Note: On August 5, 2011, one month after I started blogging, I wrote the following post responding to an op-ed in the Wall Street Journal by David Malpass, an op-ed remarkable for its garbled syntax, analytical incoherence, and factual misrepresentations. All in all, quite a performance. Today, exactly seven and a half years later, we learn that the estimable Mr. Malpass, currently serving as Undersecretary for International Affairs in the U.S. Treasury Department, is about to be nominated to become the next President of the World Bank.
In today’s Wall Street Journal, David Malpass, who, according to the bio, used to be a deputy assistant undersecretary of the Treasury in the Reagan administration, and is now President of something called Encima Global LLC (his position as Chief Economist at Bear Stearns was somehow omitted) carries on about the terrible damage inflicted by the Fed on the American economy.
The U.S. is practically alone in the world in pursuing a near-zero interest rate and letting its central bank leverage to the hilt to buy up the national debt. By choosing to pay savers nearly nothing, the Fed’s policy discourages thrift and is directly connected to the weakness in personal income.
Where Mr. Malpass gets his information, I haven’t a clue, but looking at the table of financial and trade statistics on the back page of the July 16 edition of the Economist, I see that in addition to the United States, Japan, Switzerland, Hong Kong, and Singapore, had 3-month rates less than 0.5%. Britain, Canada, and Saudi Arabia had rates between 0.5 and 1%. The official rate of the Swedish Riksbank is now 2.5%, but it held the rate at 0.5% until economic conditions improved.
As for Malpass’s next sentence, where to begin? I won’t dwell on the garbled syntax, but, even if that were its intention, the Fed is obviously not succeeding in discouraging thrift, as private indebtedness has been falling consistently over the past three years. The question is whether it would be good for the economy if people were saving even more than they are now, and the answer to that, clearly, is: not unless there was a great deal more demand by private business to invest than there is now. Why is business not investing? Despite repeated declamations about the regulatory overkill and anti-business rhetoric of the Obama administration, no serious observer doubts that the main obstacle to increased business investment is that expected demand does not warrant investments aimed at increasing capacity when existing capacity is not being fully utilized. And for the life of me I cannot tell what it is that Mr. Malpass thinks is connected to the weakness in personal income. Nor am I am so sure that I know what “weakness in personal income” even means.
From here Malpass meanders into the main theme of his tirade which is how terrible it is that we have a weak dollar.
One of the fastest, most decisive ways to restart U.S. private-sector job growth would be to end the Fed’s near-zero interest rate and the Bush-Obama weak-dollar policy. As Presidents Reagan and Clinton showed, sound money is a core growth strategy—the fastest and most effective way to tell world capital that the U.S. is back in business.
Mr. Malpass served in the Reagan administration, so I would have expected him to know something about what happened in that administration. Obviously, my expectations were too high. According to the Federal Reserve’s index of trade weighted dollar exchange rate, the dollar exchange rate stood at 95.66 when Reagan took office in January 1981 and at 90.82 when Reagan left office 8 years later. Now it is true that the dollar rose rapidly in Reagan’s first term reaching about 141 in May 1985, but it fell even faster for the remainder of Reagan’s second term. So what exactly is the lesson that Mr. Malpass thinks that the Reagan administration taught us? Certainly the reduction in dollar exchange rate in Reagan’s second term was much greater than the reduction in the exchange rate so far under Mr. Obama, from about 83 to 68.
Then going in for the kill, Mr. Malpass warns us not to repeat Japan’s mistakes.
Only Japan, after the bursting of its real-estate bubble in 1990, has tried anything similar to U.S. policy. For close to a decade, Tokyo pursued a policy of amped-up government spending, high tax rates, zero-interest rates and mega-trillion yen central-bank buying of government debt. The weak recovery became a deep malaise, with Japan’s own monetary officials warning the U.S. not to follow their lead.
Funny, Mr. Malpass seems to forget that Japan also pursued the sound money policy that he extols. Consider the foreign exchange value of the yen. In April 1990, the yen stood at 159 to the dollar. Last week it was at 77 to the dollar. Sounds like a strong yen policy to me. Is that the example Mr. Malpass wants us to follow?
Actually the Wall Street Journal in its editorial today summed up its approach to economic policy making rather well.
