Miles Kimball

In National Review Online, Ramesh Ponnuru described last night’s State of the Union speech as “… a laundry list of mostly dinky initiatives, and as such a return to Clinton’s style of State of the Union addresses.” I agree with the comparison to Bill Clinton’s appeal to the country’s political center, but Ponnuru’s dismissal of the new initiatives the president mentioned as “dinky” is short-sighted.

Freedom of religion is a hard-won principle. In Europe, the wars of religion raged for over a century before the Peace of  Westphalia solidified freedom of religion for rulers in 1648. Freedom of religion for ordinary citizens was much slower in coming: the Bill of Rights to the US Constitution was a huge advance in that sphere.Then it took the US Civil War for the principle to be firmly established in the 14th amendment that the key provisions of the Bill of Rights apply to state laws as well: “nor shall any State deprive any person of life, liberty, or property, without due process of law.”

Among its many other meanings, Christmas points to a central truth of human life: a baby can grow up to change the world. But it is not just that a baby can grow up to change the world; in the human sense, babies are the world: a hundred-odd years from now, all of humanity will be made up of current and future babies.

The US Federal Reserve announced yesterday that it would reduce the rate at which it would buy long-term government bonds and mortgage bonds—the long-awaited taper of quantitative easing. But the financial markets have the last word on which way monetary policy has shifted. And as Tyler Durden complained at zerohedge.com, the rise in stock prices and gold prices, and fall in long-term interest rates and the dollar, indicated that the Fed had moved in the direction of monetary stimulus. The reason is that in the financial markets, the reaction to Fed action is always an expectations game. The Fed announced a smaller cut in bond-buying than the financial markets expected, so the markets treated the Fed decision as a move in the direction of stimulus.

University of Missouri-Kansas City professor Stephanie Kelton threw down the gauntlet for everyone serious about influencing economic policy into the next generation when she put out her MMT Coloring Book  as a downloadable stocking-stuffer (pdf). (MMT stands for “Modern Monetary Theory,” the name of Stephanie’s viewpoint.) In response, I tweeted:

The Hunger Games paints an eerily apt picture of the world’s reality. The Capitol is the rich nations of the world: the US, Canada, Australia, Japan, Israel, New Zealand, some oil kingdoms, most European nations. The Districts are the poor nations of the world—Haiti, Nepal, Bangladesh, Cambodia, Laos, Papua New Guinea, many countries in central Asia and Africa, all of which have per capita incomes less than $10 per day.

As my regular academic work slows down in the days leading up to Thanksgiving, my thoughts have turned toward gratitude. In a visceral way, I feel thankful for my family, for my work, for the exhilarating November air on a brisk walk around my neighborhood, for my friends both here in Ann Arbor and online, and for being alive in this very interesting era—in what I believe is still close to the dawn of human history, yet a time of great abundance compared to what has gone before in past centuries.

A personnel shakeup at the US Federal Reserve Bank of Minneapolis last week at first flew under the radar; by the time the Minneapolis Star-Tribune reported the news, followed by other news outlets, it had been percolating through the economist grapevine for weeks. But the world should be paying attention, because the shakeup may be a part of big changes that are happening at the Fed, as well as a tectonic shift in the field of economics itself.

Janet Yellen was in the hot seat yesterday before the Senate Banking Committee. Due to a remarkably public vetting process, the presidential nomination for US Federal Reserve Chair that put her there also constituted a comedown for Yellen’s principal rival for the job: Larry Summers. At an International Monetary Fund Conference in honor of former Bank of Israel Governor—and earlier IMF chief economist—Stan Fischer on Nov. 8, Summers made a strong bid for continued relevance to economic policy-making as a private citizen with a trenchant speech. (David Wessel gives an overall report on the conference in this Wall Street Journal article.) Here is the speech:

“I’m just not a math person.”

With the world still suffering from the 2008 financial crisis, it is good to see Nobel prizes going to three economists who have set the bar for analyzing how stock prices and other asset prices move in the real world: Eugene Fama, Robert Shiller, and Lars Hansen. Eugene Fama is best known for setting the benchmark for how financial markets would work in a world of perfect efficiency. Robert Shiller pointed out that financial markets look much less efficient at the macroeconomic scale of financial market booms and busts than they do at the microeconomic level of prices for individual stocks. And Lars Hansen developed the statistical techniques that have served as the touchstone for arbitrating between competing views of financial markets.

President Obama was right to say his appointment of Janet Yellen to head the US Federal Reserve has been one of his most important economic decisions. As the graph below shows, from the mid-1980s through 2007, monetary policy kept US GDP growth fairly steady, without needing much help from Keynesian fiscal policy. Economists talk about this period when GDP growth was much steadier than before as “The Great Moderation.” Monetary policy has done less well in years since the financial crisis in 2008, because the Fed felt it could not lower its target interest rate below zero, and has not been fully comfortable with its backup tools of quantitative easing and “forward guidance” about what it will do to interest rates years down the road.

