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January 2010

This Is Not What I Elected You do Do, Barack Obama. Do Better!

The current draft of the State of the Union address performs its function of getting a nice headline from the New York Times:

Obama to Offer Aid for Families in State of the Union Address

And a nice beat-sweetener lead from the [incompetent, unethical, mendacious] Sheryl Gay Stolberg:

President Obama will propose in his State of the Union address a package of modest initiatives intended to help middle-class families, including tax credits for child care, caps on some student loan payments and a requirement that companies let workers save automatically for retirement.... By focusing on what one White House official calls “the sandwich generation” — struggling families squeezed between sending their children to college and caring for elderly parents — Mr. Obama hopes to use his speech on Wednesday to demonstrate that he understands the economic pain of ordinary Americans. The proposals also include expanded tax credits for retirement savings and money for programs to help families care for elderly relatives...

Of course, below the fold is:

[T]he president is calling on Congress to nearly double the child care tax credit for families earning less than $85,000 — a proposal that, if adopted, would lower by $900 the taxes such families owe to the government. But the credit would not be refundable, meaning that families would not get extra money back on a tax refund...

That means: if your annual household cash income is more than $85K or less than $30K, you get nothing.

If your cash income is between $30 or $40K, there are nine chances in ten you get zero. If your cash income is between $40K and $50K, there are two chances in three you get zero. Even if your cash income is between $50K and $85K, there is still one chance in four you get zero. http://www.taxpolicycenter.org/UploadedPDF/1001289_who_pays.pdf

I don't have the tax-units-with-children-by-cash-income numbers handy, so I cannot figure out here and now on the fly what the proportion of families with children who get zero from this policy initiative is. But it's high.

Congratualations. It would be hard to design a policy that did more to maximize the likely good short-term press from a corrupt and incompetent press corps while minimizing the shifting of the tax burden away from working families with children.


Economics 211: Seminar in Economic History: U.C. Berkeley: Spring 2010

Berkeley Economics Department Seminars

Economics 211: Seminar in Economic History: U.C. Berkeley: Spring 2010

Contact: Cheryl Applewood capple@econ.berkeley.edu

M 2-3:30, 597 Evans Hall

Jan 25 (M): Organizational Meeting

Feb 1 (M): Ludger Woessman (Munich and Stanford): Catch Me If You Can: Education and Catch-up in the Industrial Revolution (with S.O. Becker and E. Hornung)

Feb 8 (M):

Feb 17 (W): Atif Mian (Chicago):

Mar 1 (M): Brad DeLong (UCB): "Overtrading, Revulsion, and Discredit": Irrational Exuberance in Economists' Visions of the Economy since 1776

Mar 10 (W): Luigi Pistaferri (Stanford) (DS)[1]:

Mar 17 (W): Esteban Rossi-Hansberg (Princeton) (DS):

Mar 31 (W): Torsten Persson (Stockholm) (DS):

Apr 8 (Th): Ricard Blundell (UCL) (DS):

Apr 12 (M): Shari Eli (UCB):

Apr 19 (M): Matt Sargent (UCB):

Apr 21 (W): Alan Auerbach (Berkeley) (DS):

Apr 26 (M): Debin Ma (LSE):

May 3 (M): Richard Hornbeck (MIT):

May 6 (Th): Daron Acemogul (MIT) (DS):

May 10 (M): Aldo Musacchio (HBS):

May 17 (M): Richard Sutch (UC): The Unexpected Long-Run Impact of the Minimum Wage: An Educational Cascade


[1] Departmental Seminar.


Barack Obama Is Off Message

The White House press secretary writes:

THE WHITE HOUSE

Office of the Press Secretary

FOR IMMEDIATE RELEASE

January 25, 2010

President Obama and Vice President Biden Preview Initiatives for Middle Class Families

Discussion Previews a Key Theme for State of the Union Address

Washington, DC – Today, President Barack Obama and Vice President Joe Biden will hold a meeting of the Middle Class Task Force, where they will lay out key investments for middle class families. Today’sdiscussion will preview one of the key themes of the President’s State of the Union address, which include creating good jobs, addressing the deficit, changing Washington, and fighting for middle class families...

That should be "addressing the long-run deficit...", not "addressing the deficit..." In the short run--out until the end of 2012 or so--a bigger deficit is a plus for America's hard-working families that play by the rules. Only afterwards does it become a minus.

Staying on message isn't rocket science, and it is important...


What Is the Obama Economic Strategy?

Janet Adamy writes:

Obama to Address Job Creation During State of the Union: President Barack Obama plans to talk about additional steps the White House will take to create jobs during his State of the Union address Wednesday, a top White House aide said. The economy has lost seven million jobs since the recession began in 2007, White House adviser David Axelrod told CNN’s “State of the Union” program on Sunday. He estimated that the American Recovery and Reinvestment Act that the president signed last year saved two million jobs. “It is cold comfort to those who still are looking,” Axelrod said. Axelrod suggested Obama would enumerate in his Wednesday address specific measures that his administration planned to take to create more jobs, but didn’t provide details.

The White House had hoped to tout a health-care victory during the speech. But a Republican victory in last week’s Massachusetts Senate election to replace the late Edward Kennedy has deprived Democrats of their filibuster-proof majority in the Senate, stalling Congress’ effort to pass that health-care bill. The Republican win also underscored the public’s concern that Democrats aren’t doing enough to fix the economy...

If the Senate won't let us run bigger deficits, and if the Federal Reserve is not expanding but rather cutting back on its degree of monetary easing, then there are only three paths open to try to increase employment:

  • Shifting government spending from things that create the most in the way of useful goods and services (and that also boost employment) to things that create the most employment (and maybe also create some useful goods and services): i.e., large government employment programs.

  • Shifting private production from things that create the most in the way of useful goods and services (and that also boost employment) to things that create the most employment (and maybe also create some useful goods and services): i.e., large (but incremental and temporary) new employment tax credits.

  • Using the U.S. Treasury as the world's biggest hedge fund to take huge amounts of private-sector risk onto the government's books, and thus create an appetite on the part of investors to finance additional risky investment even given their limited and depressed risk tolerance.

It's unclear to me which of any of these are on the table...


In Which Paul Krugman Leaves the Order of the Shrill for the Order of the Despairing

Paul Krugman:

Of Fate and Fumbles: It has not been a good year for Obama, or for the progressive agenda. But why? Ignore all the pontificating about how Obama needed to focus differently, seek bipartisanship with people who have no interest in making a deal, etc.. The primary factor in Obama’s troubles is, simply, the continuing weakness of the job market.

Which then raises the question, could anything have been done to improve the job picture?...

[T]he economics were bound to be difficult. Long before the bad numbers started rolling in, there were strong reasons to believe that the economy was in for a prolonged jobless recovery.... So one case you can make is that Obama was just fated to have a bad first year.... But could more have been done to turn things around? The best chance of averting the normal, dismal aftermath of financial crisis was to respond very aggressively on multiple fronts: really big fiscal stimulus, massive recapitalization of the banks to get them lending again (which in turn would have meant temporary nationalization of the weakest players). And aggressive action at the Fed, including really big quantitative easing and a higher inflation target, could have helped. In fact, the Obama administration didn’t do any of these things. Instead, it pursued meliorative policies: a stimulus that was huge by historical standards but inadequate to the size of the problem, and a bank policy aimed at restoring confidence rather than promoting a revival of lending.

It’s not clear whether they could have done more; it’s possible that the dysfunctional nature of the Senate, in particular, really made it politically impossible to follow the kind of policies that might have avoided the long post-crisis hangover. In that case, we were just fated to suffer what we’re suffering, but the fault lay not in our economic stars but in our Senate.

What is clear, however, is that the Obama economic team didn’t see themselves as being in that position. All indications are that the top people believed that the economy would start adding jobs and unemployment would start falling fairly quickly even without a big stimulus. I don’t know why they hadn’t taken on board the lessons of the past two recessions, plus that of financial crises elsewhere, but they clearly hadn’t. Instead, the administration played it safe — or thought it was playing it safe. Moderate-sized stimulus, non-disruptive bank policy. The trouble, of course, was that this was anything but safe. By the time it was clear that those measures had been inadequate, the political will to do more had evaporated; government intervention was seen as a failed policy. Betting that the economy would largely take care of itself was, it turned out, a deeply risky strategy — and the bet went bad. Again, we don’t know either that more aggressive policies would have worked, or that they were politically possible. So maybe the fumbles didn’t matter; maybe Obamanomics was just fated to do badly, one way or another.

In any case, at this point I don’t see much hope of a policy turnaround. The best bet is to pass health care, so that Obama has something to show for his efforts (and also to provide health care!), and hope that the economy turns around in time to help Obama in 2012.

If all this sounds deeply discouraged, it’s because it is.


Financial Aid to the States Is the Long-Hanging Fruit Here...

Mark Thoma has a nice piece on automatic stabilizers:

The Importance of Automatic Stabilizers: [D]espite their importance in smoothing the impact of economic shocks, very little discussion of the recent crisis has been devoted to whether the automatic stabilizers we have in place have been adequate.... One reason is that they are automatic and hence largely outside the political process, this is one of their advantages, and it’s only when programs such as unemployment compensation threaten to come to an end that they catch our attention....

However, while automatic stabilization policies bypass the political process once they are operative, the political challenges of putting automatic stabilizers in place to begin with are just as great.... But... negotiations over automatic stabilizers can be carried out when the economy is doing well and delay isn’t as costly.... We need to do a careful and thorough assessment of the strengths and weaknesses of existing automatic stabilizers....

The lags in the effects of policy and the existing political atmosphere mean it’s too late to do much more to help the economy this time around, but we should be as prepared as we can the next time this happens.

There is one area of automatic stabilizers for which it is not too late. We could act right now to create some state-level automatic stabilizers, rather than let our state governments exert downward pressure on the economy by acting even more like fifty little Herbert Hoovers. Large federal aid packages to the states to prevent big additional cuts to state and local government services starting in July is one of the very best things we could do.

Of course, it is unlikely to happen. Senators dislike transfers to states. State governors use those transfers to accomplish initiatives, and then run against senators to take their jobs.

Yet another reason why we would all be better off without a U.S. Senate...


Ten Economics Pieces Worth Reading: January 25, 2010

1) Michael Linden: How to Spot a Deficit Peacock:

Deficit hawks come in a variety of breeds.... And then there is another species of deficit bird all together: the deficit peacock. Deficit peacocks like to preen and call attention to themselves, but are not sincerely interested in taking the difficult but necessary steps toward a balanced budget. Peacocks prefer scoring political points to solving problems. How can you tell the difference between deficit hawks, those who are serious about the dangers posed by persistent, large deficits and deficit peacocks, those who only use those dangers to preen and score political points? It’s actually fairly simple. Here are four easy ways to tell when someone isn’t taking our budget problems seriously.... 1. They never mention revenues.... 2. They offer easy answers.... 3. They support policies that make the long-term deficit problem worse.... 4. They think our budget woes appeared suddenly in January 2009...

2) Stan Collender: More On Walking Away From A Mortgage:

I've previously posted on my dislike of the notion that it's acceptable for homeowners who can afford to make their monthly payments but refuse to do so to walk away from their homes simply because they feel like it.  They made a bad decision (or decisions if they took out home equity loans based on the assumption that the value of their homes would never fall) and should have to bear a major part of the total costs involved.  Walking away from the obligation will increase the costs that I and others who are not in this situation have to pay the next time we try to buy a home.  I want that externality captured in a significant way to make it less likely that it will happen...

3) Mark Thoma sends us to Richard Thaler: Non-Recourse Mortgage Borrowers Have Already Paid for Their Option to Walk Away:

[M]illions of American homeowners are “underwater.”.... In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.... Some homeowners may keep paying because they think it’s immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be “simply a speculator — and one who is not honoring his obligation.” (The irony of a former investment banker denouncing speculation seems to have been lost on him.)... The morality argument is especially weak in a state like California or Arizona, where mortgages ...[are] secured [only] by the home itself.... [B]orrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed...

4) Jay Rosen and Scott Rosenberg: Get there by clicking a link and the New York Times paywall disappears:

"Q. What about posting articles to Facebook and other social media? Would friends without a subscription then not be able to view an article that I think is relevant for them?" — Julie, Pinole CA. "A. Yes, they could continue to view articles. If you are coming to NYTimes.com from another Web site and it brings you to our site to view an article, you will have access to that article and it will not count toward your allotment of free ones."

Jay Rosen: [T]he answers are from Janet Robinson, president and chief executive of the Times company, and Martin Nisenholtz, senior vice president for digital operations. They ought to know, right?  So according to the people who made the decision, the metered system to which the Times will be moving permits unlimited access to articles at the Times site as long as the user gets there from another web site. Therefore, all linking from blogs would be unaffected.... Google News is surely "another Web site."... That looks a lot less like a pay wall to me. It isn't a metered system if I can access the Times via the link economy without limit.  This scrambles a lot of what's been written on the subject. 

Scott Rosenberg: I think that the phrase "get there from another website" may be executive fuzz-brain of some kind. Maybe they mean "get there from certain other websites we select." Because otherwise what they're saying is "we want people to read our articles. We will charge them to do so if they find those articles by clicking from our own front page, but if they arrive from anywhere else they will be free." Which makes zero sense...

5) Free exchange: The jobless recovery, illustrated:

A NEW Goldman Sachs report... on America's lacklustre labour market.... [E]ven by the pitiful standard of those recent downturns the current recovery is a jobless one. The gist of the report on housing, by the way, is that the sector's performance in 2010 is likely to be disappointing relative to the second half of 2009, thanks to the withdrawal of government supports, continued labour market weakness, and foreclosure troubles.

Already the data appear ready to support the Goldman conclusion. Just today, the National Association of Home Builders released its report on builder confidence for January, and its index declined from December—the second consecutive monthly drop. As Calculated Risk notes, housing starts data tend to follow builder confidence pretty closely, which suggests that the autumn rebound in home construction is likely to stall out. That will mean fewer new jobs in construction, and where back to the point about the jobless recovery. It will be a while until the American economy pulls itself out of this trap.

6) Economist: Published calories counts have intended effect:

Here's a new piece of research from NBER, by Bryan Bollinger, Phillip Leslie, and Alan Sorensen:

We study the impact of mandatory calorie posting on consumers’ purchase decisions, using detailed data from Starbucks. We find that average calories per transaction falls by 6%. The effect is almost entirely related to changes in consumers’ food choices—there is almost no change in purchases of beverage calories. There is no impact on Starbucks profit on average, and for the subset of stores located close to their competitor Dunkin Donuts, the effect of calorie posting is actually to increase Starbucks revenue. Survey evidence and analysis of commuters suggest the mechanism for the effect is a combination of learning and salience.

That is what we'd expect to see; after all, consumers seem to significantly underestimate the calorie content of junk food, occasionally by thousands of calories. What's interesting is that Starbucks actually benefitted financially, relative to nearby competitors, from posting this information. That suggests that firms should be quick to adopt calorie posting in places where it's not yet mandated. And, oddly enough, the government mandate seems to have turned up a few twenty dollar bills, just lying around on the sidewalk.

7) GRAPH OF THE DAY: John Timmer: NASA: 2009 tied for 2nd-warmest year, 00s hottest decade:

NASA: 2009 tied for 2nd-warmest year, 00s hottest decade too

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Garry Kasparov: The Chess Master and the Computer:

The AI crowd, too, was pleased with the result and the attention, but dismayed by the fact that Deep Blue was hardly what their predecessors had imagined decades earlier when they dreamed of creating a machine to defeat the world chess champion. Instead of a computer that thought and played chess like a human, with human creativity and intuition, they got one that played like a machine, systematically evaluating 200 million possible moves on the chess board per second and winning with brute number-crunching force. As Igor Aleksander, a British AI and neural networks pioneer, explained in his 2000 book, How to Build a Mind:

By the mid-1990s the number of people with some experience of using computers was many orders of magnitude greater than in the 1960s. In the Kasparov defeat they recognized that here was a great triumph for programmers, but not one that may compete with the human intelligence that helps us to lead our lives.

It was an impressive achievement, of course, and a human achievement by the members of the IBM team, but Deep Blue was only intelligent the way your programmable alarm clock is intelligent. Not that losing to a $10 million alarm clock made me feel any better...

9) STUPIDEST THING I HAVE READ TODAY: Bill O'Reilly, via Adam Serwer of TAPPED Bill O'Reilly is very very sad that you can't make "Arab jokes" anymore:

O’REILLY: So 48 years ago — 48 years ago in this country we could make fun of Arabs. … We could make fun of people in a general way, and certainly, Ahab was the Arab was a general parody. But now, we can’t. What has changed in America?

Serwer comments: It's not really that you "can't" make racist jokes anymore; it's that you when you make them, you can't expect everyone to remain silent as you assert your cultural or racial superiority through humor. Still, while we're clearly a country where simply "making fun of Arabs" is seen in most circles as inappropriate, we are a country where it's not as taboo to whine about no longer being able to make fun of Arabs...

