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February 2009

Support the Market...

Last March, George Akerlof told me that in his view it was time for Fannie Mae and Freddie Mac to start large-scale borrowing from the Treasury and for them to buy up (conforming) mortgages at market prices until interest rates were back at "normal" levels. That was the best way to fix the macroeconomy. And once Fannie Mae and Freddie Mac own all the mortgages the government can rewrite their terms with an eye on the general welfare.

He was right then. And I think it is still a very good idea today:

Alan Rappaport: Financial Times: US home prices fall at record pace: Home prices in big US cities fell at a record 18.5 per cent in the year to December as the stricken housing market showed no signs of bottoming out amid slumping sales and rising foreclosures. The drop followed an 18.2 per cent year-on-year decline in the prior month, itself a record, as no major city was spared, according to the closely watched Case-Shiller index released on Tuesday. At the same time, US consumer confidence fell to a new low in February, sinking to 25 from 37.4 the prior month.

The cities facing the sharpest declines from the previous month in December were Phoenix, Las Vegas and Minneapolis. Bright notes were Boston, Denver and New York, which notched relatively small declines. “The mix of a sharply deteriorating labour market, associated weakness in personal income; broader negative wealth effects from other asset classes; a massive overhang of actual and potential supply; and, troubled credit availability, are swamping the record affordability measures,” said Alan Ruskin, strategist at RBS Greenwich Capital. “Cheap just does not do it.” December was the 29th consecutive month that the index, published by Standard and Poor’s, declined. Home prices have fallen to levels last seen during the third quarter of 2003. “The broad downturn in the residential real estate market continues,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “Most of the nation appears to remain on a downward path.”

Since the US housing market peaked in July 2006, the home price index has fallen by 26.7 per cent. In the seven years prior to its peak, the index had jumped by 155 per cent and economists predict that prices will continue to fall because of a massive overhang in the market. Joshua Shapiro, chief US economist at MFR predicts that home prices are one-half to two-thirds of the way through the ultimate total decline in this cycle. “Declines in home values of 2 per cent are costing U.S. households some $370bn per month, which helps explain why people are miserable,” said Ian Sheperdson, chief US economist at High Frequency Economics.

The Conference Board confidence index said on Tuesday that consumers felt worse about current conditions in February. Of the 5,000 US households queried, 51.1 per cent said that current conditions had worsened, up from 47.9 per cent in January. Consumers are also feeling much worse about the state of the labour market and have renewed fears about inflation. “Increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever,” said Lynn Franco, director of The Conference Board’s consumer research centre.

All Correlations Are Equal to One

Felix Salmon on David Li:

Recipe for Disaster: The Formula That Killed Wall Street: The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006. At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation...

Or, as Charlie Kindleberger used to say back around 1980: in a financial crisis everything moves together--all correlations are one.

Entitlement Summit: The Back of the Envelope Version

Paul Krugman:

Entitlements on the back of an envelope: Right now, the federal government spends about 9 percent of GDP on the three biggies, Social Security, Medicare and Medicaid, with the total roughly evenly divided between retirement and medical care. We have an aging population, which will tend to increase the share of GDP spent on these programs. Looking ahead to circa 2050, we’ll go from about 3 workers per retiree to 2. This would, other things equal, raise spending on the programs by about 4 percentage points of GDP. (Not 4.5, because only part of Medicaid is age-related). That is, we’d spend 6.75 percent of GDP on retirement, 6.25 percent on health care. Now, 4 percent of GDP is a lot, but not catastrophic: remember, the share of GDP spent by the government currently is 10 percentage points or more higher in a number of wealthy countries than it is here.

What makes the projections you actually see so scary is the assumption that “excess cost growth” in health care will continue — that is, health spending per person will continue to rise at close to 2 percent faster than GDP per capita. This means, circa 2050, that health care costs will be roughly double what pure demography would predict, adding another 6 plus percentage points to the entitlements projection. Looking beyond that, demography adds very little — it’s all health care.

So if excess cost growth in health care can be brought under control, the entitlement problem is manageable. If not, even savage cuts in Social Security will make little difference.

Dealing with the Financial Crisis

Susan Woodward, Robert Hall, and Jeremy Bulow have the cleverest plan I have yet seen:

The right way to create a good bank and a bad bank « Financial Crisis and Recession: Most discussions... presume that the government must inject a lot of new capital to create a well-capitalized good bank together with a still-solvent bad bank.... But... we can create a good bank with a big cushion of capital while keeping the bad bank as solvent as the existing integrated bank. The key idea–from Jeremy Bulow–is that the bad bank owns all of the equity in the good bank.... The good bank will continue to operate under the [established] brands as a well-capitalized operating entity. The bad bank will be a financial fund with no operating functions. The good bank gets the short-terms assets... [and] the better half of the long-term assets... the bad bank gets the poor half, where the impairment has already occurred and suspicions of further price declines persist. The bad bank holds the valuable equity in the good bank....

The deposits remain as liabilities of the good bank. Because the good bank is heavily capitalized, the deposits are safe.... All of the debt goes to the bad bank. The holders of the debt were never promised a government guarantee. The shareholders in [the old banks] become the shareholders in the bad bank. They are indirectly shareholders in the good bank as well, because the bad bank owns the good bank. The bad bank is thinly capitalized.... With further declines in the values of the troubled assets, the bad bank may become insolvent. In that case, the bondholders will need to negotiate diminished values or the bad bank will need to be reorganized. In either case, the shareholders will lose all their value....

[N]either the shareholders nor the bondholders suffer any impairment of their existing intrinsic values. At present, the shareholders own an out-of-the-money call option on the assets. The bondholders own the assets subject to the shareholders’ call. Their combined value declines by the amount of any further decline in the value of the troubled assets. As claimants on the bad bank, they would be in the same situation....

The adoption of the proposed good- and bad-bank separation would result in capital losses for the shareholders and bondholders, because the new policy would eliminate the benefit that they might receive from further bailout money from the government. The potential reorganization of the bad bank made necessary by future insolvency would not create any kind of financial emergency, so there would be no reason for the government to bail out the bad bank....

[O]ne might wonder... why bother?  Pundits talk about the toxic assets in the banking system as if somehow they were infectious, and the good assets would become infected by the bad assets. One envisions the mold on one piece of cheese taking up residence on an adjacent piece in the fridge.... What the change does do is make ever-so-clear what the priorities are... the debt claims, including the short-term commercial paper, are direct liabilities of the bad bank. If the bad bank cannot re-fund its commercial paper one morning, the bad bank must be re-organized.... [W]hat this re-organization of the ownership claims does is show how easy and orderly a garden-variety Chapter 11 reorganization of a large bank could be, and how unnecessary it is to throw additional public money into insolvent institutions....

At the most practical level, the advantage of the good-bank/bad-bank separation is to prevent the emergency that would occur if a large bank threatened insolvency... the first symptom would be a run on the bank by those depositors.... By contrast, no run could occur on the heavily capitalized good bank in our example. Reorganization [of the bad bank] could proceed peacefully while the good bank went about its banking business. The claims of the shareholders and bondholders, which are inferior to those of the depositors, can be sorted out without interfering with the operation of the bank...

Republicans: Worse than You can Imagine (Bobby Jindal Edition)

Louisiana governor Jindal shows that he cares less than nothing about the unemployed of Louisiana.

