Wednesday, May 09, 2012

Cyclicalists should start talking about structural issues too.

I could count on my fingers the number of times Paul Krugman has obviously been wrong about something, and still have enough fingers left to type 60 words per minute. But if there's one thing I've learned in my years of arguing with people, it's that if you're not in math or the natural sciences, being right on the merits is never good enough to win an argument. You have got to win hearts and minds.

Krugman has convinced a huge chunk of the populace that there is something seriously wrong with macroeconomics. That is good. But he seems not to have made much headway in garnering intellectual support for more active countercyclical policy. As an illustration of this, consider the recent push for "structural" explanations of our current high unemployment rate. Raghuram Rajan, David Brooks, and Tyler Cowen are all confidently asserting that our problems are structural, not cyclical. This point of view is seconded by Greg Mankiw and John Cochrane and echoes recent comments by Jim Bullard.

Now, it is true that these "structuralists" (to use Brooks' term) are in some sense just the usual suspects. For these people to support, say, quantitative easing would be to go against their political instincts. But in 2009 you did not hear these people arguing nearly as strongly or loudly that everything was structural, because in 2009 this point of view was far less credible. The fact that no one now feels ashamed of making structuralist claims shows that the winds of public opinion are starting to shift against Krugman and the "cyclicalists".

In response, Krugman has rebutted the structuralist argument with data (see here, here, and here). He is joined by Scott Sumner, Karl Smith, Mike Konczal, Ezra Klein, and other cyclicalists. On the merits, their case is very strong. It is much stronger than the case of the structuralists, which seems mostly based on assertion and repetition, and includes a fair bit of confusion (for example, Cowen claims that we have a drought of government investment, and then claims that there is somehow a tradeoff between government investment and fiscal stimulus; Cochrane seems to think that Keynesians believe that negative AD shocks move the economy to a slower long-term growth path). If economic policy arguments were settled on the basis of logic, the cyclicalists would be winning. 

And yet they are not winning. They are slowly losing. The battle for fiscal stimulus in America has been lost, the battle for more quantitative easing in America has been lost for now, and the battle against European austerity is not going well. My guess is that this coincides with an increasing acceptance of structuralist ideas on both sides of the Atlantic.

Why? I suggest several reasons:

1. People intuitively understand structuralist ideas, which is to say they intuitively understand long-run supply. They do not intuitively understand aggregate demand. Anyone who has taught undergrad macro knows this fact. And though intuition and common sense are not a good substitute for scientific expertise, it is not certain who constitutes an expert, and when trillions of dollars are on the line, people have a tendency to go with their gut rather than listen to some smart guy with a confusing theory.

2. Many people just don't care about business cycles, and assume that even without help, the economy will recover in a few years.

3. Many people want (quite reasonably!) to use the ongoing economic troubles as an opportunity to win political backing for their favorite structural reforms - as the saying goes, "never letting a good crisis go to waste".

4. Many people are worried about structural problems anyway, regardless of where we are in the business cycle.

5. Many people think that economists understand optimal structural policy much better than they understand optimal cyclical policy, and that we should focus on making suggestions that we understand better.

So if I'm right, Krugman and the cyclicalists can unload as many pretty graphs and impressive numbers and inventive models and carefully argued paragraphs as they like, and it will make very little difference to what most people think. A new rhetorical approach is needed.

For this new approach, I suggest that Krugman and others start talking about structural policy ideas.

I do not mean that cyclicalists should stop recommending things like quantitative easing. I mean that they should start also throwing out ideas about how to improve our economic performance in the long run. They should do this for two reasons. 

The first reason is that many policymakers and members of the public currently think that there is a tradeoff between cyclical policy and structural policy. In general, contra Tyler Cowen, this is not true. If you think that deregulation is what we need to grow more in the long run, then you should realize that there is no tradeoff between deregulation and quantitative easing, or deregulation and stimulus. Ditto for free trade. Ditto for corporate tax cuts (as long as income taxes are raised to keep revenue the same). Ditto for policies to improve education. Ditto for policies to improve labor search and matching. In the case of the government investment that Tyler Cowen says we need more of, good structural policy also makes good countercylical policy! In fact, the only "structuralist" policies - if you can call them that and keep a straight face - that conflict with countercyclical policy are austerity and hard money.

Krugman and some of the cyclicalists have focused the vast majority of their attention on cyclical issues. But this reinforces the (mistaken, misleading) claim of the structuralists that there is a tradeoff between the short term and the long term. One more Krugman blog post is not going to convince anyone to support stimulus, QE, etc. But one more Krugman blog post dedicated to discussing long-term issues will do a lot to convince readers that there is no policy trade-off. In other words, the marginal value of Krugman devoting more time to cyclical issues is negative.

The second reason for cyclicalists to discuss structural policy is political. The people advocating "structuralist" policies are, right now, mostly conservatives. Their ideas about long-term growth policy are basically more tax cuts and more deregulation. Only occasionally, if ever, do these "structuralists" call for repairs to our disintegrating infrastructure, or increased spending on research, or ending the dollar's reserve currency status. And the conservative "structuralists" have ideas about education, health care, and occasionally immigration that strongly diverge from what liberal "cyclicalists" would be promoting if they bothered to talk about structural policy more often. 

In other words, while liberals throw all their energy into a losing rearguard action against austerity, conservatives are winning the future.

This is why I call for a balance between discussions of cyclical policy and discussions of structural policy. Yes, it would still be good if we got more QE. Yes, European-style austerity is a real danger. But continuing to hammer home these points with logic and reason is yielding diminishing returns. Logic and reason are good things to have, but by themselves they do not win arguments. If I have a choice between proving I'm right and winning, I'll pick winning every time...

Update: Here is a good example of what I'm calling for!


  1. Mass, persistent unemployment requires government action, whatever the proportion of cyclical to structural is.

    Now is the time to invest in our future in a big way, and address chronic unemployment, the chronic underperformance of the private sector and the chronic failure of national vision and leadership.