10) HOISTED FROM THE ARCHIVES: DeLong (April 2005): Materials Science:

Wood is truly an amazing substance. Relatively light, very strong for its weight, elastic, capable of being shaped to an extraordinary degree.... It seems clear that competition between plants has a bunch to do with it: whatever plants can get their leaves higher and wider spread has a big advantage in photosynthesis and thus in fitness. It seems pretty clear that wind has a bunch to do with it: wind can put great stresses on plants--especially those that reach high and are widely spread. But I really do wish that by now somebody had told me why wood is so... woody.

Tomorrow: I also wish someone would tell me why doping iron with carbon atoms changes its properties so much...


Ten Economics Pieces Worth Reading: January 24, 2010

1) Jackie Calmes: Political Memo - Questioning the Use of a Commission on the Debt Limit:

[J]ust in time for the latest debate, the unpublished posthumous memoir of a central figure on the Greenspan panel, Robert M. Ball, a former Social Security commissioner, has emerged to challenge the conventional wisdom about its achievement.... Ball calls the Greenspan Commission a failure. As he tells it, only a willingness to compromise by the two principal antagonists of the time — Ronald Reagan, the Republican president, and Representative Thomas P. O’Neill, the Democratic House speaker — made it possible for Mr. Ball and a few others to salvage from the deadlocked panel a deal that raised payroll taxes and trimmed benefits enough to keep Social Security solvent.

“A commission is no substitute for principled commitment,” wrote Mr. Ball, who died two years ago at 93. He expected that growing deficits soon would spur talk of another such panel. “Above all,” he added, “we should not allow ourselves to fall into the trap of expecting miracles from another Greenspan Commission — by deluding ourselves into believing, mistakenly, that the first one was a great success.”...

The commission met roughly monthly from February to November of 1982 without progress.... December’s session lasted only minutes, though the panel’s deadline was Dec. 31. Mr. Baker’s deputy, Richard Darman, called Mr. Ball and asked, “Can we have a meeting that never took place?” Their rendezvous gave rise to others at Mr. Baker’s house and at Blair House, the government guesthouse near the White House. Four top administration officials, led by Mr. Baker, met with five of the commission’s most pragmatic members — Mr. Ball and Senator Daniel Patrick Moynihan of New York for the Democrats, and for the Republicans, Mr. Greenspan, Senator Robert J. Dole of Kansas and Representative Barber B. Conable Jr. of New York.

Mr. Reagan extended the commission’s life by two weeks to Jan. 15, but it “was no longer functioning,” Mr. Ball wrote. “Some of its members didn’t know we were meeting.” When word leaked and reporters staked out his house before one session, Mr. Ball sneaked out the rear and slid down a hill to a car sent by the White House. The group reached agreement late on Jan. 15, a Saturday, and secured support from a commission majority only with White House arm-twisting.... Twenty-five years later, during the 2008 presidential campaign, Mr. Obama’s main rivals, Hillary Rodham Clinton in the Democratic primaries and John McCain, the Republican nominee, cited the Greenspan Commission as the model for how they would address Social Security’s woes. Mr. Obama dismissed the idea.

2) Barry Ritholtz on the WSJ:

I am willing to give the Marketplace and Money & Investing sections the benefit of the doubt. But it seems weird to me to say that I am now sequestering the OpEd pages AND much of the A section.  Once the political motivations of the owner leave the Opinion pages, it is a slippery slope down towards yellow journalism.

3) Robert Skidelsky: The Bogey of Inflation:

How real is the danger of inflation for the world economy? Opinion on this matter is divided between conservative economists and official bodies like the IMF and OECD. The IMF and OECD project very low inflation rates.... Which view is right has big implications.... [A]s a result of the slump, capacity utilization is lower than it was 15 months ago: global output has declined by roughly 5% since 2008, and developed-country output by 4.1%. One would expect inflation to fall with the decline in output, and this is exactly what happened.... But what about the vast quantitative easing (printing of money) that has been occurring? Since the start of the crisis, the Bank of England has pumped $325 billion into the British economy, the Fed has expanded the US monetary base by close to $1 trillion, and the People’s Bank of China originated a record amount of $1.4 trillion in loans. These measures alone correspond to 4% of global GDP. Surely that means that inflation is just round the corner unless the money is withdrawn fast, right?

For those who have had a couple of lessons in the Quantity Theory of Money, this seems a plausible conclusion. The quantity theory states that the general price level will rise proportionately to the increase in the money supply. So if the money supply increased by 5% globally in the last year, world prices will rise by 5% after a short lag. But, as John Maynard Keynes never stopped pointing out, the Quantity Theory of Money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output...

4) Bruce Bartlett: One Year Of Obama:

Does this mean I am happy with everything Obama has done in office? Of course not. I am sympathetic to the idea that the stimulus plan was too small and insufficiently front-loaded to turn the economy around. But on the other hand, the Republican idea that we should have done nothing or just cut taxes is nonsense.... The whole health reform effort has looked to me as if it was jury-rigged from day one, based less on a serious analysis of what needed to be done than about getting something--anything--through Congress that could be called health reform. I am disappointed that the idea of bending the cost curve has gotten short shrift, but I am even more disappointed that Republicans adopted the extraordinarily cynical strategy of defending Medicare from any cuts whatsoever.... [H]ealth reform, cap-and-trade, immigration reform and other issues that have occupied the president's attention could have been put off. One consequence is that reform of the financial sector, which is badly needed, has languished and been picked apart by industry lobbyists.... That said, I think Obama has done an adequate job in office his first year and given McCain's statements and actions, which show no remaining evidence of the independent streak he once exhibited, I have no reason to think we would be any better off if he had won. So I am comfortable with my vote and willing to give Obama the benefit of the doubt for a while longer.

5) Barry Eichengreen: Obamanomics: Year One and Beyond: Barack Obama... inherited a financial system on the verge of collapse... an economy in recession... a Congress and an economics profession with a tendency to confuse these real demons with imaginary ones.

His strength has been not to allow the perfect to become the enemy of the good. His $787 billion fiscal stimulus was good... too heavily tilted toward tax cuts... unaccompanied by a credible medium-term fiscal strategy.... But, having said all that, the stimulus package gave the economy a necessary shot in the arm. Obama’s efforts to stabilize the banking system, it almost pains me to acknowledge, succeeded despite themselves. I would have preferred bigger capital injections. I would have liked to see his administration use its leverage to replace the management responsible for creating the financial mess in the first place. But the stress tests and targeted TARP money, the path of least resistance taken, enabled the banks to earn their way back to solvency. However distasteful the uses to which those earnings have been put, they at least prevented the financial system from falling off a cliff....

The same middle-of-the-road approach can be taken in the second year.... Obama can use his State of the Union message to flesh out a bipartisan strategy for narrowing the budget deficit... reinstating pay-as-you-go rules... an independent commission to submit to Congress amendment-proof (and filibuster-proof) recommendations.... But Obama needs to provide stronger leadership on financial reform... the need for comprehensive financial reform is pressing... if the initial approach to financial reform doesn’t work, we face the prospect of another financial crisis every bit as serious as the last.... This is one area where Obama’s consensual instincts do not serve him well. He needs to use his bully pulpit. He needs to mobilize the general interest effectively...

6) Simon Johnson on the Banks: Off With Their Heads:

At the critical moment of crisis and rescue – from September 2008 to early 2009 – the Bush and Obama administrations blinked. There was no serious thought of deposing the bankers, who had helped to cause the crisis, or of breaking up their banks.... Ordinarily, if an industry plunges into crisis, you expect a serious shake-up.... The US treasury has for many years consistently advocated such principles... when other countries have got into trouble. But in the case of the US banking industry... pre-crisis executives in big banks have remained in place... little has changed in terms of risk-control practices, or remuneration. Why was the administration so conservative? Fear of a complete collapse of the banking system must have played some role.... In any case, the window of opportunity appeared to have been missed. As the measures taken to stabilize the economy began to work, the banks started to make money.... The administration did launch a modest regulatory-reform initiative in summer 2009, proposing new consumer protections and some measures to strengthen financial stability, but the measures were fought every inch of the way.... But, finally, after Massachusetts, it looks as if something important is happening...

7) The Financial Times Dislikes Volckerfest 2010:

Being cut off from trading securities for their own book will not stop banks from putting insured deposits at risk. Their inventiveness in finding ways to lose money knows no bounds, and the most time-honoured money-loser of all – making bad loans – remains available.... [T]he “Volcker rule” will not end the subsidies for the (many more) risks deposit-taking banks remain authorised to take. If it also prevents them from hedging those risks, it may make the banking system less, not more stable. Nor does the ban on proprietary trading do anything to protect the financial system from systemic dangers in its non-bank parts... many financial groups that do not take deposits... match... long-term illiquid assets with short-term liquid liabilities. This “shadow banking system” was the epicentre of the financial crisis. In the Lehman Brothers and AIG meltdowns, the equivalent of bank runs afflicted money market funds, repo markets and securities lending.... [T]hese alternative financing markets are huge... trillions of dollars each. If they stop functioning, financial stability is clearly in jeopardy. The key players in these markets, therefore, are ones governments still cannot allow to fail....

To cap market shares of non-deposit funding (as those of deposits already are) may be good for competition purposes. But a stabilising effect is unlikely: it forces the sector to leverage or deleverage in unison. And having many small banks did not save the US from a crippling wave of bank runs that plunged it into a Great Depression. For all its warts, a genuine effort at regulatory reform was wriggling its way through Congress – and at least a modicum of attention was being paid to co-ordinating such reforms at a global level. All this has now been blown out of the water by a White House seized by political panic. The result is that no one knows what will happen. A return to radical insecurity was the last thing we needed.

8) GRAPH OF THE DAY: Zheng Liu and Glenn Rudebusch: Inflation: Mind the Gap:

FRBSF Economic Letter: Inflation: Mind the Gap (2010-02, 1/19/2010)

Figure 2 displays the inflation forecasts.... The Phillips curve model with the unemployment gap captures the large decline in the inflation rate for the period from the first quarter of 2008 to the third quarter of 2009. But the alternative model without the unemployment gap completely misses it. For the period from the fourth quarter of 2009 to the fourth quarter of 2010, the Phillips curve model suggests that inflation should continue to go down and remain low, as the unemployment rate is likely to remain high. In contrast, the alternative model without unemployment gaps predicts that inflation should remain elevated at around 2.5%.... [T]he Phillips curve produces substantially more accurate forecasts than does the alternative model without unemployment gap measures. The RMSE of the Phillips curve model is about 25% of that of the naive model without the gaps... because it takes into account the large increase in the unemployment rate as a signal for lower future inflation, whereas the alternative model ignores information from the unemployment gap.... Stock and Watson (2009)... argue that measures of economic activity such as unemployment gaps do not seem to help improve the accuracy of inflation forecasts in relatively tranquil periods, but do help forecast inflation in periods with large deviations of the unemployment rate from the NAIRU. In this sense, our findings do not contradict those in Atkeson and Ohanian (2001) and others, who focus on the sample period during which the U.S. economy experienced relatively tranquil business cycles, a period often referred to as the Great Moderation...

9) BEST NON-ECONOMICS THING I HAVE READ TODAY: John Cole: There Is Your Opening, President Obama:

Right here: ' A prominent Republican senator said Thursday that President Obama is seeking to spark “class warfare” with increasingly populist rhetoric and a series of regulatory measures aimed at Wall Street. “I think they think if they can create enough animosity toward Wall Street and corporate America, they get into this traditional sort of Democrat rhetoric and tap into the populist anger out there,” Sen. John Thune, South Dakota Republican, told The Daily Caller. “For Democrats to be successful they’ve got to create a sense of class warfare and an us versus them mindset.”'

They are so eager to defend Wall Street they are doing it pre-emptively. Unemployment is at 10%. People are angry. People are pissed about the bonuses and the bailout. Even Bob Shrum could figure this out. And, as a side note, this merely confirms what we already know- whenever the Republicans accuse someone of something, they are already doing it. Class warfare? Has he watched the GOP the last twenty years?

10) HOISTED FROM THE ARCHIVES: DeLong (2004): The Icy Breath of the Ghost of Andrew Mellon:

If domestic policies were perfect... there would be no crises.... [T]he Mexican government in 1994 undertook a six-month liquidity goosing of the economy in the runup to its presidential election. The Mexican government also undertook to boost its long-run credibility by offering its creditors the infamous Tesebonos--peso-denominated but dollar-indexed bonds. These two policy missteps produced the Mexican crisis of 1994-5--a crisis that was bad....

[But] policy is never perfect, and I at least certainly did not think before 1994 that it was a very bad thing for a government to be willing to offer its creditors inflation-indexed debt, or that a short pre-election monetary goosing was more than a minor sin against the gods of monetarism. Yet the gods of monetarism proved to be jealous gods: the punishment was swift and terrible.

To say that "crises are overwhelmingly domestic in origin" seems to direct our attention away from just what it is that makes the gods of monetarism such awful and jealous gods, and what relatively small changes to our international institutions might make the gods of monetarism kinder and gentler ones. Yes: the shocks that generate crises are primarily domestic, or at least the domestic elements are necessary prerequisites. But the propagation mechanisms are global and international.

I feel the icy breath of the ghost of Herbert Hoover's Treasury Secretary Andrew Mellon when we focus on the sins of the bankers and borrowers rather than the workings of the system.


Pass a Helpful and Useful Fracking Health Care Bill!

If you need help, pass this:

A BILL: To make quality, affordable health care available to all Americans; reduce costs; improve health care quality; enhance disease prevention; strengthen the health care workforce; raise revenue; and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE

This Act may be cited as the "Completely Fed Up with the Congress Health Act"

TITLE I—QUALITY, AFFORDABLE HEALTH CARE FOR ALL AMERICANS

Subtitle A—Effective Coverage for All Americans

PART I—MONITORING EFFECTIVE COMPREHENSIVE HEALTH BENEFIT PLANS

Sec. 101. The Secretary of Health and Human Services shall establish, within the Department of Health and Human Services, a Health Security Agency.

Sec. 102. The Health Security Agency shall monitor the health insurance market, and prepare and update a list of HMOs, PPOs, insurance benefit plans, and other mechanisms for financing the delivery of health care services that meet the standards of being an effective comprehensive health benefit plan.

Sec. 103. The Secretary of Health and Human Services shall, at the end of each calendar quarter, transmit the list of effective comprehensive health benefit plans to the Secretary of the Treasury.

Sec. 104. Out of any funds in the Treasury of the United States not otherwise appropriated, there are appropriated such sums as may be necessary to carry out these sections for each fiscal year.

PART II-FINANCING

Sec. 201. There shall be assessed and levied upon every employee an earnings tax, to be collected from and paid by every employer not qualifying for the health security exemption.

(I) As of January 1, 2011, this tax shall be at the rate of two and one-half per centum of the wages paid by such employer to such employee.

Sec. 202. Every employer seeking to qualify for the health security exemption must, at the end of every calendar quarter, affirm under penalty of fraud that each employee for whom the exemption is sought is covered by an effective comprehensive health benefit plan on the list maintained by the Health Security Agency.

PART III-ACCESS FOR ALL AMERICANS

Sec. 301. Every employee not qualifying for the health security exemption may petition the Health Security Agency and then enroll in the Federal Employees' Health Benefit Plan.

Sec. 302. Every employer may petition the Health Security Agency and then enroll and fund its employees' participation in the Federal Employees' Health Benefit Plan.


Ace Hardward Is Running a Special on Gopher Wood...

The NWS says:

National Weather Service Watch Warning Advisory Summary: THIS HAZARDOUS WEATHER OUTLOOK IS FOR SAN FRANCISCO BAY AREA AND MONTEREY BAY AREA.

.DAY ONE...SATURDAY AND SATURDAY NIGHT

SCATTERED SHOWERS WILL CONTINUE ON SATURDAY. BRIEF HEAVY DOWNPOURS ARE POSSIBLE WITH SOME SHOWERS...AS WELL AS SMALL HAIL. SNOW WILL FALL IN THE MOUNTAINS...MAINLY ABOVE 2000 FEET. SHOWERS WILL GRADUALLY TAPER OFF DURING THE DAY AND END BY SATURDAY EVENING.

.DAYS TWO THROUGH SEVEN...SUNDAY THROUGH FRIDAY

A PACIFIC WEATHER SYSTEM WILL BRING PERIODS OF RAIN TO THE SAN FRANCISCO BAY AREA FROM SUNDAY THROUGH TUESDAY NIGHT. LOCALLY HEAVY RAIN MAY OCCUR AT TIMES. THE SOIL IS SATURATED AFTER A WEEK OF SIGNIFICANT RAINFALL. THEREFORE...ADDITIONAL RAINFALL WILL RESULT IN RAPID RUNOFF. STREAMS AND CREEKS ACROSS THE AREA WILL RISE RAPIDLY IN RESPONSE TO HEAVY RAINFALL. MINOR URBAN AND SMALL STREAM FLOODING IS POSSIBLE FROM LATE SUNDAY THROUGH TUESDAY.

.SPOTTER INFORMATION STATEMENT...

WEATHER SPOTTERS ARE ENCOURAGED TO REPORT SIGNIFICANT WEATHER CONDITIONS PER STANDARD OPERATING PROCEDURES.

$$

DYKEMA


Brown Voters' Attitudes Toward Gruber-Romney-Obama Health Care

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.


I Think EconomistMom Doesn't Understand the Game Being Played Here...