Ryan Powers of Think Progress:

Think Progress: Jindal Rejects $90 Million In Recovery Funding That Would Have Benefited 25,000 Louisiana Residents: [T]he Economic Recovery and Reinvestment Act... funding to states that allowed for a $25 per week increase in benefits.... EUC program which gives 20 weeks of federally-funded unemployment benefits to individuals “who had already collected all regular state benefits”... widened the pool of people eligible to receive unemployment benefits.

Today, however, Louisiana Governor Bobby Jindal announced his intention to oppose changing state law to allow his Lousiana citizens to qualify for the second two unemployment provisions... turned away nearly $100 million in federal aid for his state’s unemployed residents... on Febuary 13, EUC extension alone would have benefited 24,981 Louisiana residents. Jindal... claimi[s]... expanding unemployment benefits would result in tax increases for businesses.... But... by Jindal’s own estimate, the recovery package would have funded his state’s unemployment expansion for three years, at which point the state could — if it chose to do so — phase out the program...

Jindal believes that this grandstanding--at the expense of the interests of the people who elected him--will raise his chances of winning the Republican presidential nomination in 2012. I urge all Republicans to reflect that political loyalty ought to run both ways: a politician--like Jindal--who has no loyalty to his supporters who voted for him is not a politician whom any voter has any business supporting.

Why Not Let Ronald Reagan Be the Real Ronald Reagan?

Jonathan Rauch commits The Sin Against the Holy Ghost of History:

Real Reaganites Raise Taxes: To reclaim President Reagan's legacy in the Obama era, conservatism may need to abandon the anti-tax dogma that it adheres to in Reagan's name.... How will we pay for, say, 24 percent [of GDP] government?... [T]he creaky, inefficient income tax is barely able to raise even today's inadequate revenues.... By taming inflation, restructuring the tax code, and thinning regulatory undergrowth, Reagan made the welfare state sustainable, something liberals had proved unable to do. He wooed middle-class voters away from liberalism by stabilizing the modern entitlement state, not shrinking it.... Bartlett wrote recently in Politico, "Conservatives would better spend their diminished political capital figuring out how to finance the welfare state at the least cost to the economy and individual liberty." Just like Reagan.

There are two big things wrong with Jonathan Rauch:

  • The--very strange--claim that the fact that the "income tax is barely able to raise even today's inadequate revenues" is a structural flaw in the income tax as an instrument. That is simply wrong.

  • The headline--"Real Reaganites Raise Taxes"--and its associated claim that Reagan's aim was "stabilizing the modern entitlement state, not shrinking it." Reagan wanted to cut taxes, not stabilize them. Reagan did not especially care about cutting spending for its own sake. He would have, had he had the votes and had he known that cutting taxes required cutting spending. But because he had, in Margaret Thatcher's words, "not too much between the ears" he did not understand the inconsistency between his spending and his tax plans. And so it is a gross distortion of everything Reagan stood for to say that "real Reaganites raise taxes."

I realize what Jonathan Rauch is trying--for his own tactical political reasons--to do: erase the history of the real Reagan and replace it with something else. But I protest. The story of Reagan's bamboozlement is an important part of American history that we should remember.

From his diary:

Thur Sep 10 1981: Dropped in on meeting of Ec. Advisors--a roomful of our country's greatest economists. None of them could explain why interest rates are so high.

Fri Nov 6 1981: We're going to have to build in more open time around meetings with Congressional leaders. Met 1st with Sen. leaders and meeting went 45 min. over time. Then the House Leadership which of course started late but ended later. The meetings were about the economy. With our plan barely started unforeseen things such as the high interest rates, etc. have increased the estimated deficit and make a balanced budget by '84 look unlikely. On the hill they automatically start thinking of tax increases. We differ and I think with good reason. I believe we reduced the differences between us but the press is going wild with its usual irresponsibility.

Thur Nov 12 1981: It looked like everything was going wrong today. The "Big 3" were waiting with a "what to do about Stockman" question. Before we could get into that--had a meeting with leadership Repub. of the House and Sen. on the budget--Stockman present. He asked for the floor--got up and told them he'd made a stupid mistake, etc and they applauded. Back in the Oval Off met with staff, George B. and Don Regan. I didn't go along with one or two who wanted to fire Dave--nor did Don R. or George B. Dave came over he and I had lunch. I had lunch--he couldn't eat. He stood up to it and then tendered his resignation. I got him to tell the whole thing about his supposed friend who betrayed him, then refused to accept his resignation. Told him he should do a "mea culpa" before the press and clear the misconceptiono that had been created by the tory. He was all set to go and did--taking their questions head on.

Thur Dec 10 1981: Met with Council of Ec. advisors.... Tax increases don't eliminate deficits they increase govt. spending. The general consensus was that our plan is the proper medicine for the recession and we should stick to it. That's what I intended to do all the time.

Thur Dec 22 1981: A budget meeting. We've finally come together on the cuts--probably won't get all we ask for from Congress. They're so used to spending (for votes) they're getting edgy with '82 being an election year. The recession has worsened, throwing our earlier figures off. Now my team is pushing for a tax increase to help hold down the deficits. I'm being stubborn. I think our tax cuts will produce more revenue by stimulating the economy. I intend to wait and see more results.

Mon Jan 11 1982: Repub. House leaders came down to the W.H.--Except for Jack Kemp they are h--l bent on new taxes and cutting the defense budget. Looks like heavy year ahead.

Wed Jan 20 1982 The day however was a tough one. A budget meeting and pressure from everyone to give in to increases in excise taxes tied to Federalism program. I finally gave in but my heart wasn't in it.

It is interesting how Reagan never asked his economic advisers: "Well, isn't what you are telling me now inconsistent with what you told me last year?"

Alan Shearer of the Washington Post Writer's Group: Global Warming Deniaist

From Tim Lambert:

Deltoid: Washington Post rejects the concept of objective facts: I didn't write about George Will's recent global warming denial piece, because his numerous errors have been well documented. Even Nate Silver joined in. But I can't let the latest development pass. The Washington Post has refused to make any corrections to his column. Why not?:

Alan Shearer, the Washington Post Writers Group editorial director, told the Wonk Room that he looked into the accuracy of Will's claim that "According to the University of Illinois' Arctic Climate Research Center, global sea ice levels now equal those of 1979":

We have plenty of references that support what George wrote, and we have others that dispute that. So we didn't have enough to send in a correction.

In other words, the fact that University of Illinois' Arctic Climate Research Center says that global sea ice levels are now whole lot lower than in 1979 doesn't matter. As long as you can find a couple of people who say that the Arctic Climate Research Center said something else, you don't need to make a correction or even mention that Arctic Climate Research Center disputes the position you attributed to them.

Note that under this policy Will, can attribute any statement at all to any organization he wants and no correction would be necessary, no matter how much the organization denies the statement. For example, next week Will could write that the Smithsonian had concluded that the Earth is only 6,000 years old, and he would not have to correct this no matter how fiercely the Smithsonian denied it, as long as he could find a Creationist web site that said that was the Smithsonian's conclusion.

