I do wonder what is going on…
UPDATE: Yay!! Success!!
I do wonder what is going on…
UPDATE: Yay!! Success!!
Just saying. If the financial crisis of 2008 and the failure to respond to it appropriately does in the end knock the U.S. from a 2.7-3.2%/year long-run growth trajectory to a 2.0%/year long-run growth trajectory for even ten years, in the long run it will turn out to be a much bigger deal than the Great Depression…
L'Esprit de l'Escalier: May 31, 2013
The Daily Edge: "Reagan turned his back on gays during AIDS epidemic. Iran-Contra scandal was an unthinkable abuse of power #ObamaIn3Words Better Than Reagan" Me: But there was that awesome episode of "Reagan" in which a scrappy band of misfits--an astrologer, a fashionista, and a washed-up ex-actor with early-stage Alzheimer's--banded together and tried to end the Cold War…
Apropos of https://frederickguy.com/2013/05/25/delongs-endearing-false-modesty/: The difference is that Ken Rogoff is both scary-smart and has done his homework, and Carmen Reinhart has definitely done her homework and looked at every historical episode: they have reasons for thinking that using Germany's debt capacity for debt restructuring would be much better from a technocratic-economic point-of-view than fiscal expansion in Germany, and the fact that I don't full grasp those reasons may well say something not about their errors but about mine. I could say something not quite as strong but analogous about Robert Barro: scary-smart, does his homework--the big problem with his analyses, I think, is that for him it is always 1976, Gerald Ford is always President, and Arthur Burns is always chairing the Fed. Fama, Cochrane, Lucas, and company… with them, by contrast, they simply don't bother to do their homework, and then feel it would be too humiliating to ever admit any error on their part. But it's not doing your homework that's uncool. And it's not being willing to admit error that is truly humiliating. As for Steve Williamson... Well, what do you think of https://newmonetarism.blogspot.com/2012/10/when-is-it-time-to-take-vacation.html?
His Majesty’s Government feel most strongly that this great force, which comprises their best and most experienced divisions and the main part of their army, should not in any circumstances remain idle. Such an attitude could not be justified to the British nation or to our Russian allies.
The Wirecutter | The Sweethome | Carola Binder: This Time is Not So Different: The Euro Crisis and the 1840s | Andrajit Dube: A Note on Debt, Growth, and Causality | Dan Keenan: A real Potemkin Village: recession out of the picture as Fermanagh puts on a brave face for G8 leaders | Olivier Blanchard, Giovanni Dell'Ariccia, and Paolo Mauro: Rethinking macroeconomic policy: Getting granular | Alan Auerbach:* Tax Corporate Earnings Where Products Are Sold | Owen Zidar: The Risks of Debt by Brad Delong |
Marty Feldstein: America’s Misplaced Deficit Complacency: "The new complacency about future deficits makes it difficult, if not impossible, to enact the legislation needed to begin the process of trimming America’s long-term fiscal deficit. It is important for policymakers and the public alike to understand the real fiscal outlook and the damage that high deficits will cause if prompt action is not taken. Merely moving the problem to the back burner will not prevent it from boiling over."
Adam Posen: Austerity Has Made Europe's Real Problem Worse: "Austerity – meaning excessively fast and large public spending cuts and tax increases – has been worsening Europe's real problem, which is loans that went bad. Austerity has also backfired by making public deficits worse. This economic policy approach was never demanded by markets, it was just a mistake. The euro area governments are right to ease off on the pace of fiscal consolidation."
If I am in Berkeley, CA, is it likely that I am requesting directions to the Four Seasons Hotel in Maronouchi?
Yes, I know the last time I stayed in a Four Seasons it was the Four Seasons Maronouchi. Nevertheless…
And we are live at Project Syndicate: Inequality on the Horizon of Need :
BERKELEY – By any economic measure, we are living in disappointing times. In the United States, 7.2% of the normal productive labor currently stands idle, while the employment gap in Europe is rising and due to exceed that of the US by the end of the year. So it is important to step back and remind ourselves that the “lost decade” that we are currently suffering is not our long-run economic destiny.
As Paul Krugman recently reminded us, John Maynard Keynes perhaps put it best:
This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life – high, I mean, compared with, say, 20 years ago – and will soon learn to afford a standard higher still. We were not previously deceived. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time.
Andrajit Dube: A Note on Debt, Growth, and Causality:
Abstract: This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the Reinhart and Rogoff dataset. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate.
I use a number of simple tools to account for some of the reverse causality in the bivariate regression–such as using forward growth rates, instrumenting the current debt ratio with its lag, and controlling for lagged GDP growth rates. These simple methods of accounting for reverse causality diminish the size of the association by between 50 and 70 percent, with the linear regression estimate indistinguishable from zero. Finally non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both.
Economist's View: 'DSGE + Financial Frictions = Macro that Works?': This is a brief follow-up to this post from Noah Smith….
In my last post, I wrote:
So far, we don't seem to have gotten a heck of a lot of a return from the massive amount of intellectual capital that we have invested in making, exploring, and applying [DSGE] models. In principle, though, there's no reason why they can't be useful.
One of the areas I cited was forecasting. In addition to the studies I cited by Refet Gurkaynak, many people have criticized macro models for missing the big recession of 2008Q4-2009. For example, in this blog post, Volker Wieland and Maik Wolters demonstrate how DSGE models failed to forecast the big recession, even after the financial crisis itself had happened…
This would seem to be a problem.
Confessions of a Supply-Side Liberal: My Thoughts about What Brad Says in the Quote Just Above: As I noted above, my reaction is to what we Yichuan and I found is similar to Brad’s. There must be a negative effective of debt on growth through the bond vigilante channel [when it is active vis higher interest rates], as Yichuan and I emphasize in our interpretation. For example, in our final paragraph, Yichuan and I write:
…other than the danger from bond market vigilantes, we find no persuasive evidence from Reinhart and Rogoff’s data set to worry about anything but the higher future taxes or lower future spending needed to pay for that long-term debt.
