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December 2009

1998 and 2008: A Comment on Simon Johnson

Simon Johnson believes that the Obama administration is much more powerful than I do:

Lessons Learned From The 1990s: In the 1990s, the Clinton Administration amassed a great deal of experience fighting financial crises around the world.... In a major retrospective speech to the American Economic Association in 2000, Larry Summers – the primary crisis-fighting strategist – put it this way:

Prompt action needs to be taken to maintain financial stability, by moving quickly to support healthy institutions.  The loss of confidence in the financial system and episodes of bank panics were not caused by early and necessary interventions in insolvent institutions.  Rather, these problems were exacerbated by (a) a delay in intervening to address the problems of mounting nonperforming loans; (b) implicit bailout guarantees that led to an attempt to “gamble for redemption”; (c) a system of implicit, rather than explicit and incentive-compatible, deposit guarantees at a time when there was not a credible amount of fiscal resources available to back such guarantees; and (d) political distortions and interferences in the way interventions were carried out... (“International Financial Crises: Causes, Prevention, and Cures,” American Economic Review, May 2000, p.12; no free version is available, unfortunately:

Now, of course, Summers heads the White House National Economic Council.... [H]as this crack team of crisis fighters applied what they learned from the 1990s? They pushed early and hard for a fiscal stimulus... the Summers group drew sensible lessons from the experience of the 1990s.... But in terms of their handling of the financial system, the Summers-Geithner-Lipton approach this time around is at odds with their views and actions a decade ago. In the 1990s, they were completely opposed to unconditional bailouts.... No modern economy can function without a financial system, so some form of rescue that restored confidence in our banks was necessary.... In the 1990s, the US – working closely with the IMF – insisted that crisis countries fundamentally restructure their financial systems, which involved forcing out top bank executives. In the US during 2009, we not only kept our largest and most troubled banks intact (while on life support), but allowed the biggest six financial conglomerates to become larger than they were before the crisis.... We are still waiting for a full explanation of why the management of major troubled US banks were treated so gently – given their self-inflicted problems and desperate circumstances; if you doubt that these banks were close to failing, read some of the leading blow-by-blow accounts. Rick Waggoner, the head of GM, was forced out earlier this year, but the administration has not pressed major bank chief executives hard.

Presumably, this time around, the Summers-Geithner-Lipton group will argue there was no way to restore financial market confidence other than through the kind of unconditional and implicit bailout guarantees they opposed in the 1990s. If true, this has a terrible implication.  The structure of our financial system has not changed in any way that will reduce reckless risk-taking by banks that are large enough to cause massive damage when they threaten to fail.  The logic and 1990s experience of Summers and his colleagues suggest serious problems lie in our future. The reform legislation they have placed before Congress could still address “too big to fail” issues in principle, but attempts to limit the power of – and danger posed by – our largest banks have bogged down in heavy lobbying.  Postponing reform attempts until the banks were out of intensive care was a mistake – and just what today’s economic leadership used to warn against.

My view has always been that the Fed and the Treasury should have taken majority equity positions in all the "too big to fail" institutions in 2008 1998 as part of the price for the government support that they were given: when institutions are illiquid, you lend at a penalty rate; when you fear that lending at a penalty rate will make them insolvent, you take equity ownership--or explicitly nationalize. Had this been done, we would be having a very different financial reform conversation right now. But with Henry Paulson as Secretary of the Treasury there was no way that that was going to happen in 2008. And so when 2009 rolls around Obama has to play the cards that Paulson has left him.

Five Economics Pieces Worth Reading: December 31, 2009

1) Felix Salmon: Inside the legislative sausage factory, banking committee edition:

Ryan Grim and Arthur Delaney have the must-read story of the day, on the politics of the House financial services committee. It’s long — 6,500 words, spread over three pages — and it took five journalists in all to piece it all together: don’t say that HuffPo doesn’t do original reporting! Do read the whole thing, but in a nutshell, the problem is that the committee is far too big, weighing in with 71 members: when was the last time that you ever saw a 71-member committee which ever got anything done. To make matters worse, a large proportion of those 71 members are conservative Democrats in marginal seats facing Republican opponents. They want to be on the committee because it’s an easy way to monster campaign donations, with freshmen representatives raising over $1 million apiece if they sit on the committee. That’s twice as much as if they don’t. And once they’re on the committee, they tend to be pretty friendly to Wall Street and its lobbyists. And with so many members, you can imagine the number of revolving doors there are...

2) Justin Fox: A critique of Ron Paul's 'End the Fed':

Here's the list of happy consequences that [Ron] Paul says ending the Fed would bring:

  • A new heaven.
  • A new earth.
  • No more tears.
  • No more death.
  • No more sadness.
  • No more crying.
  • No more pain.
  • The fearful, and unbelieving, and the abominable, and murderers, and whoremongers, and sorcerers, and idolaters, and all liars, shall have their part in the lake which burneth with fire and brimstone: which is the second death.
  • That great city, the holy Jerusalem, descend out of heaven from God having the glory of God: and her light was like unto a stone most precious, even like a jasper stone, clear as crystal; And had a wall great and high, and had twelve gates, and at the gates twelve angels, and names written thereon, which are the names of the twelve tribes of the children of Israel: On the east three gates; on the north three gates; on the south three gates; and on the west three gates. And the wall of the city had twelve foundations, and in them the names of the twelve apostles of the Lamb.
  • No admittance to any thing that defileth, neither whatsoever worketh abomination, or maketh a lie.
  • Admission to all they which are written in the Lamb's book of life.

3) BEST NON-ECONOMICS THING I'VE READ TODAY: Ezra Klein: The world's most embarrassing legislative body:

I've been focusing on the filibuster today, but Senate "holds" are almost as pernicious.... The Senate has jurisdiction over a lot of things that most of its members don't care about very much. The deputy U.S. trade representative, for instance. And when senators have that much individual power, they can take a strong stand on things other senators don't care about in order to extract concessions on something they themselves do care about. And why would the other senators stop them? They like having that power, too. And so Sapiro's nomination stalled for nine months -- and the position went unfilled -- because Bunning wanted to sell more -- sigh -- candy-flavored cigarettes.

4) STUPIDEST THING I'VE READ TODAY: Outsourced to the Poor Man: Shoot Now, Because We Might Ask Questions Later « The Poor Man Institute For Freedom, Democracy, and a Pony:

Shorter Joe Lieberman: "If we don’t invade Yemen today, then at some point in the future we might have to invade Yemen.  So we better invade now just in case." That, my friends, is a war monger’s war monger.  One wonders whether the conscience of America will ask the CBO to score the invasion costs.  Actually, one doesn’t wonder that at all.

5) HOISTED FROM THE ARCHIVES: DeLong (December 27, 2002): Nor Trust in Wodan/Walhall's High Drighten...:

The raw ingredients out of which J.R.R. Tolkien fashioned The Lord of the Rings are equal parts Norse-Anglo-Saxon-Germanic myth, chivalric romance, and Christian apocalyptics (evil personified and mighty, but also powerful guardian spirits, and over all a God who arranges things so that the highest prizes fall to those who suffer). The mix is extraordinarily powerful. But if you want the Norse-Anglo-Saxon-Germanic myth itself, akratos--unmixed, undiluted--you have to go elsewhere: to a place like Stephan Grundy (1994), Rhinegold (New York: Bantam: 0553095455: 1994).

links for 2009-12-31

  • There are three ways to use the budget reconciliation process for further stimulus. The first is to include a reconciliation "directive" in the next budget. The second is to use the directive that was included in the 2010 budget for health care. And the third is to pass a new directive into the 2010 budget. Because I don't want your eyes to glaze over before you reach the conclusion, I'll put it up at the top: If Democrats want to do this, they can. They can do it on their timetable, and they only need 51 votes.
  • Unfortunately for politicians, the security measures that work are largely invisible. Such measures include enhancing the intelligence-gathering abilities of the secret services, hiring cultural experts and Arabic translators, building bridges with Islamic communities both nationally and internationally, funding police capabilities -- both investigative arms to prevent terrorist attacks, and emergency communications systems for after attacks occur -- and arresting terrorist plotters without media fanfare.
  • My post of what Lovable Liberal called “bullet porn” has attracted some curious readers to this blog.  One of them emailed me today, with a line I truly never expected to read within the academic cocoon. It read: “I’m not  ready to trust my TA with a rifle.” Now that’s a what I call a tough university.
  • I know that columnists rarely write their own titles but this Maureen Dowd column lives up to the awfulness of its headline. I suppose I just don’t see the nation actually freaking out as much as the political class is over the Nigerian bomber story, let alone the media.  The politicos and media are having a collective hissy fit, of course, but most people are worrying more about new TSA restrictions than they are about the attempted attack.
  • the Fed's commitment to undo its interventions is already having an effect. In expectation of more of these moves to come (as well as, perhaps, increases in interest rates) markets have been bidding up the dollar, which has busily appreciated during the month of December. That, in turn, will deprive the American economy of a potential source of demand—growth in consumption of American exports thanks to the effect of a weak dollar. More bluntly, we're seeing a move toward contractionary monetary policy at a time when unemployment is at 10%. Funny that.

Obama Economic Team: Exceeds Expectations

I was just about to write a year-end reflection in which I was going to say that the Obama economic policy team had exceeded expectations--a sizeable fiscal stimulus, a second round now moving through the congress, victory in the intellectual war over whether the government should and can stabilize the economy, blocking any protectionist moves, key support for what looks to be a successful (if moderate Republican) health care reform, key support for ongoing climate policy--a solid B+/A-. The major problems are (a) that the macroeconomic situation turned out to be much more dire than we thought last November-December, (b) that financial regulatory reform looks to be a flop--too many members of congress bought by bankers--but IMHO Geithner and company played out a weak hand that Paulson had taken care to leave them, and (c) that the fact that private banks have profited while the government has not from the bailouts means that there is now no more ammunition should things turn south once more.

But still: exceeds expectations. Remember: Clinton's attempt at a stimulus package cratered in the spring of 1993, NAFTA nearly failed in spite of Republican and Democratic leadership support, the 1993 Reconciliation Bill was the narrowest of victories (albeit a very important one)--and that was it for two years.

Yet now I find Duncan Black linking to:

Al Hunt [who] has a rather distressing portrayal of the functioning (or not) of Obama and his econ team...


Obama’s Foreign-Policy Team Bests Economy Stars: Two recent anecdotes illustrate this problem. On Dec. 2... Obama... heard a familiar reprise of the previous several meetings with budget director Peter Orszag arguing for more emphasis on reducing the deficit and Council of Economic Advisers chief Christina Romer leading the contingent espousing a greater short-term stress on jobs. The president, by his standards, exploded. “Why are we having this meeting again, the same discussion,” participants quoted him as saying. Several administration insiders, prominent outside Democratic economic advisers and a few Congressional heavyweights, all worry this is symptomatic of a process that isn’t working well. Summers, they argue, is brilliant on policy and ill-suited for a high-level staff job, which is what the head of the National Economic Council is. “If you came up with 10 words to describe Larry, coordination and collaboration would not be two,[1]” says one person requesting anonymity who has worked with Summers extensively and admires his intellectual force.... Summers too often is dismissive of fellow economic advisers, other than Geithner... he gets a bum rap for supposedly freezing Volcker out....

The other problem, an inability to effectively communicate an economic policy, was typified in a Dec. 4 interview with Geithner, who was asked what is the “clear, coherent economic message.”... He proceeded to talk about “high-class education” for children, affordable health care, better incentives for energy and infrastructure, public-private arrangements and the like.[2] There are 15.4 million unemployed Americans and another 11.5 million “underemployed,” either having given up looking and thus not counted in the jobless numbers or involuntarily relegated to part-time work. A laundry list of the Democrats’ agenda is unlikely to prove comforting. Geithner, who wins praise from Obama and others for his substantive performance... acknowledges that public communications isn’t his forte. It isn’t Summers’ either. And those who are more effective, including Roemer and fellow Council of Economic Advisers member Austan Goolsbee, sometimes are cut out of the action...

So Hunt has three criticisms:

  • Effective communicators like Christie and Austan aren't put out in front enough on the substance and the message.
  • Larry squashes dissent, dismisses the views of others, and doesn't let them get their say.
  • Tim cannot stay on a simple message.

Yet Hunt's article shows only one of these three. His article doesn't show Larry squashing dissent and freezing out others. Instead, it shows him running a process in which Christy Romer and Peter Orszag both make their strong--if opposed--pitches. His article doesn't show Romer and Goolsbee being cut out: Peter Orszag is not in their alone giving the budget briefing. His article does show Tim Geithner getting off message: the message is supposed to be that the administration's policies are all aimed at creating lots of good jobs to make Americans prosperous--and education, affordable health care, investments in efficient energy, infrastructure, public-private partnerships, etc. are all part of that.

Can we at least ask for articles that show, not tell, the defects in policy-making they claim?

The constraints on the Obama Administration have been mighty: the united, disciplined, destructive opposition of the Republican Party, the extreme and counterproductive perversity of Senators 51 through 60, and the peculiar culture and attitude of the Federal Reserve (though why hasn't Obama at least made recess appointments for the two vacant Fed governorships?). We are lucky that they have been able to do as much as they have.

So my grade for the Obama economic team for its first year would definitely be: exceeds expectations.

[1] While it is true that "if you came up with 10 words to describe Larry, coordination and collaboration (and consensus) would not be" among them, the ten words that do describe Larry Summers are very strong ones: workaholic, quick, thoughtful, knowledgeable, incisive, encyclopedic, disciplined, dedicated, brilliant, arrogant.

[2] In Business Week, Al Hunt presents this part of the interview... rather differently:

Hunt: Does the Obama Administration have a clear, coherent economic message?

Geithner: Our responsibility is to make sure that we repair what is broken in this economy... and do all those things critical to creating the kind of environment in which private business can flourish. This crisis [is] not like anything we've seen before because of the intensity of the financial fire. But the problems America faces today are not just because of the recession. They are the result of a sustained period where we saw public policy just not doing what needed to be done...

Ten Economic Pieces Worth Reading: December 30, 2009

1) Paul Krugman: Fannie, Freddie, and Full Faith:

Fannie and Freddie... [are] in the same business as the Fed these days.... [W]hat the Fed is doing when it engages in “quantitative easing” [is] expanding its balance sheet by buying unconventional assets... a broader provision of credit to the private sector by governmental or quasi-governmental agencies.... Why do this? Part of what depressed the economy during the financial crisis was a widening spread between government debt and private borrowing costs--not just in things like the TED spread, but also in mortgage rates. This spread was narrowed thanks to a combination of Fed actions and the expansion of Fannie-Freddie lending. And the administration very much wants to keep this kind of intervention going. You can argue that some other policy — inflation targeting by the Fed, expanded fiscal stimulus, whatever — would be better. But none of these things seem politically possible. Keeping Fannie and Freddie fully engaged in the mortgage-support business is one of the few tools available to prop up a still very weak economy. And so they’re doing it.

2) Claret and London:

On April 10th 1663, Samuel Pepys, diarist and man-about-London, noted that he had enjoyed “a sort of French wine called Ho Bryan that hath a good and most particular taste that I never met with”. He drank what is now called Château Haut Brion at the Royall Oak Tavern in the heart of London, one of many such establishments that had sprung up after the return from exile of King Charles II three years earlier and which offered such new delicacies as tea, coffee and classy wines. The hedonistic atmosphere of the times was responsible for the introduction not only of “Ho Bryan” and the other great wines of Bordeaux, but also of port from the Douro Valley in Portugal, the sparkling wines of Champagne and the brandy from a little town called Cognac, north of Bordeaux.

3) Lexington: America's greatest strength:

[O]ne reason why America is such attractive place to migrate to is that almost anyone can find an agreeable niche here: "No matter where an immigrant hails from, he can find a cluster of his ethnic kin somewhere in America. In fact, he is probably spoilt for choice. If he wants to live in a suburb, eat Korean food and listen to fire-and-brimstone sermons in Korean, he can do so in northern Virginia. If he prefers an urban and secular Korean lifestyle, he can try Boston or San Francisco. If he craves Ethiopian food, Amharic radio and lots of gay clubs, Washington, DC, may suit him. And so on." You can find welcoming clusters of ethnic minorities in other rich countries, but not nearly as many. In a European country, if you want Korean food and a particular denomination of Korean church, you might find it in the capital but you will struggle in the suburbs. In America, it is easier to find just the niche you want: Polish or Vietnamese, metropolitan or exurban, gay or straight, Episcopalian or Muslim, or any combination of the above." The article tells the stories of three very different immigrants: a conservative Korean Christian, an English fox-hunter and a Dutch-Somali atheist. It contends that: "a country’s economic prospects depend in large measure on whether it is a place where people want to be. Desirable destinations draw talented and industrious migrants. Less desirable ones suffer a brain drain."