Washington Post Crashed-and-Burned Watch: A Suggested Correction For Will’s ‘Dark Green Doomsayers’ Column

From Brad Johnson

Wonk Room: A Suggested Correction For Will’s ‘Dark Green Doomsayers’ Column: To the editors of the Washington Post:

George F. Will’s column of February 15, 2009, “Dark Green Doomsayers,” contained certain factual inaccuracies despite the “multi-layered editing process” it underwent. Several bloggers have volunteered their time to fact-check Mr. Will’s column. Here is a suggested correction based on their work:

George Will’s Feb. 15, 2009 column mischaracterized a statement by Secretary of Energy Steven Chu on the threat of catastrophic snowpack decline in California due to global warming. Chu was referring to an end-of-the century scenario, not a near-term threat.

Will’s column claimed that experts cited a 2008 decline in “global sea ice” as evidence of man-made global warming. Scientists cited the observed decline in Arctic, not global sea ice.

Will’s column claimed that the University of Illinois’ Arctic Climate Research Center said that global sea ice levels are “now equal to those of 1979.” Although the center said that global sea ice levels were “near or slightly lower than those of late 1979″ at the start of January, global sea ice levels are now eight percent below their levels in February 1979.

Will’s column claimed the U.N. World Meteorological Organization said “there has been no recorded global warming for more than a decade.” According to the WMO, global warming is continuing, with the past decade the warmest on record.

Will’s column argued that imminent global cooling was a predicted planetary catastrophe in the 1970s. There was no scientific consensus in the 1970s that imminent global cooling was a threat.

Will’s column cited articles from Science magazine and Science News to imply the authors expected an imminent ice age. The Science article instead predicted an ice age within several thousand years, “ignoring anthropogenic effects.” The Science News article described climatology as an “infant science” and discussed predictions of manmade global warming that have since proven to be accurate.

The Washington Post and George Will regret the errors.

Clark Hoyt vs. Andy Alexander

In striking contrast to the mendacious hackwork of Andy Alexander at the Washington Post, the New York Times has a real ombudsman in Clark Hoyt:

The Public Editor - They Still Have the Nixon Tapes to Kick Around: WITH the movie “Frost/Nixon” reviving memories of Watergate, Times readers might have been expecting major revelations when they saw this recent front-page headline: “John Dean’s Watergate Role at Issue in Nixon Tapes Feud.” Instead, they got an article reviving a decade-old argument over the editing of widely cited transcripts of the Watergate cover-up.... The article repeated accusations by a handful of critics that Stanley I. Kutler, an esteemed historian, deliberately omitted and distorted material to paint a benign portrait of Dean.... The story demonstrated The Times’s power to propel an essentially dormant dispute into the national conversation....

The article also posed serious journalistic questions.... I think The Times blew the dispute out of proportion with front-page play, allowed an attack on a respected historian’s integrity without evidence to support it.... The peg for the article, its reason for being, seemed weak: Peter Klingman, an independent historian, had submitted a manuscript to the American Historical Review, the field’s leading journal, charging Kutler with willful deception. He had made a similar charge in 2002, and it had gotten no traction.... It did not help when, less than a week later, Klingman’s manuscript was rejected. Robert Schneider, the editor of the American Historical Review, told me the piece was very much “ad hominem.” Klingman refused to let me read it.

Patricia Cohen, the reporter, said that while the manuscript was the peg for her article, she expected it to be rejected and wrote a story only because a small group of historians had started talking again about the dispute.... [I]n Cohen’s article... the most serious charge against Kutler... [was made by a man who] appeared to be the most disinterested figure.... Frederick J. Graboske... accused Kutler of deliberately mixing up two tapes, but there was no evidence in the article to back that up.

Cohen said she made sure that Kutler’s denial got on the front page.... Cohen... said she thought Graboske was a “completely straight, honest broker.” I asked Graboske how he was certain Kutler mixed the two tapes on purpose. To have done it, he said, “would have been the height of sloppiness, and Stanley is a sloppy researcher or he did it deliberately.” That is a different answer than he gave Cohen.... The Times should [not] have printed the charge without strong evidence. Journalistic balance, giving both sides, did not produce fairness....

Alison Mitchell, the weekend editor, said that when the culture desk offered the article for Page 1, she took it because she found it fascinating and a good read. Mitchell, a former education editor, said academic disputes do not get covered enough in newspapers. “We weren’t saying, ‘shocking new revelation,’ ” she said. “We were saying, ‘interesting tale about tapes.’ ” But David Greenberg, a Rutgers historian... argued that the tale... was more like the Watergate version of global warming, with most historians long ago coming to a consensus and only a few outliers arguing against it. “Professional scholarly consensus is not sacrosanct, but it should count for a lot,” he said.... Kutler said he thinks this dispute is overblown. He did not minimize Dean’s role, he said. “Dean was the action officer for the cover-up, as I describe in my book.” But Nixon was the chief figure in Watergate, he added...

I See That Clive Crook Is Having a Conversation with Robert Barro...

It is here.

I remember the first time I ever saw Robert Barro. It was early 1984. He was arguing that Ronald Reagan's fiscal policies were not a structural break in American public finance, and that he saw no reason to worry that the large federal deficits of 1982 and 1983 would persist. He expected the federal debt-to-GDP ratio not to rise over 1984-1988 but rather to resume its long post-WWII decline.

Robert Barro in early 1984:

[T]he recent [Reagan] deficits [of 1982 and 1983] and the near-term projections of deficits [in 1984 and 1985] reflect mainly the usual responses to recession and, in turns out, to anticipated inflation....


[T]he actual behavior of public debt through 1983... is reasonably well in line with the [standard post-WWI] experience of debt issue.... The main things that are out of line with the previous structure are projections of longer-term deficits on the order of $300 billion.... [T]here is nothing yet in the data to suggest this type of structural break... these forecasts of deficits [are best seen] as amounting to predictions that either taxes will be increased or spending will be decreased.... Notably, equation (16) implies that the planned growth of the real debt... would approach zero if the unemployment rate were to decline to about 5.5%.... [T]here is nothing in the experience of actual deficits through 1983 that conflicts in any major way with these propositions.

John Shoven as discussant attempted to introduce a little reality into the mix:

This is an interesting and thought-provoking paper.... Frankly, though, it is not at all clear that it is sucessful.... Taken literally, the theory provides strong predictions about the size of the government deficit.... The theory, of course, is not very plausible.... Does anyone really believe that the projected 1984-1988 deficits are what they are owing to tax smoothing?... [T]he empirical results of the paper do not lend support to the theory.... What have we learned after Barro's analysis? Well, not much that we did not know before.... The final conclusion of the paper... is that the current deficits... are not far off the usual pattern.... [Barro asserts] that... "normal" unemployment is... 5.4% (which is lower than the consensus)... and if 1984 unemployment comes in at 7.8% (which is higher than the consensus), and if inflation is 6.6% (again, higher than the consensus), then Barro's operation predicts a $145 billion deficit for 1984, lower than othe projections.... [Barro's belief that] the historical deficit generating process can almost account for the current deficit... requires several assumptions each shaded relative to consensus in a direction that will generate higher deficit forecasts...

Shoven was, of course, right about the future course of the debt and the deficit. And Barro was wrong:

Path Finder

Charlatans and Cranks...

Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: "It's bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it."

What Greg Mankiw says in 2009, via Obey:

Why is Greg Mankiw freaking me out?!: [T]oday I find on the [Greg Mankiw web]blog this text on the stimulus plan, which contains the following: 'The expression "create or save [4 million jobs]," which has been used regularly by the President [Obama] and his economic team [Christie Romer, Larry Summers, Jared Bernstein, Tim Geithner, etc.], is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus. [...] So he gave us a non-measurable metric...'

