tag:blogger.com,1999:blog-2499715909956774229.post5835982998744586422..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Secular Stagnation: Useful Ideas or Hot Air?Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger38125tag:blogger.com,1999:blog-2499715909956774229.post-4919282332573139432014-09-02T13:35:59.389-07:002014-09-02T13:35:59.389-07:00Hi Steve,
I have been reading the ebook that you l...Hi Steve,<br />I have been reading the ebook that you link to... They mention Effective Demand in the section titles, but they do not even describe what the term means or even use it in any article of the book. People do not understand effective demand, but the concept is working its way into the understanding.<br /><br />Answers to your questions...<br />i... Think of Germany where they reduced labor share and national savings increased. The result was an increase in their exports to zero out their balance of payments. If there is no one to absorb the excess production, what would have happened to Germany? Stagnation.<br /><br />ii... Increasing labor share would increase demand for final consumption goods. But the key is to see that increasing labor share increases effective demand. So you would need to understand what effective demand is. Effective demand is a limit upon production. The easiest way to describe it is like this... firms will not produce beyond labor's share of total productive capacity. So if total productive capacity is $20 trillion, and labor share is 75%. Then the economy will not want to produce beyond $15 trillion. This has been the pattern for as long as I have data (since the 1960's). <br />Imagine a baker who has 15 potential customers. The baker can produce enough for 20 customers. The baker will always lose if he bakes for more than 15 customers. There are reasons to have excess capacity for production. As long as the baker produces for less than 15 customers, he has pricing power to increase profits. You will see a similar reasoning by Keynes on page 220 of this link. (in the full paragraph on that page)<br />http://alvaroaltamirano.files.wordpress.com/2010/05/keynes_general_theory_of_employment_qje_1937.pdf<br /><br />iii... The optimal labor share depends on the optimal and sustainable growth path of your economy. As an economy matures, optimal labor share will increase. The same used to happen in business. As a business matures, it will hold less retained earnings and pay out a larger share to management and the workers.<br />We now see labor share reversing in advanced countries from Germany, China, Japan, UK, Euro area to the US. The problem is that our economies have matured and don't have incentive for investment like they used to years ago. Our economies have come to rely on stable demand. But when demand weakens due to income, there is less incentive to invest and more incentive to hoard profits. Then you see a secular decline.Edward Lamberthttp://effectivedemand.typepad.comnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31691734240657117832014-08-26T03:27:39.763-07:002014-08-26T03:27:39.763-07:00You have obviously not read this seminal paper, ot...You have obviously not read this seminal paper, otherwise you would not become so mad when somebody mentions it and its implications concerning land inequality in the third world.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-5913418712350472022014-08-25T15:10:29.850-07:002014-08-25T15:10:29.850-07:00I wonder if Steve would claim his model applies to...I wonder if Steve would claim his model applies to Brazil in 1992 (negative real rate), the U.S. in 1979 (negative real rate), and Japan in 1998 (positive real rate). Would make for an interesting post though. <br /><br />anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-47450425561850749462014-08-25T13:35:52.243-07:002014-08-25T13:35:52.243-07:00"private sector safe assets at the time was a..."private sector safe assets at the time was a function of the stability of the banking system"<br /><br />Not true! As in the model (see Steve's 2012 AER paper) so in real life the supply of safe assets is related to the distribution of returns of the investment opportunities available to the private sector. A shifting down of this distribution reduces the ability of the private sector to supply safe assets.<br /><br />""demand for interest bearing safe assets" does not rise during high inflation"<br /><br />Sure it does! If you go by the Keynesian liquidity preference theory, demand for money is negatively related to the nominal rate of interest (which includes the rate of inflation), since the latter is the opportunity cost of holding money instead of interest-baring assets. In Steve's model (see his 2012 AER, section 3.3.3) when inflation is high, people would rather spend the money right away rather than deposit it at the bank where it loses purchasing power faster. This results in a higher price level for goods at all dates (lower price level for money), which reduces the real stock (purchasing power) of outstanding government bonds that serve as safe assets. In turn, this reduces their real interest rate! Now, are the bonds of Brazil and Argentina really safe assets? Come on now! <br /><br />You seem too eager to dismiss the theory. I think you should spend more time thinking/reading about it. Anyway, I am calling it quits at this point.CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-54553983506463479372014-08-25T10:49:38.790-07:002014-08-25T10:49:38.790-07:00Lots of leaps there. Supply of private sector saf...Lots of leaps there. Supply of private sector safe assets at the time was a function of the stability of the banking system, which did not see a hicup from the 40's through the 70's. Further, "demand for interest bearing safe assets" does not rise during high inflation, or Brazil/Argentina would have had well functioning long term bond markets in the early 90's. High inflation countries tend not to have long-duration fixed income markets because of the the volatility of long term rates. <br /><br />In short, the real rate is a complex function. Tying it to "demand for safe assets" in one period: 1) amounts to a tautology as the evidence for that demand is, in turn, low real rates; and 2) does not explain the real rate in other periods/geographies.anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-52655712769344332822014-08-24T17:40:12.685-07:002014-08-24T17:40:12.685-07:00"If the real rate was low in the late 70'..."If the real rate was low in the late 70's, did that signify a safe asset shortage?"