4) Zachary Roth: Republican Corruption Watch: Majority Of Tea Party Group's Spending Went To GOP Firm That Created It:

The political action committee behind the Tea Party Express (TPE)... directed around two thirds of its spending during a recent reporting period back to the Republican consulting firm that created the PAC.... Our Country Deserves Better (OCDB) spent around $1.33 million from July through November... $870,489 went to Sacramento-based GOP political consulting firm Russo, Marsh, and Associates, or people associated with it. OCDB['s]... site was registered in July 2008 by Sal Russo... the PAC's "chief strategist." Tea Party Express fundraising emails... come from another Russo, Marsh employee, Joe Wierzbicki. Just for good measure, legendary GOP bamboozler Howard Kaloogian is also on OCDB's board, and has close ties to Russo, Marsh...

5) Renminbi RX - Paul Krugman Blog -

Dean Baker is right: it’s bizarre to report that Chinese officials are (a) worried about inflation and (b) determined not to let their currency appreciate without noting that these are contradictory policies.... By deliberately keeping E higher than it would be under floating, China is creating pressures for P to rise; the inflationary pressures are directly related to the exchange rate policy. This isn’t a new story. The proximate cause of the breakup of Bretton... was the fact that Germany, whose currency was pegged to the dollar, found itself facing inflationary pressures; the Germans solved that problem by letting the Deutsche mark float, and the rest is history. Oh, and right now Spain faces deflationary pressure because it can’t devalue, yet the economy wants a depreciated real exchange rate. So China is basically trying to keep water from flowing downhill. And it really needs to stop.

6) Calculated Risk: Divergent Views on Treasury Yields in 2010:

Here are a couple of stories with very different views... From Bloomberg: Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits (ht Bob_in_MA): "Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said." And the LA Times has comments from PIMCO's El Erian: "El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing. So he's buying Treasurys and selling riskier stuff. His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid." Earlier Greenlaw argued that the Fed would start raising rates in the 2nd half of 2010 because of rising inflation, even with a fairly weak economy. I think it is unlikely that the Fed will raise rates in 2010 (although possible) - and I'll definitely take the under on Greenlaw's 2010 prediction of 7.5%+ rates on 30-year fixed mortgages - that seems extremely unlikely.

7) Barry Ritholtz: Freefall in LCD Prices:

So the old 27″ Sony TV — a 32″ CRT in the bedroom is — finally dying. Turn it on, and the screen goes on and off until its warmed up. I want to replace it with a bigger flat panel — I want 37″, the wife insists on smaller. Looks like 32″ will be the compromise. I am torn between getting something really nice or a something that’s a really good deal. I am leaning towards the latter.  The TV in the den is kickass — and I really don’t want to be tempted to watch anything other than late night TV before bedtime. I started looking around for a replacement, and I was stunned at how much prices have freefallen. The NYT runs full page J&R ads most days, and the discounts have been pretty deep. Here’s what I scared up:

Good (720p)

  • Panasonic VIERA X1 Series TC-L32X1 LCD HDTV ($400) (More info at Panasonic)
  • Sony KDL-32L5000 BRAVIA L-Series LCD Flat Panel HDTV ($449) (More info at Sony)

Better (1080p):

  • LG 32LH30 LCD HDTV ($449)  (More info at LH)
  • Sony KDL-32XBR9 Class BRAVIA XBR9 Series LCD HDTV ($599) (More info at Sony)

Are there any better suggestions? I’m leaning towards the cheap Panasonic VIERA X1 Series TC-L32X1 — a 2009 model that comes with an iPod doc — it turns the tv set into a audio system.


9) STUPIDEST THING I'VE SEEN TODAY: David Harvey: Organizing for the Anti-Capitalist Transition:

A revolutionary politics that can grasp the nettle of endless compound capital accumulation and eventually shut it down as the prime motor of human history, requires a sophisticated understanding of how social change occurs.  The failings of past endeavors to build a lasting socialism and communism have to be avoided and lessons from that immensely complicated history must be learned.  Yet the absolute necessity for a coherent anti-capitalist revolutionary movement must also be recognized. The fundamental aim of that movement is to assume social command over both the production and distribution of surpluses. We urgently need an explicit revolutionary theory suited to our times.  I propose a “co-revolutionary theory” derived from an understanding of Marx’s account of how capitalism arose out of feudalism. Social change arises through the dialectical unfolding of relations between seven moments within the body politic of capitalism viewed as an ensemble or assemblage of activities and practices: a)  technological and organizational forms of production, exchange and consumption b)  relations to nature c) social relations between people d) mental conceptions of the world, embracing knowledges and cultural understandings and beliefs e) labor processes and production of specific goods, geographies, services or affects f)  institutional, legal and governmental arrangements g) the conduct of daily life that underpins social reproduction. Each one of these moments is internally dynamic and internally marked by tensions and contradictions (just think of mental conceptions of the world) but all of them are co-dependent and co-evolve in relation to each other.  The transition to capitalism entailed a mutually supporting movement across all seven moments. New technologies could not be identified and practices without new mental conceptions of the world (including that of the relation to nature and social relations). Social theorists have the habit of taking just one of the these moments and viewing it as the “silver bullet” that causes all change. We have technological determinists (Tom Friedman), environmental determinists (Jarad Diamond), daily life determinists (Paul Hawkin), labor process determinists (the autonomistas), institutionalists, and so on and so forth. They are all wrong. It is the dialectical motion across all of these moments that really counts even as there is uneven development in that motion. When capitalism itself undergoes one of its phases of renewal, it does so precisely by co-evolving all moments, obviously not without tensions, struggles, fights and contradictions. But consider how these seven moments were configured around 1970 before the neoliberal surge and consider how they look now and you will see they have all changed in ways that re-define the operative characteristics of capitalism viewed as a non-Hegelian totality. An anti-capitalist political movement can start anywhere (in labor processes, around mental conceptions, in the relation to nature, in social relations, in the design of revolutionary technologies and organizational forms, out of daily life or through attempts to reform institutional and administrative structures including the reconfiguration of state powers)...

10) HOISTED FROM THE ARCHIVES: DeLong (April 4, 2003): Let us now praise... the wild-eyed enthusiasts who begat the dot-com bubble-boom:

When the stock market hit the puke stage, conventional wisdom turned. The whole new economy thing had been a bad thing. Time, talent, and capital were thrown away on unsustainable enterprises like point-and-click pet food; it was good for Odwalla, but not good for America.... Fortunes were poured into overflowing snake pits of fiber-optic cables, which, like Web-ordered groceries, proved to be profit-free zones. In just four years, the craze sucked up $600 billion worth of purchasing power....

As Andy Grove said in these pages, "The dotcoms threw themselves on the bonfire, but they created a bigger flame as a result." So while the Intels, Dells, and Oracles might be shells of their former market-cap selves, huge amounts of useful stuff found its way to consumers. Even the flameouts pumped out stuff so cheap that though it's not all clearly useful, it's still an amazing bargain.... [H]istory will look back and see gain and gain... profits are not the same thing as social value. Just because a group of firms, an industry segment, flopped as a profitmaker does not mean it failed as a producer.... The US airline industry is a perpetual loss machine. Yet the service it provides the rest of us is incredibly valuable. British investors in US railroads during the late 19th century got their pockets picked twice: first as waves of overenthusiasm led to overbuilding, ruinous competition, and unbelievable (for that time) burn rates, and second as sharp financial operators stripped investors of control and ownership during bankruptcy workouts. Yet Americans and the American economy benefited enormously from the resulting network of railroad tracks that stretched from sea to shining sea. For a curious thing happened as railroad bankruptcies and price wars put steady downward pressure on shipping prices and slashed rail freight and passenger rates across the country: New industries sprang up.

Consider, for example, the old Montgomery Ward and Sears Roebuck catalogs. Sears and Montgomery Ward discovered at the end of the 19th century that the cost of shipping consumer goods to rural America was no longer a competitive burden. Mail a catalog to every household in the country. Offer them big-city goods at near big-city discounts. Rake in the money from satisfied customers. For two generations this business model - call it the "railroad services" business model - was a license to print money, made possible only by the gross overbuilding of railroads, the resulting collapse of freight rates, and the fact that railroad investors had had to kiss nearly all their money good-bye. Their pain was outweighed by the gain to American consumers and manufacturers, who could now order and ship goods essentially free. The irrational exuberance of the late 1800s made the railroads a money-losing industry - and a wealth-creating industry...

When Does the Senate Take This Up?

Calculated Risk:

Calculated Risk 12/17/2009 12:00:00 AM: House Approves Next Stimulus: From Reuters: U.S. House approves $155 billion jobs bill

  • More infrastructure spending: "The bill would provide $48.3 billion for infrastructure projects that promise to get workers back on job sites by April. Highway construction projects would get $27.5 billion, while subway, bus and other transit systems would get $8.4 billion."

  • Extends COBRA subsidy to 15 months

  • Extends unemployment benefits for six months (that expire at the end of the year).

  • Aid to states: "States would get $23 billion to pay 250,000 teacher salaries and repair school buildings, and $1.2 billion to pay for 5,500 police officers... $23.5 billion to help pay their share of federal healthcare programs for the poor."

Not nearly enough in the way of aid to states, but it is a start.

Unfortunately, the senate is unlikely to add to state aid: governors cut ribbons and then run against senators for their seats, so the senate has a strong political incentive to try to keep the states cash-strapped.

The Fairness of Financial Rescue

Project Syndicate - The Fairness of Financial Rescue: Perhaps the best way to view a financial crisis is to look at it as a collapse in the risk tolerance of investors in private financial markets. Maybe the collapse stems from lousy internal controls in financial firms that, swaddled by implicit government guarantees, lavish their employees with enormous rewards for risky behavior. Or perhaps a long run of good fortune has left the financial market dominated by cockeyed optimists, who have finally figured that out. Or perhaps it stems simply from unreasoning panic.

Whatever the cause, when the risk tolerance of the market crashes, so do prices of risky financial assets. Everybody knows that there are immense unrealized losses in financial assets, but no one is sure that they know where those losses are. To buy – or even to hold – risky assets in such a situation is a recipe for financial disaster. So is buying or holding equity in firms that may be holding risky assets, regardless of how “safe” a firm’s stock was previously thought to be.

This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system. This crash sends a very peculiar message to the real economy. The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky.

But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. And if the decline in nominal wages signals that there is an excess supply of labor, matters only get worse. General deflation eliminates the capital of yet more financial intermediaries, and makes risky an even larger share of assets that had previously been regarded as safe.

Ever since 1825, central banks’ standard response in such situations – except during the Great Depression of the 1930’s – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.

This response is understandably controversial, because it rewards those who bet on risky assets, many of whom accepted risk with open eyes and bear some responsibility for causing the crisis. But an effective rescue cannot be done any other way. A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy.

The political problem can be finessed: as Don Kohn, a vice-chairman of the Federal Reserve, recently observed, teaching a few thousand feckless financiers not to over-speculate is much less important than securing the jobs of millions of Americans and tens of millions around the globe. Financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all – even if the unworthy gain more than their share of the benefits.

What cannot be accepted are financial rescue operations that benefit the unworthy and cause losses to other important groups – like taxpayers and wage earners. And that, unfortunately, is the perception held by many nowadays, particularly in the United States.

It is easy to see why.

When Vice Presidential candidate Jack Kemp attacked Vice President Al Gore in 1996 for the Clinton administration’s decision to bail out Mexico’s feckless government during the 1994-1995 financial crisis, Gore responded that America made $1.5 billion on the deal.

Similarly, Clinton’s treasury secretary, Robert Rubin, and IMF Managing Director Michel Camdessus were attacked for committing public money to bail out New York banks that had loaned to feckless East Asians in 1997-1998. They responded that they had not rescued the truly bad speculative actor, Russia; that they had “bailed in,” not bailed out, the New York banks, by requiring them to cough up additional money to support South Korea’s economy; and that everyone had benefited massively, because a global recession was avoided.

Now, however, the US government can say none of these things. Officials cannot say that a global recession has been avoided; that they “bailed in” the banks; that – with the exception of Lehman Brothers and Bear Stearns – they forced the bad speculative actors into bankruptcy; or that the government made money on the deal.

It is still true that the banking-sector policies that were undertaken were good – or at least better than doing nothing. But the certainty that matters would have been much worse under a hands-off approach to the financial sector, à la Republican Treasury Secretary Andrew Mellon in 1930-1931, is not concrete enough to alter public perceptions.

What is concrete enough are soaring bankers’ bonuses and a real economy that continues to shed jobs.

The Brookings Institution Needs to Exercise Some Quality Control

Ryan Avent is on the case. This is really embarrassing.

Brookings Institution senior fellows--especially Co-Directors of Economic Studies--really need to have read Grossman and Stiglitz (1980), "On the Impossibility of Informationally-Efficient Markets," American Economic Review 70:3 (June), pp. 393-408 That Ted Gayer has not says something really bad.

Ted Gayer:

The EPA Tackles Greenhouse Gas - Brookings Institution: But Krugman oversells the affordability claim by linking to a widely cited report by McKinsey & Company. The main point of the McKinsey study is provided in their Exhibit B, which illustrates a rather peculiar finding that there are a significant number of pollution abatement options that can be achieved at “negative cost.”  This finding violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits...

That McKinsey and Company exists and that businesses regularly pay it money to identify $100 bills lying on their sidewalks strongly suggests that any half-competent economist should not immediately dismiss its analytical conclusions.

Some quality control, please.

In Which Clive Crook Carries Water for the Republican Hyenas...

Clive Crook: fifteen years ago I would have said--I did say--that he was the best of right-wing observers of North Atlantic political economy. But now? The brain eater appears to have eaten his brain. Completely. Paul Krugman has already noted--and lamented--this. But I think that I have to add my voice, because Paul is too mild.

What has happened in the past year is this: Consider health-care reform: Barack Obama has thrown his full weight behind a Senate proposal that is Republican Massachusetts Governor Mitt Romney's health-care reform proposal, and has also thrown the full weight of his presidency to pressure the left--which is saying: "wait a minute: this is Mitt Romney's proposal"--to get the entire left to shut up and soldier. Yet in spite of going several extra miles for bipartisanship to what was three years ago a Republican and not a Democratic legislative proposal Obama cannot attract a single Republican vote for it the Senate. Why not? Because Senate Republicans look back to 1994 and think that if they can make Obama appear to be a failure then they can pick up seats in the next election.

And what does Clive Crook have to say about it--about zero Republicans voting for a Republican proposal because they want to play the president-is-a-failure game? This:

Clive Crook: The real missed opportunity in Obama’s first year: Independents feel let down because Mr Obama said he would bridge the partisan divide and unite the country. Except for uniting left and right in disappointment, he failed.... Independents have much the most reason to be disappointed. They see – and are right to – a broken political system. Congress is polarised to its roots.... Mr Obama promised to strive for consensus. On issues such as energy policy, healthcare, education and immigration, there is no reason why moderates on both sides cannot make common cause. That is something many Americans long for. It was the great hope independents had of Mr Obama. In his first year, he rarely even tried. He simply chose not to exercise this kind of leadership. To be sure, moderate Republicans (an endangered breed) offered no encouragement, content to oppose for opposition’s sake. But Mr Obama made no stand against this. Instead he went with the flow, deferring to the implacably partisan Democratic majorities. This disengagement, this reluctance to lead, is the real disappointment of Mr Obama’s first year...

Barack Obama bears no reponsibility for the Republican failure to vote for a Republican proposal: he tried. Who does bear responsibility? Why, Clive Crook does. The Republican Senators think "if we just say no to everything Obama proposes--even if it is what a Republican President Romney would be proposing--journalists will call Obama a failure." And the Republican senators are right: Clive Crook does their bidding.

Why Clive Crook does their bidding is a complete mystery to me.

Brain. Eater.

Of course, it was also a mystery to me when he wrote:

Clive Crook: September 2008 Archives: [T]he Palin nomination. For the moment, that looks like a great success: she gave an amazing speech and, to the consternation of the Democrats and a large part of the US media, triumphantly vindicated McCain's decision to select her.... Palin blew the doors off the convention on Wednesday, bringing the torrent of derision over her nomination to an abrupt halt.... [...] Sarah Palin's speech. Astonishing. It was a fine convention speech--but, reading the text, no better than very good. What was just sensational, far exceeding my expectations, was the delivery. After the thrashing she has received from press and television in the past few days, knowing what was at stake for the party and for John McCain as she stood at the podium, with a good part of the nation watching and waiting for her to trip, her composure and self-assurance were simply amazing.... She not only touched on her own biography, in ways sure to delight small-town Americans across the land, she also asserted her command, as the governor of an oil-producing state, of the energy debate.... Well, the Democrats have a problem. They had a few days of calling her a clueless redneck, a stewardess, a nonentity, and she has hurled that back in their bleeding gums...

and when he wrote:

Clive Crook: September 2008 Archives: Democrats... lack respect for the objects of their solicitude. Their sympathy comes mixed with disdain, and even contempt.... Sarah Palin's nomination for the vice-presidency jolted these attitudes to the surface. Ms Palin is a small-town American. It is said that she has only recently acquired a passport. Her husband is a fisherman and production worker. She represents a great slice of the country that the Democrats say they care about - yet her selection induced an apoplectic fit.... Little was known about Ms Palin, but it sufficed for her nomination to be regarded as a kind of insult.... The problem in my view is less Mr Obama and more the attitudes of the claque of official and unofficial supporters that surrounds him.... [T]he fathomless cultural complacency of the metropolitan liberal... that expressed itself in response to the Palin nomination is the best weapon in the Republican armoury.... Democrats need to learn some respect.... Religion. Unembarrassed flag-waving patriotism. Freedom to succeed or fail through one's own efforts. Refusal to be pitied, bossed around or talked down to. And all those other laughable redneck notions that made the United States what it is.

