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February 2010

The Mainspring of Civil Society Is Profit, of the Republic Is Virtue, and of the Aristocracy Is Honor...

Montesquieu did not write that--but he shoud have:

Henry Farrell: In praise of the European Parliament:

Just as it isn’t because of the benevolence of the butcher or baker that we get our dinner, it’s often because of the amour-propre and power-lust of politicians that we get a system that works. The desire of the Parliament for a voice in international justice and home affairs issues, and of individual MEPs for the limelight, means that Parliament is likely to be a highly awkward customer. With any luck, it will continue to prevent security officials on both sides of the Atlantic from reaching mutually convenient deals that are likely to seem rather less politically attractive when they are exposed to the rigors of a public vote by elected representatives. As there are more and more of these deals being cooked up in the EU and elsewhere (a whole world of information sharing arrangements, some justifiable, some not so justifiable, but few exposed to processes of public justification,3 this would be a good thing. MEPs are surely as venal as the next bunch of politicians, but without the Parliament, there would be next to no public debate of these deals, let alone any possibility of vetoing them. It would be nice to see Economist type liberals (who care, I have no doubt about civil liberties, as well as market freedoms) acknowledging this every once in a while.

Ten Things Worth Reading, More than Half Economics: February 16, 2010

1) Paul Krugman: The Case For Higher Inflation:

Olivier Blanchard.... "Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions."... I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree. I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis. Or to put it a bit differently, the long-run Phillips curve isn’t vertical at very low inflation rates.

I think this is especially important in the European context. As I’ve been writing in a number of posts, the period 2000-2008 saw a huge divergence in price levels between the capital-inflow nations of the European periphery and the European core.... Almost surely, that divergence now has to be reduced. Yet with a low overall inflation rate for the eurozone, that means large-scale deflation in the overvalued economies if convergence is to happen any time in, say, the next 5-10 years. (Actually, in Eurospeak I think this is cohesion rather than convergence, but never mind). The task would be a lot easier if the eurozone had 4 percent inflation instead of 2. So yes, let’s have modestly higher inflation. Alas, Ben Bernanke — at least when speaking publicly — doesn’t agree. And I can only imagine what Trichet would say.

2) Ryan Avent: Fiscal policy: State government drag:

State legislatures are looking a combined budget gaps worth more than the size of the House jobs legislation, and senators busy themselves stripping aid to states from their bill. Mr Krugman has written that what the euro zone needs is tighter fiscal integration to offset the burdens imposed by a uniform monetary policy. But if America is any indication, tighter fiscal integration doesn't mean a thing if the people running the show at the federal level are short-sighted, provincial, and apt to choose grandstanding over good policy.

3) Rajiv Sethi: The Invincible Markets Hypothesis:

There has been a lot of impassioned debate over the efficient markets hypothesis recently, but some of the disagreement has been semantic rather than substantive, based on a failure to distinguish clearly between informational efficiency and allocative efficiency. Roughly speaking, informational efficiency states that active management strategies that seek to identify mispriced securities cannot succeed systematically.... Allocative efficiency requires more... is satisfied when the price of an asset accurately reflects the (appropriately discounted) stream of earnings.... If markets fail to satisfy this latter condition, then resource allocation decisions (such as residential construction or even career choices) that are based on price signals can result in significant economic inefficiencies. Some of the earliest and most influential work on market efficiency was based on the (often implicit) assumption that informational efficiency implied allocative efficiency. Consider, for instance, the following passage from Eugene Fama's 1965 paper on random walks in stock market prices....

The assumption of the fundamental analysis approach is that at any point in time an individual security has an intrinsic value... which depends on the earning potential of the security. The earning potential of the security depends in turn on such fundamental factors as quality of management, outlook for the industry and the economy, etc.... In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.

Or consider the opening paragraph of his enormously influential 1970 review of the theory and evidence for market efficiency:

The primary role of the capital market is allocation of ownership of the economy's capital stock. In general terms, the ideal is a market in which prices provide accurate signals for resource allocation: that is, a market in which firms can make production-investment decisions, and investors can choose among the securities that represent ownership of firms' activities under the assumption that security prices at any time “fully reflect” all available information. A market in which prices always “fully reflect” available information is called “efficient.”

The above passage is quoted by Justin Fox, who argues that proponents of the hypothesis have recently been defining efficiency down:

That leaves us with an efficient market hypothesis that merely claims, as John Cochrane puts it, that "nobody can tell where markets are going." This is an okay theory, and one that has held up reasonably well—although there are well-documented exceptions such as the value and momentum effects.

The most effective recent criticisms of the efficient markets hypothesis have not focused on these exceptions or anomalies, which for the most part are quite minor and impermanent. The critics concede that informational efficiency is a reasonable approximation, at least with respect to short-term price forecasts, but deny that prices consistently provide "accurate signals for resource allocation."

4) Economics of Contempt: Mind-Boggling Nonsense from John Cochrane:

After reading John Taylor and John Cochrane's analyses Lehman's failure, I'm beginning to understand how it's possible for economists to say that "we're still arguing about the causes of the Great Depression." It's generally hard to come to an agreement when one side simply lies, or refuses to acknowledge undeniable facts.... Let's start with Cochrane's claim that there wasn't a secondary wave of failures after Lehman's bankrtupcy. First of all, that's not even true. Plenty of hedge funds failed as a result of Lehman-related losses. However, since they were generally structured as LLPs, they went into pre-defined liquidation procedures rather than filing for bankruptcy. But that doesn't make those failures any less real. Second, Cochrane, like Taylor, inexplicably ignores the fact that Lehman's biggest counterparties — the other dealers — were virtually all bailed out by their governments.

Next, let's take Cochrane's bizarre attempt to minimize the importance of the obvious knock-on effects from Lehman's bankruptcy — namely, the problems at Lehman's European broker-dealer (LBIE), and the run on the money markets. Contrary to Cochrane's assertion, it wasn't just "repos in the United Kingdom" that were affected by LBIE's failure. In addition to the 140,000 failed trades, over $40bn in prime brokerage client funds and assets were frozen by LBIE's administrator. That's $40bn that was suddenly and unexpectedly unavailable to hedge funds — and when you consider that hedge funds use their prime brokers to lever up, that end result is that LBIE's failure caused hundreds of billions in liquidity to suddenly vanish from the markets. It also caused other hedge funds to pull their money out of their prime brokerage accounts at Morgan Stanley and Goldman (the two biggest prime brokers), since they were now scared that they wouldn't be able to access their funds if either of the prime brokers failed....

And there was absolutely nothing minor about the run on the money markets.... As to why the run on the money markets would cause people to stop lending to banks like Citigroup, there are several reasons. The biggest reason the run on the money markets affected Citi's (and other banks') wholesale funding was that to meet the massive redemptions, money funds all drew down their backup lines of credit with banks at the same time. Institutional investors knew this, and started to pull back aggressively from the big banks in the wholesale funding markets. And then there were all the asset firesales by money funds.... Cochrane's claim that these two problems were "easy to fix" further demonstrates how detached from reality he is. The vast majority of the prime brokerage client assets frozen by LBIE's administrator still haven't been returned yet. Not only was that problem not "easy to fix," but it still hasn't been fixed yet! Also, the money market funds never borrowed from the Fed. I know the structures of the Fed's various financing facilities are a bit complicated, but Cochrane is supposed to be a professor of finance at a prestigious business school, is he not?)

Finally, there's Cochrane's point that "[m]ost of Lehman's operations were up and running in days under new owners." Well, yes, Barclays did buy Lehman's core US units, and Nomura bought some of Lehman's Asian and European units — minus those pesky liabilities, of course! I'm not sure Cochrane knows this, but in a bankruptcy, the debtor's liabilities tend to be kinda-sorta important in determining how large an effect the bankruptcy has on non-debtors...

5) John Gruber: Adobe Puts Secret Hold on HTML5 Spec:

In public, Adobe claims to “support” HTML5. On the private W3C mailing list, though, they’ve placed an objection to prevent the current spec from being published. My understanding is that Adobe is trying to block the API spec for the canvas element. The canvas element hasn’t gotten as much attention as the video element, but clearly, 2D graphics in canvas is competitive with Flash, and it appears that Adobe’s plan is to sabotage it via W3C politics.

6) GRAPH OF THE DAY: Bond Spreads:

ERP (2).pdf

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Mark Graham: Rereading Christopher Moore's Bloodsucking Fiends: A Love Story:

The week of Valentine’s Day is an ideal time for a love story.  Christopher Moore’s third vampire novel, Bite Me: A Love Story, isn’t due out for another month, so this seemed an ideal time to reread Bloodsucking Fiends: A Love Story, the first book in the series. Although Bloodsucking Fiends, released in 1995, was preceded by Practical Demon Keeping and Coyote Blue, it was this hilarious vampire love story that began to establish the former disc jockey, waiter and grocery store shelf stocker as a cult icon, and eventual New York Times best-selling author.

Twenty-six-year-old Jody Stroud has just gotten off work at her menial job in an insurance company in San Francisco.  She is dragged into an alley, bitten in the throat and forced to drink from her attacker’s arm, then drained of blood and left under a dumpster. When Jody awakens the following night, she discovers she has the strength to toss the dumpster off her and that the hand that has been left in the sunlight is badly burned.  It doesn’t take too long for her to discover that she has joined the ranks of the undead.  She has a thirst for blood and she will remain exactly as she is for eternity.  She will never be able to lose that last five pounds she was intending to diet away. Nineteen-year-old Tommy Flood has left the Midwest, adopted the pen name C. Thomas Flood (the C doesn’t stand for anything, but sounds great for a writer), and nursed his dying Volvo to San Francisco where he hopes to become an author.  The fact that the Volvo goes up in flames is probably a symbol for something, but you will have to decide what.... In order to pay the rent, Tommy hires on with the night crew at a local Safeway where he proves his prowess at frozen turkey bowling (not yet a Winter Olympic sport, but not totally dissimilar to curling).

As Jody begins to get used to being a vampire, she discovers her need for a man, someone who can operate during the day, who can get her car out of the impound lot, who can find an apartment with a bedroom with no windows, in general, someone who can run errands. Her current boyfriend is a jerk who is already two-timing her. It’s time to find a Renfield...

8) STUPIDEST THING I HAVE NOT READ TODAY: The New York Times headline writers, as observed by RoberWaldmann:

[T}his New York Times headline is... uhm... very...