She writes:

If We Can’t Even Agree on the Commission…: I still don’t understand why those in Congress who truly want to achieve fiscal sustainability would oppose this commission just because it’s not as strong as a statutory commission, which they can’t pass in Congress anyway.  In helping policymakers and the American public confront the tough choices, any fiscal commission is better than none–as long as we don’t have to deficit finance the commission itself...

Economist Mom doesn't understand the game being played here.

Let's pick ten Republican or near-Republican senators typically called "moderates" (some of whom have retired since 2003): Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, and Lincoln. Only two of them (Blanche Lincoln and Judd Gregg) opposed the unfunded Medicare Part D. Only one of them (Olympia Snowe) opposed the 2003 tax cut, even though it was very clear at the time that permanent (as opposed to temporary recession-fighting) tax cuts were the last thing that America needed. And none of them opposed the 2001 tax cut--even though Alan Greenspan was at the time wandering around Capitol Hill whispering that it was bad policy, and that we were very likely to rue the day it had passed.

So these aren't deficit hawks. These are something else--deficit chickens, deficit doves, deficit turkey-vultures.

Yet they are the kinds of senators who are the big boosters of the Commission. Senator Voinovich went to talk to Obama to urge him to support the Commission--very much like an arsonist pleading to be put in charge of the fire department. What did he say to the President? "Stop me before I legislate again!"?

The idea is that by voting for the deficit commission that they can insulate themselves against the charge of fiscal irresponsibility: "What do you mean I'm not fiscally responsible? I voted for the deficit commission!" And because the ability to vote for pointless deficit commissions exists, Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, Lincoln, and all their ilk are under less pressure to actually do something to create an American government that lives within its means and has the means to live.

Thus EconomistMom is, IMHO, completely wrong when she says that "any fiscal commission is better than none." That would hold only if the Republican and near-Republican senators were playing a very different game than they actually are.


Republicans: Politically Savvy but Substantively Irresponsible

Keith Hennessey:

Why you can’t do just the health insurance reforms: Most of the current insurance “reform” debate instead focuses on the guaranteed issue and community rating provisions of the House- and Senate-passed bills.  I oppose these provisions, but they have broad-based bipartisan support.  Yet those Republicans who claim to support these provisions do not support the other policies required to make these provisions effective.  These Republicans have taken a politically savvy but substantively inconsistent (and, I believe, irresponsible) position...


The Internet's Chief Bernanke Apologist Officer Speaks!

The internet's Chief Bernanke Apologist Officer? That's me. And I guess I have to speak because Paul Krugman is "agonizing" over the Ben Bernanke question.

Paul writes:

The Bernanke Conundrum: I’m agonizing — which isn’t a place I ever expected to be, and not just because Bernanke hired me at Princeton...

And he issues the first count in his bill of indictment:

[Bernanke] completely failed to see the trouble building as the housing bubble inflated — and no, it wasn’t one of those things nobody could have predicted, since a lot of reputable economists were warning almost frantically about the bubble. True, Bernanke’s failure to see what was right in front of his nose was shared by almost everyone at the Fed — but as I’ll explain in a moment, that’s actually part of the problem...

In rebuttal, let me say that my conversations with senior Federal Reserve officials in 2004-2006 appear to have been very different than those Paul Krugman had. The points made in my conversations by Federal Reserve officials were roughly as follows:

  • Of course we can't say "there's a bubble" or be reported as saying "there's a bubble." For a central banker to say "there's a bubble" is for a central banker to say "SELL! SELL!! SELL!!!" And financial markets where people have to worry that central bankers may suddenly say "SELL! SELL!! SELL!!!" are unlikely to function well. So we are off the record, right?...

  • Is there a bubble? There's certainly a lot of froth, and there are certainly neighborhoods and regions where it would be surprising if there weren't a correction...

  • But there are reasons why house prices should be elevated right now above long-term trend--the global savings glut, the filling-up of America and thus the end of free residential land at the Ricardian margin, and limited transport capacity coupled with higher expected future oil prices should all push housing prices up...

  • Of course, if there weren't a plausible story that "this time it's different," there wouldn't be even a chance of a bubble...

  • Remember that Greenspan was confident there was a tech bubble in 1996--and was wrong: there was no tech bubble until 1999. It was just a rational boom...

  • And remember that when the tech bubble did crash, we had the tools to keep it from becoming a macroeconomic disaster...

  • And remember that the tech bubble gave us a lot of business model experimentation and a lot of cheap fiber--it was a social boom, a much better use of the money than if the rich people who bet heavily on tech in the 1990s had spent their money on their fourth houses or had given it to Harvard...

  • More to the point: If there is a bubble, what do you want us to do? Raise interest rates to discourage mortgage borrowing and so boost unemployment? You don't want us to do that...

  • More to the point: If there is a bubble, what do you want us to do? Use our regulatory authority to block transactions--to tell people "we don't care that you want to lend and you want to borrow at these terms, you can't"? If we try to do that, Congress destroys us as an independent agency in less than a year...

  • If there is a real estate bubble, we are ready to deal with the consequences of a crash to keep it from becoming a macroeconomic disaster...

All these points--except for the last--seem to me to be serious arguments, even with hindsight. I believe that the Fed should have followed the Gramlich rather than the Greenspan line and done much more on the regulatory side. But I cannot accept Paul Krugman's particular in his bill of indictment that the Federal Reserve was clueless.

Paul moves on:

The second [particular in the bill of indictment] is that since the acute phase of the crisis came to an end, and especially since his renomination, Bernanke has seemed out of touch with the severe problems that remain. He hasn’t engaged in any self-criticism.... He hasn’t been a strong voice for financial reform.... [H]e has seemed deeply worried about defending himself against the inflation hawks, not at all concerned with the question of whether the Fed is doing all it should to fight catastrophically high unemployment. (It isn’t).... Bernanke... to a greater degree than I had hoped, he has been assimilated by the banking Borg.... Bernanke, alas, has become too much of a respectable central banker...

In rebuttl, this seems to me to probably misread who and what Bernanke is right now. He is no longer the academic intellectual who advocates inflation targetting. He is, instead, the voice for the consensus of th Federal Open Market Committee--and a member of that committee who can, by his own internal arguments, move that consensus at the margin. So he is going to reflect that consensus.

So I am much more interested in moving the FOMC consensus in a constructive direction--in getting two extremely articulate and thoughtful sensible macroeconomists added to the FOMC via recess appointments by Obama to fill the vacant Fed governorships as soon as possible--than in demanding that Bernanke's public statements deviate from the FOMC consensus: a Fed chair who doesn't reflect the consensus in public has less power to move the consensus in private. From my perspective, I don't think that there's anything wrong with Ben Bernanke's (private, intellectual, academic) analysis of the current situation. What is wrong is that the FOMC consensus is wrong--and Bernanke's public statements reflect that wrong consensus.

So here I tend to blame Obama more than I blame Bernanke for the recent character of Bernanke's public statements--for the fact that Fed policy and rhetoric right now is not more Gagnonesque, because Obama could have done things over the past year to move the FOMC consensus that he has not done.

Excuse me:

OBAMA!! GET ALAN BLINDER AND DAVID ROMER ON THE FED BOARD NOW!!!!

There.

Now I'm back.

Last July, when Bernanke's reappointment was discussed, my view was a very, very tepid judgment that it was slightly more likely than not to be a mistake. There were six considerations:

  1. Bernanke's personal policy views were (probably) completely sound.

  2. He would (everybody thought) readily be reconfirmed.

  3. He was the Fed Chair likely to have the biggest influence moving the FOMC consensus toward sounder policies.

  4. Reappointing Bernanke would reassure markets, lower interest rates, and help recovery by sustaining the flow-of-funds through financial markets because he represented continuity that would calm markets:

  5. The continuity of reappointing Bernanke would depress recovery by eliminating expectations of additional major stimulative policy shifts.

  6. Reappointing Bernanke would mean that Obama was taking complete ownership of the state of the economy--you cannot say "The economy is in bad shape because of the failed policies of the past carried out by people who I have no chosen to be my Treasury Secretary and my Federal Reserve Chair."

It seemed to me that it was more likely than not that (5) and (6) slightly outweighed (1) through (4)--but that I was not an expert on the politics, and thus on the size of (6).

Now, however, (6) is a sunk cost. Obama owns the state of the economy. And it seems to me that (1) through (4) on the positive side clearly outweigh (5).

As Paul Krugman writes:

Ben Bernanke is a great economist, whose work on monetary economics has been a crucial guide to action in this crisis, and he applied his academic insights forcefully in 2008 and early 2009, helping pull the world back from the brink.


Your One Stop Shop for Understanding the Implications of Bernanke Brinksmanship...

The intelligent and thoughtful Edmund Andrews presents the current Wall Street consensus on Bernanke reappointment brinkmanship:

Bernanke Brinksmanship: Could the Democratic debacle in Massachusetts derail Ben Bernanke’s Senate confirmation to a second four-year term as Fed chairman? I wouldn’t bet on it, but... there is strong smell of panic among Democrats and a growing push to assuage popular fury on the right and the left... two more Democrats announced that they would vote against Bernanke.... By the end of the day on Friday, a spokesman for Harry Reid, the Senate majority leader, was saying Reid didn’t know if he could round up 60 votes to clear a filibuster and hadn’t himself decided whether to support him. The Republicans are probably even more hostile, even though Bernanke is a Republican who was originally nominated to the Fed by George W. Bush.... 

It’s true that Bernanke was complicit in Fed’s mistakes leading up to the crisis.... But it’s also true that Bernanke has been heroic in responding to the crisis once it arrived. He didn’t just lower interest rates.  He took Fed policy to places few had even imagined before, using every tool and lever he had or could design to fight the epic collapse in credit markets. The time to go after Bernanke, for those who wanted to, was when his nomination was before the Senate Banking committee....

The problem with opposing his nomination now is that it threatens to leave the Federal Reserve rudderless – never a good idea, but especially not when the economy and markets are still fragile.  Nominating a successor to Bernanke, getting him or her approved by Senate Banking and then getting that person approved by the Senate, where NOTHING passes without a supermajority of 60 votes, would take months.... [T]o the markets, Bernanke would be a lame duck who wouldn’t have the same credibility.  He would likely be seen as hesitant to undertake big new initiatives or to chart course changes, and he might have more trouble herding the hawks and doves together on the Federal Open Markets Committee.  What would that mean?  Uncertainty, reluctance to invest and possibly higher interest rates if foreign investors began to worry about lax controls over inflation.  At this juncture, that strikes me as a dangerous game to be playing.

Bruce Bartlett says that it wouldn't be so bad:

Thoughts on Bernank: Opposing Bernanke at this point is almost costless for everyone involved. If he is not reconfirmed as chairman he will still remain a member of the Board because his position as chairman is separate from his position as a member of the Board.... Don Kohn, is highly respected and been with the organization forever. He will simply take over the formal duties as chairman once Bernanke is no longer chairman. Third, the Fed, by its nature, tends to operate by consensus. So it doesn't really matter very much, insofar as monetary policy is concerned, whether Ben is chairman or merely a member of the Board.... Fourth, there is no obvious replacement for Bernanke who could get confirmed any more easily than him.... Ben's strength is as an economist and analyst. Whether he is chairman or not, his perspective will be respected by the other Board members.... [T]he issue of Bernanke's reconfirmation as chairman is a bit of a red herring. I don't anticipate any meaningful change in policy.

And Jim Hamilton says that yes, it would be so bad:

Why Bernanke should be reconfirmed: Please permit me to suggest that intellectual stamina is the most important quality we need in the Federal Reserve Chair right now.

I wonder which of previous Fed Chairs critics think would be better for the job than Bernanke. Surely you don't think we'd have been better off bringing Alan Greenspan back? G. William Miller fumbled badly with much simpler problems. Arthur Burns is a case study in how not to conduct monetary policy. And while I believe that Paul Volcker was the right person for the job at the time, I'd worry about whether he could adapt his hard money views to the subtlety of balancing the current short-run deflationary pressures with the inflationary potential of longer-run budget deficits. If you roll the dice, statistically you're likely to get someone more like the previous four than Bernanke.

I shake my head when I look at the list of senators who say they'll vote "no." How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke?

Perhaps some senators reason that a "no" vote could score them political points. If so, it's all the more reason to be alarmed.


Ten Economics Pieces Worth Reading: January 23, 2010

1) Christina Romer et al. (2010): ARRA: Second Quarterly Report:

[T]he ARRA had a substantial positive impact on real GDP growth in the second, third, and fourth quarters of 2009. The CEA estimates suggest that the Act contributed between 2 and 3 percentage points to real GDP growth in the second quarter; between 3 and 4 percentage points in the third quarter; and between 11⁄2 and 3 percentage points in the fourth quarter. The estimates imply that as a result, it has raised the level of GDP at the end of 2009 by about 2 percent, relative to what otherwise would have been. The Act has also increased employment in each quarter relative to what otherwise would have occurred. As of the fourth quarter of 2009, the CEA estimates that the ARRA has raised employment relative to the baseline by between 11⁄2 and 2 million. The CEA estimates for both the effects on GDP and employment are similar to those of respected private forecasters and government agencies...

2) Economics of Contempt: A Few More Assorted Thoughts on Financial Reform:

The single best thing we could do for financial reform: Triple the budgets of all financial regulatory agencies. Immediately.... Obama has proposed banning banks' prop trading desks and internal hedge funds. I'm fine with that, as long as it's done properly... there's really no compelling reason why the banks need to have prop trading desks or internal hedge funds.

But you can't simply prohibit banks from buying and selling securities for their own account, because that's precisely what market-makers do.... Some people will claim that it's impossible to distinguish between market-making trades and propietary trades, but that argument is completely baseless. The banks themselves already distinguish between their market-making trades and their proprietary trades, as there's a whole different set of rules for proprietary versus market-making trades....

In any event... there's zero chance the proposals Obama announced today will ever be law. This was a fairly transparent political stunt — the White House needed to do something to take the media's focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama's proposals, because even if the White House fights for them (which they won't), Chris Dodd has no intention of inserting them into his committee's bill. I like how some people think Obama's proposals represent a fundamental turning point on financial reform, because....well, clearly this is their first rodeo. (Hence the uber-quixotic language they use to describe financial reform.)

3) Paul Krugman: Glass-Steagall, Part Deux:

I don’t think that too-big-to-fail is at the heart of our financial problems. Nor do I think a sharp separation between narrow banking depository institutions and other financial players is a silver bullet: unless the shadow banking system is really reined in, financial institutions will create things that look like deposits, act like deposits, but don’t have an FDIC guarantee; yet in crisis, there will be strong incentives to bail them out anyway.

4) James Hamilton: Inflation fears:

Inflation is not something you should be afraid of for 2010. But what we need is a convincing commitment from the government to both near-term stimulus and longer-term fiscal responsibility in order to be assured that it's not a concern over the next decade.

And that's not what I'm seeing from the U.S. Congress.

5) Barry Ritholtz sends us to Danny Blanchflower on the Economics of Lunacy, and comments:

Fiscal and monetary intervention has prevented a great depression, but the new political consensus on public spending cuts could send us ‘back over the cliff’ says the man who predicted the recession. David Blanchflower, known as Danny, was one of the very few economists to anticipate the severity of the credit crunch. As a member of the Bank of England’s monetary policy committee he consistently called for rate cuts in defiance of his peers. Video:

Source: "‘The economics of lunacy’: Blanchflower warns against austerity": Daniel Grote | 14:17:26 | 15 January 2010 http://www.citywire.co.uk/personal/-/video/other/content.aspx?ID=376986

6) PEG: Why Tumblr is kicking Posterous’s a--:

Tumblr and Posterous are the two most prominent “tumblogging” sites... that make blogging more straightforward by making it easier to post media.... But now Tumblr has been an Alexa Top 100 site for a while and is still growing strong.... Yet Posterous has everything to win: it’s a Y Combinator company with top-tier investors like Chris Sacca and Mitch Kapor. Its founders are experienced software engineers with computer science degrees from Stanford. How come it’s eating dust from a small startup started by a high school dropout? The answer is... Tumblr is a New York company and Posterous is a Silicon Valley company.... Posterous is an engineered product, while Tumblr is a designed product. Posterous is extremely well engineered. There’s nothing wrong with it. Every single thing about it is well thought out. But it’s not just that it’s less pretty (though it is). It’s just not designed as well as Tumblr is....

I’m not here to bash Posterous, I think it’s a tremendous product and I wish them the best of luck.... But if you’re in a market where what matters is design edge, that’s not enough. There needs to be great design, by which I don’t mean looks (though they’re important), but how it works for the end user.... Tumblr and Posterous are just picture-perfect examples of two very important trends. The first is that New York has truly come of age as a startup hub, with its own “style”, its own way of doing things, its own mindset, which can sometimes — not always, but sometimes — kick Silicon Valley’s a--. The second is that for consumer web apps today, design matters more than technology. Much has been written about how the cloud, accessible web frameworks, etc. have dramatically lowered the cost of getting a startup to market, and that’s certainly true, but it also means that since everyone is on EC2 and Ruby on Rails, technology is no longer what differentiates most consumer web apps. What does is design. UI/UX design. Social design. Business model design as well...