Ten Economic Pieces Worth Reading: December 29, 2009

1) Randall Smith and Sarah Lynch: Derivatives Overhaul Has Failed:

Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down. The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.

But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges. A lawyer for one big Wall Street dealer said in an interview that the rollback from the first proposals in Congress was the result of an "educational" process by dealers and customers that resulted in "a grudging recognition" that many uses of derivatives didn't fit such a strict approach. At one point, House agriculture chairman Collin Peterson (D., Minn.) said he suspected dealers had dispatched their customers to lobby Capital Hill.

For Wall Street, switching to exchanges would have cut their profits in a lucrative business. "Exchanges are anathema to the dealers," because the resulting added price disclosure "would lower the profits on each trade they handle, and they would handle many fewer trades," said Darrell Duffie, a finance professor at Stanford business school...

2) Arvind Subramanian: How economics managed to make amends:

Here, one year on, we can say that economics stands vindicated. How so? Recall that the recession of the late 1920s in the US became the Great Depression, owing to a combination of three factors: overly tight monetary policy; overly cautious fiscal policy (especially under FDR in 1936, when tightening led to another sharp downturn in the US economy); and dramatic recourse to beggar-thy-neighbour policies.... The impact of this global financial crisis has been significantly limited because on each of these scores, the policy mistakes of the past were strenuously and knowingly avoided. On monetary policy, Mr Bernanke was true to the word he gave to Milton Friedman on the occasion of his 90th birthday: “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”... On the fiscal side, policymakers enacted huge stimulus packages. They took their cue from Keynes.... Most surprisingly, despite the unprecedented collapse in trade, few countries resorted to beggar-thy-neighbour policies....

What is striking about the influence of economics is that similar policy responses in the fiscal and monetary areas, and non-responses in relation to competitive devaluations and protectionism, were crafted across the globe... in emerging market economies and developing countries as much as in the industrial world; in red-blooded capitalist countries as well as in communist China and still-dirigiste India. If ever there was a Great Consensus, this was it. If the Great Depression had not happened 80 years before, there may not have been a “natural experiment” to draw upon, and perhaps 2009 might have turned out differently. But the fact of the Great Depression was only a necessary condition. We were not condemned to repeat the mistakes of history because the economics profession had learnt and distilled the right lessons from that event...

3) >Mark Thoma Defends Ben Bernanke: Is Criticism of the Bernanke Fed Justified?:

[T]he Fed is largely flying blind right now. It does not have the models it needs to truly understand what policy approach is best in the present environment. I have not been a strong advocate of quantitative easing, i.e. targeting, say, a 3 percent inflation rate, but I cannot claim that my view is informed by a theoretical model of the crisis I believe in, [for] such a model does not yet exist. My view is based on empirical evidence suggesting the relative impotency of monetary policy in recessions, but that evidence comes from regular recessions, not a severe recession like we are having now and the evidence may not apply. Because of this, i.e. because of the considerable uncertainty over what policy is best, I have emphasized a portfolio approach involving both monetary and fiscal policy in the hopes that one or the other will get the job done. My concern lately is that all the talk about Bernanke and the Fed has distracted our attention away from fiscal policy, but perhaps another stimulus package isn’t politically viable.... But as I’ve said before, that doesn’t mean I will give up pushing this point... fiscal, not monetary policy, is the best response right now. For those who are making strong statements about what policy should be, and beating up Bernanke and the Fed for not following those policies, I ask you to do one thing: Produce a theoretical model that can explain the crisis and justify your policy response...

4) Megan McArdle: Heroes of the Health Care Bill, First Class - :

I would like to point out that there is one group that is especially deserving of a holiday:  the CBO analysts who have been scoring this bill.  They've been working flat out literally all year, and by this point, they have long ago exhausted any reserves of energy they might once have had.  They've been doing this because we wanted to have some sort of reasonable model of how much this was all going to cost, and what it was going to do--and whatever my arguments with the CBO model, they have fulfilled their mandate superbly.  In return they get modest government salaries, and absolutely no recognition by anyone except the three people who might recognize a CBO analyst on the street. 

So in the spirit of harmony with our fellow men that ought to fill this holiday season, let's offer a very special thank you, and a huge "Happy Holidays!" to the Doug Elmendorf and team at the CBO.  I don't know what superhuman powers have allowed them to survive the last six months, but they richly deserve the praise of a grateful nation.

Unfortunately, one budget geek of a blogger is all they're likely to get.  It's not enough, and indeed, it's doubtful that anyone at the CBO will see it.  But I'm afraid it's the best I can do.

5) Jonathan Gruber: 'Cadillac' tax isn't a tax -- it's a plan to finance real health reform:

The Senate assessment on high-cost insurance plans has much to recommend it, which is why it is almost universally favored by health policy experts. It would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending. In other words, it "bends the curve." It would also be progressive, in that it would take from those with the most generous insurance to finance the expansion of coverage to those without insurance. But there have been numerous criticisms of the Senate financing. Perhaps the strongest is that some insurance plans will be "unfairly" burdened. For example, firms with older employees may have higher insurance costs not because their plans are more generous but because the employees themselves are more expensive to insure. Thus, many claim that this is a tax not on excessively generous insurance plans but on those who happen to have high insurance costs.

But this argument misses an important point: The assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break that is provided to exactly these firms. Under current law, if workers are paid in wages, they are taxed on those wages. But if they receive the same amount of compensation in the form of health insurance, they are not taxed. As a result, the tax code has for years provided a large subsidy to the most expensive health plans -- at a cost to the U.S. taxpayer of more than $250 billion a year. To put this in proportion, the cost of this tax subsidy to employer-sponsored insurance is more than twice what it will cost to provide universal health coverage to our citizens. The excise tax on generous insurance plans would simply offset this bias for the most expensive health insurance plans -- and only on a partial basis.

6) David Warsh: The Hidden History of the Health Care Bill:

[A] bipartisan approach devised by middle-of-the-road technocrats for an entrepreneurial Republican became a winning issue for the Democrats and provoked a crisis in the Republican Party.... [Romney] returned to Massachusetts in 2002 and was promptly elected governor.... In November 2004, on the op-ed page of The Boston Globe, Romney announced "My plan for Massachusetts health insurance reform"... a bipartisan approach. His plan would require no employer mandate or “single-payer” government takeover of the system. Nor would any new taxes be required. But by restraining medical expenses, the measure would lower the cost of health insurance for all.... Two men had worked hard to devise the plan. Timothy R. Murphy... Jonathan Gruber.... The two took advantage of a considerable head start, relative to all other states: Massachusetts already put aside as much as $1 billion annually for emergency care of the uninsured. The state had relatively few non-elderly insured – about half the national average of 18 percent. And Romney persuaded the Bush Administration to preserve $400 million in annual Medicare funding.... Eighteen months later, Romney declared that the problem had been solved. A combination of a series of new no-frills insurance plans and a requirement that even healthy young adults purchase one, plus government subsidies for those unable to afford those basic policies, and increased emphasis on Medicaid for those who qualified under current law would accomplish the goal with no new taxes.... He didn’t like to call it a plan for “universal coverage,” Romney told Time’s Joe Klein; to him it was a “personal responsibility system;” but the net effect would be the same....

So a contagious Republican proposal which quickly spread to the Democratic primaries proved to be the proximate cause of landmark legislation... by extending somewhat the principle of federal regulation, it changes the geometry of the medical industrial complex in fundamental ways. As Chait puts it, the proposed statute “prods the system” in myriad ways.... [T]he current bill is not the kind of plan that liberals wish they could design from scratch. “Rather, it is a centrist compromise of the best variety, combining the ideas of the now nearly extinct moderate wing of the Republican Party with the smartest bipartisan technocratic reforms.”

Is there a crisis in the Republican Party? The best evidence of it is the lone Republican congressman from Louisiana who voted for the health bill, Anh (Joseph) Cao. All the others who might have obtained some benefit from the bill refrained for fear of being ostracized.... The Wall Street Journal fulminated... the editors wrote. “A popular president might have crafted a durable compromise that blended the best ideas from both parties.” That, of course, is exactly what Romney attempted and Obama accomplished. Sufficiently clouded by defeat is the editors’ judgment, however,  that they no longer seem to recall that they themselves showcased Romney’s “Healthcare for Everyone? We’ve Found a Way” proposal in 2006...

7) Paul Krugman: The Big Zero:

Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary (and now the Obama administration’s top economist), gave in 1999. “If you ask why the American financial system succeeds,” he said, “at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.” And he went on to declare that there is “an ongoing process that really is what makes our capital market work and work as stably as it does.” So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.

What percentage of all this turned out to be true? Zero.

What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes...


Yesterday, when I wrote about 34 Obama Nominees Not Named Dawn Johnsen being confirmed by the Senate on the heels of the healthcare vote, and before they left town, I was not aware, in addition (h/t earlofhuntingdon), the nomination was now completely dead. From Main Justice: "The Senate approved a unanimous consent request today to hold over several nominees for the second session of the 111th Congress, which begins in January. But nominees to head three DOJ offices: Dawn Johnsen, for the Office of Legal Counsel, Mary L. Smith, for the Tax Division, and Christopher Schroeder, for the Office of Legal Policy, were returned to the White House before the Senate recessed for the holidays..." The nomination of Dawn Johnsen to be the head of the Office of Legal Counsel at DOJ, a critical post, is now truly dead. If Ms. Johnsen is to serve, she will have to be renominated by Barack Obama and start over. She never got the up or down vote promised as soon as the Senate had done healthcare, she never got an ounce of support from the Administration that nominated her, and a year of her life was taken in what certainly appears to be a cowardly and demeaning political ploy.... Dawn Johnsen’s nomination had languished, twisting in the wind, for 280 days.... The only notable recent support for Johnsen from the White House came in a statement by White House Counsel Greg Craig on October 11, 2009, a weak statement saying only that the White House “would not withdraw” her nomination. Craig was subsequently fired and, hilariously, attempted to be scapegoated by Rahm Emanuel for – wait for it – not getting nominations like Johnsen’s confirmed...

9) STUPIDEST THING I'VE SEEN TODAY: Clive Crook: The real missed opportunity in Obama’s first year:

Independents have much the most reason to be disappointed... a broken political system. Congress is polarised to its roots. The country’s wide political centre is largely unrepresented on Capitol Hill. Committed Democrats and Republicans can hardly bear to be in the same room, let alone talk to each other. Mr Obama promised to strive for consensus. On issues such as energy policy, healthcare, education and immigration, there is no reason why moderates on both sides cannot make common cause.... It was the great hope independents had of Mr Obama. In his first year, he rarely even tried. He simply chose not to exercise this kind of leadership. To be sure, moderate Republicans (an endangered breed) offered no encouragement, content to oppose for opposition’s sake. But Mr Obama made no stand against this. Instead he went with the flow, deferring to the implacably partisan Democratic majorities... [What world does Clive Crook live in? Whatever moderate Republicans in the senate want in a bill, they can have: look at the stimulus package. Whatever moderate Republicans wanted in health care, they could have had. And whatever they want in cap-and-trade or financial reform they can have--but they would rather just say "no" to everything. Obama cannot change that.]

10) HOISTED FROM THE ARCHIVES: DeLong: Liquidity, Default, Risk:

I think that what Larry White has written misses the big point about what really has happened. So let me try to lay out what the situation looks like to me.... [T]wo years ago we lived in a world in which the wealth of global owners of capital was some $80 trillion.... Now over time the wealth of global capital fluctuates, and it fluctuates for five reasons: (1) Savings and Investment.... (2) News.... (3) Default Discount.... (4)Liquidity Discount.... (5) Risk Discount.... In the past two years the wealth that is the global capital stock has fallen in value from $80 trillion to $60 trillion. Savings has not fallen through the floor. We have had little or no bad news about resource constraints, technological opportunities, or political arrangements. Thus (1) and (2) have not been operating. The action has all been in (3), (4), and (5).

As far as (3) is concerned, the recognition that a lot of people are not going to pay their mortgages and thus that a lot of holders of CDOs, MBSs, and counterparties, creditors, and shareholders of financial institutions with mortgage-related assets has increased the default discount by $2 trillion. And the fact that the financial crisis has brought on a recession has further increased the default discount — bond coupons that won’t be paid and stock dividends that won’t live up to firm promises — by a further $4 trillion. So we have a $6 trillion increase in the magnitude of (3) the default discount.... (4), the Federal Reserve, the European Central Bank, and the Bank of England have flooded the market with massive amounts of high-quality liquid claims on governments’ treasuries, and so have reduced the liquidity discount — not increased it — by an amount that I estimate to be roughly $3 trillion. Thus (3) and (4) together can only account for a $3 trillion decrease in market value.

The rest of that decline in the value of global capital — all $17 trillion of it — thus comes by arithmetic from (5): a rise in the risk discount. There has been a massive crash in the risk tolerance of the globe’s investors. Thus we have an impulse — a $2 trillion increase in the default discount from the problems in the mortgage market — but the thing deserving attention is the extraordinary financial accelerator that amplified $2 trillion in actual on-the-ground losses in terms of mortgage payments that will not be made into an extra $17 trillion of lost value because global investors now want to hold less risky portfolios than they wanted two years ago...

links for 2009-12-29

Stupidest Newspaper Evar!

Fred Hiatt calls Franklin Delano Roosevelt, with his Four Freedoms--freedom of speech and expression, freedom of religion, freedom from want, and freedom from fear--a Communist.

I'm not going to give the Washington Post any more links. I'll link to Matthew Yglesias, who quotes it:

Fred Hiatt: Ms. Clinton.... The Obama administration, she said, would “see human rights in a broad context,” in which “oppression of want — want of food, want of health, want of education, and want of equality in law and in fact” — would be addressed alongside the oppression of tyranny and torture. “That is why,” Ms. Clinton said, “the cornerstones of our 21st-century human rights agenda” would be “supporting democracy” and “fostering development.” This is indeed an important change in U.S. human rights policy.... Ms. Clinton’s lumping of economic and social “rights” with political and personal freedom was a standard doctrine of the Soviet Bloc, which used to argue at every East-West conference that human rights in Czechoslovakia were superior to those in the United States, because one provided government health care that the other lacked.... Health care, shelter and education are desirable social services, but they depend on resources that governments may or may not possess. These are fundamentally different goods, and one cannot substitute for another...

Can we please shut the Washington Post and all its misshapen progeny down now?

Why oh why can't we have a better press corps?

On the Definition of a "Taylor Rule"...

One of the oddest things to happen in the past year has been the fight between John Taylor and his Taylor Rule.

It started on April 27, 2009, when Krishna Guha wrote an article: Fed study puts ideal interest rate at -5% ">:

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve's last policy meeting. The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation. A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.... The assessment that the US central bank needs to provide stimulus equivalent to a substantially negative interest rate is unlikely to have changed ahead of this week's policy meeting.... [M]any Fed officials expect they may well keep rates near zero for another 18 months to two years and some might see value in making this more explicit.... The last meeting saw the Fed buy long-term treasuries for the first time in decades. The large initial impact of the move on markets is no longer visible, but officials think the policy was reasonably successful. Previous staff analysis suggested the $300bn purchase would reduce the yield on 10-year treasuries by 25-35 basis points, and officials think the rate today is about this much lower than it would have been if they had not started buying. Further purchases are possible, particularly if the Fed again downgrades its economic forecasts. The staff analysis comparing unconventional operations to interest rate cuts suggests more might be needed anyway...

I believe that Krishna Guha was reporting on a study like that of Glenn Rudebusch's San Francisco Fed "The Fed's Monetary Policy Response to the Current Crisis" with this chart:

FRBSF Economic Letter: The Fed's Monetary Policy Response to the Current Crisis (2009-17, 5/22/2009)

which is in turn based on a 2006 Rudebusch paper in the International Journal of Central Banking containing Rudebusch's estimated Taylor Rule:

Then two weeks later John Taylor, in his speech "Systemic Risk and the Role of Government", fires back, saying not so:

According to a widely cited article4 appearing in the Financial Times two weeks ago, the Fed’s Taylor rule calculations show that the interest rate should be -5 percent. The article was based on a leaked report from the Fed.... [T]he calculations are way off. The Taylor rule specifically says that the interest rate should be one and a half times the inflation rate plus a half times the GDP gap plus one. Whether you average a broad based GDP inflation index over the past year, as I originally suggested, or whether you use core inflation rates, the inflation rate is not less than 1 percent at this time; it is closer to 2 percent, but let’s suppose the Fed takes it as 1 percent. The GDP gap seems to be around minus 4 percent. Now, if we put those numbers into the rule, we get 11⁄2 times 1, plus 1⁄2 times -4, plus 1, which equals .5 percent not -5 percent. The Fed’s calculation reported in the Financial Times has both the sign and the decimal point wrong. In contrast my calculation implies that we may not have as much time before the Fed has to... raise the [federal funds] rate...

