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ain that is all that there is of delong s contribution to the post it s just as well really the rest of the post is made up of excerpts from those who share his view you know rogoff krugman blanchard delong oddly the excerpts come from paul krugman gavyn davies paul krugman and jared bernstein well delong is right about one thing i did have to re read his post here s why in his introductory paragraphs delong admits to being disturbed by disagreement between two groups the delong group holds that higher inflation will solve the problem the other group holds it will not my failure to comprehend why they think this disturbs me he says maybe he means he is coming around to their point of view wow it s pretty well hidden if that s what he means but let me tell you why i think that might be the case in the first excerpt paul krugman says i very much fear that larry summers may be right in the second excerpt gavyn davies says if the other guys are right inflation won t solve the problem the problem of under performance of gdp will last for a very long time and will not solve itself through flexibility in prices in the third excerpt krugman favors higher inflation but still has doubts one answer could be a higher inflation target so that the real interest rate can go more negative i m for it but you do have to wonder how effective that low real interest rate can be if we re simultaneously limiting leverage in the fourth excerpt jared bernstein favors higher inflation but still has doubts i m totally with the program re getting the real interest rate down but i m nervous that it might not be as effective as historical correlations would suggest in those excerpts together there is as much doubt as support for a policy of 4 inflation so i think delong is telling us he s having second thoughts soon he will abandon the delong group in his first paragraph he s firmly in favor of 4 inflation as a solution to our deep macro economic problems in his second paragraph he is disturbed by other views in the rest of the piece he dwells on the fears worries concerns and doubts of others brad delong is preparing to change his views on the effectiveness of higher inflation as a solution my respect for brad delong just hit a record high but listen brad buddy we don t have time for this we re six years into the sinkhole you gotta get your act together i want to take bits and pieces from the excerpts delong provides to see if i can come up with something he might have missed krugman 2 when the minsky moment came there was a rush to deleverage this drove down overall demand for any given interest rate and made the wicksellian natural rate substantially negative pushing us into a liquidity trap when the minsky moment came there was a rush to deleverage krugman says but i suspect we knew the minsky moment had come because there was a rush to deleverage it s not like the minsky moment came and then we all said let s get out of debt now the minsky moment is just the name for that moment when there s a rush to deleverage other than that krugman s statement is one long trail of theory see how he takes an actual event the rush to deleverage and buries it in layer after layer of theory it drove down demand it made the natural rate negative it created a liquidity trap this is as good an example as i have ever seen of an economist who needs to go back and rethink the problem first see what the problem really is spend a lot of time on that then consider solutions krugman s thought process doesn t start with deleverage it starts with the liquidity trap it starts with his conclusion krugman 1 the underlying problem in all of this is simply that real interest rates are too high the market wants a strongly negative real interest rate and so we ll have persistent problems until we find a way to deliver such a rate what the market wants is to be out of debt remember the rush to deleverage stop focusing on negative real interest rates and other elegant claptrap focus on facts as of this moment we re still not ready to rush back into leverage that s why we still have large output gaps and no evidence of price pressures bernstein many years post panic we still have large output gaps and no evidence of price pressures the zero bound is constraining fed policy fuck the zero bound that s not the problem it s a result many years post panic we still have large output gaps and no evidence of price pressures because we re still delevered from mine of 22 september 2012 the problem is not that prices are too low the problem is that growth is too slow there is only one correct focus and it is to understand the reason growth is slow for the record as long as economists continue to dismiss out of hand the possibility that excessive private sector debt is the reason growth is slow economists will continue to fail to understand slow growth maybe that s confusing i just took a lot of your time to tell you the rush to deleverage was the problem then i say excessive debt is the problem do you see how those pieces fit together the excessive private sector debt was the cause of the rush to deleverage when the excessiveness of it finally hit home deleverage was the only option left excessive debt was the problem that caused the deleverage problem that caused the negative real rate problem that caused the liquidity trap problem that s how the pieces fit okay but i also said growth is slow because debt is excessive but it s the deleveraging that slowed things down how do those pieces fit gavyn davies the normal route through which monetary policy works by bringing forward consumption from the future into the present is unlikely to be successful there will still be a shortage of demand when the future comes around bringing forward consumption from the future into the present is accomplished by spending future income in the present in other words by the use of credit we have policies to encourage the use of credit indeed as gavyn davies says that is the normal route through which monetary policy works tax policy also encourages credit use through tax deductions these policies accelerate the use of credit we have policies to accelerate the use of credit but we have no policy to accelerate the repayment of debt therefore debt accumulates to unnatural and excessive levels the cost of that debt hinders economic growth fosters the growth of finance and drives the inequality of wealth and income yadda yadda yadda and rather than raising interest rates to fight inflation policy must accelerate the repayment of debt to fight inflation posted by the arthurian at 4 00 am 5 comments tuesday august 25 2015 where s the explosion the blue line shows the rate of change in the federal debt the red lines are calculated trends for the periods 1948 1965 1965 1984 and 1984 2000 in which period did the explosion of debt occur posted by the arthurian at 6 43 am 10 comments monday august 24 2015 the federal debt graph with a constant growth rate denominator i was saying noah s picture of debt growth is distorted by a wandering denominator by a gdp that suffers from a variable and inconsistent rate of increase it occurs to me that we could get a better picture of debt growth by faking the gdp numbers rather than using actual values we can calculate a set of values that approximate the gdp numbers but are based on a constant rate of growth i didn t do any of that least squares crap or anything like i just picked 1947 for a startpoint and 2000 for an endpoint