7) GRAPH OF THE DAY: From the Economist Free Exchange: Good news is out there:

From a Vox write-up of new research by Maxim Pinkovskiy and Xavier Sala-i-Martin. They also note that the world income distribution used to be bi-modal—the haves and the have-nots. Now it approximates a normal distribution:

Good news is out there | The Economist

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Barry Ritholtz: WSJ Jumps the Shark:

The politicalization of the WSJ has moved to a new and more risky phase. The paper is now in danger of being a money loser... for those traders who read its content. It used to be that articles on the Market or specific companies or various finance stories were objective and reliable and free from bias. Sure, you could always count on money losing, bat-shit crazy nonsense in the editorial pages, but that was a special area of sequestered partisans, who due to their insanity cared not a whit about how much capital their lunatic ravings lost their readers. (The list is long and varied, but the Boskin “Obama Crash” on March 6th is a good place to start; then read anything Don Luskin writes — he is a reliable contrary indicator).

I assumed the drunks on the OpEd page did not care about what they did to your portfolio if you drank their Kool-Aid. But they were easy to avoid... the business pages were... run with a steel-eyed objectivity that professionals could rely upon. That is no longer the case.... I keep seeing headlines that are blatantly political, articles that looked to be edited by a ham-fisted politburo apparatchiks, other signs that the usual outstanding journalism at the WSJ is under assault....

A specific article that led to this sad conclusion? The most egregious example (of many) I noticed was this front page headline: New Bank Rules Sink Stocks.  This is the sort of silly headline I expect from lesser media outlets, not the Journal. Without getting too philosophical, we know that day-to-day action is mostly nonsense. Selecting a causal factor from the cacophony of news releases, earnings, price data is all but impossible.  There is a whole lot of noise, and very little signal. Assigning a definitive causative factor is at best a guessing game, at worst an exercise in futility.

9) STUPIDEST THING I HAVE READ TODAY: Economics of Contempt quotes John Taylor:

"[N]ot one counterparty, derivative counterparty to Lehman, filed for bankruptcy after the Lehman case. The major creditors who did not fail. So it's hard to find a direct knock on effects from that in the data."

What?! First of all, Lehman's biggest derivatives counterparties — the other dealers — were virtually all bailed out by their governments. Second of all, there were lots of hedge funds that failed because of their open derivatives positions with Lehman, and especially with Lehman Brothers International (Europe). The fact that John Taylor didn't know about these hedge fund liquidations at the time doesn't mean they never occurred. They occurred. Oh believe me, they occurred.

10) HOISTED FROM THE ARCHIVES: DeLong (August 25, 2009): Bernanke's Reappointment:

David Wessel: "Obama to Reappoint Fed Chairman Ben Bernanke - WSJ.com: President Barack Obama will announce Tuesday that he is nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve, White House Chief of Staff Rahm Emanuel said..."

Two reactions:

  1. I think Bernanke is one of the best in the world for this job--I cannot think of anyone clearly better. He has made only one big mistake--buckling under to pressure from all those yelling at him for enabling moral hazard and not finding a way to takeover Lehman Brothers, and he is not going to make the same mistake again...

  2. I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn't stop the recession would together make him damaged and that Obama would want to bring in a fresh face--never mind that Bernanke had no way to try to lessen the recession save by policy steps that inevitably involve giving money to the banks. It shows, I think, a seriousness about getting the policies right--or as close to right as we can--that I like to see in a president...


links for 2010-01-23


Justin Fox Says Goodbye!

He writes:

The Curious Capitalist: I started writing this blog in Sept. 2006 at Fortune.com (a wholly owned subsidiary of CNNMoney.com). The very first post was about boards of directors. Law professor Stephen Bainbridge thought it was stupid. I said no it wasn't, and my blogging career was off...

For the record, Justin Fox was right: his piece was not stupid.


Don't Block Ben!

I wish Boxer and Feingold had not done this:

Patrick Yoest and Luca di Leo: Boxer, Feingold Come Out Against Fed Chairman Bernanke - WSJ.com: Ben Bernanke faced ebbing support for a second term as Federal Reserve chairman as more senators adopted a populist, antibank stance even as the White House launched a public push to defend his candidacy. The erosion of support crossed party lines. Two Democratic senators facing re-election in November, Barbara Boxer of California and Russ Feingold of Wisconsin, on Friday joined two Democrats and an independent who previously announced their opposition. Ten Republicans say they, too, will oppose Mr. Bernanke.

Alarmed that there might not be the 60 votes in the Senate needed to extend Mr. Bernanke's term beyond its Jan. 31 expiration, the White House entered the fray publicly for the first time, with officials trying to win support among Democratic senators...

First, a correction to the story: it's not 60 votes, it's 51--for there are many more people who want to be on record as opposing Bernanke than who actually want the Federal Reserve to be headless on February 1.

Second, I think Boxer and Feingold have fallen into a trap. If Bernanke's nomination fails, it will be because of a combination of left Democrats and right Republicans. Why would right Republicans vote against the nomination of a Republican-appointed hard-money Republican? So that they can then vote against financial regulatory reform without taking political damage. "You are too friendly to the banks!" their opponents will say. And they will respond: "Oh yeah? Your president wanted bank-friendly Ben Bernanke to stay at the head of the Fed. AND WE BLOCKED HIM!!"

Boxer and Feingold, it seems to me, are enabling the future Republican ability to block financial reform without taking political damage from it.

So I find myself thinking about last August, and the Bernanke renomination:


Bernanke's Reappointment: David Wessel

Obama to Reappoint Fed Chairman Ben Bernanke - WSJ.com: President Barack Obama will announce Tuesday that he is nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve, White House Chief of Staff Rahm Emanuel said...

Two reactions:

  1. I think Bernanke is one of the best in the world for this job--I cannot think of anyone clearly better. He has made only one big mistake--buckling under to pressure from all those yelling at him for enabling moral hazard and not finding a way to takeover Lehman Brothers, and he is not going to make the same mistake again...

  2. I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn't stop the recession would together make him damaged and that Obama would want to bring in a fresh face--never mind that Bernanke had no way to try to lessen the recession save by policy steps that inevitably involve giving money to the banks. It shows, I think, a seriousness about getting the policies right--or as close to right as we can--that I like to see in a president...


Paul Krugman on the Return of Glass-Steagall

He writes:

Glass-Steagal, Part Deux: So what do I think about the new White House initiative on limiting bank size and restricting the activities of depository institutions?

  1. It’s OK as part of a broader financial reform, and is a good sign that the WH is getting ready to rumble with the banks.

but

  1. I’m from Missouri — show me. Actually, that’s a lie: I’m from New Jersey by way of New York, but whatever. I liked the Treasury reform plan from last spring, too. What remains to be seen is how much fight there is behind it.

As I’ve written repeatedly, I don’t think that too-big-to-fail is at the heart of our financial problems. Nor do I think a sharp separation between narrow banking depository institutions and other financial players is a silver bullet: unless the shadow banking system is really reined in, financial institutions will create things that look like deposits, act like deposits, but don’t have an FDIC guarantee; yet in crisis, there will be strong incentives to bail them out anyway.

Still, you have to admit that the growth of the shadow system was fueled, in part, by FDIC-backed players providing credit lines and so on to their shadow-banking arms, and that the sheer size of some players has posed real difficulties for resolving crisis. So in the context of a broader financial reform, this stuff could help.

This last part--the part starting with "Still..."--seems to me to be wrong. I have seen no evidence that pieces of the shadow banking system that could draw on FDIC-guaranteed funds (like Wachovia, Citigroup, and JPMorgan Chase) were any more highly fueled than pieces of the shadow banking system that could not (Countrywide, Bear-Stearns, Lehmann, Morgan Stanley, Goldman Sachs, et cetera). Moral hazard created by deposit insurance seems to me to be a red herring here.

And I would also note that the difference between Paul Krugman and Tim Geithner on the rest of it is a subtle one. Paul believes that "too-big-to-fail is [not] at the heart of our financial problems... a sharp separation between narrow banking depository institutions and other financial players is [not] a silver bullet." So does Geithner. But Krugman believes that any excuse for an administration rumble with the banks would be good--would lead them to make concessions and to surrender the votes of their tame congressmen on other more important points. Geithner, on the other hand, appears to believe that the administration has limited power, and should reserve that power for first-order problems and not get distracted.


Econ 210a, U.C. Berkeley: January 27, 2010: One Economics or Many?

How many economicses are there?

Karl Marx was sure that there were many:

Economists express the relations of bourgeois production, the division of labour, credit, money, etc., as fixed, immutable, eternal categories.... Economic categories are only the theoretical expressions, the abstractions of the social relations of production.... Economists have a singular method of procedure. There are only two kinds of institutions for them, artificial and natural. The institutions of feudalism are artificial institutions, those of the bourgeoisie are natural institutions.... When the economists say that present-day relations – the relations of bourgeois production – are natural, they imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. These relations therefore are themselves natural laws independent of the influence of time... eternal laws which must always govern society.... [But] during the epoch of the domination of feudalism... the knightly virtues, the beautiful harmony between rights and duties, the patriarchal life of the towns, the prosperous condition of domestic industry in the countryside, the development of industry organized into corporations, guilds and fraternities.... Thus, feudal production, to be judged properly, must be considered as a mode of production.... Is not this as good as saying that the mode of production, the relations in which productive forces are developed, are anything but eternal laws, but that they correspond to a definite development of men and of their productive forces, and that a change in men's productive forces necessarily brings about a change in their relations of production?...

Was he right? Or wrong?


Readings Around the Knotty Question of "Modes of Production":


Writing Assignment:

Write a 200-500 essay on whether we are better off presuming that there is one economics common to all societies, or alternatively that there are many--that different types of economies follow different economic laws of motion. At least 18 hours before the class--by 6 PM PST on January 26, 2010--email your paper...

You might, as you write your essay, think about the following question:

"Formalists" would say that all economies are pretty much alike--that people make stuff and distribute it in a social process, and that this social process is or can be fruitfully and conveniently modeled as one of reciprocal exchange of commodities at market prices. I contract with the Bay Alarm Company to provide security for my house: they install, monitor, and respond to a burglar alarm, and I pay them valuable money. Similarly, Hrothgar (Roger) the Scylding, King of the Danes "contracts" with warriors to provide security for his villages: they acquire weapons, train until they are skilled in their use, and follow him into battle against raiding bandits who want to steal the cows and rape and kidnap the women of the Danes; he in return feeds them dinner, plies them with alcohol, entertains them with skalds, and gives them places to sleep every night in his great hall of Heorot. These are, the formalists would say, fundamentally the same thing: the "purchase" of security services in exchange for value at an "equilibrium" price.

"Substantivists" would say that economies are very different: that there is next to nothing in common between the business conducted by the Bay Alarm Company on the shores of San Francisco Bay early in the twenty-first century and the business conducted by Prince Beowulf of the Geats and his companions on the shores of sixth-century Jutland. The "prices" at which the reciprocal obligations that make up social life are "exchanged" or "bought and sold" are not set by equalizing a supply and demand themselves the results of utility, scarcity, opportunity, and capabliity but are instead determined by overpowering sociological forces--fear, force, custom, command, bureaucracy, and honor--combined with a generalized human desire to return good for good and evil for evil alongside a sense of shame if the flow seems to be too one-way. The economic is thus "embedded" in the sociological and the political.

An example. Back in 1997 there was on two-week period in which my wife and I hired three babysitters: a 22 year old recent graduate of Berkeley who was also our children's swimming teacher who we paid $10 an hour as a babysitter (and $40 an hour as a swimming teacher); a 16 year old just moved to Bayarea from Mexico city for her last two years of high school whom we paid $7 an hour as a babysitter; and a 13 year old living in our neighborhood who put up a sign at the local playground whose mother would not let us pay her more than $4 an hour. In none of these cases were the terms and conditions of employment determined by anything like supply-and-demand equilibrium in a competitive auction market. In all of these cases what we pay is determined much more by what we feel is an appropriate level of earnings for someone of her age and skill. Economic conditions--scarcity and opportunity--do enter, for where do beliefs about appropriate wages come from?, but they enter only at one remove, for we pay different people different wages for the same work.

Clearly even the most "substantivist" of situations has a formal element: when Grendel shows up very few of Hrothgar's warriors stick around because the food and drink is not worth having your arms torn off. And even the most "formalist" of situations has a substantivist element: we don't have the cartoon of oatmeal tested by a biochemist before we pay for it at Safeway, but rely (most of the time) on the Safeway workers' belief that their social role is to sell food rather than garbage and (most of the time) we are right. But to say that the truth is in the middle is unsatisfactory. So: to what degree should we lean toward the "formalist" or the "substantivist" end in doing are economic analyses? To what degree should we presume that there is only one economics? And to what degree should we presume that there are many?


Food for Thought:

DeLong (2008), "Economic Growth--The Ultimate Bird's Eye View":

(

DeLong (1997), "On the 'Embedded Economy' Thesis"


Five Economics Pieces Worth Reading: January 22, 2010

1) Via Paul Krugman: TA.C.Pigou: Economics of Welfare:

Corresponding to the above investments in which marginal private net product falls short of marginal social net product, there are a number of others, in which, owing to the technical difficulty of enforcing compensation for incidental disservices, marginal private net product is greater than marginal social net product. Thus, incidental uncharged disservices are rendered to third parties when the game-preserving activities of one occupier involve the overrunning of a neighbouring occupier’s land by rabbits—unless, indeed, the two occupiers stand in the relation of landlord and tenant, so that compensation is given in an adjustment of the rent. They are rendered, again, when the owner of a site in a residential quarter of a city builds a factory there and so destroys a great part of the amenities of the neighbouring sites; or, in a less degree, when he uses his site in such a way as to spoil the lighting of the houses opposite...

2) Howard Gleckman:

George Bush could have proposed the Senate health bill. If he had, those Republicans who now loathe the measure would be at the barricades defending it... think for a minute about the framework of this bill. As I’ve written before, it is pretty simple and not very radical. At its core is a health system that relies on employer-based private insurance to cover most working people. The old would continue to be insured by Medicare and the poor would be covered by Medicaid, just as they are today. The changes: Insurance companies would have to offer coverage to all, regardless of pre-existing conditions; everyone would have to obtain basic coverage or pay a penalty; exchanges would enhance the individual insurance market; the government would subsidize premiums for those who cannot afford them, including both individuals and small businesses; and Congress would take some small steps to slow the growth of health costs.

None of these ideas are new and most used to sit comfortably in the GOP mainstream. The Senate bill mimics the framework of the 2006 Massachusetts health reform, an idea that was pushed by Republican then-Governor Mitt Romney and, as we know by now, was supported by new Massachusetts Senator Scott Brown. This is what Romney said about the bill after it passed: "Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced." Sound familiar? The Bay State model was so important in the Washington debate that congressional health negotiators privately described their road to a final bill as “going down Massachusetts Avenue.”  

And the Massachusetts plan was not just Romney’s idea. Staffers at the conservative Heritage Foundation provided extensive technical guidance, and the broad outlines (if not all the details) were widely praised by the right—at least until the 2008 presidential campaign, when Romney denied parentage of his own reform bill....

In 1993, Republican senators Bob Dole and John Chafee proposed a reform that included an individual mandate, cost controls, and generous government subsidies. In 1994, a bipartisan bill sponsored by Chafee and conservative Democrat John Breaux included many of the same elements.... The bottom line is that much of the battle over health reform is not about substance at all. If it were, Democrats and Republicans could have gotten together last year and reached a workable consensus reform that, indeed, would look a lot like the Massachusetts—or the Breaux-Chafee—design. But that, it seems, was never in the cards. It was politically much more productive to caricature the plan as a government take-over of health reform or a big new tax on working people.    

3) Matthew Yglesias: Conservatives Love Universal Health Care Once It Happens, and Scott Brown is No Exception:

Specifically, the candidate says he doesn’t think Massachusetts voters need a federal universal health care plan since Massachusetts already has a universal health care plan: “We have insurance here in Massachusetts. We have some of the best doctors, nurses and hospitals in the country; that’s why people come here,” he said in the final debate. “Not only is this bill going to be bad for the state, my job is to be the senator from Massachusetts. I’m not going to be subsidizing for the next three, five years, pick a number, subsidizing what other states have failed to do.” A Brown advisor made this even more explicit. The national plan is very similar to the Massachusetts plan. And Brown thinks the Massachusetts plan is good. It’s just that Brown thinks the Massachusetts plan will, on net, transfer funds out of Massachusetts and toward other states: “In Massachusetts, 98 percent of residents are covered by insurance through our own state reforms. The plan is not perfect, and we need to get costs down, but we have already achieved near-universal coverage. There is nothing for us in a national plan except higher taxes and more spending to finance coverage expansions in other states. It’s a raw deal for Massachusetts,” he said.... [A]ssuming you’re interested in the issue of whether or not the proposed federal health plan will work well on the whole, Brown’s point of view strongly suggests that it will. Massachusetts did something similar a few years back and it’s worked so well that even Republicans like Scott Brown happily embrace it. Canadian Conservatives love Medicare, British Tories love the NHS, and Massachusetts Republicans love Commonwealth Care. There’s a pattern here.

