Allan Meltzer

On March 9, Carnegie Mellon economist Allan Meltzer argued in the Wall Street Journal ("A Look At The Global One Percent") that income inequality is a global phenomenon and therefore not a problem that can be solved through changes in U.S. domestic policy. He's right about the first proposition and wrong about the second. Actually, he isn't even entirely right about the first. Yes, income inequality is occurring globally. But it isn't happening uniformly. Until recently it was declining in France, Ireland, and Spain. Now it's declining in Turkey and Greece, and it's basically flat in France.

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AEI's Allan Meltzer has an extremely familiar screed against President Obama's economic program in today's Wall Street Journal op-ed page. The one portion of it I hadn't heard for a while was this: One piece financed temporary tax cuts. This was a mistake, and ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt.

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In his NYT mag piece, Paul Krugman blames macroeconomists for believing the world behaved as well as the math behind their models. His solution? To re-embrace Keynes. But in a provocative counterpoint on VoxEU, Scott Sumner says looking back to Keynes won't solve the problem.

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The Wall Street Journal has a useful piece up today about the historical analogy that looms large in the minds of administration economic officials: 1937, the year the Fed, FDR, and Congress prematurely tightened economic policy and sent the economy back into a deep recession after several years of recovery. What I always find remarkable about these discussions is that proponents of early tightening essentially (sometimes explicitly) argue that the expected loss from too much inflation (that is, the loss weighted by the probability of it happening) is greater than the expected loss from a doub

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I have a lot of respect for Allan Meltzer. His History of the Federal Reserve is a real achievement; I've even cited it a few times in my own writing. But on the question of the current inflationary threat, the subject of his op-ed in yesterday's New York Times, I agree with Paul Krugman, whose response can roughly be summarized as: Huh? Meltzer is most mystifying when he writes: "Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation.

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Visible Hands

When Hank Paulson, a successful investment banker turned Republican treasury secretary, caps his career by nationalizing two financial institutions so large that even Norman Thomas in his socialist heyday would have paused before taking them onto the government's balance sheet, and a conservative central banker agrees to bail out an insurance company to the tune of $85 billion, you know that a fundamental change is underway. The day when that engine of capitalism, the financial market, was allowed to operate more or less unimpeded by government has passed.

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Overblown

Last June, the Federal Reserve quietly released a discussion paper that garnered little attention in the mainstream press but created a minor stir on Wall Street and in the rarefied world of academic economics. The paper, titled “Preventing Deflation: Lessons from Japan’s Experience in the 1990s,” was nominally about exactly what its title suggested: how the persistent deflation and economic stagnation that has followed Japan’s late-’80s bubble could have been avoided.

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