Previous month:
December 2009
Next month:
February 2010

January 2010

No Lover of Unregulated Banking He...

The monetary economics of Adam Smith:

Adam Smith:* An Inquiry Into the Nature and Causes of The Wealth Of Nations*: The Scotch banks, no doubt, paid all of them very dearly for their own imprudence and inattention: but the Bank of England paid very dearly, not only for its own imprudence, but for the much greater imprudence of almost all the Scotch banks. The over-trading of some bold projectors in both parts of the united kingdom, was the original cause of this excessive circulation of paper money. What a bank can with propriety advance to a merchant or undertaker of any kind, is not either the whole capital with which he trades, or even any considerable part of that capital; but that part of it only which he would otherwise be obliged to keep by him unemployed and in ready money, for answering occasional demands. If the paper money which the bank advances never exceeds this value, it can never exceed the value of the gold and silver which would necessarily circulate in the country if there was no paper money; it can never exceed the quantity which the circulation of the country can easily absorb and employ....

The banking companies of Scotland... were for a long time very careful to require frequent and regular repayments... and did not care to deal with any person, whatever might be his fortune or credit, who did not make... frequent and regular operations with them.... First, by this attention they were enabled to make some tolerable judgment concerning the thriving or declining circumstances of their debtors... men being, for the most part, either regular or irregular in their repayments, according as their circumstances are either thriving or declining.... Secondly... they secured themselves from the possibility of issuing more paper money than what the circulation of the country could easily absorb and employ. When they observed, that within moderate periods of time, the repayments of a particular customer were, upon most occasions, fully equal to the advances which they had made to him, they might be assured that the paper money which they had advanced to him had not, at any time, exceeded the quantity of gold and silver which he would otherwise have been obliged to keep by him for answering occasional demands; and that, consequently, the paper money, which they had circulated by his means, had not at any time exceeded the quantity of gold and silver which would have circulated in the country, had there been no paper money.... This second advantage, though equally real, was not, perhaps, so well understood by all the different banking companies in Scotland as the first.

Traders and other undertakers may, no doubt with great propriety, carry on a very considerable part of their projects with borrowed money. In justice to their creditors, however, their own capital ought in this case to be sufficient to insure, if I may say so, the capital of those creditors; or to render it extremely improbable that those creditors should incur any loss, even though the success of the project should fall very much short of the expectation of the projectors. Even with this precaution... money... ought not to be borrowed of a bank, but ought to be borrowed upon bond or mortgage.... A bank, indeed, which lends its money without the expense of stamped paper, or of attorneys' fees for drawing bonds and mortgages, and which accepts of repayment upon the easy terms of the banking companies of Scotland, would, no doubt, be a very convenient creditor to such traders and undertakers. But such traders and undertakers would surely be most inconvenient debtors to such a bank.

It is now more than five and twenty years since the paper money issued by the different banking companies of Scotland was fully equal, or rather was somewhat more than fully equal, to what the circulation of the country could easily absorb and employ. Those companies, therefore, had so long ago given all the assistance to the traders and other undertakers of Scotland which it is possible for banks and bankers, consistently with their own interest, to give. They had even done somewhat more. They had over-traded a little, and had brought upon themselves that loss, or at least that diminution of profit, which, in this particular business, never fails to attend the smallest degree of over-trading....

The bills which A in Edinburgh drew upon B in London, he regularly discounted two months before they were due, with some bank or banker in Edinburgh; and the bills which B in London redrew upon A in Edinburgh, he as regularly discounted, either with the Bank of England, or with some other banker in London. Whatever was advanced upon such circulating bills was in Edinburgh advanced in the paper of the Scotch banks; and in London, when they were discounted at the Bank of England in the paper of that bank. Though the bills upon which this paper had been advanced were all of them repaid in their turn as soon as they became due, yet the value which had been really advanced upon the first bill was never really returned to the banks which advanced it; because, before each bill became due, another bill was always drawn to somewhat a greater amount than the bill which was soon to be paid: and the discounting of this other bill was essentially necessary towards the payment of that which was soon to be due.... The paper which was issued upon those circulating bills of exchange amounted, upon many occasions, to the whole fund destined for carrying on some vast and extensive project of agriculture, commerce, or manufactures.... It was a capital which those projectors had very artfully contrived to draw from those banks, not only without their knowledge or deliberate consent, but for some time, perhaps, without their having the most distant suspicion that they had really advanced it.

When two people, who are continually drawing and redrawing upon one another, discount their bills always with the same banker, he must immediately discover what they are about, and see clearly that they are trading, not with any capital of their own, but with the capital which he advances to them. But this discovery is not altogether so easy when they discount their bills sometimes with one banker, and sometimes with another, and when the two same persons do not constantly draw and redraw upon one another, but occasionally run the round of a great circle of projectors, who find it for their interest to assist one another in this method of raising money and to render it, upon that account, as difficult as possible to distinguish between a real and a fictitious bill of exchange, between a bill drawn by a real creditor upon a real debtor, and a bill for which there was properly no real creditor but the bank which discounted it, nor any real debtor but the projector who made use of the money....

In the midst of this clamour and distress, a new bank was established in Scotland, for the express purpose of relieving the distress of the country. The design was generous; but the execution was imprudent, and the nature and causes of the distress which it meant to relieve, were not, perhaps, well understood. This bank was more liberal than any other had ever been, both in granting cash-accounts, and in discounting bills of exchange. With regard to the latter, it seems to have made scarce any distinction between real and circulating bills, but to have discounted all equally. It was the avowed principle of this bank to advance upon any reasonable security, the whole capital which was to be employed in those improvements of which the returns are the most slow and distant, such as the improvements of land.... The operations of this bank seem to have produced effects quite opposite to those which were intended by the particular persons who planned and directed it.... This bank, no doubt, gave some temporary relief to those projectors, and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt; so that, when ruin came, it fell so much the heavier both upon them and upon their creditors. The operations of this bank, therefore, instead of relieving, in reality aggravated in the long-run the distress which those projectors had brought both upon themselves and upon their country. It would have been much better for themselves, their creditors, and their country, had the greater part of them been obliged to stop two years sooner than they actually did. The temporary relief, however, which this bank afforded to those projectors, proved a real and permanent relief to the other Scotch banks. All the dealers in circulating bills of exchange, which those other banks had become so backward in discounting, had recourse to this new bank, where they were received with open arms. Those other banks, therefore, were enabled to get very easily out of that fatal circle, from which they could not otherwise have disengaged themselves without incurring a considerable loss, and perhaps, too, even some degree of discredit....

It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. That part of his capital which a dealer is obliged to keep by him unemployed and in ready money, for answering occasional demands, is so much dead stock, which, so long as it remains in this situation, produces nothing, either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock; into materials to work upon; into tools to work with; and into provisions and subsistence to work for; into stock which produces something both to himself and to his country. The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country...

Why Are We Still in a Recession? The Shape of the Crisis and "Too-Big-to-Fail"

Jim Hamilton sends us to John Cochrane, who makes a number of good points. Cochrane agrees with the conventional wisdom that it was not any fundamental change or news about preferences, technologies, or the risks of undertaking production and hiring workers but rather the bankruptcy of Lehman Brothers that turned us from being in a small recession to being in the deepest recession since the Great Depression--to perhaps being in a (little) depression of our own:

John Cochrane: The signature event of this financial crisis was the... whatever you choose to call it... in late September of 2008.... Short-term credit dried up, including the normally straightforward repurchase agreement, inter-bank lending, and commercial paper markets.... Why would Lehman's failure cause a panic? Why, after seeing Lehman go to bankruptcy court, would people stop lending to, say, Citigroup, and demand much higher prices for its credit default swaps (insurance against Citi failure)?... We did not see a secondary wave of creditors forced into bankruptcy by Lehman losses.... Sure, there was some mess-- repos in the United Kingdom got stuck in bankruptcy court, some money market funds "broke the buck" and had to borrow from the Fed--but those issues are easy to fix and they do not explain why Lehman's failure would cause a widespread panic. What is more, Lehman's failure did not carry any news about asset values; it was obvious already that those assets were not worth much and illiquid anyway.

Cochrane makes the true and obvious but understressed point on the origins of our macroeconomic crisis that mortgage defaults in the desert between Los Angeles and Albuquerque are simply not large enough to justify the $25 trillion global fall in the value of financial assets that has hit our economies:

The underlying decline in wealth from the housing bust was not that large.... Most estimates put subprime losses around $400 billion. The stock market absorbs losses like that in days...

Indeed, relative to the size of the economy the losses during the crash of the dot-com bubble were four times as large. But the collapse of the dot-com bubble did not drive unemployment up above 10% even with extraordinary government interventions to create a liquidity tsunami to try to float the markets.

Cochrane makes the true and obvious point that what is special about our current situation is not that there were losses, or that those losses were the result of the unwinding of irrational exuberance, but rather how those losses hit overleveraged and overexuberant banking and shadow banking systems:

[M]ortgages were held in very fragile financial structures. An extreme example: many mortgages were pooled into securities, and the securities were held in special purpose vehicles (SPVs), funded by rolling over short term commercial paper with an off-the-books credit guarantee from a large bank. Less extreme: when Bear Stearns failed, it was holding a large portfolio of mortgage-backed securities (MBSs) funded at 30-to-1 leverage by overnight debt. In both cases, when the mortgages lose value, the debt-holders refuse to renew their loans and the whole thing blows up...

But then it seems to me that his argument starts to jump the tracks here:

We are left with only one plausible explanation for why Lehman's failure could have had such wide-ranging effect: After the Bear Stearns bailout earlier in the year, markets came to the conclusion that investment banks and bank holding companies were "too big to fail" and would be bailed out. But when the government did not bail out Lehman, and in fact said it lacked the legal authority to do so, everyone reassessed that expectation. "Maybe the government will not, or cannot, bail out Citigroup?" Suddenly, it made perfect sense to run like mad...

And it goes off the rails, crashes, and burns here:

[T]he central problem is how to escape the bailout expectations trap. To do this, we have to finally define what “systemic” means. And then, we must define clearly what is not systemic, and thus should and will be left to fail next time—we really mean it! This limit must be written in law or in regulation. We cannot rely on the good intentions of powerful administrators; Odysseus knew he had to tie himself to the mast. The only way to limit expectations of a bailout is for the government to give up the legal authority to do it. Lehman is actually a great example: it went to bankruptcy because the government could not save it. We need more of that. If everybody had known that ahead of time, rather than have it emerge from the usual weekend conclave in Washington, there likely would have been no panic because Lehman’s failure would not have signaled anything about the government’s commitments to Citigroup...

To see what is wrong Cochrane's story, let's start by summarizing it: It is that (i) the failure to rescue Lehman caused fears that the government would not rescue anybody, and so (ii) it was rational for everyone to panic and try to dump their risky assets. In Cochrane's view, the problem is that asset prices collapsed when financiers realized that the government's promise to bail-out too-big-to-fail banks was empty. That shock sent the real economy into a tailspin. And the solution is never to make any bail-out promises to begin with: if the promises aren't made, then people cannot fear that the promises are empty, that fear cannot generate a sudden collapse in asset prices, and so the economy cannot be sent into a tailspin.

But remember what happened in the immediate aftermath of Lehman: the U.S. government nationalized AIG and settled its liabilities at 100¢ on the $; Hank Paulson got down on his knees before Nancy Pelosi; the Treasury was given $700 billion to spend to make sure that there were no more Lehmans. After the creation of the TARP, we were all much surer that the U.S. government would rescue Citi if it needed rescue than we had been in the months between Bear-Stearns and Lehman. In point of fact, the government's promises to rescue too-big-to-fail banks weren't empty: the government has lived up to them.

The logic of Cochrane's argument implies that the passage of the TARP should have fixed the problem: the aftermath of Lehman saw "[no] secondary wave of creditors forced into bankruptcy by Lehman losses... [some] issues... easy to fix... Lehman's failure did not carry any news about asset values..." and the passage of the TARP is good news for the likelihood of bailouts. So, Cochrane's story leads us to think, everything should have been completely fine in the aftermath of the TARP: asset prices should have immediately bounced themselves back up to their pre-Lehman levels, and the storm clouds should have dissipated.

So why are we still in a deep recession?

And why were the flashpoints of the ovespeculation crash found not among institutions that were too-big-to-fail and were bailed out (Citigroup, Goldman-Sachs, JPMorgan Chase) but instead among institutions that were definitely not too-big-to-fail--and have failed--like Bear Stearns, Lehman Brothers, WaMu, Wachovia, and Countrywide?

A crisis that was caused by excessive confidence in the government's implicit guarantee of too-big-to-fail financial institutions would have had a very, very different shape than the crisis we are now in.

Evan Bayh Says Barack Obama and Mark Zandi Are Far-Left-Wing Weblogs

Jason Linkins:

TV SoundOff: Sunday Talking Heads: Evan Bayh, he wants someone to reduce the deficit for him, but he'd like to not do it himself. SOMEONE DO IT FOR HIM. And he yells at "far left wing blogs" for criticizing the spending freeze -- in 2008, Obama criticized the spending freeze, because he was a blog!

Mark Zandi? You see, he doesn't like the discretionary-spending slush and the accompanying shriking of fiscal expansion any more than I do:

The Washington Monthly: MCCAIN ADVISER TOUTS STIMULUS.... It's impossible to characterize economist Mark Zandi as some kind of liberal partisan -- he was an adviser to the McCain/Palin campaign in 2008. With that in mind, it should carry a little more weight than usual when he credits Democratic recovery efforts with creating strong economic growth. Here was Zandi yesterday:

I think stimulus was key to the 4th quarter. It was really critical to business fixed investment because there was a tax bonus depreciation in the stimulus that expired in December and juiced up fixed investment. And also, it was very critical to housing and residential investment because of the housing tax credit. And the decline in government spending would have been measurably greater without the money from the stimulus. So the stimulus was very, very important in the 4th quarter....

ast November, Zandi was saying the same thing, arguing that "the stimulus is doing what it was supposed to do... without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent."

Barack Obama on His Mitt Romney Health Plan

From the Washington Monthly:

CLOSING THE RHETORIC/REALITY GAP: Perhaps the most noteworthy portion of today's event in Baltimore, during the Q&A between President Obama and House Republicans, came during an exchange on health care reform. The president explained that the "component parts" of the Democratic reform plan are "pretty similar to what Howard Baker, Bob Dole and Tom Daschle proposed at the beginning of this debate last year." Obama reminded GOP lawmakers that they may or may not agree with those three, but by any measure, "that's not a radical bunch." He added, "But if you were to listen to the debate, and, frankly, how some of you went after this bill, you'd think that this thing was some Bolshevik plot. That's how you guys presented it.... I know you guys disagree, but if you look at the facts of this bill, most independent observers would say this it's similar to what many Republicans proposed to Bill Clinton when he was doing his debate on health care. "So all I'm saying is we've got to close the gap a little bit between the rhetoric and the reality."