and figured out a constant growth rate that would get me from the 1947 gdp number to the 2000 gdp number it is completely subjective or arbitrary really and if you know how you could probably come up with a better series of constant growth rate values meanwhile i got what i got and i m going with it graph 1 graph 1 shows actual often called nominal gdp in red and my constant growth rate numbers in blue you can see that the lines cross some time around the year 2000 exactly in the year 2000 actually as that year was one of the defining points of the blue curve by design the lines also cross in 1947 though we would have to zoom in to see it clearly the lines also cross around 1977 but this is not because i pinned them together at that point actually that is information the graph gives us that is the reason for making the graph now looking at those three crossing points we can say the red line runs below the blue for some years before 1977 then above the blue until the year 2000 then again below the blue in more familiar terms we might say gdp growth was less than average before 1977 above average from 1977 to 2000 then again below average obviously this is not correct it is the result of picking 1947 and 2000 as my arbitrary start and end dates if i had picked 1966 or 1973 as an end date the whole rest of the blue line after that date might have been above the red that would have been a better look at economic growth but the purpose of this exercise is not to find the point that economic growth began slowing the purpose is to approximate the gdp we actually got using a constant rate of growth for that purpose the blue line looks about right to me up to 2007 anyway you with me do not imagine that graph 1 shows periods of better than average and worse than average growth it does not saturday s post showed this comparison of growth rates for actual gdp red and the federal debt blue graph 2 click graph for fred source page it is pretty easy to see that the federal debt jumps up above gdp growth just after the 1982 recession but if you take a second look you might notice that the red line wanders upward until the late 1970s which makes the simultaneous increase in the blue line appear less significant and then the red line wanders downward for 20 years or so making the increase in the blue line look more significant the changes in actual gdp contribute to making the change in federal debt seem like a sudden increase that occurs after 1982 like noah we are deceived the growth rate of actual gdp varies as the red line on graph 2 shows the growth rate of my constant growth gdp does not this approximate measure the blue line on graph 1 has a constant annual growth of about 7 25 plotted on a graph the growth rate is a flat horizontal line i took the numbers i used for graph 1 worked out the annual growth rate values for them and made a new graph graph 3 the proportions of graph 3 differ from those of graph 2 but that difference aside the blue lines on the two graphs are the same both blue lines represent the growth of federal debt but on graph 3 i show the growth rate of the constant growth rate gdp approximation a flat red line near the 7 25 level for the full period shown on the graph on graph 3 it is pretty easy to see that the federal debt jumps up above gdp growth just after the 1974 recession that s the 1974 recession not the 1982 recession it is now quite obvious that a sudden increase in federal debt growth occurs some eight years earlier than we thought the difference is not due to any changes i made to the blue line i made no such changes i only changed the red line from a wiggly worm to a constant average growth rate value so that the red line does not obstruct our view of the blue line almost done we ve been looking off and on lately at a picture of the federal debt relative to gdp this fred graph from noah graph 4 the federal debt relative to gdp it shows the federal debt relative to a wiggly worm according to our graph 1 above the wiggly worm ran low in the years before 1977 and then high till the year 2000 running low before 1977 it makes the federal debt look falsely high low as it is in those years on graph 4 it is falsely high running high between 1977 and 2000 it makes the federal debt look falsely low i m saying that the growth of federal debt was less than we think in the years before 1977 and more than we think in the years after we are deceived why are we deceived because we think of the federal debt in comparison to the wiggly path of actual gdp but now we can fix that we can use the constant growth rate approximation of gdp in place of actual gdp this will give us a version of federal debt relative to gdp that is similar to graph 4 without the distortions arising from variations in gdp growth graph 5 below shows in red the same relative to actual gdp data that we see on graph 4 in particular the red line shows the increase beginning around 1982 the increase noah calls the explosion in u s government debt the blue line on 5 which shows the same federal debt but shows it relative to the constant growth rate approximation of gdp shows that increase beginning around 1975 that is the same difference we noticed above comparing graphs 2 and 3 the federal debt relative to actual gdp red and relative to a constant growth approximation of gdp blue graph 5 the two lines are very similar that says the two measures of gdp are very similar and we would want that to be true so we can have confidence in the approximation but the two lines also differ in the years before 1977 the blue line is lower in the years between 1977 and 2000 the blue line is higher but look also at the transition from downtrend in the 1960s to uptrend in the 1980s the red line using actual gdp hits bottom around 1974 and runs flat until 1982 and then suddenly starts on its upward journey we know that of course noah pointed it out the transition from downtrend to uptrend is different for the blue line it is earlier instead of going suddenly flat in 1974 like the red line the blue line begins its uptrend there that uptrend is definitely stronger after 1982 so if you were wanting to blame reagan for the big increase in federal debt i guess you can still do that but 1982 is not where the uptrend starts not for the blue line not for the federal debt and the only difference between the red and blue lines is that the red line is shaped by vagaries in both debt growth and gdp growth the blue line is not the blue line is the better measure of federal debt growth and the postwar increase in federal debt growth started before 1982 the excel file at google drive posted by the arthurian at 4 00 am 1 comments sunday august 23 2015 and you thought milton friedman wasn t funny milton friedman the price system is the mechanism that performs this task without central direction without requiring people to speak to one another or to like one another free to choose chapter one posted by the arthurian at 6 51 am 0 comments saturday august 22 2015 oh no this again if you look at noah s graph of debt relative to gdp it certainly looks like the big increase started around 1982 graph 1 noah s graph noah s graph shows the federal debt as a percent of gdp i called up gdp red and the federal debt blue as two separate series and looked at the growth rates for those two series sure enough the blue line is way up high in the 1980s graph 2 click graph for fred source page but that s not the only thing i see the blu...
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