<br /><br />Well, it is not a crazy idea. On one hand you had fast rate of growth of government liabilities, resulting in high inflation. This tends to increase the demand for interest-baring safe assets as it raises the cost of holding reserves. On the other hand, we had negative productivity shocks that reduced the expected profitability of the private sector. This tends to reduce the supply of safe assets by the private sector. The two effects reinforce each other in creating a relative scarcity of safe assets, thus reducing their real rate of interest. Pretty cool, huh?CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45436934406492241672014-08-24T03:56:50.748-07:002014-08-24T03:56:50.748-07:00This was everything I wanted in a Stephen Williams...This was everything I wanted in a Stephen Williamson post. Meandering, original, and self-confident enough not to hold back on the crazy. Bonus points for casting Summer's horrendous proposal for the Fed to worry about financial instability instead of inflation and unemployment in positive light. I'd have like to see more name-calling directed at Krugman and his ilk "creaky dinosaurs blowing hot air" wasn't enough for me. Stephen, did you have your better half edit this first? Is that why you pulled your punches?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32097882570949083822014-08-23T15:33:17.556-07:002014-08-23T15:33:17.556-07:00The real rate is a complex dynamic. If the real r...The real rate is a complex dynamic. If the real rate was low in the late 70's, did that signify a safe asset shortage? Similarly, in Japan for much of the past twenty years, the real rate has been higher than it has been in the U.S. for the past fifteen. Does that mean the U.S. had a safe asset shortage relative to Japan? If so, how should that have impacted their relative rates of growth? <br /><br />I do agree with Steve's model in that savers should earn a positive real rate to postpone consumption. The question is how the Fed is able to maintain stable inflation expectations while, in effect, taxing safe asset savers. The "safe asset shortage" explanation says this is not a tax, but a scarcity premium. I think it is more complicated than that. There are agency effects and carry trades, plus global central banks have targeted low rate volatility. Put all those together and you have front running and herding effects that depress the real rate. Does all that square with EMH? Well, there are agency effects that drive market failures. The PBOC's willingness to hold term Treasuries with negative real rates is a glaring one. Is this "demand for safe assets" or merely a byproduct of the country's mercantilist development strategy? Similarly, if pension funds are still shooting for an 8% return to hold down plan contributions, and so therefore must lever cap-gains bets on 30yr Treasuries, is that "excess demand for safe assets"? Again, no, it is an agency effect. anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84764709959591356722014-08-23T11:20:55.514-07:002014-08-23T11:20:55.514-07:00Actually, I don't think that liquid assets as ...Actually, I don't think that liquid assets as a % of total assets is a good gauge. A nice feature of Steve's model is that you can use the interest rate as a gauge of how low the supply of safe assets is relative to demand. If the supply of safe assets is abundant relative to demand, then the interest rate will have to be high and equal to the rate of time preference. In lame terms, the amount that people deposit for the purpose of buying things gradually until their next paycheck is not enough to meet the demand for loans, so borrowers must offer an interest rate that convinces people to save for the long run (sacrifice current consumption to consume more in the future). If the supply of safe assets is low relative to demand then the interest rate can fall below the rate of time preference because people still deposit their paycheck at the bank but spend all of it gradually until they get paid again. Therefore, borrowers can still obtain funds even if depositors do not save for the long run. This cool feature of the model, which reminds me of the Baumol-Tobin model of transaction demand, allows the interest rate to fall below the rate of time preference. <br /><br />So, to get to the point, a key difference is that in 1997 the real rate of interest was quite high by historical standards. This means that the supply of safe assets was abundant, and the high interest rate motivated depositors to buy more assets. According to my own published research, part of the increase was due to a high rate of innovation through its effect on the demand for investment. But today, the interest rate on safe assets is very low. The alternative explanation of why this is the case requires us to believe that people have become so patient that they are indifferent between consuming now or later. I do not think anyone buys into that.<br /><br />Of course, I agree with you that something was different in the pre-crisis era relative to 1997, and if I were Robert Gordon I would tell you that what is different is that the impact of the IT-revolution is winding down and that the impact of this winding down was masked by the false belief that we had found a better way to deal with asymmetric information with the use of derivatives (e.g. through trenching) , and that now that this belief is gone we are seeing the true nature of things. CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-23141828319318677532014-08-23T03:52:37.891-07:002014-08-23T03:52:37.891-07:00Interesting, I think that was a particularly presc...Interesting, I think that was a particularly prescient comment by Cochrane. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-83163148292226732572014-08-22T20:16:34.389-07:002014-08-22T20:16:34.389-07:00If something remains subdued relative to pre-crisi...If something remains subdued relative to pre-crisis levels, this is just as easily evidence that the pre-crisis levels were abnormal. A great example is household liquid assets as a % of total assets. The percentage is elevated today compared to 2007, but not compared to 1997. In 1997, the economy was doing great, and no one claimed there was, "excess demand for safe assets". anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6826736102189180692014-08-22T16:05:46.730-07:002014-08-22T16:05:46.730-07:00And, as far as the data are concerned, some eviden...And, as far as the data are concerned, some evidence is that the securitization of mortgage, C&I and consumer loans remains subdued relative to pre-crisis levels (if I remember correctly especially for consumer loans) and that in surveys the vast majority of banks reported a tightening of lending standards for all types of loans through 2008 and 2009 even as demand for loans was weakening. Some of this has been reversed recently, but not to the extend that existed before the crisis. CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6193205815267562122014-08-22T15:47:53.782-07:002014-08-22T15:47:53.782-07:00I forgot to mention that there is an additional re...I forgot to mention that there is an additional reading to the models, which is probably closer to what Steve had in mind. The idea is that assets like Treasuries, loans, etc. have an advantage over reserves in that they can be used in structured finance, for example to construct asset-backed securities, CDO's, etc. A reduction in the availability of assets that can be used in structured finance has the effect of reducing the production and trading of such products, and therefore the income generated in this sector. In turn, this results in lower demand by the finance sector for goods and services produced by other sectors. <br /><br />Of course, this is a concern only if one believes that much of what structured finance was doing before the crisis had positive social value!CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55679829878931714922014-08-22T15:44:08.353-07:002014-08-22T15:44:08.353-07:00Thanks for the clear summary. I don't think i...Thanks for the clear summary. I don't think it holds together though. The nut of it is that individuals/SME credit is illiquid. Let's take these one by one. Subprime auto lending is booming. Credit card receivables are easily securitized. Agency mortgages are easily securitized. Within the consumer space, only non-Agency mortgages have an issue. Now take SME's. Some portion of SME credit was always securitized (SBA). Another portion, the lion's share, is why community/regional banks exist in the first place: to take on the information costs of extending non-securitizable credit to this sector. <br /><br />Summing up: there is no evidence that lending to individuals is constrained by, "excess demand for safe assets". There is no evidence that, on the margin, "excess demand for safe assets" makes it harder for SME's to get credit.<br /><br />There is, however, a big problem. SME's and individuals can no longer easily obtain credit via non-Agency cash-out mortgages or HELOC's. This is not evidence of "demand for safe assets". It is evidence that the technology of those two products was a failed one, something that we did not discover until 2008. anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-18406461066111236742014-08-22T14:37:05.824-07:002014-08-22T14:37:05.824-07:00What is postmodernist is citing in every post the ...What is postmodernist is citing in every post the same Stiglitz paper regardless of whether the topic of discussion is business cycle, the underdevelopment of Latin America, Picasso's Guernica or loop quantum gravity. We read Stiglitz paper; we get it! You obviously don't!!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20988981198993335532014-08-22T14:02:47.788-07:002014-08-22T14:02:47.788-07:00Last time I checked incentive problems due to asym...Last time I checked incentive problems due to asymmetric information literature has nothing to do with postmodernism. Somebody is indeed utterly confused ...or shall I say economically illiterate?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29282795595983700702014-08-22T11:21:17.170-07:002014-08-22T11:21:17.170-07:00Is the last comment an exercise in postmodernism? ...Is the last comment an exercise in postmodernism? Or the product of an utterly confused mind?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88500361528372540242014-08-22T11:16:10.115-07:002014-08-22T11:16:10.115-07:00The idea is that a fraction of depositors engage i...The idea is that a fraction of depositors engage in purchases using monitored transactions (debit cards, checks, etc.) rather than withdrawing cash. These purchases generate claims from the bank of the seller against the bank of the buyer. To settle these transactions, banks do not need to hold reserves, provided that the financial instruments generated when a bank lends out its reserves are liquid, meaning that a bank can settle a claim by transferring to the other bank ownership of loans or of derivatives that have bank loans as underlying assets (e.g., mortgage-backed securities). Now suppose that some types of financial instruments generated by banks lose their liquidity, meaning that they are no longer acceptable by other banks. In this case, banks need to hold excess reserves in order to settle even some of their monitored transactions. In turn, this means that they reduce credit. Because there are fewer liquid loans supplied, their price rises (and their interest rate falls). But consumption and investment fall below what is Pareto optimal because there exist borrowers who are willing to pay an interest rate high enough to entice depositors to supply the demanded funds but banks refuse to intermediate between the two because the terms of the loans that these borrowers are willing to accept render them illiquid within the banking sector, This results in a deadweight loss. And while corporations can tap bond markets, individuals and small businesses cannot. As in other models with asymmetric information and liquidity constraints, a possible solution is for the government to borrow on behalf of the individuals, for example by giving a tax cut financed by a deficit. In essence, the government issues liquid financial instruments on behalf of the private sector who has lost the ability to do so.