And if I type "mankiw 2003 tax cut effects" into the Google search box, the fourth hit takes us to "Charlatans and Cranks"--what Greg Mankiw said in 2003:

Greg Mankiw: On Charlatans and Cranks: [T]he actions the President [George W. Bush] took made the recession less severe. As the President [George W. Bush] has discussed, analysis done within the Administration has shown how his tax cuts have substantially offset the series of adverse shocks that have been buffeting the economy. Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP would have been about 2 percent lower in the middle of 2003. About 1.5 million fewer people would have jobs today. The job market is not what we would like it to be right now, but it would have been worse without the Administration’s actions. One can view the short-run effects of these tax cuts from a classic Keynesian perspective. The tax cuts let people keep more of the money they earned. This supported consumption and thus helped maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks...

Forgetting that teh Google exists is a very elementary blunder.

In the long run, I think, the coming of Google will greatly increase the degree to which people say what they think rather than what they believe will ingratiate themselves to some powerful group. Being exposed as transparently two-faced is humiliating, and if you say what you really think and only what you really think then you are safe--except, of course, for having your words ripped from context, and for those cases in which what you really think actually does change over time. But as the realization that teh Google exists, more and more ganders are going to think twice before they try to make sauce for the goose...

Obey comments:

This is a strange thing [for 'Greg Mankiw'] to say. Because it is stupid and [the entity claiming the internet name] 'Greg Mankiw' could not have the credentials [Greg Mankiw] has if [Mankiw] were stupid. Firstly, 'create or save' just means the gap between (i) the unemployment rate with the stimulus and (ii) the expected counterfactual unemployment rate were there no stimulus.... Now, if 'Mankiw' were a mindless zombie, this kind of thing would be understandable. After all, there are zombie masters in the republican party who want the Obama plan to fail, or at least look like it has failed.... But 'Mankiw' is not a mindless zombie - he says lots of other things that are strikingly human-like.... The moral of the story being, that I prefer my blogs to be anonymous, and I don't like credentials - because without them all this kind of cognitive dissonance goes away...

Washington Post Crashed-and-Burned Watch

Mark Kleiman writes to the Washington Post ombudsman:

The Reality-Based Community: Letter to the Washington Post:

Dear Mr. Alexander:

Your response to queries about George Will's misrepresentations both of scientific fact and of how those facts have been reported by scientists, published on the Web, has left me, and many other long-time admirers of the Post, dumbfounded and dismayed.

Will was, simply, wrong, and dishonestly so. The source he cited reported that total ocean ice has remained more or less stable, but that Northern Hemisphere ice, predicted by global-warming models to shrink, has done so, while Southern Hemisphere ice, about which the models make ambiguous predictions, has grown. Thus Will's claim that the sea-ice figures support his what-me-worry optimism was grossly, obviously, and inexcusably wrong.

Fine. That's what George Will does for a living: offer sermons to comfort the comfortable. And there's at least a reasonable case for the Post printing his nonsense as the reflection of an important point of view.

But when you, on behalf of what used to be a respected newspaper, endorse his dishonesty, there's something seriously, seriously wrong. There are still honest and competent reporters writing for the Post, but if any article in the paper is to be believed it will now have to be on the basis of the reporter's known integrity and skill, not on the fact of its publication in a newspaper that not only publishes palpable falsehood but then justifies doing so.

I doubt that Katherine Graham would have approved.


Mark Kleiman
Professor of Public Policy

Republicans (and Heath Shuler): Worse than You Can Imagine

Have they no shame at all? Lee Fang:

Think Progress: At Least 22 Lawmakers Have Touted The Money From The Recovery Package They Voted Against: On Wednesday, ThinkProgress pointed out that several Republican lawmakers who voted against President Obama’s economic recovery package are now touting its benefits to their constituents. The New York Times picked up on the phenomena yesterday, writing that “the temptation to take credit for at least a few of those billions” has proved “irresistible” to the anti-stimulus lawmakers.

For instance, Rep. John Mica (R-FL) gushed after the passage of the bill he voted against, releasing a statement that applauded Obama’s “recognition that high-speed rail should be part of America’s future.” Mica’s chief of staff, Rusty Roberts, defended his boss to the Times, saying that “it’s possible to oppose the entire bill on principle and favor certain sections of it.”

Roberts isn’t alone in this rationalization. Thus far, ThinkProgress has found at least 22 lawmakers who voted against the bill, but have spoken positively about what the money will do for their constituents. Here are a few examples that the New York Times missed:

  • Sen. Mike Crapo (R-ID) bragged to Idaho lawmakers that “Approximately $400 million plus, maybe as much as $465 million will come to INL right here in Idaho for hundreds of new jobs and a significantly expedited clean up activity.”

  • Rep. Heath Shuler (D-NC) defended his vote against the bill on Thursday, but added that he was “prepared to fight” for “Western North Carolina getting its fair share” of the stimulus money.

ThinkProgress will continue to add to our list and follow members of Congress who tout the benefits of the recovery package that they voted again.

Justin Fox Is Still Perplexed

He wonders:

Brad DeLong tutors me on fiscal stimulus :: The Curious Capitalist - I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It's basically just, We ran gigantic budget deficits during World War II and the economy got better. That's the kind of argument I would make, not the kind of argument I'd expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It's just all so seat-of-the-pants. But it's better to be approximately right than precisely wrong, I guess...

"Lacking in the customary rigor..." Justin could mean either of two things:

  1. Rigorous economics should produce tightly-estimated conclusions based on statistical sieving of mountains of data, like: when Safeway cuts grocery prices by 1%, its sales rise by 1.456%.

  2. Rigorous economics should involve lots of theoretical equations with sigmas and rhos and betas in them.

With respect to the first possibility, Justin's expectations are just too high. We cannot build models up from precisely-known microfoundations--we are not chemists who can calculate how molecules should behave because we know how the electrons and the nucleons that make them up do behave. We don't have that many past examples of large-scale fiscal stimulus programs, and so we do the best that we can--and to be up-front about the partial and uncertain state of our knowledge is part of doing the best that we can.

With respect to the second possibility--well yes, I could make a bunch of arguments with lots of theoretical equations with sigmas and rhos and betas in them, but once again these theoretical equations would not rest on any solid microfoundations. Chemistry theory is built on top of physics theory. But economic theory--it is just a bunch of people looking at historical episodes and saying: "it looks like this is what happened a bunch of times in the past; let's build a model of it." Economic theory is crystalized history. But when the historical episodes out of which theory is being crystalized are as rare and as scarce as they are in the case of large-scale fiscal stimulus programs, why crystalize? Why not just take the history raw?

Council on Foreign Relations Chatter...

Some voices:

  • What's going on?...

  • Benn Steil: gold bug and fringe anti-Keynesian...

  • Max Boot: Kipling aficionado and chicken hawk...

  • Amity Shlaes: Calvin Coolidge fan...

  • Elliot Abrams: perjurer and war criminal...

  • I used the think the CFR was a middle-of-the-road tree club for Rockefeller Republicans. Anyone know what's going on?...

  • 95% of the council's membership was wrong about the fate of the Soviet Union, the al Qaeda threat, and invading Iraq. They keep dusting themselves off and marching forward with their pompous groupthink...

  • Haass is the one who has to answer for Shlaes et al. at CFR...