At the time it seemed to me that there were two things wrong with Taylor's speech:

  • With a May unemployment rate of 9.4% and an Okun's Law coefficient of 2, an output gap of 4% would imply a NAIRU of 7.4%--and yet every estimated NAIRU I know of is somewhere close to 5-6%, implying an output gap not of 4% but of 7% to 9%.

  • There is a key ambiguity in what a "Taylor Rule" is: is it the original rule with the original parameters set out by John Taylor in 1993, or is it a rule of that form that central banks happen to follow?

When Glenn Rudebusch writes:

A rough guideline for setting the federal funds rate that captures the Fed's behavior over the past two decades is provided by a simple equation that relates the funds rate to the inflation and unemployment rates. This equation is obtained by a statistical regression of the funds rate on the inflation rate and on the gap between the unemployment rate and the Congressional Budget Office's estimate of the natural, or normal, rate of unemployment. The resulting empirical policy rule of thumb—a so-called Taylor rule—recommends lowering the funds rate by 1.3 percentage points if core inflation falls by one percentage point and by almost two percentage points if the unemployment rate rises by one percentage point...

This is the rule:

i = 2.4 + 1.39π + 0.92ygap

that Glenn found gives the best fit to actual Fed policy between 1987 and 2005. He calls this a Taylor Rule--and it is this rule that says that the federal funds rate right now should be -5%.

John Taylor, by contrast, says that the Taylor Rule is the rule:

i = 1 + 1.5π + 0.5ygap

back in 1993 that he found fitted Fed behavior from 1987-1992

So we have two different questions and answers.

  • Glenn Rudebusch asks: "If the Federal Reserve could set the Fed Funds rate negative and were following the same reaction function it follows in the late 1980s, 1990s, and early 2000s, where would it want to set the Federal Funds rate?" And the answer is: "-5%.":

  • John Taylor asks: "If the Federal Reserve were to set the Fed Funds rate according to the particular reaction function that in 1993 I fittd over 1987-1992, where would it want to set the Federal Funds rate?" And the answer is: "0.5%."

Seems to me that John Taylor in the long run wants "Taylor Rule" to mean any statistically-fitted reaction function in which interest rates respond to inflation and the output gap and not to the one rule he fitted over 1987-1992, Abd us seens to me that a rule fitted over 18 years should probably be preferred over one estimated over 6 years in a time span that ended more than 15 years ago. But chacon a son gout...

This is worth revisiting because recently John Taylor has renewed the argument that the Federal Reserve should be massively cutting back on reserves and raising interest rates, if not now then at least soon:

John Hilsenrath: Q&A: John Taylor on His Rule:

Hilsenrath: There’s been a lot of debate about how to use the Taylor rule in this kind of environment. What is your view of what the Taylor rule is saying given where the economy is?

Taylor: There are disagreements, but if you look at average estimates of inflation and the GDP gap you get a fed funds rate of close to zero. That’s not based on a forecast of inflation or an excessive GDP gap. It is not perfect, but that is where we are. Some people are saying it should be minus five.

Hilsenrath: Using your rule.

Taylor: Not really. As far as I’ve been able to tell you have to change the rule to get that. For example, you have to have a higher coefficient for the output gap to get that. And some people use forecasts. They don’t use the current level. They stick forecasts of inflation or the output gap into their models. They might extrapolate out what the forecast is saying. Some of them are forecasting declining inflation. They put that in and that will lower the rate too. In terms of the actual Taylor rule, I don’t see how anyone can get minus 5 from that.

Hilsenrath: One could argue that using a forecast is right because you want policy to be forward looking.

Taylor: No I disagree. In fact the original way the Taylor rule was formulated was specifically to say that you should get the best estimate of where you are right now and then you react to it this way. It already builds in forecasts. After all policy makers have to use current information, whether it’s commodity markets or current GDP. They can’t see the future. They have to project out from current observed things. You put the current observed things into the rule. That’s all you have anyway. And then you see what the best coefficients are to get the fed funds rate. I don’t think it’s correct to say you have to put forecasts in...

It seems to me that the best way to avoid confusion is to redefine "Taylor Rule": henceforth "Taylor Rule" should mean only i=1.5π+0.5ygap, and we need to find some other name for reaction functions fitted to central-bank behavior.

In Which Mark Thoma Defends Ben Bernanke...

Mark Thoma writes:

Is Criticism of the Bernanke Fed Justified?: >[T]he employment problem is big enough to justify a wide spectrum, aggressive approach. Thus, while I do worry about our ability to undo quantitative easing later without causing an inflation problem — something that would be a big blow to employment down the road — and while I’m not convinced quantitative easing will do much to generate new output and jobs right now, we should try everything that has a reasonable chance of working. That means quantitative easing, new spending on infrastructure, tax cuts to encourage investment and hiring, make work programs, whatever it takes to get both the economy and people working again...

This is, I think spot on. I endorse it without any quibbles.

But he says some other things that I annot buy into:

[T]he Fed is largely flying blind right now. It does not have the models it needs to truly understand what policy approach is best in the present environment. I have not been a strong advocate of quantitative easing, i.e. targeting, say, a 3 percent inflation rate, but I cannot claim that my view is informed by a theoretical model of the crisis I believe in, [for] such a model does not yet exist. My view is based on empirical evidence suggesting the relative impotency of monetary policy in recessions, but that evidence comes from regular recessions, not a severe recession like we are having now and the evidence may not apply. Because of this, i.e. because of the considerable uncertainty over what policy is best, I have emphasized a portfolio approach involving both monetary and fiscal policy in the hopes that one or the other will get the job done. My concern lately is that all the talk about Bernanke and the Fed has distracted our attention away from fiscal policy, but perhaps another stimulus package isn’t politically viable.... But as I’ve said before, that doesn’t mean I will give up pushing this point... fiscal, not monetary policy, is the best response right now.

For those who are making strong statements about what policy should be, and beating up Bernanke and the Fed for not following those policies, I ask you to do one thing: Produce a theoretical model that can explain the crisis and justify your policy response. It’s certainly possible to start with, say, a liquidity trap and move on from there to justify quantitative easing, but if the liquidity trap arises in a New Keynesian sluggish price adjustment model, or some other model that does not capture the essence of this particular crisis, should we take it seriously?  There are some models that can justify quantitative easing, but I don’t think those models fully capture the factors that caused this particular crisis. It’s very good to ask these questions, and perhaps quantitative easing is, in fact, the way forward, but until we have better models, we just don’t know for sure....

Mark's second paragraph--well, I think that the only model that is of any use right now is basic Hicks-Hansen, with the short=term safe nominal interest rate on Treasuries on the vertical axis and nominal spending on the horizontal axis. Only I prefer to call it Fisher-Wicksell. Irving Fisher, you see, focuses on one equilibrium condition: supply-and-demand in the money market. Given the price of liquidity--the difference between the return on cash and the return on short-term safe nominal bonds--is the flow of nominal spending at the right level to make businesses and households happy holding all of the economy's cash? Knut Wicksell focuses on another equilibrium condition: the flow-of-funds through financial markets. Given the level of spending, is the configuration of interest rates and asset prices such that the flow of savings into financial markets matches net uses of funds by businesses seeking to expand?

Normal monetary policy by altering the quantity of money changes the equilibrium level of spending conditional on the price of liquidity. In normal circumstances the Wicksellian flow-of-funds is an annoyance: it induces changes in interest rates that shift velocity to partially crowd-out effects of conventional monetary policy.

The problem is, as Mark Thoma says, the liquidity trap. In the liquidity trap more-or-less any level of money balances is consistent with a low level of spending. Policy has to get you out of the liquidity trap--which means affecting the Wicksellian flow-of-funds in such a way that investment exceeds savings even when the short-term safe nominal interest rate is zero. Quantitative easing is a tool to shift the Wicksellian flow-of-funds--to make businesses think that the future course of nominal prices is likely to be such that their wealth is better held in the form of yet more excess capacity than in the form of cash.

But, as Mark says in his first paragraph, there are no guarantees and we should be trying anything. And, as he does not note, the very thing that promises to make quantitative easing effectiving in the present is that it will generate expectations of the future inflation that would pose a policy problem in the future.

This is not rocket science. This is more difficult than rocket science. Ben Bernanke does not have an easy job.

Ten Economic Pieces Worth Reading: December 28, 2009

1) Eric Alterman: Obama's Game-Changing Win:

The obvious answer to the question of how Obama managed it is that he gave away the Democratic store. The bill he passed has no public option, no expansion of Medicare to those under 65, and additional restrictions of abortion funding. It is littered with provisions showering holiday goodies on the insurance industry, the pharmaceutical industry, the citizens of Nebraska. To win, Obama and his advisers appeared to offer up one concession after another, coupled with gratuitous insults to the Democrats’ liberal base--as if they needed some outrage on the left to make the whole thing feel kosher.... Sen. John Barrasso (R-WY) told ABC News, "I think it's going to be a historic mistake for the country if this is what happens to health care," said Barrasso. "Now, as you know, the changes don't actually go into place until four years from now, so people aren't going to be able to see immediately what the problems are. But they are going to notice the cuts in Medicare and, specifically, the increased taxes which go into effect the day that this bill is signed into law."... How can you sell the benefits if all that people have experienced are the costs? You can argue, as American Prospect editor Mark Schmitt does, that it comes down to good government, an aspiration even the most cynical Democrats on occasion find unavoidable. “[T]he bill as it has passed provides the basic components needed to construct a workable system of near-universal health coverage, and all that is outstanding—implementation and legislative improvement—can be accomplished without anyone needing to beg at the feet of a gleefully sneering Joe Lieberman or Ben Nelson.” But why then, are (most) Democrats so happy and (all) Republicans so glum this Christmas? My guess is that Democrats are gambling.... They’ve redefined the playing field of American politics to ground that is inherently favorable to their team. When Americans complain about their health care in the future, are they going to look to the party that wants to do nothing to fix it? No, they’re going to go with the side of political activism and government involvement. The other side, after all, isn’t even in the game. Republicans had their chance and all they could say was “Bah Humbug.”

2) Andrew Samwick: Some Reactions to the Senate Health Care Bill:

[M]y ideal reform... included four elements: 1. Community Rating. 2. Guaranteed Issue. 3. Ex Post Risk Adjustment. 4. An Individual Mandate (with Medicaid for a fee as the backup option) I think the first two elements are well represented in the Senate bill, and, importantly, they apply to all health insurance plans.  I have a personal preference for more latitude for insurers in charging different premiums to those of different ages, particularly in the individual market.  I am just averse to any program that further takes from the young to give to the old, given how much we already do through existing old-age entitlement programs. The ex post risk adjustment and reinsurance in the Senate bill seems to be quite extensive, but I wish they went beyond the individual and small group markets and included all health insurance plans.  On a related note, I am not a fan of the excise tax on so-called "Cadillac" health plans.  I would need to be convinced that the reason why the premiums are so high is unrelated to the health characteristics of the insured group.  What if the premiums are so high because the insured group is old or has large families?  Simply including all plans in the ex post risk adjustment and reinsurance aspects of the bill is the right way to even out premium costs in the face of differences in the insured group.  And if people want to spend more on their own health insurance, through high-quality services or (to my thinking) inefficiently low deductibles and co-pays, why stop them? The individual mandate in the bill, summarized here by The New York Times, seems a bit weak to me.  If you were determined to avoid having coverage, you now do have to pay a penalty in most cases, but those penalties are still well below what others would be paying for coverage.  I think the individual mandate ought to be combined with Medicaid-for-all. pecifically, I'd like to see everyone enrolled in Medicaid via the tax return as the default, unless they can prove that they had alternative coverage....

I don't miss the public option or Medicare-for-a-fee. There is no evidence that the federal government can operate a public option without borrowing large sums of money from future taxpayers. So I see no reason, given what I've outlined above, to expand that model of coverage...

3) Calculated Risk: Chinese Premier: No Change to Exchange Rate Policy:

From the Financial Times: Wen resolute on strength of currency. The Financial Times quotes Chinese Premier Wen Jiabao as saying: ”We will not yield to any pressure of any form forcing us to appreciate. ... The purpose [of these calls for appreciation] is to hold back China’s development." "In recent weeks the demands for China to appreciate its currency in order to help a rebalancing of the global economy have increased to include not only the US and the European Union but also developing nations such as Brazil and Russia..." This is one of the key global imbalances, and it looks like China will still not allow their currency to appreciate.

4) Dan Gross: Timothy Geithner on the financial crisis and the government's response:

GROSS: It's common to hear congresspeople complain that "We did the bailout, but this business in my district can't get a loan." Has there been a failure of communication? GEITHNER: I've got lots of weaknesses and failures of communication, but I always tried to say that the capacity to lend will be much stronger because of these [rescue] efforts. In recessions, loan demand falls, and in recessions that follow big financial booms it's going to fall more than usual. You can't view that as an indication of whether policy is working. Our strategy was to make sure that we didn't have a perverse contraction that would starve economically viable firms of credit. We haven't got it perfect yet. But it's been very successful relative to what happened in past crises, and the best measure of that is the sharp fall in the cost of credit.

GROSS: What about housing? There seems to be universal dissatisfaction with the process for helping people who are facing foreclosure. GEITHNER: We were very careful from the beginning—but the qualifications get lost—to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people's basic sense of financial stability. [We tried to make clear] that what we'd do to prevent foreclosure would be very targeted and limited. We wouldn't try to keep people in homes they couldn't fundamentally afford. While we thought we'd lowered expectations, we're still being hung for letting expectations get ahead of policy....

GROSS: So you don't think the bailouts were too friendly to Wall Street? GEITHNER: The idea that the strategy was unfair and has principally benefited a small number of institutions in New York is a mischaracterization of the design and result of the strategy. I thought people would have understood this after the failure of Lehman Bros. But when you do too little and you leave the system with real fear that everything is going to fall apart, like any financial crisis, it hurts the poorest most. A just and fair strategy, even if it is politically hardest to explain and justify, is to use well-designed but massive force to stabilize the system....

GROSS: Dial back to March: Which of the positive developments that have occurred would you have said would be most surprising? GEITHNER: The [GDP] growth is better and strong er than we expected, than anyone expected, and the dramatic improvement in the strength of the financial system at much lower cost—trillions of dollars of emergency guarantees done, finished, closed down. By adopting a strategy designed to [shore up financial institutions] with private capital, we achieved much better basic results at a much lower cost to the taxpayer. A lot of the insurance we provided came with explicit fees that are going to generate tens of billions of dollars in returns. The stress tests this spring forced people to raise capital and have a more realistic sense of losses going forward. We're going to have $175 billion of the $240 billion in TARP payments back by the end of next year....

GROSS: There's a perception that you regard your portfolio narrowly, as primarily focused on the health of Wall Street, with Main Street a distant second. GEITHNER: My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy. The idea that we did not do much for the broader challenges facing the country is completely unjustified. The Recovery Act itself was not just a sweeping, essential force for growth but included a bunch of targeted investments in education, energy, environment, health care that will have huge long-term benefits...

5) BEST NON-ECONOMICS THING I'VE READ TODAY: Naomi Patton: Passenger 'heard a pop and saw ...smoke and fire' | Detroit Free Press:

An Ohio man who witnessed the attempted destruction of a Northwest Airlines flight to Metro Airport said he's proud of how passengers reacted. Syed Jafry of Holland, Ohio, near Toledo, who had flown from the United Arab Emirates, said after emerging from the airport that people ran out of their seats to tackle the man. Jafry was sitting in the 16th row -- three rows behind the passenger -- when he heard "a pop and saw some smoke and fire." Then, he said, “a young man behind me jumped on him.” Jafry said there was a little bit of commotion for about 10 to 15 minutes. The incident occurred during the plane's descent, he said. He said the way passengers responded made him proud to be an American...

6) SECOND BEST NON-ECONOMICS THING I'VE READ TODAY: David Weigel: Why I Don’t Write About Sarah Palin’s Facebook Posts:

Palin has put the political press in a submissive position, one in which the only information it prints about her comes from prepared statements or from Q&As with friendly interviewers. This isn’t something most politicians get away with.... Palin has leveraged her celebrity... to win a truly unique relationship with the press. She is allowed to shape the public debate without actually engaging in it.... Andy Barr [of Politico] posted most of Palin’s response without any kind of fact-check about her claims.... While Gore submitted to an interview, on camera, Palin lent her name to a Facebook post. I say “lent her name” because there is really no way of telling if Palin wrote the post.... [W]hat Palin’s doing here is incredibly savvy. She knows that anything that goes out under her name will be accepted as fact by conservatives.... I think that the media’s indulgence of Palin’s strategy — which often results in pure stenography of press releases that may or may not have been written by her — is ridiculous, bordering on pathetic.