The surprise is the pattern that when countries around the world shifted toward higher debt than would be predicted by past growth, that later growth turned out to be somewhat higher than after countries around the world shifted to lower debt. It may be possible to explain why that evidence from trends in the average level of debt around the world over time should be dismissed, but if not, we should try to understand those time series patterns. It is hard to get definitive answers from the relatively small amount of evidence in macroeconomic time series, or even macroeconomic panels across countries, but given the importance of the issues, I think it is worth pondering the meaning of what limited evidence there is from trends in the average level of debt around the world over time. That is particularly true since in the current crisis, many people have, recommended precisely the kind of worldwide increase deficit spending—and therefore debt levels—that this limited evidence speaks to.
I am perfectly comfortable with the idea that the evidence from trends in the average level of debt around the world over time is limited enough so theoretical reasoning that shifts our priors could overwhelm the signal from the data. But I want to see that theoretical reasoning. And I would like to get reactions to my theoretical speculations above, about (1) supply-side benefits of lower taxes that reverse in sign in the future when the debt is paid for and (2) liquidity effects of government debt (which may also have a price later because of financial cycle dynamics).
Berlin-Charlottenburg 2 :: May 30, 1943
To the Reichsführer SS and Chief of German Police, Himmler
Re: Iron and steel quota for SS, especially Auschwitz concentration camp
Dear Party Comrade Himmler!
Apropos of Kimball and Wang…
Miles Kimball writes:
.@delong undersells our results. I would have read Arin Dube’s results alone as saying high debt does slow growth. Of course low growth causes debt in a big way. But we need to know if high debt causes low growth, too. No ev it does!
“I demand freedom of thought!”
“I think your marriage is a joke. A marriage of two men is like a marriage of a toaster and a blender.”
“You mean you disagree?”
“Yes, I disagree.”
“What do you have against freedom of thought?”
“Nothing. I just think you’re a bigot. That’s all.”
“You what??? I… I don’t like that you think that!”
Owen Zidar sends us to Reed Walker: >The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce | Bill Davidow: The Internet 'Narcissism Epidemic' | William G. Bowen: The ‘Cost Disease’ in Higher Education: Is Technology the Answer? | Brad DeLong (March 20, 2008): The Liquidity Trap Cometh... | Central Banks Act With a New Boldness | Margot Sanger-Katz: Wal-Mart’s Super-Counterintuitive Health Care Plan: Instead of skimping on the most expensive care, the giant retailer is sending its workers to top-tier hospitals. Turns out, it’s a great way to save money | Donald Taylor: Parsing the details of catastrophic health plans | Josh Bivens: No cause for relief—austerity will indeed drag hard on the economy in 2013 and 2014 | Aaron Carroll: Opinion: Myths about Obamacare |
Ezra Klein: No one really believes in ‘equality of opportunity’: "Avik Roy writes that everyone is missing the point of the conservative reformers. The changes aren’t happening, or aren’t mainly happening, at the level of policy. They’re happening at the level of principle. 'Where many reformers differ from their ancestors is in the philosophical source of their support for free markets…. Older, libertarian-flecked strain of American economic conservatism appreciates liberty as an end in itself… today’s conservative reformers [see] equality of opportunity — especially for the poor — [as] the highest moral and political priority'…. Everyone in American life professes to believe in equality of opportunity. But nobody really believes in it…. You can’t have real equality of opportunity without equality of outcome. A rich parent can purchase test prep a poor parent can’t. A rich parent can usher their children into social networks a poor parent can’t. A rich parent can make donations to Harvard that a poor parent can’t…. When people say they believe in 'equality of opportunity', they really mean they believe in 'sufficiency of opportunity'…. Democrats who believe in sufficiency of opportunity tend to want to spend more on health care and education for the poor…. On the Republican side, Rep. Paul Ryan (Wis.) has taken the lead in arguing that conservatives should focus on opportunity. But his approach largely consists of cuts to the safety net… the poor are held back by the government spending too much money to cover the uninsured and too much money on food stamps and too much money on education and too much money on childhood nutrition and too much money on daycare."
Paul Krugman https://krugman.blogs.nytimes.com/2013/05/18/old-fashioned-austerity/: "Matthew Yglesias… makes a point… if the real problem is that we overspent and lived beyond our means, we should be working harder, not throwing millions of people into unemployment. Yglesias makes his point with the case of Iceland, which has indeed restored relatively full employment while continuing to suffer somewhat reduced real income. But there’s an even better example from the historical record: Britain after World War II… responded to high levels of debt with an economy in which life was pretty hard for investors, luxuries were hard to come by even for the middle class, and everyone worked hard — but, you know, everyone had a job. We’ve responded to much lower levels of debt by ensuring that the economy functions far below potential, millions of people who want to work can’t find jobs, and many people see all their hopes for the future slipping away."
Miles Kimball and Yichuan Wang confirm Arin Dube: Guest Post: Reinhart/Rogoff and Growth in a Time Before Debt | Next New Deal:
Miles and Yichuan:
After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth - Quartz: After crunching Reinhart and Rogoff’s data, we’ve concluded that high debt does not slow growth.
In May 1943, units from 17th Infantry of the U.S. 7th Infantry Division made amphibious landings on Attu to retake the island from Japanese Imperial Army forces led by Colonel Yasuyo Yamasaki…. Arctic weather conditions and exposure-related injuries also caused numerous casualties among U.S. forces. But after two weeks of relentless fighting, American units managed to push the Japanese defenders back to a pocket around Chichagof Harbor.