Climate-Change Debate Is Heating Up in Deep Freeze

The article by John Broder clearly explains that the debate is between climate scientists on one side vs politicians and media personalities on the other. Every single scientist quoted in the article notes that, to the extent that the recent blizzard on the mid Atlantic US provides evidence on global warming it supports standard models of human caused warming. As far as I can tell from the article, all such models imply increased precipitation on the area. The article contains a brief reference to global warming skeptics which clearly refers to the very very few actual climate scientists who are skeptics. However, Broder doesn't have a quote from an actual climate scientist who doesn't think that, to the very limited extent it provides any evidence, the blizzard weakens the skeptics case. Among scientists there is a difference of emphasis between those who note that the blizzard supports the standard models and those who note that a few days weather provides almost no evidence on climate change. In effect all scientists quoted agree that the blizzard provides evidence in support of standard models but, being only a few days weather on one region, only a little. This view is supported by citations of predictions of higher precipitation made before the blizzard. There really couldn't be a stronger case that the blizzard is not evidence in favor of global warming skepticism.

A reasonable headline would be "All interviewed scientists agree that Inhofe is full of it" or "standard global warming models predicted increased snow" or something. Instead, the disagreement must be presented as a debate in which headline skimmers are not informed that one side in the debate consists of people with no expertise making claims inconsistent with all published evidence...

9) DELONG SMACKDOWN WATCH OF THE DAY: Professionally administered by Brian Weatherson:

rad DeLong has two posts up defending Richard Layard's defence of Benthamism against criticism from Fontana Labs and Will Wilkinson. I think Brad is misinterpreting Bentham, so while his defence might be a defence of something interesting (say, preference utilitarianism) it isn't much of a defence of Bentham.... The problem with interpreting [Bentham] is that "advantage, pleasure, good, or happiness" do not really come to the same thing. At the very least, it is clear that advantage and pleasure do not come to the same thing, and which (if either) of these good and happiness are is part of what's at dispute. But for interpreting Bentham, it's very important to realise that he did view them as the same thing.... What matters for [Brad] is "what people would choose for themselves", i.e. preferences, and preference satisfaction isn't a kind of experience. If people choose different kinds of experiences, or even things that don't maximise their own chances for good experiences (as when people take life-endangering jobs so as to provide goods for their children) they are getting what they choose, but not maximising utility as Bentham saw it. In principle my preferences can be satisfied by things that happen after I die, even if I don't get any extra experiences after I die, in which case we certainly couldn't identify preference satisfaction with any kind of experience. As I said, I don't want to get into the pros or cons of the moral view Brad is espousing here. I just want to make an historical point, that it's a mistake to think Bentham viewed preferences rather than experiences as the core of utilitarianism. It was a great advance over Bentham (I think) when later philosophers made this move...

10) HOISTED FROM THE ARCHIVES: A Rich Baker Special (June 2002):

Jem (serious): "The Americans didn't land on the Moon - it was all a hoax."

Rich: "Dude, you're so naive. America doesn't exist: it's really a soundstage in the south of France..."

links for 2010-02-16

At Least a Third of What We Spend on Health Care Is Wasted--and We Don't Spend Enough

Michael McWilliams:

Letting Perfect be the Enemy of Good?: An Atlantic Monthly article by Megan McArdle questions whether health insurance coverage saves lives, drawing from a narrow slice of the literature to suggest the beneficial effects of insurance coverage on mortality might be negligible.  While it is true these effects have been challenging for researchers to assess accurately, this question deserves more than a selective reading of the literature to inform the public and policymakers properly.  Indeed, when reviewed comprehensively and with an understanding of key clinical and methodological nuances, the research to date provides consistent and compelling evidence that health insurance coverage significantly improves health outcomes, particularly for adults with treatable conditions (McWilliams 2009)....

Studies on the health consequences of uninsurance can be broadly categorized as observational or quasi-experimental. Observational studies... are fundamentally limited because it is usually impossible to control for all possible differences and some differences may be both causes and consequences of insurance coverage.... McArdle selects just one negative study to suggest insurance coverage may not affect mortality (Kronick 2009). Yet several other observational studies that controlled for an equally robust set of characteristics have consistently demonstrated a 35-43% greater risk of death within 8-10 years for adults who were uninsured at baseline and even higher relative risks for older uninsured adults with treatable chronic conditions such as diabetes and hypertension (Baker et al. 2006; McWilliams et al. 2004; Wilper et al. 2009)....

From the quasi-experimental literature, McArdle cites evidence of a lack of immediate survival gains with near-universal Medicare coverage after age 65 in the general population (Card et al. 2004; Levy, and Meltzer 2008). From a clinical perspective, however, we should not expect immediate survival gains for most previously uninsured adults because mortality is such a distal outcome.... Quasi-experiments that rely on abrupt discontinuities occurring with age are not well suited to capturing these complex but potentially large effects. Consequently, the absence of evidence suggested by these studies is not evidence of absence.... [I]mmediate mortality effects might be expected for acutely ill patients for whom coverage may improve access to life-saving procedures and therapies. Indeed, a more recent study found age-eligibility for Medicare was associated with a substantial and lasting reduction in mortality for patients who were hospitalized for a range of acute illnesses that were amenable to treatment (Card et al. 2009).

Because many quasi-experimental strategies are geared to capture effects of insurance coverage only if they occur in the short term, they are better suited to examining proximal or intermediate health outcomes. Therefore, perhaps more can be learned about the effects of insurance coverage on mortality from studies that rigorously examine effects on health outcomes that are highly predictive of mortality... numerous studies have found consistently beneficial and often significant effects of insurance coverage on health across a comprehensive set of outcomes and a broad range of treatable chronic and acute conditions that affect many adults in the U.S., including hypertension, coronary artery disease, congestive heart failure, stroke, diabetes, HIV infection, depressive symptoms, acute myocardial infarction, acute respiratory illnesses, and traumatic injuries (McWilliams 2009). In particular, several studies have robustly demonstrated positive effects of near-universal Medicare coverage after age 65 on self-reported health outcomes and clinical measures of disease control, particular for adults with cardiovascular disease or diabetes who make up two-thirds of the near-elderly (Decker and Remler 2004; McWilliams et al. 2007, 2009). Thus, when rigorous study designs have been coupled with appropriate outcomes and applied to clinical populations for whom medical care is effective, the evidence that insurance coverage improves health and survival is consistent and convincing...

Pass the D----- Health Care Bill Already!

Jonathan Cohn is optimistic:

Thump-Thump ... Thump-Thump: President Obama issued his formal invitation to the bipartisan meeting on February 25... the letter's most important passage was this one:

Since this meeting will be most productive if information is widely available before the meeting, we will post online the text of a proposed health insurance reform package. This legislation would put a stop to insurance company abuses, extend coverage to millions of Americans, get control of skyrocketing premiums and out-of-pocket costs, and reduce the deficit.

That passage seems to suggest.... 1) House and Senate leadership have nearly finished negotiating a new compromise version of their legislation. The text the administration plans to post will reflect that compromise; [or] 2) House and Senate leadership are still struggling to come to an agreement, if not over what to pass then in what sequence to pass it. The administration hopes this promise will force them to wrap things up....

[C]onversations with various sources over the weekend make me think the truth is some combination.... If it's (1), the House and Senate have finally worked out most of their differences. If it's (2), President Obama is starting to give them the shove they need.... One more reason for (relative) optimism is the very next paragraph of the invitation:

It is the President’s hope that the Republican congressional leadership will also put forward their own comprehensive bill to achieve those goals and make it available online as well.

Republicans want to make this event--and, indeed, this whole debate--a referendum on the Democratic health care reform plan. Obama wants to make this a referendum on what to do about the nation’s health care problems, with each party putting forward its ideas. And it looks to me like Obama will get his way.

And then in the very next sentence Jonathan Cohn reveals that he lives in a fantasyland:

If the Republicans don’t post a plan, everybody will see that the GOP isn't serious about health care reform...

The Republicans have not been serious about health care reform since the start of 1994. A great many people have bet their lives and their fortunes--they have no honor--on pretending not to see that. Why should one more meeting make them change their posturing?

Ten Things Worth Reading, Mostly Economics: February 15, 2010

1) Gustavo J. Bobonis and Peter M. Morrow: Export Commodity Booms, Labor Coercion, and the Historical Containment of Education:

A significant share of labor arrangements during the colonial period in the Americas involved the use of coercion. To what extent did labor coercion affect individuals’ accumulation of human capital? What was the role of primary commodity exports in influencing this relationship? We study these questions in the context of nineteenth century Puerto Rico, where unskilled laborers were forced to work for legally-titled landowners from 1849 until 1874. We develop a model of labor market coercion under an elite-controlled regime, and show that coercion depresses the effective wages of unskilled labor, inducing workers to acquire more schooling than in a case without coercion. Guided by this model, we use unique micro data from individuals and municipalities in Puerto Rico and exploit variation in the suitability of coffee cultivation across municipalities and changes in world coffee prices across time to estimate the response of schooling to coffee price changes. During the coercive period, governments in coffee growing regions allocated more public resources towards coercive labor measures and fewer resources towards primary schooling – with the latter declining 40 percent. Following the abolition of coercive measures in 1874, literacy rates declined 25 percent, consistent with a significant drop in the skilled labor wage differential. These results strongly suggest that labor market liberalization reduced the extraction of rents from unskilled laborers’ wages by local landowners.

2) Paul Krugman: The Case For Higher Inflation:

Olivier Blanchard, normally at MIT but currently the chief economist at the IMF, has released an interesting and important paper on how the crisis has changed, or should have changed, how we think about macroeconomic policy. The most surprising conclusion, presumably, is the idea that central banks have been setting their inflation targets too low: "Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions." To be a bit more precise, I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree. I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis. Or to put it a bit differently, the long-run Phillips curve isn’t vertical at very low inflation rates. I think this is especially important in the European context. As I’ve been writing in a number of posts, the period 2000-2008 saw a huge divergence in price levels between the capital-inflow nations of the European periphery and the European core.... Almost surely, that divergence now has to be reduced. Yet with a low overall inflation rate for the eurozone, that means large-scale deflation in the overvalued economies if convergence is to happen any time in, say, the next 5-10 years. (Actually, in Eurospeak I think this is cohesion rather than convergence, but never mind). The task would be a lot easier if the eurozone had 4 percent inflation instead of 2. So yes, let’s have modestly higher inflation. Alas, Ben Bernanke — at least when speaking publicly — doesn’t agree. And I can only imagine what Trichet would say.