Hear, hear. The biggest irony of the entire health care debate is that Republicans had a complete meltdown -- and may have very well killed the best chance America has ever had to reform a dysfunctional system -- over an entirely moderate bill.... [T]hat's precisely why the president's comments were so important -- Americans probably should learn the truth about this at some point. The Democratic plan is exactly the kind of proposal that should have generated bipartisan support -- it cuts costs, lowers the deficit, and adds wildly popular consumer protections, while bringing coverage to tens of millions who need it. It includes provisions long-favored by Republicans and policy wonks of both parties...

Boldly Going Where No One Has Gone Before...


Reading Ebooks in the Bathtub: Reading in the bath is actually what I like best about ebooks. Take one reader of choice, encase in ziploc freezer bag, read at will. Because you can press to turn pages, it works much better than a physical book. No more soggy spots from turning pages with damp fingers!

I have no idea whether this will work with an iPad, nor how long one could leave the bag immersed for without problems, but I will vouch for safety from splashes and one terrifying time when I dozed off and dunked it.

Ten Economics Pieces Worth Reading: January 31, 2010

1) via Calculated Risk: Lawrence Summers:

What we see in the United States and some other economies is a statistical recovery and a human recession.

2) Fraser Speirs: Future Shock: the iPad:

I'm often saddened by the infantilising effect of high technology on adults. From being in control of their world, they're thrust back to a childish, mediaeval world in which gremlins appear to torment them and disappear at will and against which magic, spells, and the local witch doctor are their only refuges. With the iPhone OS as incarnated in the iPad, Apple proposes to do something about this, and I mean really do something about it instead of just talking about doing something about it, and the world is going mental.

Not the entire world, though. The people whose backs have been broken under the weight of technological complexity and failure immediately understand what's happening here. Those of us who patiently, day after day, explain to a child or colleague that the reason there's no Print item in the File menu is because, although the Pages document is filling the screen, Finder is actually the frontmost application and it doesn't have any windows open, understand what's happening here....

People talk about Steve Jobs' reality distortion field, and I don't disagree that the man has a quasi-hypnotic ability to convince. There's another reality distortion field at work, though, and everyone that makes a living from the tech industry is within its tractor-beam. That RDF tells us that computers are awesome, they work great and only those too stupid to live can't work them.... The Real Work is not formatting the margins, installing the printer driver, uploading the document, finishing the PowerPoint slides, running the software update or reinstalling the OS. The Real Work is teaching the child, healing the patient, selling the house, logging the road defects, fixing the car at the roadside, capturing the table's order, designing the house and organising the party.... If the iPad and its successor devices free these people to focus on what they do best, it will dramatically change people's perceptions of computing from something to fear to something to engage enthusiastically with. I find it hard to believe that the loss of background processing isn't a price worth paying to have a computer that isn't frightening anymore.

In the meantime, Adobe and Microsoft will continue to stamp their feet and whine.

3) Kurt Andersen:

Watching AAPL's share price live: the moment Jobs announced the iPad's base price ($499), Apple's market cap increased by $5 billion.

4) Duncan Black:

Human Recession: Perhaps someone should consider doing something about this? Unemployment data comes out on Friday. I'm hoping it's a really horrible one, not because I want things to be worse but if we get an official measurement of things that's really bad maybe someone will consider doing something about it.

Of course I'm so old I can remember when 10% unemployment was "really bad."

5) Mark Thoma on Education Online:

I’ve been videotaping all my undergraduate courses and putting them on YouTube for a couple of years now (I have an old Director’s account which does not have a 10 minute time limit, and Google still honors the old designations even though individuals can’t get them anymore). I would argue adamantly that [lecture and vido] are complements, not substitutes. People who rely upon the videos [exclusively] do not do as well. There’s something about meeting as a group, listening (as though it were a story around the campfire that captures attention?), writing notes, etc. that doesn’t work as well when you try to [watch the video] individually.... I’ve also found that you have to explicitly tell students that they are complements, help them to learn to use the new technology optimally, and then it enhances rather than detracts from the course (and [lecture] attendance won’t fall as much as you might fear).

Students with language issues get the most out of the videos – they watch and rewatch segments until they finally understand – and if you explain to classes that the videos are best used to fill in holes left from lecture (by scrolling the video to find the segments you want), much as people with language issues use them, it works best. The number of views – hundreds for each video for a 70 person class with spikes near homewo9rk and exams – tells me that many students are finding them useful.

There is also a segment of the class who wouldn’t come anyway, and now they are doing better.... I’m not sure if I should enable this, but they aren’t coming anyway and if my goal is to maximize learning, I shouldn’t much care.

But when someone is telling stories around the campfire live, it seems to capture the group’s attention in a way that a video cannot duplicate. The students always agree with this, but can never quite put their finger on why, though they do mention that there’s no roommates, no TV in the background, no refrigerator calling out to you, and so on.

6) Peter R. Orszag: Facing the Fiscal Facts:

A Wall Street Journal op-ed today by the prior Administration’s CEA Chair, Edward Lazear, observes that the ratio of federal spending-to-GDP has risen by 14 percent since 2008—and that the transition from 2008 to 2009 saw the greatest annual increase in spending in the last 30 years. Ed is right about the numbers—but let’s look at the facts. On January 7, 2009, the Congressional Budget Office issued its Economic and Budget Outlook for Fiscal Years 2009-2019.  In that document, CBO projected that government spending would rise from 20.9 percent of GDP in fiscal year 2008 to 24.9 percent of GDP in fiscal year 2009.  (Just for the record, that CBO projection was issued 2 weeks before the current Administration took office.) This week, CBO issued its updated Economic and Budget Outlook for Fiscal Years 2010-2020.  That document shows that government spending in fiscal year 2009 turned out to be 24.7 percent.... It is thus correct that federal spending rose by roughly 4 percentage points of GDP between 2008 and 2009 -- and it is also the case that the increase in spending has helped to stabilize the economy -- but it is wrong to attribute that increase primarily to Administration actions since it took office.  The increase was already on the books when we arrived.

7) VISUAL OF THE DAY: Ta-Nehisi Coates"I Just Remembered Chris Matthews Was White" sends us to John Stewart and Wyatt Cenac on the Atrocious Horror that Is Chris Matthews:

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Speech Therapy - Post-Racial
Daily Show
Full Episodes
Political HumorHealth Care Crisis

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Paul Krugman: Cossack Rahm Works For The Czar:

Ezra Klein finds Rahm Emanuel’s apparent willingness to let health reform slide into the indefinite future very depressing. So do I. And it’s not just health reform that will die under this approach — it’s the road to a caretaker presidency. It’s all very well to say “we’re going to focus on job creation”. But what does that mean? At this point, no major economic programs have any chance of getting passed. Think of it this way: a year ago the question was whether the stimulus would be $700 billion or $1.2 trillion, now we’re talking about $30 billion jobs tax credits.

Maybe financial reform will happen, or at least set up a “teachable moment” battle with the GOP. But by letting health reform slide, the administration is abandoning one really big policy initiative that is just inches from happening. Let this go, and there’s likely to be no achievements worth remembering.

But don’t blame Rahm Emanuel; this is about the president. After Massachusetts, Democrats were looking for leadership; they didn’t get it. Ten days later, nobody is sure what Obama intends to do, and his aides are giving conflicting readings. It’s as if Obama checked out.... What’s now in question isn’t his ability to talk, it’s his ability to lead.

9) STUPIDEST MAN I HAVE READ TODAY: Stanford's Eddie Lazear. Outsourced to Matt Yglesias: That’s How Budgeting Works:

One of the most memorable parts of the State of the Union was when the President had to remind certain jeering members of congress that taking budgetary steps this fiscal year that don’t take effect until next fiscal year is “how budgeting works.” It looks to me like Ed Lazaer could use a tutorial in this point: "Since 2008, the ratio of federal spending-to-GDP has risen by about 14%. From 2008 to 2009 we saw the greatest annual increase in spending in the last 30 years. In the name of stimulating job growth, the share of federal spending is now 24% of the economy, up from 21% in the last year of the Bush administration." As Peter Orszag observes, the Obama administration wasn’t in power when most of the relevant decisions were made....

[W]hat’s particularly weird is that Ed Lazaer was chairman of the Council of Economic Advisors from 2006 up until Barack Obama’s inauguration in 2009. He knows perfectly well that the Fiscal Year 2009 Budget Proposal was written by the Bush administration. You can even download the 2009 Economic Report of the President (PDF) and see that it has Lazaer’s signature on it and everything. It’s right there on page 11. The Cato Institute’s Daniel Mitchell did a good piece on this flim-flam back in December. You have to ask yourself what it says about the tea party crowd that they didn’t seem even slightly bothered by federal spending or large deficits until Obama took office.

10) HOISTED FROM THE ARCHIVES: DeLong (2001): The Keynesian Nature of the Monetarist Counterrevolution:

Last year I published an essay (DeLong, 2000) arguing that modern Keynesians are really monetarists. Even if they--we--do not really like to admit it, most of the key elements in how modern "new Keynesian" economists view the world are derived from or heavily influenced by the work of Milton Friedman. But that essay... was only half of the story. Just as modern Keynesians are (in many respects) monetarists, so modern monetarists are really Keynesians--even though they like to admit it even less. They ... have the same profound and deep distrust in the laissez-faire market economy's ability to deliver macroeconomic stability. Moreover, they share the confidence John Maynard Keynes had that limited and strategic government interventions and policies could produce macroeconomic stability while still leaving enormous space for the operation of the market.

Thus there are no believers in true laissez-faire left, at least not as far as academic macroeconomics is concerned. The rhetoric of post-World War II monetarism held that it was a return to laissez-faire in macroeconomics. All the government had to do was to get out of the way and leave monetary policy in "neutral," and macroeconomic stabilization would be successfully achieved. But on closer inspection the "neutral" monetary policy advocated in works like Friedman and Schwartz (1963) turns out to be a policy that pre-Keynesian generations would have called extraordinarily activist.... The laissez-faire rhetoric obscures the extraordinarily broad common ground that Milton Friedman shares with John Maynard Keynes.

This recognition has important implications for understanding the meaning and effect of the monetarist counterrevolution.... [Harry] Johnson saw the monetarist counterrevolution as a true intellectual revolution--one that renders the previous literature obsolete, irrelevant, and uninteresting.... Johnson also--relatively cynically--saw the monetarist counterrevolution as the triumph not of new evidence (or a reevalution of old evidence) but as the triumph of misleading rhetoric.... Johnson saw the counterrevolution as a genuine counterrevolution that would--if successful--return economists' thinking to its previous state.

I want to argue that, underneath its laissez-faire rhetoric about a non-activist, neutral monetary policy, the monetarism of the monetarist counterrevolution had been thoroughly infected by the Keynesian virus. It carried with it a way of thinking about macroeconomic policy that was as "activist" in its own way as John Maynard Keynes could have ever wished...

links for 2010-01-31

When Amazon Attacks!!!!

Carolyn Kellog:

Amazon pulls Macmillan titles in first e-book skirmish: f you want to buy Hilary Mantel's popular, prizewinning "Wolf Hall" from today, you'll be getting it from some third-party vendor. Same for Orson Scott Card's "Hidden Empire" and the Hungry Girl cookbooks. In the place where the Amazon price should be, you'll find only a double dash. That's because those books are all published by Macmillan, and Amazon has pulled all Macmillan books from its cybershelves. Macmillan, one of the big six publishers, includes publishing houses Henry Holt & Co., science fiction-focused Tor/Forge and the Tiffany of fiction, Farrar, Straus and Giroux....

Up until Tuesday, a publisher like Macmillan had no real alternative if it was unhappy with Amazon's e-book prices. But when Apple announced its iPad and an upcoming iBook Store on Wednesday, the e-book landscape changed. Five publishers were announced to be working with Apple; Macmillan is one of them. The dispute between Amazon and Macmillan has bled beyond e-books, however. All formats of Macmillan books are now unavailable for purchase from Amazon. And that may be tough on the publisher...

John Scalzi:

A Quick Note On eBook Pricing and Amazon Hijinx: This asinine jockeying over electronic book prices has very little to do with what’s actually good or useful for anyone other than the manufacturer of a piece of hardware... who also happens to be a book retailer. I understand Amazon’s desire to corner the electronic book market with the Kindle, which requires publishers to bend to its will on pricing, but I’m not notably sympathetic to it.... If nothing else, this bit of a--hattery on the part of Amazon has well and truly cured me of any desire to ever get a Kindle. If Amazon is willing to play chicken with my economic well-being — and the economic well-being of many of my friends — to lock up its little corner of the ebook field, well, that’s its call to make. But, you know what, I remember people who are happy to trample my a-- into the dirt as they’re rushing to grab at cash.... All I’m saying is: I remember how I’m treated and for what reasons. And you know, I do buy a lot of books....

[D]elisting an entire publishing house as a bargaining tactic, on a weekend or no, is going to have a long-term effect on Amazon’s relationship with publishers, and not the one Amazon is likely to want, especially now that iBookstore lurks, gravid, on the horizon. But I suppose we will see...

Keith Hennessey Asks: What Does It Mean to Focus on Jobs?

And I am off to check his math...


What does it mean to focus on jobs?: The conventional Beltway logic is that the President used his State of the Union Address to “pivot to focus on job creation.” We have been told for a week or two that job creation is policy priority #1.... Wednesday night the President “pivoted to focus on jobs.”

That is why jobs must be our number one focus in 2010, and that is why I am calling for a new jobs bill tonight.

I have a simple question: What does it mean to focus on jobs?

I would presume that it means the President would propose new policy changes that are designed to significantly increase employment, and fairly quickly....

My back-of-the-envelope calculation... suggests that the President’s new Small Business Jobs and Wages credit will increase full-time employment in 2010 by 165,000 – 297,000 years.  By 2011, it will increase full-time employment by 264,000 – 594,000 years.... For comparison, remember that the U.S. economy has lost 2.7 million jobs since a year ago, and 7.2 million jobs since the beginning of the recession in December 2007.  297,000 is 4.1% of 7.2 million, so you’re talking about a policy change that at best would restore fewer than 1 out of 25 jobs lost since the recession began.

Now for the bigger problem:  the White House fact sheet is correct– CBO says this is the job creation policy with the greatest job creation bang per deficit buck.  Other policies are less efficient.  So while the total 2010 jobs impact of the President’s full proposal will be larger than just the impact of this new credit proposal, it’s still going to take only a tiny bite out of our employment problem, and the other components will have an even smaller effect than this core element.

I am not comfortable extending my back-of-the-envelope calculation to the President’s full proposal, but someone in Congress should ask CBO to apply their methodology to the President’s full package.  Members of Congress should understand not just the policies they are voting on, but the projected quantitative impacts of those policies on employment, GDP growth, and budget deficits. The numbers matter...

James Kwak on Cohen and DeLong's "The End of Influence"

Very flattering. He writes:

The Wasted Opportunity « The Baseline Scenario: I thoroughly enjoyed reading The End of Influence by Stephen Cohen and Brad DeLong.*For one thing, it’s not specifically about the financial crisis (although that does play a role), so you don’t have to read the nineteenth explanation of how a CDO works or what a NINJA loan is. For another, it’s short–only 150 pages, and small pages at that–and easy to read, so it will probably jump your queue of books to read and you can cross it off your list in just a couple of hours.