  • A couple of them shouldn't even be at KFC...

Martin Wolf on the Obama Financial Plan

Our text for today is the excellent, thoughtful, and illustrious Martin Wolf, who writes:

Martin Wolf - Why Obama’s new Tarp will fail to rescue the banks: The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined.... All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency. Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses....

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities....

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst....

The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem....

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress....

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once.... By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.

I am, once again, having a hard time wrapping my mind around the concepts of "illiquidity" and "insolvency" here. As Larry Summers once said: "if there is no doubt that an organization is solvent how can it ever be illiquid?" Somebody who has cash will be eager to lend it to the institution at a rate epsilon above the prevailing safe interest rate, and then it will no longer be illiquid

Not What I Expected to See...

Hilzoy is sent into a prophetic trance upon reading the Financial Times:

Obsidian Wings: Signs Of The Times: That the Financial Times has a headline that reads "Greenspan Backs Bank Nationalization" is truly a sign that we live in strange, strange times. Any moment now the sun shall become as black as sackcloth of hair, and the moon shall become as blood, and the stars of heaven shall fall unto the earth, even as a fig tree casteth her untimely figs, when she is shaken of a mighty wind, and the seas shall turn to blood, and we shall hear an angel flying through the midst of heaven, saying with a loud voice, Woe, woe, woe, to the inhabiters of the earth by reason of the other voices of the trumpet of the three angels, which are yet to sound!...

When the New Jerusalem comes down from the clouds, don't get caught underneath it and get crushed. Just sayin'...

Moving Toward Bank Nationaization

Paul Krugman:

Stressed for Success: Aha — the Times’s dealbook blog supplies exactly the numbers I was looking for. It cites a CreditSights report on the potential losses of major banks — which gives us a guide to the amount of capital the federal government needs to put in to make these banks viable. Focus just on the big four money center banks: Citi, B of A, Wells Fargo, JPMorgan. According to this estimate, they need around $450 billion. Meanwhile, their combined market cap is only about $200 billion — and part if not all of that market cap surely represents the “Geithner put,” the hope that stockholders will in effect get a handout from the feds.

Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”. Hence the perplexity of policy. Our best hope right now is that the “stress test” will make (b) inevitable — that Treasury will declare itself shocked, shocked to find that the banks are in such bad financial shape, leaving government receivership unavoidable.

Why the Climate-Change Wingnuttery?

Ryan Avent poses an interesting question:

The Bellows » Chilly Willy: My question is why conservatives think it advances their purpose to continue this demonstrably wrong adherence to climate change denialism. This isn’t like, say, evolution. Scientific evidence of evolution is quite strong and will only continue to get stronger, but that growing evidence won’t be ever more obvious to the layperson. Birds, for instance, won’t start evolving faster and faster until it’s frighteningly clear that evolution is real and all those deniers were, in fact, cranks.

But the planet is getting warmer, and people are going to notice. [George] Will [and the Washington Post] can talk about global cooling all he wants, but arctic ice is actually disappearing. Snowpacks are shrinking. Droughts are intensifying. Sea-levels are rising. And this isn’t going to stop.

Climate change denialism is like arguing at three that in two hours it won’t be five. However convincing you think you are, you will ultimately be revealed as a fool and a charlatan...

Against Stupidity the Gods Themselves Contend in Vain

I used to think that Republican office holders could not possibly be as stupid as they were ugly. Now I am pretty sure that they actually are as stupid as they are ugly.

Paul Krugman:

Against stupidity: The most valuable lesson I learned from the year I spent in Washington (1982-1983, on the staff of the Council of Economic advisers — I was the senior intl economist, the senior domestic economist was a guy named Larry Summers. What ever happened to him?) was the extent to which senior government figures have absolutely no idea what they’re talking about. So when I read something like this:

“Why should we reward Fannie Mae and Freddie Mac with $200 billion in taxpayer dollars without first reforming these housing entities that were at the heart of the economic meltdown?” House Minority Leader John A. Boehner (R-Ohio) said in a statement.

and people ask what on earth Boehner might mean when he talks about taxpayers “rewarding” institutions that are owned by taxpayers, I go for Occam’s Razor: Boehner doesn’t have some complicated notion in mind, he either doesn’t know that the government took over F&F months ago, or he just doesn’t get this “government-owned” concept.

A Problem for Everyone Who Works for the Washington Post

Matthew Yglesias cannot see why anyone who wants a future in journalism would still be working for the Washington Post:

Matthew Yglesias: Washington Post Stands By Climate Change Denialism: Yesterday, the Post finally responded to complaints about [George Will's climate change denialism] column[s], sending a reply to my colleague Brad Johnson that stands foresquare behind Will, citing the existence of a “multi-layered” process to check the facts in the article. As for why it’s okay for Will to write stuff that isn’t true, the Post didn’t have much of substance to say. They picked one of debunked subsidiary claims, and said they think Will is right, though they acknowledge that the very organization Will was citing as an authority says Will is wrong.... Will wrote, and is trying to get readers of The Washington Post to believe, that there was a scientific consensus about global cooling in the 1970s. This is false. Post readers are being deceived. And the Post is standing by the deceivers.

This started as a problem for Will, his direct supervisors, and the Post’s ombudsman. But now that the Post as a paper is standing behind Will’s deceptions, I think it’s a problem for all the other people who work at the Post. Some of those people do bad work, which is too bad. And some of those people do good work. And unfortunately, that’s worse. It means that when good work appears in the Post it bolsters the reputation of the Post as an institution. And the Post, as an institution, has taken a stand that says it’s okay to claim that up is down. It’s okay to claim that day is night. It’s okay to claim that hot is cold.... Everyone who works at the Post, has, I think, a serious problem.

National Review Has Removed the Ball-Gag from Jerry Taylor's Mouth!

After eight years spent gagged and bound, Jerry Taylor is once again allowed on the stage. Matthew Yglesias welcomes him back:

Matthew Yglesias » Jerry Taylor, National Review, and Executive Power: I did a post this morning noting with amazement that the inauguration of Barack Obama was swiftly followed by a Corner post bemoaning excessive executive power, something that doesn’t seem to have been a big concern during the Bush years. I should, however, have been clear on the point that the author of the post, Jerry Taylor from the Cato Institute, hasn’t been engaged in any hypocrisy here. Cato and Cato personnel were always, and appropriately, very critical of the Bush administration’s actions in this regard. Taylor just wasn’t blogging at the Corner until very recently. But therein lies the rub. Conservatives are suddenly rediscovering this topic and reaching out to the Taylors of the world. It’s funny.

Remember who your friends are, Jerry. They are not the people you are posting beside.

Amazon's Kindle and the Recovery of Readerly Naivete; or, Were-Bats--the Big Bug Scourge of the Skies!

Jane Austen:

Northanger Abbey: The anxiety, which in this state of their attachment must be the portion of Henry and Catherine, and of all who loved either, as to its final event, can hardly extend, I fear, to the bosom of my readers, who will see in the tell-tale compression of the pages before them, that we are all hastening together to perfect felicity...

In a normal book, an author cannot have the antagonist fall with an ensorcelled death-sword in its belly with one-third of the pages left to go and expect the reader to be surprised at what comes next. The thickness of the pages beneath one's right hand scream: "THAT'S NOT THE ANTAGONIST, SCHMUCK!!!"