The Keynesians have fired all their ammo, and here we are, going south. Maybe now President Obama should consider everything he’s done to revive the American economy — and do the opposite.
That’s what it comes down to for the Journal. If Obama is for it, we’re against it. Simple as that. Leave your brain at the door.
Uneasy Money 
I saw that op-ed but knowing Malpass just didn´t bother reading. 15 years ago I was at a meeting in Bear Sterns where he was chief-economist. Back then he was already well known as a “crank”!
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It is simple.
If interest rates were higher, then interest income would be higher. If interest income where higher, total income would be higher.
It is like saying that if we raise the minimum wage, then wage income would be higher. If wage income were higher, then total income would be higher.
He is ignoring that there is someone who must pay the interest (just as in the second situation, someone must pay the wages.)
And, as you explain, he is correct that higher interest rates would improve the incentive to save. But he is ignoring demand (for investment as you say.)
It is like saying that if the minimum wage is increased, then the incentive to work would be improved, and so employment increases. What about demand? A higher minimum wage increases the amount people would like to work, but they won’t actually work unless someone will hire them.
Admittedly, the possibility of monetary disequilibrium means that the individual can always save more–just accumulate money. But we know that total saving in the economy does really depend on investment.
I think we have plenty of experience of some people saving more and it is other people who save less, and they do so because they don’t have a job.
Of course, with a higher minimum wage, those who continue to be employed presumably have higher wage incomes. And while the real incomes of those using the poducts of labor may be a bit smaller, sure enough, there are some other people who have no wage income. The people who would have been hired iif not for the higher minimum wage.
Hey, I am all for improving the business climate so that there is more investment demand at any expected level of future output (that can be sold) and so a higher market clearing interest rate. Still, fixing the demand problem is pretty important.
But the simple answer is– it is supply and demand.
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Can anybody (Malpass) really write such a poor editorial? It is nearly jibber-jabber. It is stupifyingly inaccurate. It is garbage. The WSJ printed this? Profanity is required, but I can’t summon any words foul enough to describe this excretum from Malpass.
And we have a glut of capital. There is no shortage of savings in the world. Fed auctions are oversubscribed–the Bank of New York says you have to pay them to take deposits.
Investors want to put their money somewhere. If you have any sort of good looking business plan in IT or energy, you will get funded. Corporations are sitting on $2 trillion in cash.
The fact that Malpass (bad pass in Spanish btw) wrote this, and it was published, plays to my worst conspiracy theories. No one is as stupid as Malpass makes out to be. He simply wants Obama to fail. Malpass wants to wreck the economy, so a different group can get into power. Murdoch hates the Dems, and Murdoch owns the WSJ.
If the GOP wins in 2012, we won’t hear about inflation, gold, or maybe even budget deficits again.
Add in: Inflation in Reagan’s last couple years in office was in the 4-6 percent range. Now we have core at 1.6 percent. The headline rate was down last month, and with oil tanking, will probably start heading down.
Congrats to Glasner for pointing out this smear of brown gunk that ran in the WSJ.
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As a retiree with substantial savings, I can personally vouch for the truth of Mapass’ assertion that the zero-interest rate policy has had negative effect on income.
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May I propose that you perform a similar deconstruction of Larry Kudlow, so as to continue the Bear Stearns theme? I’d like to point out that the name of Malpass’ current enterprise translates to “on top” as in “on top of the wealth distribution curve.”
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David
BTW, congrats. You were mentioned in Krugman’s column.
I hope all NGDP’ers keep up blogging, try to get your op-eds out there.
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Funny, Mr Malpass. To rise now interest rate would be a clever idea.
The interesting thing is that he associate expanding fiscal deficit with monetary loosening, whereas actually it happens to be the opposite.
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He’s a rentier, or thinks like one. If you were counting on CD’s paying 3% to fund your retirement you are probably pretty miffed by current monetary policy. However there is no mention of “Risk free reasonable rate of return” in the bill of rights.
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There is no such thing as neutrality, so asserting this:
“That’s what it comes down to for the Journal. If Obama is for it, we’re against it. Simple as that. Leave your brain at the door.”
is asking those with hard assets to leave their brain at the door….