3) Paul Krugman: Premature Exit:

Basically, the stimulus fades out fast starting in fiscal 2011, which starts in October 2010. Yet the consensus view is that unemployment will be around as high as it is now. The point is that we’re doing a 1937 — or actually worse, since unemployment had in fact fallen dramatically before FDR made his big mistake. Fiscal support for the economy will be pulled away with the economy having barely begun to recover.

4) Brad Johnson: Global warming is a ‘nightmare’ for coffee.:

Man-made global warming has “affected Kenyan coffee production through unpredictable rainfall patterns and excessive droughts, making crop management and disease control a nightmare.” Joseph Kimemia, director of research at Kenya’s Coffee Research Foundation (CRF), told reporters that hotter temperatures and unpredictable rainfall are damaging his nation’s ability to grow coffee:

We have seen climate change in intermittent rainfall patterns, extended drought and very high temperatures. Coffee operates within a very narrow temperature range of 19-25 degrees (Celsius). When you start getting temperatures above that, it affects photosynthesis and in some cases, trees wilt and dry up. We have see trees drying up in some marginal coffee areas.

Global warming-related droughts, heat waves, and climate change are also damaging coffee production in top exporters such as Uganda, Brazil, Mexico, Peru, and Nicaragua, as growers are “being forced uphill to higher altitudes, at a rate of three to four meters a year on average, as temperatures rise.”

5) Think Progress: After warmest January in history, Vancouver airlifts in snow for Winter Olympics.:

After warmest January in history, Vancouver airlifts in snow for Winter Olympics.

Record warmth is forcing the organizers of the 2010 Winter Olympics in Vancouver, British Columbia to helicopter in snow to cover mountains. The planet’s changing climate is threatening the start of the Olympics, as “sloppy, foggy weather” has canceled training runs on both Whistler and Cypress Mountains. In Vancouver, the “average temperature in January was 44.9 degrees, besting the previous warm record of 43.3 in 2006 and well above the historic average of 37.9 degrees”: After the warmest January in Vancouver history, organizers moved more than 5,000 cubic meters of snow onto Cypress by helicopter and truck from nearby mountains. Some 750 workers are bringing in snow and building courses before competition starts on Saturday.

Vancouver’s troubles are part of a broader trend of warmer winters across the Northern Hemisphere. Increased warmth and changing weather patterns have led to glacial retreat and unreliable snowfall across the globe, putting the future of alpine sports in jeopardy. Globally, we are in the warmest winter on record. Locally, the weather forecast for the Olympics “calls for more rain and warm temperatures for the next five days.”

6) GRAPH OF THE DAY: The Stagnation of Education in America:

ERP (2).pdf


Your question about whether anyone had heard the phrase "up or down vote on a jobs bill" struck a chord. It's not just the jobs bill. I can't remember the last time I've heard a Democrat use the phrase "up or down vote" on any bill held up by Republicans in the Senate. This is a shame, since a demand for an "up or down vote" is a far better message than the self-defeating complaints about "Republican obstructionism."... The current Democratic obsession with the phrase "Republican obstructionism" is a classic case of beltway Democrats failing to understand the electorate. Something like 25% (or less) of Americans know that 60 votes are necessary to overcome a filibuster in the Senate. However, when Americans are asked about specific votes, polls show that strong majorities almost always answer in favor of a holding a vote when asked questions like, "should John Roberts receive an up or down vote?" This isn't rocket science. Most Americans have no idea what a filibuster is, but if they asked whether a matter before the Senate should receive an "up or down vote", Americans nearly always says "yes". This answer cuts across party lines, even among those who oppose the issue being voted on. Conversely, when the public hears about "Republican obstructionism", even most liberals shrug their shoulders and mutter, "well, of course Republicans are obstructing the Democratic agenda. Republicans disagree with the Democratic agenda."

My point is this: Democrats can talk until they are blue in the face about how "unprecedented" this wave of Republican filibusters in historical terms, and most Americans won't have any idea what they are talking about.... When the concept of a filibuster is properly framed as a procedural roadblock employed by a small number of malcontent senators to prevent their colleagues - who won the last election - from voting, the public strongly disapproves. Why? Because even partisans agree that our democratic system should not permit a minority from grinding the government to a halt. If I had to guess, senate Democrats (whose cowardice knows no bounds) are afraid to adopt the "up or down vote" attack is because they worry they will be called hypocrites when they are back in the minority.... But the answer to this is simple: just look at the Republicans. Last I checked, the Republican senators who demanded an "up or down vote" on Roberts and Alito seem to be avoiding the "hypocrisy" label...

8) STUPIDEST THING I HAVE NOT READ TODAY: By Fouad Ajami, of whom Steve M. makes us aware, for writing in the *Wall Street Journal&:

But no sooner had the country recovered its poise, it drew a line for Mr. Obama. The "bluest" of states, Massachusetts, sent to Washington a senator who had behind him three decades of service in the National Guard, who proclaimed his pride in his "army values" and was unapologetic in his assertion that it was more urgent to hunt down terrorists than to provide for their legal defense.

Steve. M. comments:

Wow -- Massachusetts, of all states, sent a guy to the Senate who's actually worn a military uniform! What a 180! Something like that could never have happened prior to the mass disillusionment with Obama! The state also voted for Kerry for president... after... he pledged to "destroy" Osama bin Laden and his fellow terrorists, and in which he campaigned frequently with fellow Vietnam veterans -- but Kerry lost that year to two draft-dodgers who'd allowed bin Laden to escape at Tora Bora and then ignored him after that...

9) DELONG SMACKDOWN WATCH OF THE DAY: Marx on India: Michael Perelman--whose knowledge of the history of economic thought far exceeds mine--takes exception to my classifying Marx's writings on the British in India as Marx in his "prophetic mode":

I have done some work on the subject. It was not Marx the prophet. The articles [on India] were directed toward Henry Carey, who was undermining Marx's position on the New York Tribune. The story is very interesting, including others, including Frederick Law Olmstead. Marx says that Carey sent him at least one book. I have tried to locate Marx's correspondence with Carey, but have been unsuccessful...

10) HOISTED FROM THE ARCHIVES: DeLong (2004): September 11: The Threat to 'Angel':

Of all the strange parts of the government's reaction to the terror attacks on September 11, 2001, the strangest is the claim that Al Qaeda had threatened Air Force One--and that that was why it and George W. Bush were diverted to Offutt Air Force Base.... [T]here are three stories: (i) Bartlett's that somebody said, "Is there a threat to angel," and Cheney interpreted this as, "There has been a threat to 'Angel'," using that exact secret designation for Air Force One; (ii) Cheney's story number one that a Secret Service agent told him that there had been a threat to 'Angel'; (iii) Cheney story number two that a "uniformed military person" whom nobody since has ever been able to identify told him that there had been a threat to 'Angel'.

We... now have Richard Clarke's account.... "pp. 6-7: I picked up the open line to the PEOC. I got a dial tone. Somebody had hung up on the other end. I punched the PEOC button... When Major Fenzel got on the line I gave him the first three decisions we needed: 'Mike, somebody has to tell the President he can't come right back here. Cheney, Condi, somebody. Secret Service concurs. We do not want them saying where they are going when they take off'.... pp. 18-19: I moved in and squatted between Cheney and Rice. 'The President agreed to go to Offutt', Cheney informed me. His manner implied that it had been a hard sell..."

Think about (i) the focus of people inside the PEOC on the TV networks, (ii) the lack of attention paid inside the PEOC to the Situation Room information channel, and (iii) the fact that the Situation Room is the operational decision-implementation center to which information flows. Think about the sequence of events: (i) A consensus decision is reached inside the White House that George W. Bush should not return to Washington immediately. (ii) Cheney takes on the task of persuading George W. Bush to go along. (iii) Cheney calls Bush, and tells him the Secret Service and the Situation Room want him to stay away from Washington. (iv) Bush balks--he wants to be back in his proper place as fast as possible. (v) Cheney thinks about his failure, and calls again--this time with the story about 'Angel.' (vi) Bush agrees to go to Offutt.

Isn't the balance of the probabilities that Cheney decided upon a lie that he thought would scare George W. Bush into doing what he wanted him to do, and thought (correctly) that the normal Fog of War would keep him from being called on it? Is there any other way to explain why the "news" about the "threat to 'Angel'" flowed only upwards from Cheney to Bush, and not downwards from Cheney to the PEOC to the Situation Room?

Dysfunctional Senate Watch...


Barbara Krivat:

Job creation in the real world: Senate Majority Leader Harry Reid is already catching heat for saying:

We feel the American people need a message. The message that they need is that we're doing something about jobs.

This comment comes on the heels of news that a bi-partisan jobs bills has fallen through, and Reid is now plowing ahead with a slimmed-down four-point plan. Yes, what Reid said is a bit tone-deaf. The American people don't need a message that Congress is doing something about jobs; they need jobs...

But then Barbara goes off-message:

At the same time, Reid's framing is one of the most honest I've heard yet in the discussion about job creation. The American people may not need a message, but that's pretty much the most Congress has to offer on the jobs front—at least in the short run.... Yes, we all want jobs to come back quickly, but we lost more than 7 million of them, and it's going to take some time....

The reason it's so tough for the government to simply whip up jobs, of course, is because the fundamental thing that drives companies to hire is an increase in demand for their products and services. The government has already done a lot to bolster demand in the economy. For example, stimulus spending.... But with the economy's biggest spenders—American consumers—still reeling from the downturn, not to mention too much debt, such efforts will only go so far.

The other chunk of the jobs bill that remains is a tax break for hiring.... Noble effort, and if you don't mind paying $13 billion over 10 years to do it, fine, but it's not going to be a game-changer...

The President's Council of Economic Advisers says:

ERP (2).pdf

And I think these numbers are about right. What they don't say is that by the end of 2010 they project that the number of stimulus-supported jobs will be down to only 1.2 million or so: stimulus spending in fiscal 2011 will proceed at only 1/3 the rate of stimulus spending in fiscal 2010.

Harry Reid could simply propose to extend ARRA spending at its current pace until the unemployment rate falls below 8%. That would be a game-changer--for at least a million Americans who would find that they had jobs as a result.

