Hmm. In my inbox:

Dear Dr.Paul Krugman,

I am writing to let you know about our upcoming Special Issue on “Depression “, which will be published in Psychology (PSYCH, ISSN: 2152-7199) in September 2012. You can find the Call for Papers for this Special Issue at www.scirp.org/Journal/cfpOfSpecialIssue.aspx?JournalID=148 and the deadline for submission is 10th July 2012. The Special Issue is open to both original research articles as well as review articles.

I am contacting you about this Special Issue since I understand that you have published before in this area and I wanted to invite you to submit an article.

I guess a word search on “depression” for a psychology magazine would finger me as a possible author — if the searcher were a bot, not a human being.

While we’re at it, Princeton now has Microsoft speech technology providing transcriptions … sort of. I did kind of like the message about Chateau Banking, which I guess involves doings at palatial French homes — unless it’s about repo and stuff like that. Also the message concerning “Jeans for a link”, who I eventually figured out heads the National Economic Council.

I for one am ready to welcome our new bot overlords, but only once they get more of the kinks worked out.

Just to confirm what I said in today’s column:

RNC Spokeswoman: Republican Economic Platform Will Be The Bush Program, ‘Just Updated’

Because the worst incomes and jobs record since Herbert Hoover was just an accident.

Do we need this? Sheila Bair has joined the crew urging the Fed to stop trying to promote economic recovery, on the grounds that it’s feeding a bond bubble.

Sigh.

First of all, Bair simply assumes that we’re on the road to recovery. That’s very uncertain, and in any case it’s a very long road. My favorite current indicator:

Yes, a bit of progress toward the end — but hardly enough to declare victory.

Second, there is no good reason to believe that there is a bond bubble. The question you should ask is, do long-term rates make sense given the likely future path of short-term rates? And if you consider the outlook for unemployment (high) and inflation (low), short rates should stay low for a long time. Here’s my estimate based on CBO projections of U and inflation:

Given this prospect, a long-term rate well below 2 is indicated.

So where is this coming from? I suspect that Bair is talking to financial types, who do tend to insist that there’s something unnatural about low rates. But the economics is not on their side — and whether they know it or not, they’re talking their book.

Edward Luce says what many of us have been thinking: there’s a dangerous lack of focus in the Obama campaign, all too reminiscent of previous episodes. Above all, Obama isn’t telling a clear story about the economy.

What should that story be? Obama defenders do in fact have a clear story, which goes like this: he was confronted both with a very bad economy and with complete political obstruction — which mattered, by the way, even when Democrats controlled both houses of Congress, because of the filibuster. So he did what he could, via stimulus and other policies, and pulled the economy back from the brink. If he hasn’t done more, well, maybe he could have gotten a somewhat bigger stimulus, maybe he could have done more on housing relief, but on the whole he did pretty well given the political environment.

Let’s not get into the question of whether he could, in fact, have done considerably more. The point for now is that this is not the story the administration has been telling, at any point. First they insisted that the clearly inadequate stimulus was just right; then they have tried various anodyne slogans nobody remembers, all of which seem to imply that we’re doing just fine.

Presumably this reflects the judgment of the political team, which apparently believes that pointing out obstruction conveys an impression of weakness, and that happy talk is better than a Trumanesque campaign of hammering the do-nothing Republicans in Congress. But I have seen nothing these past three years suggesting that the political team has any idea how to play this game — and the happy talk leaves them completely flatfooted every time the economy underperforms.

For the past few months there has been an evident drift into complacency, a belief that a string of good jobs numbers will validate the happy talk. That’s a bet that can easily lose Obama the election.

OK, some readers have asked me to react to this critique by Mike Kimel. Brief response: Kimel apparently misses the distinction between ordinary monetary policy and quantitative easing, and also misunderstands what the Fed is buying.

Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound. But the large-scale conventional expansion the Fed engaged in by getting to the zero bound has, of course, widened the spread between short and long term rates, since markets expect short rates to rise above zero eventually. So looking at the raw data on the short-long spread tells you nothing.

QE is an attempt to get traction despite those zero short-term rates by buying long-term debt, hopefully narrowing the spread and thereby boosting the economy. I don’t think it’s had a large effect, but that’s the goal.

And as for the other thing: Kimel apparently thinks the Fed is buying privately issued MBS, aka toxic waste; actually it’s only buying agency debt, which already has an implicit federal guarantee and is functionally not much different from long-term Treasuries.

Next question?