Hoisted from the Archives: October 2011: The Tribal Dislike of John Hicks and IS-LM: History of Economic Thought Edition: When you do economics and apply it to the real world, you start with the simplest possible model. Does that help you understand enough of the real world to satisfy you? If not, you complicate it by adding the most important thing that you had left out. Does that help you understand enough of the real world to satisfy you? If so, you use that model--and then when you want to go further you complicate it in its turn.
Ampersand: "we know that free birth control can reduce abortion by 60%" | Mark Thoma sends us to Lucrezia Reichlin, Adair Turner, and Michael Woodford: Helicopter money as a policy option | 2013 Industry Studies Association Program | 4th Banque de France – Deutsche Bundesbank Macroeconomics and Finance Conference | Josh Israel: Former GOP Senators Bob Dole and Olympia Snowe: Republicans Must 'Rethink Their Approach As A Political Party' |
Simon Wren-Lewis: mainly macro: Debating Helicopter Money (while the lunatics continue to run the asylum): "Vox has published an excellent summary account of a debate between Adair Turner and Michael Woodford (skilfully moderated by Lucrezia Reichlin) on helicopter money. My line on helicopter money has been that it is formally equivalent to fiscal expansion coupled with an increase in the central bank’s inflation target (or whatever nominal target it uses), and so adds nothing new to current policy discussions. I think the Woodford/Turner debate confirms that basic point, but as this may not be obvious from the discussion (it was a debate), let me try to make the argument here."
Ezra Klein and Evan Soltas: Wonkbook: The GOP’s dangerous Obamacare strategy: "They may be right about that, or they may be very wrong. But this is a theory that requires Republicans to knowingly damage America’s health-care system on the off-chance the damage is severe enough to help them accomplish a much larger policy goal. It’s a theory that requires them to choose to let problems fester because the pain is more politically useful than the cure. There’s an emergent argument, and some strong evidence, that Obamacare is going to work much better in 2014 than Republicans realize, at least in the states that are actually trying to implement it… even under the most optimistic possible future for the Republican Party, they don’t have anyone in the White House willing to sign repeal until 2017 — by which point it will likely be far too late. The question then is when the GOP makes sufficient peace with Obamacare that they can begin engaging with it constructively and passing bills that fix the parts they and their constituents don’t like. Those laws can, of course, be framed as victories for the Republican Party and admissions by Democrats that Obamacare is imperfect. That’s politics, and it’s fine. What’s dangerous is if the heighten-the-contradictions strategy the GOP is currently previewing persists after 2014, or even after 2016. At some point, if they can’t repeal Obamacare, they need to learn to live with it."
Fiscal policy: Debt, growth and competing risks: CARMEN REINHART and Kenneth Rogoff have revived the debate over their work on debt and growth with an open letter to Paul Krugman. They accuse him of incivility, factual misstatements and general wrongness. On the first, he's guilty (but so are many economists, usefully). On the second, he is guilty of a lesser charge; Ms Reinhart and Mr Rogoff do seem to have made their data available as they turned it up, but they do not respond to charges that they were slow in making public their Excel spreadsheet, which is what allowed critics to understand what they had done and where they had gone wrong. On the third, Ms Reinhart and Mr Rogoff have swung and missed. They have retreated to the general position that a negative relationship exists between debt loads and growth. And on the matter of causality—which one might say is the crux of the debate—they can do no better than argue that the evidence is mixed.
The 2013 Conference will be held at the Ewing Marion Kauffman Foundation Conference Center in Kansas City, Missouri, May 28 - May 31, 2013. The address for the Kauffman Foundation is:
4801 Rockhill Road, Kansas City, Missouri 64110
“America’s Innovation Future” at ISA 2013:
Date: Wednesday, May 29, 2013 :: Time: 8:45am – 10:15am :: Location: Kauffman Foundation Conference Center – Kansas City, MO
The USS Runner (SS-275) was a Gato-class World War II era submarine.
The namesake of the USS Runner is any of certain species of fishes in the family Carangidae (order Perciformes), which also includes the jacks, amberjacks, and pompanos. The blue runner (Caranx crysos) is a shiny, greenish or bluish fish of the Atlantic. Like others in the family, blue runners have deeply forked tails. They are popular game fish that reach lengths of sixty centimeters (two feet).
On May 28, 1943, the USS Runner, captained by Lieutenant Commander Joseph. H. Bourland, departed the Midway Island submarine base on her third and final war patrol. Her orders were to proceed to coordinates 48° 30' 0.000" N, 154° 0' 0.000" E, which is in the Kurile Islands, and from there to patrol southwestwardly until she reached the Hokkaido and northeast Honshu area. Once on station there, she was to patrol that area from June 8th until July 4th. She was expected to return to Midway Island between July 11th and July 15th. No word was heard from her while she was on patrol and she failed to return to Midway as expected. On July 20, 1943, she was posted overdue and presumed lost.
Gerald Silverberg: Meltdown Economics & Other Complex Catastrophes: Reinhart-Rogoff vs. New Zealand: Final Round? | Evans and Honkapohja Interview with Thomas Sargent | Senate.gov search for "Ken Rogoff" | Adam Serwer (2010):Salam On DREAM | * Joe Weisenthal: Is Germany Finally About To Do What It Takes To Save Europe? |
Cpt. Renault: Well, you were asking about Rick, and here he is. Mademoiselle, may I present…
Rick Blaine: Hello Ilsa.
Ilsa Lund: Hello Rick.
Cpt. Renault: Oh. You've already met Rick, Mademoiselle?
Cpt. Renault: Well, then, perhaps you also…
Ilsa Lund: This is Mr. Laszlo.
Victor Laszlo: How do you do?