  2. I agree that there are some structural reforms that everyone should agree on - like building necessary infrastructure and increasing research spending - and should be implemented immediately. Rajan was quite vague on what the structural reforms he proposes for the United States are.

    A lot of the structural things the right is talking about, like entitlement reform, are so far in the future as to be meaningless, or purely partisan stuff like tax cuts for the rich which may increase GDP and make the rich richer but actually make the middle class poorer.

    I saw that Cochrane was drooling at Rajan's call for educational reform. It seems to me that the financial meltdown was more likely the result of inadequate educations being provided by university finance professors in, say, Chicago than the failings of third grade teachers in Alabama.

  3. There is a possibility that there is a structural problem that leads to the run away accumulation of wealth in the hands of a few with a low propensity to consume, a savings glut by the wealthy, increasing borrowing by the middle class from the wealthy to sustain their standard of living in the medium term which accelerates the overall process of wealth concentration. We would see evidence of this type of spiral in very low interest yields on US treasuries and banks holding excess reserves for want of sufficient productive investments.

    The "structural" reform that such a dynamic would call for would be to increase taxes on the wealthy and to move to break up large concentrations of wealth.

    "Structural reform" does not have to just mean that the middle class will be working harder for less.

    1. I like that. I often point out (as Ross Gittins has in the SMH from time to time) that economists seem deeply concerned about efficiency in production, but completely ignore efficiency in consumption. The more evenly distributed income is, the higher the marginal utility that income generates.

  4. Oh why cant we be friends.

    1. ... by the way, one of the reasons PK and others are against (some) structural reforms right now is that they can be counter productive when there is an AD shortfall because wages are downwardly rigid. trying to reduce incomes during a balance sheet recession is also bad (although there are some could still be done). Also I am thinking Cochranes idea of reform is to privatize all schools and healthcare wheras PK is to have the govt take over healthcare and education. So you have that small issue too.

      the intersection of structural reforms that SS, PK, and JC agree on is: legalize and tax pot.

      oh why cant we just be friends man!

  5. It's times like this that I'm glad I pursued chemistry and not economics in college. I try reading Cowen and the other conservatives and always come up empty; almost like drinking lite beer. I really don't understand how they cannot fathom that this is a simple demand problem (even CEOs of major companies when asked about investment and expansion say that the demand is not there and I presume most of these folks are Republicans). The amount of fast and loose with numbers and charts is appalling to one schooled in the physical sciences (Veronique de Rugy's latest is a classic example of trying to pull the wool over one's eyes).

    Infrastructure investment is largely a government job (national, state and local) yet the payoffs can be immense in the long term. Same with education. But these are so obvious to be laughable.

    I go on too long. Hope your thesis defense goes well (if it hasn't already taken place) and you can join the legions of piled higher and deeper (aka PhDs) with the rest of us.

  6. Krugman is almost never obviously wrong. He is very frequently subtly wrong, though. His parsing of the literature for the lay public is particularly questionable, for example. He misreads Adam Posen, throws Tobin/Brainard at MMT without reading the text himself, etc.

    Still, interesting post.

  7. Not quite on point, but do structuralists have things the wrong way round? If business was booming, new businesses/industries would be offering large wages to these high skilled workers we all hear about. That would encourage people to train to become such workers - or firms would even pay for training. Better aggregate demand might facilitate whatever structural change is necessary/desirable, not the other way round.

    1. IMO, yes: when business is booming they invest more in training (for example paying for education or giving job offers earlier). The fact that there are a lot of college grads unemployed is evidence of cyclical unemployment, not structural.

    2. I think that for right-wing economists (let's drop polite fictions), their idea of 'natural' (i.e., desirable) is a labor surplus, where all of the burden and risk is on the employees' side.

      For example, see right-wingers' reactions to the increases in unpaid 'internships'. You can see the delight in their eyes, at the sheer size and desperation of the 'reserve army'.

  8. Noah, I am not an economist. This piece is one of the best explanations I have read on how economic policy is put into practice. My hope is that Krugman reads this and learns from it. Being right is neither sufficient or even necessary for winning the policy battle. I totally agree with "If I have a choice between proving I'm right and winning, I'll pick winning every time..." I am afraid that Democrats will be right all the way to a permanent Republican majority.

  9. Anonymous3:23 AM

    I think whether or not your tactic of agreeing and suggesting specific structural reforms is the right one depends on an interpretation of the 'other side's' expected response.

    I can't speak for him, but I interpret Krugman's belief to be that the Other Side is not at all willing to compromise on structural investment/reform (e.g. fixing bridges and energy). He believes (I think) that the 'structural' argument is nothing more than a cynical attempt to muddy the waters and block any change whatsoever, and that granting their point to meet them halfway will just be undermined by suggestions of 'reform' that neither contribute to aggregate demand nor constitute investment - it will just be more tax and benefit cutting, or naked attempts to block the administration from doing anything.

    And, to put it politely, he has considerable evidence to back this view.

    Blaming the Other Side for being crazy and evil isn't likely to break the logjam either - but if the Other Side really won't compromise, it's hard to see how offering to compromise might help.

  10. "... or ending the dollars reserve currency status."

    WOW - YES! Has any other main stream economist said this? Lots have suggested a lower dollar would help. But I don't know anybody else recognising the negatives associated with the USD reserve currency status (a sort of dutch disease).

  11. Noah,
    isn't there another very important argument to be made. It is that the evidence is that structural change happens when the economy is growing, not when it is in recession. So that far from cyclical policy and structural adjustment being in conflict, they are complemntary. I know PGL has made this argument.