7) STUPIDEST THING I'VE SEEN TODAY: Matt Welch. Outsourced to Glenn Greenwald: Glenn Greenwald: Reason Editor Matt Welch suggests his own magazine is lying:

"The Congressional Budget Office now reports that this bill will reduce our deficit by $132 billion over the first decade, and by as much as $1.3 trillion in the decade after that" -- Barack Obama, Tuesday. "Obama's Latest Health Care Lie:  There are actually multiple lies and deceptions in [Obama's] paragraph, beginning with the verb 'reports' to describe what the Congressional Budget Office does. The CBO, as Peter Suderman documented in his foundational Reason feature on the organization, does not 'report,' it 'projects,' in highly speculative fashion, what a proposed piece of legislation may cost" -- Matt Welch, Editor-in-Chief, Reason, yesterday, writing next to a photo of Obama with a Pinocchio nose. So according to Welch, Obama "lied" because he used the word "report" to describe what the CBO does and because he suggested the CBO's projections are reliable.  What, then, does that say about numerous Reason editors and writers, who wrote the following back when Reason loved the CBO because it was reporting that Obama's health care proposal and other policies would increase the deficit?  Using Welch's "reasoning," it must mean that Reason's staff is filled with outright liars.... Peter Suderman... Ronald Bailey... Veronique de Rugy...

8) SECOND STUPIDEST THING I'VE SEEN TODAY: Republican Senator Lamar Alexander: Medicaid Is Like A "Bus Line Where The Bus Only Runs About Every 5 Minutes":

9) THIRD STUPIDEST THING I'VE SEEN TODAY: Michael O'Brien of The Hill and Joe Lieberman of the Connecticut for Lieberman Party: Outsourced to:Matthew Yglesias: Joe Lieberman Does Unpopular Stuff, Unpopularity Ensues, The Hill is Confused:

As we all recall, it was just a short time ago that Joe Lieberman held the health reform process hostage to some idiosyncratic demands. Expanding coverage and curbing the deficit were important, said Lieberman, but not so important that he would vote to do those things. Unless, that is, some popular ideas like a public option or Medicare expansion were completely killed. He got his way, and now the health care train is moving. But you can see why these kind of actions would make you less popular. Unless, that is, you [are Michael O'Brien and you] write for The Hill in which case you see them as puzzling: "It is difficult to pinpoint when or why Lieberman has taken a hit: In the past two weeks, he not only crucial in helping remove the healthcare bill’s public option and Medicare buy-in provisions, but also subsequently announced that he would join with Democrats to support the bill after those provisions were removed." These seems like a nice encapsulation of the weird fetishization of “centrist” politics that we have in DC. In some trivial sense it’s politically savvy to be “in the center” in the sense of having most people agree with you. But not every instance of “centrist” dealmaking is going to hit that sweet spot. And the polling on this was pretty clear—people had a lot of doubts about health reform, but definitely liked the public programs idea.

10) HOISTED FROM THE ARCHIVES: Delong (June 16, 2002): Google as Humanity's First Anthology Intelligent System: Cory Doctorow Once Again Makes the Clouded Clear:

How is it that Google manages to do so very well at finding the things we want to find on the internet?... Cory Doctorow has a theory: Google is superior because it provides a way of tapping into the human intelligence already being used--in a decentralized way--to impose structure on the internet: "When I link to some arbitrary document, it's an indication that I think that it's in some way authoritative. When you link to a document I wrote, you're indicating that I'm in some way authoritative. The Internet is already structured in a meaningful way, but that structure is obscured. Google teases out the relationship between the URLs, examining the webs of authority: this person is linked to by 50,000 others, and he links to this other person over here, which indicates that person one is a pretty sharp individual, one who's inspired 50,000 human beings to take time out of their busy schedules to link to him; and person one thinks that person two is on the ball, which suggests that person two knows what she's on about.... The computers at Google are asked to tirelessly count and re-count the number and destination of links on every page that Scooter... can lay its user-agent on. Those links are made by human beings, doing what they do best, link by link, drip by drip, layering a film of order over the Internet."

The ARRA's Boost to the GDP Growth Rate Ends in Two Quarters

Menzie Chinn sends us to:

Peter Hooper (2009), "Drivers and Drags: US Macroeconomic Setting for 2010," Global Economic Perspectives (New York: Deutsche Bank; December 18):

Drivers of growth

Fiscal stimulus is a key near-term driver

Based in part on CBO estimates, we expect the combined positive effects on the level of real GDP of the tax cuts, transfers, and spending increases in the ARRA package to peak around the middle of next year and then to begin to diminish. Translating these level effects into impacts on the annual rate of growth of GDP yields a boost of 1 to 2 percentage points to GDP growth through mid-2010. That growth effect then drops to zero and eventually turns negative during the second half of the year, subtracting about a percentage point from growth during 2011. This is a key reason why we see growth receding somewhat in 2011 relative to 2010. We have not assumed that a major portion of the Bush tax cuts will be allowed to expire at the end of 2010, but that does pose a downside risk to the forecast.

It's boost to the level remains, of course, but it would be really nice if we had another stimulus program in the pipeline that would kick in in six months or so.

Gizmodo on Kindle


Kindle Milestone: Amazon Sold More Kindle Books Than Physical Books On Xmas:

Yes, this is obviously the result of everyone who got a Kindle for Christmas (lots of folks) firing it up and ordering a bunch of eBooks on a day in which most physical-book readers weren't shopping. But it's still important and impressive. The Kindle's economics are still lousy for Amazon: The company loses money on new releases and makes only a modest amount on older titles, thus losing an estimated $1 per Kindle book. That said, Amazon's strategy is clearly to drive "ubiquity," and based on stats like those above, it is succeeding. The more Kindle books Amazon sells, the more leverage it will have over publishers when it tries to force them to cut wholesale prices. If Amazon's Kindle momentum continues, the day publishers have to capitulate will come sooner rather than later.... Amazon's release below.

Amazon Kindle is the Most Gifted Item Ever on Amazon.comOn Christmas Day, for the First Time Ever, Customers Purchased More Kindle Books Than Physical BooksSEATTLE, Dec 26, 2009 (BUSINESS WIRE) —, Inc. (NASDAQ:AMZN) today announced that Kindle has become the most gifted item in Amazon's history. On Christmas Day, for the first time ever, customers purchased more Kindle books than physical books. The Kindle Store now includes over 390,000 books and the largest selection of the most popular books people want to read, including New York TimesBestsellersand New Releases. "We are grateful to our customers for making Kindle the most gifted item ever in our history," said Jeff Bezos, founder and CEO of "On behalf of employees around the world, we wish everyone happy holidays and happy reading!"

Matt Buchanan: Is Your Kindle Spying On You? (Yes.):

If you don't want other people to know what you read, you probably shouldn't own an ereader. And you really shouldn't get a constantly connected Kindle or Nook, at least according to the EFF's eye-opening guide to ebook privacy. The Kindle and Nook are tied to Amazon and Barnes & Noble's respective bookstores, meaning every purchase and every book search is recorded. Amazon's license agreement for the Kindle, for instance, notes that the Kindle's software "will provide Amazon with data about your Device and its interaction with the Service...and information related to the content on your Device and your use of it (such as automatic bookmarking of the last page read and content deletions from the Device)." The Nook is obviously capable of phoning home in a similar manner, but it's unknown whether or not it does, at least for now. With Google Books, it's clear that what you're actually reading is logged, down to the specific page...

Joel Johnson: The Secret Lives of Amazon's Elves:

If Amazon is Santa, 400 folks living in RVs outside the Coffeyville, Kansas fulfillment center this winter are the elves. A few years back Chris Dunphy and Cherie Ve Ard flipped the bird to their desk jobs, packed their belongings in a custom 17-foot solar-powered fiberglass camper, and hit the road to live "at the intersection of Epic and Awesome." A couple months ago, while staying with friends, they noticed that Amazon was luring RVers to Coffeyville, Kansas, the site of the retail giant's original and largest fulfillment center.... Fast forward a couple of weeks, and the self-styled "technomads" were putting down stakes at a state park about 20 miles from the four enormous but dull warehouses that comprise the Coffeyville hub.

Their first day inside, Chris was awed. "Walking inside reminded me of the scene from Indiana Jones when they abandon the Ark in that giant warehouse. It's three stories high. It feels like an industrial library. Shelves going up and up and up." Hundreds of employees scurried, some "orange-badges" or "green-badges" hired by two temporary employment services mixed with the sought-after blue-badges of full-time Amazon employees, guided to their next destination by computers that flashed lights when bins were full or guided workers through the maze with handheld computers. "Pickers are basically playing a human Pac-Man game. They've got a computer scanner that they carry around that tells them where to go. They find their little shelf. One slot might be a book. The next shelf over might be a toaster. Or an iPod. The next slot after that might be a pair of jeans." Amazon didn't always lure in "workcampers" from the RV community...

Punchbowlism: David Cranshaw FTW!!!

He writes:

They didn't look very hard. Took me about half an hour when I was writing an essay on the topic. Last page of this PDF: Martin, William Jr., Address as Chairman of the Federal Reserve to the New York Investment Bankers Association, 19 October 1955:

In the field of monetary and credit policy, precautionary actions to prevent infltionary excesses is bound to have some onerous effects--if it did not it would be ineffective and futile. Those who have the task of making such policy don't expect you to applaud. The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.

Ten Economic Paragraphs Worth Reading: December 27, 2009

1) Jon Gruber: Letters to health-care Santa: Better insurance, please:

If I could add one thing to the Senate bill in conference committee it would be an improvement in the actuarial values for those individuals and families with incomes in the range of 150% to 300% of the poverty line. The Senate bill provides for relatively limited benefits for those low income individuals -- much lower than the House. Given that the Senate bill covers preventive care, and caps out of pocket expenses, this is essentially a "doughnut hole" issue -- the Senate bill provides very little coverage (if any) between the preventive care and the out of pocket maximum. Essentially we are putting fairly low income individuals into high deductible plans. Moving towards the House on these actuarial values (even if we don't get all the way there) would greatly improve the insurance coverage we provide to low income populations.

2) Chris Hayes; The Great Leap:

When you talk to Chinese officials, they seem competent, focused and obsessed with stability (if also, sometimes, arrogant and pedantic). But occasionally you can glimpse the dangers and threats.... Wen Tianping, the spokesman for Chongqing's municipal government, told us. "We work under extreme pressures and we have a lot of difficulties." The foremost difficulty is immigration. In English we'd call it "migration," but our translators unfailingly used the word "immigration," and I began to see that it was the more accurate description of what was happening. Just as developed countries like the United States and members of the European Union face an influx of workers from the developing world, so does China: it's just that China contains both the developed and developing worlds within its borders. The way China regulates this flow is not that different from the way nation states do.... But just as walls and laws have a hard time restricting human traffic from Mexico to the United States when the economic incentives are so extreme, so do the internal regulations of the Chinese state. "They can be migrant workers forever," said Paul Mak, a Chinese-American businessman in Shanghai who has worked for the American company Mary Kay in Shanghai for twelve years. "A migrant worker cannot become a resident of Shanghai. Now if you have a college degree you can come but not without education. You have a class of people in this limbo." This marginal population freaks out the Chinese authorities because they desperately wish to avoid the experience of so many other developing countries, from Brazil to India, which have seen the growth of massive, ungovernable miserable slums in their largest cities...

3) Paul Krugman: Historical Notes:

A few things: 1. In this post, I was not, despite what some readers apparently thought, endorsing the Roman Empire. I was endorsing Monty Python. 2. Some commenters took umbrage at my assertion in this post that Robert E. Lee fought in a terrible cause. The Civil War, they say, wasn’t about slavery. Well, let me pull Abraham Lincoln out from behind this sign to explain it to you. Yes it was. 3. Some commenters ask for proof that I warned early about the housing bubble. As it happens, I ran across this interesting piece from 2005, denouncing the lying liberal media — mainly me — for asserting that there was a bubble in housing.

4) The Mess That Greenspan Made: The globalization of "extend and pretend":

It seems the entire world is just biding its time, waiting and hoping that asset values return to the lofty heights achieved a few years back and that people resume their mid-decade spendthrift ways. If you wait long enough, it just might work, though that theory will surely be put to a stern test in Dubai. Based on this Reuters story it looks like that's the plan.

5) Ryan Avent: A plan, a canal:

ARE canals the most underbuilt piece of infrastructure there is? "The effects of distance on trade and of trade on income have puzzled economists for centuries. This column presents new evidence from a natural experiment – the 1967-1975 closure of the Suez Canal. Results suggest that a 10% decrease in ocean distance results in a 5% increase in trade. Also, it estimates that every dollar of increased trade raises income by about 25 cents." That's from a new Vox piece by James Feyrer. He uses the Suez Canal experiment to demonstrate the link between trade and income, which he then uses to support reductions in trade barriers. I'm all for that, but what about the canals? Presumably, we could use the numbers Mr Feyrer presents above to determine which potential canals are likely to generate the highest income returns, and those expected returns could be compared to the expected cost of construction. Is it really the case that using these measures, all the conceivably positive net return canals have been built already?

6) Ralph Atkins: Orphanides says lessons were learnt:

As central bank governor of Cyprus, Athanasios Orphanides represents one of the eurozone's smallest economies. But his voice has carried extra weight during the past year because of his expertise on past economic crises. "I was at the Federal Reserve Board in the late 1990s and became interested in following developments in Japan at that time," he says. "It was the first time in the developed world that we had experienced a deflation, and policy rates being very close to zero, since the 1930s." As such, he was one of the forces earlier this year encouraging the European Central Bank to cut its main interest rate faster and further than before and to flood the banking system with liquidity, driving market interest rates even lower.... Mr Orphanides said that while it was too early to judge fully the effectiveness of policy responses to the current crisis: "I think we can already say that we have avoided an experience as terrible, as catastrophic, as in the 1930s."... He admitted being haunted by the words of John Maynard Keynes. "In 1930, even before the Great Depression had taken hold, he was concerned that the mentality and ideas of policymakers could actually hinder the appropriate action needed to avoid the worst. During the 1930s, his concerns proved well founded. But we have learnt the lessons of history." However, the low level of eurozone inflation is a lingering concern for Mr Orphanides. The annual figure turned negative this year, before bouncing back - just - into positive territory in November, when it was 0.5 per cent. Crucially, he argues, expectations by consumers, economists and financial markets about inflation rates in the "medium to long term" remain firmly in line with the ECB's target of an annual rate "below but close" to 2 per cent. Mr Orphanides points out that underlying or "core" inflation measures are still on a downward trend. "Over the past year or so we have observed a decline in core inflation away from our definition of price stability, and that is something which personally I find to be of concern"...

7) Robert Skidelsky: Why market sentiment has no credibility:

This only confirms what common sense and elementary Keynesian theory would lead one to expect. In a slump there is no natural tendency for the rate of interest to fall, because people’s desire to hoard money is increasing. So printing enough money to “satisfy the hoarder” is the only way of getting interest rates or the exchange-rate down. But, of course, there is always “market sentiment” to fall back on. The government must cut its spending now, because this is what “the markets” expect. These are the same markets that so wounded the banking system that it had to be rescued by the taxpayer. They are now demanding fiscal consolidation as the price of their continued support for governments whose fiscal troubles they have largely caused. Why on earth should we take this market sentiment any more seriously than that which led to the great debauch of 2007? Markets, it is sometimes said, may not know what they are talking about, but governments have no choice but to do what they tell them. This is unacceptable. The duty of governments is to govern in the best interests of the people who elected them not of the City of London. If that means calling the bankers’ bluff, so be it.

8) BEST NON-ECONOMICS THING I'VE READ TODAY: Matthew Yglesias: Someone Tell Lindsay Graham That White People Get Medicaid:

When he did it yesterday I thought maybe he was just free-associating or something, but Media Matters observes that yesterday in formal remarks on the Senate floor Lindsay Graham again argued that South Carolina deserves a fair share of Medicaid money specifically by citing the fact that black people live there. Graham seems to have some combination of the belief that all black people are poor, only black people are eligible for Medicaid, all poor people are black, or something. The reality is that South Carolina is, in fact, a state with a lot of poor people—its 15.1 percent poverty rate in 2007 put it above the national average, and the number will have only gone up since the recession hit. But of course poor people can be white, black, Asian, whatever. And Matt Finkelstein observes that there are more white Medicaid recipients in South Carolina than black ones.