4) BEST THING I HAVE READ TODAY: Pedantry: everything that bored you to death in high school:

I'm still reading Hobsbawm, and just finished the chapter on the Cold War. I find Hobsbawm is best read by doing a whole chapter in one sitting, then allowing it some time to sink in before embarking on the next chapter. Usually, it's just enough to time to read another book. Today, it was Dark Light by Ken MacLeod.... MacLeod has a good quote attributed to him: "History is the trade secret of science fiction.' It's an appropriate quote for a socialist, and he demonstrates it in Dark Light.

What sparked this post, however, is a minor bit nearly at the end of the book:

"Bad news. What about the Party branch?"
Endecott's sandy eyebrows twitch, very slightly.
"They're solid. Most of them."
"What party?" Annie asks suspiciously
"Uh, later," says Matt. He has an absurd flash-forward of her taking Endecott to task for Kronstadt, Makhno and the Barcelona Phone Company.

What do Kronstadt, Makhno and the Barcelona Phone Company have to do with each other? Well, this is perhaps an obscure bit of history. Kronstadt is well known enough as the moment the Bolsheviks took action against leftist anarchists who had taken over Kronstadt island near St-Petersburg. The Barcelona Telephone Company refers to a violent incident in the Spanish Civil War when communists took action against an institution controlled by the anarchists. And Makhno... well, Nestor Makhno was an anarchist with a small army who took over a big chunk of the Ukraine during the Civil War. Later, he was exiled to Paris and still has his fans among the anti- and not-particularly-Marxist varieties of socialist radicals. All, in effect, refer to incidents when more orthodox communists took action against socialist anarchists.

The thing is, for some people, Makhno was a terrorist. I'm one of those people, and one of the reasons is that they terrorised my grandfather's parents, and my granfather used to tell the story regularly. Not that Grandpa could ever have entertained this thought, but getting rid of Makhno was one of the better things the Bolsheviks did...

5) HOISTED FROM THE ARCHIVES: DeLKong (March 2003): Is It too Late to Ask to Be Born on Another Planet?:

A correspondent complains: "I'm not sure I want to live on a planet where Howard Fast can write Spartacus and Freedom Road, and still accept the Stalin Prize. Is it too late to ask for another planet?" The answer, unfortunately, is "Yes, if you are already alive it is too late to ask to be born on another planet." But we could try to fix the one we have...


DeLong: Review of Paul Krugman, The Accidental Theorist

Review of Paul Krugman, The Accidental Theorist: Of all the books of short essays that Paul Krugman has written, I think that this is the very best: you can learn an awful lot of economics from this book, for Krugman's usual clarity and force of argument is raised to a higher power in this book.

It is a collection of twenty-seven short essays, almost all of which strike me as essentially correct and all of which are worth reading. But because the book is made up of twenty-seven different essays, it has no single theme. It does, however, have a single method: think clearly, look at the facts, and remember that people respond to incentives, that supply balances demand, and that there are a lot of politically-motivated ideologues making shabby arguments out there.

Each reader will be annoyed when some of his or her personal oxes are gored. Each will applaud when Krugman turns his scalpal in a direction they approve of. And each will--with an open mind--learn a great deal.

My favorite passages from this book include a demolition of the rhetoric of ex-Republican presidential candidate Bob Dole (from "The Lost Fig Leaf" Why the Conservative Revolution Failed":

"You now work from the first of January to May just to pay your taxes so that the party of government can satisfy its priorities with the sweat of your brow.... Somewhere, a grandmother couldn't afford to call her granddaughter, or a child went without a book, or a family couldn't afford that first home because there was just not enough money.... Why? Because some genius in the Clinton administration took the money to fund yet another theory, yet another program, and yet another bureaucracy." The words... Bob Dole's... tried to put over, one more time, the fiction that the federal government takes away your hard-earned money and spends most of it on things that only social workers want...

[But] it [is] quite easy to get a realistic picture of where your tax dollar goes.... Social Security: 21.6%. Defense: 18.9%. Interest on the debt: 13.7%. Medicare: 9.7%. Medicaid: 5.8%. Pensions for federal workers: 4.2%. Veterans' benefits: 2.6%. Transportation: 2.6%. Unemployment insurance: 2.0%. Law enforcement: 1.1%....

[This] encompasses the bulk of government spending--82.2%, to be precise. Anyone who proposes a radical downsizing of the federal government must mean to slash this list.... [And] these are programs that the public likes...."

For as Krugman correctly notes, it is not that he is telling Bob Dole anything Dole doesn't know--he is telling you things that Dole and his ilk would rather that you remained ignorant of.

They also include Krugman blasting Robert Reich's idea that growing inequality in America is the result of the middle class getting "downsized":

The people who are really doing badly are those who do not have good jobs and never did. Those with lousy jobs have seen their already-low wages slowly but steadily sink.... [T]he main victims... are not the few thousand managers who have become hamburger flippers but the tens of millions of hamburger flippers, janitors, and so on whose real wages have been declining... for the past two decades...

Krugman denouncing the old-Keynesian doctrines of his own teachers as irrelevant in normal times:

The simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates.... [T]he unemployment rate... will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.... And so all the paradoxes of thrift, widow's cruses, and so on become irrelevant.... [A]n increase in the savings rate will translate into higher investment after all, because the Fed will make sure that it does.

And Krugman trying to get people to remember that we have lived through a history, and that people whose ideas have been wrong and false in the past have no right to claim our attention without explaining just why and how their past advice was bad:

The supply side idea--which is that tax cuts have such a positive effect on the economy that one need not worry about paying for them with spending cuts--does not persist because of any actual evidence in its favor.... In 1993, after the Clinton administration had pushed through an increase in taxes on upper-income families, the very same people who have persuaded Dole to run on a tax-cut program were very sure about what would happen. Newt Gingrich confidently predicted a severe recession. Articles in Forbes magazine urged readers to get out of the stock market to avoid the inevitable crash. The Wall Street Journal editorial page had no doubts that the tax increase would shaprly increase the deficit instead of reducing it.

But my most favorite pieces of the book of all are three passages that go to the heart of Krugman's commitments--both moral and intellectual. The first is a biting denunciation of William Greider for being an "accidental" theorist: someone who does not think issues through, but who just looks at surfaces without peering into depths or thinking coherently and whose thought is thus shaped by implicit, unexamined theories of which he is not conscious:

...reducing the number of workers it takes to make [manufactures] reduces the number of jobs in the [manufactures] sector but creates an equal number in the [services] sector, and vice versa. Of course, you would never learn that from talking to [manufacturing] producers, no matter how many countries you visit; you might not even learn it from talking to [services] manufacturers. It is an insight that you can gain only... by engaging in [economic] thought experiments.

I think I know what people like Greider would answer: that while I am talking mere theory, their arguments are based on the evidence. The fact, however, is that the U.S. economy has added 45 million jobs over the past 25 years.... Greider's view, if I understand it, is that this is just a reprieve--that any day now the whole economy will start looking like a steel industry. But this is a purely theoretical prediction. And such theorizing is all the more speculative and simplistic because he is an accidental theorist, a theorist despite himself."

The second is a parable Krugman tells about just why unwarranted and unnecessary inequality is a bad thing:

consider this simple parable: There are two societies. In one, everyone makes a living at some occupation--say fishing--in which the amount people earn over the course of a year is fairly closely determined by their skill and effort. Incomes will not be equal in this society... but the range of incomes will not be that wide. And there will be a sense in which those who catch a lot of fish have earned their success. In the other society... a few find rich mother lodes and become wealthy. Others find smaller deposits, and many find themselves working hard for very little reward. The result will be a very unequal distribution of income. Some of this will still reflect effort and skill.... But there will be many skilled, industrious prospectors who do not get rich and a few who become immensely so. Surely the great majority of Americans... feel that a nation that resembles the second imaginary society is a worse place than one that resembles the first. yet there is also no question that our nation today is much less like the benign society of fishermen--and much more like the harsh society of prospectors--than it was a generation ago.

He then uses this parable as a paddle to spank Dick Armey--who is, like Bob Dole, most anxious to make sure that Americans do not understand their economy. As Krugman puts it:

Armey denies that the eighties were a period in which the rich got richer and the poor got poorer. 'The statisticians', he writes, 'break our population into five income groups, called quintiles. During the eighties they gained in average real income as follows: Lowest quintile--up 12.2 percent.... Highest--up 18.8 percent.'... [Armey] is fibbing a bit. These figures are not... for all of the eighties, but only from 1983 to 1989.... At the end of the 1983-1989 recovery, the bottom quintile was still worse off than it was in 1979

And the third is Krugman's denunciation of our market economy, coupled with a reaffirmation of it as the best social system we know how to construct:

At the heart of capitalism's inhumanity--and no sensible person will deny that the market is an amoral and often cruelly capricious master--is the fact that it treats labor as a commodity. Economics textbooks may treat the exchange of labor for money as a transaction much like the sale of a bushel of apples, but we all know that in human terms there is a huge difference.... An unsold commodity is a nuisance, an unemployed worker a tragedy; it is terribly unjust that such tragedies are created every day by new technologies, changing tastes, and the ever-shifting flows of world trade. There would be no excuse for an economic system that treats people like objects except that, as Churchill said of democracy, capitalism is the worst system known except all those others that have been tried from time to time...

Critics of Paul Krugman call him acerbic and boastful, unfair on the attack and unwilling to make concessions on the defense, certain that he is correct, and always sure that those who disagree are mendacious or foolish (or both). And I cannot deny that these criticisms are accurate. But all these are outweighed by one fact: he is almost always--not always, but almost always--right.

He is the closest thing to an heir to John Maynard Keynes we have today.


Stupidest Thinktank Alive: The American Enterprise Institute

Utterly remarkable. It is hopeless to appeal for some quality control, but I do so anyway:

Charles Murray:

The Word Made Flesh « The Enterprise Blog: I’ve been marooned in Paris the last three days, waiting for a plane home after the snowstorm mess (“Poor Charles,” you’re all saying). Last night, having been struck by how polyglot Paris has become, I collected data as I walked along, counting people who looked like native French (which probably added in a few Brits and other Europeans) versus everyone else. I can’t vouch for the representativeness of the sample, but at about eight o’clock last night in the St. Denis area of Paris, it worked out to about 50-50, with the non-native French half consisting, in order of proportion, of African blacks, Middle-Eastern types, and East Asians. And on December 22, I don’t think a lot of them were tourists.

Mark Steyn and Christopher Caldwell have already explained this to the rest of the world—Europe as we have known it is about to disappear—but it was still a shock to see how rapid the change has been in just the last half-dozen years...

In addition to the fact that Charles Murray simply cannot add, there are things like this:

File:Alexandre Dumas.jpg - Wikipedia, the free encyclopedia

Alexandre Dumas, père: 1802 - 1870


Volckerfest 2010: Return to Glass-Steagall...

http://www.nytimes.com/2010/01/21/business/21volcker.html?hp

I suppose this means that my schedule before my NASI lunch panel is in total collapse this morning...

THE WHITE HOUSE Office of the Press Secretary

FOR IMMEDIATE RELEASE January 21, 2010

President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers

WASHINGTON, DC- President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President's economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers.

The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.”

The proposal would:

  1. Limit the Scope-The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit. .

  2. Limit the Size- The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

In the coming weeks, the President will continue to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too Big to Fail.” Chairman Barney Frank’s financial reform legislation, which passed the House in December, laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively risky activities.

As part of the previously announced reform program, the proposals announced today will help put an end to the risky practices that contributed significantly to the financial crisis.


Six Economics Pieces Worth Reading: January 21, 2010

1) Gideon Rachman: Why America and China will clash:

The reason that the Google case is so significant is because it suggests that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong. The US has accepted – even welcomed – China’s emergence as a giant economic power because American policymakers convinced themselves that economic opening would lead to political liberalisation in China.

If that assumption changes, American policy towards China could change with it. Welcoming the rise of a giant Asian economy that is also turning into a liberal democracy is one thing. Sponsoring the rise of a Leninist one-party state, that is America’s only plausible geopolitical rival, is a different proposition. Combine this political disillusionment with double-digit unemployment in the US that is widely blamed on Chinese currency manipulation, and you have the formula for an anti-China backlash.

Both Bill Clinton and George W. Bush firmly believed that free trade and, in particular, the information age would make political change in China irresistible. On a visit to China in 1998, Mr Clinton proclaimed: “In this global information age, when economic success is built on ideas, personal freedom is essential to the greatness of any nation.” A year later, Mr Bush made a similar point: “Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy ... Trade freely with the Chinese and time is on our side.”...

So far, the facts are refusing to conform to the theory...

2) James Kwak on Ariba and the Tech Bubble:

Over time, as with all bubbles, we began to doubt. By late 2000, I think most of us realized that reaching the expectations the market had for us was a long shot. And as I said, the fundamental problem wasn’t the software, although the software wasn’t as good as it could have been. It was that the customers were failing at building the marketplace communities as fast as they had envisioned, and as the bubble imploded suddenly they were no longer interested anymore, and suddenly the market expected us to collapse. As it turned out, the customers didn’t really want what they had been desperately scrambling for less than a year before. And we had over two thousand people lined up to build shovels that no one wanted.

There are obviously parallels to the financial craze of 2004-2007, and we did more or less play the part of Chuck Prince (music, dance, etc.). All of the paper wealth went to the heads of people at the boom companies, who started thinking they were smarter and better-looking than they actually were, just like overpaid bankers are convinced they are actually smarter than their college friends who got Ph.D.s in physics and are now struggling junior professors. (Unlike the Wall Street bubble, however, most of that wealth stayed on paper, because of the rule that stock options vest over four years, and the tendency for most people not to cash out at the first opportunity.)

But the big difference, as many have noted, is that ours was an equity bubble, not (for the most part) a debt bubble. Technology startups were funded by venture capital firms, which generally have no debt, and by stock offerings; they generally don’t have the assets and steady cash flows to borrow money. (The telecom infrastructure companies were an exception.) There was little margin borrowing to buy stocks, as compared to the 1920s, so when the NASDAQ crashed, the damage did not spill over into other asset classes, and the financial system didn’t even wobble...

3) Paul Krugman: What Didn’t Happen:

Why was the stimulus underpowered?.... Their political judgment may or may not have been correct; their economic judgment obviously wasn’t... in late 2008 and early 2009 the Obama team was focused on little else. The administration wasn’t distracted; it was just wrong.

The same can be said about policy toward the banks. Some economists defend the administration’s decision not to take a harder line.... But the light-touch approach to the financial industry further entrenched the power of the very institutions that caused the crisis.... And it has had disastrous political consequences: the administration has placed itself on the wrong side of popular rage over bailouts and bonuses.

Finally, about that narrative: It’s instructive to compare Mr. Obama’s rhetorical stance on the economy with that of Ronald Reagan. It’s often forgotten now, but unemployment actually soared after Reagan’s 1981 tax cut. Reagan, however, had a ready answer for critics: everything going wrong was the result of the failed policies of the past. In effect, Reagan spent his first few years in office continuing to run against Jimmy Carter. Mr. Obama could have done the same — with, I’d argue, considerably more justice.... But he didn’t. Maybe he still dreams of bridging the partisan divide; maybe he fears the ire of pundits who consider blaming your predecessor for current problems uncouth — if you’re a Democrat.... Mr. Obama has allowed the public to forget, with remarkable speed, that the economy’s troubles didn’t start on his watch....

At this point Mr. Obama probably can’t do much about job creation. He can, however, push hard on financial reform, and seek to put himself back on the right side of public anger by portraying Republicans as the enemies of reform — which they are...

4) BEST NON-ECONOMICS THING I HAVE READ TODAY: bena:

Picard: Soft on the crystalline entity. Soft on Borg extermination. Vote Nechayev!

5) STUPIDEST THING I HAVE SEEN TODAY: Mike Potemra. Outsourced to Kevin Drum:

Quote of the Day: Conservative Values: From Mike Potemra, over at National Review Online: "I have over the past couple of months been watching DVDs of Star Trek: The Next Generation, a show I missed completely in its run of 1987 to 1994; and I confess myself amazed that so many conservatives are fond of it. Its messages are unabashedly liberal ones of the early post-Cold War era — peace, tolerance, due process, progress.... "You know, conservatives don't usually confess straight up to finding peace, tolerance, due process, and progress so disagreeable.  But I guess they slip up every once in a while.

6) HOISTED FROM THE ARCHIVES: DeLong (2003): Economics 236: Your Last Course in Macroeconomics:

PART I: A QUICK OVERVIEW. January 22: Introduction: Olivier Blanchard (2000), "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?" Quarterly Journal of Economics 115:4 (November), pp. 1375-1410; Olivier Blanchard (1990), "Why Does Money Affect Output? A Survey", in B.M. Friedman and F. Hahn eds, Handbook of Monetary Economics, 1990, Vol 2, 779-835. January 29: Unemployment and Institutions.... February 5: Contracts and Aggregate Output.... February 12: Taking Technology-Shock Theories Seriously.... PART II: THE GROWING STRENGTH OF BEHAVIORALIST APPROACHES.... The Rationale for Behavioralist Approaches.... Unemployment and Behavioral Economics.... Money Illusion and Aggregate Output.... Savings and Economic Psychology.... What Should Investors Do?.... What Do Investors Do?.... Whither Behavioral Macro?... PART III: GROWTH ONE LAST TIME.... Corruption and Political Blockages to Growth.... Trade and Growth.... Institutional Roots of Growth...


links for 2010-01-21


Senator-to-Be Scott Brown and Health Care Reform

Senator-to-Be Scott Brown and Health Care Reform « The Berkeley Blog: One of the stranger things about the Washington DC reaction to Scott Brown’s victory is that very few people seem to have noticed that Scott Brown approves of the health care reform bill–he thinks that it is good policy, that it would be a good set of reforms to the country’s health care system.