    1. Oops
      I see Luke already made this argument, more eloquently.

    2. No worries- happy for even limited confirmation my query might not be complete nonsense.

  12. In all humility, I propose my “income versus wealth” framework as an additional explanation for the tenacity of structuralism. From a wealth standpoint (a) Keynesian (cyclical) thinking has to be combated everywhere it shows its head because it risks inflation and justifies a more powerful (and tax-collecting) state, and (b) the understanding of macroeconomic stress has to be rooted in obstructions to profit-making like state-monopoly education, unions (in countries that have them), fear of future taxes or inflation (lack of confidence), etc. In theory a wealth/structuralist could make common cause with a Keynesian over lack of effective demand as an obstacle to private investment, and they do in an emergency, but during even semi-normal times the other concerns subsume it.

    And the wealth perspective, whatever its intellectual merits, rules for political economic reasons. Paul K can’t change that by discussing structural issues—which he’s done a lot of on health care, for instance.

    In fairness to the other side, it is true that most of the time Keynesians give little thought to how their proposals will affect wealth-holders. I agree with that bias, but it is still a bias.

    But I think you are also right about the trickiness of macroeconomic reasoning. You have to grasp that expenditures are identically incomes in a closed system, relaxed only partially in an open economy, and identical again for the planet. It’s much easier to say, that unemployed person over there would have a job if he/she had a masters in chemical engineering, or something like that. We seem to be hard-wired to think on a personal level about who is unemployed and who isn’t, rather than why the number of jobs overall has shrunk.

    1. Isn't the effect on wealth holders in aggegate positive - (since an increase in income can support an increased flow of income to wealth holders, a decreased total income can't). But you can't say a priori that any given wealth holder will benefit.

    2. it is true that most of the time Keynesians give little thought to how their proposals will affect wealth-holders.

      I don't think that's accurate. Rather, they aren't representing some narrow interests, they're looking at the economy as a whole. And as Reason suggests, often the self-interest of the wealthy is wrong/misguided/counterproductive. Take your pick.

    3. IIRC, there was a study of economic growth for the post-WWII USA, which looked at performance under presidents (Democratic/Republican, and using 1,2 and 3-year lags),
      which showed that economic growth was higher under Democratic Presidents, even for the top several percent.

  13. Agreed - structural narratives are much easier to tell and are much more compelling than cyclical narratives.

    For instance, much of the labor market malaise can be summarized with the shift in the Beveridge Curve (see chart), long-term unemployed, the skilled/unskilled unemployment ratio and the labor force participation rate.

    Add to this, the tendency of Americans to extrapolate and pine for the good old days when the country's political and social institutions (apparently) had fewer problems.

    ADS Analytics

  14. Anonymous9:02 AM

    The argument the wealthy elites make is:
    1. The unemployment problems is structural.
    2. BigG should not/cannot do anything about a structural unemployment problem.

    I call BS.

    Plenty of countries have labor and industrial policy. The US has a labor and industrial policy, but it is not discussed openly. It is done in closed meetings with lobbyists. It is done to meet the demands of special interests, not necessarily for the good. States have industrial and labor policy. They build industrial parks, fund incubators and colleges to attract business. The wealthy elites argue that BigG should not do this, even though our international competitors, China, India, EU countries all do this.

    The Great Depression was a slack demand problem but also a structural problem. Ag sector employment collapsed and displaced workers lacked the skills for a new economy. WWII increased demand but it was also a workforce training program. Millions of Americans learned new skills from pilot to electronics to warehouse manager, truck driver, etc. After WWII the GI Bill provide college education to rural farm boys so they could train for the new economy and not return to an Agricultural economy that had already shed jobs. GI Bill also subsidized housing and small business. This was a structural change in rural America as small towns dried up and blew away. Places like Western Kansas have a lower population density today than when the Native Americans lived there 2 centuries ago.

    These were all structural changes and BigG invested a lot of money in labor and addressing the structural issues. Of course, $$Money- a lot of it was spent to address structural issues, and that $$Money also increased demand for goods and services, directly and indirectly.

    It is a mistake to view the issue as either Demand only or Structure only. There is an important interaction term Demand X Structure where funding appropriate structure leads to future demand. For example, improving energy efficiency of existing structure would increase current labor demand, but it would also alter the structure allowing people to spend less on one commodity (energy) and more on other goods and services that may be more labor intensive.

    The interests of business and the public overlap, but they are not exactly the same. BigG has an important role, in spite of efforts to deny it. That does not change whether the problem is demand, structure or interaction between demand and structure.

    -jonny bakho

    1. You are so correct "the interests of business and the public are not exactly the same." Unfortunately, a lot of little politicians have forgotten that their roles are to be leaders and establish a focus and direction for BigG policy for their members of the public. BigG should be the "Determinator" for the state and not the "Terminator" of the state.

  15. Phil Koop9:28 AM

    (1) "there is something seriously wrong with macroeconomics"

    (2) "But he seems not to have made much headway in garnering intellectual support for more active countercyclical policy"

    These are essentially the same statement; what is wrong with macroeconomics is not that we don't know much about it - every subject of human inquiry has its infancy some time. What is wrong is that it is possible for even the most respected members of the profession to disregard facts and logic in the service of tendentious argument and suffer no consequences. On the contrary, they are praised for their efforts.

    Your diagnosis - that a more clever rhetorical approach is required - would be pretty damning if true. But I am not convinced. Is it really true that Krugman et al are fighting the long defeat?

    There is an alternative explanation to "in 2009 you did not hear these people arguing nearly as strongly or loudly that everything was structural". Those people have been supporting the same conclusion but with a succession of different arguments. That suggests the opposite of your conclusion: facts and logic do slowly corrode bogus arguments and as they become useless they must be replaced.

  16. Phil Koop9:39 AM

    "It is much stronger than the case of the structuralists, which seems mostly based on assertion and repetition"

    :-) That reminds me of one of the best Bizzaro cartoons of all time: "Karl Rove and Plato":

  17. Noah, what's notable about the 'structualists' you cite is that they are clearly partisan liars. Neither Krugman nor you will convince them; the last several years are proof of that.