Rick Blaine: How do you do?
Victor Laszlo: One hears a great deal about Rick in Casablanca.
Rick Blaine: One hears a great deal about Victor Laszlo everywhere.
Victor Laszlo: Won't you join us for a drink.
Cpt. Renault: Oh, no. Rick never…
Rick Blaine: Thank you. I will.
Cpt. Renault: Well! A precedent is being broken! Er, Emil…
Victor Laszlo: This is a very interesting cafe. I congratulate you.
Rick Blaine: And I congratulate you.
Victor Laszlo: What for?
Rick Blaine: Your work.
Victor Laszlo: Thank you. I try.
Rick Blaine. We all "try". You succeed.
Can't we all get along?
Can't we all agree that in a better world than this the R-Team would never have written that 90% was an "important marker", and reacted much more aggressively to distance themselves from people who claimed that 90% was some sort of gross debt line of death? And can't we all agree that we have learned a lot from This Time It's Different and from SB on financial repression in historical perspective?
And can't we all agree that a considerable portion of the abuse directed at the R-Team should be redirected to Alberto Alesina (for Alesina and Ardagna) and Greg Mankiw (for his claims that it is easy and straightforward to summon the inflation-expectations imp via QE)?
And can't we move on to issues of macro substance?
In their open letter to Paul Krugman, the R-Team writes:
We don’t see your attraction to fiscal largesse as a substitute. Periphery Europe cannot afford it and for Germany, which can afford it, fiscal expansion would be procyclical. Any overheating in Germany would exert pressure on the ECB to maintain a tighter monetary policy, backtracking some of the progress made by Mario Draghi. A better use of Germany’s balance sheet strength would be to agree on faster and bigger haircuts for the periphery, and to support significantly more expansionary monetary policy by the ECB…
Since I joined Team-K on March 20, 2008, when I saw the liquidity trap cometh, Team-K has been for more of:
The R-Team have been members in good standing of Team-K, with the exception of (7), on which they have exercised a major line wobble. Unfortunately, the political and central-banking processes have frozen (1)-(5) over the past three and a half year, leaving the R-Team's impact on the policy process as one that is objectively pro-austerity.
But the interesting questions to me right now are: What is it about the R-Team's basic model, orientation, and understanding of the economy that has caused this line wobble on their part vis-a-vis the rest of us on Team K? And are they right?
When the Bank of England invited me to give a talk at their workshop on macroeconomics, I wasn't sure if they wanted me to provoke (i.e. troll) them with the kind of skeptical stuff I usually write on this blog, or to talk about my own research on artificial markets and expectations. So I did both…. I'd reproduce part of my talk in a blog post - the part where I talked about DSGE models. (In other words, the provocative part.)… To be "DSGE" your model probably has to have things like infinitely far-sighted rational expectations, rapid clearing of goods markets, certain simple types of agent aggregation, etc…. As of 2013, the most "mainstream" DSGE models of the business cycle are "New Keynesian" models. The most important of these is the Smets-Wouters model, which has gained a huge amount of attention, especially from central banks, for seeming to be able to forecast the macroeconomy better than certain popular alternative approaches. If you know only one DSGE model, Smets-Wouters is the one you should know.
Noahpinion: Bets do not (necessarily) reveal beliefs: Bryan Caplan is well-known for demanding that people bet on their macroeconomic beliefs and theories. The idea (which I endorse, btw) is that people don't really know much about macroeconomics, and tend to project an unwarranted sense of certitude in their ideas. Of course, Bryan is hardly alone in this belief; Alex Tabarrok famously declared that "a bet is a tax on bullshit".
No. 6816 Havildar Gaje Ghale, 5th Royal Gurkha Rifles (Frontier Force), Indian Army.
In order to stop an advance into the Chin Hills of greatly superior Japanese forces it was essential to capture Basha East hill which was the key to the enemy position.
Two assaults had failed but a third assault was ordered to be carried out by two platoons of Havildar Gaje Ghale’s company and two companies of another battalion.
Haviidar Gaje Ghale was in command of one platoon: he had never been under fire before and the platoon consisted of young soldiers.
Memorial Day: For those of us in the U.S., today is Memorial Day. America has a fine tradition of military service and sacrifice. The best way to respect and honor it is to reflect on what it means to serve and perhaps die for your country, and to think about the value of the cause, the power of the reasons, and the strength of the evidence you would need before asking someone—someone like your brother, or friend, or neighbor—to take on that burden. That so many are willing to serve is a testament to the character of ordinary people in the United States. That these people have, in recent years, shouldered the burden of service for the sake of a badly planned war begun in the name of an ill-defined cause, on the thinnest of pretexts, and with the most flimsy sort of evidence, is an indictment of the country’s political class.
Orin Kerr thinks I “don’t get it,” believes this post “seems designed to get lots of people hopping mad,” and several commenters voice similar opinions below. I disagree. I grew up in a country steeped in false piety and soaked in the language of blood sacrifice. I have no tolerance for either. Contrary to what Orin claims, there is no better time than public holidays of remembrance for people to seriously consider whether we should be adding still more young men and women to the roll of dead whom we will remember in coming years. I am not the one who is “test[ing] my ability to invent a populist voice” as Orin claims. For an example of that, you could have gone to Arlington Cemetery today and heard someone claim that ‘we must honor [the war dead] by completing the mission for which they gave their lives, by defeating the terrorists, advancing the cause of liberty, and building a safer world.’ In both Orin’s post and some of the comments below the assumption seems to be that any effort to counterbalance that sort of talk is always just designed to get people mad; that questioning policy always just means taking partisan cheap shots; and that taking leaders at their word and asking whether they live up to their promises is simply an effort to grab the spotlight or spit out some personal bile. That’s a purely cynical view of political life and public debate. And yet I’m supposed to be the one who is not taking things seriously….