9) STUPIDEST THING I'VE READ TODAY: John Micklethwait and Adrian Wooldridge (2004), The Right Nation, p. 380:

Who would have imagined that the 2004 presidential election would represent something of a last chance for the Democrats?... [C]onservatism's progress goes much deeper than the gains that the Republican Party has made... or the steady decline in Democratic registration. The Right clearly has ideological momentum on its side.... [T]he grandson of Prescott Bush has cut taxes, catered to the Religious Right, and generally governed like a Sunbelt business tycoon....Bush has reduced the Democratic Party into merely the anti-Bush party: the party of the moon rather than the sun.... [H]e seems set to conitnue with a onservative agenda, redesigning Social Security, solidifying his tax cuts, pouring more money into America's military might...

10) HOISTED FROM THE ARCHIVES: DeLong: My Earliest Forecast of the Late-1990s Boom: May 18, 1994:

UNITED STATES TREASURY, May 18, 1994, MEMORANDUM FOR ASSISTANT SECRETARY FOR ECONOMIC POLICY ALICIA MUNNELL. From Brad DeLong, Deputy Assistant Secretary, Economic Policy. Subject: EQUIPMENT INVESTMENT BOOM. Isn’t this remarkable? I should figure out how much of it simply the falling price of computers coupled with the 1987 base year. But if we do not see a substantial acceleration of U.S. potential output growth over the next few years, Larry Summers and I will have a lot of explaining to do...

Well, Well, Well!! The Associated Press Has Eaten Its Wheaties This Morning!

It says that all Republican senators are hypocrites who if they wish to avoid eternal damnation should resign their posts, give all they have to the poor, and take up a life of anonymous service to others:

Health care: Republican senators attacking the cost of a Democratic health care bill showed far different concerns six years ago, when they approved a major Medicare expansion that has added tens of billions of dollars to federal deficits.... [W]hen Republicans controlled the House, Senate and White House in 2003, they overcame Democratic opposition to add a deficit-financed prescription drug benefit to Medicare. The program will cost a half-trillion dollars over 10 years, or more by some estimates.... All current GOP senators, including the 24 who voted for the 2003 Medicare expansion, oppose the health care bill.... Six years ago, "it was standard practice not to pay for things," said Sen. Orrin Hatch, R-Utah. "We were concerned about it, because it certainly added to the deficit, no question." His 2003 vote has been vindicated, Hatch said, because the prescription drug benefit "has done a lot of good."

Sen. George Voinovich, R-Ohio, said those who see hypocrisy "can legitimately raise that issue." But he defended his positions in 2003 and now, saying the economy is in worse shape and Americans are more anxious. Sen. Olympia Snowe, R-Maine, said simply: "Dredging up history is not the way to move forward." She noted that she fought unsuccessfully to offset some of President George W. Bush's deep tax cuts at the time. But for now, she said, "it's a question of what's in this package," which the Senate passed Thursday in a party-line vote. The Senate bill still must be reconciled with a House version. The political situation is different now, Snowe said, because "we're in a tough climate and people are angry and frustrated."

Some conservatives have no patience for such explanations. "As far as I am concerned, any Republican who voted for the Medicare drug benefit has no right to criticize anything the Democrats have done in terms of adding to the national debt," said Bruce Bartlett, an official in the administrations of Ronald Reagan and George H.W. Bush. He made his comments in a Forbes article titled "Republican Deficit Hypocrisy." Bartlett said the 2003 Medicare expansion was "a pure giveaway" that cost more than this year's Senate or House health bills will cost. More important, he said, "the drug benefit had no dedicated financing, no offsets and no revenue-raisers. One hundred% of the cost simply added to the federal budget deficit."...

Other lawmakers who voted for the 2003 Medicare expansion include the Senate's top three Republican leaders, all sharp critics of the Obama-backed health care plans: Mitch McConnell of Kentucky, Jon Kyl of Arizona and Lamar Alexander of Tennessee. Eleven Democratic senators voted with them back then....

Bill Clinton's administration was largely constrained by a pay-as-you-go law, requiring most tax cuts or program expansions to be offset elsewhere with tax increases and/or spending cuts. Clinton ended his presidency with a budget surplus. But it soon was wiped out by a sagging economy, the Iraq war, GOP tax cuts and the lapsing of the pay-as-you-go restrictions....

Judy Feder, an analyst with the Democratic-leaning Center for American Progress, said these Republicans had their chance and blew it. In the second Bush administration, she said, "there was a total elimination of any kind of pay-for responsibility." Those responsible should now show some humility, she said.

Matthew Yglesias Asks a Question

He writes:

Matthew Yglesias: [T]he perception is... widespread that constant filibustering is a longstanding tradition. I used to think that was the case.... But surely lots of people remember the Carter and Reagan administrations? As UCLA political scientist Barbara Sinclair tells Ezra Klein....

[I]t really has a big impact from the first Clinton Congress on. If one can say there’s a break point, that’s where filibusters become a regularly used partisan tool.... [N]ow it’s much more a tool of the minority party. And the minority party is organized and relatively large, even when it’s small by our standards. Forty Republicans is as small as it’s been in a long, long time. That still means if you really get the minority to hang together, everyone on the other side becomes key.

Was anyone really sitting around in 1990 or so and saying to themselves “the big problem with the American government is that if you have majority support for something in the House and the Senate and the relevant Congressional committees and the President supports it and it passes muster with the Supreme Court, then that thing just might get done?” If they were, shifting to a 60-vote threshold for Senate action solves the problem. But what could the problem have possibly been?

The "perceived problem" was that Bill Clinton and gotten elected with 43% of the vote. The Republican response was: this guy is an illegitimate president. Let's block everything he does because he shouldn't be sitting in that chair. And in 1994 they concluded that it had worked--they won their congressional majorities.

So now they are trying to do it again.

Ezra Klein's Filibuster Links

Ezra writes:

After health care, we need Senate reform: On Dec. 8, 1964, Mike Manatos wrote a letter that explains what's wrong with the Senate in 2009. This wasn't, of course, the subject of his letter.... Manatos counted a solid majority in favor of the president's effort. "If all our supporters are present and voting we would win by a vote of 55 to 45," he predicted. That letter would never be written now. In today's Senate, 55 votes isn't enough to "win," or anything close to it; it's enough to get you five votes away from the 60 votes you need to shut down a filibuster. Only then, in most cases, can a law be passed. The modern Senate is a radically different institution than the Senate of the 1960s, and the dysfunction exhibited in its debate over health care -- the absence of bipartisanship, the use of the filibuster to obstruct progress rather than protect debate, the ability of any given senator to hold the bill hostage to his or her demands -- has convinced many, both inside and outside the chamber, that it needs to be fixed....

[T]he Senate passed a $900 billion health-care bill Thursday morning. But consider the context.... This was a test of whether a party could govern when everything was stacked in its favor. The answer seems to be, well, not really. The Democrats ended up focusing on health-care reform's low-hanging fruit.... Democrats still could not find a single Republican vote, which meant they had to give Nebraska a coupon entitling it to a free Medicaid expansion and hand Joe Lieberman a voucher that's good for anything he wants. If the Senate cannot govern effectively even when history conspires to free its hand, then it cannot govern.

To understand why the modern legislative process is so bad... you need to understand one basic fact: The government can function if the minority party has either the incentive to make the majority fail or the power to make the majority fail. It cannot function if it has both. In decades past, the parties did not feel they had both.... But in the 1990s, Newt Gingrich, then the minority whip of the House, and Bob Dole, then the minority leader of the Senate, realized they did have both. A strategy of relentless obstruction brought then-president Bill Clinton to his knees, as the minority party discovered it had the tools to make the majority party fail. Unfortunately, both parties have followed Gingrich's playbook ever since... 8 percent of major bills faced a filibuster in the 1960s. This decade, that jumped to 70 percent. The problem with the minority party continually making the majority party fail, of course, is that it means neither party can ever successfully govern the country...

And see

Well, This Is Certainly a Surprise!

So on Christmas Day I open a box that I think is some large and unknown present from a relative--and it turns out to be 25 real physical copies of Stephen S. Cohen and J. Bradford DeLong (2010), The End of Influence: What Happens When Other Countries Have the Money (New York: Basic Books: 0465018769).

It is a short attempt to get a fix on three interrelated processes:

  • The increasing public and national indebtedness of the United States.

  • The extraordinary growth elsewhere in the world of asset pools that are under the control not of return-seeking market actors but of national governments.

  • The financial crisis-induced collapse of confidence in the neoliberal order--that is, in the presumption that in general one should try to shrink the state because government failures are more pernicious than market failures.

and what these three ongoing processes mean.

The excerpt I like the most is:

When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though, hopefully, in quiet, nonconfrontational ways. An you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time...

The fact that the last "Christmas present" I opened was the book presents me with a problem. Steve and I agreed that we would try to save the publisher some money by putting the notes up on the web. And then, of course, we did not finalize the notes when we submitted the manuscript. And I, at least, thought we had two more weeks to put the notes up--although Steve, to his credit, has been pestering me for quite a while.

So now I have a bunch of work to do to make, Notes, etc., to "The End of Influence," fit for human eyes...

Ten Economic Paragraphs Worth Reading: December 26, 2009

1) Paul Krugman: A strange complacency:

[T]he [Washington] Post is being too kind to Bernanke here, by implicitly asserting that past warnings about California housing bubbles had proved wrong. Um, no.... [T]here was indeed a huge CA bubble in the 80s, which burst painfully. Nor was this an obscure bit of knowledge: in fact, people like Calculated Risk and yours truly were quite explicitly using the great California bubble of the 80s as a model for what was going to happen nationally. This whole episode makes me think considerably worse of my former department head.

2) Baruch: Phase Transitions and the Googlephone:

Until now, 4 or 5 names shared out the vast majority of goodies in mobile telephones. Maximum market shares seemed to be limited at 30%-40%; losing or gaining 10 points of share took years. Over long periods those gains or losses would, unless something had gone very wrong with one of the players, tend to mean revert. It seemed a fast, dynamic sector at the time, but really, it wasn’t. Now, software or application markets show us entirely different characteristics, those of Extremistan, where rapidly evolving monopolies and duopolies are much more common.... Apple’s achievement has been to shift the focus of the high-end handset market from voice to apps and browsing. Any old hardware would do for voice and SMS. So vendors added froufrou to differentiate themselves and keep ASPs up.... That’s finished, though the Sony-Ericssons of this world pretend it hasn’t; now it is how nicely your phone can email, surf the web, and most of all, how rich and easy is the ecosystem of applications, that determines whether people buy your product or not. That’s software; precisely the type of market where monopolies or duopolies emerge. For hardware-focused analysts, it’s hard to accept that their reliably mediocre handset market has been transferred to Extremistan.... Many of his peers are still stuck on denial. When pushed, they say things crossly to him like, “well, if you really think no-one’s going to properly compete with Apple, you shouldn’t be owning anything in the space.”  Ahem.

3) Nate Silver: Insurance Stocks Rise on News of Health Care Deal; What's It Mean?:

[W]ith the news over the weekend that Ben Nelson would support the package, a more reasonable estimation is that it went from having roughly a 50 percent chance of passing to about a 90 percent chance -- an improvement of 40 percent.... This would mean that the total value added from passage of the bill is $16.04 billion. That's a lot of money: $16 billion. But relative to the total outlay from the bill, it is fairly small. Over the course of the next ten years, the Senate's bill directs about $447 billion in public subsidies to people for the purchase of private health insurance.... [T]he Senate's bill will add about 17 million nonelderly members to the private insurance companies' enrollment... a 9.6 percent increase in their customer base.... [T]he total gain to these companies from passage of the bill (vis-à-vis the status quo) is 8.5 percent. You should see that these two numbers -- 9.6 percent and 8.5 percent -- are broadly comparable. What this probably implies is that the increase in share prices today reflects an expectation of higher volumes -- but probably not higher profit margins, which are likely to remain fairly low in the industry...

4) Jeff Frankel on Greg Mankiw:

I don’t agree... [that] “the policy environment seems adverse to business.”... Greg cites trade policy, fiscal imbalances, and energy costs.... Trade. I wasn’t happy in September when the White House put tariffs on imports of Chinese tires. But President Obama... has yet to succumb to any protectionist measures as big or as blatantly in violation of international trade agreements as... Reagan's... or George W. Bush’s.... Budget.... It is known to those who look carefully at the budget numbers that Obama’s recent actions are a distant 5th on the list of contributors [to the deficit].... #2 are the long term effects of Bush’s tax cuts.  A close #3 are the effects of Bush’s spending increases (including the wars in Iraq and Iran and the expansion of Medicare benefits, among other things).... Energy costs. Greg Mankiw in fact believes that a system of energy taxes or cap-and-trad.... I am skeptical that investment is currently depressed by perceptions of an anti-business climate. But if the average businessperson does in fact have the perception that recent Democratic administrations have been worse for business than Republican administrations, I suggest setting aside campaign rhetoric and looking at actual history...

5) Baruch: Phase Transitions and the Googlephone II:

The fact that it IS happening is the only reasonable explanation I can come up with for the otherwise obviously insane step Google just took, which was to leak to the WSJ their upcoming “Googlephone“, a Google-branded Android phone made by HTC.... Google is the epitome of a company used to Extremistan-like environments; compared to how things worked in the old days in handsets, Android adoption has been excellent. But in Extremistan it’s not enough. Android app catalogues are neglected, and the best ones come from Google. It’s forced to write the apps itself because independent developers have limited resources; having to tailor apps for the different hardware specifications of all the different Android phones is too annoying, the ecosystem too fragmented. Much better to write for iPhone first.... Google know they need to do something, and the endgame may be rapidly approaching. Last week PALM reported, and the stock tanked; they basically admitted they were embarking on a death-or-glory spending spree, which if successful might see them make a bit of money for their investors, but probably not much. The downside of course is zero; Baruch has a hard time getting his PALM model to produce a positive result...

6) Alex Tabarrok: Pricing Copenhagen:

"U.S. President Barack Obama said the climate-change accord he reached with China and most of the 193 attending nations on Dec. 18 was an “unprecedented” first step to slow global warming. Environmental groups such as Friends of the Earth called it a failure... " And the market says? "European and United Nations carbon prices fell the most since February after the Copenhagen climate accord didn’t set targets that would boost demand for permits. European Union carbon-dioxide allowances for delivery in December 2010 declined 8.3 percent to close at 12.45 euros ($17.82) on the European Climate Exchange in London. Today was the first day of trading since the summit concluded Dec. 19. The agreed targets in the Copenhagen deal amount to a 'bunch of negotiation ranges' that investors had already factored in, Trevor Sikorski, an emissions analysts for Barclays Capital, said in a phone interview after returning to London from the Danish capital. 'It seems to be below even our modest expectations.'

7) Justin Fox: News about the Curious Capitalist:

This just went out on Businesswire. For those who don't believe in clicking through, it says I've got a new job, editorial director of the Harvard Business Review Group. I start Jan. 25, and I'll still be at TIME and writing this blog through Jan. 22. (I'm pretty sure the blogging over the next month will be a lot better than it has been for the past month, because I now no longer have a big secret I can't write about.) I'll keep writing occasional columns for TIME even after that, but my Internet home will be up north at My TIME colleagues are likely to hatch plans soon to replace or expand upon this here blog—I'll keep you posted if they tell me anything.

8) BEST NON-ECONOMICS THING I'VE READ TODAY: Will Wilkinson: Two Thoughts on Searle on Free Will at Google:

[T]the optical illusions to which we’re subject aren’t like extra little easter eggs evolution had to program in; they’re side effects of a certain kind of perceptual system that it was too costly to get rid of. And indeed, the reason you’d end up with this kind of illusion seems much more obvious than in he perceptual case. As Searle himself notes, the subjective sense of freedom is a “gappy feeling” between our premises and our decisions. But of course if you’ve got an information processing system that’s conscious, the part where it’s working to the conclusion will seem “gappy” or “open” because it hasn’t gotten there yet. To feel like the conclusion or the output of your mental process was compelled or inevitable, you’d have to be conscious of its result before the termination of the process that makes you conscious of its result. So there’s just no reason to suppose that the “gappy feeling” is something extraneous evolution had to pay some extra price to inject...

9) STUPIDEST THING I'VE READ TODAY: Outsourced to Invictus of The Big Picture: Luskin: Buy Stocks, Buy Citi (11/07) Sell Stocks (3/09):

I’ve been reviewing some older columns that stood out to me as giving especially bad advice during  the period near the market peak. One in particular stands out as especially bad — poorly reasoned, not well thought out, full of weak analysis. It was amongst the worst of the money losing financial advice Smart Money has ever run.... Don Luskin, a top Ideological Hack Hall of Famer, told us the 11 Reasons to Buy Now — this was in November 2007, a month AFTER the top, that Abu Dhabi’s investment in Citi was proof that Citigroup and the market were both cheap: “ADIA’s investment in Citi means that stocks have gotten very, very cheap. Mega-investors like that only step in with $7 billion when they are getting a deep bargain.” Or not.... It’s not just his pompous, arrogant, know-it-all attitude that is annoying about Mr. Luskin. Rather, its that all of his commentary seems to be that of a broken clock. He has been bullish as long as he has been on TV. The only time I have seen him bearish was yhis one exception: On March 6, 2009, he finally capitulated his bullish stance. Of course, this was RIGHT AT GENERATIONAL MARKET LOWS. Luskin wrote in Even Worse Than the Great Depression that: “We can’t blame President Obama for the mess he inherited. But we can definitely blame him for making it worse. Stocks are off 28.4% since his election, 15.2% since his inauguration, and 17.2% since his so-called “stimulus” bill was enacted. To say the very least, whatever he’s doing, it ain’t working.” And there is the partisan hackery he is so famous for. Since that politically inspired post, the S&P has rallied 63%. No word from DL as to what this rally means...