­Republican hatred of Obamacare and Democratic support for Obamacare have shut down the US government. Now might be a good time to remind the world just how far the country’s health care sector—with or without Obamacare—is from being the kind of classical free market Adam Smith was describing when he talked about the beneficent “invisible hand”  of the free market. There are at least five big departures of our health care system from a classical free market:

Back in June, Ben Bernanke told the press:

There’s a reason why the workings of the price system through supply and demand are taught as one of the first lessons when studying economics. This is where the action is. When people want to buy more of something than others want to sell, the price of that good goes up, signaling that more needs to be produced and less needs to be bought. When the opposite occurs (there’s more to sell than people want to buy), the price of that good goes down to signal that less needs to be produced and more needs to be bought to bring things into balance. Interference with those price signals lowers the IQ of the “invisible hand,” this competition that naturally guides markets.

Whatever the exact trigger that brought Nasdaq down today, it is likely that a contributing cause is the huge increase in lightning-fast high-frequency computer trading in recent years. Nathaniel Popper wrote in the New York Times in October 2012 that the profits from high-frequency-trading have started to fall because the volume of stock-trading has fallen in the wake of the Great Recession, but that

Back in May, Noah wrote about the amazingly good deal that is the PhD in economics. Why? Because:

Ben Franklin was one of the greatest grand strategists in American history. He “had the vision of the Great Power of the New World” as refugees from the Old World poured in, writes Conrad Black in his page-turning, tour-de-force Flight of the Eagle: The Grand Strategies That Brought America from Colonial Dependence to World Leadership. Franklin then followed up that vision with brilliant diplomacy and sponsoring, along with George Washington, the constitutional efforts of Madison, Hamilton and Jay. 

The financial crisis of 2008 and the miserable performance of the US economy since then made the Federal Reserve look bad. And almost everything the Federal Reserve has done since then to try to get the economy back on track—from the role it took in the Wall Street bailouts (detailed in David Wessel’s book In Fed We Trust), to dramatically increasing the money supply, to quantitative easing—has also made the Fed look bad.

Reading Ben Zimmer’s “How to talk like Whitey Bulger: Mobster lingo gets its day in court“ in the International Herald Tribune provided by the hotel during my recent stay in Tokyo reminded me of my litany of the basics the government must provide to make anything close to market efficiency possible:

In order to predict the future, the ancient Romans would often sacrifice an animal, open up its guts and look closely at its entrails. Since the discovery of an Excel spreadsheet error in Carmen Reinhart and Ken Rogoff’s analysis of debt and growth by University of Massachusetts at Amherst graduate student Thomas Herndon and his professors Michael Ash and Robert Pollin, many economists have taken a cue from the Romans with the Reinhart and Rogoff data to see if there is any hint of an effect of high levels of national debt on economic growth. The two of us gave our first take in analyzing the Reinhart and Rogoff data in our May 29, 2013 column. We wrote that “…we could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth.”

Leaving aside monetary policy, the textbook Keynesian remedy for recession is to increase government spending or cut taxes. The obvious problem with that is that higher government spending and lower taxes tend to put the government deeper in debt. So the announcement on April 15, 2013 by University of Massachusetts at Amherst economists Thomas Herndon, Michael Ash and Robert Pollin that Carmen Reinhart and Ken Rogoff had made a mistake in their analysis claiming that debt leads to lower economic growth has been big news. Remarkably for a story so wonkish, the tale of Reinhart and Rogoff’s errors even made it onto the Colbert Report. Six weeks later, discussions of Herndon, Ash and Pollin’s challenge to Reinhart and Rogoff continue in earnest in the economics blogosphere, in the Wall Street Journal, and in the New York Times.

Martin Feldstein is an eminent economist. In addition to being a prolific researcher, he served as head of US president Ronald Reagan’s Council of Economic Advisors, and made the National Bureau of Economic Research (NBER) what it is today—an institution that Paul Krugman called “the old-boy network of economics made flesh.” (I am one of the many economists who belongs to the NBER.) But Feldstein was wrong when he wrote in the Wall Street Journal last week, “The time has come for the Fed to recognize that it cannot stimulate growth,” in an op-ed headlined “The Federal Reserve’s Policy Dead End: Quantitative easing hasn’t led to faster growth. A better recovery depends on the White House and Congress.”

Ken Rogoff is an economist who has always been kind to me, and for whom I have deep respect. And I have no animus toward Carmen Reinhart. Nevertheless, I hope there has been a nightmarish quality to the last few days of what Quartz writer Matt Phillips called a “bone-crunching social media pile-on that Harvard economists Ken Rogoff and Carmen Reinhart received in recent days after some other researchers questioned their influential findings that high government debt is a drag on economic growth.” I say this because I know from my own experience as a researcher how powerfully the hint of such an embarrassment motivates economists and other researchers to sweat the details to get things right.  Some errors will always slip through the cracks, but a researcher ought to live in mortal fear of a contretemps like that Reinhart and Rogoff have found themselves in this week.