I cannot accept the view that the reasons for the deaths we commemorate aren’t up for discussion on Memorial Day. Just go to Gallipoli any ANZAC day to see that there’s no contradiction between solemn commemoration and the reflection that it was all a huge waste. The best analogy I’ve seen comes from war-supporter Trent McBride. Imagine I had posted on May Day saying something like “This is not the day to point out that all those ordinary people who died at the hands of Stalin and Mao did so for nothing: instead we should simply remember and honor their deaths, not condemn the pointless social experiments that caused them.” What then? Would the same people who attack me in the comments below defend me then? I doubt it.
Macroeconomic Hippie-Punching: Brad DeLong interprets the Keynes-bashing opening of Ken Rogoff’s latest as strategic hippie-punching (see definition 2.2), designed to soften up his readers for the easy-money, debt-forgiveness message that follows.
Maybe that’s it, or maybe it’s just personal ire at some of the hippies. Either way, though, there is a question about whether it’s an effective strategy. I don’t think so.
RealTime Economic Issues Watch | Self-Defeating Austerity and the Improved US Fiscal Outlook: Last week, Tyler Cowen of the blog Marginal Revolution asked “Have we seen self-defeating austerity in the United States?” Cowen declines to take a clear stand on the question, but his main point is that the well-known fiscal cuts of 2012 and 2013 have, in fact, reduced the US budget deficit. Ergo, goes the implication, austerity was not self-defeating. The problem is that the case for self-defeating austerity—described in a blog post by Paul Krugman and a paper [pdf] by Brad DeLong and Lawrence Summers to which Cowen provides links—focuses on the long-run fiscal impact… fiscal deficits are unusually cheap to finance and monetary policy is not going to move to offset much (if any) of the effects of fiscal policy on the economy….
Jeff Frankel sends us to Kevin Warsh (2006): Corporate Cash Balances and Economic Activity | Cosma Shalizi: Advanced Data Analysis: Problem Set 11 | Solution Set 11 | Barry Ritholtz: A hedge fund for you and me? The best move is to take a pass |
Robert Waldmann: Angry Bear » Debt and Growth III: "Does the Reinhart Rogoff (hence R-R) data set… post WWII contain evidence that a debt-to-gdp ratio higher than 90% causes lower real GDP growth. My answer is: no…. Why is my result different from almost everyon else’s (except for Dube’s)? Well, I take the very very first step to address causation — I run a regression including lagged real GDP growth…. The dependent variable is annual real GDP growth. The first coefficient is on the debt-to-gdp ratio in percent rounded down to 90 if it is over 90. The second coefficient—the coefficient of interest—is the ratio minus 90 if it is over 90 or zero if it is under 90. This coefficient is an estimate of the effect of further debt once debt has already reached 90% of GDP…. l1drgdp is the one year lagged rate of real GDP growth. _cons is a constant term…. The coefficient on debtgdpmin90 is actually very slightly positive. There is no evidence in the R-R data set that debt to GDP ratios greater than 90% are worse for growth than a debt ratio of 90%."
Ezra Klein and Evan Soltas: Bernanke lashes Congress: "Ben Bernanke thinks Congress is doing quite a lot wrong…. 'The expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year…. Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.'… He basically walked up to Congress and said, 'You’re the reason the economy isn’t taking off more.' This is why people need to stop celebrating our rapidly falling deficits. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong…. We’re doing basically nothing about long-term deficits, which is where the problem actually lies. And we’re using policies, like sequestration, that most everyone agrees are bad policy…. No wonder Bernanke’s irked."
Ah. I missed this at the time. Josh Bivens wrote:
A slight bit of substance on the Reinhart and Rogoff 90 percent debt threshold: A statistical association of high debt ratios with slow growth could well be (in fact is more likely to be) driven by causality that runs from slow growth to high debt ratios, and the not the reverse causality that R&R strongly argue. In an interview with Dylan Matthews, Reinhart dismissed this:
Reinhart dismisses these criticisms as wishful thinking. ‘We’re quite aware that you have causality going in both directions,’ she says. ‘But please point out to me what episodes from 1800 to the present have we had advanced economies who carried high levels of debt growing as rapidly or more rapidly than the norm.’
Answer: Britain after 1815. Debt of 240% of a year's GDP. Economic growth unprecedented both in earlier ages and in comparison with every place else in the world…
The Post-WWII G-7:
In the post-WWII G-7, the high-debt low-growth correlation is overwhelmingly driven by (a) the recent experience of Italy and Japan, in which slow growth preceded high debt; (b) the high-debt UK after WWII, but UK growth did not accelerate as its debt load fell; and (c ) the low-debt defeated axis after WWII, which rapidly rebuilt and caught up to their pre-WWII levels of prosperity.
The Owen Zidar Graph:
Countries with debt-to-GDP ratios above 90% do have slower growth than countries with lower debt-to-GDP ratios, but there is no "cliff" at 90%--and policymakers should not have been told that there is an "important marker" at 90%.
Let me highlight a passage from the "Understanding Our Adversaries" evolution-of-economists'-views talk that I started giving
three five months ago, a passage based on work by Owen Zidar summarized by the graph above:
The argument for fiscal contraction and against fiscal expansion in the short run is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart, Reinhart, and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow.
This is the most live argument today. So let me nibble away at it. And let me start by presenting the RRR case in the form of Owen Zidar's graph.
First: note well: no cliff at 90%.
Second, RRR present a correlation--not a causal mechanism, and not a properly-instrumented regression. Their argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question.
The third thing to note is how small the correlation is. Suppose that we consider a multiplier of 1.5 and a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. Suppose that all of the correlation is causation running from high debt to slower future growth. And suppose that we boost government spending by 2% of GDP this year in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by… wait for it… 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?….