Valentine's Day Triple-Size Special Festival of Human Stupidity: February 14, 2010

Yes, it's the Festival of Recent Human Stupidity:

1) Republican Representative Paul Ryan, as observed by Benjamin Sarlin:

Ryan... voted for the bank bailout, a position considered heretical by most of the right wing, and the auto bailout, an even more reviled bill among Republicans. Ryan said his vote for the bailout was influenced by Jonah Goldberg's Liberal Fascism... and his belief that a second Depression would threaten capitalism--and rescue Obama's presidency.... "TARP... represented a moment where we had no good options and we were about to fall into a deflationary spiral," he said. "I believe Obama would not only have won, but would have been able to sweep through a huge statist agenda very quickly because there would have been no support for the free-market system." He couched his support for the auto bailout in similar terms.... “A lot of these votes are defensive votes," he said. "A lot of them are not votes you want to take but under the circumstances they're the best path forward."

2) Leon Wieseltier, observed by Blake Hounshell:

Wieseltier uses a W.H. Auden quote as a framing device for long, tedious, and link-free article that paints Sullivan as an anti-Semite. Sullivan fires back with a rebuttal of Wieseltier's interpretation of the quote and shows the original email exchange that prompted Andrew to use it. He follows up a while later with a 2008 quote from Wieseltier explicitly saying Sullivan is NOT an anti-Semite.... I'm not impressed by any of it. Wieseltier does catch Sullivan writing some weird and sloppy things about Jews, and Andrew should be much more careful in criticizing Israel. But Wieseltier is equally sloppy and careless with his language, sweepingly accusing Sullivan of "venomous hostility toward Israel and Jews." The whole thing is pretty tiresome, and the fracas as it plays out will do little to enhance the discussion about Israel and the Palestinian question (and just wait until Marty Peretz throws his hat in the ring)...

3) Dan Riehl, as observed by Conor Friedersdorf:

Mr. Riehl titled his post, dated November 18, 2009: “Friedersdorf Digs Sullivan’s Crazy Anti-Semitism.”

Valley of the Shadows has been on this angle. I detest such vile displays. It’s a good thing it isn’t allowed on Talk Radio where they police such things for appropriateness. Why do these young post-menstrual, or whatever they are, faux conservatives support hate speech? Are they anti-Semites at heart? Friedersdorf … hmm, is that a German name? Gosh, I hope that isn’t it.

4) The U.S. Senate, as observed by Chris Dodd: Mike Stark Reports: Dodd: Senate “a dysfunctional institution”; Senators need to start acting like Senators; “were about to abandon the essence of the Senate” at

I asked what he thought of reconciliation and recess appointments. He never answered that question, but he had some pretty strong words for the conduct of certain Senators (that remained unnamed), saying they needed to “start acting like Senators”. But perhaps the most revealing thing Senator Dodd said was that because the Senate is currently dysfunctional, “because we’re frustrated right now over an abusive use of a historic vehicle that led to the essence of what the Senate is, we’re about to abandon the essence of the Senate.” That came after he said, “I’m saddened in a way… the reason the Senate works is because the chemistry of the membership makes it work. That’s why it takes unanimous consent to do almost anything. And the essence of the Senate was basically a longer, slower look at things.”

5) Republicans, observed byJon Chait:

In 1994, when they were killing Bill Clinton's health care plan, Republicans promised over and over they just wanted to do it right. Start fresh and pass a real health care plan without all the bad socialist stuff: "'"We don't have to do it all this year', [Bob Dole] said in the closing address to committee members. 'We don't have to do any of it this year. You know, Congress meets every year. I see a lot of bright spots to (acting) next year.'... 'If they come up with something I can live with, I would support it', said California state party Chairman Tirso del Junco, a surgeon. 'But I do not believe that the plans presently on the table would be approved by the American people. To rush this through is bad news'." Of course, the Clinton plan died, and Republicans proceeded to do absolutely squat for the next fifteen years.

This year, when they're doing everything possible to kill President Obama's health care plan, Republicans again insist they just want to start over fresh, have a chance to enact a real bipartisan plan. Why do they say that?... [I]t's pretty clear that the Republican pretense to really want to do reform, only just not this reform and not right now, is rooted in an understanding that their real position does not reflect public sentiment. There's been an enormous amount of bluster about popular repudiation of the Democratic health care plan. If Republicans truly thought the public shared their beliefs, they wouldn't be talking constantly about starting over and doing it right in a bipartisan fashion.

6) Gerald Alexander and Charles Krauthammer, as observed byMichael Kinsley:

"[I]n the end the bedrock common sense of the American people will prevail," wrote conservative columnist Charles Krauthammer Friday in the Washington Post. He was crowing over Scott Brown's victory in Massachusetts and the apparent about-face by Americans generally about President Obama's health care reform. He mocked liberals for believing that "the people are stupid" and accused liberals of having "disdain for the intelligence and emotional maturity of the people."... Gerard Alexander asked, "Why are liberals so condescending?" He said they "insist that their side has all the answers and that their adversaries are idiots," and "the benighted public is either uncomprehending or deliberately misinformed."...

Where is the evidence that liberals are more condescending than conservatives? Krauthammer offers a snippet from a New York Times columnist saying that people are "suspicious of complexity," an unnamed Time Magazine blogger who said we're "a nation of dodos," and a nine-year-old New York Times obituary in which a philosopher is credited with offering a "philosophical justification" for conservative ideas. The condescension, I guess, is in the notion that conservative ideas need a philosophical justification. Alexander's examples of condescension are mostly more like simple disagreement. He says that liberals "disregard the policy demands" of conservatives.

Poor babies. If believing that you are right and that people who disagree with you are wrong amounts to condescension, then we are all condescending.... If you had a friend who was wrecking his future by making bad choices, it would not be "elitist" to tell him so. It would be treating him as an adult--and as an equal. In the end, which is more condescending? To tell citizens that they are behaving like children or like fools, or to praise them for their "bedrock common sense"?

7) Bloomberg News, as observed by Greg Sargent:

One of the day’s big stories is that Obama said in an interview with Bloomberg that he doesn’t “begrudge” the massive bonuses awarded to the CEOs of Goldman Sachs and Chase, pointing out that some professional athletes take home even more. The story has been widely picked up, with critics blasting Obama.... The White House is making a transcript of the interview available to anyone who asks, and the comments seem a bit more nuanced than the headlines suggest... there’s a bit more of an emphasis here than the initial story suggested on his support for specific measures to check the long-term trend of inflated bonuses, and the thrust of his comments seem aimed at combating the perception that such policies are anti-business...

8) The Advocates of the Miles Driven Tax, as observed by Andrew Samwick:

[O]ne of the most ridiculous policy proposals I've read in a while -- to make up for falling gas tax revenues with a new tax on miles driven.  Ashley Halsey III is on the case in The Washington Post yesterday. The appropriate tax instrument to make up for declining or inadequate gas tax revenues is ... a higher gas tax rate.  Compared to a higher gas tax rate, a tax on miles driven ignores the amount of fuel used to drive those miles.  Highway travel is taxed the same as city travel.  Gas guzzlers are taxed the same as hybrids. Neither change makes any sense from an environmental perspective.  Nor is it necessary to raise issues of privacy involved in collecting a tax on miles driven in the ways suggested in the article by monitoring the history of the locations of the car (as opposed to an annual fee based on an odometer reading collected at a state inspection). Many cities are experimenting with congestion taxes, which are based on miles driven at particular times in particular locations.  Those are worthwhile policy measures to relieve congestion and are different from a uniform tax on miles driven. 

9) Republicans who claim that blizzards in Washington DC are reasons to disbelieve in global warming, observed by Matthew Yglesias:

While the normally snow-free Washington, DC area is suffering from crippling blizzards, Olympics planners in Vancouver are concerned about a snow drought: "On Tuesday, organizers gave the news media their first look at Cypress Mountain, the site of the snowboarding and freestyle skiing events, with hopes of allaying concerns about a lack of snow and unseasonably warm weather endangering the competitions. But officials kept the snowboarding halfpipe off limits, citing safety concerns. The mountain looked as if it were under military siege, not an Olympic site days from competition."

Of course by the “heads I win, tales you lose” accounting that prevails in the climate change debate, unseasonably snowy weather in the mid-Atlantic counts as evidence that we should allow uncontrolled pollution, whereas unseasonably warm and snow-free weather in British Columbia is just ignored. If you turn your moron filter off, though, you’ll see that unusual weather events all around the world are exactly what you would expect from systemic shifts in the global climate. This also illustrates the point that shifts, as such, can be harmful. Most human settlements are reasonably well-adapted to their existing climate. Farmers have suitable land and suitable crops for their local situation. Boston owns lots of snowplows and Atlanta doesn’t. The Winter Olympics are in Vancouver and not DC. Just swapping weather patterns around is incredibly destructive.

10) The entire management and editorial staff of the Washington Post Company who pay Robert Samuelson, and Robert Samuelson, as observed by James Kwak:

Remind me never to open Newsweek again when I have real work to do. Robert Samuelson tries to play the tough guy yet again in his column, saying that we face either major entitlement cuts or major tax increases and we have to buck up and take it like real men... this was what set me off: “There is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases.” This leaves out the obvious and best solution: reduce the growth rate of health care costs. Democrats and Republicans differ on how to do it–the former put a large package of cost-cutting measures in the Senate version of the health care reform bill, the latter want to kill the tax exclusion for employer-sponsored health care (and some Democrats would be fine with that as well). But everyone knows that the long-term debt problem is a health care problem... and cutting health care cost growth is the key. If we don’t, then we’re completely screwed no matter how much we cut Medicare--someone has to pay those health care costs, and if we cut entitlements we’re just shifting the problem onto individuals....

Samuelson says, “Even with these cuts [proposed by him], future taxes would need to rise. Unless you’re confronting these issues–and Obama isn’t–you’re evading the central budget problems.” Does he not realize that health care reform was the centerpiece (now perhaps failed, but at least he tried) of Obama’s first year in office, and that Obama himself insisted that cost reduction was more important than universal coverage, to the chagrin of his own political base? Oh, wait. Samuelson doesn’t realize that health care is the central budget problem. I’m sorry to belabor the point. You all know it. But apparently Robert Samuelson doesn’t.