“If the GOP wins in 2012, we won’t hear about inflation, gold, or maybe even budget deficits again.”
My god, stop couching your blather with “conspiracy” – it is a FACT and rightful one. We ARE doing it to you, but it is based on far deeper beliefs.
Let me rewrite your claim for you Benji:
“If Obama wants to see money printing, he can act like a good Republican, cut public employee salaries, kill the EPA, end Obamacare, and basically pretend he wasn’t elected.”
The result WILL be a large change in how business and thus economists (the pesky large majority who inform Fed decisions) view money printing.
After all, things are back in their normative state, the government is not even considering messing with the private sector….
That’s WHEN printing money to juice things makes good sense.
You people talk and talk about expectations, but don’t like to admit the very real expectations of the haves in the very real world hinge on whether a bunch of agitating have-nots are empowered to come take from them.
When no one thinks that is the case, the inflating away of savings (which is a tax), is FAR EASIER TO SWALLOW.
Bill Clinton ate it and bent over and did what he was told and Greenspan rewarded him. Obama went for the “crisis in capitalism” play…
And DEEP DOWN, no self respecting lover of free markets is going to reward him for it.
Get over it. If you want your QE, end Obama.
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This is EXACTLY what Obama needs to do. Apologize.
http://www.breitbart.tv/small-businesswomans-epic-rant-against-obamas-disastrous-economic-policies/
The only people who matter talk and think like this. These are the people who have to expect NO government intrusion, they have to expect every local, state, and federal employee to STFU, forget about their agendas, and prostrate themselves to the causes and whims of the private sector.
Expectations matter.
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Here for the first time via Mark Thoma:
We all agree (or should agree) that the principal goal of economic policy should be the rapid repair of consumers’ balance sheets. Higher interest rates would seem to support that goal unless
1. they would lead to higher mortgage and consumer credit interest rates resulting in negative savings, economy wide, or
2. higher rates would not induce higher savings (and their associated income) because consumers who most need to repair their balance sheets are already saving as much as they can.
David — are these your objections to Malpass’ call for higher rates? some others? I think that rather than mocking Malpass (deserved or not), you should lay out your objections, expressly.
Never let a link from a popular website — which brings you us dabblers — go to waste!
Ellen1910
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Marcus, Having read several of his pieces before in the Journal, I knew what to expect, and my expectations were not disappointed.
Bill, Thanks for leading me through the debris. It’s a silly point, but at least now I can see what he was trying to say.
Benjamin, It is insulting to think that the WSJ has such contempt for its readers that they will allow a piece this bad to be printed under their banner. I have had a couple of pieces published in the Journal and was proud to have them accepted. Not any more.
Terry, Interest is only one component of income, so it is not follow that just because the interest component of income is down total income is down as a result.
Lisa, What’s the old saying? So much nonsense, so little time, or something to that effect. I’m just one solitary blogger.
Benjamin, Thanks. Thanks to Krugman this is the busiest day ever on the blog.
Luis, It is almost like free association. Nothing hangs together.
Atworkforu Yes, I agree that there is no natural right to collect 3 percent interest on one’s savings.
Morgan, You have an interesting take on policy, but I have trouble following your reasoning. At my age, I am not expecting, and don’t really want, to see a revolution in the way this society, the only society that I have ever known, operates. There are a bunch of small changes I would like to see, but I don’t want to see the country turned upside down. So I am trying to keep things going with the least disruption possible while you seem to want to change everything.
Ellen, The truth is that I would also like to see higher rates. But my point is that rates are low now because expectations of future prices are low, and the only way to raise expectations of future prices is by a monetary policy that encourages people to think that prices will rise. Once we get a monetary policy aimed at raising prices, business activity and employment will pick up and the economy will get back to its normal trend rate of growth of about 3 percent a year, though in a recovery phase it should do a lot better than that.
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I read the Journal more or less regularly for 50 years and crazy comment like this has been a staple of the ed page for as long as I can remember. Basically I used to selectively read the ed page for laughs and happily the reporting was fenced off from the fantasies of Bartley and Gigot but this has definitely changed since Murdoch’s aquisition. He’s turned it into a comic as he’s done with all the other quality papers he aquired and I dropped my sub a couple of years ago and switched to the FT. Malpass’ piece is as you point out full of the most basic errors and inchoherent reasoning. But that’s where conservatives are these days.