Karl Smith is bemused; in two posts he asks what Wall Street thinks quantitative easing does, and apparently is getting a lot of vehemence but no coherence. (I liked this comment: “Zero hedge commentary suggests the fed manipulates our very life blood, as ordered by the lizard men, in order to create infinite debt and establish a soviet central planning regime.”)

I can’t help him here. It might, however, be helpful to have a picture of what we’re talking about here. The Cleveland Fed has a nice, continually updated chart on the Fed’s balance sheet. Here’s the story up to now:

There was a period when the Fed was lending a lot of money to banks under the TALF and all that — which is probably where the thing about giving the banks money comes from — but most of that has been repaid. These days, QE is basically purchases of long-term federal debt and bonds issued by Fannie and Freddie, which is effectively also federal debt. And these purchases have vast effects on the economy because … well, I share Karl Smith’s bemusement.

PS: Reading a few comments, I think it’s really important to emphasize that the Fed is only buying agency mortgage-backed securities — that is, the stuff that already has an implicit Federal guarantee. A lot of readers seem to think that the Fed is buying subprime MBS or something like that, handing over money for worthless paper. Not so.

So Mitt Romney gave a speech at a closed Ohio drywall factory, which he tried to use as a symbol of Obama’s economic failure. The symbolism was perfect — not as an illustration of Obama’s failure, but as an illustration of just how stupid Romney thinks we are.

Even regular reporters noticed that the factory in question closed under, yes, George W. Bush — a fact Romney failed to mention, although his campaign scrambled to cover for him afterwards.

What I didn’t see mentioned was the point that this was a drywall factory — that is, a supplier of a product largely used in home construction. It’s one thing to say that Obama should have revived the economy as a whole; it’s another to say that he should have brought back the housing bubble!

Finally, why should we believe that Romney’s policies — basically tax cuts for the rich, as usual — would yield great economic results? Well, I guess you can point to Bush’s example; how did his administration at this point compare with Obama? From BLS data:

You can offer various excuses for Bush’s record, I guess. But on the face of it, what possible reason is there to think that Bush-like policies would be an improvement?

I don’t know much about French politics. From here, however, it looks as if Sarkozy has a very clear idea of what he should be doing on economic policy, while Hollande doesn’t.

And this is a reason to root for Hollande.

If Sarkozy somehow pulls off an upset win, it will mean more of the same European economic orthodoxy — the insistence that fiscal responsibility is the only virtue and austerity the universal answer. This orthodoxy somehow retains its grip despite overwhelming evidence that it’s wrong and disastrous failures in practice.

An Hollande victory would shake things up, and offer at least the possibility of something better.

Oh, and Hollande is clearly a crazy person for actually calling for tax rates on top incomes that are around as high as leading public finance experts calculate they should be.

Recently I linked to Harold Pollack’s outrage over remarks by Paul Ryan, in which Ryan suggested that our safety-net programs are “a hammock that lulls able-bodied people to lives of dependency and complacency”.

Further to that point, Aaron Carroll tells us who actually receives Medicaid, which Ryan and Romney want to cut sharply. Carroll’s point is that it’s nonsense to claim that vast savings can be achieved through “innovation”; but his chart also tells you about who we’re talking about. In order of expense, these are the key Medicaid groups:

– the blind or disabled
– the elderly
– children

And many of the adults who account for the rest are pregnant mothers or parents of young children.

So, look at all those able-bodied people living lives of complacency thanks to Medicaid. Hmmm.

Ryan Avent and Matt Yglesias have been having a debate about whether the zero lower bound really matters for monetary policy, which is related to — but not the same as — the debate about whether the Fed is falling way short on the job. So let me throw in my two basis points here.

The shared starting point here is that we are in a situation in which the Fed would clearly cut rates if it could; based on historical relationships between unemployment, inflation, and policy rates, the Fed funds rate “should” be something like -4 percent. But the Fed can’t do that. What it could do, however, is try to reduce real interest rates by raising expected inflation.

Avent is right in saying that raising the inflation target would, in economic terms, be very much the same thing as cutting rates. He then argues that this says that the real constraint on policy is political, not technical, and hence that the Fed is engaging in malfeasance.

Yglesias argues that the difference between conventional and unconventional policy is consequential — that there are well-established rules and understandings about how the Fed moves short-term rates, whereas something like moving the inflation target would enter unknown territory even if the strict economics says that it’s pretty much the same thing.

As I see it, Yglesias’s point is right — but there’s even more to it than that, a point I tried to get at here. Changing inflation expectations may be similar in its implications to just cutting rates, but it’s very different in terms of implementation. The Fed can cut rates simply by telling the open-market desk to make it so; it can only change expected inflation by shifting market beliefs about what it will do some years down the road — by credibly promising to be irresponsible, as I put it way back when — which is a much more iffy task.