Reading it on the Kindle--the sudden appearance of the were-bats has an extra punch that it cannot have in the hard copy...

Washington Post Crashed-and-Burned Watch. We Make Phone Calls

So we called Mr. Andrew Alexander at the Washington Post and left him a message:

The Washington Monthly this morning publishes a letter from Washington Post ombudsman Andrew Alexander defending George F. Will's use of scientific sources. In it, Mr. Alexander defends Mr. Will's citation of the University of Illinois Arctic Climate Research Center and provides a link Either Mr. Alexander did not read the ACR note, or he read the note and decided to mendaciously misrepresent what it said. Will claimed the note said that sea ice changes since 1979 do not provide evidence of global warming. The note says the opposite: that the shrinkage of arctic and (smaller) expansion of antarctic sea ice is evidence of global warming.

This appears a serious breach of either professional responsibility--the responsibility to read what you cite to make sure it says what you claim it says--or professional ethics--the duty not to lie about what your sources say.

Can you tell me whether Mr. Alexander did in fact read the ACR note? (It definitely says that global sea ice patterns since 1979 are in fact what we would expect if global warming is proceeding. Yet Alexander's letter is written as if he does not know that that is what the ACR note says.)

Can you tell me, if he in fact read the ACR note, why Mr. Alexander decided to misrepresent what the note said? (For it is a misrepresentation to say that the note said that "observed global sea ice area, defined here as a sum of N. Hemisphere and S. Hemisphere sea ice areas, is near or slightly lower than those observed in late 1979" while omitting that the note said that "global climate models project a decrease in the Northern Hemisphere sea ice... under increasing greenhouse gas scenarios. But... some recent studies suggest... sea ice in the Southern Hemisphere may initially increase as a response to atmospheric warming...")

Can you provide me with any reason why Mr. Alexander should not be immediately fired from the Washington Post for not doing his job to speak truth to editors, reporters, and readers?

Andrew Alexander in his own words:

Thank you for your e-mail. The Post’s ombudsman typically deals with issues involving the news pages. But I understand the point you and many e-mailers are making, and for that reason I sought clarification from the editorial page editors. Basically, I was told that the Post has a multi-layer editing process and checks facts to the fullest extent possible. In this instance, George Will’s column was checked by people he personally employs, as well as two editors at the Washington Post Writers Group, which syndicates Will; our op-ed page editor; and two copy editors. The University of Illinois center that Will cited has now said it doesn’t agree with his conclusion, but earlier this year it put out a statement that was among several sources for this column and that notes in part that "Observed global sea ice area, defined here as a sum of N. Hemisphere and S. Hemisphere sea ice areas, is near or slightly lower than those observed in late 1979,"

Best wishes,

Andy Alexander
Washington Post Ombudsman

Firing John Yoo

In my email inbox:

[You should just] be clear about [why Berkeley should fire Yoo].... It's not for saying torture is permissible. It's not even for saying torture is permissible while [working] at the OLC. Its for saying torture is permissible because the Bush administration wants you to say it. It's the abdication of responsibility that makes Yoo an accessory [I would say "makes you unfit to belong to any university, and a conspirator and a criminal"] here...

Fire Washington Post Ombudsman Andy Alexander This Morning

The latest Washington Post employee to show that he has no business at all in journalism is "ombudsman" Andy Alexander--who should be run out of town this morning, if not sooner.

Let's turn the microphone over to Hilzoy::

Obsidian Wings: The Washington Post's "Multi-Layer Editing Process": I haven't written about George Will's factually challenged column from last Sunday, but I have been following the various refutations of mistakes he made. I have also been following the various requests for comment from the Washington Post, and wondering when the Post might respond. Now they have:

Thank you for your e-mail. The Post’s ombudsman typically deals with issues involving the news pages. But I understand the point you and many e-mailers are making, and for that reason I sought clarification from the editorial page editors. Basically, I was told that the Post has a multi-layer editing process and checks facts to the fullest extent possible. In this instance, George Will’s column was checked by people he personally employs, as well as two editors at the Washington Post Writers Group, which syndicates Will; our op-ed page editor; and two copy editors. The University of Illinois center that Will cited has now said it doesn’t agree with his conclusion, but earlier this year it put out a statement that was among several sources for this column and that notes in part that "Observed global sea ice area, defined here as a sum of N. Hemisphere and S. Hemisphere sea ice areas, is near or slightly lower than those observed in late 1979."

Best wishes,
Andy Alexander
Washington Post Ombudsman

[O]n reading that Will's column had been subjected to a "multi-layer editing process"... I clicked the link Mr. Alexander provided, and read it. Did he? I don't know what would be worse: that he did, and takes it to support Will, or that he didn't take his job seriously enough to bother.  Here's how George Will cited the Arctic Climate Research Center:

...According to the University of Illinois' Arctic Climate Research Center, global sea ice levels now equal those of 1979."

Here's the statement Mr. Alexander cites as "one of" Will's sources, including the sentence he specifically references. It's a response to an article in the Daily Tech called "Sea Ice Ends Year at Same Level as 1979": 

One important detail about the article in the Daily Tech is that the author is comparing the GLOBAL sea ice area from December 31, 2008 to same variable for December 31, 1979.... GLOBAL sea ice area may not be the most relevant indicator. Almost all global climate models project a decrease in the Northern Hemisphere sea ice area over the next several decades under increasing greenhouse gas scenarios. But... there have been some recent studies suggesting the amount of sea ice in the Southern Hemisphere may initially increase as a response to atmospheric warming through increased evaporation and subsequent snowfall.... Details: Observed global sea ice area, defined here as a sum of N. Hemisphere and S. Hemisphere sea ice areas, is near or slightly lower than those observed in late 1979.... N. Hemisphere sea ice area is almost one million sq. km below values seen in late 1979 and S. Hemisphere sea ice area is about 0.5 million sq. km above that seen in late 1979...

Where I come from, when someone writes something of the form: "P is not evidence for Q, and here's why", it is dishonest to quote that person saying P and use that quote as evidence for Q. If one of my students did this, I would grade her down considerably, and would drag her into my office for an unpleasant talk about basic scholarly standards. If she misused quotes in this way repeatedly, I might flunk her.

Will does this more than once.... I checked the quote from Science in this passage:

Although some disputed that the "cooling trend" could result in "a return to another ice age" (the Times, Sept. 14, 1975), others anticipated "a full-blown 10,000-year ice age" involving "extensive Northern Hemisphere glaciation" (Science News, March 1, 1975, and Science magazine, Dec. 10, 1976, respectively).

...Here is the bit Will cited in context:

Future climate. Having presented evidence that major changes in past climate were associated with variations in the geometry of the earth's orbit, we should be able to predict the trend of future climate. Such forecasts must be qualified in two ways. First, they apply only to the natural component of future climatic trends -- and not to such anthropogenic effects as those due to the burning of fossil fuels. Second, they describe only the long-term trends, because they are linked to orbital variations with periods of 20,000 years and longer.... When such a model is applied to Vernekar's astronomical projections, the results indicate that the long-term trend over the next 20,000 years is toward extensive Northern Hemisphere glaciation and cooler climate.

So that "extensive Northern Hemisphere glaciation" is (a) supposed to happen "over the next 20,000 years", not imminently, and (b), more importantly: it's a prediction that does not take into account anthropogenic changes in climate, like, um, those "due to the burning of fossil fuels". Which is to say, the kind of global warming we're now talking about.

