There are lies that help people accomplish goals and hold one another responsible for their actions. People who believe that success is the result of effort and not luck are more likely to work hard, and thus succeed. Yes, much of success is due to luck, but the false belief enables people to succeed.
The Fed can’t perfectly control the price level (or any other nominal variable for that matter). There are a lot of shocks that are more powerful than the Fed, at least in the short run. But what standards should we hold the Fed to? What optimal beliefs the Federal Reserve Board should hold to do a good job stabilizing the economy?
Outcome = (Factors the Fed controls) + (Factors the Fed doesn’t control)
I believe that the Fed has powerful control over the long run, and less control over the short run. If the Fed wanted 100% inflation over the course of a decade, that would be be easier than causing 2% in a month. But if short run shocks cause inflation to be 1% higher than the target, the Fed adjust their actions to compensate, and eventually they will be able to bring the price level in line with their long run objective.
Which institution will create less misbehavior, rules or discretion?
If the Fed were to be controlled via a rule, that rule would be determined by Congress. Congress, to put it gently, does not consist of macroeconomic experts. Actual monetary policy history is a parade of failure. There have been many dumb ideas that have held sway at various points in history. Once you make something a law, it fixes that idea for a long time. Our current “dual mandate” is a good example, yet no one has bothered to change the rule.
If a rule were good, a discretionary policy could just choose to follow the rule of their own accord. The Fed just does whatever the consensus is among macroeconomists, so not having a rule just means it’s decided by the sort of people who would come up with the rule anyway. Why not continuously determine what the best policy should be, in real time?
What does the central bank control? No one knows! Legally, the Fed has a dual mandate of inflation and unemployment. But no one these days believes that the Fed can actually target unemployment. They might as well have a “color of canaries” target, or “flavor of watermelon” target. Everyone knows this, but every time they miss their never-specified inflation target, they just mumble something about unemployment and people let them off the hook!
When things go wrong, the Fed says “We’re doing discretionary policy so you can’t really criticize us.” Imagine if everyone were so lucky at their jobs! You go to a restaurant and not only won’t they tell you what kind of food you’re going to get, when it tastes bad, you can’t complain because the cook cites his “cooking discretion”. That’s not good enough for the world’s most powerful economic actor. Any change in a target itself makes the central bank less effective because their most important goal is stability itself.
My main complaint about discretion is that it makes talking about macroeconomic general equilibrium impossible. People write all kinds of nonsense about how certain actions will affect macroeconomic variables: increasing capital taxes won’t reduce spending, government spending will increase inflation, every single statement made about real interest rates, etc. The internet is full of it. If the central bank had a target, I could say “that won’t happen because the central bank will/won’t offset it. Now, if I say “assuming the central bank targets inflation, blah blah blah”, people retort with “yeah, well they don’t target inflation all the time so my nonsense is really true!”. B.S. hides in randomness.
It’s not a trivial matter because Congress is a big purveyor of and victim of, B.S.
Source (modified for compactness).
ARRA did not improve the supply side of the economy, so any positive effect was purely from the demand side. Furthermore, not many people were hired because of ARRA (see also here and here), so the entire weight of the claim of lower unemployment is the secondary spending caused by the bill – the additional spending from people who got money from the bill.
Now, try to make the claim above in a world with an inflation target. It’s impossible. Fiscal stimulus works in a fixed inflation world iff it improves the supply side of the economy. Either it makes efficient investment, or increases TFP, or some other microeconomic reason why unemployment should go down. With fixed inflation, if the government moves the IS curve left, Y decreases, leading to lower employment.
The only way the fiscal stimulus works is if a.) the central bank leaves the inflation target, b.) The fiscal authority increases inflation and c.) The central bank never would have increased inflation back to the trend line in the absence of fiscal action. That chain of events can only happen in a “discretion” world.
I’m not a believer in the “zero lower bound” theory. A central bank can always inflate. If you don’t think you can do it, give me the printing press for a few days and I’m sure I can work something out.
There are good reasons for not wanting to hand control over monetary policy over to a fixed law, however, pure discretion can be mere chaos in practice. What if the central bank had to follow a rule, but the rule they followed was up to their discretion? A central bank could pick an inflation target, an NGDP target, a price of apples target, whatever, and then they would have to hit that target until they declared a new target. You get most of the flexibility of discretion, but the predictability, stability, and clarity of a rule based policy.
Economic instability can lead to political extremism which can in turn lead to totalitarian governments which are a million times worse than a few bank shareholders taking a haircut. The level of seriousness is simply not there in Troika. This isn’t kindergarten. It’s 1933 and it’s time to stop fucking around and pretending like the worst possible outcome is the Deutsche Bank going out of business. Krugman likes to talk about Very Serious People (“VSPs”) in a pejorative way, and I think this is a good use of the term. There are a lot of serious looking people in suits who are treating this like some sort of game.
The IMF is not to be trusted. They have happily destroyed countries in their pursuit of maximizing lending banks’ profits. When you have Joe Stiglitz calling you out, maybe that’s a red flag for your trustworthiness. Even a cursory examination of the IMF’s history will reveal a litany of failure, at least if you define failure as bad outcomes for the countries being intervened in.
I don’t think bank losses are a big deal, especially when they have had 6 years to insulate themselves from Greek debt. No one thinks the Greeks are going to pay back what they owe. The only question is how much. Any bank wiped out at this point from a Greek default only has themselves to blame. Banks are firms. They can go out of business and new ones will arise to take their place. Bankruptcy is the sign of a healthy economy, because it demonstrates creative destruction is working. No one firm is as important as overall economic performance.