And this isn’t the graph that you were looking for. You want the causal graph. That, worldwide, growth is slow for other reasons when debt is high for other reasons or where debt is high for other reasons is in this graph, and should not be. Control for country and era effects, and Owen reports that the -0.06% becomes -0.03%. As Larry Summers never tires of pointing out, (a) debt-to-annual-GDP ratio has a numerator and a denominator, and (b) sometimes high-debt comes with high interest rates and we expect that to slow growth but that is not relevant to the North Atlantic right now. If the ratio is high because of the denominator, causation is already running the other way. We want to focus on cases of high debt and low interest rates. Do those two things and we are down to a -0.01% coefficient.
We are supposed to be scared of a government-spending program of between 2% and 6% of a year's GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP? That does not seem to me to compute.
Carmen Reinhart and Ken Rogoff (July 2011):
Too Much Debt Means the Economy Can’t Grow: As public debt in advanced countries reaches levels not seen since the end of World War II, there is considerable debate about the urgency of taming deficits with the aim of stabilizing and ultimately reducing debt as a percentage of gross domestic product.
Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such.
Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings -- why not take advantage of the cheap money?
Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an “all clear” signal for a further explosion of debt.
Several studies of financial crises show that interest rates seldom indicate problems long in advance. In fact, we should probably be particularly concerned today because a growing share of advanced country debt is held by official creditors whose current willingness to forego short-term returns doesn’t guarantee there will be a captive audience for debt in perpetuity.
Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly. Even though politicians everywhere like to argue that their country will expand its way out of debt, our historical research suggests that growth alone is rarely enough to achieve that with the debt levels we are experiencing today.
While we expect to see more than one member of the Organization for Economic Cooperation and Development default or restructure their debt before the European crisis is resolved, that isn’t the greatest threat to most advanced economies. The biggest risk is that debt will accumulate until the overhang weighs on growth.
At what point does indebtedness become a problem? In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth. Our results are based on a data set of public debt covering 44 countries for up to 200 years. The annual data set incorporates more than 3,700 observations spanning a wide range of political and historical circumstances, legal structures and monetary regimes.
We aren’t suggesting there is a bright red line at 90 percent; our results don’t imply that 89 percent is a safe debt level, or that 91 percent is necessarily catastrophic. Anyone familiar with doing empirical research understands that vulnerability to crises and anemic growth seldom depends on a single factor such as public debt.
Matt O'Brien sends us to Tim Fernholz who sends us to Senator Tom Coburn:
Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask his question: "Do we need to act this year? Is it better to act quickly?"
"Absolutely," Rogoff said. "Not acting moves the risk closer," he explained, because every year of not acting adds another year of debt accumulation. "You have very few levers at this point," he warned us.
Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it is not risky to hit the 90 percent threshold, we would expect a higher incidence."
Tim Fernholz's Reinhart-Rogoff quotes:
“[I]t is widely acknowledged, based on serious research, that when public debt levels rise about 90% they tend to have a negative economic dynamism, which translates into low growth for many years.” — European Commissioner Olli Rehn.
“Economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth and intensifies the risk of a debt-fueled economic crisis.” — House Budget Committee Chairman and former Republican vice-presidential candidate Paul Ryan.
“It’s an excellent study, although in some ways what you’ve summarized understates the risks.”— Former US Treasury Secretary Tim Geithner.
“[W]e would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.” Lord Lamont of Lerwick, former UK chancellor and sometime adviser to current chancellor George Osborne.
“The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth.”— Doug Holtz-Eakin, Chairman of the American Action Forum.
WASHINGTON, Tuesday—I had a visitor this morning who came to talk on a subject which must be troubling a great many people. This woman said she knew many people, particularly women, who had lost their sons in this war, and who felt that they must have something to say about the kind of peace which will be made at the end of it.
She felt sure that the people as a whole understood quite well that during the war, meetings of the leaders had to be held where no publicity was allowed at the time. People were only told afterwards what had happened. But, the vast majority of people had such a sense of personal responsibility, that they could not be satisfied unless they felt that their leaders would give them the benefit of such facts as had a bearing on the afterwar period. Then they could allow the people to register their feelings, so that the preliminaries for peace would really be shaped in conjunction with the people.
Eduardo Porter: Despite Keynesians’ Victory, Economic Policy Holds | Social media in the 16th Century: How Luther went viral (2011) | Keith Humphreys: Weekend Film Recommendation: Tinker, Tailor, Soldier, Spy | Carl Zimmer: Dogs - From Fearsome Predator to Man’s Best Friend | Teresa Nielsen Hayden sends us to Molly Muses: Mormon Flow Chart for Your Soul | Kenneth Rogoff: Europe’s Lost Keynesians | Chris Blattman: Dear governments: Want to help the poor and transform your economy? Give people cash |
Mark Thoma: 'The Noble and Ancient Tradition of Moron-Baiting': "I'm still not fully convinced on this point. The internet may make bluffing harder, but it also makes it easier for 'bullshitting (to use the correct philosophical terminology)' to spread within conservative and/or liberal circles (which are relatively isolated). But perhaps those calling bullshit are, on average, prevailing over those spreading it -- I sure hope so."