Despite being a short book, it’s about a lot of things. The most obvious is the much-bemoaned fact that the U.S. is now a huge debtor nation and is unlikely to maintain its status as the world’s importer of last resort indefinitely, and what that all means. The most central, however, is probably the global shift away economic neoliberalism–the idea that governments should withdraw from the economic sphere and allow free market forces to work their magic, symbolized by the recent effort to convince sovereign wealth funds to behave like ordinary, return-seeking institutional investors (see pages 85-89). Cohen and DeLong show that the last few decades of neoliberalism are really just a historical blip and that most of history–including most of the post-World War II–saw plenty of government intervention, even industrial policy, in countries like France (TGV, Airbus, etc.) and the United States (via the Pentagon). They see a resurgence of industrial policy all around the world (although it never really went away–see China, for example), and even if it often ends badly, it is something we will have to reckon with.

If the book isn’t centrally about the financial sector and the financial crisis, though, they still have a minor starring role. In their account, the recent period in which developing countries wanted to lend us their dollar surpluses gave us a great opportunity: “It gave America the opportunity, while absorbing more and more routine manufacturing from Asia at the expense of those same industries at home,” to shift its own economy into what should have been the ’sectors of the future.’” Instead, though we shifted our economy into finance. “The freedom of action that the United States enjoyed because it had the money was squandered” (pp. 12-13).

Cohen and DeLong recount (in admirably condensed form) the charges generally leveled against the financial sector, but they also point out something that often is overlooked:

[Finance] had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding fo elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of ‘let the market work its magic.’ It was so easy (pp. 112-13).

Cohen and DeLong do not make the financial sector the sole villain in their story. Another one is inequality: “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?” (p. 107). They worked more, and they borrowed more.

So where do we go from here? Although their book is all about the decline of U.S. financial power, Cohen and DeLong are far from prophets of doom. America simply needs to become a little bit more like a normal country–only a little, because we are still the world’s largest economy and its only superpower. “A drop in the value of the dollar, even a big drop, is not the end of the American economy” (p. 100). We don’t have as much weight to throw around in international meetings. I agree.

This is me talking now, not Cohen and DeLong: There is a lot of hand-wringing over global imbalances, but the answer is quite simple: the dollar needs to fall. Imported goods will get more expensive, but domestic goods won’t, and we’ll adapt. We won’t be able to dictate to the world as much as we used to, but frankly that’s a good thing, given how many other parts of the world we have messed up in our history and how wrong our extreme free market ideas turned out to be. In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.

Rickstersherpa Gets It Wrong, I Think

Hoisted from Comments: Can Someone Please Tell Me How This Is Supposed to Be Good Policy?: Rickstersherpa said...

I can only guess that Larry and Tim think this is 1993-94 again and if they signal Fiscal rectitude (also known as making the world safe for future Republican tax cuts), then Ben, whose neck they just saved, will relent on Number 2 and they might get enough political space to play with number 1. The Village wants a balance budget from Democrats, so a balance budget they are going to get. The only solace is that the coming double dip will speed the Washington Post into oblivion before Sarah Palin's administration.

I have seen no signs that the Federal Reserve will react to short-run fiscal consolidation in this way, or that anybody inside the Obama administration believes that the Federal Reserve will react to short-run fiscal consolidation in this way.

Can Someone Please Tell Me How This Is Supposed to Be Good Policy?

There is about a 30% chance that the U.S. economy is about to start growing rapidly, with unemployment declining by a percentage point or two each year. There is about a 40% chance that we are about to start a recovery like or a little bit better than the "jobless recoveries" that have followed the last two (much shallower) recessions, with unemployment staying where it is or trending down slowly. And there is about a 30% chance that the unemployment rate is going to pause--and then start rising again in a double-dip recession.

The tools to fight a further rise in unemployment are threefold:

  • Banking policy--have the Treasury buy or guarantee risky financial assets in enormous amounts in order to boost asset prices and get businesses back into a position where they can profitably obtain financing for expansion.

  • Monetary policy--have the Federal Reserve goose asset prices by taking steps that lower real interest rates somewhere along the yield curve.

  • Fiscal policy--have the government spend money, either by hiring people directly or by buying things from private companies that then hire people directly.

The populist anger and fallout from the last set of banking policy interventions has taken the first of these off the table.

The current complexion of the Federal Open Market Committee has taken the second of these off the table.

And now Barack Obama is taking the third of these off the table.

Will someone please tell me how this is supposed to be good policy?

Daniel Dombey of the FT:

Obama sets stage for fiscal retrenchment: President Barack Obama set the stage on Saturday for an administration budget proposal intended to begin fiscal retrenchment after several years of high spending against recession. In his weekly radio and video address, Mr Obama highlighted his promise to pull back the country’s $1,400bn fiscal deficit, the goal set to be at the heart of Monday’s budget proposals. “As we work to create jobs, it is critical that we rein in the budget deficits we’ve been accumulating for far too long – deficits that won’t just burden our children and grandchildren, but could damage our markets, drive up our interest rates, and jeopardise our recovery right now,” he said.

Mr Obama praised the US Senate for restoring a pay-as-you-go law intended to prevent unfunded programmes from being approved and drew attention to his own plans for a three year freeze on discretionary spending, except for national security. The savings from such a freeze will be relatively modest – reducing the  $12,400bn in accumulated government deficits over the next decade by only $250bn, according to the Committee for a Responsible Federal Budget. But administration officials hope the freeze will signal commitment to fiscal discipline and help build consensus for more fundamental measures that deal with burgeoning entitlements spending.

In his address, Mr Obama highlighted his plan for reaching such a consensus – a bipartisan Fiscal Commission intended to “sit down and hammer out concrete deficit-reduction proposals by a certain deadline”.  He added: “We’ve heard plenty of talk and a lot of yelling on TV about deficits, and it’s now time to come together and make the painful choices we need to eliminate those deficits.”...

Ten Economics Pieces Worth Reading: January 30, 2009

1) Veronica Navarro EspinosaCurbing Irrational Exuberance: Brazil Tax May Encourage More Measures, Dennis Says:

Jan. 19 (Bloomberg) -- Brazil’s success in curbing the rally in the real by imposing a tax on foreigners’ purchases of stocks and bonds is a “scary” and “dangerous” precedent, said Citigroup Inc. equity strategist Geoffrey Dennis. The success of the tax may encourage officials to adopt more measures to stem the currency’s appreciation.... “It’s kind of scary because it might mean that the government wants to do more things over time should the currency stay strong,” Dennis said.

The real has weakened 3.1 percent against the dollar since the government implemented a 2 percent tax on the purchases of equity and fixed-income assets by overseas investors on Oct. 19. The currency surged 33 percent last year, the best performance among 16 major currencies tracked by Bloomberg, as an accelerating economic recovery and growing demand for commodities lured foreign investors to the country.

“Part of the success of the tax comes about because there’s an implicit threat by the government to actually increase the tax if the currency continues to appreciate,” Tony Volpon, a Latin America strategist for Nomura Holdings Inc., said at the conference. “The government has had a surprising success in putting the fear in the carry-trade community.” In carry trades investors borrow at a low interest rate to invest in markets where returns are higher, earning the spread between the cost of borrowing and the returns on their investment. Brazil’s benchmark lending rate is 8.75 percent, compared with the U.S. Federal Reserve’s near-zero target rate...


MR. JUSTICE VAN DEVANTER, MR. JUSTICE SUTHERLAND, MR. JUSTICE BUTLER, and I are unable to agree.... We conclude that these causes were rightly decided by the three Circuit Courts.... The opinions there given without dissent are terse, well considered, and sound.... Considering the far-reaching import of these decisions, the departure from what we understand has been consistently ruled here... the obligation to present our views becomes plain.

The Court, as we think, departs from well established principles followed in Schechter Poultry Corp. v. United States, 295 U. S. 495 (May, 1935), and Carter v. Carter Coal Co., 298 U. S. 238 (May, 1936). Upon the authority of those decisions, the Circuit Courts of Appeals of the Fifth, Sixth, and Second Circuits in the causes now before us have held... the Act conferred upon the National Labor Relations Board no authority in respect of matters covered by the questioned orders.... Six District Courts, on the authority of Schechter's and Carter's cases, have held that the Board has no authority.... No decision or judicial opinion to the contrary has been cited, and we find none. Every consideration brought forward to uphold the act before us was applicable to support the acts held unconstitutional in causes decided within two years. And the lower courts rightly deemed them controlling...

3) Michael Woodford: Simple Analytics of the Government Expenditure Multiplier:

This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in such a case, expected utility is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates.

4) Ezra Klein: Rahm Emanuel makes me very pessimistic about health-care reform:

It is very, very, very important to be clear on what the death of health-care reform looks like. It is not a vote that goes against the Democrats. It is not an admission that the White House has moved on from the subject. It is continued statements of commitment from the key players paired with a continued stretching of the timetable. Like everything else in life, policy initiatives grow old and die, even if people still love them.

The timetable Emanuel is laying out makes little sense. The jobs bill will take some time. Financial regulation will take much longer. Let's be conservative and give all this four months. Is Emanuel really suggesting that he expects Congress to return to health-care reform in the summer before the election? Forgetting whether there's political will at that point, there's no personnel: Everyone is home campaigning.

Moreover, there's a time limit on health-care reform. The open reconciliation instructions the Senate could use to modify the bill expire when the next budget is (there's disagreement over the precise rule on this) considered or passed.

5) Mike Konczal: Fake Homeownership:

I saw an ad on craigslist (though most story that starts with that line are shady, this one is not especially so) for apartment rental opportunities in Sacramento, CA. The rent was very cheap, but you had to post a gigantic security deposit, sign away rights related to eviction and give proof that you’ve never been convicted of a crime. Digging a bit deeper, it was clear that the owner was an out of state company that was buying up sections of foreclosed homes in abandoned neighborhoods. And what they needed was less a “renter” but a controlled “squatter.” If left alone, these buildings would become homes for the homeless, gang activity, looters and pranksters, etc. So what the investment company wanted to do, since they wanted to sell the properties as homes in the long run but couldn’t in the short run, was get someone to squat in these buildings for them; they were looking to hire a respectable squatter, get him on the payroll through really cheap rent, and he or she who could do whatever in the building as long as it wasn’t destructive of value.

I think that’s a good metaphor for what homeownership is like with a regime of subprime loans. I like discussing this because it blurs the line of the ideals of homeownership of the late 20th century – a yeoman ownership society where nobody ever washes a rented car – with something more feudal. We’ve had this discussion before, but it only focused on the way up – what’s interesting now is we can begin to play with a theory of fake homeownership on the way down.

6) Michael Pomerleano and Andrew Sheng: A failure of public financial sector governance:

We are driven to the conclusion of Hyman Minsky that conventional wisdom and the “trend is your friend” invariably lead to complacency: “Stability leads to instability.” The cycle between greed and fear will be such that even if regulatory standards are toughened and independent systemic stability councils are put in place, fading memories of disasters will cause the public and policy makers alike to relax their vigilance, leading to the next crisis. The flawed public financial sector governance incentives that led to the present crisis have not been addressed in the prospective reform agenda. This article is intended to stimulate thinking and discussion about what can be done.

7) GRAPH OF THE DAY: The Failure of Okun's Law:


8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Sam Stein: Obama Goes To GOP Lions' Den -- And Mauls The Lions:

President Obama traveled to a House Republican retreat in Baltimore on Friday and delivered a performance that was at once defiant, substantive and engaging. For roughly an hour and a half, Obama lectured GOP leaders and, in a protracted, nationally-televised question-and-answer session, deflected their policy critiques, corrected their misstatements and scolded them for playing petty politics. White House officials told the Huffington Post they were absolutely ecstatic. MSNBC's Luke Russert, who was on the scene in Baltimore, relayed that a Republican official and other GOP aides had confided to him that allowing the "cameras to roll like that" was a "mistake."

So effective was the president that Fox News cut away from the broadcast 20 minutes before it ended...

9) STUPIDEST THINGS I HAVE SEEN TODAY: The Dumb-as-a-Post Mike Pence (R-House) and the Underbriefed and Lazy Chris Matthews: Outsourced to Matthew Yglesias:

For an example of what I’m talking about with regards to dumb-as-a-post Representative Mike Pence, watch his answer to the question of what kind of compromise he would propose for health reform: “Well, look, you know, I was, uh, yeah, yeah, look, uh” Pence then pivoted away from addressing the issue to a kind of stammering evocation of the idea that the health insurance industry should be completely deregulated under the guise of allowing you to buy insurance across state lines. This, of course, is just a longstanding conservative proposal and not an idea for a compromise.... Chris Matthews didn’t... have the policy chops to dig deeper with Pence on the insurance regulation issue. But this is the point.... Pence’s proposal... is that one revenue-hungry state should cut a deal with insurers—move your headquarters’ to Sioux Falls (or just bribe enough state legislators) and we’ll let your lobbyists write whatever lax regulations you like. Then next thing you know everyone is “allowed” to buy this unregulated South Dakota health insurance and no other kind of insurance policies are available. This is what’s been done with the credit card industry and it’s the model that Pence wants to extent to health insurance...

10) HOISTED FROM THE ARCHIVES: DeLong (1999): Why We Should Fear Deflation:

After more than sixty years, deflation has reappeared as something to worry about. In the past six months major newspapers printed 438 articles classified under the keyword "deflation"--compared to 36 such in the first half of 1997 and 10 such in the first half of 1990. For sixty years, ever since the middle years of the Great Depression, next to no one had worried about deflation. Next to no one had seen actual falls in the price level as even a remote possibility. Now people do....

Given that deflation is back on the agenda, should it be feared?...

If the danger of deflation springs from its effect on net worth and depends on the degree of financial fragility in the economy, then economies may well have more to fear than declines in broad goods-and-services price indices alone. If securities and real estate holdings have been pledged as collateral for debt contracts, then large-scale asset price declines also trigger the confusion of macroeconomic events with entrepreneurial failure that makes deflation feared.

Is the United States today potentially vulnerable to large-scale asset price declines in this way? In real estate no. In the stock market yes. Perhaps fundamental patterns of equity valuation have truly changed, as investors have recognized that the equity premium over the past century was much too large--in which case stock prices have reached a permanent and high plateau. But it seems more likely that there are substantial risks of stock market declines on the order of fifty percent back to Campbell-Shiller fundamentals.

A second source of potential deflation-like pressure--seen during Sweden's exchange rate crisis of 1992, during Mexico's exchange rate crisis of 1994-5, during the East Asian crises of 1997, as well as in Great Depression-era events like the Austrian financial crises of 1931--arises out of large-scale foreign-currency borrowing by banks, companies, and governments in countries whose exchange rates then sharply depreciate.

Exchange rate depreciation is a standard reaction to a sudden fall in foreign demand for a country's goods and services exports (on the current account) or property (on the capital account). When demand for a private business's products falls, the business cuts its prices. When demand for a country's products falls, a natural reaction is for the country to cut its prices, and the most way to accomplish this is through exchange rate depreciation.