The fact that this prediction specifically excludes anthropogenic climate change means that you cannot use it to say: those silly scientists; they used to believe that the earth was cooling, and now they think it's warming. When scientists say "if we don't take man-made changes to climate into account, the earth will get cooler over the next 20,000 years", this is completely consistent with saying: "however, when you factor in those man-made changes, the earth will get warmer", or "when you factor in those changes, we don't know", or any number of things.

If Will actually read these two articles, it's hard to see how he's not being deliberately deceptive by citing them as he did. If, as I suspect, he just got them from some set of climate change denialist talking points and didn't bother to actually check them out for himself, he's being irresponsible. All those people who supposedly fact-checked Will's article as part of the Post's "multi-layer editing process" -- "people [George Will] personally employs, as well as two editors at the Washington Post Writers Group, which syndicates Will; our op-ed page editor; and two copy editors" -- should be fired, either for not doing their job or for doing it utterly incompetently. These are hard times for newspapers; I wouldn't have thought they could afford more than one layer of an editing process that produces no discernible improvement in quality.

And Andy Alexander? He should read the cites George Will gives him before he sends them out, under his own name, in support of his paper's decision to publish Will's piece, if he doesn't want to be embarrassed like this again.

Every day that the Washington Post prints is another black day for journalism. Why oh why can't we have a better press corps?

Economic Magery

From Lois McMaster Bujold (2009), The Sharing Knife: Horizon: Three ranger-wizards talking:

“Look closely at this.” Arkady, mystified, accepted it. “If you found this somewhere, not knowing what it was, how would you judge the metalwork?”

“Well... the raised image of the crayfish is actually quite fine. And the lettering, of course, so tiny, but clear to read”—Arkady squinted—“Silver Shoals City Mint, One Cray. And making things perfectly round is harder than it looks, I suppose.”

“Aye. Yet when we all visited the mint at Silver Shoals, back when we were coming downriver on the Fetch, we saw the machine that stamps these out a hundred at a time. One of these disks is a little work of art. Tens of thousands of ’em... become farmer magic.”

Arkady raised his brows; Dag plowed on. “They’re counters, memories of trade and labor that a man can put in his pocket and carry across a continent. They make things move. With my groundsense, I can summon my horse from a mile away. With enough of these, the folks at Silver Shoals can summon a forty-mule tea caravan from eight hundred miles away. And the ground density and complexity of a big river city like Silver Shoals is a making in its own right.”

“You see a farmer town as a making?” said Barr, his forehead wrinkling at this new thought. “I do.” “What about a Lakewalker camp, then?” “That, too, of course.” Arkady made to hand the coin back; Dag grinned and said, “Keep it. There’s plenty more where that came from”...

Animal Spirits

Book by Akerlof and Shiller. Picture of animal spirits by Koren.

No, Shiller does bit know how much the Koren picture of animal spirits cost to commission...Animal Spirits

On Robert Shillet's "Animal Spirits" Lecture at the New School

It is in some part Robert Shiller's fault that I am an economist. In the spring of 1979 I was talking to my freshman economics teacher and saying: gee, it seems that economics is all about how the market is always perfect--or can be made perfect with a minor technocratic tweak or to. But that's not true--was it Rick Ericson?--told me. Here is a paper by a hotshot young Yale economist that says that financial markets are really lousy at their job--and he handed me a xerox of an article by Robert Shiller.

Financial markets are not supposed to be just more boring versions of Las Vegas or ways for the Princes of Wall Street to become fabulously rich by extracting surplus value from the rest of us. Financial markets are supposed to tell the real economy the value of providing for the future--of taking resources today and using them nor just for consumption or current enjoyment but in building up technologies, factories, buildings, and companies that will produce value for the future. And Shiller has more than anyone else argued economists into admitting that financial markets do a really lousy job. The prices that financial markets feed the real economy value safety too much, are also much too frightened of risk, on average are too low--that is, greatly undervalue the worth of providing for the future, and are also grossly excessively volatile. Depending on the date, the same flow of rationally-expected future profits and values can vary in its price by a factor of three depending on what Akerlof and Shiller call "animal spirits" and what Chicago-school economists like Cochrane and French call "time variation in the unfortcastable component of required expected returns."

Later on, when I grew up and became an economist, I found that I had been baited-and-switched: that Robert Shiller was an unusual economist, and that the modal economist working on Shiller-issues in an American finance department spends most of his or her time explaining that what I call the Shiller-facts about the performance of financial markets aren't facts at all, or if they are facts they reflect not bubbles and mistakes but are, rather, rational.

But Shiller did change my life. Not only is he one of the reasons I am an economist, and not only is his work the inspiration for what is still today my most cited troy of publications, but when I moved to California in 1995 I found that one of the options was that I could get a sam from Berkeley--a lower interest rate plus mortgage insurance...

But what would we do if we took Shillet seriously--as we should? Two planks:

  • John Maynard Keynes--the state of long-term expectation. A crutch for the economy to keep it on an even keel as it is shaken by financial-side shocks...

  • Fix the markets by making more of them with better market instruments...

This Week in Journamalism...

Newsweek Crashed-and-Burned Watch: Tom Tomorrow makes a catch:

This Modern World: Media meltdown watch: Newsweek’s response to the Ongoing Cluster@#*& is a fabulous new makeover:

Newsweek also plans to lean even more heavily on the appeal of big-name writers like Christopher Hitchens, Fareed Zakaria and George Will...

Only one of these three is sufficiently intelligent and oriented to reality to be able to make his way to the sink to brush his teeth in the evening.

It goes on:

...Starting in May, articles will be reorganized under four broad, new sections — one each for short takes, columnists and commentary, long reporting pieces like the cover articles, and culture — each with less compulsion to touch on the week’s biggest events. A new graphic feature on the last page, “The Bluffer’s Guide,” will tell readers how to sound as if they are knowledgeable on a current topic, whether they are or not.

And Tom Tomorrow snarks:

You might as well buy some stock in the Washington Post Company right now, because I don’t see any way this plan could fail!

Red Charlie:

NPR Crashed-and-Burned Watch (Ellen Weiss Unclear on the Concept Department): Yeah, I gave up on NPR after Bob Mondelo and Richard Harris reviewed "An Inconvenient Truth" They laughed about the prospect of flooded Manhattan, and joked about FEMA building dikes around New York. I don't see how that could be funny, especially after Katrina. As far as I'm concerned, NPR has the Broder disease really bad. They ain't getting my money any more.

In fiscal year 2007, the United States government spent $2,728.9 billion dollars. In fiscal year 2008, the United States government spent $2,978.5 billion dollars--an increase (not adjusted for inflation) of $249.6 billion. On February 13, 2009, in the pages of the New York Times, David Brooks writes:

The Worst-Case Scenario - Between 1990 and 2007, the total mortgage debt held by Americans rose from $2.5 trillion to $10.5 trillion. This rise was part of a societal credit bubble that burst in 2008. To cushion the pain of that collapse, federal authorities decided to replace private debt with public debt. In 2008, the Bush administration increased spending by about $1.7 trillion, and guaranteed loans, investments and deposits worth about $8 trillion...

I realize that the absence of basic quantitative literacy is regarded by the New York Times as an excellence rather than as a shame--as a reason that people should pay respectful attention to it rather than the reverse--but this is ridiculous.