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“A Falling Dollar Will Mean a Faster U.S. Recovery”
Op-Ed, Wall Street Journal
August 1, 2011
Author: Martin Feldstein, George F. Baker Professor of Economics at Harvard University
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David, surprise! this is the way your society operates.
Look, you may or may not agree with this idea from Sumner: the BOJ WANTED to to run a “liquidity trap” – meaning they could have done the things Ben encouraged, but they chose not to…
But whether you agree to disagree, you recognize the idea is debatable, and certainly within the boundaries of discussion.
Ok so here’s mine: Bush II wanted to spend all the money on anything that didn’t reward Dem voters.. And before him Reagan DID THE SAME (and David Stockman came to realize it was on purpose and hated it). And Clinton sat down with Greenspan early 1993, and came out and said he wouldn’t be “investing” in anything, he’d be balancing the budget, put Greenspan on the dias and bought himself 8 years.
Obama KNEW the money had all been spent on purpose, and instead of being Clinton he chose to fight it, as such he is being punished, not by a conspiracy, but by a basic assumption within American business and economics which favors those that own hard assets, because such a huge swath of people own hard assets.
The debate is about whether America CAN BECOME a European safety-net country, and the brutal reality is NO IT CAN”T. One side will burn it down before that happens.
Ok, now like Sumner’s BOJ point, you may or may not agree… but the approach I’m taking to this is completely debatable.
My narrative isn’t about a change to America, it isn’t about an argument for revolution, my narrative simply says that “Monetary Policy” is just another tool that is used to keep democrats from expanding the social safety net – it isn’t done INTENTIONALLY, it is done NATURALLY, because the American business mind has feelings and expectations – and those expectations have been RAPED.
Let me ask you David, you work for the government… why don’t you give this some thought as a discussion about what policies best support those who own hard assets, forget about trying to make the economy “work” or worry about “unemployment.”
Forget about money, let’s pretend what matters is which people get to OWN title, just like in the game monopoly. The houses and the land never goes away, what matters is WHO owns it.
Now then, pretend they are the boss of everything, the hard assets holders.
This is a valid discussion. I proved it above. Assume liberal desires don’t matter.
If hard assets holders are the boss, and you must form policy the owners of hard assets find acceptable, then WHAT POLICIES do you advocate that best help you reduce employment?
DeKrugman does not have a dog in this fight.
This is a fight between two groups of asset holders – the Tea Party and the Banksters – one group of hard asset holders if going to win.
You want to reduce unemployment, I argue you MUST let the banks go insolvent, and let the Tea Party acquire even more of the hard assets.
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“It is garbage. The WSJ printed this?”
>>
Why in the world, given the usual crap they publish from the friends of Stephen Moore and Don Luskin, would ANYONE be surprised that the op-ed page of the WSJ would contain something like this? It is par for the course. Total BS, hiding under the prestige of the name “Wall Street Journal.” Given Murdoch’s ownership of the paper, no one should be surprised whatsoever that they would publish another Heritage-esque tapestry of stupidity….
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Ok, this is Steve Benen in the Washington Monthly telling EXACTLY the same story I tell:
http://www.washingtonmonthly.com/political-animal/2011_08/a_timeline_of_events031362.php
There is not a single basic fact I disagree with and i doubt any of you can either.
BUT, I start in 1913, with the advent of “Democracy” and I count all the votes taken to extend the social safety net and i see those as a bad thing.
Seeing those as a BAD THING is perfectly acceptable in economic discussion.
So when I then read Steve Benen’s litany of facts since 1980, I’m able to completely disagree with how he finishes his point:
“There have been several instances since the mid 1990s in which I genuinely believed Republican politics couldn’t possibly get more blisteringly ridiculous. I was wrong; they just keep getting worse.”
NOW LOGICALLY we see Benen and I are 100% in agreement on a statement of facts, we simply interpret them differently.
He is a emotional liberal who cannot even grasp this opponent.
I am a student of long term political / economic strategy.
I see 1913-1980 as what happens when one side spends to buy votes and power, and 1980 till today as what happens when the other side learns a BETTER STRATEGY to defeat the liberals.