But if governments, banks, and non-financial corporations have borrowed abroad in hard currencies, depreciation writes up the home-currency value of their debts and impairs their balance sheets in the same fashion as conventional goods-and-services price index deflation.

We know that other countries certainly have been vulnerable to this form of financial market disruption. Is the U.S. vulnerable? Not today. U.S. gross external obligations of $7 trillion or so are overwhelmingly equity or dollar-denominated investments. But will they still be dollar-denominated come the end of the year 2000, when they will amount to perhaps $9 trillion, and when these gross obligations are part of a net investment position of more than -$2 trillion?...

links for 2010-01-30

5.7% Real GDP Growth Rate in the Fourth Quarter (Where Oh Where Is My Okun's Law? Department)

The Bureau of Economic Analysis:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent. The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 26, 2010...

No surprise. But we are still all gobsmacked by what next week's productivity number will be--between 7 and 8%...

It's not just in this past quarter that productivity growth has been abnormally high given what is going on with real GDP. Look back at the past eight quarters: we are substantially outside of previous post-WWII American experience.


The linear relationship is:


You expect 8 quarters over which real GDP has not grown to see a rise in unemployment of 2.78%--and 8 quarters over which real GDP has fallen by 1.62% to see unemployment rise by 3.5% and not 5.2%.

A world in which the unemployment rate were not 10.0% but rather 8.3% would be quite a different world than the one we live in...

Ten Economics Pieces Worth Reading: January 29, 2010

1) Menzie Chinn sends us to: Michael Rosenberg, Financial Conditions Watch (Bloomberg, Jan. 27, 2010):

Fed Funds Rate Outlook -- A Taylor Rule Perspective: With U.S. real GDP growth moving back into positive territory in the second half of 2009 following four consecutive quarters of negative growth (see Figure 1), the economic forecasting community appears to be increasingly optimistic about the U.S. economy's growth prospects for 2010-11.... According to Bloomberg's latest survey of 57 economists (as reported on {ECFC}), the U.S. economy is expected to grow by 2.7% in 2010 and 2.9% in 2011 (see Figure 2). These projections represent a significant rebound from the 2.5% decline expected for 2009.

Indeed, judging by expectations of the future course of U.S. short-term interest rates, the market appears to believe that the U.S. recovery will prove to be stronger than a typical post-crisis recovery. Expectations for higher short-term interest rates are reflected both in the Fed Funds futures market and in the consensus interest-rate projections of leading economists (as reported in Bloomberg's latest {BYFC} survey)... the futures market is pricing in Fed rate hikes that will take the Funds rate to around 0.75% by year-end 2010 and to around 1.00% by February 2011. The forecasting community believes the Fed will be even more aggressive as they expect the Fed to hike the Fed Funds rate to 1.75% by mid-2011.

While it is certainly the case that the Fed will eventually have to push its policy rate higher, there is reason to believe that the policy-rate path predicted in Figure 4 might be overly aggressive. Indeed, as we demonstrate below, the market's projection for Fed rate hikes is not consistent with the path forecasted by conventional Taylor Rule models. If we input the Federal Reserve's forecasts for core inflation and unemployment into a variety of Taylor Rule-type models, we actually end up with a zero or negative Fed Funds rate projected for all of 2010 and, in a number of cases, for 2011 as well.

2) Felix Salmon: Global financial regulatory reform falls apart:

There are literally more representatives of Bill Clinton here in Davos than there are of Barack Obama. If the Obama administration is serious about its newest ideas for regulatory reform, especially the Volcker Rule, it would have made a great deal of sense to send Paul Volcker — or at the very least someone like Austan Goolsbee — to Davos, to try to get the rest of the world excited about it. But they didn’t.

And even the president himself doesn’t seem to wedded to it... the relevant bit of his address last night... is all so vague as to be meaningless; the one thing that’s for sure is that House has not passed financial reform with a Volcker Rule embedded — mainly because the Volcker Rule didn’t exist when the House was putting its bill together. Yet it seems that Obama is reasonably happy with the House bill in its present form.

3) Tim Duy: Dissent:

The FOMC statement contained a mini-bombshell, the dissent of Kansas City Fed President Thomas Hoenig.  I am skeptical, however, that this dissent is a significant shift in the policy environment.  Instead, I view the statement as taking another baby step forward to a normalization of monetary policy now that the financial crisis has eased and that the economic environment has firmed.  Many policymakers will simply find themselves increasingly uncomfortable holding rates at rock bottom levels while sitting on a bloated balance sheet - regardless of the unemployment rate.  Short of a significant reversal of recent economic gains, I would be hard pressed to see the Fed back away from a policy stance that is growing tighter, albeit slowly tighter.

4) John Gruber: The iPad Big Picture:

Apple now owns and controls their own mobile CPUs. There aren’t many companies in the world that can say that. And from what I saw today, Apple doesn’t just own and control a mobile CPU, they own and control the hands-down best mobile CPU in the world. Software aside (which is a huge thing to put aside), it may well be that no other company could make a device today matching the price, size, and performance of the iPad. They’re not getting into the CPU business for kicks, they’re getting into it to kick ass. They’re Microsoft and Intel rolled into one when it comes to mobile computing. In the pre-taped video Apple showed, Bob Mansfield said of the iPad, “No one else could do it.” Only Apple. And so my takeaway from this — with the bragging about making their own CPUs and their annual revenue and their size compared to companies like Sony, Samsung, and Nokia — is that this is Apple’s way of asserting that they’re taking over the penthouse suite as the strongest and best company in the whole ones-and-zeroes racket.

5) GRAPH OF THE DAY: from the Economic Policy Institute:

Worst economic crisis since the Great Depression? By a long shot

6) BEST NON-ECONOMICS THING I HAVE READ TODAY: Michael Cohen: America the Ungovernable:

In 2008 Barack Obama and the Democrats were elected to fix the economy; and yet the only real measures at their disposal—increasing government spending and bailing out or nationalizing key industries—is precisely what is sparking voter discontent. Had Democrats not passed an $800 billion stimulus package, if Obama hadn't bailed out the auto industry or continued the TARP program, the country would likely be in far worse shape than it is today. Yet the president is getting no credit for doing the exact things he was asked to do last November.

On health care, polls indicate that Americans want Congress to extend access, cut costs, and tame the insurance industry. But they don't want their own benefits affected, or government's role in the health-care system to increase, or be mandated to buy insurance. In short, they want change, but they reject the most commonsense means of bringing that change about and generally refuse to sacrifice for the greater good of society as a whole.

Making the situation worse is that political news coverage, rather than explaining the gulf between voter expectations and political reality, often panders to the electorate's misguided notions. Partisans are allowed to spew talking points decrying government spending and rising deficits without being forced to explain how they would rein it in. Politicians call for bipartisan compromise without acknowledging their own role in exacerbating partisan tensions. Voters complain that Washington must do more to help the economy but in the same breath decry government's expanding role or misstate basic facts about their government and are given a virtual free pass by reporters who take "customer is always right" attitude toward the electorate.

7) SECOND BEST NON-ECONOMICS THING I HAVE READ TODAY: Ta-Nehisi Coates: Chris Rock On The Negro Dialect:

8) SECOND STUPIDEST THING I HAVE READ TODAY: Eric Hobsbawm: Age of Empire, p. 50:

The world merchant marine, whose growth roughly indicates the expansion of the global economy, had remained more-or-less static between 1860 and 1890. Its size fluctuated between 16 and 20M tons. Between 1890 and 1914 it almost doubled...

[But the fleet of 1860 is a sailing fleet. The fleet of 1890 is a steam fleet. What with the changability of the wind, a steamship can sail about three times as fast as a sailing ship. the 20M tons of 1890 had three times the cargo-carrying capacity of the 20M tons of 1860.]

9) STUPIDEST THING I HAVE READ TODAY: Greg Mitchell tells us about David Brooks: David Brooks on Sarah Palin: A Profile in Cowardice:

It was amusing -- if appalling -- to watch David Brooks on the TV yesterday declare that Sarah Palin is a "joke" and only qualified to be a TV "talk show host." Last year, during the 2008 campaign, he believed exactly the same thing but refused to put it in print. It was a Profile in Cowardice and one of the biggest stains on Brooks' career in journalism and punditry.... Last year, in early October, the New York Times columnist admitted at a small Manhattan forum -- fortunately captured on video by then-HuffPoster Rachel Sklar -- that vice presidential candidate Sarah Palin was not qualified for higher office ("not even close") and, indeed, was a "cancer" on his party, the GOP. To that point, while offering some criticism of Palin as candidate, Brooks had not offered this frank appraisal to his millions of Times readers or in a national TV airing. Days passed and he never did. I kept a running count here of days he was missing in action. Election day came and went and no Brooks slam in print on this "unqualified" angle. And, of course, he never did say that selecting an incompetent was a fatal blemish on John McCain. In fact, Brooks wrote, "Palin is smart, politically skilled, courageous and likable. Her convention and debate performances were impressive. But no American politician plays the class-warfare card as constantly as Palin." Brooks also mocked what he called the "smug condescension that has so marked the reaction to the Palin nomination in the first place"...

10) HOISTED FROM THE ARCHIVES: Brad DeLong (August 2007)Weirdest First Week of Class Experience EVAR!!:

"The 210a students are waiting for you." "What?" "Economics 210a. The students. They are waiting for you. In Evans 608-7." "But 210a is in the spring!" "There are seventeen 210a students waiting for you in Evans 608-7 right now."

It turns out that when we in the Economics Department moved 210a from the fall to the spring semester, we never told the registrar. So students who relied on the schedule of classes rather than the Economics Department gossip vine thought 210a starts today. I am pushing as many of them as I can back to the spring, and I suppose I will wind up doing a reading course for the rest who cannot make the spring time...

UPDATE: We may well have told the registrar. The registrar thinks that I am teaching 210a in the fall, and that Barry Eichengreen is teaching 210a in the spring. We may have just confused the registrar.

links for 2010-01-29

UPDATE: Len Burman Approves of the Discretionary Spending "Freeze"

Len Burman approves--but not because he thinks it will boost output and employment in the short term or do anything to solve our long-term fiscal problems (it does, after all, expire after three years). Len Burman approves of the freeze because--wait for it--it sends "[t]he message... that government jobs no longer come with life tenure".

How a three-year discretionary spending freeze sends the message that government jobs no longer come with life tenure is left as an exercise to the reader.

Len Burman:

TaxVox: the Tax Policy Center blog :: Warm thoughts about Obama's freeze: The growth of government will have to be constrained and applying a scalpel to less effective programs is, as Howard Gleckman said, “a start.”

As for the Republicans, get real!  Yeah, the big problem is entitlements and not discretionary spending. But when President Obama tried to limit Medicare growth in the health reform bill, you guys emerged as the defenders of the seniors’ health program. How do you suggest the president take on mandatory spending?  How about a budget commission?  No, you and your liberal co-obstructionists in the Senate shot that down yesterday. 

Cutting discretionary spending is hard for a Democratic president.  Republicans who care about the size of government should applaud rather than sneer.  (Encouragingly, Senator McCain and a few other prominent Republicans have expressed support, although the leadership is still dismissive.) 

But I've concluded that Obama’s freeze isn’t aimed at either Republicans or the Democratic base. It’s a populist move meant to assuage those who are ticked off that the federal payroll has grown while private-sector jobs have been vanishing at an alarming rate. The message in the freeze is that government jobs no longer come with life tenure. To that end, Pelosi and Reid’s protestations are a plus—if the president can put together a coalition to implement the freeze.  And such a bipartisan coalition would provide comfort to the independents who are fleeing Obama’s camp.

That said, the freeze is a risky move.  If the President can’t pull it off, he’ll lose the populist boost while undermining his base support.

Easy Answers to Simple Tech Questions

Paul Krugman asks:

whyPad?: I’ve been reading all the stories about the iPad and sort of wishing I could find some reason to get one. But I can’t come up with a justification. Right now, I carry a dumb phone — GSM, so it works all over the world and in parts of New Jersey; a Lenovo X61 (with an aircard, so that New Jersey Transit is my mobile office); and a Kindle 2. I lug all of them almost everywhere, so I’m kind of a beast of burden. If the iPad were an adequate substitute for the notebook, it would let me lighten that load. But from what I’m seeing, it isn’t: I need lots of files available, number-crunching capacity, basically the ability to do whatever I would do sitting at my regular desk. So I’m still stuck with my backpack-sized briefcase.

Answer: The iPad dominates the Kindle.

February 5 I Will Be In DC Again...

From the Center for American Progress:

Center for American Progress Email: The End of American Influence?

February 5, 2010, 10:00am – 11:30am

Admission is free.

RSVP to attend this event

Featured Authors:

Stephen S. Cohen, Senior Fellow, Center for American Progress; Professor, University of California, Berkeley; author, The End of Influence
J. Bradford DeLong, Professor, University of California, Berkeley; co-author, The End of Influence
Nina Hachigian, Senior Fellow, Center for American Progress

Moderated by:

Bruce Stokes, International Economics Columnist, National Journal; Fellow, German Marshall Fund

America’s Employment Dilemma

Project Syndicate - America’s Employment Dilemma: BERKELEY – There are always two paths to boost employment in the short term. The first path is to boost demand for goods and services, and then sit back and watch employment rise as businesses hire people to make the goods and services to meet that demand. The second path is not to worry about production of goods and services, but rather to try to boost employment directly through direct government hiring.

The first path is better: not only do you get more jobs, but you also get more useful stuff produced. The problem is that it does not take effect very quickly. It is subject to what Milton Friedman called “long and variable lags.” Thus, policies aimed at boosting employment by the end of, say, this calendar year needed to be put in place about a year ago to have time to have reached their full effect.

Some countries – China, for example – did, indeed, implement such job-creation policies a year ago and are already seeing the benefits. Others, like the United States, did not, and so unemployment remains at around 10%.  

This is not to say that the Obama administration did not try to boost employment. A year ago, it set five policy initiatives in motion:

  • Additional deficit spending;

  • Recapitalization of banks that appeared very vulnerable to prevent a further flight from risky assets;

  • Asset purchases by the US Treasury and other executive-branch entities to reduce the quantity of risky assets that the battered and risk-intolerant private sector was holding;

  • Continued monetary easing via very low Federal Funds rates;

  • Expansion of extraordinary policy interventions by the Federal Reserve.

The stress tests conducted by the US Treasury last year suggested that the banking sector had re-attained sufficient capital. And the Fed has continued its low-interest monetary policy. But the dysfunctional US Senate capped additional deficit spending at $600 billion over three years – only half of the $1.2 trillion that was the technocratic goal.

Moreover, the Fed became gun-shy and did not continue to increase its balance sheet beyond $2 trillion. And large-scale market interventions funded and guided by the Treasury never came to pass on a sufficiently large scale to have any tangible effect on jobs.

In short, perhaps two and a half out of the Obama administration’s five policy initiatives came to fruition. And, in the face of a recessionary crisis that turned out to be roughly twice as large as was forecast at the end of 2008, such limited action was not enough to keep the US unemployment rate below 10% – or even set it on a downward trajectory.