Evidence, Logic, and Robert Barro

Hoisted from Comments: Richard Green writes:

Grasping Reality with Both Hands: Council on Foreign Relations Wingnut Watch: Benn Steil: I am glad that Barro's logic escaped you, as well. As I am not a macroeconomist, I figured that it was I who was dense. But it seemed to me that the facts presented in the article showed that even an enormous stimulus that burned a lot of resources (building tanks and ships that will be destroyed are kind of like bridges to nowhere, economically) had very little crowding out effect.

The context is Benn Steil's claim that Robert Barro's January 22, 2009 Wall Street Journal op-ed "provides logic and offers evidence" to support Steil's claim that the interest elasticity of money demand is zero and thus that the fiscal multiplier is zero too.

As I said before, the evidence that Barro presents suggests a multiplier for temporary government purchases not of Steil's zero but instead of 0.8:

Robert J. Barro: Government Spending Is No Free Lunch: Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II.... I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540).... We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War.... Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before...

But it is the logic that most puzzles me. Barro writes:

The [Keynesian] theory... assumes that the government is better than the private market at marshaling idle resources.... Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one...

If I read this paragraph correctly, Barro thinks (a) there are theoretical reasons to think that the fiscal multiplier cannot be greater than one, and (b) there are theoretical reasons for thinking that if you believe in positive fiscal multipliers you should also believe that expansionary monetary policy that raises the flow of nominal spending will also raise employment and production--which people do, for it is only when they fear that monetary policy is tapped out and cannot raise the flow of nominal spending any more that they fear that monetary policy may be ineffective.

So I don't understand how Barro gets to his very next sentence:

A much more plausible starting point is a multiplier of zero...

Stan Collender Calls Out Clive Crook

He writes, about Clive Crook's pointless and annoying "balance":

Calling Out Clive Crook | Capital Gains and Games: I know and truly like Clive Crook.  We were colleagues for a while when I wrote for, and the BTW and I have joined Clive and his wonderful wife for dinner a number of times.  He is smart, perceptive, funny, and a gifted writer. And that's why I'm surprised that Clive would use a truly ridiculous statistic like this when posting about the economic stimulus plan:

Republicans have a point when they complain about the inordinate length of the bill–1,400 pages or thereabouts...

Would a shorter bill have made it better?  At less than 3 pages and at a cost of $700 billion, was the original version of the TARP that Hank Paulson sent to Congress a gem?  Should the legalese needed to make the changes in the stimulus bill been dropped or shortened so that many provisions would have been subject to court challenges and the money never spent?

What Clive seems to be saying is that, at 1400 pages, the bill could not possibly have been reviewed in detail by many members of Congress before they voted for it given the rush to get it done.  What he doesn't say is that most representatives and senators generally only review the parts of any bill that are important to them for some reason.  They may look at the parts that pertain to their committee assignment or which are relevant to their district or state.  More likely, they've had their personal or committee staff look at the bill and tell them whether there's anything they need to be concerned about.

But citing the number of pages as a reason to think legislation is bad is ridculous.  That's on a par with football commentators talking about the number of minutes one team has had the ball compared to the other or the greater number of plays one team has run.  It's also similar to the meaningless total number of points one tennis player has won during a match compared to the other.

These statistics are meaningless and often completely misleading.  The same can be said for the number of pages in legislation.

Council on Foreign Relations Wingnut Watch: Benn Steil

Benn Steil resents being called a wingnut. But what choice do I have? He is a wingnut: he continues to assert something that nobody--save Jacques Rueff--ever believed since the days of R.G. Hawtrey and the original "Treasury View": that the fiscal multiplier is zero because the interest elasticity of money demand is zero:

Benn Steil: Krugman’s claim [that money demand is interest elastic] is manifestly false. Institutions are not hoarding dollar bills, awaiting the issuance of stimulus bonds. Any funds they choose to make available to the government, beyond their current holdings of Treasurys, will have to be withdrawn from the banking system or the market for corporate securities.... [I]f Krugman had actually been using the word “idle” to mean circulating at low velocity, he would then have been assuming the very thing he needs to establish - that by outbidding the banks and corporate securities markets for funds, and then spending such funds, the government necessarily increases velocity...

I asked him for other, alternative adjectives, but he has not responded.

Milton Friedman is thought to have known something about money demand. Milton Friedman went to great pains to assure everyone that he was not so silly as to think that the interest elasticity of money demand is zero:

[Tobin claims that] characteristic monetarist propositions require the LM curve to be vertical.... I thought that I had disproved this contention in detail.... In... 1966, I concluded, "In my opinion, no 'fundamental issues'... hinge on whether the estimated elasticity [of demand for money with respect to the interest rate] can... be approximated by zero or is better approximated by -.1 or -.5 of -2.0, provided it is seldom capable of being approximated by -∞..."

And Benn Steil tries to muster support from Robert Barro:

Benn Steil: Harvard’s Robert Barro, writing in the Wall Street Journal on January 22, provides logic and offers evidence supporting the case that it is not true...

where "it" is presumably Krugman's belief that (a) money demand is elastic and (b) the fiscal multiplier is greater than zero.

What evidence does Robert Barro bring to the table? This:

Robert J. Barro: Government Spending Is No Free Lunch: I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540).

No help for Steil there.

What logic does Robert Barro bring to the table? This:

Robert J. Barro: Government Spending Is No Free Lunch: The theory... [is] that the government is better than the private market at marshaling idle resources.... Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy.... So, something deeper must be involved.... A much more plausible starting point is a multiplier of zero...

I confess that Barro's logic eludes me. The disease for which fiscal stimulus is the remedy can indeed be helped by expansionary monetary policy, and indeed expansionary monetary policy is almost always a superior medicine. People who believe that fiscal policy can help do not believe that monetary policy cannot. It is not clear to me what the logical point is.

Clark's Wager on the Stimulus

Greg Clark says it is a good bet:

Picking sides (sort of) - The Atlantic Business Channel: Brad DeLong asks that I not just bemoan the exquisite irrelevance of most academic economists that the current crisis has revealed. Instead he asks that I take sides in the debate between Keynesians like him and Krugman and neoclassicals like Eugene Fama and John Cochrane on the efficacy of fiscal policy. I am no macroeconomist. And I am reluctant to get trampled in a clash of macroeconomic titans. But I find Brad's various arguments, particularly his reductio ad absurdum, convincing. And I think Obama is right to try a fiscal stimulus from the following simple chain of argument:

  1. There is no logical reason why a stimulus cannot work -- it is a matter of empirics whether it will work or not, depending on the reactions of various economic actors.

  2. Because of the absence of controlled experiments over the last 80 years we do not know whether a stimulus will actually increase output (though Christina and David Romer have some decent evidence from the US that it will).

  3. Even if the stimulus package does not produce one extra job, the social cost of the stimulus is a fraction of the $789 billion being spent, since the tax reductions, unemployment benefits, aid to states and educational and health investments all have some value. The true social cost, absent any output gains, is likely $100 billion or less.

  4. The potential gains are huge. If the multiplier really is as high as the 1.9 sometimes found in Econ 1 texts such as Greg Mankiw's, then the social gain from the $100 billion expense could be as much as $1,400 billion. It is a risk, for sure, but those seem like attractive odds at which to gamble.

(1) - (4) amount to a version of Pascal's Wager -- on why the prudent person should believe in God -- but applied to more mundane economic concerns.