<br /><br />Disclaimer: The models are much richer and somewhat different than the story above, but this is the best I could do to tie them to what is going on in the real world and also keep the length of the comment reasonable. I hope I have not butchered what Steve had in mind when he wrote them.CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56479717788597589942014-08-21T14:27:34.597-07:002014-08-21T14:27:34.597-07:00"Except that in Latin America, which you brin..."Except that in Latin America, which you bring as an example, the problem is not property rights per se, but their weak enforcement."<br /><br />It is rather the other way around. One problem in many South-American countries is the unequal distribution of land and everybody who read his Stiglitz (Incentives and Risk-Sharing in Sharecropping) knows that this has negative incentive effects. Not to mention the "political externality" of inequal land distribution, right-wing land owners supporting antidemocratic policies and so on.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65716590742338432832014-08-21T11:38:35.058-07:002014-08-21T11:38:35.058-07:00As John Cochrane wrote "when Daron Acemoglu...As John Cochrane wrote "when Daron Acemoglu, who seems to know everything about everything, has to preface his comments on macro papers with repeated disclaimers of lack of expertise, it's clear that the two fields really have gone their separate ways. Perhaps it's time to merge fluctuations with finance, where we seem to be talking about the same issues and using the same methods, and growth to merge with institutions and political or social economics. "<br /><br />Solow and Romer-Jones endogenous growth models have run smack into a dead-end in other words. <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-32246539935190635932014-08-21T10:48:35.579-07:002014-08-21T10:48:35.579-07:00Beautiful post.
A small quibble. You write, about...Beautiful post.<br /><br />A small quibble. You write, about the Eggertson model(s): "Basically, the problem is insufficient government debt, and the solution is straightforward."<br /><br />It seems to me the same reasoning can be applied to your paper as well. If the costs of "cheating" are high enough, the financial system operates efficiently and we're back to the best of all possible worlds. <br /><br />So, again, the "solution" appears "straightforward": let's prosecute white collar crimes with an iron fist. <br /><br />Am I missing something important here? <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11086113175633856152014-08-21T07:47:25.406-07:002014-08-21T07:47:25.406-07:00Ultimately, the collateral shortage has to affect ...Ultimately, the collateral shortage has to affect intermediation. If credit is readily accessible at normal spreads, what, exactly, is the problem? anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-14442903009348518162014-08-20T17:07:21.095-07:002014-08-20T17:07:21.095-07:00"In reality, corporations face enormous deman..."In reality, corporations face enormous demand for their supposedly illiquid debt, and they issue it in droves to fund share buybacks instead of what presumably are low return competing projects."<br /><br />Stocks are more liquid than a new factory or production line, so I do not think it contradicts the model if a company tries to boost the return on its equity by buying back its shares rather than investing in various projects. But, in any case, in the models the problem is that the shortage of safe assets reduces transactions within the banking sector because of the role these assets play as collateral in repos and other transactions among banks. Greater issuance of low grade bonds does nothing to ameliorate this problem as such bonds cannot perform this function. If banks have harder time selling to other banks consumer and commercial loans issued by themselves or other banks and can't find other safe assets to buy they are likely to hold more reserves and reduce credit. This should have an adverse effect on investment as well as consumption. At least, this is my understanding, but I defer to Steve.CAnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-92160571302224603432014-08-20T14:11:44.251-07:002014-08-20T14:11:44.251-07:00In the models, firms supposedly won't fund hig...In the models, firms supposedly won't fund high return projects because illiquidity harms their financing cost/access.<br /><br />In reality, corporations face enormous demand for their supposedly illiquid debt, and they issue it in droves to fund share buybacks instead of what presumably are low return competing projects. <br /><br />The burden is on the safe asset theorist to reconcile the two. <br />anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-243683342262232092014-08-20T12:59:13.650-07:002014-08-20T12:59:13.650-07:00Apparently evidence is not in Edward Lambert's...Apparently evidence is not in Edward Lambert's toolbox. Effective demand? No such thing, or rather it can be anything you want it to be? People aren't buying? Their effective demand must be low. People are buying? Their effective demand is still too low. Go away, crackpot.Anonymousnoreply@blogger.com