Why is he pledged to vote against it, then? Two reasons: (a) Party loyalty. (b) The current bill doesn’t do more for Massachusetts–Massachusetts, you see, already has the benefits of the bill (they were enacted by the Mass. legislature and Mitt Romney when he was governor), so from the narrow perspective of Massachusetts’s interests, the bill has no benefits but has some costs.

So Brown’s victory is–whatever it may mean–certainly not a sign that the voters of Massachusetts think the health care reform bill is bad policy for the nation.

The more general lesson? I think it is simple: political parties should not let lousy campaigners run for senate seats.

Obama is, IIRC, a little more popular than presidents typically are at this point in the election cycle–and he is much more popular in Massachusetts than presidents typically are in typical states at this point in the election cycle. So there doesn’t seem to be a message for Obama here in terms of his popularity.

As far as legislative tactics are concerned, this returns us to 59 Democrats and 41 Republicans–exactly where we were before the Club for Growth drove Arlen Specter out of the Republican Party. It makes Reconciliation the only functioning legislative process in Washington DC, and that has powerful implications for what actually passes over the next year.


Marty Feldstein's Take on Obama's First Year

Paired with my article:

What's Wrong With the Economy: Unlike previous recessions, the current downturn was not caused by Federal Reserve tightening and therefore couldn't be reversed by lowering interest rates. President Obama was correct to conclude that boosting economic activity required a fiscal stimulus. Unfortunately, despite the talented team of economists in the administration, most of the president's economic policies have done little to help the problem. And indeed, many of these policies have created even more problems than they solved.

For starters, the president allowed congressional Democrats to design the $787 billion stimulus package. The result was an unnecessarily large increase in the national debt for a very modest rise in gross domestic product.... Only about one-fourth of the nearly $800 billion will be used for government spending that adds directly to GDP. In contrast, the funds given to households will be largely saved or used to pay down existing debts. And the dollars that went to state governments relieved pressure to use their "rainy day" funds or levy temporary tax increases...

[This last seems to me to be wrong: the "rainy day" funds are wrong--and temporary state tax increases or further spending cuts would have been even more damaging to the economy: Fifty little Herbert Hoovers, after all...]

Congress and the president could have gotten more stimulus from accelerating the repairing and replacing of equipment in the civilian and defense sectors.... Other programs by the administration have had similar failings. "Cash for clunkers," for instance, was successful in raising auto buying and gave a temporary boost to GDP, since two-thirds of the third-quarter GDP rise was motor-vehicle production. The credit for first-time home buyers also gave a temporary boost to the housing market. But both programs just borrowed demand from the future....

Local banks around the country have cut back business lending because they fear future losses on existing real-estate loans. The administration's plan to prevent mortgage defaults by helping millions of homeowners reduce their monthly mortgage payments fizzled down to helping just a few hundred thousand. Moreover, nothing was done to reduce the incentive to default among the 15 million homeowners whose mortgages now exceed the value of their homes. And nothing has been done to deal with the $1.5 trillion of distressed commercial real-estate loans that will have to be rolled over during the next five years. The administration's plan to induce local banks to sell impaired loans to nonbank investors so that they could start lending again was well intentioned. But it failed, despite generous proposed subsidies, because banks don't want to reduce their accounting capital.

Although solving the banking and real-estate problem is key to recovery, the president's focus on his health legislation and the public's concern about future deficits appears to have stopped him from dealing with these problems...


Falling Short on the Economic Stimulus: We Are Live at the Wall Street Journal...

Falling Short on the Economic Stimulus: Fourteen months ago, just after Barack Hussein Obama's election, most of us would have bet that the U.S. unemployment rate today would be something like 7.5%, that it would be heading down, and that the economy would be growing at about 4% per year.

A 5% unemployment rate as of the end of 2009 would have been seen from a late-2008 perspective as a very good and lucky outcome, and a 10% unemployment rate would have been seen as a very bad and unlucky outcome.

Well, we have been unlucky. Unemployment is not going down but going sideways—we hope that it is still not going up. And the unemployment rate is not 7.5% but 10%. More important, perhaps, is that the expectation is for 3% real GDP growth in 2010.

That leaves us with two major questions: First, why has the outcome thus far been so much worse than what pretty much everyone expected in the late fall of 2008? And second, why is the forecast going forward for growth so much slower than our previous experience with recovery from a deep recession in 1983-84?...


Ten Economics Pieces Worth Reading: January 20, 2010

1) John Quiggin, Conclusion to *Zombie Economics: The Dead Ideas That Walk Among Us Eating Our Brains:

The prevailing emphasis on logical rigor has given economics an internal consistency that is missing in other social science. But there is little value in being consistently wrong. Economics must move on from the infinitely rational, farsighted and asocial beings whose decisions have been the central topic of analysis in recent decades. It will still be necessary to abstract.... But the factors that are relevant in microeconomic analysis of goods markets may not be the same as that matter in labor markets or in analysis of macroeconomic aggregates.

Three decades in which market liberals have pushed policies based on ideas of efficiency and claims about the efficiency of financial markets have not produced much in the way of improved economic performance, but they have led to drastic increases in inequality, particularly in the English-speaking world.... [W]ith the collapse of yet another economic ‘New Era’ it is time for the economics profession to display some humility.... [E]conomists can still contribute to a better understanding of the strengths and weaknesses of markets, firms and other forms of economic organization, and the possibilities for policy action to yield improved economic and social outcomes.... The global financial crisis gives the economics profession the chance to bury the zombie ideas that led the world into crisis, and to produce more realistic, humble and above all socially useful body of thought.

2) Sam Stein: White House To Make Major Regulatory Reform Push After Health Care: Goolsbee:

"We're coming to the closing chapter of health care," said Austan Goolsbee, a close Obama confidant and member of the president's Council of Economic Advisers. "The president has been pretty clear that when health care is done he wants financial regulatory reform, the holding accountable of financial institutions, and now he's setting the stage...". Asked about news that Senate Banking Committee Chairman Chris Dodd (D-Conn.) was considering dropping plans to create a wholly independent Consumer Financial Protection Agency, Goolsbee reiterated that the president wanted the new body.... "The president has always said he thought a consumer authority was important, that there is a tendency when it is spread over seven different agencies at it is now -- when nobody's primary responsibility is that -- that it can fall by the wayside, as you saw in past years," Goolsbee said....

Projected to bring in up to $117 billion, the recollection measure is also required under the statute of the TARP. All of which, Goolsbee said, makes criticism from some conservatives and the banking lobby (mainly, that the tax will be passed down to consumers and shareholders) all the more difficult to rationalize. "[These banks] are flush with profits. They're talking about setting record bonuses. When they announced those things there was no discussion about those bonuses costing consumers or reducing lending," Goolsbee said. "So I find it a little unusual that when asked to pay back the money that the government and the American people are owed for the rescue, that now the argument is 'Oh, they don't have the money.'"

Pressed as to why it took the president so long to announce this tax -- and, in the process, adopt a populist approach to the banks that many in his party have long pined for -- Goolsbee replied: "I don't think the president has changed. His emphasis from the beginning was he wanted accountability from the banks. We had to get through a period of rescue, we're getting through a period of health care, we're now putting direct focus on, our key priority is, financial regulatory reform, and people are starting to notice that."

3) Paul de Grauwe: Ominous lessons of the 1930s for Europe:

[A]s in the 1930s, the dividing line is the same. The US and the UK have allowed their currencies to depreciate; the continental European countries tied in the euro area have allowed their currency to become significantly overvalued.... Why do the euro area countries repeat the same policies as the gold bloc countries in the 1930s? The answer is economic orthodoxy. In the 1930s it was the orthodoxy inspired by the last vestiges of the gold standard. Today the economic orthodoxy that inspires the European Central Bank is very different, but no less constraining. It is the view that the foreign exchange market is better placed than the central bank to decide about the appropriate level of the exchange rate. A central bank should be concerned with keeping inflation low and not with meddling in the forex market. As a result, the ECB has not been willing to gear its monetary policy towards some exchange rate objective. Just as in the 1930s, the euro area countries will pay a price for this orthodoxy. The price will be a slower and more protracted recovery from the recession. This will also make it more difficult to deal with the internal disequilibria within the eurozone between the deficit and the surplus countries....

True, since the start of the crisis, the ECB has injected plenty of liquidity in the euro money markets to support the banking system. Yet it has been much more timid than the US Federal Reserve and the Bank of England in creating liquidity. While the latter more than doubled the size of their balance sheets since October 2008 and thereby more than doubled the supply of central bank money, the ECB’s balance sheet increased by less than 50 per cent. Such an imbalance in the expansion of central bank money inevitably spills over in the foreign exchange markets. The massive supply of dollars and pounds created by the US and UK monetary authorities was transmitted to other financial markets in search of higher yields and in so doing put upward pressure on the value of the euro. Thus the greater timidity of the ECB in providing liquidity is an important factor explaining why the euro has rallied since the start of the banking crisis and why it is now excessively overvalued.

Ultimately a central bank has to make choices. The Fed and the Bank of England have opted for massive programmes of liquidity creation, attaching a low weight to the possible inflationary consequences of their actions. The ECB has been more conservative in its liquidity, creating programmes attaching a low weight to the consequences for the exchange rate and to the chances of a quick recovery. The future will tell us which of these choices was right.

4) Menzie Chinn: Policies for Increasing Economic Growth and Employment:

Interestingly, the two policies that have the maximal (and mean of range) impact on employment are "Increasing aid to the unemployed", and "Reducing Employers' Payroll Taxes for Firms That Increase Their Payroll". Both of these have larger impacts than measures that take away revenue streams from Social Security.

5) Scott Sumner: There’s one country that took Andy Harless’s advice:

As you know, I have relentlessly argued that the Fed made a huge mistake in mid-2008 by not targeting NGDP at about a 5% growth trajectory, level targeting.... If we don’t have a sensible monetary policy regime, then low inflation makes an economy more susceptible to bumping against the zero-rate bound. Nick Rowe compares the problem to balancing a tall pole in one hand.... In the 1980s we brought inflation down from double-digits to about 4%.  Should we have declared victory and stayed at that level?  In retrospect, we probably should have. We did get inflation down to about 3% in the 1990s, and only 1.8% in terms of the GDP deflator from mid-2000 to mid-2008.  At the time I thought this was good, because it lowers the real tax rate on capital.  But in retrospect it was a big mistake, as the cost of the liquidity trap we stumbled into in late 2008 will vastly exceed the gains from 1% or 2% lower inflation.  Indeed one of the costs will be a massive increase in our national debt, which will almost certainly lead to much higher tax rates on saving and investment. Interestingly, I know of only one country that stayed away from the ever lower inflation obsession of the major central banks.  The Bank of Australia.  Australia had about 4% inflation in their GDP deflator and 7.4% NGDP growth between 2000:2 and 2008:2.  With a much higher inflation and NGDP trend rate going into the crisis, they we able to avoid the zero interest rate bound.  And by the way, for those who think nominal shocks don’t explain real events like the recent recession, Australia was the only major developed economy to avoid a recession last year. Indeed they haven’t had one since 1991.  They are called ‘the lucky country,” but I have argued that their culture lacks our puritanical obsession with inflation.  Perhaps each member of our FOMC should drink a 6-pack of Fosters before their policy meetings.

6) Nouriel Roubini: The Risky Rich:

[R]ating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. The severe recession, combined with the financial crisis during 2008-2009, worsened developed countries’ fiscal positions, owing to stimulus spending, lower tax revenues, and backstopping and ring-fencing of their financial sectors.... More ominously, monetization of these fiscal deficits is becoming a pattern in many advanced economies, as central banks have started to swell the monetary base.... Fiscal stimulus is a tricky business. Policymakers are damned if they do and damned if they don’t. If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation. But if monetized fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold on growth.... The US and Japan might be among the last to face the wrath of the bond-market vigilantes: the dollar is the main global reserve currency, and foreign-reserve accumulation – mostly US government bills and bonds – continues at a rapid pace. Japan is a net creditor and largely finances its debt domestically. But investors will become increasingly cautious even about these countries if the necessary fiscal consolidation is delayed. The US is a net debtor with an aging population, unfunded entitlement spending on social security and health care, an anemic economic recovery, and risks of continued monetization of the fiscal deficit. Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200% of GDP. The US also faces political constraints to fiscal consolidation: Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates, as under President Ronald Reagan...

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Spencer Ackerman: These Were Not Suicides At Guantanamo:

A major new piece from Scott Horton at Harper’s about the alleged suicide of three detainees at Guantanamo Bay in September 2006.... Horton notices the official explanation for the deaths is absurd: "According to the NCIS, each prisoner had fashioned a noose from torn sheets and T-shirts and tied it to the top of his cell’s eight-foot-high steel-mesh wall. Each prisoner was able somehow to bind his own hands, and, in at least one case, his own feet, then stuff more rags deep down into his own throat. We are then asked to believe that each prisoner, even as he was choking on those rags, climbed up on his washbasin, slipped his head through the noose, tightened it, and leapt from the washbasin to hang until he asphyxiated. The NCIS report also proposes that the three prisoners, who were held in non-adjoining cells, carried out each of these actions almost simultaneously." An autopsy performed at Guantanamo on at least one of the men is similarly incredible, explaining away in an improbable manner the determination that a bone in one of them was broken in a manner that typically suggests manual strangulation. Four former GTMO guards spoke out to Horton about what they believe was a black site — an undisclosed detention facility — at the base they termed  ”Camp No.”... [T]he Holder Justice Department has apparently decided to close an investigation into these deaths.

8) STUPIDEST THING I HAVE SEEN TODAY: Harold Ford: David Saltonstall: Harold Ford, mulling an NY Senate run, says Sen. Kirsten Gillibrand is 'weak':

The interview - granted under the condition that the questions be limited to his rationale for running, and not issues - comes at the end of a rocky first week of buzz surrounding his potential candidacy.

In his first interview last week, Ford confessed that he gets regular pedicures, takes a chauffeur-driven car to work on most days and had been to Staten Island only once - by helicopter. Monday, in an interview at the International House of Pancakes on W. 135th St.,  he tried to laugh off those comments in a clear effort to lend a more common touch to his growing persona.

"This race isn't about feet, it's about issues," he said of ribbing he has taken on the web and elsewhere of his regular pedicures...

9) STUPIDEST THING I HAVE NOT SEEN TODAY: No, I am not going to link. I am going to outsource to John Cole: You’ll Never Get This 21 Minutes Of Your Life Back:

Instapundit, Malkin, and Joe the Plumber discuss politics for PJTV.

There is so much to love about this, I don’t know where to start, but certainly Joe the Plumber bemoaning the lack of spending cuts and general program cuts in the stimulus bill was a highlight. It is almost as if he doesn’t have the first damned clue what he is talking about. A close runner-up would be Instapundit heralding Bush’s MBA as evidence of his awesome managerial skills. There was just so much to love, it is hard to narrow down the “best” parts.

I really don’t understand how bipartisanship is ever going to work when one of the parties is insane. Imagine trying to negotiate an agreement on dinner plans with your date, and you suggest Italian and she states her preference would be a meal of tire rims and anthrax. If you can figure out a way to split the difference there and find a meal you will both enjoy, you can probably figure out how bipartisanship is going to work the next few years.

10) HOISTED FROM THE ARCHIVES: DeLong (December 2002): The Macroeconomic Outlook:

The shape of the yield curve tells us that the market expects rising interest rates.... Market expectations of rising interest rates after a recession are usually correct. Table 2 shows that the actual rise in three-month interest rates, comparing the post-recession year to the average of the ten years following the recession, has in three of four past recessions been larger than the rise that would have been predicted by taking the gap between the ten-year and the three-month yield as an index of expected rate increases.

Conclusion: take the yield curve seriously as a forecast of future interest rate movements. Today the yield curve is telling us to expect substantial Federal Reserve tightening in the next few years: the market expects three-month rates to rise to levels close to eight percent. This expected tightening of monetary policy is of a larger magnitude than has been typically seen after a recession.

Implication: The large change in policy stance the market expects from the Federal Reserve suggests that there is little value added in calculating the effect of fiscal policy changes on production and employment without taking account of the Federal Reserve's likely reaction to fiscal policy changes. One view-a view strongly held by the CBO, for example-is that the Bush administration received and the Clinton administration will receive deficit reduction essentially "for free" as far as its effect on output and employment is concerned...


[I]t's Excellent... a Really Terrific Book... [for] a Bright High Schooler or Young Adult in Your Family..."

I confess that "young adult political economy" was not a genre I had known existed...