11) Fred Hiatt and the entire management and editorial staff of the Washington Post Company, who sought out Gerald Alexander to write a "liberals are condescending" piece, as observed by Jamison Foser:

Well, this is interesting.  Remember that "Why are liberals so condescending" piece by Gerard Alexander the Washington Post published last week?  Turns out, the author didn't submit the piece the the Post -- the Post sought him out:

Bethesda, Md.: I thought that "Why are Liberals So Condescending" was the most intelligent article I've read in the Post in some time. Do you think that this is the result of a decision by your editors to be more fair and balanced? Also, I would appreciate your comments on the "All serious scientists agree that Global Warming is an enormous problem." school of thought. This matter has been positioned in exactly the same condescending manner.

Gerard Alexander: I can only tell you that the Post editor I dealt with searched me out, and were as encouraging as any editor could conceivably be.

I wonder when we'll find out that a Washington Post staffer is actively seeking out a similarly disparaging column about conservatives?  After all, Howard Kurtz keeps telling us how liberal the Post's opinion operation is. Meanwhile, Alexander spent the bulk of today's Washington Post online Q&A acknowledging that some conservatives are plenty condescending to liberals, but claiming that it just isn't very common.  Or something.  Alexander, for example, contends that "conservative magazines, elected officials, etc" don't accuse coastal liberals of being out of touch with heartland values -- and that if they did so, they'd be "run out of town." In reality, of course, such accusations are not limited to conservatives; they are pervasive in the media.  And those making such accusations are not "run out of town," they are given television shows on CNN.

12) Google, observed by Standpipe Bridgeplate:

Google is at, if not beyond, a tipping point of s---. I can't use it reliably to search this blog's archives, which are nothing more than a heap of mostly-static pages. Its contacts system has a clumsy interface and was evidently disastrously unprepared to have privacy semantics forced upon it. All of Google's various web widgets are sprouting cute little buttons that I don't dare click on because I don't know whether the ghost in the machine is going to give me a candy bar or an anal probe. You all down in Mountain View need to step back for a moment and think about what you want to do and how you want to do it.

13) *Google again, observed by Harriet Jacobs, who says: F--- you, Google:

I use my private Gmail account to email my boyfriend and my mother. There’s a BIG drop-off between them and my other “most frequent” contacts. You know who my third most frequent contact is? My abusive ex-husband. Which is why it’s SO EXCITING, Google, that you AUTOMATICALLY allowed all my most frequent contacts access to my Reader, including all the comments I’ve made on Reader items, usually shared with my boyfriend, who I had NO REASON to hide my current location or workplace from, and never did...

14) Bush speechwriter Marc Thiessen, as observed by Matthew Yglesias: Sleep Deprivation:

What I really wanted to do, though, was pull out the account Massie quotes of Menachim Begin talking about being tortured by the NKVD: "In the head of the interrogated prisoner, a haze begins to form. His spirit is wearied to death, his legs are unsteady, and he has one sole desire: to sleep… Anyone who has experienced this desire knows that not even hunger and thirst are comparable with it. I came across prisoners who signed what they were ordered to sign, only to get what the interrogator promised them. He did not promise them their liberty; he did not promise them food to sate themselves. He promised them – if they signed – uninterrupted sleep! And, having signed, there was nothing in the world that could move them to risk again such nights and such days."

This once again drives home the core points that Marc Thiessen is dodging with his absurd nitpicking. The torture techniques implemented by the Bush administration, and beloved by unintelligent and brutal people like Thiessen, are characteristic not of highly effective public security agencies but of brutal totalitarian dystopias. And their main systematic impact has never been the conduct of highly effective investigation, but rather the extraction of coerced confessions regardless of accuracy.

15) Jim Vandehei, Jonathan Martin, and the entire staff of the Politico as observed by Jim Vandehei and Jonathan Martin: Politico: We're part of the Palin problem...:

We know we're part of the problem - and we'll surely continue to run stories about Palin. But, we're looking at your top newspaper editors and network executives, listen to your grumbling political reporters when they try to tell you why going over board on the Hockey Mom beat isn't wise. Palin is no doubt a phenomenon - she's going to draw monster crowds and be an in-demand fundraiser for GOP candidates this fall. And she may overcome her weaknesses to make a run for the White House. But to cover her as the chief alternative to Obama and the presumptive frontrunner for the GOP nomination in 2012 borders on dishonest. Yes, she's good copy and yes she's good for business. But that doesn't mean she should be treated like a president-in-waiting.

16) The Pro-Euro Policy Elite, as observed by Paul Krugman:

So, whose fault is all this? Nobody’s, in one sense. In another sense, Europe’s policy elite bears the responsibility: it pushed hard for the single currency, brushing off warnings that exactly this sort of thing might happen (although, as I said, even euroskeptics never imagined it would be this bad).

Am I calling, then, for breakup of the euro? No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.

But oh, what a mess.

17) The government of Latvia, as observed by Mark Weisbrot and Rebecca Ray:

The Latvian recession, which is now more than two years old, has seen a world-historical drop in GDP of more than 25 percent. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. This would make Latvia’s loss more than that of the U.S. Great Depression downturn of 1929-1933. This paper argues that the depth of the recession and the difficulty of recovery are attributable in large part to the decision to maintain the country’s overvalued fixed exchange rate, because it prevents the government from pursuing the policies necessary to restore economic growth.

18) Donald Luskin, as observed by ">Derek Thompson:

The Wall Street Journal op-ed section has a lot of bad habits, but one of the worst is blaming the White House for every stock market crash. I'm serious. Every. Single. One. And adjusting for typical WSJ nonsense, this is the worst paragraphs I've read in a long time:

From the beginning of this historic rally--up 73% over the 316 days since last March's market bottom--politics has been an important theme. That horrific bottom was reached after Democrats in Congress rammed through a $787 billion stimulus bill so quickly that no senator or representative could have possibly read all 1,073 pages of it. That hastily concocted porkfest should not be credited with turning stocks around. Rather, it should be blamed for the more than 18% loss that stocks suffered in the 24 days from the date of its enactment to the day of the March bottom.

In other words, the stock market crashed because Democrats succeeded in passing the stimulus. But wait. After the Congress rejected the first government bailout in September 2008, the Dow dropped 778 points. That was the single worst market value loss in American history, and it happened after a stimulus plan failed. Guess who the WSJ blamed? Democrats for failing to pass the stimulus!... Here's what I know. In the 300 days after the Recovery Act passed, the market soared a "historic" 73%. Economists from the CBO and Goldman Sachs credited the stimulus with adding up to four percentage points to our third and fourth quarter GDP growth. In the meantime the Federal Reserve spent trillions of dollars buying bad assets as the government set a floor to big bank losses and assured the financial system that it would not allow another major failure, and the administration administered a stress test of banks that clearly helped them to recapitalize. Don Luskin's conclusion? Forget last 12 months, let's focus on blaming the administration for some stock fluctuation last March! Of course, this sets up a couple doozies: (1) if the market grows only when Democrats fail, why did it rally last spring and summer when the Democrats' agenda looked more certain? And (2) how do you explain the recent stock market fall-off that occurred after the Massachusetts upset threw a wrench into the Democrats' plans? Luskin:

It's because the immediate reaction to the Brown election--in both parties--has been a dangerous lurch toward antibusiness populism.

Of course, this is utter silliness. Financial regulation was nearly declared nearly dead last week. Going by the Luskin Theory of Dow Fluctuations, that should have sent stocks soaring. Instead the market hit a three month low yesterday. Explain that one, Luskin. Truly, the WSJ has outdone itself today.

19) *Max Boot, as observed by Matthew Yglesias:

I learned earlier this week that before Max Boot became a national security expert and acquired his current wingnut welfare perch at the Council on Foreign Relations he was involved in other branches of right-wing crankier and even wrote a book called Out of Order: Arrogance, Corrption, and Incompetence on the Bench decrying—wait for it—judicial activism. Searching around in the book you can tell that Boot is a cut above your standard-issue conservative since he has the good sense to recognize that the entire “activism” controversy was spawned not in some rights of the accused case, but rather in the Supreme Court’s decision to rule that school segregation was illegal in the landmark Brown vs. Board of Education decision.

As he writes, “as with all modern judicial activism, the answer comes back, ineluctably, to Brown v. Board of Education.” Or, since “judicial activism” is a made-up nonsense word, the way I would have put it would have been that “as with all modern complaining about judicial activism, the answer comes back, ineluctably, to the fact that white supremacists didn’t like Brown v. Board of Education.” But of course Boot, being a contemporary conservative rather than a 1950s or 60s conservative, isn’t a white supremacist at all. He even goes so far as to concede that “the result is one we can all applaud.” He’s just more upset by the prospects of courts overturning the demographically expressed will of a herrenvolk democracy that denied its black citizens the right to vote in order to better be able to oppress them with the systematic application of terrorist violence than he is by the apartheid regime itself.

And so we get yet another classic expression of the weird conservative view on racism. They’re not exactly for white racism, and they get very upset if you accuse them of being for it. They’re just against doing anything about it and very concerned that efforts to do something about it are having all manner of dire consequences.

20) Tim Sumner of 9/11 Families for a Safe and Strong America, as observed by Ta-Nehisi Coates:

Tim Sumner, who runs the website 9/11 Families for a Safe & Strong America:

The race card. Who'd of thunk this leftist author would ever play one? Did the thousand-plus 12/5 crowd chant "Lynch Holder" in unison? Where's the video? Did Ta-Nehisis "Tee-hee-hee" Coates ever object when it was suggested President GW Bush be strung up or as his likenesses were hung in effigy hundreds of times during his Presidency? Is it always okay to suggest hanging a white Republican? Wasn't that what they were suggesting, Tee-hee-hee? Or was it is effigy? You being a person of color, obviously makes you the world's foremost expert on peering into a person's heart and mind-reading so you know. Discern for us their intent, please, Tee-hee-hee. I am currently hanging in effigy a printed off picture of you, Tee-hee-hee, over my computer with the words 'Lynch Coates' written on the photo. Discern that.

I did some googling around and found that Tim Sumner, evidently, lost a relative on 9/11. My condolences. I'm not quite sure what my reaction would be, or who I'd become, if I lost a loved one like that. One thing I hope would not happen--whatever my politics, whatever my feelings about torture, whatever my feelings about terrorism--is that I'd be compelled to threaten other people with lynching. When I read Jane Mayer's description of that rally, I was somewhat in disbelief. Had she been another reporter, writing for another magazine, I might have even doubted her account. Turns out she was more right than I knew. I don't know what manner of blindness makes people pillory the race card, and then turn around and threaten a lynching. I don't know what makes them seethe with this kind of hate. I don't know what America they want to keep safe, or strong. It isn't mine. Likely, that's the point.