    The trick is to persuade the people who are not liars, and to shame those liars who are open to shame (i.e., nobody at Chicago, Harvard, George Mason).

    One of the things which you clearly don't emotionally understand is that you have entered a deeply corrupt and intellectually bankrupt profession. Luckily, you've entered it at a good time, when the data is clearly in, and a cohort of people will be entering knowing that the existing system is broken. In addition, you're not at the leading edge of that cohort, which is going to take casualties.

    1. Agreed.

      Noah's lack of courage is very disappointing and a bad omen. If he represents the generation whose coming in to deal with these issues, the future is in some trouble.

      Barely out of school, he's already been assimilated by the Borg.

      Very disappointing to see, as he had such promise. Alas, I had a bad feeling about it, given his frequent approving links to the intellectually bankrupt and thoroughly disingenuous Tyler Cowen.

      And now we have the cherry on the sundae in this post.

  18. What I think Noah isn't grappling head-on with is that the economics profession suffers the same political influence problem that the mass media does. The wealthy tend to get their interests embedded in the culture of the profession. It is worse for the media, but still economics has a similar problem. Or so it seems to me.

    1. Anonymous10:56 AM

      So the same people that fund "Climate Change" denial and "Cigarette Smoking Causes Cancer" denial and "Adam and Eve Walked With the Dinosaurs" are also funding economists who are "Fiscal Stimulus Works" deniers?
      Ya think?

      -jonny bakho

    2. How do you want me to grapple with this head-on? Intuition says that this is happening, but I only have evidence in a few cases (George Mason, for example). Some muckraking journalist should go dig up the dirt and make a documentary about this.

    3. You're probably right to suggest it's not your bailiwick... I was acting on the impression that your suggestion was essentially, "logic & facts are ineffective, so Krugman should mix a bit of hoki-poki into his message since hoki-poki is the game they're playing nowadays."

      I wish Krugman could do more, but don't see that he can.

  19. Anonymous12:45 PM

    I hope you added the Krugman "we must nationalize the banks to save the world" to your list of Krugman being wrong.

    1. Actually I think he was 100% right, if we had nationalized the banks, fired their top management, bailed them out, restructured their operations, and re-privatized them, it would have had the same beneficial effect as the bailouts we actually did, but without much of the moral hazard that TARP etc. created.

    2. Anonymous7:56 PM

      First, you're answering a different question, but lets stick with it for a moment. Krugman can't be 100% correct about something that did not happen. How to do you describe the consequences of something that didn't happen? There is no logic to that statement.

      I was saying something different. Krugman said we would not make it if the banks weren't nationalized. That i can prove was wrong. We have made it out, the banks made it out, and the economy is growing -- perhaps slowly, but growing. Go to 2009 and find an article where Krugman is not freaking out.

      We can argue about the relative merits of nationalizing vs. not regarding whether wedd be better off or not, but the doomsday scenario he suggested was wrong, plain and simple.

      I'm picking on you. I could pick on all of you blog writers that think they know what they're talking about. I have no issue with your opinions if they remained opinions. They are plausible. But the manner in which you write-off other viewpoints is hilarious because you similarly don't have an airtight case for your policies (Example: your response to my comment).

    3. "if we had nationalized the banks, fired their top management, bailed them out, restructured their operations, "

      J Dimon, the head of JMP Risk, the head of market risk, right on down should be fired for a $2 Bn loss on stuff that ooops "In hindsight, ... was flawed, complex, poorly reviewed, poorly executed and poorly monitored"

      oh and this gem: "This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed."

      really? Was Homer Simpson doing the analysis?

      Let me help you out with this one: every paycheck for the rest of your life belongs to the shareholders until it adds up to 2Bn. i'll give you $100 for itunes and a cardboard box after that learn to hunt pigeons with a slingshot on Canary Wharf.

      rant off.

    4. How to do you describe the consequences of something that didn't happen?

      First of all, you do it like this: "If X had happened, Y would have happened."

      Second of all, that's not what I was doing. Krugman supports bank nationalization after financial crises. So do I.

      Krugman said we would not make it if the banks weren't nationalized.

      Really? I thought he just said that nationalization was the clear optimal policy. Where did he warn of doomsday?

      As I see it, nationalization is just bailout without the moral hazard. Krugman seemed to be saying the same thing.

    5. Anonymous provide a link (or at least an exact quote). My memory corresponds with Noah's.

    6. Anonymous12:49 PM

      i still dont see how you know the consequences of something that hasn't happened. you may think you know, which is fine, but you don't know. join the club that has no crystal ball.

      temporarily nationalizing doesn't get rid of the moral hazard, depending on which moral hazard you're talking about. the moral hazard is that bankers do what they want adn there is littel downside. While shareholders get nailed on nationalization, the bankers do not. plus, you cannot ignore the potential chilling effect that nationalizing may have on future investment. as an investor, i am comfortable with the risk of bankruptcy. but to layer on the fact that hte government may decide to nationalize is scary, and changes the investing equation. what effect will that have on investment? No clear idea, but its something that should be considered prior to making the decision. your conclusion is simply "oh its the same thing but better in one way." i t

      do you think nationalizing makes sense today? literally today? the banks are relatively healthy.

      check out this oped. i think all three conclusions have been proven incorrect (though depending on what he meant, maybe not the second). Remember the US made a killing on the bank bailouts. interstingly, the point i raising about krugman saying we need to nationalize the banks was subject to a dispute between sorkin adn krugman. You may say Krugman was not wrong because he says "may need to nationalize the banks" -- OK, but my takeaway was that nationalization, from his perspective, was necessary. regardless, the larger point i'm making is that all these opnions are just that. you (not in the personal sense) are limited by the information you know, which is limiting for two reasons: you can't factor in information you don't know about (i.e. consequences of nationalization) and you dont know the relative importance of that unknown information when forming an opinion.