Macro and you macro-economists CANNOT pretend this is all levers and buttons, any more than a scientist can pretend that splitting the atom doesn’t have consequences.
You are but tools in the larger game.
There is a bigger world out there than money theory, the game is the hard assets and the power to determine who controls them.
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Ottovbvs and Dean, Actually I think that the Journal used to have higher standards for its op-ed pieces than it does now. The pieces that I wrote for the Journalwere rigorously edited. It’s one thing to push a particular political and economic philosophy, but, as Krugman correctly noted, the Journal and much of right-wing economic writing has no discernible theoretical foundation. They haven’t even adopted an Austrian approach, probably because that would alienate too many non-Austrian right-wing economists. So lacking any theoretical foundation, they just spew forth a hodge-podge of anti-Keynesian cliches. They still have some smart people who are contributors, like Ronald McKinnon who is top-notch economist in anyone’s book, and Alan Reynolds who is a very smart non-academic economist who usually makes a good argument even if I don’t necessarily agree with it. But it is just shocking that they would print a piece like the one Malpass wrote on Friday.
Chris, Thanks for this cite. Feldstein writes a lot for the Journal, too. I am not a big fan of his, and I wrote this letter criticizing a column that he wrote for the Financial Times criticizing QE2. Feldstein later had a change of heart and conceded that QE2 had resulted in a pickup in economic activity. But that was before the spike in oil prices in February, the tsunami in Japan in March and the worsening European debt situation since the early spring. I am not a big fan of Feldstein, and he is not really a monetary economist, but there is no dispute about his competence.
Morgan, Thanks for explaining to me your view of the world. Just out of curiosity, and I know that this is really off-topic, what is your theory about what really happened in the 2000 election? But on your larger point, I am not inclined to get into a debate with you about how our society really works and who is really in control. It’s hard enough for me to stay on top of the narrow little slice of the world that I am trying to write about without having to figure out answers to the larger questions that you are posing. The late Earl Thompson from UCLA, who taught me so much about monetary economics and economic theory, had some very interesting, but eccentric, views about society and which forces are really in control. And although I did not particularly care for his take about a lot of issues, I rarely got into arguments with him about his political and social theories, because doing so was too emotionally exhausting for me. You might want to go to his webpage where you could find his papers discussing and explaining his social and political views. You might find them interesting.
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In 2000, you saw the a pure admittance that SCOTUS is political, and it will manifest itself just like the Fed (and the monetary policy you SAY you want to focus on).
Fortunately SCOTUS and those that inform it (exactly like the Fed and those that inform it) will likely be made up of those that self-identify with owners of hard assets, whose natural view of what is “acceptable” will change based upon who the parties are as much as what arguments they are making.
This might help you admit I’m right: imagine we were listening to a bunch of lawyers act as if justice is blind, and some asshole (me) kept reminding everyone that in each case justice is partially based on the judge, and that if most of the judges were a certain type – than a certain legal reality would set in.
So I am not explaining to you my world view, I am making an argument that TRUMPS yours. It is statistically factual: the Fed has different opinions about monetary / fiscal based on who is in office, just like like NBA referees make calls a certain way based on home team, tournament play and the like.
You don’t like the idea of a biased Fed?
Who cares. You might as well not like gravity.
The question is do you pretend to do economics without accepting the fact of gravity?
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I love guys like Morgan who make claims, and then just declare themselves to have “won,” eo ipso. Everyone else is simply making liberally-biased emotive please. Disappointing, because Morgan, you seem pretty bright otherwise
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Here’s another version of the same hegemonic bias that you are obligated to accept:
“But S&P sees the continuation of the Bush tax cuts in 2001 and 2003 as something that could still allow the U.S. to maintain its new “AA+” rating.”
http://thehill.com/blogs/floor-action/house/175755-sap-values-spending-cuts-more-than-tax-revenue-in-credit-rating-analysis
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Dean, dude, step up and take some pitches. I’m the visiting team, if I’m not throwing heaters… get in the box and spit on your hands and make a damn argument.
I’m not making “claims” – in any course on logic, I’m making arguments.