21) Leon Wieseltier, as observed by Matthew Yglesias:

To pick one thing I thought was particularly egregious:

[Wieseltier:] Leave aside the question of the relation of blogging to writing, of posting to publishing. I wish to emphasize what the love songs omit: the economic and professional consequences of the cheap entropy of the web–its proletarianization of the writer. I wonder if people outside the besieged walls of the profession understand how little is earned with contributions to websites. The sums are scandalous.

Wieseltier works at a print magazine called The New Republic and he knows perfectly well that the researcher-reporters at The New Republic are paid less than entry level bloggers at, say, Think Progress. Indeed, they’re paid so little that The New Republic (a print magazine, I hasten to add) seems to have recently decided to relabel the salary as a “stipend” presumably because if the salary were a salary it would violate minimum wage laws...

22) *Ronald Reagan, as obserbed by Bob Herbert:

It was primarily a symbolic gesture. Way back in 1979, in the midst of an energy crisis, Jimmy Carter had solar panels installed on the roof of the White House. They were used to heat water for some White House staffers. “A generation from now,” said Mr. Carter, “this solar heater can either be a curiosity, a museum piece, an example of a road not taken, or it can be a small part of one of the greatest and most exciting adventures ever undertaken by the American people, harnessing the power of the sun to enrich our lives as we move away from our crippling dependence on foreign oil.” Ronald Reagan had the panels taken down. We missed the boat then, and lord knows we’re missing it now

23) The United States of America, as observed by Bob Herbert:

Keith Bradsher was writing from Tianjin, China, about how the Chinese were sprinting past everybody else in the world, including the United States, in the race to develop clean energy. That we are allowing this to happen is beyond stupid. China is a poor country with nothing comparable to the tremendous research, industrial and economic resources that the U.S. has been blessed with. Yet they’re blowing us away — at least for the moment — in the race to the future. Our esteemed leaders in Washington can’t figure out how to do anything more difficult than line up for a group photo. Put Americans back to work? You must be kidding. Health care? We’ve been working on it for three-quarters of a century. Infrastructure? Don’t ask. But, as Mr. Bradsher tells us, “China vaulted past competitors in Denmark, Germany, Spain and the United States last year to become the world’s largest maker of wind turbines and is poised to expand even further this year.”...

We’re in the throes of an awful and seemingly endless employment crisis, and China is the country moving full speed ahead on the development of the world’s most important new industries. I’d like one of the Washington suits to step away from the photo-op and explain the logic of that to me. The truth, of course, is that there is no reason at all for this to be happening. The United States, in many ways, is very well prepared to move ahead on clean energy. It could and should be the world’s leader. Many, if not most, of the innovations in this area were developed right here. But much of that know-how, as we are seeing in China (and have been seeing in Germany and other places), is being implemented overseas...

24) Dan Quayle, observed by Steve Benen:

Former Vice President Dan Quayle appeared on Fox News [yesterday] afternoon to chip in his two cents on the health care debate. Namely, he warned that using the reconciliation process would set a "very bad precedent" because a simple majority is just unconstitutional. "They're gonna go to budget reconciliation, which I believe would set a very bad precedent, because essentially -- if they could do it, and I don't know if they can do it, but if they could do it -- what you have done, effectively, is to take away the filibuster in the United States Senate," Quayle said. "So, therefore, you have 51 votes in the House and 51 votes in the Senate. That is not what our Founding Fathers had in mind. That is not the constitutional process."

25) The entire management of Stanley Kaplan Test Prep Inc, as observed by DougJ

A Washington Post reporter wrote a post that criticized DC school chancellor Michelle Rhee’s cozy relationship with the Washington Post editorial board. The post was taken off the site and the reporter was called on the carpet. So much for those Chinese walls between the editorial board and the news staff. Sorry to inflict my Kaplan fixation on you so long after the cocktail hour, but I find this kind of thing fascinating.

26) Law professor Brian Tamanaha, a genuine stupidest man alive candidate:

Justice Thomas recently, in an almost off-handed fashion, made several important observations: " the University of Florida law school, Thomas said the Court's decisions should be questioned, but he is bothered by rhetoric suggesting its justices have ulterior motives, the Associated Press reports." He is correct to object that we (legal types) are too quick to suspect the motives of Supreme Court justices. This skeptical tendency is corrosive of law, unwarranted and unfair (except for the occasional one-off like Bush v. Gore). The sitting justices, by all indications, are people with integrity who sincerely render decisions in accordance with their good faith reading of the law...

Except when they want to and the stakes are high. Brian doesn't say that we shouldn't call someone a thief because he only steals things as occasional one-offs, or that we shouldn't call someone a murderer because he only kills people as occasional one-offs, does he? Stupidest man alive candidate.

27) Charles Krauthhammer, as observed by TBogg:

On Health care: "Providing adequate health care for all Americans who need it is far too difficult for the government to handle. Leave it to private enterprise." On Space, The Final Frontier: "Sending astronauts to seek out and obtain Four-Breasted Wild Women from the Planet A-Go-Go is just too difficult and expensive for private enterprise. Government should totally handle this."

28) "Economist" Steven Horwitz: “For every dollar that government spends, there is one less dollar being spent somewhere else in the economy.”

Sigh... You can argue that it is a bad idea to create jobs for people right now by boosting government spending–that if they stay unemployed until private enterprise recovers and hire them that they will get better and more productive jobs. I think that argument is largely wrong, but it is a coherent argument. However, that is not Horwitz’s argument. Horwitz’s argument is that boosting government spending doesn’t create any jobs now. And that is a claim that no even half-trained economist has believed for generations–not since Irving Fisher pointed out that government bond sales to finance deficits affect interest rates and that money demand is interest elastic, not since Knut Wicksell pointed out that the total flow of spending in an economy is such as to match savings to investment at the market rate of interest and that government deficits affect and detract from savings. Horwitz needs to go fight the late Knut Wicksell and Irving Fisher and Milton Friedman, and not open his mouth until he has done so.

29) STUPIDITY HOISTED FROM THE ARCHIVES: Brad DeLong, as observed by Brad DeLong: Smackdown Watch (Special Self-Smackdown Edition): Greenspanism and Its Discontents:

For a decade now, I have been a follower of Greenspanism--the doctrine that I name after former Fed Chair Alan Greenspan that the constraint on expansionary monetary policy is inflation and inflation alone. The idea is that the first priority of the central bank is to maintain low consumer price inflation, and that the second priority is--given low current and forecast consumer price inflation--to maintain maximum employment and purchasing power--and the third priority of the central bank is that there is no other third priority.... The Greenspanist retort to the Mussaites--a retort I would have said I believed 100% a year and a half ago, 90% a year ago, and 60% last March--is that creating unemployment and idle factories because you are scared of what might happen when irrational exuberance dies away and asset prices collapse is a crime; that modern central banks are powerful; that they can successfully manage whatever crisis is provoked when it happens; and that it is easier to sweep after the elephants have gone through than to try to stop them--especially when stopping them requires the destruction of millions of jobs.

I don't see how I can maintain my belief in Greenspanism today.

Therefore I abjure, I recant, and I do penance...

30) AND ONE THING THAT IS NOT STUPID AT ALL: Ta-Nehisi Coates on Nelson Mandela and James Longstreet:

It's been twenty years since Nelson Mandela got out. This was like the defining political event of my youth. I was either a freshman or sophomore in high school, can't remember which. What I think is pretty cliche: Whatever South Africa's problems, the fact that the country (and its leaders) did not descend into mass revenge mode is an enduring tribute to compassion and empathy. It's a great object lesson on how to handle being wronged. It's one of the things I've struggled to accept as an African-American. There is no Rosewood. Often you are wronged, and by your hand, or even in your lifetime, your persecutors will never be brought to account. There are limits to our justice. It doesn't mean you shrink in the face of injustice (South Africa did no such thing) but that you recognize that it's not really in your power to even the odds.

I've been thinking about this a lot in my study of the crimes of slavery, the Civil War and Jim Crow. I don't think the scales will ever be evened.... James Longstreet, Confederate general, once hailed as General Lee's warhorse and one of the greatest generals of the war, but eventually dismissed as nigra-lover and blamed for the Confederacy's defeat at Gettysburg. I'm dying to read a bio  on James Longstreet, though I have no idea when I'll get to it. Here's the thing: Longstreet was a great general, but there's some controversy over his generalship at Gettysburg. But most distressing to the white South, after the War, Longstreet became a black Republican, supported civil rights, and endorsed Grant.

I don't want to equate Longstreet and Mandella, and more than that, I don't know if it was political courage or cynicism that caused Longstreet's change of heart. (Haven't read that bio!) But what I see in my reading about both of them is an understanding of the limits of blood-feuding. History is important to me because I love narratives. But it's important to me broadly as a  science, as way of understanding "how it happened." History can help us fix some things, but it can't make everything. It can't settle our scores. Some wounds we will have to bear.

links for 2010-02-14

Philip of Macedon, the Ultimate Authority on Gays in the Military, Speaks!


Let nobody say these men did or suffered anything shameful!

Philip II Argead, King of Macedon, father of Alexander the Great, builder of the army that Alexander used to become Lord of Asia and that then--in splintered pieces under his and his son's ex-generals and in turn their heirs the Antipatrids, Antigonids, Seleucids, Ptolemids, and others--dominated the Near East until the coming of the Romans in the second century BC, said this over the bodies of the Sacred Band of Thebes, who all lay dead in their places, killed by the attack of Philip's army at the Battle of Chaeronea.

The Sacred Band:

Sacred Band of Thebes - Wikipedia, the free encyclopedia: The Sacred Band of Thebes (ancient Greek: Ἱερὸς Λόχος τῶν Θηβῶν; Hieròs Lókhos tôn Thebôn) was a troop of picked soldiers, consisting of 150 age-structured couples, which formed the elite force of the Theban army in the 4th century BCE. It was organised by the Theban commander Gorgidas in 378 BCE and played a crucial role in the Battle of Leuctra. It was completely annihilated, however, by Alexander the Great under Philip II of Macedon in the Battle of Chaeronea in 338 BCE.