:-)

But Reihan Salam is very generous to The End of Influence:

The Agenda on National Review Online: Stephen S. Cohen and J. Bradford DeLong have just published The End of Influence, and it's excellent. Cohen and DeLong are both left-of-center, yet they occupy the technocratic end of the progressive movement, which explains their obvious sympathy for the aspirations of economic neoliberalism.

One of the central virtues of the book is the sustained attention Cohen and DeLong give to some of the lazy assumptions we make about the American economy: they note that while postwar mixed economy model of the United States was very different from the models that took root in Europe, it was just as statist and interventionist. My takeaway is that the conflict over U.S. political economy is better understood as a conflict between rival industrial policies, one centered on spurring the growth of the defense industries and the Sunbelt and another centered on old-line manufacturing and the Rustbelt, than as a battle between libertarians and social democrats.

The key driver for Cohen and DeLong has been large American trade deficits that have poured resources into oil-producing states and East Asia's manufacturing powerhouses. Rather than consume the dollars they earn, these states have increasingly placed them in large state-controlled sovereign wealth funds that are becoming a crucial source of investment capital for firms around the world. The question is, will these sovereign wealth funds behave like conventional private funds that aim to maximize returns — or will they seek to serve other national interests? 

I wrote a far-from-flawless and rather pessimistic column on the book, which focuses on how the decline of American economic power is leading us to a new global equilibrium in which beggar-thy-neighbor mercantilism will become even more pervasive. I think of myself as a fairly upbeat person, but I can't imagine a worse state of affairs, not least because it will exacerbate the risk of great power conflict.

All in all, this is a really terrific book that does an excellent job of cutting through the confusion surrounding the broader meaning of the financial crisis, etc. If there is a bright high schooler or young adult in your family, this would make a great present. It helps that the book is mercifully short, weighing in at just over 150 pages.

When even one person likes your book so much, you feel as though it was all worth doing. Thanx.


Logistics of Aid to Haiti

Spencer Ackerman writes about General Ken Keen:

The Ongoing Logistical Nightmare of Haiti, Six Days Later: Ken Keen, a three-star Army general, was in Haiti on Tuesday at the U.S. ambassador’s office shortly before nightfall when the quake began. The ambassador’s office is high above the city of Port-au-Prince. Keen heard “the screaming and yelling of the people in the valleys below.” Now Keen is the commander of the U.S. military mission in Haiti....

Updating bloggers on a conference call Sunday night, Keen made it clear that one of the most difficult obstacles he has to overcome is the sorry state of Haiti’s pre-earthquake transportation infrastructure. Take the airport. Yes, airport, singular. Haiti has a single airport, with just one runway and one taxiway. Before the quake it managed 13 flights daily.... Haitian President Preval authorized the U.S. Air Force to control the so-called “slot times” for letting planes land and then depart, which the airmen set at two hours per plane. That means planes have to be back in the air after two hours’ wheels-down to unload their cargo and refuel if necessary. The pace has meant over 100 planes went through Haiti on Sunday with no delays, Keen said, the first time in six days the airport hasn’t reported a delay. But the rapid turnaround also meant a mobile hospital had to get back in the air — a major problem, and one Keen sounded frustrated about.

The quake seriously damaged Haiti’s major seaport. Keen sent divers into the port, which he called South Port, and found “we do have some separations [between] the pylons and the pier.” He estimated it would be at least the end of the week before the port could be opened, something he called “absolutely critical” to move cargo in and take pressure off the airport.

It’s a tense moment. Keen was proud of delivering 233,000 bottles of water to civilians on Sunday, but said it was “nearly not enough,” considering there are an estimated 3.5 million Haitians — nearly a quarter of the population — suffering.... A more sustainable solution for hydration is on its way: 16 water purification units are being shipped to get people off of bottled water. The USS Carl Vinson, an aircraft carrier with 19 helicopters, is just offshore, and the hospital ship Comfort will arrive later this week. In the next several weeks, Keen said his military contingent will grow to about 10,000, with half kept offshore to minimize the logistical needs — food, water, shelter — that go along with large-scale deployments.

“Everyone is doing the best they can,” Keen said. “Obviously, there is much more to do.” And only a handful of ways of getting the necessary assets into the country.


Ketchup Economics!

Here is a $500,000,000 bill lying on the sidwewalk:

Bernard Simon: Shares in old GM climb to value 'worthless' company at $500m: The old General Motors died in a US bankruptcy court last summer. But its shares remain very much alive. So alive that as the rest of Wall Street took its biggest tumble of the year on Friday, shares of the old GM, now known as Motors Liquidation Company, gained another 3 per cent, giving the legacy company a market value of close to $500m (£306m). In spite of repeated warnings from the restructured GM, the Securities and Exchange Commission and others that the shares are worthless, Motors Liquidation has surged from 47 cents at the start of the year to 77 cents on Friday. Someone has made a tidy killing.

Motors Liquidation, which remains in Chapter 11 bankruptcy protection, holds about 200 properties and more than 500,000 contracts abandoned by GM during its court-supervised restructuring. The winding down is expected to take several years, and liabilities are sure to dwarf whatever is raised from asset sales. "It's been a challenge to get through to people that these are not shares in the new company," GM said. The Motors Liquidation name was adopted as part of the effort to distinguish the old and new GMs.

The new GM is a private company, with almost three-quarters of its equity held by the US and Canadian governments, and the rest by a union healthcare fund and old GM bondholders. A public share offering is possible later this year, if all goes well.

Cromwell Coulson, chief executive of the Pink Sheets over-the-counter market where the Motors Liquidation shares trade, identifies three groups that have kept the pot boiling. With 611m shares outstanding, Motors Liquidation is an obvious target for day traders, who aim to make a quick profit from heavily traded, volatile counters. More than 10m Motors Liquidation shares changed hands on Friday. Mr Coulson also singles out investors who sold short as GM headed for bankruptcy last year and must now cover their positions. Finally, some investors, it seems, have yet to get the message that the shares are worth nothing.

"[Motors Liquidation] could discover oil on one of their properties, weird things can happen," Mr Coulson says sardonically. "A market can't regulate the intelligence of investors."


Architectural Malpractice Department

You could call the rooms "B1-B99" to indicate that they are in the *basement* (never mind that there is also a subbasement) or you could call the rooms "001-099" to indicate that they are on the zeroeth floor (never mind that there would then be a minus first floor to). But no!

Six Economics Pieces Worth Reading: January 19, 2010

1) Mark Thoma sends us to Maxine Udall: Please, sir, may we have some justice?:

We have just witnessed highly compensated investment bankers asserting that they are the clueless victims of an unforeseeable, unpreventable hundred year financial crisis (except when it happens every five to seven years). Until last year, Maxine had always assumed that at least one reason for investment bankers' high compensation was that the market had chosen to reward them for competence and knowledge about high finance, things we lesser mortals couldn’t possibly grasp with our mundane, tiny little minds. Now we find out that they apparently hadn’t even grasped the basics that Maxine’s rather less well-paid businessman father drilled into her from a very early age. “Maxine,” he used to say. “The higher the returns, the higher the risk, and if the returns are high and sustained, you’re in a Ponzi scheme or a bubble. Never forget that.” And Maxine never has...

2) Free Exchange: More on bubble spotting:

SCOTT SUMNER has written a long post defending Eugene Fama and the efficient markets hypothesis. In a nutshell, he thinks that I'm gravely mistaken if I believe that bubbles can be spotted ahead of time, that The Economist's correct calls of the tech and housing bubbles were just a magnificent stroke of luck, and that if we're so bloody confident in our ability to predict bubbles why aren't we making billions running mutual funds? I feel like this is the sort of critique that sounds lovely so long as one remains comfortably in the realm of abstract intellectualism. The price-to-income ratio has risen above its long-term trend, but how can we know that it's a bubble? Fundamentals? Well, perhaps they've shifted. And if you're so confident, why aren't you ringing up your trader and telling him to short housing?

In The Economist's recent Briefing on bubbles, the author of the Briefing outlined a few key signs... high asset values relative to historical trends... price-to-income and price-to-rent ratios... well above trend levels.... At the very least, you ought to be able to tell a compelling story about why things have changed.... Secondly, the author warned that bubbles typically involve rapid private credit growth and market enthusiasm. If this were all a matter of making predictions based on big upward swings in a set of asset values, well, Mr Sumner might have a point. But it's a little strange, is it not, that writers at The Economist and elsewhere didn't just identify the bubble but correctly pointed out the specific dynamics that were creating this unsustainable state--a heedless expansion of the credit available to those willing to buy homes? It's one thing to be right about a guess that it may rain tomorrow. It's another to identify the approaching low pressure system and specify the moisture content of the airmass....

Markets are efficient in the sense that it's hard to make an easy buck off of them, particularly when they're rushing maniacally up the skin of an inflating bubble. But are they efficient in the sense that prices are right? Tens of thousands of empty homes say no. And despite the great extent to which markets depart from the theoretician's ideal, people did manage to put together models predicting the fall, bet on those models, and make a great deal of money off of those bets. And now we find ourselves in a situation where these people, having set up a model explaining what would happen which was subsequently verified by events, are being told that they suffer from cognitive illusion. That in fact, this testable hypothesis, which passed a test against real world events, is no good.

Well, ok. If Mr Sumner and Mr Fama continue to feel secure in their beliefs, then that's their business...

3) Matthew Yglesias: Efficient Markets Hypothesis Rhetoric:

Read Scott Sumner’s lengthy defense of Eugene Fama and the Efficient Markets Hypothesis makes me want to refine what I said already about Fama’s recent New Yorker interview. This goes back, I suppose, to Larry Summers’ old point about ketchup economics, but I think people are talking past each other over the term “efficient.” Let me quote Summers:

The differences I am discussing may be clarified by considering a field of economics which could but does not exist: ketchup economics. There are two groups of researchers concerned with ketchup economics. Some general economists study the market for ketchup as part of the broader economic system. The other group is comprised of ketchup economists located in Department of Ketchup where they receive much higher salaries.... General economists are concerned with the fundamental determinants of prices and quantities in the ketchup market. They attempt to examine various factors affecting the supply and demand for ketchup such as the cost of tomatoes, wages, the prices of ketchup substitutes and consumers incomes. They examine a number of different types of data in an effort to explain fluctuations in ketchup prices.... Ketchup economists reject out of hand much of this research on the ketchup market. They believe that the data used is based on almost meaningless accounting information and are quick to point out that concepts such as costs of production vary across firms and are not accurately measurable in any event. They believe that ketchup transactions prices are the only hard data worth studying. Nonetheless ketchup economists have an impressive research program, focusing on the scope for excess opportunities in the ketchup market. They have shown that two quart bottles of ketchup invariably sell for twice as much as one quart bottles of ketchup except for deviations traceable to transactions costs, and that one cannot get a bargain on ketchup by buying and combining ingredients once one takes account of transactions costs. Nor are there gains to be had from storing ketchup, or mixing together different quality ketchups.... Indeed, most ketchup economists regard the efficiency of the ketchup market as the best established fact in empirical economics.

To say that the ketchup market is “efficient” from the point of view of a participant in the ketchup market seeking an opportunity trade at a profit is just a totally different thing from saying that the fluctuations of the ketchup market constitute an efficient element of a larger economic system.... [Market] crashes have a lot of undesirable effects on people’s lives and that the speed and magnitude of the changes doesn’t seem grounded in any acts of God. It’s not as if an earthquake leveled the stock market or the productivity of the American workforce dramatically plummeted. It’s just not clear that predictability has anything to do with this. But if people just called the thesis that financial markets are unpredictable the “unpredictable markets hypothesis” then I doubt that people outside the Department of Ketchup would be very interested in arguing with them...

4) BEST NON-ECONOMICS THING I HAVE READ TODAY: Robert Farley: On How Neocons Feed Off One Another...:

The ideology of toughness extends beyond the borders of the United States; the Russian, Chinese, and Iranian versions of Chuckie Krauthammer are at this very moment insisting that the projection of power, resolve, and toughness will force the Americans to back down/give up/stop poking us/do something. The implications of handing foreign policy to people committed to the rhetoric of toughness should be obvious. A demonstration of "resolve" on the part of the United States is matched by a similar demonstration on the part of the Chinese; a weapon system intended as a "bargaining chip" spurs development of a corresponding system by the Russians; insistence on "regime change" in Iran empowers the people who have always argued that the United States intends to conquer Iran. And then we get things like this: "China said late Monday that it had successfully tested the nation’s first land-based missile defense system..."

[H]ow could you think that a Chinese ABM test would have an even vaguely positive effect on US behavior? Does anyone now believe that it is less likely that the US will transfer F-16s and Patriot missile systems to Taiwan? I appreciate that weapons need to be tested and domestic constituencies need to be appeased, but it seems clear that the Chinese intended this test as a warning to both the US and Taiwan. I suspect that the Chinese intended this message to say: "Please respect China's territorial integrity, and right to manage its sphere of influence..." I very much doubt that this is the message Americans will hear. More specifically, I doubt that the right people will hear this message in the way the Chinese want. Instead, those voices who have always insisted that the Chinese are an incorrigible threat, that they cannot be dealt with, and that they only understand the language of force will be enabled. To manage the next foreign policy dispute with China in a wise and measured fashion will become "appeasement of the aggressor." Voices in Beijing will be making precisely the same argument.

I suspect that international franchising of the Weekly Standard might be an excellent investment opportunity.

5) STUPIDEST THING I HAVE READ TODAY: Via Glenn Greenwald, Cass Sunstein:

What can government do about conspiracy theories?... (1) Government might ban conspiracy theorizing. (2) Government might impose some sort of tax.... (3) Government might itself engage in counterspeech, marshalling arguments to discredit conspiracy theories. (4) Government might formally hire credible private parties to engage in counterspeech. (5) Government might engage in informal communication with such parties, encouraging them to help. Each instrument... will have a place.... However, our main policy idea is that the government should engage in cognitive infiltration of the groups that produce conspiracy theories...

6) HOISTED FROM THE ARCHIVES:


Beyond the Bad Economy: Jobs, Retirement, Health, and Social Insurance | National Academy of Social Insurance

The National Academy of Social Insurance:

Beyond the Bad Economy: Jobs, Retirement, Health, and Social Insurance | National Academy of Social Insurance: January 21, 2010,

National Press Club, 529 14th Street, NW, 13th Floor Ballroom, Washington, DC 20045, United States

Member and Associate $ 400.00; Non-Member $ 550.00

THURSDAY JANUARY 21:

10:15 a.m. Opening Keynote: The Bad Economy and Social Insurance. Steven Pearlstein, The Washington Post

10:45 a.m. Session I: What is the Impact of the Recession on Social Insurance? Eric Rodriguez, National Council of La Raza (Moderator). Dean Baker, Center for Economic and Policy Research. Jennifer Klein. Iris Lav, Center on Budget and Policy Priorities. Mark Levitan, New York City Center for Economic Opportunity.

12:30 p.m. How Should We Think About the Public Debt? Lisa Mensah, Initiative on Financial Security of the Aspen Institute (Moderator). Bradford DeLong, University of California, Berkeley. Maya MacGuineas, The New America Foundation


Yes, We Are in Big Budgetary Trouble

Background

In June 2007 the S&P Composite was at 1500 and a ten-year 5% coupon $1000 U.S. Treasury bond sold for $990. By March 2009 the S&P was at 800 and ten-year 5% coupon $1000 U.S. Treasury bonds (would have) sold for $1170. This great wheeling of asset prices—45% cumulative loss on risky equity and 23% cumulative gain on safe debt—is a collapse in the risk tolerance of the market, a grand flight to safety as nearly everybody tried to dump the risky parts of their portfolios and scramble into safe assets.

Such large movements in asset prices matter to everybody. Financial markets sent the real economy signals that all risky investments should be avoided, and all risky organizations should be shrunk. And the firms of the real economy responded by firing people.

Since at least 1825—when Britain’s canal speculation-driven bubble collapsed, and when Robert Banks Jenkinson Second Earl of Liverpool begged Bank of England Governor Cornelius Buller to do something—governments have responded to such collapses in risk tolerance. Households feel poor and stop spending and businesses stop investing and shrink operations because risky asset prices have collapsed as investors scramble for safety. The government tries to fix the situation by making more safe assets and expanding the demand for risky ones:

  • Guarantee private debt to turn risky assets into safe ones.
  • Nationalize troubled institutions to turn dodgy liabilities into gilt-edged ones.
  • Buy long-duration and other risky assets for cash.
  • Reduce the demand for safe assets by eliminating any expectations of nominal deflation.
  • Print up a huge honking extra tranche of new safe assets—government bonds—by bringing forward in time government spending and postponing taxes.

There are limits to these policies. The feckless bankers who caused the problem have leveraged positions in risky assets—and benefit enormously from policies that raise their prices. Knowledge that there was a Bernanke put last time will encourage future irrational exuberance. Governments that buy up so many assets that they own banks and companies are unlikely to run them well. If too many risky assets are generated the central bank then faces the task of somehow withdrawing them before we replace our depression problem with an inflation one. The huge honking tranches of bonds printed up have to be amortized. And if you print up so many extra bonds—run such huge honking deficits—that you crack the Treasury bond’s status as safe asset then you have not raised but instead reduced the supply of safe assets, and moved into a world in which the only well-performing asset classes are sewing needles, bottled water, and ammunition.

