summaries of my stuff with an accompanying picture — hi there, Salon — might want to start using pictures that resemble my current incarnation.)

First, on the no best diet point: We tend, as a culture, to overstate individual differences. Turn on CNBC and you’ll see lots of ads for accounts that let you invest to meet your needs, or something; um, the vast majority of people should NOT be making investment choices, they should just park their money in an index fund. The same for insurance policies, whatever — and even on consumption, how many people really, really gain a lot from being able to, say, customize their fast food?

But if you’re trying to limit calories, people really are different. Some people can do sustained self-discipline, eating healthy limited portions all the time; sorry, I need to drown my sorrows in red wine and pasta. Mark Bittman’s vegan before 6 works for some people I know. But what has worked for me is severe caloric restriction two days a week. In case you’re wondering, it’s actually very unpleasant. But periodic suffering seems to suit my personality.

On the tracking issue: I use a Fitbit, not because I think it’s accurate, but to guilt-trip myself, which it does effectively, bullying me into doing my daily cardio, walking to work, etc. I also weigh myself daily, knowing full well that the fluctuations don’t mean anything; again, the guilt’s the thing.

And if all this sounds kind of grim, the fact is that I’m feeling pretty good. Will I hold to the new regime over the next few years? I guess we’ll see.

Is there a larger moral here? Ask me after the Fressen.