Look, liberals like Benji GIVE UP THE GOAT, they say out loud that they fear the Fed is biased.
I say YES it is true. Uh-oh.
Now in any place where say real money was on the table, like in the free market, or say a hedge fund, an intelligent discussion would then grow from that assumption.
Given that the Fed (owned by banks) is biased towards private enterprise and against government control of the economy, macroeconomics is no longer a bunch of plots on a curve, it becomes a deep riddle of what a guy like Obama can politically sacrifice, and change in government policy to COAX, to TEASE OUT some more QE.
Already we have the Tea Party keeping Congress in session through 2012, not even allowing Obama to make appointments out of session, SO “put Romer or Diamond on of the Fed” is like saying “rub the genie lamp!”
Why waste your breath?
Let’s get down to brass tacks man, how much for the ape?
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David thanks much for Thompson, he is quite a find. This is pure joy:
Click to access 31-1.pdf
He makes mistakes, but he certainly grasped and had the strength to admit so much more than what you all are doing here.
I am very much concerned with snatching the conch from the Baby Boomers and giving them their choice of ice floe, and I suspect when the time comes most of what Thompson assumed will fall by this simple fact:
Human history now finally progresses more vertically than horizontally, parents are truly outdated before the nest is likely cleared, and will be outdated even sooner with each new decade. Kids today by any measure are smarter.
Property rights and inheritance will stick around forever, but letting those over 70 vote won’t – unless they vote as instructed by their kids.
Grandma and grandpa are supposed to shut up and they will.
Thanks again for Thompson.
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Morgan, Glad that you liked Thompson. I think that I would rephrase Dean’s point as follows. Before you can claim that your view of the world is to economics, politics, and law what Newton’s view of the world is to physics, you will have to do a bit more than just make comments on a two-bit blog like this one, visited on average by a few hundred souls a day (but doing a little better, thanks to Paul Krugman and Mark Thoma, lately); you will have to do a little more than assert that you have discovered the social equivalent of gravity. I’m not saying that you haven’t, I’m just saying that until you have made a more comprehensive argument than you have, or could, on this blog, the rest of us are entitled to treat your claims (or arguments) with a fair amount of skepticism. You might want to consider spending the next two years writing a book explaining your view of the world, you could call it Principia Economica. Otherwise, you are not really going to get very far convincing people who don’t already share your views or aren’t interested in getting into an argument with you.
PS Morgan, I would appreciate it if you would contact me by email glasner.david@gmail.com
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David: I appreciate your blogging a great deal. If, in the blogosphere, citation linking is the sincerest form of flattery, then my recent guest post at Skepticlawyer (cross-posted at Critical Thinking Applied) engages in significant flattery of your good (blogging) self 🙂
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Lorenzo, I am indeed flattered, more than flattered actually, to receive your accolade. I only hope that your wonderful and deeply insightful essay has the influence it deserves.
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Perhaps as president of the World Bank, Malpass will so less harm to the US than he is doing at Treasury. I canceled my subscriptions to the WSJ years ago because it started publishing op-eds by Malpass and his ilk. And if the NYT publishes more op-eds by Diane Swonk, I’all cancel my subscription to it.
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David,
“By choosing to pay savers nearly nothing, the Fed’s policy discourages thrift and is directly connected to the weakness in personal income.”
First, the Fed does remit a portion of the interest it collects on it’s government bonds back to the Treasury department. And so in that sense, it does deny Interest payments to prospective savers.
But you are correct, this is a garbled statement. Under most circumstances, the Fed does not “pay savers” anything – they are a lender, not a borrower.
Perhaps you can answer a legal question – when the Fed conducts open market operations, do bondholders have the legal right to refuse to sell to the Federal Open Market committee?
I suspect that many of the same banks that make regular purchases of government debt at auction (and sell that debt to the Fed) also have access to the Fed’s discount window. For those interested, the Fed is not legally permitted to purchase debt at auction – they must buy it on the secondary market.
Finally, Melpass does miss an important point – quantities matter.
See:
https://fred.stlouisfed.org/series/A091RC1Q027SBEA
Total interest payments by the Federal Government on it’s debt:
3rd Quarter of 2018 : $554 Billion
That is significantly more than the “nothing” that Melpass seems so concerned about.
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