This brings us to the present moment, with US unemployment unacceptably high and refusing to fall. As a result, there is now a very strong case to turn the focus of the US economy from measures aimed at increasing demand to measures aimed at boosting employment directly (without worrying much about whether these measures are efficient in the sense of substantially raising the quantity of goods and services produced).

In practice, that means that the government either hires people and puts them to work or induces businesses to hire more people. We are talking about either direct government employment programs, or large tax credits for businesses that increase the number of workers they employ.

There is still time for a substantial shift in federal spending toward high-employment (but in all likelihood low-value) projects to reduce unemployment before the end of 2010 – if Congress acts quickly. And there is still time for a substantial temporary and incremental new-hire tax credit aimed at getting businesses to boost employment before the end of 2010.

But will Congress act quickly? Given the depth of political polarization in the US, and thus the need for 60 of 100 votes in the Senate to end a Republican filibuster, there is no sign of it being able to do so. Such a plan can get off the ground only if 50 Democratic senators are willing to rely on the budget reconciliation process – used to combine the bills adopted by the House of Representatives and the Senate – and are willing to accelerate that process and complete it within a month. Don’t hold your breath.

PBS Annotated State of the Union, Excerpted

Barack Obama:

The Annotated State of the Union | Online NewsHour | PBS: Madame Speaker, Vice President Biden, Members of Congress, distinguished guests, and fellow Americans....

But when I ran for President, I promised I wouldn't just do what was popular - I would do what was necessary. And if we had allowed the meltdown of the financial system, unemployment might be double what it is today....

BRAD DELONG: I wonder where this unemployment number came from? I haven't seen anything suggesting another 10 percent of unemployment -- 4 percent maybe...

BARACK OBAMA: Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year. The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That's right - the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster...

BRAD DELONG: Which raises the question of why Obama isn't extending and enlarging it. If the stimulus bill was causing interest rates to go up and that was retarding investment, then there is a case for not enlarging and extending the ARRA. But interest rates aren't rising. And yet Obama isn't extending and enlarging the ARRA. Big mistake...

BARACK OBAMA: So tonight, I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat. I am also proposing a new small business tax credit - one that will go to over one million small businesses who hire new workers or raise wages. While we're at it, let's also eliminate all capital gains taxes on small business investment; and provide a tax incentive for all businesses, large and small, to invest in new plants and equipment...

BRAD DELONG: Haven't seen any paper suggesting that these measures would be effective yet -- and the Carter-era new hires tax credit was a disappointment. The restriction of the new hires tax credit to small businesses cannot be a good move. I'm predisposed to like an equipment investment tax credit as relatively effective at boosting investment and employment -- but again, I haven't seen any paper on this yet, and I should have.

BARACK OBAMA: You see, Washington has been telling us to wait for decades, even as the problems have grown worse. Meanwhile, China's not waiting to revamp its economy...

BRAD DELONG: China isn't proposing a domestic spending 'freeze' either...

BARACK OBAMA: Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't. And if I have to enforce this discipline by veto, I will...

BRAD DELONG: Oh boy. If the stimulus package was good policy, this is political posturing. If this veto threat is good policy, the stimulus package was political posturing. Very bad sign...

BARACK OBAMA: I know that some in my own party will argue that we cannot address the deficit or freeze government spending when so many are still hurting. I agree, which is why this freeze will not take effect until next year, when the economy is stronger. But understand - if we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery - all of which could have an even worse effect on our job growth and family incomes...

BRAD DELONG: Now somebody--perhaps me--is confused. Fiscal 2011 begins in October -- this year, when the unemployment rate is still projected to be near 10 percent. But Peter Orszag says the 'freeze' applies to fiscal 2011 -- and is not delayed until fiscal 2012, which starts in October 2011. The economy is not going to be meaningfully stronger when fiscal 2011 starts than it is now. Either there are some wires crossed, or a lot of people in the White House don't know when fiscal years begin...

BARACK OBAMA: No wonder there's so much cynicism out there...

BRAD DELONG: Add me to the cynical: To defend deficit spending in the ARRA and then call for a spending freeze ten minutes later does not pass the coherence test...

Ten Economics Pieces Worth Reading: January 28, 2010

1) Milton Friedman: A Monetary and Fiscal Framework for Economic Stability:

A progressive tax system which places primary reliance on the personal income tax. Every effort should be made to collect as much of the tax bill as possible at source and to minimize the delay between the accrual of the tax liability and the actual collection of the tax.... Changes in the tax structure should reflect changes in the level of public services or transfer payments the community chooses to have. A decision to undertake additional public expenditures should be accompanied by a revenue measure increasing taxes...

2) Jonathan Chait: I'm Back. So Is Health Care Reform:

[T]he structural dynamic remains the same -- Democrats understand that they have to pass this bill or face even deeper electoral catastrophe than they're likely to suffer anyway. They suffer from disorganization, lack of urgency, and extreme parochialism. The good news is that, having passed a bill through the Senate, the largest procedural roadblock by far is now behind them. The Democrats now just 50 Senators to cut a deal with the House to fix a bill through reconciliation, and 218 House members to vote for the Senate bill.... I don't see this as a sure thing, but the outlook remains a lot better than you'd guess from reading the national news headlines.

3) Ryan Avent: A tree falls in Oregon:

I don't really see any reason to downplay this outcome relative to the Massachusetts election. If anything, this vote is more telling as candidate personalities weren't on the ballot. Of course, I don't expect Republicans to suddenly reevaluate their outlook on tax rates. One would think that someone in the Democratic leadership might note, however, that raising revenues can be a credible and acceptable way to help close a budget gap.

The tricky part is that one doesn't really want to go about jacking up tax rates in the midst of recession (or its immediate aftermath). As the CBO notes in its new Budget and Economic Outlook, allowing the Bush tax cuts to expire shaves quite a bit off deficits over the coming decade—but at the expense of some growth. But what does seem clear is that the adminstration could propose and Congress could pass revenue-raising measures now, to begin taking effect in three or four years. Having put the country on a credible path toward budget sustainability, the government might then have more room to pursue short-term stimulus. But that's not what we're going to get, it seems. Instead, the American economy will be stuck with insufficient spending now, and insufficient deficit-reduction later.

4) Jon Gruber: ‘All or nothing’:

“You can’t break this bill apart and have it work,” said MIT economist Jonathan Gruber. “It’s all or nothing at this point. The Democrats, and essentially the president, have to decide if they’re willing to go for it all, or are willing to live with nothing.” First, though, Gruber, a central architect of the Massachusetts health-care system that has served as the model for the congressional legislation, acknowledged his extreme chagrin over the political reversal that accompanied Massachusetts Republican Scott Brown’s victory last week in the special election to replace the late Sen. Edward M. Kennedy. “My kids are like, ‘Why are you so sad, daddy?’” said Gruber, speaking at The Stata Center. “I explained, ‘Imagine you worked on a term paper for a year, and you were about to hand it in, when someone turned off your computer and you lost all your work.’”

5) Tim Geithner: House Committee on Oversight and Government Reform:

The decision to rescue AIG was exceptionally difficult and enormously consequential. At that time, our economy stood at the brink. The financial institutions that Americans rely on to protect their savings, help finance their children’s education, and help pay their bills were at risk in ways few had ever experienced. The institutions and markets that businesses rely on to make payroll, build inventories, fund new investments, and create new jobs were threatened like at no time since the Great Depression. Across the country, people were rapidly losing confidence in our financial system and in the government’s ability to safeguard their economic future. Action was required. The world was watching. And the government did not have the luxury of time. The steps the government took to rescue AIG were motivated solely by what we believed to be in the best interests of the American people. We did not act because AIG asked for assistance. We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks. We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses....

6) GRAPH OF THE DAY: From CBO: If we stick to PAYGO, we have a (barely) sustainable budget outlook for the next decade--at least according to today's forecasts: » Blog Archive » What a Potentially Sustainable Budget Outlook Looks Like

7) MOST INTERESTING NON-ECONOMICS THING I HAVE READ TODAY: Ed Luce: / US / Politics & Foreign policy - White House nightmare persists:

[M]ost people do not think Mr Obama can even command unity within his own administration on the Wall Street proposals amid growing speculation about whether Tim Geithner, the Treasury secretary, can survive in his job. Mr Geithner was conspicuously sidelined during Thursday’s announcement by the presence of Paul Volcker, the former Federal Reserve chairman, who lent his name to the push to rein in Wall Street banks. The speculation about Mr Geithner is only likely to grow. “The Obama proposals were clearly politically motivated and came from the White House not the Treasury,” says a Democratic adviser to the administration, who withheld his name.

Finally, there is increasingly open Democratic disaffection about the way Mr Obama is managing relations with Capitol Hill. Many believe that Rahm Emanuel, Mr Obama’s aggressive chief of staff, served Mr Obama badly by persuading the president that his election was a transformational moment in US politics that gave him the opportunity to push through long-cherished Democratic goals, such as healthcare reform. In fact, exit polls from Mr Obama’s election showed that almost two-thirds of the voters cited the economy as their chief concern, with fewer than one in 10 mentioning healthcare. Mr Emanuel is also perceived to have mishandled the day-to-day logistics of getting healthcare through Congress. By leaving the scripting of the details of the healthcare bill to Democratic leaders on Capitol Hill, the White House openly courted the risk of chaos. Tellingly, in his victory speech in Boston on Tuesday,...

“I haven’t seen Rahm Emanuel except on television,” Jim Pascrell, a Democratic lawmaker from New Jersey, told Politico, the news website, on Friday. “We used to see him a lot; I’d like him to come out from behind his desk and meet with the common folk.” In short, Mr Obama’s nightmare January could easily slip into a nightmare February. “Unless and until the president changes the way his White House, works, things are going to continue to go badly for him,” says the head of a Democratic think-tank. “Heads still have to roll.”

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Matthew Yglesias Institutions Matter:

I have various points of agreement and disagreement with Fareed Zakaria’s version of the “Obama is screwing everything up” process column but there’s one point with a really glaring flaw:

The Republican Party has decided to be utterly uncooperative (although on health care Obama never really reached out to them with serious compromises). But whether or not Republican senators would at first reward Obama for adopting a more nonpartisan approach, independent voters would, which would then change the political calculus in Washington. Rahm Emanuel quipped that the task was not to get health-care legislation through “the executive committee of the Brookings Institution, but the U.S. Congress.” In fact, proposals that would impress experts would also impress tens of millions of independents, the vast middle ground where elections are won and lost in America. That is how Bill Clinton outmaneuvered Newt Gingrich, and how Tony Blair outfoxed the Tory party for 10 years.

Here’s the thing. As far as two different countries go, the United States and the United Kingdom have reasonable similar political cultures. So similar sorts of electoral strategies can work in both countries, and political strategists actually do go back-and-forth across the Atlantic. But in terms of political institutions the US and UK are totally different. The UK is a highly centralized country with a de facto unicameral legislature, a parliamentary system, and extremely strong party discipline. The United States is a strongly bicameral federal republic with weak party discipline and an independent executive. Under the circumstances, governing strategies that work in the UK won’t work in the US and vice versa.... You can think what you want about American governing institutions, but I find it very frustrating when commentators don’t acknowledge that our institutions are both unusual (we have the only full presidential system in the developed world) and an important determinant of policy outcomes.

9) STUPIDEST THING I HAVE READ TODAY: STUPIDEST THING I HAVE READ TODAY: The Incompetent and Mendacious Chief Justice John Roberts, as related by James Fallows:

‘When corporations use other people’s money to electioneer,’ as Kagan explained, ‘that is a harm not just to the shareholders themselves but a sort of a broader harm to the public,’ because it distorts the political process to inject large sums of individuals’ money in support of candidates whom they may well oppose.

“Roberts sharply challenged this line of argument. ‘Isn’t it extraordinarily paternalistic,’ he asked, ‘for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can’t sell their shares or object in the corporate context if they don’t like it? … ‘ “We the government have to protect you naive shareholders.” ‘


Virtually all such “wealth” as my wife and I hold, apart from our house, is in low-cost indexed mutual retirement funds. I literally have no idea which specific companies I might have bigger or smaller positions in. By the prevailing wisdom of the day, I’m behaving rationally for a non-expert prudent investor. By Roberts’ standard, I am “too stupid to keep track” of what every one of these companies is doing and shifting my positions day by day in response. Or maybe just too lazy.

And Felix Salmon:

As long ago as 2003, Roberts owned no fewer than 46 different common stocks, on top of 31 different mutual funds, one ETF, and a REIT. I very much doubt that he was keeping track of what all of the corporations he owned were doing, and selling his shares or objecting in the corporate context if he didn’t like it. And I don’t think that he believed that his mutual-fund managers were doing that either.

10) HOISTED FROM THE ARCHIVES: Brad DeLong (August 2007: NOOOOOOOOOO!!!!!!!!!!!

It is always a mistake to surf over to National Review. Always:

Pour in the Cash [Larry Kudlow]: [M]y campaign to get the Fed to permanently inject new cash into the banking system and deal with the dysfunctional commercial paper market — as well as the general credit freeze-up. There’s housing price deflation... commodity deflation.... Stock prices for materials are off nearly 13 percent since July 19, while metal and mining shares are off 16 percent. There’s the deflation of loan values, both CDOs and CLOs. And there’s the deflation of the Treasury bill rate from 5 percent to 4 percent...

Does Larry Kudlow really not know that three-month Treasury bills are worth 98.76 when the bill rate is 5% and are worth 99.01 when the bill rate is 4%? That the prices of Treasury bills rise--hardly a sign of "deflation"?

Can he really be that ignorant? Can he really be that thoughtless?

Department of "Huh?!?!"


I know that some in my own party will argue that we cannot address the deficit or freeze government spending when so many are still hurting. I agree, which is why this freeze will not take effect until next year, when the economy is stronger.

Now I am genuinely confused. The Office of Management and Budget says that the "freeze" starts in October with the start of fiscal 2011:

Ryan Avent: Deputy Director of Office of Management and Budget Rob Nabors responded to a question on how the freeze might conflict with efforts to return the economy to full employment. Mr Nabors noted that in 2010, the adminstration was focused on putting Americans back to work. Then in 2011, when the economy is on a more stable footing, the president will turn his attention to working toward a sustainable budget situation. This is utter foolishness. Fiscal 2011 begins in October of this year. At that point, according to CBO, unemployment will be above 9.5%. At the beginning of fiscal 2012, according to CBO, unemployment will still be at or near 9%...

Does the Office of Management and Budget not know what the budget proposal is? Does Barack Obama not know that fiscal 2011 accounting period begins this October?


Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will...

Oh boy. If the ARRA was good policy, then--because interest rates on Treasury debt now are lower than everybody thought they would be--enlarging and extending it is good policy, and any "freeze" is political posturing. If a "freeze" now is good policy, then the ARRA was political pandering.

It is not good to defend the ARRA and say that it saved two million jobs and then turn around and reverse your argument ten monutes later. Not good at all...