10) FROM THE ARCHIVES (not mine: Fafblog's): No to the Outsourcing of Torture!:

Fafblog! the whole worlds only source for Fafblog.: Giblets is outraged! Congressional Republicans are trying to sneak provisions into the 9/11 Recommendations Implementation Act of 2004 that would legalize the foul practice of "extraordinary rendition" - the transfer of suspected terrorists to other countries to be tortured for information. To pass the bill in this form would be inconceivable - for how can any red-blooded pro-torture Congressman justify outsourcing our nation's torture work when American torturers are losing their jobs every day? Giblets is a proud supporter of torture. After all, an increasingly pervasive federal government isn't going to be torturing people like you or Giblets - it will be torturing nothing but Very Bad People, or other people who have been foolish enough to share the same ethnic features or religious beliefs as Very Bad People. As a good honest citizen you have nothing to worry about! Americans should be proud that the state is willing to electrocute our genitals and pull out our nails in order to protect us. But it looks like our lawmakers aren't very proud of this rich new American tradition, approving it in the closet while pushing the labor force out to cheap foreign torturers in Pakistan! If we want to legalize torture, Giblets demands we go all the way and give torture some public, homegrown respect! Giblets wants to see the brave men and women of the 101st US Torture Brigades, Dick Cheney beating prisoners with rods on CSPAN, George Bush standing in front of a pile of naked and bleeding Iraqis under a "MISSION ACCOMPLISHED" banner!... Torture is as American as baseball, apple pie, preventive war, the equating of dissent with treason, and the principle of a commander-in-chief who stands above the law. So stand proud, Americans...

Winston Churchill Liveblogs World War II: December 25, 1939

December 25, 1939:

The end of the year 1939 left the war still in its sinister trance. An coxasionai cannon-shot or reconnoitring patrol alone broke the silence of the Western Front. The armies gaped at each other from behind their rising fortifications across an undisputed "No-man's-land".

There is a certain similarity [I wrote to Pound on Christmas Day] between the position now and at the end of 1914. The transltion from peace to war has been accomplished. The outer seas, for the moment at any rate, are dear from enemy surface craft. The lines in France are static. But in addition on the sea we have repelled the U-boat attack... and we can see our way through the magnetic mine novelty. Moreover, in Prance the tmes ttm tbe frontiers instead of six or seven of the French provinces and Belgium being in the enemy's hands. Thus I feel we may compare the position now very favourably with that of 1914. And also I have the feeling (which may be corrected at any moment) that the Kaiser's Germany was a much tougher than than Nazi Germany.

This is the best I can do for a Christmas card in these hard times...

links for 2009-12-25

Senate Passes Health Care Reform

Ezra Klein:

Health Care Refom: Passing legislation, it turns out, is a long and ugly process. God, is it ugly. The compromises, both with powerful special interests and decisive senators. The trimming of ambitions and the budget gimmicks and the worship of Congressional Budget Office scores. By the end, you're passing a compromise of a deal of a negotiation of a concession. But bad a system as it might be, it's the only one we've got. At least for now. This is what victory looks like.... [T]his bill will do most of the things supporters hoped it would do: cover about 95 percent of all legal residents, regulate insurers, set up competitive exchanges, pretty much end risk selection, institute a universal structure that we can improve and enhance as the years go on, and vastly reduce both medical and financial risk for families. It's been a long time since the legislative system did anything this big, and people have forgotten how awful the victories are. But these are the victories, and if they feel bad to many, they will do good for more. As that comes clearer and clearer, this bill will come to feel more and more like the historic advance it actually is.

Jonathan Cohn:

BREAKING: Senate Passes Reform: The party-line outcome was not surprising. But it was clarifying. McConnell used his time to restate some of his party's now-familiar complaints about the measure--and to vow more opposition. "This fight is long from over," McConnell vowed. "My colleagues will work to stop this bill from becoming law."... [I]t is not the left that has stood (and still stands) in the way of creating a decent, protective health care system for nearly a hundred years. It’s the right.... For nearly a hundred years, the political system has been debating whether access to basic medical care should be a right all citizens enjoy. When reform passes, the political system will finally render its verdict: "yes."

Jonathan Chait:

And The Rest Is Just Noise | The New Republic: The sum total effect of this legislation is fairly simple. It would redirect a large chunk of the money sloshing around the health care system away from ineffective treatments and toward providing care for the uninsured. On top of that, it would prod the system, in dozens of ways large and small, to adopt cutting edge methods. It is not the kind of plan liberals would create if they could design it from scratch. Rather, it is a centrist compromise of the best variety, combining the ideas of the now nearly-extinct moderate wing of the Republican Party with the smartest bipartisan technocratic reforms. 

What, then, is not to like? Conservatives have attacked reform with a potent combination of populist attacks against cost controls, aimed particularly at terrified elderly voters, along with more intellectually-respectable attacks protesting the lack of cost control, aimed at winning elite opinion.... The Republican charge of fiscal profligacy rests upon a handful of endlessly repeated data points. The first, and most commonly cited, is that health reform does not truly pay for itself because it is predicated on an unrealistic promise to slash physician pay by 20 percent. The accusation stems from a simple misunderstanding. In 1997, Congress enacted a series of cuts in Medicare, including a reduction in payments to doctors. The cut was poorly designed, and wound up slashing pay by far more than Congress intended. So, though the cut remains on the books, every year Congress provides for a one-year reprieve, in a ritual known to Hill insiders as the “doc fix.”... Inexplicably, this fact has become exhibit A in the case against health care reform. (“There is nothing in the bill that will take care of the doctor fixes, $247 billion over the next 10 years,” charges Senator Lindsey Graham, citing this fact as evidence of the bill’s “Enron-accounting.”) This would be a persuasive argument if the health bill were introducing the physician payment cut as a way to offset the cost of health care reform. But it isn’t. The physician payment blunder is a hole in the budget that will be there regardless of whether or not health care reform passes....

The persistence of these thoroughly debunked pseudo-factoids reveals a couple things about the state of the GOP. The first is that the party desperately lacks for genuine health care expertise. Being a member of a party long committed to defending American health care naturally makes one disinclined to study the horrifying reality of the system; likewise, a thorough understanding of the health care system makes one disinclined to support the party that has spent decades blocking its reform. Second, conservative belief in the failure of health care reform is undergirded by deeper ideological values that are not amenable to data. Consider this typical salvo against reform in National Review, by Jeffrey Anderson, a Bush-era HHS speechwriter: “The motivation is simple and can be reduced to one word: power. And it doubtless has the American Founders, who dedicated their lives to securing liberty, spinning in their graves.” If we want to understand why a bill that embodies the best of moderate Republican ideas has attracted zero support from the Republican Party, it is because moderation has disappeared from the party. The takeover of ideological conservatives, implacably opposed to the expansion of government, has rendered impossible any bipartisan solution....

Insurers may be getting a lot of new customers, but that comes with the trade-off of a lot of unwanted regulation. There is more at work in the progressive revolt than an irrational attachment to the public plan or an executive distrust of private industry. The bizarre convergence of left-wing and right-wing paranoia echoes the forces that brought down the moderate consensus of the postwar era. The GOP retreat into Palinism represents one half of this collapse. The left’s revolt against health care reform represents the other. What has re-emerged in recent weeks is the spirit of the New Left--distrustful of evolutionary change, compromise between business and labor, and the practical tools of progressive reform. It is the spirit that rejected Hubert Humphrey in 1968 and Al Gore in 2000. The New Left rejection of “corporate liberalism” came at what we now regard as the historical apex of American liberalism. At the moment of another historical triumph, liberals are retreating from politics into languor, rage, and other incarnations of anti-politics. One day they may look back upon this time with longing.

The True Spirit of Christmas Is...

Merry Christmas, everyone.

Let me turn the microphone for a minute over to Mobutu Sese Seko:

Et tu, Mr. Destructo?: Our God Is an Awesome God and a Crappy Shot: [A] caller and teabagging enthusiast asks Senator John Barrasso (R-WY) why Senator James Inhofe (R-OK) wasn't able to attend the health care vote.... [T]his guy starts openly weeping on the phone because he thinks that he or Barrasso have killed Inhofe. Why? Because Senator Tom Coburn (R-OK) got on the floor of the senate and urged all Republicans to pray that certain people would be incapable of attending the health care vote, that God would somehow prevent them. The implication in Coburn's prayer was pretty clear, as the very ill and 92-year-old Robert Byrd (D-WV) was expected to cast the filibuster-proof 60th vote for the health care bill. Thus, Coburn's exhortation was little more than the Christian dog-whistle equivalent of asking God to kill Byrd.... The whole clip is barely a minute long, but it's absolutely captivating television. This man is openly weeping, not because he asked a merciful and loving God to murder another person for a political victory, but apparently because he thinks that Senator Barrasso failed to pray hard enough, or that he himself failed to pray hard enough, or perhaps that his omnipotent and all-knowing God somehow got the wrong signal at the end of the God Switchboard — like he shook his God Cell Phone as it garbled, stared at it, furrowed his brow, then said, "Well, I'm God and all, but how the hell am I going to figure out what he just said? I know—f--- it—I'm gonna kill Inhofe."

God is a vicious, impatient and intercessory God. The New Testament never happened. God waits by the blower eternal, ready for the impious to be smitten, brought low and then completely f---ed up.... God has watched every John Mellencamp "This Is Our Country" Chevy Silverado ad and is even now making an executive's finger hover over an office telephone button, ready to commission more. God thinks Mexican food sucks everywhere outside of Texas, including Mexico.

And the best part of all — despite the fact that Byrd is alive, was wheeled into the senate at 1:00 a.m. with a runny nose, rheumy eyes and a handkerchief before casting the 60th "aye" vote and literally fist-pumping while he did it — is the righteous and emotional investment the man has in an ethos he clearly knows nothing about. He cares enough about America and about Christianity to weep openly about them and to pray intensely without ever connecting a health care bill with lessons that Christ taught about healing the sick, a rich man's limitations, the meek's inheritance. or the goodness of surrendering material wealth for the enrichment of all. He's managed to internalize his belief strongly enough to sob about it on national television while giving the whole mercy/tolerance/cheek-turning thing a complete pass.

In the season of peace, honoring the birth of a God-made-man who raised his hand to no one and instead chose to die to save us all, this caller chokes up with impotent despair that his plans to kill another fucking human being went awry...

links for 2009-12-24

Open Thread

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Alan Greenspan's Age of Turbulence merely says that William McChesney Martin was "alleged" to have said that the Fed's role was to order the punchbowl removed just when the party was really warming up. Makes me think that Greenspan and his people looked for a documented transcript quote--and did not find one.

Jo Walton Provides Some Very Good Advice

She writes:

What books do you buy to give to other people?: In my post on Desolation Road, Argent mentioned that it was a book they bought whenever they saw it, to give to other people. I do this too, which is one of the reasons I’m so glad to see it back in print, and in such a nice edition. There’s a specific set of books I do this with. They’re good, they’re out of print and hard to find, they’re the kind of thing I think my friends will appreciate, and I stumble upon them in secondhand bookshops. It’s not a case of “Oh look, X, I think Y will like that,” though I certainly do that, too. And it’s not a case of searching for copies online—it’s picking them up when I see them in the certain knowledge that somebody will want them. Ian McDonald scores high on this, there are three of his books Emmet and I always grab and give away—Desolation Road, King of Morning, Queen of Day, and Sacrifice of Fools.

The number one book in this category for us though has to be Walter Jon Williams Aristoi, a strange and wonderful book that pushes the edges of science fiction. It’s about nanotech and better living through splitting your personality. It’s a thoughtful interesting book with a moustache-twirling villain. It came out in 1992 and I was already a big Williams fan and rushed to buy it, and it thereafter sank without trace. I think between us Emmet and I must have given away dozens of copies we’ve found secondhand...

Non-Conforming Thirty-Year Fixed-Rate Mortgages?

Richard Green says that they are believed to be of the same status as R.O.U.S.:

Richard's Real Estate and Urban Economics Blog: The real problem with John Taylor's paper...: that it asks the wrong question. The issue is not what would happen to rates without the Fed backstop to Fannie/Freddie, but whether there would be fixed rate mortgages at all. 30-year-fixed rated-80-percent-loan-to-value mortgages beyond the conforming loan limit basically do not exist at the moment. A conversation I had today with two bank executives confirmed this. Some would argue that 30-year fixed rate mortgages are over-rated, but not I.

Washington Post Crashed-and-Burned-and-Smoking Watch

A correspondent emails, apropos of the incredible

The culture within the Post is so beholden to official sources, and so hostile of other published sources, especially on the internet, that I don't see how it can survive for five or ten years. If they don't have a monopoly on the local printing press, setting aside the Moonies of course, why would anyone want to see their so-called reporting? I thought it was mostly a problem with their national political reporting, but it appears to infect their local reporting as well. They simply can't compete like this, and it's not clear how they would go about changing.

Ten Economic Paragraphs Worth Reading: December 23, 2009

1) Mark Thoma: Is Criticism of the Bernanke Fed Justified?:

So two groups opposed to Bernanke’s reappointment are worried he won’t devote enough attention to fighting inflation, and the third group is worried inflation is too much of a priority. These groups appear to be reinforcing rather than canceling each other politically even though they are upset about opposite things.... I do not believe for a minute that Ben Bernanke is taking the side of Wall Street over Main Street when he talks about the need to keep inflation under control. He believes that stabilizing inflation leads to higher employment, a better mix of goods, and higher household welfare... maximizing household welfare means responding more aggressively to inflation shocks than to output shocks... the Fed should increase the federal funds rate by one-half percent when output deviates by one percent from target, but increase the federal funds rate three times as much, by a point and a half, in response to a one percent inflation shock. There are two questions here. First, is the rule the Fed follows... optimal? Second, is the standard Taylor rule type policy appropriate for severe recessions?...

2) Tom Lauricella: For Stocks, the Worst Decade Ever:

The U.S. stock market is wrapping up what is likely to be its worst decade ever. In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s. Investors would have been better off investing in pretty much anything else.... Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s, the best calendar decade in history with a 17.6% average annual gain, stocks simply had gotten too expensive.... And in a time of financial panic like 2008, stocks were a terrible place to invest. With just two weeks to go in 2009, the declines since the end of 1999 make the last  10 years  the worst calendar decade for stocks going all the way back to the 1820s.... It edges out the... 1930s, which up until now held the title of worst decade.... Since the end of 1999, the Standard & Poor's 500-stock index has lost an average of 3.3% a year on an inflation-adjusted basis.... So what went wrong for the U.S. stock market? For starters, it turned out that the old rules of valuation matter. "We came into this decade horribly overpriced," said Jeremy Grantham, co-founder of money managers GMO LLC. In late 1999, the stocks in the S&P 500 were trading at about an all-time high of 44 times earnings, based on Yale professor Robert Shiller's measure, which tracks prices compared with 10-year earnings and adjusts for inflation. That compares with a long-run average of about 16. Buying at those kinds of values, "you'd better believe you're going to get dismal returns for a considerable chunk of time," said Mr. Grantham, whose firm predicted 10 years ago that the S&P 500 likely would lose nearly 2% a year in the 10 years through 2009...

3) Jonathan Cohn: What Reform Means For Families (A Reponse To FireDogLake & Others):

In her column, Hamsher offers ten reasons why she opposes the Senate bill. For now, I want to focus on two of them: (1) Forces you to pay up to 8% of your income to private insurance corporations — whether you want to or not. (3) Many will be forced to buy poor-quality insurance they can’t afford to use, with $11,900 in annual out-of-pocket expenses over and above their annual premiums. Both statements are true. That's why many of us have been calling attention to these numbers for months. But a crucial question, which Hamsher and most lefty critics I know never address, is "compared to what?"...This is a hugely progressive program to bolster economic security, the likes of which we haven't enacted in this country for a long, long time. To be clear, I don't think these numbers are great in absolute terms... it's essential to push for better subsidies and more protection in the conference negotiations--and then, if the law passes, to work on improving the law afterwards. But you can't do any of that if a bill doesn't get past the Senate...