Plutarch records that the Sacred Band was made up of male couples, the rationale being that lovers could fight more fiercely and cohesively than strangers with no ardent bonds. According to Plutarch's Life of Pelopidas, the inspiration for the Band's formation came from Plato's Symposium, wherein the character Phaedrus remarks,

And if there were only some way of contriving that a state or an army should be made up of lovers and their loves, they would be the very best governors of their own city, abstaining from all dishonour, and emulating one another in honour; and when fighting at each other's side, although a mere handful, they would overcome the world. For what lover would not choose rather to be seen by all mankind than by his beloved, either when abandoning his post or throwing away his arms? He would be ready to die a thousand deaths rather than endure this. Or who would desert his beloved or fail him in the hour of danger?

The Sacred Band originally was formed of picked men in couples, each lover and beloved selected from the ranks of the existing Theban citizen-army. The pairs consisted of the older "heniochoi", or charioteers, and the younger "paraibatai", or companions, who were all housed and trained at the city's expense. During their early engagements, in an attempt to bolster general morale, they were dispersed by Gorgidas throughout the front ranks of the Theban army.

After the Theban general Pelopidas recaptured the acropolis of Thebes in 379 BCE, he assumed command of the Sacred Band, in which he fought alongside his good friend Epaminondas. It was Pelopidas who formed these couples into a distinct unit: he "never separated or scattered them, but would stand [them with himself in] the brunt of battle, using them as one body." They became, in effect, the "special forces" of Greek soldiery, and the forty years of their known existence (378–338 BCE) marked the pre-eminence of Thebes as a military and political power in late-classical Greece.

The Sacred Band under Pelopidas fought the Spartans at Tegyra in 375 BCE, vanquishing an army that was at least three times its size. It was also responsible for the victory at Leuctra in 371 BCE, called by Pausanias the most decisive battle ever fought by Greeks against Greeks. Leuctra established Theban independence from Spartan rule and laid the groundwork for the expansion of Theban power, but possibly also for Philip II's eventual victory.

Defeat came at the Battle of Chaeronea (338 BCE), the decisive contest in which Philip II of Macedon, with his son Alexander, extinguished the Theban hegemony. Alexander became the first to break through the Band's line, which had hitherto been thought invincible. The traditional hoplite infantry was no match for the novel long-speared Macedonian phalanx: the Theban army and its allies broke and fled, but the Sacred Band, although surrounded and overwhelmed, refused to surrender. It held its ground and fell where it stood. Plutarch records that Philip II, on encountering the corpses "heaped one upon another", understanding who they were, exclaimed,

Perish any man who suspects that these men either did or suffered anything unseemly.

In about 300 BCE, the town of Thebes erected a giant stone lion on a pedestal at the burial site of the Sacred Band. This was restored in the 20th Century and still stands today. Although Plutarch claims that all three hundred of the Band's warriors died that day, excavation of the burial site at the Lion Monument in 1890 turned up only 254 skeletons, arranged in seven rows.

Google Image Result for

The Life and Strange Death of Okun's Law...

The President's Council of Economic Advisers in the Economic Report of the President, 2010:

Since the recession began in December 2007, 7.2 million jobs have been lost.... This jobs deficit is much larger than the vast majority of observers anticipated at the end of 2008. this is not the result of a slow economic turnaround. On the contrary, as described above, the change in the economy’s direction has been remarkably rapid given the economy’s condition in the first quarter of 2009. Rather, the jobs deficit reflects two developments.... [F]irst... the unanticipated severity of the downturn in the real economy in 2008 and early 2009.... [T]he Blue Chip Consensus released in mid-December 2008 projected fourth quarter growth would be -4.1 percent and first quarter growth would be -2.4 percent. the actual values turned out to be -5.4 percent and -6.4 percent.... [T]he Administration’s economic forecast made in January 2009... like the private forecasts, underestimated the speed of GDP decline in the first quarter. It also underestimated average growth over the remaining three quarters of 2009. For the four quarters of 2009, the Administration forecast overall growth of 0.3 percent; the actual value, according to the latest available data, is 0.1 percent....

[S]econd... the behavior of the labor market given the behavior of GDP... consensus forecasts for the unemployment rate... as of December 2008, unemployment in the fourth quarter of 2009 was forecast to be 8.1 percent, dramatically less than the actual value of 10.0 percent....

Some of the unanticipated rise in unemployment was the result of the worse-than-expected GDP growth in 2008 and the beginning of 2009 [i.e., about 0.4 percentage points]. CEA analysis, however, also suggests that the normal relationship between GDP and unemployment has fit poorly in the current recession.... Okun’s law... suggests that a fall in GDP of 1 percent relative to its normal trend path is associated with a rise in the unemployment rate of about 0.5 percentage point after four quarters.... [A]lthough the fit of Okun’s law is usually good, the relationship has broken down somewhat during this recession. the error was concentrated in 2009.... CEA calculations suggest that as of the fourth quarter of 2009, the unemployment rate was approximately 1.7 percentage points higher than would have been expected given the behavior of real GDP since the business cycle peak in the fourth quarter of 2007...

ERP (2).pdf

Erica Groshen and Simon Potter (2003), "Has Structural Change Contributed to a Jobless Recovery?" Current Issues in Economics and Finance (August) 9:8 (New York: Federal Reserve Bank of New York)

The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change—the permanent relocation of workers from some industries to others—may help explain the stalled growth in jobs.

A surge in payroll jobs used to be a reliable sign of the end of a recession—but not any longer.... [T]he National Bureau of Economic Research (NBER)... designated November 2001 as the end of the nation’s latest recession.... By the end of June 2003, GDP had risen 4.5 percent from its low in the third quarter of 2001 and significantly exceeded its pre-recession peak.... What troubled the committee was that payroll employment, which would normally rise in tandem with output, had shown no sign of recovery. Indeed, the payroll numbers fell almost 0.4 percent in 2002 and another 0.3 percent through July 2003....

We advance the hypothesis that structural changes—permanent shifts in the distribution of workers throughout the economy—have contributed significantly to the sluggishness in the job market. We find evidence of structural change in two features of the 2001 recession: the predominance of permanent job losses over temporary layoffs and the relocation of jobs from one industry to another. The data suggest that most of the jobs added during the recovery have been new positions in different firms and industries, not rehires. In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment.... Although the weak performance of the labor market during the current recovery has been surprising, it is not without precedent. The period following the 1990-91 recession was dubbed the “jobless recovery” because the economy added so few jobs during the first year and a half after the expansion began. The current recovery parallels this earlier recovery in important respects. In 1991-92, output growth rose fairly steadily, but job growth remained near zero for more than a year. In 2002-03, real (inflation-adjusted) GDP has grown each quarter at annualized rates between 1.3 and 5.0 percent, while payroll growth averaged -0.4 percent at an annualized rate through July.2

The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries.... The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery....

Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job. A preponderance of structural—as opposed to cyclical—adjustments during the most recent recession would help to explain why employment has languished during the recovery.... [W]e look for evidence that structural change played a dominant role in the 2001 recession.... Did temporary layoffs decline relative to permanent job losses in the recession? Were many of these lost jobs relocated to different industries?...


The period after the 2001 recession will be remembered as the second jobless recovery. Our inquiry into the reasons for the current labor market slump suggests that structural change has played an important role. Industries that lost jobs during the recession have continued to shrink during the recovery, and permanent job losses have eclipsed temporary layoffs.... Although our analysis has focused on the recent past rather than the future, our findings suggest that a return to job growth may require a mix of two ingredients: improved financing options for riskier ventures and resolution of current uncertainties, including time for the dust to settle from all the recent structural changes...

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York

I can't say "I told you so'--Erica and Simon told us so: they did the heavy lifting. But I can claim to say that I noticed that they were telling us so:

DeLong: Econ 101b: Fall 2003: Lecture Topic: The Erosion of Okun's Law (September 3, 2003): We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns.

Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left of the branch is from the early-1990s recession and recovery.)

Econ 101b: Fall 2003: The Erosion of Okun's Law: Archive Entry From Brad DeLong's Webjournal

The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back.

This means that we no longer have any confidence that we understand the cyclical pattern of productivity growth--which means that we have little ability to translate the (high) productivity growth numbers we see into information about what the underlying long-run trend growth rate of the economy is.

Why is this? Why have firms changed their behavior? Let me turn the mike over to Erica Groshen and Simon Potter of the New York Federal Reserve Bank...

2004 Economic Report of the President: Indeed, the performance of employment over the past couple of years has been appreciably weaker than in past business cycles (Chart 1-10). Employment was slow to pick up in the average previous recovery, perhaps because employers delayed hiring until they became confident that the increases in demand were sustainable. However, such sluggishness typically has been short-lived (a quarter or two) and followed by vigorous expansion. In contrast, in the current business cycle, employment did not begin its recovery until nearly two years after the upturn in real GDP. The performance of employment in this cycle has lagged even that of the so-called “jobless recovery” from the 1990-1991 recession...

2003 Economic Report of the President: In other ways, however, the recent behavior of the labor market has been different from that in past business cycles. One difference is the high fraction of job losers who reported a permanent rather than temporary separation in 2001. In the government’s monthly Current Population Survey, each respon- dent who reports a job loss is asked whether he or she expects to return to work with the same employer. (Those who expect to return are typically on an explicitly temporary layoff, although this need not be the case.) Research from the Bureau of Labor Statistics found that, in the initial quarters of the four recessions before 1990, slightly more than half of job losers were perma- nently separated from their previous employers, with the rest on temporary layoff. In the three quarters after the business cycle peak of 1990, however, the share of permanent job losers rose to almost three quarters, and the comparable proportion for the March 2001 peak is nearly 90 percent. The rising proportion of job losers facing a permanent separation in recessions may reflect structural changes in the labor market during the past two decades, including the rise in temporary help employment...

Fifty Little Herbert Hoovers and a Dysfunctional Senate Watch

As I have said before, the reason senators don't like to support state budgets in a recession is because state governors then run against senators and take their jobs:

Tami Luhby: Senate moves on jobs: NEW YORK ( -- States are looking to the federal government for more help balancing their budgets, but the Senate is not heeding their call. Federal aid to the states was among the top priorities in an early Senate job creation bill, as well as in a $154 billion measure passed by the House in December. But it has fallen off the list as Senate Democrats look to craft legislation that will attract bipartisan support. Senate Majority Leader Harry Reid, D-Nev., on Thursday unveiled a jobs bill that does not contain state aid. A Senate Democratic aide said Reid hopes to back a state aid measure in the future. Republican support, however, remains questionable.