We Need Bigger Deficits Now...

With that as background, I have two things to say. First: we need bigger deficits now. Unemployment is at 10%. The U.S. government can borrow for thirty years at an expected real rate of 2.12% while leaving bondholders holding 100% of inflation risk. Over the past 30 months the private market has swallowed an extra $2.9 trillion in U.S. Treasury debt—from $4.9 to $7.8 trillion—without that extra debt having moved Treasury interest rates up at all. Commit $1 of real cash flow to debt amortization and you can raise $40 today if you are the U.S. government selling into the Treasury market—and only $15 if you are an S&P 500 company. If you have any trust in price signals at all, right now they are yelling at us that the government should be raising more money on financial markets and spending it.

And there is no sign in financial markets that we are close to the edge of America’s debt capacity right now. And our reserve army of the unemployed is larger than the U.S. armed forces at their World War II peak.

We Need Smaller Deficits Later...

Second, we need smaller deficits later for a value of “later” equal to “soon,” as in “before 2015.” CBPP wants to stabilize the debt-to-GDP ratio in normal times. But we have to do better. We need the debt capacity to run large deficits in extraordinary times: World Wars II, Marshall Plans, bribing the Chinese to build nuclear rather than coal-fired greenhouse gas-emitting power plants, paying to move the population of Bangladesh to Alberta and build them places to live there, and fighting depressions are all things that all for large deficits, and if your debt-to-GDP ratio is stable in normal times you won’t have the debt capacity to do so.

Getting smaller deficits later for “later” equals “soon” is going to be very hard. America needs to make two political decisions: (i) How large a social insurance state do? (ii) How to get reasonable value for that portion of our health care system that is financed by the government? If we don’t make these decisions, global capital markets will at some point make them for us in ways that none of us will like.

For thirty years we have by and large been unable to make these decisions. Our governance structure has been broken: the unbalanced Reagan (as opposed to Ford) Republicans—some thinking that large unfunded tax cuts would force spending discipline on congress, some thinking that large unfunded tax cuts would unleash a huge economic boom, rather more thinking that promising lower taxes and more spending would get them jobs and après nous le deluge. The round-the-bend Gingrich (as opposed to Darman) Republicans, who developed the strategy of create-gridlock-and-blame-the-other-party and rode it to power. And now, as a health care bill that is Mitt Romney’s plan moved to the right attracts zero Republican votes, Republican Republicans—for there is no longer any sane faction in either Republican caucus.

At the moment our health care system spends twice as much as other countries for worse outcomes. We have a 6.9% of GDP CBO baseline fiscal gap. And virtually everybody expects the members of congress to decry our fiscal future and then turn around and vote overwelmingly to reject PAYGO and increase the fiscal gap by an extra 2.5% of GDP: doc fix, AMT fix, R&D tax credit, middle class-tax cut that plays the same role in the aftermath of the inauguration of a president that the solidii to the Praetorian Guard played in the aftermath of the inauguration of a Roman Emperor.

If we had not had George W. Bush installed as President over Al Gore in 2001 by a vote of 5-4—of our fiscal gap, 1.2% is Medicare Part D enacted in those days when as Senator Hatch says “it was customary not to pay for things,” 1.4% is to amortize Bush-era deficits, 0.7% for the expansion of a military the aerial portion of which appears to increase rather than reduce the number of recruits to Al Qaeda. I sometimes want to close my eyes, tap my heels together three times while saying “there’s no president like Gore,” open them—and be on a planet in which we have a 3.6% of GDP fiscal gap and are at the edge of a stable debt-to-GDP ratio.

Maya Needs to Give Us Some Answers...

We need to climb out of this box. I don’t know how we are going to. And I have already talked for too long.

So I am going to stop.

And I am going to demand that Maya come up with sensible, possible, effective institutional reforms and policy initiatives—things that will rescue us from nearly thirty years of collective national budget folly.


Andrew Anthony on the Odious, Mendacious Noam Chomsky

Anthony writes, in the Observer:

Reply: t's worth taking a look at Professor Chomsky's selection of quotes in his response to my piece. For example, he notes that he described Francois Ponchaud's book as "serious and worth reading". This is true, but what he doesn't say is that he also called it 'fast and loose with quotes and numbers", "careless, sometimes in rather significant ways" , or that he argued that it suffers from "an anti-Communist bias". By contrast, no such criticisms were made of Hildebrand and Porter's book, which was based largely on Khmer Rouge propaganda.

Professor Chomsky made the following comparison between Hildebrand and Porter's grotesque misrepresentation of what was actually happening in Cambodia and Ponchaud's historically accurate account: Ponchaud "lacks the documentation provided in Hildebrand and Porter and its veracity is therefore difficult to assess". The implication here is that Hildebrand and Porter's veracity was more straightforward to assess - ie based on fact. In actuality it was a travesty. Not only did they fabricate the reality of the Khmer Rouge before the revolution, but they swallowed whole the Khmer Rouge propaganda after the revolution.

For instance, they argued that the forced evacuation of Phnom Penh, which was estimated to have cost 20,000 lives, was designed to avoid famine. This was of course a KR fiction. As the historian Philip Short has conclusively shown in his biography of Pol Pot, the real intention behind the evacuation - quoting from a KR central committee study document - was 'to preserve the political position of cadres and combatants, to avoid a solution of peaceful evolution which could corrode [the revolution] from within; to fight corruption, degradation, debauchery, to get the urban population to take part in [agricultural] production; [and] to remove Sihanouk's support base.'

Professor Chomsky then goes on to quote from the American preface of Cambodia Year Zero in which Ponchaud praises Chomsky's 'responsible attitude and precision of thought'. I wonder why he doesn't mention that Ponchaud also describes how Chomsky had called upon him to "'stem the flood of lies' about Cambodia ? particularly, according to him, those propagated by Anthony Paul and John Barron in their book Murder of a Gentle Land"? Could it be because this "flood of lies" refers to the mass murder, torture and starvation that Paul and Barron said was taking place in Cambodia.

Thankfully Ponchaud stuck to the job of telling the truth he had learned. Perhaps this is why Chomsky later wrote of Ponchaud:

What are we to think of a person who is quite capable of reaching an international audience, at least with atrocity stories, and who could see with his own eyes what was happening to the Khmer peasants subjected to daily massacres as the war ground on, but kept totally silent at a time when a voice of protest might have helped to mitigate their torture? It would be more charitable to assume that Ponchaud is simply not telling the truth when he speaks of his sympathy for the Khmer peasants and for the revolution, having added these touches for the benefit of a gullible Western audience...

It's up to the reader to decide who is doing the manufacturing here. I shall just make three brief points. First, however we may choose to interpret Chomsky's judgment on Ponchaud, we know that Caldwell believed that it served to damage Ponchaud's credibility, because that is what Caldwell wrote in the Guardian on 8 May 1978.

Secondly, nothing in my piece vilified Malcolm Caldwell in the way, say, that Professor Chomsky has vilified those with whom he disagrees -- such as the American war correspondent Sydney Schanberg, made famous by his portrayal in the film The Killing Fields, whom Chomsky has described as a 'person of utter depravity'. Nor did I insult Caldwell in the way that Caldwell insulted the victims of Khmer Rouge terror, whom he described as 'arch quislings' and 'lackeys'. So I think we can be spared this self-righteous and self-serving line about 'vilify[ing] the messenger'.

Finally, the charge that my piece was designed in the 'interests of power' may sound like paranoid hysteria, but it's really just more evasion and blame-shifting. Power is what the Khmer Rouge wielded over its millions of victims while Caldwell applauded. That is documented history. What's more, it was documented by Ponchaud while it was happening. And it is in the interests of all who abhor what took place under the Khmer Rouge not to pretend otherwise.


Ten Economics Pieces Worth Reading: January 18, 2010

1) Greg Mankiw for the Bank Tax:

[N]ow the problem of implicit subsidies is far more widespread.  We have in effect turned much of the financial system into government-sponsored enterprises. What to do?  We could promise never to bail out financial institutions again.  Yet nobody would ever believe us.  And when the next financial crisis hits, our past promises would not deter us from doing what seemed expedient at the time. Alternatively, we can offset the effects of the subsidy with a tax.  If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.... [I]t is possible that it will be better than doing nothing at all, watching the finance industry expand excessively, and waiting for the next financial crisis and taxpayer bailout.

2) Andrei Shleifer and Robert W. Vishny (19970, "The Limits of Arbitrage," Journal of Finance 52:1 (March), pp. 35-55.:

Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, pro- fessional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from funda- mental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

3) Miguel Almunia, AgustÌn S. Benetrix, Barry Eichengreen, Kevin H. ORourke, and Gisela Rua* (2009), "From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons":

[F]iscal policy, where applied, worked extremely well in the 1930s, whether because spending from other sources was limited by uncertainty and liquidity constraints, or because with interest rates close to the zero bound there was little crowding out of private spending. Previous studies have not found an effect of fiscal policy in the 1930s, not because it was ineffectual, but because it was hardly tried (the magnitude of the fiscal impulse was small). That said, we still find it possible to pick out an effect. Our results for monetary policy are mixed, but we again find some evidence that expansionary policies were effective in stimulating activity. That modern studies (see e.g. IMF 2009) have not found equally strong effects in crisis countries, where the existence of dysfunctional banking systems and liquidity-trap-like conditions casts doubts on the potency of monetary policy, appears to reflect the fact that the typical post-1980s financial crisis did not occur in a deflationary environment like the 1930s or like that through which countries have been suffering in the last year. The role of monetary policy was to vanquish these deflationary expectations, something that was crucially important then as well as now.

4) Mary Carmichael: What Health-Care Reform Will Mean for You:

If you have coverage now... there won't be many changes next year. That's by design.... Two changes will affect people with current private insurance... they won't have to worry about maxing out their lifetime medical benefits... people who are frustrated with their plans will have someone to gripe to other than their congressmen.... Medicare beneficiaries will see... the shrinking of the "donut hole," wherein Medicare covers no medical expenses between $2,700 and $6,154.... If you're a senior with moderately high health-care costs, you'll be getting some serious relief. People who've been laid off and have turned to COBRA... will be able to keep their COBRA until the state exchanges are ready, not just for the 18 months after their layoffs.... People who currently have no insurance are the ones with the biggest changes in the near future. If they've been denied coverage because of pre-existing health conditions, they'll be able to enroll in a high-risk pool... until the states get their insurance exchanges up and running in 2014.

5) Coibion and Gorodnichenko: Does the Great Recession really mean the end of the Great Moderation?:

In our view, the answer is that the current recession will not mark the end of the Great Moderation. Instead, we are experiencing a particularly severe business cycle that nonetheless pales in comparison to the volatility experienced in the 1970s... the rolling standard deviation of annualised quarterly real GDP growth over a five-year horizon with equal and geometrically declining weights for past observations. One can clearly identify the Great Moderation, associated with a reduction in volatility of approximately 50%, from the highs in the late 1970s to the lows of the 1990s. With five-year rolling measures of volatility, each of the recessions since the Great Moderation has been associated with an uptick in measured volatility, with the current recession obviously leading to a bigger rise in volatility. Nonetheless, current levels of volatility as well as expected future levels of volatility based on forecasts (as of December 2009) from Macroeconomic Advisors and the Survey of Professional Forecasters from the Philadelphia Federal Reserve remain well below levels reached in the 1970s. It is particularly apparent that the volatility has passed its peak when we use geometric discounting which downplays distant periods in general and the transitory volatility blip in 2009. Furthermore, even the most pessimistic forecasts made by professional forecasters point to levels of volatility that are simply not comparable in magnitude to levels reached in the 1970s...

6) Coibion and Gorodnichenko: Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation:

[W]e combine the empirical distribution of our parameter estimates of the Taylor rule with a calibrated standard New Keynesian model and different estimates of trend inflation to infer the likelihood that the US economy was in a determinate equilibrium each period. We find that despite the substantial uncertainty about whether or not the Taylor principle was satisfied in the pre-Volcker era, the probability that the US economy was in the determinacy region in the 1970s’s is zero according to our preferred empirical specification. This reflects the combined effects of a response to inflation that was close to one, a non-existent response to output growth, relatively little interest smoothing, and, most importantly, high trend inflation over this time period. On the other hand, given the Fed’s response function since the early 1980s and the low average rate of inflation over this time period, 3%, we conclude that the probability that the US economy has been in a determinate equilibrium since the Volcker disinflation exceeds 99% according to our preferred empirical specification. Thus, we concur with the original conclusion of Clarida et al (2000). However, whereas these authors reach their conclusion primarily based on testing for the Taylor principle over each period, we argue that the switch from indeterminacy to determinacy was due to several factors, none of which would likely have sufficed on their own. For example, taking the Fed’s pre-Volcker response function and replacing any of the individual responses to macroeconomic variables with their post-1982 value would have had no effect on determinacy given the high average inflation rate in the 1970s. Instead, the most important factors causing the switch away from indeterminacy were the higher inflation response combined the decrease in the trend level of inflation.

Our paper is closely related to Cogley and Sbordone (2008). They find that controlling for trend inflation has important implications in the estimation of the New Keynesian Phillips Curve, whereas we conclude that accounting for trend inflation is necessary to properly assess the effectiveness of monetary policy in stabilizing the economy. In a sense, one may associate the end of the Great Inflation as a source of the Great Moderation...

7) Ben Bernanke: Letter to Dodd and Shelby:

Strengthening our financial regulatory system in ways that take the appropriate lessons from the crisis is essential for the long-tenn economic stability of our country. To this end, as you know, the Banking Committee has compiled an extensive hearing record and has begun considering specific refonn proposals. A number of your colleagues on the Committee have recently asked for the Board's views on the importance ofthe Federal Reserve's continued role in bank supervision and regulation. In response to these requests, I am enclosing for you and your colleagues a document that discusses (1) how the expertise and infonnation that the Federal Reserve develops in the making of monetary policy enable it to make a unique contribution to an effective regulatory regime, especially in the context of a more systemic approach to consolidated oversight; and (2) how active involvement in supervising the nation's banking system allows the Federal Reserve to better perfonn its critical functions as a central bank.

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Buce on Tom Campbell: What Can He Be Thinking?:

I've always had the highest possible regard for Tom Campbell ever since I met him back in the 80s. He's that rarest of the rare among politicians, a genuinely honest, hard-working serious guy, looking for real solutions to real problems. But I really can't imagine what he is thinking by jumping into the California Senator's race alongside Carly Fiorina. Is't it a given that he and she will split the sane vote and leave the lunatics in charge of the asylum. If he does, what then? I've never been particularly nuts about Boxer as a senator though I don't think she is anywhere the demon she is made out to be. And my impression is that maybe she's grown a bit in the job.

At first blush, you think I'd go for Campbell in a heartbeat. But do I really want Republicans organizing the Senate? I'm afraid that question answers itself ("no"--ed.). Put differently: I can understand why Campbell doesn't want to be a Democrat but why in heavens' name does he want to hang out with the current crop of Republicans?

9) STUPIDEST THING I HAVE READ TODAY: Elizabeth Bumiller and company. Outsourced to Dan Froomkin: Fool Me Over and Over and Over Again:

Our elite media has been repeatedly suckered into trumpeting glaringly unsupported assertions about the number of Guantanamo detainees that have "returned" to the battlefield.... [L]ast summer... New York Times Public Editor Clark Hoyt appropriately spanked reporter Elisabeth Bumiller and her editors for a top-of-the-front-page story in late May that was "seriously flawed and greatly overplayed... demonstrated again the dangers when editors run with exclusive leaked material in politically charged circumstances and fail to push back skeptically."... Bumiller's article... provided a handy talking point for former vice president Cheney later that day.... Bumiller's reporting failure also earned her an editor's note appended to her story, and a scolding op-ed.

And yet, amazingly enough, eight months later... Bumiller is at it again... chasing Bloomberg, et al.... This time it's one in five former detainees who have "engaged in, or is suspected of engaging in, terrorism or militant activity."... [I]t's not just that the Pentagon's assertions are suspicious on their face. As it happens, a series of studies directed by Seton Hall Law Professor Mark Denbeaux has been effectively picking them apart for years.... Among the other (little, inconsequential) things the Seton Hall reports have pointed out is that the Pentagon, in all the times it has leaked on the topic, has nevertheless consistently refused to provide names that would allow anyone to actually verify most of its claims. There's the issue of how they define "returning to the fight" - it apparently includes detainees speaking out publicly against their incarceration...

10) HOISTED FROM THE ARCHIVES: DeLong (March 2005): Why Oh Why Can't We Have a Better Press Corps? (Shut Up or We'll Kill Your Development Bank! Department):

The Washington Post "argues" that critics of Paul Wolfowitz as World Bank President should be quiet. Why? Because "the World Bank is necessary.... People who care about this institution and its mission -- as many of Mr. Wolfowitz's detractors do -- should think carefully before they damage it by attacking its new boss." No argument that Paul Wolfowitz is the best candidate for World Bank President. No argument that he is even a good candidate. No argument that he is either minimally qualified--in his understanding of development, in his understanding of international finance, or in his ability to manage a large bureaucracy. Pathetic. Contemptible.


links for 2010-01-18