Speed bankruptcy can save the world. Banks deliberately structure themselves so that they are fragile in order to credibly blackmail governments into giving them bailouts when things go downhill. There’s no other reason to finance yourself with so much debt vs. equity. However, there is a counter. If you make bank debt convertible to equity in the cause of a bank run, you take away the bank’s trump card – defaulting on their own loans, and triggering a chain reaction. If another bank is tipped into bankruptcy by the speed bankruptcy, run them through speed bankruptcy as well.
Banking cronyism is THE #1 economic problem in the first world. Lenin taught us that political cronies are interchangeable. Take a page from his book and convince yourself that economic cronies are also interchangeable. Sure, Goldman Sachs looks pretty indispensable right now, but if they’re gone, another investment bank will take their place and throw money into your reelection campaign just like the last bank did.
Prudent lending is just as important as prudent borrowing. If you know someone is going to default and you lend them money anyway, that is your fault as much as it is theirs. Sure, the “predatory lending” story doesn’t fit as well with Greece as they are with sub-prime borrowers, but it rhymes. If you lent Greece a ton of money, you’re going to get what you deserve good and hard and you have no one to blame but yourself.
Default does not change the net wealth of a society. The lender loses by exactly as much as the borrower gains. In fact, default is even better with government debt because government debt is paid back by taxation which has deadweight loss. From a strict economic efficiency perspective, governments should default all the time.
Germany’s mercantilism is stupid in the long run. Sure, in the short run, you can lash yourself to importers and get an artificially weak currency to boost your exports, but in the long run you get exactly the sorts of imbalances you are seeing now. Sure, you help exporters, but only at the cost of hurting consumers who are buying imports. Free trade and floating currency is, and always has been, the first best option.
Conflation of default and leaving the Euro. If a country can’t default without leaving a currency, it should never have entered the currency union in the first place. A U.S. city or state can default without having to leave the dollar. Why isn’t this the case in Europe? Just default and start to issue new debt. You don’t need permission from anyone. Germany can’ kick Greece out involuntarily any more than Greece can tell Germany not to use the Euro.
Greece is going to have to run a primary surplus one way or another, either to stabilize its debt or as a way of avoiding capital markets. And in fact, defaulting may lower Greece’s interest rates. If your debt to GDP is 200% and rising fast, no one thinks you are ever doing to repay it. So your interest rates are going to be sky high, leading to more debt. It’s a vicious cycle. But if you default, suddenly your debt to GDP ratio is 0, and suddenly your debt burden is bearable for a few years. Even if you continue to run small deficits, lenders have more reason to think you’ll pay them back, not less. If you look at historical examples of default, this is exactly what happens.
Reform would be good for Greece no matter what you think about debt forgiveness. Need primary account surplus/balance. Greece has a terrible economic climate, and not just because of the Euro.
If the ECB is going to keep being stupid, it’s not worth staying in. Greece may be able to set up their own CB to act reasonably. No one is cursed by their culture to permanently have high inflation. Problem of idiosyncratic shocks.
The stupidity of the ECB is a major factor pushing Greece not to unilaterally default. A competent central bank can maintain an inflation target in spite of defaults on government debt. The ECB can’t maintain an inflation target in a stiff wind. If the Greeks were to default, there would probably be massive deflation in the Eurozone, maybe even Great Depression levels of it. Given the large number of fixed amount government welfare programs, such deflation would trigger even more debt and more economic chaos. If deflation greater than 10% were to occur, the best outcome I could forsee would be everyone leaving the Euro. The worst outcome would be WW3 and/or a takeover of totalitarian regimes.
Hey diddle diddle,
The Cat and the fiddle,
The Cow jumped over the moon.
The short answer is that a cow jumping fast enough to escape Earth’s orbit, let alone getting to the moon, would explode in a huge plume of fire and ash.
The escape velocity of Earth from sea level is really fast (11.2 km/s). Rockets are able to go to space without burning up because they continue to apply force all the way up, rather than releasing it all at once and coasting the rest of the way. But a jump doesn’t work like that. Once you jump, that’s it for vertical force. If you are going to go to space with a jump, you have to have sufficient kinetic energy the second you leave the ground to get you all the way there.
KE = (1/2) * mass * velocity^2
According to a Google search, a cow weighs about 600 kg.
(1/2) * (600) * (11,200)^2 = 37,632,000,000 Joules, or 37.6 GJ.
Given that insane speed in a normal Earth atmosphere, I’m just going to assume all of the kinetic energy is converted to thermal energy by friction. A cow is not going to be able to hold together under the force from the air resistance it would encounter at that speed. It would quickly break apart and the surface area would increase to the point where all that speed would quickly convert to heat.
The specific heat of beef is 3.5 kJ/kg C, and I’m going to assume that that’s pretty close to the specific heat of the full cow.
3.5/600 = .005833 kJ per degree C that the cow increases in temperature.
37,632,000 kJ * 0.005833 = 219,507 C change in temperature.
So, it’s hard to get a mental handle on just how overcooked that beef would be. The surface of the Sun is a measly 6,000 K, which isn’t even close to our poor bovine friend. Lightning is a bit closer at 30,000 K, but still you’re off by a factor of 7. Fortunately, it would be cool enough that our hapless cow wouldn’t set off a fusion reaction of the nitrogen in the atmosphere.
Basically, the cow’s better off staying on Earth.