Bruce Bartlett Is Convincing Me That We Need a VAT

He writes, apropos of Oregon:

The Oregon Tax Vote: populist anger, which has previously been channeled toward the anti-tax tea party movement, may have the potential to swing in the other direction when people are faced with cuts in programs with wide support. I can easily see many tea party goers becoming rabid tax-the-rich folks if the alternative is higher taxes on them. Let us not forget that just about a year ago many of the House of Representatives' most conservative members voted to impose a 90 percent tax rate on bank bonuses. As I noted at the time, those supporting this confiscatory tax measure included Eric Canter, Peter Hoekstra and Paul Ryan.

I have foreseen this development for some years and feared that once our budgetary problems forced action that sharply higher tax rates on the rich, corporations and capital in general would be the inevitable consequence. That is why I have championed the value-added tax as a way of raising the revenue that will be raised one way or another, but in a way that exempts capital because it is a tax on consumption. In short, it is the most conservative way of raising revenue that we know of.

Thus it's ironic that almost all of the opposition to a VAT comes from conservatives. Just the other day the right-wing Heritage Foundation published a blast against it that made no serious effort to address the real reasons for a VAT: taxes will be raised and all the alternatives to a VAT are worse from Heritage's own point of view. It must be nice to live in a right wing dream world where deficits never lead to tax increases, only spending cuts (except on defense or Medicare, which the Republican National Committee has declared to be sacrosanct)...

Fiscal Policy in Oregon

USA Today:

News roundup: Oregon voters OK tax hike for wealthy, businesses -: Oregon voters have passed measures to raise income taxes on the wealthy and on businesses.  The measures were approved 54% to 46%. It means that taxes will go up for individuals with taxable income of more than $125,000 and households with more than $250,000. If the measures had failed, the legislature would have faced a huge shortfall in the two-year state budget. It was the first time time since the 1930s that Oregon voters have approved a state-wide income tax increase...

Department of "Huh?!"

The New York Times:

Opposite of Bold: To create jobs, Mr. Obama must make it clear that he will not abandon the states at this time of budget crises. Bolstered aid to states is unpopular. But it is among the surest ways to preserve and create jobs because the money is pushed through quickly to employees, contractors and beneficiaries. The alternative is recovery-killing spending cuts and tax increases on the state level...

Who thinks that aid to states is unpopular? It is unpopular among senators. But my impression was that keeping schools from closing was quite popular...

A Good Sign: Barney Frank Is Nice to Obama

By not including what Obama calls the Volcker rule in last summer's financial regulation plan, Obama made extra work for Barney Frank. But Barney is being a doo-bee and is playing nice:

Frank says Obama bank plan could be law within months: The chair of the House of Representatives financial services committee, and a lynchpin of US President Barack Obama’s attempts to rein in the banking sector, has argued that the dramatic proposals unveiled by the administration last week to clamp down on banks could be incorporated into legislation already planned by his committee, and thus could be enacted into law within months.

In an exclusive video interview with the Financial Times, Congressman Barney Frank admitted that he had been surprised by the timing of Obama administration’s move last week - but insisted that the policy detail of the proposals, drafted by Paul Volcker, chairman of President Obama’s Economic Recovery Advisory Board, were in line with the committee’s existing thinking.

“We’ve been working with Paul for most of the [last] year, so I wasn’t surprised [by the details of the proposals],” he says. Mr Volcker, previously seen as an “odd man out” had now been recognised by the administration for the “cogency of his work”, Mr Frank said.

Last week Mr Obama and Mr Volcker announced twin proposals – one to constrain the biggest banks from growing bigger, and another to force them to shed hedge fund, private equity and proprietary trading activities. The initiative was dubbed Glass-Steagall Lite by some commentators, who saw in it a slimmed down version of the 1930s legislation that forced commercial and investment banks to split.

Mr Frank said one caveat for his support was that banks must be given sufficient time – “at least three years” – to divest hedge fund and private equity assets, or trim their size.. “You can’t have a firesale. There would have to be a phase-in,” he said...

Ten Economics Pieces Worth Reading: January 27, 2010

1) Martin Wolf: Volcker’s axe is not enough to cut banks to size:

[T]he biggest issue is whether Mr Volcker’s ideas are in themselves good. Are these new proposals desirable, workable and relevant? On the first of these, my answer would be: yes. It is desirable that institutions are prevented from exploiting explicit and implicit guarantees in order to make speculative investments of little economic benefit.... Again, it would clearly be much better if it were possible to wind up financial institutions without excessive disruption, because they are not too large or because they are not too interconnected with the rest of the financial system. Then, are these ideas workable? Here doubts begin to arise. Would it really be possible to draw and, more importantly, police a line between legitimate activities of banks and activities “unrelated to serving their customers”?...

Finally, there is the biggest question of all – that of the relevance of these ideas. There is no doubt that deposit-taking institutions are special. They perform irreplaceable services for the public and the economy. But, as experience has now taught us, the vast parts of the financial system that evolved, particularly in the US, partly in order to get round capital requirements designed to make banks safer, are of vital importance, too. As Paul Tucker, deputy governor of the Bank of England, noted in an important recent speech, “shadow banking” also had to be rescued. Any institution that promises to redeem its liabilities on demand, while investing in longer-term or riskier assets, has bank-like characteristics and is vulnerable to a run.... It is, alas, not the case that the US government can credibly promise to make banks safer, while leaving this vast forest of shadow institutions to the market....

Moreover, the question of relevance arises in other ways, too. In this crisis, at least, banks’ investments in hedge funds, private equity and even proprietary trading were simply not the core of what went wrong. Again, while it is easy to rail against big banks, the failure of a small, highly interconnected institution, Lehman, proved vastly important. Indeed, it triggered the rescue of the entire global system. I admire Mr Volcker and strongly support his desire to develop a financial sector that supports the wider economy.... I agree that part of the solution is indeed structural. But these proposals are, in important respects, unworkable, undesirable and irrelevant.... The president may indeed be desperate. But much more work is needed.

2) Paul N. Van de Water and James R. Horney: Using Reconciliation Process to Enact Health Reform Would Be Fully Consistent With Past Practice:

Democratic congressional leaders must soon decide whether to use the reconciliation process to help pass health reform legislation.... Some critics have charged that using reconciliation to enact a major change in policy, such as health reform, would... represent a gross misuse of the process... this charge is incorrect: Congress has employed reconciliation many times to make major policy shifts... welfare reform enacted in 1996, massive tax cuts in 2001 and 2003, and creation or expansion of several health coverage.... Using reconciliation to help enact health reform would be consistent with past congressional practice.... The sharp break with past practice took place in 2001, when Congress used reconciliation to enact a large tax cut that greatly increased federal deficits and debt. Prior to 2001, every major reconciliation bill enacted into law reduced the deficit. In 2003 Congress used reconciliation to pass another round of deficit-increasing tax cuts.... In 2007, the House and Senate adopted rules preventing Congress from using reconciliation to increase deficits and debt as was done in 2001 and 2003. Since rising health costs are the single largest reason for projected long-run deficits, it is appropriate that health reform be considered through the reconciliation process.

3) Ryan Avent: The "spending freeze" in context:

[W]hile the administration is busy not denting the long-run budget deficit, it's also not addressing short-term economic weakness.... Real GDP is expected to increase by 2.1% in 2010 and 2.4% in 2011. That's extremely sluggish growth coming out of a deep recession. Core consumer price inflation is forecast to be 1.1% in 2010 and 0.9% in 2011. And CBO has unemployment at 10.1% in 2010, 9.5% in 2011....

In a conference call that just concluded, Deputy Director of Office of Management and Budget Rob Nabors responded to a question on how the freeze might conflict with efforts to return the economy to full employment. Mr Nabors noted that in 2010, the adminstration was focused on putting Americans back to work. Then in 2011, when the economy is on a more stable footing, the president will turn his attention to working toward a sustainable budget situation. This is utter foolishness. Fiscal 2011 begins in October of this year. At that point, according to CBO, unemployment will be above 9.5%. At the beginning of fiscal 2012, according to CBO, unemployment will still be at or near 9%. This is an important point; one of the primary factors causing current high deficits is the revenue-reducing effect of a weak economy combined with the automatic increase in spending on social programmes associated with the weak economy. It's very difficult to balance a budget while the economy is weak, because every contractionary policy move further reduces economic activity, thereby trimming revenues and putting upward pressure on automatic stabiliser spending.

The one source of solace here is that the freeze proposal is too lame to produce serious budget cuts. But that means it's basically a waste of time and political energy, at best. No amount of spinning from the administration is going to cover that fact.

4) Greg Ip: Not liberal or conservative, just incoherent:

[T]e IMF warns against “premature and incoherent exit” from government support for the economy. “Incoherent” nicely describes the policy debate in Washington....

Start with the Fed. On the right, they’re angry about quantitative easing which they say is monetising deficits. On the left, they’re angry about lax regulation of banks. Both are furious at bail-outs... both think the Fed created a bubble with its low interest rates. So the Fed, presumably, should shrink its balance sheet, end its asset purchases and liquidity programmes, order banks to raise underwriting standards and raise rates to nip the next bubble in the bud. And this is going to bring unemployment down?...

[T]he intensity of attacks could shape its behaviour, and not for the better. The confirmation circus is surely the last nail in the coffin of any additional quantitative easing.... Buy more mortgage-backed securities now, and everyone will see payback to Mr Reid. Perversely, to avoid perceptions of political pliability, the Fed may err on the side of less stimulative monetary policy. Meanwhile, to atone for past sins bank regulators are breathing down lenders’ necks and even Mr Bernanke admits “uncertainty attending... regulatory capital standards” is suppressing the supply of credit.... The administration has two vacancies to fill on the Fed’s seven-member board of governors—more if some of the current governors retire.... A weakened board means a louder voice for the Fed's hawkish reserve bank presidents.

On fiscal policy, voters seem equally upset about deficits and high unemployment as if the first has caused the second when the reverse is true. Republicans have certainly fanned this perception by insisting the stimulus did nothing.... Obama feeds the confusion. Last fall he warned that adding to the national debt could lead to a double-dip recession.... This week, even as Congress prepares additional stimulus, Mr Obama has begun ringing the fiscal austerity gong, backing a deficit commission (albeit too late to make a difference) and offering a discretionary spending freeze.

Done right, stimulus now and deficit reduction later is good policy. Yet such delicate sequencing is tough enough in rational times, never mind this post-Massachusetts world.... The risk of a policy error, always high, may be rising.

5) Duncan Black: Where Was Plan B?:

I get that administration officials were not as pessimistic as I was about the economy. I don't claim to right and prescient about everything. They could have been right!

What bugs me is that they should have had a plan 'B' in place. And they didn't.

6) GRAPH OF THE DAY: CBO Unemployment Rate Projections:

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Steve Mirsky: Greenhouse Bananas: Non-Science Smear Campaigns: Scientific American:

Here’s my conclusion: the only strong evidence we have that Oklahoma Senator James M. Inhofe isn’t a clown is that his car isn’t small enough...

8) SECOND STUPIDEST THING I HAVE READ TODAY: Faux News on Fifteenth Street--otherwise called the Washington Post--attacks the idea that elected representatives should have anything to do with who runs the Federal Reserve: Should Bernanke Stay at the Fed?:

The issue now is much bigger than whether Mr. Bernanke gets another term. By threatening his tenure for no apparent reason other than political panic and pandering, his new opponents have turned this confirmation process into a test of central bank independence, which is an indispensable element of modern economic management. If a stampede of spooked senators were to trample Mr. Bernanke’s confirmation, the message to markets would be that the value of the U.S. dollar is hostage to short-term politics. That would deliver a huge, possibly lasting, blow to the economy.

9) STUPIDEST THING I HAVE READ TODAY: Pope Leo XIII Against Democracy, Feminism, Progressive Income Taxation, and Socialism (via Matt Yglesias): Pope Leo XIII 28 December 1878:

Their habit... is always to maintain that nature has made all men equal, and that, therefore, neither honor nor respect is due to majesty.... But... inequality of rights and of power proceeds from the very Author of nature, "from whom all paternity in heaven and earth is named"... by mutual duties and rights, that the thirst for power is restrained and the rational ground of obedience made easy, firm, and noble.

Assuredly... "There is no power but from God; and those that are, are ordained of God. Therefore he that resisteth the power resisteth the ordinance of God. And they that resist purchase to themselves damnation." And again she admonishes those "subject by necessity" to be so "not only for wrath but also for conscience' sake," and to render "to all men their dues; tribute to whom tribute is due, custom to whom custom, fear to whom fear, honor to whom honor."... [E]ven in the kingdom of heaven He hath willed that the choirs of angels be distinct and some subject to others... so also has He appointed that there should be various orders in civil society, differing indignity, rights, and power... many members, some nobler than others....

[I]f at any time it happen that the power of the State is rashly and tyrannically wielded by princes, the teaching of the Catholic church does not allow an insurrection... she teaches that relief may be hastened by the merits of Christian patience and by earnest prayers to God....

Even family life itself... necessarily feels and experiences the salutary power of the Church... as Christ is the head of the Church, so is the man the head of the woman... so also should wives be subject to their husbands... the authority of our heavenly Father and Lord is imparted to parents and masters....

[T]he Church, with much greater wisdom and good sense, recognizes the inequality among men, who are born with different powers of body and mind, inequality in actual possession, also, and holds that the right of property and of ownership, which springs from nature itself, must not be touched and stands inviolate...

10) HOISTED FROM THE ARCHIVES: DeLong (2003): The Manaus Opera House:

Deep in the Brazilian Amazon is Manaus, and inside Manaus is the Manaus Opera House:

The Amazon Theater is one of the most important monuments left by the exhilarating rubber boom period. It was preserved as a national partimony in 1965, and will celebrate its centenary in 1996, in perfect condition after a thorough renovation that left it in its original colors and details. The architecture is eclectic and neo-classic with material and artists brought in from Europe. On the outside of the building, the dome is covered with 36,000 decorated ceramic tiles painted in the colors of the national flag. In the shape of a harp, the central nave can seat 640 in the auditorium and the 3 floors with box seats. Toward the back, the stage curtain projects the painting "Meeting of the Waters"; originally done in Paris by Crispim do Amaral. This curtain rises vertically so as not to damage the painting. On the ceiling are painted scenes depicting music, dance, drama, and a homage to Carlos Gomes. The central gold chandelier descends to the level of the seats for cleaning purposes and changing light bulbs. Above this chandelier, in the middle of the roof, there is a painting imitating the view of someone standing beneath the Eiffel Tower. The Noble Room was decorated by Domenico de Angelis and contains paintings suchs the one entitled 'Guarani". The floor of this room is made of wood fitted together without the use of nails or glue. The theater also contains a small museum with a rich history. Items on display include original building plans, rare porcelain, and even objects from artists who performed there.

manausopera.gif 290ղ02 pixels

Built as a result of the extraordinary burst of prosperity that was the Brazilian rubber boom. But the rubber boom soon came to an end. The British Empire found that rubber would grow very well in Malaya--after all, the rubber plant's pests and parasites were thousands of miles away. Malayan rubber plantations worked by Chinese immigrants were able to undersell Brazil's rubber producers, and the Brazilian rubber boom collapsed.

links for 2010-01-27

Jared Bernstein on the Slushie...