4) John W. Schoen: Economists: We don't need more stimulus:

No more stimulus, please, we're capitalists. That’s the view, at least, of the majority of economists surveyed in’s year-end roundtable. Though unemployment will remain stubbornly high, and the economic recovery sluggish in 2010, the government doesn’t need to provide another round of stimulus spending to keep the economy afloat, they say. The House last week narrowly approved a $155 billion “jobs” bill that includes nearly $50 billion in infrastructure spending and $79 billion for expanding benefits like unemployment insurance and Medicaid. But most of the forecasters in our panel are against the idea of another government stimulus package...

5) Ryan Avent Sends Us to Meghan Busse, Christopher Knittel, and Florian Zettelmeyer:

The dramatic increase in gasoline prices from close to $1 in 1999 to $4 at their peak in 2008 made it much more expensive for consumers to operate an automobile. In this paper we investigate whether consumers have adjusted to gasoline price changes by altering what automobiles they purchase and what prices they pay. We investigate these effects in both new and used car markets. We find that a $1 increase in gasoline price changes the market shares of the most and least fuel-efficient quartiles of new cars by +20% and -24%, respectively. In contrast, the same gasoline price increase changes the market shares of the most and least fuel-efficient quartiles of used cars by only +3% and -7%, respectively. We find that changes in gasoline prices also change the relative prices of cars in the most fuel-efficient quartile and cars in the least fuel-efficient quartile: for new cars the relative price increase for fuel-efficient cars is $363 for a $1 increase in gas prices; for used cars it is $2839. Hence the adjustment of equilibrium market shares and prices in response to changes in usage cost varies dramatically between new and used markets. In the new car market, the adjustment is primarily in market shares, while in the used car market, the adjustment is primarily in prices. We argue that the difference in how gasoline costs affect new and used automobile markets can be explained by differences in the supply characteristics of new and used cars. 

6) Steve Randy Waldmann: Norms of credit:

I think that underwater homeowners ought to walk away from their loans for the very same reason McArdle want us to consider them jerks for doing so. We both want to see norms we consider valuable enforced. I think that banks violated a great many norms of prudence and fair dealing in their practices during the credit bubble, and that they violate the fundamental norm of reciprocity by fully exploiting their own legal rights while insisting that borrowers have a moral obligation not to exercise a contractual option. In order to strengthen norms I consider crucial, I hope transgressors face legal and social consequences (strategic default and reduced shame attached to default) that will alter their behavior going forward. McArdle values a norm that I think most of us share in interpersonal settings, that a person should make every possible effort to pay back money he has borrowed. She also wants to create consequences for transgressors, social costs via a consensus that those who walk away by choice be considered jerks. We have different preferences regarding the kind of world we want our normative frameworks to support: McArdle favors a world with both easy credit and easy bankruptcy. I favor the easy bankruptcy, but not the easy credit. I think that debt arrangements are hazardous and should be entered into only with great care. I don’t consider increasingly leveraged homeownership and aggressively accessible consumer credit to have been positive developments. As a practical matter, I think we must rely on creditors rather than potential debtors to differentiate between wise and unwise loans. So I consider it a feature rather than a bug that holding creditors accountable will encourage them to think twice before sending out convenience checks. Norms, like laws, are always contested. McArdle and I have very different worldviews, and that is reflected in the different norms we are each trying to reinforce...

7) Stan Collender: Olympia Snowe Loses Whatever Credibility She Had Left:

Many things in American politics are silly but, assuming it's true, this has to be considered a lifetime achievement award.  From Talking Points Memo: "After months in which the senate health care bill was held up over efforts to find some form in which she would agree to sign on to it, Sen. Snowe (R-ME) now says she will oppose it because it is being 'rushed'."

8) BEST NON-ECONOMICS THING I'VE READ TODAY: Paul Krugman: The WYSIWYG president: There’s a lot of dismay/rage on the left over Obama, a number of cries that he isn’t the man progressives thought they were voting for. But that says more about the complainers than it does about Obama himself. If you actually paid attention to the substance of what he was saying during the primary, you realized that (a) There wasn’t a lot of difference among the major Democratic contenders, (b) To the extent that there was a difference, Obama was the least progressive Now it’s true that many progressives were ardent Obama supporters, with their ardency mixed in with a fair bit of demonization of Hillary Clinton. And maybe they were right — but not on policy grounds. (I still remember people angrily telling me that if Hillary got in, she’d fill her economics team with Rubinites). So what you’re getting is what you should have seen. And exactly what should we blame Obama for?... [T]he important thing to bear in mind is that this isn’t about him; and, equally important, it isn’t about you. If you’ve fallen out of love with a politician, well, so what? You should just keep working for the things you believe in.

9) STUPIDEST THING I'VE READ TODAY: Michael Hudson: The Problem with Paul Samuelson: Michael Hudson in Commonweal (December 18 1970): "Does economics deserve a Nobel prize? (And by the way, does Samuelson deserve one?)"

It is bad enough that the field of psychology has for so long been a non-social science, viewing the motive forces of personality as deriving from internal psychic experiences rather than from man's interaction with his social setting. Similarly in the field of economics: since its "utilitarian" revolution about a century ago, this discipline has also abandoned its analysis of the objective world and its political, economic productive relations in favor of more introverted, utilitarian and welfare-oriented norms. Moral speculations concerning mathematical psychics have come to displace the once-social science of political economy. To a large extent the discipline's revolt against British classical political economy was a reaction against Marxism, which represented the logical culmination of classical Ricardian economics and its paramount emphasis on the conditions of production. Following the counter-revolution, the motive force of economic behavior came to be viewed as stemming from man's wants rather than from his productive capacities... [Only somebody who knows neither the economics of Ricardo, the writings of Marx, or Samuelson's neoclassical synthesis could possibly write that paragraph with a straight face]

10) FROM THE ARCHIVES: Brqd DeLong (February 20, 2003): Thinking About Aristotle of Stagira:

I'm never sure whether I should begin my economic history survey courses with Aristotle or not. As Moses Finley powerfully argues, Aristotle does not care about the economy. The fragments in his Ethics and Politics that economists like Joseph Schumpeter point to are, mostly, concerned with other things than economic analysis. Karl Polanyi thought that Aristotle's naivete was the result of the fact that a mercantile, market, commercial economy was something very new. He was surely wrong: it was not something new, but rather something that Aristotle as a Hellenic aristocrat would have been embarrassed to be caught thinking seriously about. Still, I now wish I'd started this semester's history course with more on Aristotle. His perspective is so different from ours that it provides a useful mental shock: Consider, first, that Aristotle of Stagira was not an idiot (even if he did believe that women had fewer teeth than men). For two thousand years people--pagan Hellenes, Christian Europeans, and Islamic Arabs, Egyptians, Mesopotamians,and Iranians--called Aristotle of Stagira "the philosopher", as if there could be only one. Think of the way seventeenth, eighteenth, and nineteenth century Britons regarded Newton (or the way we regard Einstein). So we need to take Aristotle seriously: think hard about how a very good mind, thinking very hard, in pre-industrial-revolution economic circumstances, could wind up thinking the thoughts on the economy that Aristotle does. Specifically, why does he: --believe so strongly that gross inequality--domination and slavery--is natural and inevitable? --believe that the 'natural art of acquisition'--the getting of the resources necessary to properly run one's household--has a limit: 'a boundary fixed, just as there is in the other arts; for the instruments of any art are never unlimited, either in number or size, and riches may be defined as a number of instruments to be used in a household or in a state...'? (Never mind that Aristotle's "limit" is probably the full-time year-round labor of at least fifty people, at today's OECD wage levels some $3,000,000 a year: in one sense very, very few of us will ever come near to Aristotle's point of satiation; in another sense every single one of us has already gone far beyond Aristotle's limit.) --believe that shepherds are '...the laziest [of men]... lead an idle life... get their subsistence without trouble from tame animals...'? --believe that '[t]here are two sorts of wealth-getting... one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another...'? --believe that of '...the practical part [of wealth-getting] the discussion of such matters is not unworthy of philosophy, but to be engaged in them practically is illiberal and irksome'? Note: don't miss Aristotle's story of Thales of Miletos and his corner of the olive-press-rental market on Khios...

links for 2009-12-23

  • WaPo Sits on Eyewitness Account on Snowball Gun Incident Posted by Erik Wemple on Dec. 22, 2009, at 1:52 pm Washington Post editorial aide Stephen Lowman was at 14th and U on Saturday when the controversial snowball-fight-cum-police-indiscretion went down. He wasn't there on assignment--he was just taking it all in. And take it all in he did. He eye-witnessed the snowball fest and the cop waving around a gun, not to mention all the hubbub that ensued. So Lowman got on the phone to the Post, to give the newsroom a heads-up. He says he was placed in contact with staff writer Matt Zapotosky. Lowman told Zapotosky about the confrontation and the gun. It was just after 3 pm. Not long thereafter, Washington City Paper posted photos of the officer, later identified as Det. Mike Baylor, trudging around in the snow with a gun in his hand. By this point, there was also video on the Web in which the officer admits he pulled his gun out in the midst of a snowball fight. Two hours later, a

Picking Up Nickels in Front of the Steamroller: A Simple and Partial Finger Exercise

Okun gaps, monetary accommodation, speculator overoptimism, bailouts, carry trades, bubbles, and taking away the punchbowl before the party really gets rolling. Alas! A risk neutral model, but still one that I think is of considerable use in clarifying a whole bunch of issues...

20091222 delong picking up nickels.pdf

Five Economic Paragraphs Worth Reading: December 22, 2009

1) Paul Krugman: The insincere center:

[L]et’s also not fail to take note of those who had a chance to join in this historic moment, and punted. I’m not talking about the progressives who... don’t think it’s good enough; I disagree, but I respect the[m].... I’m talking instead about the self-described centrists, pundits and politicians, who have spent years lecturing us on the need to make hard choices and actually come to grip with America’s problems.... So what did they do when faced with a chance to help confront those problems? They made excuses.... As Atul Gawande and others have pointed out, the Senate bill tries a wide variety of approaches to cost containment — in fact, just about everything that has been suggested. We don’t know which of these approaches will work or how well, but that’s more than anyone has managed to achieve ever before. Oh, and the legislation is fiscally responsible from the start. So did the deficit scolds, the people who preach the need to rein in entitlements and start paying our way, rally behind the cost-containment plans? Um, no. As I said, they made excuses, whining that the bill doesn’t do enough... or insisting that even though the legislation does do the right thing, it doesn’t matter, because Congress won’t let the cost cuts go into effect.... [T]hese people are insincere... like posing as defenders of fiscal rectitude... but when push comes to shove... their refusal to consider any government economy measures that don’t involve punishing people with lower incomes, trumps their supposed concern.... Gentlemen — everyone I can think of here does happen to be male — this was your moment of truth, your test of character. You failed.

2) Charlie Stross: Gadget Patrol: 21st century phone:

Pre-2005, digital mobile phones... badly choked their ability to do anything useful and internet-worthy. By 2005, the first 3G networks based on WCDMA (aka UMTS) began to open up. By 2009, 3G HSDPA networks can carry up to 7.2mbps. The modem-grade data throughput of the mid-noughties smartphone experience has been replaced by late-noughties broadband grade.... To the mobile phone companies, 3G presented a headache.... What can you do over 3G that justifies the extra cost? Version 1 of their attempt to monetise 3G consisted of walled gardens of carefully cultivated multimedia content.... It turns out that what consumers want of a 3G connection is not what a mobile company sees fit to sell them, but one thing: bandwidth. Call it Version 2.... Enter: Apple and Google.... Apple are an experience company... a high-end marque.... How they got into the mobile phone market is an odd and convoluted story, but it's best to view it as a vertical upwardly-mobile extension of the MP3 player market (from their point of view), which has taken on a lucrative life of its own. Apple's unique angle is the user experience.... Apple don't want to destroy the telcos; they just want to use them as a conduit to sell their user experience. Google, however, are another matter. Google is an advertising corporation. Their whole business model is predicated on breaking down barriers to access.... I think Google are pursuing a grand strategic vision of destroying the cellco's entire business model.... [I]f Google succeeds, the economic basis of your mobile telephony service in 2019 is going to be unrecognizably different from that of 2009. Some of the biggest names in phone service (T-mobile? Orange? Vodafone? AT&T? Verizon?) are going to go the way of Pan Am and Ma Bell by then; the ones left standing will be the ones with the best infrastructure (hint: that doesn't look like AT&T right now — by some analyses, AT&T mis-understand TCP/IP so badly that their network trouble is self-inflicted) and best interoperability (goodbye Verizon), selling bits at the lowest price to punters who buy their cheap-to-disposable (phones are part of the perpetually deflating consumer elecronics sector; today's $350 BoM should be down to under $100 by 2019, for something a good deal more powerful) unlocked in WalMart and take ditchwater-cheap international roaming service for granted.... [T]hings will have come full-circle, and the internet will have eaten the phone system. What's good for the internet is good for Google. Right now, the phone companies are not good for the internet. If I'm right about the grand strategy, the Googlephone will change that.


That Rich would even implicitly compare Barack Obama, who has made a significant and very substantive intellectual effort to deal with every problem he's faced, with an adulterous golfer is facile to the point of slander... And so is the judgment that the country is "mired in a sand trap with no obvious way out." From where I sit, the country is facing very difficult problems--caused, in large part, by the right-wing extremism Rich seems to be crediting here--but it is in much better shape than it was a year ago.... After a thirty year period during which the very notion of governance was ridiculed, we need to take the work of government seriously again. Barack Obama is doing precisely that. You can disagree with Obama's decisions and his philosophy. You can argue that that he has tried to take on too much. You can argue that health care reform was the wrong priority in the midst of a deep recession.  But you cannot gainsay the intensely serious nature of this presidency. And to give any credit to the notion that Obama is "spineless" requires a fundamental lack of knowledge.... Yes, Americans have grown cynical. The most toxic form of that cynicism is the know-nothing populism that Rich is celebrating here. Frank Rich's value as a columnist has always been his willingness to push back against the carnival tide of ignorance that has washed over the country in recent decades. Today, he lazily went with that tide.  At a moment when the real voices of progress and sanity need all the help they can get, that is a terrible mistake.

4) STUPIDEST THING I HAVE READ ALL DAY: Richard Posner: The (F)utility of GDP?:

I disagree with economists who say the “recession” ended in the third quarter. The depression (as I think we should call it if only because of its enormous potential political consequences) has caused massive unemployment with all the associated anxieties and hardships, has greatly reduced household wealth, has caused private investment to turn negative, has cost the government trillions of dollars in lost tax revenues and recovery expenditures (TARP, the fiscal stimulus, the mortgage-relief programs, the auto bailouts, etc.), has undermined belief in free markets and altered the line between government and business in favor government, and is threatening a future inflation while deepening our dependence on foreign lenders. To view a change in GDP from negative to positive as signifying the end of a depression (by which criterion the Great Depression ended in 1933 and again in 1938) is to misunderstand the utility of GDP as a measure of economic activity... [The depth of ignorance required to claim that anyone thinks that the end of the downturn--the end of the recession--is also the end of the period during which the economy is hag-ridden with slack and unemployment... that depth of ignorance leaves me simply speechless.]

5) FROM THE ARCHIVES: Brad DeLong (February 12, 2003): Andrei Shleifer's "Implementation Cycles":

I think I was very smart to teach this paper as an [introductory] way of pointing students to the issues involved in bringing innovation, technological progress, and market structure into aggregative macroconomics. The underlying basic model is very elegant. It begins with an initial setup that seems rather complicated, yet it rapidly simplifies to produce a situation in which: --A lot of firms implementing their new technologies at once creates a boom. --An aggregate demand externality makes it profitable to cluster the implementation of new technologies. A firm with a new technology wants to wait until a boom to implement it because its technology will be quickly copied--its edge is temporary--and it is more profitable to implement when the economy is booming and demand is high than when the economy is not booming and demand is low. --Partly offsetting this is the fact that the interest rate is high when a boom is expected, and thus the cost of waiting until a boom to implement your technological innovation can be substantial. (In fact with log utility or a utility function less risk-averse than log utility, the interest rate effect always outweighs the aggregate demand externality effect). --Thus the model can exhibit periodic "implementation cycles" in which technological advance is delayed until periodic booms. --However, in the basic model households always want new technology to be implemented as fast as possible: these implementation-cycle equilibria reduce welfare. --But this can be reversed: in a version of the model with fixed costs of implementation and with 'standing on the shoulders of giants' effects in discovery, it is very possible that technological progress is only possible if there are periodic large booms. There is one dimension in which the paper is not a good guide for students thinking about how to write their dissertations. It is a perfect-foresight model--its equilibria are those in which everyone has point expectations about what the future will bring, and those expectations are always confirmed. Today it's hard to get a job with a perfect-foresight model: too many people will say that the dive was not difficult enough. It is, however, a great article: all kinds of issues--the role of expectations, of imperfect competition, of market profits as spurs to innovation, and of the relationship between short-run business cycles and long-run development--are raised and dealt with in a very thoughtful way...

links for 2009-12-22