Scott Lemieux: Good Motives Are Not Enough: 'For the most part, after seeing Kinsley’s latest I’m happy to defer to Drezner, Konczal, and Krugman. But… I should note that neither Krugman (nor me, in the linked post) “called [Kinsley] a neocon.” The point was just that Kinsley’s invocation of stagflation is comparable to neocon invocations of Munich…. And, again, the moralism that seems to be doing most of the work in Kinsley’s argument isn’t an invention of his critics; it’s entirely explicit…. "My fear is not the result of economic analysis. It’s more from the realm of psychology…. [...] But this cure has been one ice-cream sundae after another. It can’t be that easy, can it? The puritan in me says that there has to be some pain. That’s not to say that there hasn’t been plenty of economic pain. But that pain has come from the recession itself, not the cure." It’s not name-calling to say that moralism rather than economic analysis seems to underpin Kinsley’s belief in austerity. It’s just an accurate description…. What makes this argument offensive, though, is Kinsley’s implicit assumption of shared sacrifice…. If you’re a liberal advocating policies that are certain to inflict immediate pain on people who are already in dire straits, you’d better have a damned good argument that this is justified by a clear long-term payoff. Boil off the puritain moralism, though, and Kinsley’s only substantive argument is the invocation of stagflation. And this argument is transparently wrong…. Which is presumably why Kinsley is unwilling to defend his claim on the merits and would prefer to discuss the purity of his motives… So, fine, let’s stipulate that Kinsley is a good liberal…. It just doesn’t matter because he doesn’t have any kind of serious argument to make in defense of austerity.'
Paul Krugman writes:
The Four Percent Solution: Larry Ball makes the case that we would be a lot better off with a 4 percent inflation target rather than the 2 percent that is now central bank orthodoxy. Intellectually, this position is hardly outlandish; indeed, Ball’s case is very similar to the case Olivier Blanchard made three years ago, just stated more forcefully and with more evidence. The basic point is that a higher baseline for inflation would make liquidity traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen. Ball estimates that if we had come into this crisis with an underlying inflation rate of 4 percent, average unemployment over the past three years would have been two percentage points lower. That’s huge — it amounts to millions of jobs and trillions of dollars of extra output.
But Ken Rogoff is one of the people I disagree with with great trepidation, and at my peril...
In my Inbox: "I enjoyed 'Palimpsest' by Charles Stross. It seems to be a one-off novella, I was wondering if any of his other short stories, etc. are set in that universe? Wikipedia was of no help..." "At one time there were several excellent stories set in that universe. Unfortunately, the timeline in which they occurred was wiped out, so they're now as lost as the Cathedral of Chalesm. I have discovered a truly marvelous early draft of one of them, which this comment form is too small to contain." – Tom Zych
Paul Krugman is annoyed by the hippie-punching at the start of Ken Rogoff's Project Syndicate column, in which Ken lands blows on Paul "Groovy Beads, Man!" Krugman and Martin "Flower Power" Wolf.
Me? I think that you are ahead as long as Ken does not consign you to the Gamma Quadrant. Some of us have the gift of prophecy and prophesy. Others have the gift of speaking in tongues and do so speak. Still others have the gift of communicating with Very Serious People and do so by punching hippies. As St. Paul said, so many gifts…
An aged Jewish water carrier, whose quick thinking saved the lives of hundreds of wounded Red Armymen, is wearing the Medal for Military Distinction today, according to a story appearing in a local newspaper. He is Alter Seigal, a resident of Dubno, now attached to a military field hospital on the Kuban front.
Greg Ip: The week in American monetary policy: Parsing the Federal Reserve | Sarah Kliff: California Obamacare premiums: No ‘rate shock’ here | Nick Rowe: Monetary policy is not interest rate policy The Challenges of Mark Carney’s European "Mission Civilisatrice" | Pius IX: Syllabus of Errors | Alan Auerbach (2010): A Modern Corporate Tax | Martin Wolf: Why George Osborne should not be so complacent |
Matthew Yglesias: Obamacare implementation good news: "You heard it here first from me in April, but I want to reiterate that over the next 18 months you're going to read a lot of stories about problems with Affordable Care Act implementations. Many of those stories are going to be accurate. But fundamentally Affordable Care Act implementation is going to work out great, and people are going to love it. The latest evidence comes to us today from California… premiums for 'silver' and 'bronze' plans are both going to be lower than was previously expected. Far from a 'train wreck', in other words, the biggest single set of clients for the program is getting something like a nice, smooth high-speed train ride. There was also good news from Oregon recently…. And the Affordable Care Act's goal of slowing the growth in aggregate health expenditures is also coming true. Now of course not every state is going to have as happy an experience as California and Oregon. There are huge swathes of the country where public officials have been deliberately refusing to try to make the new law work well, and congressional Republicans are also doing their best to try to stymie implementation. Those efforts will succeed. Residents of California, Oregon, Maryland, Massachusetts, New York, and other eager implementers will see much larger gains from the new law than residents of Texas, Florida, and Alabama… this will be a real tragedy for the country. But even in those places, people are going to end up better off than they were pre-Obamacare…. Journalists tend to cover new programs relative to politicians' promises about them, while beneficiaries judge new programs in terms of the impact on their lives. And the bottom line here is that a small number of high-income individuals are going to pay more taxes on their investment income, while a large number of working-class Americans are going to get free or discounted health insurance. There are plenty of writers out there who I read and respect who quite genuinely believe that taxing rich people's investment income in order to bolster the living standards of the bottom third of the population is disastrous long-term public policy, but in concrete terms, this has all the hallmarks of a successful and popular initiative."