In which Jared Bernstein says:

  1. It's not a freeze--not something that leaves the level and distribution of non-security defense spending frozen at its current level and in its previous pattern.
  2. It's not even a cap--it's not a plan, if congress refuses to dial down the things that Obama wants to dial down, to take the excess out of other program categories.
  3. It's not even a set of guidelines--it's not an aspirational set of spending levels because it does not include the initiatives the president wants to "undertake right away [to] jump-start job creation. In his words and deeds, the President has made clear that recovery comes first..."


Jared Bernstein: Budget Freeze-eology 101: Hatchets vs. Scalpels: an important note on timing. No one is arguing that we should take our foot off the accelerator today, when the economic recovery remains fragile and job growth has yet to return. In fact, you'll hear from the President tomorrow night about measures we should undertake right away jump-start job creation. In his words and deeds, the President has made clear that recovery comes first. But that doesn't mean we should wait to start changing the same bad habits in Washington that left a $1.3 Trillion deficit on our doorstep when we entered office in January 2009, especially when we can do so without cutting back on our jobs agenda.

Second, a little background on freeze-eology: there are two ways to do a freeze like this: (1) an across-the-board freeze on every program outside of national security; and (2) a surgical approach where overall totals are frozen but some individual programs go up and others go down. In short, a hatchet versus a scalpel.

During the campaign, you may recall that John McCain touted option 1: the hatchet approach of an across-the-board freeze.

The President was critical of that approach then, and we would be critical of it now. It's not what we're proposing. To the contrary, the entire theory of the President's proposed freeze is to dial up the stuff that will support job growth and innovation while dialing down the stuff that doesn't. Under our plan, some discretionary spending will go up; some will go down. That's a big difference from a hatchet.

Take, for example, the policies we announced yesterday -- a significant expansion (a 20% increase) in a program that provides services for seniors, like respite care and in-home services; a program to limit student loan repayments to 10 percent of income (after living expenses); an expansion of two tax credits, one for child care and another for retirement savings.

How can we expand these programs in the context of a freeze? By making sure that the freeze either holds steady or increases those parts of the discretionary budget that support jobs and income security for folks who need them, while whacking the wasteful subsidies that support lobbyists and special interests.

President Obama deeply understands the various imperatives of this moment in time, even if they don't always point in the same direction.

We must do all we can to help those who are still reeling from the impact of the great recession; we must create the economic conditions for robust, private-sector job growth, and we must make the investments in clean energy, health care, and education that will ensure that the next economic expansion is characterized by broadly shared prosperity, not narrow gains to financial speculators.

At the same time, we must take steps to move toward a sustainable fiscal position, and that's where the discretionary freeze comes in.

You can't thread that needle with a hatchet. You've got to use a scalpel. That may be a truly lousy metaphor, but it's good public policy.

Ezra Klein Writes About the Meaning of the Obama Non-Frozen Freeze

"What we have here," he says, "is a failure" of the White House "to communicate":

Ezra Klein: The Obama administration loses the deficit -- and the spending -- argument: you can't look at this as anything less than a tremendous defeat for the Obama administration. It's not the policy itself. The freeze locks in a post-stimulus, and potentially post-jobs-bill, level of spending. It's not terribly onerous. But it's also the administration's white flag on the argument that the deficit must be understood as a health-care reform problem rather than a taxes and spending problem. This was their most audacious effort to change the way Americans think, and it didn't work. For all the effort Democrats put into building a health-care bill that cuts the deficit, a full 60 percent of Americans think (pdf) the legislation increases the deficit. Only 15 percent think it's a deficit reducer.

It's also evidence of the White House's failure to win the argument over the stimulus. The administration is smart enough to refuse specifically tying the freeze to the recession. But the freeze is entirely a function of voter concerns over the recession. And the fact that those voters think the right response is to cut government spending is evidence that the administration has not convinced them of the basic case for the stimulus, or persuasively explained the basic nature of the recession.

What we have here is a failure to communicate.

Can we please get Gene Sperling back from the Treasury and into the White House to do economic and budget message control?

CBO Is More Optimistic than I Am

The CBO has its Economic and Budget Outlook out:

The two most noteworthy of CBO's analytical judgements, from my perspective:

  1. Unemployment is not going to get much higher, but it is likely to stay above 8% until the second half of 2012 (and there are, of course, risks to the forecast that would make matters worse).

  2. If we can stick to PAYGO over the next decade, we probably won't have an exploding-debt-and-deficit problem until the 2020s: we still have a decade to figure out how to get a government that has the means to live and lives within its means.

Obama Budget Message FAIL

I have--so far--seen nobody applaud Obama's "spending freeze."

From the right and the center:

  1. The Note: Obama Spending Freeze Lands on Hill with Thud...
  2. Nate Silver: FiveThirtyEight: Politics Done Right: The White House's Brain Freeze: My first reaction to tonight's news is that it's a mistake on par with John McCain's "suspending my campaign" gaffe...
  3. Pete Davis: Obama's Spending Freeze Is A Budgetary Fig Leaf: This evening, the White House leaked President Obama's proposed three year freeze on non-defense discretionary spending not including certain Homeland Security, Veterans' Affairs, and International Affairs programs. That spending would be capped for the next three years at its current level of $447 billion, saving $250 billion over the next 10 years. That sounds like at lot of money, but it's not much when compared to the roughly $6 trillion of non-defense discretionary spending in the current services baseline budget...
  4. Joe Klein: Deficit Gimmick: He's proposing a freeze of non-defense discretionary spending for the three years after this one....and it sounds a lot like a gimmick to me...
  5. Dan Mitchell: Obama’s Spending Freeze: Is It Real or Is He Copying Bush?: [D]on’t get too excited yet. It is not clear whether the White House is proposing a genuine spending freeze, meaning “budget outlays” for these programs stay at $447 billion for three years, or a make-believe freeze that applies only to “budget authority.” This is an enormously important distinction. Budget outlays matter because they represent the actual burden of government spending. Budget authority, by contrast, is a bookkeeping measure...
  6. Michelle Malkin:Fill in the blank: Obama proposing spending freeze is like…: The ballyhooed budget spending freeze that will be a feature of the State of the Union address tomorrow doesn’t cover behemoth entitlement programs. It doesn’t cover a second stimulus. It is limited to an electorally-timed three-year period. The White House is already promising that favored left-wing programs in education and the environment would get a pass. The “estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional deficits the government is expected to accumulate over that time.” And President Obama was against such a spending freeze before he was for it...
  7. Orange Punch: Obama spending freeze hoax: President Obama’s budget freeze idea is nothing more than a gimmick. No doubt President Obama is a crafty politician and a persuasive speaker, but it is starting to become very clear that he believes his oratorical abilities are able to overcome just about anything, including common sense and the intellect of the American people...
  8. Alison Fraser: Is Obama’s Underwhelming Spending Freeze A Fakeroo?
  9. Merv: PrairiePundit: The Obama spending freeze in context: Rove does more than just anticipate the Obama move, he points out how misleading it is. Obama's credibility is already hanging by a thread with many voters and I don't think they will be fooled...
  10. Samuel Staley Obama's Gimmick: [S]pending freezes are populist gimmicks. They don't address the real nature of the problems and avoid taking responsibility for the hard decisions...

And from the left:

Paul Krugman: Obama Liquidates Himself: A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback? It’s appalling on every level. It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)

It’s bad long-run fiscal policy, shifting attention away from the essential need to reform health care and focusing on small change instead.

And it’s a betrayal of everything Obama’s supporters thought they were working for. Just like that, Obama has embraced and validated the Republican world-view — and more specifically, he has embraced the policy ideas of the man he defeated in 2008. A correspondent writes, “I feel like an idiot for supporting this guy.”

Now, I still cling to a fantasy: maybe, just possibly, Obama is going to tie his spending freeze to something that would actually help the economy, like an employment tax credit. (No, trivial tax breaks don’t count). There has, however, been no hint of anything like that in the reports so far. Right now, this looks like pure disaster.

Can somebody please point me to someone, somewhere who likes it?

Ten Economics Pieces Worth Reading: January 26, 2010

1) James Surowiecki: Moral Hazard and the Crisis: The Balance Sheet : The New Yorker:

Ryan [Avent] doesn’t quite seem happy with the conclusion that moral hazard didn’t have much to do with this particular crisis, but I think it’s the right one. As I argued last year, when it comes to institutions, the moral hazard explanation for what went wrong doesn’t really hold much water. In order to believe that the banks engaged in reckless behavior because they assumed that if they got into trouble, the government would bail them out, you have to believe not only that financial institutions thought it would be fine if their share prices were driven down to near-zero as long as they were rescued in the end. You also have to believe that the banks knew that what they were doing was reckless, and that there was a meaningful chance that it would wreck their companies, but decided that it was still worth doing because if everything went south, the government would step in. And that, even before Dimon’s comment yesterday, always seemed improbable, because all of the accounts of the banks’ behavior in the years leading up to the crisis suggest that most of them were swept up in housing-market hysteria like everyone else.

In a way, the moral-hazard argument ascribes far too much foresight, intelligence, and rationality to the banks. It assumes they were coldly calculating the chances and consequences of failure and forging ahead nonetheless, when the reality seems to be that for the most part they were blissfully ignorant and arrogant about the flaws in their lending and investment strategies. The crisis, in that sense, was caused less by the fact that the banks were too big to fail than it was by the fact that they never seriously considered the possibility that they might fail.

2) Matthew Yglesias: A Simple Question:

When House and Senate members who already voted for their respective chambers’ versions of health reform need to debate opponents who say things like “he voted for Obamacare, I was always against it” what do they intend to say in response? “No, I only voted for one specific version of it; I opposed the alternate version in the other branch of Congress and that one was the unpopular one. The version I liked was really great.” Is that going to make sense to voters? Seriously, what’s the plan? I know some people who work on the Hill read the blog . . . what’s your boss going to say?

3) Mark Thoma on Harold Ford: With Friends Like These...:

The whole thing's a mess... he mixes up short-run and long-run problems... doesn't realize the different conditions that existed when Clinton was in office.... Take his call for a "bold effort to create jobs." Besides his recommendation to shift attention away from health care reform by trying to pass a health care reform bill, his other three recommended policies are payroll and supply side tax cuts on business, immigration reform (to make citizenship easier, that's fine, but it won't help with jobs), and deficit reduction (which won't help with jobs either, and will likely reduce the level of social insurance worsening conditions for the working class and the poor).

So the proposal is, for the most part, for six months of payroll tax cuts granted to a limited number of firms (those less than five years old), and the same old tired set of supply side tax cuts that we always hear, most of which only work in the long-run if they work at all. To the extent that there would be any job creation effects from these tax cut policies, and some types of tax cuts could help a bit, they are likely to be more than offset by the deficit reduction and his other policy recommendations that work in the opposite direction. Does he really think voters will reward Democrats for making unemployment worse through deficit reduction? With friends like these, who needs Republicans?

4) Economics of Contempt: The Devil is in the Exemptions:

We've been discussing financial regulatory reform for well over a year now.... At some point, people have to start getting specific about the wording of regulations they'd like to see.... Here, I'll kick it off. Here are two specific regulatory changes I'd like to see. They both involve Reg W, so you just know they're exciting....

  1. Jesus H. Christ, can we please get someone to revise the derivatives exemption in Reg W so that derivatives are subject to the Section 23A limits?... We need to swing the big bats when it comes to derivatives transactions between FDIC-insured banks and their non-bank affiliates, and that means the hard quantitative caps of Section 23A. If memory serves, the reason the Fed gave for exempting derivatives (other than credit derivatives, which weren't exempted) from Section 23A was that there wasn't enough evidence yet on the risks posed by derivatives transactions between banks and their non-bank affiliates. Still waiting for that evidence, are we?

  2. Get rid of Reg W's "ready market exemption," and go back to the old "Wall Street Journal test." Yes, I know some people thought the Fed didn't go far enough with the ready market exemption, but they were wrong then and they're wrong now. Pretty much every security has an electronic service that provides real-time data on price anymore, and the SEC is way too liberal with its definition of a "ready market." The ready market exemption basically allowed some banks (I won't name any names) to use their insured deposits to, shall we say, "support" some pretty crappy paper, like ABS and ABCP. And it wouldn't take much for comparable securities to get back into that exemption. Let's just go back to the old "Wall Street Journal test." It was conservative and reasonably clear, which is exactly what we're looking for in regulations governing large, complex financial institutions.

This isn't the stuff op-eds are made of, but this is where all the action is. You can talk about moral hazard until you're blue in the face — and then Wall Street will take your lunch money anyway, and they'll do it in a comment letter on some proposed interim rules you weren't even aware of.

5) Stan Collender: Brad DeLong Gets It When It Comes To A Commission:

I know and admire Diane Lim Rogers.  She's a friend, colleague, and frequent co-conspirator when it comes to budget.  But Brad DeLong has her number with this post: No Diane, having any budget commission is not necessarily better than not having one.

I truly wish this wasn't the case.  But when, as Brad points out, a commission is really just an excuse to do less now and a subterfuge for what's really happening, I don't see the value.  Given all the failed budget commissions and summits of the past and the fact that the moon and stars don't seem to be in proper alignment for one to succeed now, I'd much rather have members of Congress take their lumps at the next election for not using the power they already have to deal with the deficit than to promise for no apparent reason that somehow a commission is going to be different this time.

What would be better than a commission?  A serious Ross Perot-like outside effort that so raises the deficit issue in the minds of voters that the politics of not dealing with it  changes.  That's when some thing will actually occur.

6) Brown Voters' Attitudes Toward Gruber-Romney-Obama Health Care: More than half of them like it:

John Sides: The Monkey Cage: A nice tidbit from the Washington Post/KFF/Harvard poll of MA special election voters (pdf): "As you may know, Massachusetts has a law that is aimed at assuring that virtually all Massachusetts residents have health insurance. Given what you know about it, in general, do you support or oppose the Massachusetts Universal Health Insurance Law?"

Among Brown voters, 51% support this law and 44% oppose it.

7) GRAPH OF THE DAY: From David Beckworth:

Macro and Other Market Musings: Back to 2004

8) BEST NON-ECONOMICS THING I HAVE READ TODAY:Matt Taibbi: Translating David Brooks:

A friend of mine sent a link to Sunday’s David Brooks column on Haiti, a genuinely beautiful piece of occasional literature. Not many writers would have the courage to use a tragic event like a 50,000-fatality earthquake to volubly address the problem of nonwhite laziness and why it sometimes makes natural disasters seem timely, but then again, David Brooks isn’t just any writer. Rather than go through the Brooks piece line by line, I figured I’d just excerpt a few bits here and there and provide the Cliff’s Notes translation at the end. It’s really sort of a masterpiece of cultural signaling — if you live anywhere between 59th st and about 105th, you can hear the between-the-lines messages with dog-whistle clarity.  Some examples....

TRANSLATION: Don’t bother giving any money, it doesn’t do any good. And feeling guilty about not giving money doesn’t do anyone any good either. In fact, you’re probably helping by not doing anything....