    7. @Anonymous:

      J Dimon makes a 21 MM bonus. Do you really think he's in it for the extra money? He could retire tomorrow in a 10k square foot mansion with a fleet of Bentleys.

      getting rid of management embarrasses and humiliates them, and even better ban them from getting a job in the industry. clawback their assets so that they feel really poor and have to live- ahem - middle class. thats about the only real leverage you have: Dimon has to feel he has skin in the game.

      now, will it prevent banks from doing stupid things? no. But it will sure reduce it.

    8. Anonymous2:24 PM

      i think liberals sometimes get too much into the game of punishing people for doing bad acts. i see life as unfair, and look to bankers to prove it. i 'm not around to punish them. you realize i hope that all the "bad guys" from lehman nad other banks are just working at different financial institutions, right?

      these folks have no shame and don't really care. who are you going to exchange management with upon nationalization? other bankers.

    9. Anonymous:
      i work in the industry and have for a long time, around many traders.

      A trade is basically a call option heads-i-win-tails-you-lose proposition: the upside is x% of the trade or a fat bonus, the downside is a base salary. I guarantee you no trader feels as much pain as the shareholders.

      You are absolutely right the industry is incestuous, that's not the issue. The issue is injecting additional incentives so that the trader feels the true cost of the trade.

      Do you think that we are recouping any of the 2Bn from the probably 100 people who signed off on these trades? no way. This was not even a bad bet. "they got the math wrong" and had to restate their risk metrics. this was flat out incompetence.

      a couple years ago HR at many banks and trading companies instituted clawbacks for bonuses and decreased variable comp. some of these people are in it for the bragging rights and adrenaline not the $$.

      Now, I think that it is really ridiculous that the head of risk, head of market risk, on down "got the math wrong." many of these guys have PhDs in a quantitative field. They should go (and I am preparing my resume).

      I am open to suggestions: what exactly is your insightful plan to reduce the moral hazard?

    10. Anonymous3:07 PM

      first, why are we concerned with the business decisions of JPMorgan? whose 2 billion are you talking about? SH have the option to invest, they're free not to, i dont have sympathy for them.

      regardless of why they lost 2b, they lost it. this is a company that made more than 5 billion in the first three months. its a company and SH problem and frankly will not matter in the long run.

      unless there is a risk the bank will go under, who cares? the company should handle the trader as they see fit. However, if there is systemic risk as a result of a bank's operations, then i agree, we have a an issue -- the "too big to fail" issue. How do you solve that? its clearly not easy, as it is a somewhat structural issue -- banks play a larger role in our economy than ever before -- you can't just pull the rug from under them without potentially seirously affecting the economy. I think larger capital reserve requirements and the volker rule are helpful. we're all waiting to see if they make a difference. the key point is the individual trader's actions are irrelevant unless they have the ability to topple the bank. I dont think (and could be wrong) that is a serious concern right now, but time is the only way to tell.

    11. first, why are we concerned with the business decisions of JPMorgan? whose 2 billion are you talking about?

      the taxpayers (ie me) are subsidizing those excess deposits Dimon is gambling.

      Also: they were totally clueless about the size of the trade they made (their risk metrics had to be restated).

      So it was luck that prevented this from toppling the bank.

    12. Anonymous3:22 PM

      how do you figure we are subsidizing those losses? you could argue we are implicitly subsidizing those losses, but ONLY if they have to be rescued.

      "So it was luck that prevented this from toppling the bank."

      what an amazing statement. why do you think this? under what basis do you think this?

    13. I listened to the conference call, but this is a nice summary:

      JPM takes these things from us called "deposits" which are FDIC insured.

      also, they get a hefty tax credit for these losses which reduces their income tax expense.

      they had no freakin clue how big this trade is.

    14. and btw dont get me started on how ridiculous it is that they lost 2B when their VaR was 186mm. over a year, VaR is probably about the 3rd worse lost if they are using 1 year of data. they lost 10x their maximum VaR, which means their risk system is off by an order of magnitude. "got the math wrong". heh.

    15. Anonymous4:19 PM

      yes, they get losses which can offset income. of course they should, this is not a special credit. this is basic income taxlaw. net operating losses offset income. every business gets this benefit (including people running their own business).

      don't put your money in a bank that is associated with a investment bank -- you're OPTIONALLY funding them. AND you're insured.

    16. of course they should, this is not a special credit. this is basic income tax law

      so every person pays $1 of extra taxes thanks to their f&& up. Plus, there is FDIC insurance that the taxpayers fund.

      traders, CRO, and Dimon get big bonuses next year, no consequence.

      good plan!!!

    17. oh, and as i pointed out on Delongs blog: they have tightened credit to american homeowners at the same time they are making big risky bets err, hedges. maybe I would have got my refi quicker if i was making a CDO trade??

    18. Anonymous5:05 PM

      OK, put your money under your mattress. you realize of course putting your money at a bank is simply loaning them money. you dont have to do that.

      i think your hatred of banks is clouding your judgment. no one is paying "extra taxes" because of JP Morgan. not sure you are following. they're call INCOME taxes. if you dont have income, you dont pay taxes. if you have income in one year, nad losses in another, you are supposed to pay tax on the NET income. you clearly can net income within one year, the rule i'm describing is taxpayer favorable and allows you to net income over multiple years. its not some big conspiracy. its a basic part of us income tax law that is available to everyone.

    19. I don't hate banks, I make a nice living in the industry.

      my point is very simple. compensation and incentives are skewed toward traders taking big risks with other people's money
      ive seen traders miss mark their positions to hide the sausage.

      ifa bank is too big to fail it's too big.

    20. Anon:

      See, I view bankruptcy as basically akin to nationalization (i.e. receivership). The main difference is that with nationalization, management gets fired. This reduces moral hazard, because directors and executives have more skin in the game. Otherwise, nationalization is just like bankruptcy - a bank gets protection from creditors, shareholders get wiped out, and the business is restructured so as to pay off as much of its debt as possible.