So the zero lower bound does matter. By all means, let’s harass the Fed from the left, and demand that it do more. But I hope it’s possible to accept simultaneously the insight that the Fed could and should do more, and that it’s hard at the zero lower bound, and it would really help if the Fed had fiscal help.

A bit of beauty to end the week. Original:

And cover (which is where I first heard it):

Each excellent in its own way — and nothing like what I’ve been doing all week.

In response to this post, some readers asked for data on the income of the elderly. Here’s the Social Security Administration source. If you look at Table 9B6 you’ll see (left column) that 55 percent of the elderly get more than half their income from Social Security; 33 percent get more than 80 percent of their income from that source.

And if you look at Table 10.5 you see that the elderly in the middle of the income distribution get 66 percent of their income from Social Security, versus 9 percent from private pensions and just 5 percent from assets.

If that’s not the way the elderly people you know live, that’s because they’re not representative.

I don’t usually do personal-anecdote analysis, but a quick thought here.

I lived and worked in the Boston area from 1979 to 2000, with a few interruptions, and I got to know the traffic very well. In particular, I had a very good idea of how long you should count on spending in a cab if going from South Station to Cambridge at 5 PM on a Friday.

But I left before the Big Dig was finished.

So here I am, to be the dinner entertainment for the NBER macro conference, and I did the aforementioned cab ride (if the conference had been at Kendall or Harvard Square I would have taken the T, but it isn’t). And the ride was … amazingly fast.

The Big Dig is often treated as a cautionary tale of delays and cost overruns, and I have no idea how the cost-benefit analysis looks in retrospect. And I’m in general skeptical about highway expansions. But there sure have been benefits; and would the money really have yielded a higher social return if it had been used to reduce budget deficits, and thereby make more funds available for the housing bubble?

Anyway, I now return to my data-heavy usual self.

These past few years have been lean times in many respects — but they’ve been boom years for agonizingly dumb, pound-your-head-on-the-table economic fallacies. The latest fad — illustrated by this piece in today’s WSJ — is that expansionary monetary policy is a giveaway to banks and plutocrats generally. Indeed, that WSJ screed actually claims that the whole 1 versus 99 thing should really be about reining in or maybe abolishing the Fed. And unfortunately, some good people, like Daron Agemoglu and Simon Johnson, have bought into at least some version of this story.

What’s wrong with the idea that running the printing presses is a giveaway to plutocrats? Let me count the ways.

First, as Joe Wiesenthal and Mike Konczal both point out, the actual politics is utterly the reverse of what’s being claimed. Quantitative easing isn’t being imposed on an unwitting populace by financiers and rentiers; it’s being undertaken, to the extent that it is, over howls of protest from the financial industry. I mean, where are the editorials in the WSJ demanding that the Fed raise its inflation target?

Beyond that, let’s talk about the economics.

The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.

To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.

I mean, what is the un-artificial, or if you prefer, “natural” rate of interest? As it turns out, there is actually a standard definition of the natural rate of interest, coming from Wicksell, and it’s basically defined on a PPE basis (that’s for proof of the pudding is in the eating). Roughly, the natural rate of interest is the rate that would lead to stable inflation at more or less full employment.

And we have low inflation with high unemployment, strongly suggesting that the natural rate of interest is below current levels, and that the key problem is the zero lower bound which keeps us from getting there. Under these circumstances, expansionary Fed policy isn’t some kind of giveway to the banks, it’s just an effort to give the economy what it needs.

Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy — and that’s what has actually happened.

Finally, how is expansionary monetary policy supposed to hurt the 99 percent? Think of all the people living on fixed incomes, we’re told. But who are these people? I know the picture: retirees living on the interest on their bank account and their fixed pension check — and there are no doubt some people fitting that description. But there aren’t many of them.

The typical retired American these days relies largely on Social Security — which is indexed against inflation. He or she may get some interest income from bank deposits, but not much: ordinary Americans have fewer financial assets than the elite can easily imagine.And as for pensions: yes, some people have defined-benefit pension plans that aren’t indexed for inflation. But that’s a dwindling minority — and the effect of, say, 1 or 2 percent higher inflation isn’t going to be enormous even for this minority.

No, the real victims of expansionary monetary policies are the very people who the current mythology says are pushing these policies. And that, I guess, explains why we’re hearing the opposite. It’s George Orwell’s world, and we’re just living in it.

Another Hungary post from my Princeton colleague Kim Lane Scheppele, after the jump.

Read more…