TRANSLATION: I, David Brooks, am doing my Christian best right here at home. Look, I even used a capital “L” in the word “Lord.” And I wrote that thing about Obama’s Christian Realism a few weeks ago. So I‘m doing my part. Of course I’d volunteer to help, but intellectually I just don’t think volunteering really helps. I mean, there are studies and everything....

TRANSLATION: Although it is true that Haiti was just like five minutes ago a victim of a random earthquake that killed tens of thousands of people, I’m going to skip right past the fake mourning period and point out that Haitians are a bunch of lazy n------ who can’t keep their dongs in their pants and probably wouldn’t be pancaked under fifty tons of rubble if they had spent a little more time over the years listening to the clarion call of white progress, and learning to use a freaking T-square, instead of singing and dancing and dabbling in not-entirely-Christian religions and making babies all the fucking time. I know I’m supposed to respect other cultures and keep my mouth shut about this stuff, but my penis is only four and a third inches long when fully engorged and so I’m kind of at the end of my patience just generally, especially when it comes to “progress-resistant” cultures....

TRANSLATION: The best thing we can do for the Haitians is let them deal with the earthquake all by themselves and wallow in their own filth and s----- engineering so they can come face to face with how achievement-oriented and middle-class they aren’t....

p.s. Did I miss anything? Because I think that’s pretty much it. One would have thought a column on the Haitian’s lack of an achievement culture could maybe wait until after the bodies were cold, but… hey, who am I to judge?.... Again, unlike Brooks, I actually lived in the Third World for ten years and I admit it — I’m not exactly in the habit of sending checks to Abkhazian refugees, mainly because I’m not interested in buying some local Russian gangster a new Suzuki Samurai to tool around Sochi in. And I’ve actually seen what happens to the money people think they’re giving to Russian orphanages goes, so no dice there, either. But you know what? Next time there’s an earthquake in Russia or Georgia, I’m probably going to wait at least until they’re finished pulling the bodies of dead children out of the rubble before I start writing articles blasting a foreign people for being corrupt, lazy drunks with an unsatisfactorily pervasive achievement culture.... An earthquake is nobody’s fault. There’s nothing to do after a deadly earthquake but express remorse and feel sorry. It’s certainly not the time to scoff at all the victim country’s bastard children and put it out there on the Times editorial page that if these goddamned peasants don’t get their act together after a disaster this big, it might just be necessary to start swinging the big stick of Paternalism at them...

9) STUPIDEST THING I HAVE READ TODAY: Rick Santorum, former Senator (R-PA). Let me turn the microphone over to Angelica Oung: Rick Santorum's Price: $7,750:

By now we've all heard about Rick Santorum's bill seeking to prevent the National Weather Service from actually sharing weather forecasts with Americans. You see, that 'socialized weather' business has got to stop. It's taking the bread right out of the mouths of private web-based forecast providers who work so hard to make a profit by repackaging that information the NWS just want to give away for free. One such firm is Accuweather, which just so happens to be based in Pennsylvania, just like the good senator. Fancy that.

[T]hroughout 2003 and 2004, both Joel and Barry Myers have donated nearly $2,750 to Santorum's 2006 re-election efforts. Public records also showed that since 1999, the Senator received nearly $5,000 in contributions from AccuWeather executives, raising questions of whether the company attempted to court favor with the Senator through campaign contributions.

Count it up...$2,750+$5,000=$7,750. For a blatant gimme bill introduced in congress? That's what I call value!

10) HOISTED FROM THE ARCHIVES: DeLong (April 2005): When Malfunctioning Policy Development Efforts Attack!:

Peter Orszag is a national treasure: Mark Schmitt: "I'm watching the Finance Committee hearing on Social Security. Peter Orszag of Brookings and the Center on Budget and Policy Priorities just had a wonderful metaphor to respond to the idea that private accounts are a 'sweetener' or 'dessert' to Social Security that will make it easier to swallow the tax increases or benefit cuts that would ensure solvency. 'That's like trying to convince your kid to eat spinach by offering him a turnip for desert.'"...

I'm told that the White House has for months had numbers like Robert Shiller's and Goldman Sachs's thumbs-down assessments of the desirability of private accounts on the terms the administration has offered them. Yet they haven't bothered to change the terms, or even to make the argument that financing investments by borrowing from your Social Security defined-benefit account at 3% plus inflation is a good deal.

Something very similar used to happen with Ira Magaziner and company: Marina Weiss--Bentsen's senior health care aide--would go in there and say, "Ira, we don't think these numbers will work. Moreover, Robert Reischauer at CBO and Breaux's and Moynihan's people in the Senate think like us--they won't think this will work either. And you need Reischauer, Breaux, and Moynihan to be enthusiastic or this is going nowhere."

And there would be no response.

links for 2010-01-26

This Is...

Briefing on the "Volcker Rule":

FT Alphaville » The background to the Volcker rule:

Q: I’m wondering why these proposals were not included in the comprehensive legislation you proposed in June. Already the House has acted; these provisions are not in the House bill. You’re going to have to go back now as part of the process. Why now? Why not back in June?

MICHAEL BARR: As you know, Jim, in June in our white paper, we talked about making sure we limited the activities of risky firms, and being sure that we address conflicts with respect to proprietary trading and hedge funds. The basic authority is provided in Chairman Frank’s legislation, for regulators to break apart major financial firms or to address problems with risky activities to the extent that they cause the firm to act in an unsafe or unsound manner that threatens the financial system. So we worked very closely with Chairman Frank on that already.... So this is an aspect of that overall reform. The underlying authority is in the legislation, strong legislation, that Chairman Frank passed. What we’re doing today is saying regulators not only have the discretion to do that, they need to do that....

Q I have a follow-up to something earlier where you said that these authorities are included in the Frank bill. So there would be no additional legislation beyond what that is for this to take effect. So is there some official rulemaking or some directive the President has to make, or is this just a statement saying regulators should do this?

MICHAEL BARR: No, no, I’m sorry. I want to be clear. We want to put in the legislation — there’s legislative authority, there’s discretion for the regulators to take on risky activities with respect to the largest financial firms. We want to take legislative steps. We will ask Chairman Dodd and Chairman Frank to supplement what is already in their bills with legislative steps that don’t just authorize but actually require regulators to prohibit one form of that risky activity, and that’s proprietary trading by firms that own banks. So it is a legislative step. It is moving what is a discretionary authority that Chairman Frank provides in his bill to a requirement on the regulators to act in this particular area...

This Is Such a Disaster in the Making II

The Economist: "I understand the arguments from supporters... this is a political gambit... it won't actually amount to much... a tool with which to co-opt the president's moderate antagonists.... If this is the best the president can do, Democrats, and the country, are in for a very long few years":

RA: There really is no good way to interpret this turn of events. From the standpoint of the purely economical, this is a huge mistake. Even if we assume that the economy will be strong enough in 2011 to handle budget balancing, this proposal is practically worthless. The administration has said this will produce $250 billion in savings over ten years, but as The Economist noted in November, the fiscal deficit will be over $700 billion in 2014 alone, and will grow from there. Non-defence discretionary spending is nothing; those who are serious about long-term budget sustainability talk about defence, they talk about entitlements, and they talk about revenues. In other words, this will do very little about the deficit, and it will do even less to convince markets of the credibility of the American effort to trim the deficit.

So perhaps this is all about politics? Well, maybe, but there are two enormous problems with that. One is that the campaign trail version of Barack Obama railed against John McCain's proposal for a spending freeze, rightly, as using a hatchet where a scalpel was needed. It's unlikely that Mr Obama's political opponents will let him forget that. The other is that this is a complete betrayal of the political ideal Mr Obama seemed to espouse from the beginning of his political career—the rejection of the argument by the lowest common denominator in favour of a more reasoned and argued approach. This is yet another move toward the infantilisation of the electorate; whatever the gamesmanship behind the proposal, Mr Obama has apparently concluded that the electorate can't be expected to handle anything like a real description of the tough decisions which must be made. I sympathise with Mr Obama's position—would that American voters were patient enough to hear and consider a detailed policy discussion on a complex issue—but it's unreasonable to expect that Americans can be hoodwinked into major policy shifts.

And this is an incredibly risky political gamble for the president. Much of the liberal base of the Democratic party was already prepared to mutiny after the overreaction to the Massachusetts defeat and the abandonment of the health care reform bill. This may well drive them over the edge. If it weren't enough that the proposal treats voters as children and a serious problem as a political football to be kicked around, the president's plan also appears to endanger an economy that hasn't meaningfully raised employment in over a decade and it solidifies defence spending as the untouchable budget category, when in fact it should be anything but.

I understand the arguments from supporters of the president that this is a political gambit, that it won't actually amount to much but a sound talking point and a tool with which to co-opt the president's moderate antagonists. What's the difference? Seriously. How does the president move from this to any important policy goal? What room does this leave him to deal with either the jobless recovery or the long-run budget deficit?

Through bad times and good times for the president, there was one word I never associated with him and his approach to the challenges facing the country: gimmick. But this is a bright shining gimmick that advertises a lack of seriousness to both near-term economic weakness and long-run budget problems. This is decidedly not what is needed right now. If this is the best the president can do, Democrats, and the country, are in for a very long few years.

Barack Herbert Hoover Grover Cleveland Obama?

UPDATE II: It seems that it is not a freeze in non-security discretionary outlays, but rather an overall cap on non-security discretionary--which is a diffrent animal. And it seems that it is not an overall cap on non-security discretionary outlays, but instead an overall cap on non-security discretionary authority--which is a different animal. And it seems that it is not a binding cap on overall non-security discretionary: that ARRA extensions and other job-boosting deficit-spending measures, plus other "emergencies", are exempt...

UPDATE An administration source says that he believes that discretionary non-security is not frozen at 2010 ex-stimulus levels for 2011, but is instead bumped up from 2010 to 2011--that the freeze part applies to fiscal 2012, 2013, and 2014.

For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one:

Jackie Calmes: Obama to Propose Freeze on Some Spending to Trim Deficit: President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, from air traffic control and farm subsidies to education, nutrition and national parks. ut it would exempt the budgets for the Pentagon.... The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional debt the government is expected to accumulate over that time...

There are two ways to look at this. The first is that this is simply another game of Dingbat Kabuki. Non-security discretionary spending is some $500 billion a year. It ought to be growing at 5% per year in nominal terms (more because we are in a deep recession and should be pulling discretionary spending forward from the future as fast as we can)--that's only $25 billion a year in a $3 trillion budget and a $15 trillion economy.

But in a country as big as this one even this is large stakes. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year...)

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama "signal[s] his seriousness about cutting the budget deficit," Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

As Jackie Calmes writes, this isn't a real plan to control the deficit but a "symbolic" one:

[O]ne administration official said that limiting the much smaller discretionary domestic budget would have larger symbolic value. That spending includes lawmakers’ earmarks for parochial projects, and only when the public believes such perceived waste is being wrung out will they be willing to consider reductions in popular entitlement programs, the official said. “By helping to create a new atmosphere of fiscal discipline, it can actually also feed into debates over other components of the budget,” the official said, briefing reporters on the condition of anonymity.

As another deficit-hawk points out: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It's quite another to negotiate against yourself and in addition attack employment in the short term. The fact that the unemployment rate is projected to remain stable over the next year means that there is a 30% chance it will go down, a 40% chance it will stay about the same, and a 30% chance that it will go up--and whatever it turns out to do, the administration's budget has just given it an extra bump upwards.

Jonathan Zasloff:

Obama’s Self-Inflicted Lobotomy Proceeds Apace « The Reality-Based Community: I’m trying to think of what could possibly be a worse plan.  Let’s see: we might be entering a double-dip recession and unemployment is in double-digits, and you are going to freeze spending?  What in God’s name are they thinking? Perhaps the worst thing about this is how it cedes the ideological ground to the Republicans.  At some point someone must make an argument for government.  I think it was former Senator Paul Simon who said: “give the voters a choice between a Republican and a Republican and they will choose a Republican every time.”

What next?  The rotting corpse of Andrew Mellon as Treasury Secretary?  Or do we already have that?


Why Aren't Deficit Hawks Telling the House to Pass the Senate Health Care Bill?

Well, real deficit hawks are:

Sam Stein: Orszag Calls Senate Health Care Bill Biggest Cost-Container Ever Considered: The health care bill before the Senate would cut costs and reform health-care delivery more than any piece of legislation in American history, White House budget director Peter Orszag declared on Wednesday. "The bottom line is the bill that is currently on the Senate floor contains more cost containment and delivery system reforms in its current form than any bill that has ever been considered on the Senate floor period," the Office of Management and Budget director told reporters during a conference organized by the publication Health Affairs....

The OMB director cited four key aspects of the bill: its deficit neutrality and the inclusion of a commission that would restrain Medicare spending, an excise tax on high-cost insurance plans, and delivery system reforms.... "It depends what you mean by cost containment. If you are talking about attempts at reform of the overall healthcare system, not just government system but the overall healthcare system I think that's true," said Josh Gordon, policy coordinator at the Concord Coalition, a non-partisan federal budget analysis organization. "Congress has never done anything to try and restrain the growth of healthcare costs. We've never tried to change the healthcare delivery system from fee for service -- the Congress has never considered that."

"If you're looking at cost containment as being lowering healthcare inflation through delivery system reform, this bill reforms that more than any other bill prior," Gordon added. "Though relatively few bills ever make it onto the floor of the Senate, so this jumps to the top of the pack just for that procedural reason"...

It's only fake deficit hawks that aren't...

Walking While Black in America Today...

Ta-Nehisi Coates:

Ta-Nehisi Coates: Fear, Parenting, and the Police: We talked some, last week, about how fear drives black parents. I think this is the sort of case that I was thinking about:

The photos taken by Jordan Miles' mother show his face covered with raw, red bruises, his cheek and lip swollen, his right eye swollen shut. A bald spot mars the long black dreadlocks where the 18-year-old violist says police tore them from his head.

Now, 10 days after plainclothes officers stopped him on a street and arrested him after a struggle that they say revealed a soda bottle under his coat, not the gun they suspected, his right eye is still slightly swollen and bloodshot. His head is shaved. The three white officers who arrested him have been reassigned. And his mother says she is considering a lawsuit.

I think it's safe to say that these guys, despite tasering and beating a high-school senior to a pulp for "trying to avoid being seen" and carrying a Mountain Dew bottle, will be back on the street and enjoy a long career in the Pittsburgh police department. That's fine. As a society, we've decided that we'll tolerate the occasional beatdown, or murder, of an innocent in order to "feel safe." The cops are who we want them to be.

Meanwhile, some of us have friends who've been assaulted, or killed, by cops and a disproportionate number of us happen to be black. We are very clear that should one of our sons get caught up in a situation like this, the cop is, essentially, immune to any kind of meaningful censure. Having internalized this risk factor--among a dizzying array of other risk factors--we may, at times, be a little rougher on our kids.

I don't know if that's right, fair, or even smart. But I do know that some of us live in a world where you're allowed to throw snowballs at cops, yell "fucking pig" and walk away, and others of us live in a world where a young violinist who attends a performing arts high school literally has his hair ripped out for the horrendous crime of "trying to avoid being seen."