      So really, to me, the nationalization question just seems like a question of whether the government gets a say in hiring/firing decisions at bankrupt banks. I say yes, it should, to reduce moral hazard.

    21. noah,
      minor point: in a bankruptcy, usually the board gets replaced and very often management gets replaced as well. one large difference is who provides fresh capital (essentially debtor in possession financing). i am not a fan of the FDIC. But it seems like in return for FDIC, the govt should at least get a first lien on all assets.

  20. There is some confusion in this post. I don't see the logic that if you are a cyclicalist that means you have to be in favor of QE or stimulus. Or if you are a structuralist you have to be in favor of austerity. I think this is cyclical recession (cause by structural changes in the global economy:)), but I also think that there is absolutely no way to prove that things like stimulus or QE will work or has worked in the past.

  21. Logically speaking, structuralist v. cyclicalist is a distinction without a difference. In the abstract, in theoretical reasoning, it makes sense to make such a distinction, simply to define terms and concepts, but there's no corresponding difference to be observed in an actual case. Not just our present case, but any case, at any time or place. A structuralist explanation and a cyclical explanation are simply taking different points of view on a whole, which will always have both structural and cyclical aspects.

    In its logic, it is like one of those perpetual disputes in philosophy -- say, the never-ending opposition of de-ontological ethics to consequentialism. Any actual ethics has to derive from both kinds of consideration, so the "dispute" is kind of pointless, and will never be finally settled (a feature not a bug, for professional philosophers).

    The U.S. (and global) economy has structural problems, which play a prominent part in the macroeconomic reality, both in an epidemiology of the crisis and in the prospects for an effective policy response going forward. The actual macro-economy has a microfoundation, whether macroeconomics wants one or not -- it's not the RE of Lucas, but it is there, in Money and the Financial system, and in economic rents and administrative and market power and regulation, and in the distribution of income.

    As Stirling Newberry has acerbically pointed out, Krugman's thesis is clearly wrong on several counts, but most prominently, on the behavior of commodity prices. If "the" problem were entirely cyclical -- simply a shortage of aggregate demand -- commodity prices would have plunged and stayed depressed, pending recovery.

    And, then there's the whole problem of an outsized financial sector sucking blood out of the economy like an infestation of ticks on a mangy dog.

    Quantitative easing is a foolish and barren policy space. The financial sector is a cancer; it should be excised, not force-fed. The whole structure of post-WWII "cheap gas" suburban growth is obsolete, and the U.S. needs to make a radical pivot in the structure of its economy, away from Empire and rent extraction, and growth premised on "cheap gas". We are pivoting, it seems, but toward poisoning the ground water through fracking, and accelerating the demise of the oceans, through deep-water drilling.

    1. My take as an anti-equilibrium sort of person is that you are right the distinction is meaningless. The economy is always changing and some changes occur in longer time scales than others. But there is no way of knowing in advance if any chage will prove to be long term wise in advance.

  22. David Pearson4:01 PM

    The better structuralists are those that look at the impact of shadow banking in causing the boom and subsequent bust. They calim that shadow banking is way of organizing resources -- a technology -- that failed and will be permanently in disuse.

    Shadow banking affects a wide swath of the economy and employment: construction activity obviously, but also overall credit conditions (due to collateral impairment); start-up capital for new firms (due to disappearance of Home Equity Withdrawal); middle income consumer confidence (due to overindebtedness to higher income creditors); etc.

    Structuralists point out that recoveries from broad financial crises are long and shallow.

    In short, economists like Gorton and Reingart/Romer have a lot to say to cyclicalists that is not politically motivated.

    1. better structuralists

      And where are these mythical creatures?

      If you look at someone like Cochrane he is all in favor of increasing and deregulating shadow banking.

  23. I agree.

    How do you get someone like David Brooks to use his platform for good (or at least neutral) instead of evil? You don't point out what an idiot he is; people have been doing that for a decade, he'll just tune you out. Instead, tell him how reasonable and centrist sounding his plans are (that's all he really wants to hear) then gently point out that the structural holes in the economy include things like infrastructure, etc. and he'll be calling for bipartisan efforts to build bridges in no time.

    1. Larry Headlund10:50 AM

      Yes, I'm sure if you're especially nice and non-judgemental and gentle and non-critical of someone like David Brooks and tell him what he wants to hear he will cease to be the servant of the interests that pay him and instead join with you. If you have enough money for him.

      He is not a fool. He does not need to be educated.

  24. Too strong. Logic and evidence aren't going to change John Taylor's stance, because even if you convinced him, he will just lie (or grossly intentionally mislead), and say it's not true, because acknowledging it's true hurts his extreme libertarian cause. Libertarians are forced to grossly lie and mislead because if people really understood the implications of enacting their ideology almost all of them would vote against it (a big reason why libertarians are very critical of Democracy).

    But for people who aren't extreme libertarians, or extreme right wing – a strong majority – persistence pays. Keep hitting them over the head with the evidence, more and more, and it has a long term effect with a lot of people. And I say this as someone who has had a great deal of success in sales and marketing (I was a top salesman in my youth, have an MBA from Michigan, and have been successful in marketing my own businesses).

    I recall hearing that about three-quarters of economists are Democrats. But I wonder if this is very different for macroeconomists – one of the most competitive, mathematical, and prestigious areas. I wonder if these economists are a lot more libertarian and elitist. In any case, at least Stephen Williamson is a liberal (so he says repeatedly) and he's just not convinced of any kind of demand deficiency explanation. Perhaps there are a lot of other macroeconomists who are Democrats or centrists ideologically, especially young ones, who do care a lot about logic and evidence, and can eventually be convinced by its mounting.