Ryan Avent: Busts: The wages of sin: "MUST we pay for past sins? Michael Kinsley thinks so: 'I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners. That’s too easy.'But he isn't known for his economic bona fides. Matt Klein, who is, tries to put some meat on Mr Kinsley's argument… that 'we must pay for past sins'. As a first step, who is 'we'? It would seem to be the folks whose overoptimistic predictions led them to make big IT investments. What was their sin? I think that would be making IT investments that ended up yielding much less in returns than anticipated. And how were they made to pay? Well, by reaping less than anticipated returns, of course! Only, that's not the consequence Mr Klein identifies. Rather, he says that low post-crisis investment economy-wide was the cost, contributing to stagnant incomes and slow employment growth. But wait: those things affected everyone, including some people who probably thought the tech boom was ridiculous all along and who instead put their money into a 'real economy' stock like Ford, and others who didn't invest at all but just worked as bookkeepers or hotel desk clerks. So what did those people do wrong that necessitated punishment? We no longer seem to be talking about payment for sins. So let's strip the argument of its moral content and simply ask: must a financial gyration like the tech boom and bust cause economy-wide pain?… There are certainly ways that a financial mania could impair future growth potential. If the people getting the wrong kind of skills were a particularly large demographic cohort in their prime working years, then retraining might nonetheless leave the economy unable to grow as rapidly as it otherwise would have…. Had the dot come boom entailed the burning of all the world's coal or a misguided scheme to profit by salting the earth's arable land, that would have been problematic, but it didn't…. History clearly shows that whether necessary or not, financial meltdowns do tend to cause serious economic pain…. But it's important to point out that these consequences don't flow inevitably from poor past investment choices. Past 'excess' doesn't somehow break an economy; it just confuses the people who run it regarding what is supposed to come next. That might strike some as effective acknowledgement that booms necessarily require penance. If the only way to avoid a painful bust is to employ policy-makers who know just what to do in just the right circumstances, then there is no avoiding a painful bust. But there is an important difference. We, rather than some divine agent of economic karma or physical economic law, are the ones causing the pain. And just because we don't know any better now doesn't mean we'll never learn…. And so I dream of a day when the only people who suffer from money-losing investments are the money-losing investors, whose only penance is lost money."
There are two ways to think about why North Atlantic economies are depressed. The first is that would-be spenders (including people and businesses that buy durable capital goods) want to spend less than income earners would earn if there were full employment. The second is that would-be lenders want to lend more than would-be borrowers would want to borrow and than financial intermediaries would be willing to let them borrow if there were full employment. These two ways of thinking about it are, in the math, identical. But they highlight different aspects of the situation.
Now comes the very smart Ken Rogoff to say:
Europe’s Lost Keynesians: There is no magic Keynesian bullet for the eurozone’s woes. But the spectacularly muddle-headed argument nowadays that too much austerity is killing Europe is not surprising. Commentators are consumed by politics, flailing away at any available target, while the “anti-austerity” masses apparently believe that there are easy cyclical solutions to tough structural problems.
The overwhelming superiority achieved by the enemy defence was finally proved beyond dispute in the operations against the next two convoys, SC 130 and HX 239. The convoy escorts worked in exemplary harmony with the specially trained ‘support groups‘.
To that must be added the continuous air cover, which was provided by carrier-borne and long-range, shore-based aircraft, most of them equipped with the new radar. There were also new and heavier depth charges and improved means of throwing them. With all this against us it became impossible to carry on the fight against convoys.
It was only bit by bit that I received definite details of the losses we had suffered in the action against these two convoys and among the boats on passage, particularly in the Bay of Biscay, off Iceland and the focal areas in the North Atlantic.
Andrew Sheng and Xiao Geng: The Night-Watchman State’s Last Shift | Linda Beale: Another reason for NOT cutting Social Security benefits--seniors poorer than you think | Kenneth Rogoff: Europe’s Lost Keynesians | Marty Weitzman: The Odds of Disaster: An Economist's Warning on Global Warming |
Paul Krugman: Macroeconomic Machismo: "It was obvious during the runup to the Iraq war that what was going on in the minds of many hawks — and not just the neocons — was not so much a deep desire to drop lots of bombs and kill lots of people (although they were OK with that) as a deep desire to be seen as people who were willing to Do What Has to be Done. Men who have never risked, well, anything relished the chance to look in the mirror and see Winston Churchill looking back…. And the austerian impulse is pretty much the same thing, except that in this case the mild-mannered pundits want to look in the mirror and see Paul Volcker. Much of the problem in trying to stop the march to war was precisely the fear of many pundits that they would be seen as weak and, above all, not Serious if they objected. Austerity has been very much the same thing — and again, it’s not just the right-wingers who are afflicted. Let me illustrate that point with two parallel diagnoses of economic crisis, 78 years apart. The first is from John Maynard Keynes, The Great Slump of 1930; the second from Barack Obama’s first inaugural, in January 2009…. Do you see where [Obama] goes wrong? Most of the way through, Obama is getting it right…. But then he suddenly swerves into the language of Very Serious People, talking about the need to make unpleasant decisions (which is always there, but if anything less so in a depression). I was very upset about this at the time, but not upset enough — for there, right at the beginning, was the austerian temptation, adulterating the message of the man who should have been that temptation’s fiercest opponent. So if you like, the problem is Seriousness rather than sadism. On foreign policy, it’s always 1938; on economic policy, it’s always 1979. And the colossal muddle goes on."
John Maynard Keynes: The Great Slump of 1930: This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.
Barack Obama: We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.
Dan Drezner is sick of trying to reason with Michael Kinsley:
Sometimes a factual error is just a factual error: I've spent a rather alarming portion of this week wading into intellectual pissing matches, so I'm loath to respond to Michael Kinsley's response to last week's brouhaha over austerity policies. But one paragraph does merit a response. After noting the backlash to his last column, Kinsley writes the following:
There are two possible explanations. First, it might be that I am not just wrong (in saying that the national debt remains a serious problem and we’d be well advised to worry about it) but just so spectacularly and obviously wrong that there is no point in further discussion. Or second, to bring up the national debt at all in such discussions has become politically incorrect. To disagree is not just wrong but offensive. Such views do exist. Racism for example. I just didn’t realize that the national debt was one of them.
"I now know it is a rising, not a setting, sun" --Benjamin Franklin, 1787
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