    If you can convince them, and take some control of academic macro back, this can have a powerful long run influence on policy, just like the huge rightward shift of economics did a generation ago. Krugman implies often in his 1994 book Peddling Prosperity that the rightward movement of academic economics in the late 70s had an important impact on the countries (and worlds) extreme rightward shift. For example:

    In the world of politics, however, the actual content of an academic movement may be less important than the way it affects the tone of discussion. During the 70s there was a growing sense of disillusionment with the government...No matter how careful the research of conservative public finance theorists like Martin Feldstein might be, in that political climate it was inevitable that it would be widely seen as basically confirming popular prejudices. There was a huge intellectual gulf between Feldstein and Boskin and the sweeping claims of Arthur Laffer; but in the public mind they were in effect allies. (pg. 75)

    I do agree, though, we should talk a lot more about high social return public investment and long term growth. I was on board early:

    1. "I recall hearing that about three-quarters of economists are Democrats. "

      Perhaps Kausian liberal (i.e., against everything that liberals stand for, but they like to claim the title).

      "But I wonder if this is very different for macroeconomists – one of the most competitive, mathematical, and prestigious areas. "

      I wonder if these economists are a lot more libertarian and elitist. In any case, at least Stephen Williamson is a liberal (so he says repeatedly) and he's just not convinced of any kind of demand deficiency explanation. "

      Stephen Williamson is a guy who's been predicting a surge of inflation for years, now, and shows no shame in continuing that prediction.

      As for his claim to be a liberal, he's a liar. That is the parsimonious explanation for most 'liberal' economists, who seem to only like liberalism in the abstract.

      "Perhaps there are a lot of other macroeconomists who are Democrats or centrists ideologically, especially young ones, who do care a lot about logic and evidence, and can eventually be convinced by its mounting. "

      IMHO, what'll happen is that the younger ones will start with an awareness of reality, and a lack of respect for those 'distinguished' economists who stand up and tell stories that just aren't true.

      Then, as the freshwater guys die off, the profession will change a bit.

    2. Anonymous6:09 PM


      Love your shots at John Taylor

  25. Your understanding of the structuralist argument is backwards. The starting point is an aristocratic class that feels it is owed absolutely everything and that all others should get by with next to nothing and say thank you for what little they get. Since modern policy arguments are couched in the phraseology of economics, structuralism is the current mode of argument. If structuralism somehow determined that wages need to be raised, infrastructure spending was vital and abortion should be kept safe and legal, then you would see structuralism abandoned and savaged in an instant, and some new rationalization proposed, most likely couched in macroeconomic terms again.

    The actual argument is really quite old. In the middle ages, in Western Europe, it was generally couched in religious terms, and you can still find a variety of icons, paintings and sculptures representing Jesus Christ on the cross with a distinctive money pouch, usually attached to his belt. I never bothered to track down the precise theological argument, but the idea was that Jesus Christ wanted the wealthy to be wealthy, and probably that he died so that they might remain wealthy and worry about sinning against the poor and so on. Theologians might argue, citing the New Testament and Jesus Christ's own words about the moral hazard of wealth and what is owed to the poor and meek, but you can imagine how effective that was.

    It was like Paul Krugman arguing with a structuralist.

  26. Good point. I think a big part of the reason Krugman and others don't talk about structural issues--which he has mentioned several times on his blog--is that economists have been studying how to maximize longrun growth for quite some time, and for the most part have come up empty handed. We have decisive evidence that counter-cyclical policy is effective and welfare improving, but there isn't any unambiguous evidence on how to influence long run growth.

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  28. I don't think your premise is quite right. The structuralists, who in practice are virtually indistinguishable from the austerity and hard money Liquidationists, have in all likelihood past their high water point.

    Also, reason number #5 is balmy. Economists have almost no clue how to affect the long term growth rate. Heck, half the profession believes that the 'Great Divergence' is theoretically 'impossible' two hundred years after it happened.

    1. "The structuralists, who in practice are virtually indistinguishable from the austerity and hard money Liquidationists, ...."

      This is important - when the rubber hits the road, they are the same. They might have different *excuses*, but really they are the same.

    2. Anonymous12:38 AM

      "Heck, half the profession believes that the 'Great Divergence' is theoretically 'impossible' two hundred years after it happened."

      Really now. Please do cite.

  29. Good advice. I think you are understated the willful blindness of conservatives. You list Ezra Klein as a cyclicalist. He writes a lot about long term health care spending etc. Note Kevin Drum (not on your list) today writing about eating our seed grain. Also Brad DeLong (same seed grain which also pays Brad's salary except when he is on "furlough" that is layoff). Certainly one Barack Obama talks a lot about structuralist policy.

    I think you gave Krugman useful advice (and this is rare as he is pretty good at doing his jobs on his own). But I also think that you have too much respect for Brooks (that is any). Brooks's claim that he is a structuralist arguing with cyclicalists is based either on dishonesty or ignorance.

    I think the real difference is that, being demonstrably wrong about recent developments, fresh water economists and Mankiw who knows better but is a partisan Republican change the subject.

    It isn't Krugman's fault that Cowen perceives a tradeoff between public investment as advocated by Krugman and public investment as advocated by Krugman. It is impossible to convince people who ignore all the arguments one makes.

    but very good post.

    1. Yes, it's definitely true that Klein talks about structural stuff, as does Karl Smith (and Mark Thoma!), and that there are liberals like Kevin Drum who focus more on long-term issues. So yes, this advice is aimed mostly at Krugman (though also at Scott Sumner and to some degree at Brad DeLong).

      No, I don't respect Brooks, he willfully pretends to be an authority about things that he knows he knows nothing about...I just stole his terminology because it was good terminology...

  30. I could count the number of times Noah's been wrong on one hand and still be able indicate unity, but here his argument is not just wrong, but unfortunate, in the Obama-esque "don't do what's right, do what you know is wrong but what you vaguely think might have some sort of political benefit (even though it won't ultimately)".

    Noah, running the ball up the field for the other team helps you lose the game quicker. Your intellectual machinations about how it will help them see the light bla bla bal are nonsense. Just look at the evidence of how often this has worked in the past (read: never).

    That's why your argument is wrong from the point of view of effectiveness. But it's also wrong economically, for the reasons that Krugman (and Keynes) have pointed out dozens of times: there IS no viable long run without taking care of the short run.

    If you can borrow at zero percent to educate yourself to a better tomorrow (or to avoid a much worse tomorrow), you do it. The world has exactly the same problem. There's way too much money floating around, it's just horribly allocated. So let's allocate it better and get people paid to do things we need to do anyway to get to this mythical "long term".

    The lack of courage (and the intellectual excuse-making) you've showed with this post will lead me to always read you differently now. You're shown yourself to be another centrist "can't we all get along" coward along the lines of so many on the left.

    Well guess what, if you hadn't noticed from your ivory tower, we CAN'T all get along at the moment. The other side has no interest in compromise, no interest in truth, no interest in evidence.

    This is why Krugman is who he is and why you and many others of your ilk will never be a Krugman. Because he goes where the evidence takes him and then stands up for what's right, period. He doesn't back down at the first (or 50th) sign of controversy.

    The Structuralists will have a point - eventually. Krugman has even pointed that out fairly regularly. But unless we reverse the ridiculous policies in place now, there's no hope for anything but a very bad, unequal situation wherein there will be no realistic solution for the structural problems anyway.

    Though I don't believe he's expressed as much yet, in reading between his lines I infer that's what he thinks. Once we get to the point where the structuralists are mostly right, it'll be game over anyway. So we'd better do everything we can not to get there.

    In any case, a defining and very disappointing post by Noah.

    1. here his argument is not just wrong, but unfortunate, in the Obama-esque "don't do what's right, do what you know is wrong but what you vaguely think might have some sort of political benefit (even though it won't ultimately)".

      I disagree, because I think that it is very important to take steps to improve our long-term economic strength. It is not wrong.

      If you can borrow at zero percent to educate yourself to a better tomorrow (or to avoid a much worse tomorrow), you do it.

      But since education is just a long-term, structural policy, this supports my main point! The fact that we can borrow at zero percent just illustrates my point that there is no real trade-off between the short term and the long term.

      there IS no viable long run without taking care of the short run.

      That's not really true, although it is true that letting cyclical unemployment persist will lead to higher structural unemployment through hysteresis.

      The lack of courage (and the intellectual excuse-making) you've showed with this post will lead me to always read you differently now. You're shown yourself to be another centrist "can't we all get along" coward along the lines of so many on the left.

      Oh blah blah blah. What. Eh. Verr.

      I just say what I think is right, man. I don't get paid enough to moderate my positions. In fact I don't get paid at all.

      Well guess what, if you hadn't noticed from your ivory tower, we CAN'T all get along at the moment. The other side has no interest in compromise, no interest in truth, no interest in evidence.

      Oh believe me, I have noticed that. But there's still the need to win the hearts and minds of the public!

    2. Anonymous6:23 PM


      When you raise fair questions and make useful observations and then get a comment that, what you have written is "a defining and very disappointing post by Noah," you have done a great and useful job by pointing out who may be the real enemy. It is those on this side who still don't have the capacity or moral courage for conflict, or the skills or ability to engage in conflict and prevail.

      For all his skills, Krugman does not know or understand conflict, its moral components, or how to engage in conflict.

      Conflict has strategic and tactical aspects, with no firewall between the two.

      What Krugman does not know how to do, for example, is to take control over a debate by making the other guy die for his country.

      For example, he recently "debated" Ron Paul. Krugman would not make Paul admit the key point, that the Federal Gov't saved our bacon post Lehman. He should have refused to answer any questions or engage in any discussion until Paul admitted that truth and he should have forced such with hard, direct, pointed questions.

      He then should have grabbed "gold," and got Paul to admit that the return to the gold standard caused the Great Depression and he should give no quarter until Paul answered the question.

      Krugman's error, the error of the writer above, is that permit evasion because they do not see the moral nature of the conflict.

      Summers had similar opportunities recently in confronting Taylor.

      Summers should have grabbed Taylor by a central point.

      You borrow and spend, at zero percent, to educate yourself for tomorrow. Don't you agree, John?

    3. except the Fed didn't save our bacon. They saw presentations in 2005 and 2006 on how bad it could be and decided to focus on inflation instead. You do recall that right after Lehman they chickened out and did not ease?

      minutes of the Sept 16 2008 meeting:

      Participants noted that recent readings on core and headline inflation had been elevated, and they expressed concern that high inflation might become embedded in expectations and retain considerable momentum.

      Members agreed that keeping the federal funds rate unchanged at this meeting was appropriate. The current low real federal funds rate appeared necessary to provide adequate counterweight to the restraining effects of tight credit conditions and of continued declines in the housing market on spending and output. Committee members generally saw the current stance of monetary policy as consistent with a gradual strengthening of economic growth beginning next year, although they recognized that recent financial developments had boosted the downside risks to the economic outlook.
      With substantial downside risks to growth and persisting upside risks to inflation, members judged that leaving the federal funds rate unchanged at this time suitably balanced the risks to the outlook.

      look through the minutes and you will see "labor market deteriorate" "tight credit" "consumer spending weak"

      etc etc.

      The Fed caused the crash by focusing too much on inflation that never materialized, and not giving weight to the tight financial market. They spend zero time looking at TIPS, which were signalling deflation.

      Of course, they reversed course 3 weeks later after the markets told them we fell off the cliff. to late by that time.

    4. For all his skills, Krugman does not know or understand conflict, its moral components, or how to engage in conflict.

      I think that you do not understand the constraints of the battlefield that Krugman fights those debates on. You cannot force the other side to answer a direct question much less make them "admit" anything.

    5. This comment has been removed by the author.

  31. "If I have a choice between proving I'm right and winning, I'll pick winning every time..." you want to be like Mitt.

    1. No, because I don't change my positions for personal gain.

  32. Here come da economist. "Everyone is purely self-interested. Except me."