Experts and state officials say they need to know now whether they'll get more funds. Governors are currently crafting their budgets and, for many, it will be their third year of contending with massive deficits due to declining tax revenues. States are looking at a total budget gap of $180 billion for fiscal 2011, which for most of them begins July 1. These cuts could lead to a loss of 900,000 jobs, according to Mark Zandi, chief economist of Moody's

We need a much better class of senators than we have.

As a work-around, I suggest that the Federal Reserve support state-level deficit spending in this recession by offering to purchase state government bonds at high values--at Treasury borrowing rates, in fact--if the bonds are accompanied by sound long-term amortization plans.

It would help.

On "Declining" Global Temperatures: "This Little-Discussed Fact... Over the Past Several Years... Average Global Temperature... Has in Fact Decreased..."

Of all the strange things in Steve Levitt and Steve Dubner's Superfreakonomics, perhaps the strangest of all is page 186:

with its remarkable claim that that "there is this little-discussed fact about global warming: while the drumbeat of doom has grown steadily louder over the past several years, the average global temperature during that time has in fact decreased."

Back when Superfreakonomics first came out, this cliam puzzled everybody: when an economist says that something has decreased, he or she means that there is some way of estimating a trend over some period of time that produces a statistically-significant declining trend. Nobody could figure out how to do that with global temperature data..

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

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

Now it turns out that what Levitt and Dubner meant was something different: that 2005 was the hottest year on record, and that that record high temperature had not yet been broken--so global temperatures had "decreased" from their high back in 2005.

There have been thirteen new global annual temperature records set in the past 130 years--about one per decade. Since a new global temperature record is set once every ten years, Levitt and Dubner's methodology would thus lead them to say that over the past century and a third global temperatures have been decreasing 90% of the time--yet over that interval temperatures in total have risen by almost a full 1C. There have been eight new global annual temperature records set in the past forty years. That's one every five years. So by their methodology over the past sixty years global temperatures have been decreasing 80% of the time--yet over that interval temperatures in total have risen by a full 0.5C.

What odds would you need in order to take a bet that we will not see a hotter year than 2005 before 2020?

Ten Economics Pieces Worth Reading: February 13, 2010

1) Olivier Blanchard: The State of Macro Is Not Good:

[I]t’s time for a reassessment of what we know.... It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. We did not resist temptation. The crisis naturally forces us to question our earlier conclusions.... [E]conomists and policymakers alike were lulled into a false sense of security by the apparent success of economic policy ahead of the crisis—a period known as the “Great Moderation.”... The crisis has taught us a lot and we want to proactively draw lessons from the “Great Recession.”...

Keeping output close to potential and inflation low and stable should be the two targets of policy. And controlling inflation remains the primary responsibility of the central bank. But the crisis forces us to think about how these targets can be achieved... [and] the crisis has made clear... that policymakers have to watch many other variables, including the composition of output, the behavior of asset prices, and the leverage of the different participants in the economy.... Interest rates are a poor tool to deal with excess leverage, excessive risk taking, or apparent deviations of asset prices from fundamentals. We need a combination of monetary and regulatory tools... traditional regulatory and prudential frameworks need to acquire a macroeconomic dimension....

The crisis has shown that interest rates can actually hit the zero level, and when this happens it is a severe constraint on monetary policy that ties your hands during times of trouble. As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now if whether this could justify setting a higher inflation target in the future.... [L]arge shocks to the system can and do happen.... Maybe policymakers should therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks. To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?...

The crisis has returned fiscal policy to center stage as a macroeconomic tool, for two main reasons: first, to the extent that monetary policy, including credit and quantitative easing, had largely reached its limits, policymakers had little choice but to rely on fiscal policy. Second, from its early stages, the recession was expected to be long lasting, so that it was clear that fiscal stimulus would have ample time to yield a beneficial impact despite implementation lags. It has also shown the importance of having “fiscal space,” again the room to maneuver during times of trouble. Some advanced economies that entered the crisis with high levels of debt and large unfunded liabilities have had limited ability to use fiscal policy, and are now facing difficult adjustments.... [W]e should revisit target debt to GDP ratios. Maybe we should aim for much lower ratios than before the crisis. This is a long way off, given where we start, but this is another issue we must revisit...

2) Henry Aaron: Forging Ahead — Embracing the “Reconciliation” Option for Reform:

The idea of using reconciliation has raised concern among some supporters of health care reform. They fear that reform opponents would consider the use of recon- ciliation high-handed. But in fact Congress created reconciliation procedures to deal with precisely this sort of situation — its fail- ure to implement provisions of the previous budget resolution. The 2009 budget resolution instructed both houses of Congress to enact health care reform. The House and the Senate have passed sim- ilar but not identical bills. Since both houses have acted but some work remains to be done to align the two bills, using reconciliation to implement the instructions in the budget resolution follows es- tablished congressional procedure.

3) James Kwak: Some Survey Results:

Here are the results of the latest New York Times/CBS News poll....

  1. When asked what the most important problem facing the country is (question 4), here are the winners: Jobs: 27% Economy: 25% Other: 16% Health Care: 13% Budget Deficit: 4% DK/NA: 4%. This shows the divide between the country, which cares about jobs, and the Washington punditocracy, which cares (or professes to care) about the deficit. Now, I’m not saying that something’s actual importance is a function of its perceived importance. Governing requires doing what’s best for the country, whether or not people realize it. But neither is it true to say that Americans are overwhelmingly concerned about the deficit. They’re not. And looking at the numbers, you would think most would favor increased spending or lower taxes to create jobs. Later on, though, when given that explicit question, we find a much smaller margin (47-45) in favor of jobs. This, of course, is largely an artifact of question design, so you can argue about which design is more relevant depending on what question you’re trying to answer.

  2. On questions 6-10, Obama gets positive marks for foreign policy and terrorism, but negative marks for the economy, health care, and the deficit. This is what you would expect for a Republican president, not a Democratic one (with the possible exception of the deficit question, since Democrats are still seen as big spenders, the past two administrations notwithstanding). Probably the most likely explanation is that the last three are simply things that people are unhappy about in general; also, the economy and health care are issues where Obama faces disapproval both from the right and the left, for opposite reasons. Basically, we have a centrist president.

  3. Only 8% of Americans think that “most members of Congress” deserve re-election. This, it seems to me, is one of those survey results that is inherently self-defeating. All of the Republican base should be happy with Republican Congressmen for successfully fighting off the Obama agenda. Many though not all Democrats no doubt blame the last year on the Republicans and should be reasonably happy with their Congressmen. And we know the vast majority of members of the House will be returned to office. So all this means is that people have an unfocused antipathy toward Congress as an institution.

  4. When you ask if “homosexuals” should be allowed to serve in the military (page 24), people are in favor 59-29. When you ask about “gay men and lesbians,” you get 70-19. (If you follow up by asking about serving “openly,” the margin falls to 44-41 and 58-28, respectively.) Words matter.

4) Jon Chait: The Jobless Jobs Bill:

The political upside for Democrats to crafting a bipartisan jobs bill is obvious: they get a "win" on an issue the public cares about, and they show they can work with the opposition party, which people want them to do. There is, however, a downside. Securing Republican support means whittling the bill down to the verge of meaninglessness. And then you get blamed for the meaninglessness. Here's the A.P.:

It's a bipartisan jobs bill that would hand President Barack Obama a badly needed political victory and placate Republicans with tax cuts at the same time. But it has a problem: It won't create many jobs. Even the Obama administration acknowledges the legislation's centerpiece - a tax cut for businesses that hire unemployed workers - would work only on the margins. As for the bill's effectiveness, tax experts and business leaders said companies are unlikely to hire workers just to receive a tax break. Before businesses start hiring, they need increased demand for their products, more work for their employees and more revenue to pay those workers.

I still think it's a smart move for Democrats. But it does show just how steep the price of securing bipartisan support actually is -- you're reduced to essentially symbolic legislation.

5) Daniel Gross: What Henry Paulson's new memoir misses about his own responsibility for the global meltdown:

[W]hile Bush ("admirably stalwart") comes in for similar praise, Paulson has little positive to say about other Republicans. Sarah Palin annoyed him from the get-go. When he spoke to House Republicans about efforts to help Fannie and Freddie, he was chagrined that many responded with speeches about ACORN, the low-income housing activist group. House Minority Leader John Boehner was ineffectual. John McCain comes off worst of all: impulsive, ill-informed, and counterproductive. "This was crazy," Paulson writes of McCain's decision to suspend his campaign in late September 2008 and demand a White House meeting on the bailout. At the climactic meeting in the Cabinet room, Obama spoke for the Democrats, delivering a "thoughtful, well-prepared presentation." But McCain? "When it came right down to it, he had little to say in the forum he himself had called."... As the narrative lurches from crisis to crisis—TARP, AIG, GM—the reader, and Bush, are continually presented with bailout moves as unavoidable faits accomplis. Bush was "visibly shocked" when Paulson told him in November 2008 that Citigroup was in big trouble. "I thought the programs we put in place had stabilized the banks," the president said.

The main problem with this fast-paced book was the main problem with Paulson's tenure—a surprising inability to see the big picture. And as tough as he is on congressional Republicans, Paulson lets some people off much too easy. If many smart, highly regarded people had simply carried out their responsibilities with a bit more diligence—Bernanke, SEC Chairman Christopher Cox, Wall Street bankers—much of the catastrophe could have been avoided. "As first responders to an unprecedented crisis that threatened the destruction of the modern financial system, we had little choice," Paulson writes. But the first responders assembled the bonfire and helped light it. Paulson was among the Wall Street chief executives who, in 2004, lobbied the SEC to allow them to use much larger amounts of debt—a move that set the stage for the debacles of Bear Stearns and Lehman. Finally, given that Paulson knew this culture from the inside, it's disappointing that he doesn't reflect more on Wall Street's pathological need for compensation, on its pathetic leadership and corporate governance. But this is to be expected. Investment bankers look forward, not backward. So, largely, does this engaging, well-written narrative. It is what it is.

6) Ryan Avent: American joblessness: The sources of growth:

For most of the last century, educational attainment grew rapidly. Schooling noticeably leveled off in the late 1960s, however, and it actually hit a peakin the late 1990s before pulling back. Now, one obvious thing to note is that 14 years of school generally means an entire primary and secondary education and perhaps one year of post-secondary education. That's quite a bit, and to boost the mean above that level would not necessarily be easy. At the same time, given dynamics in the current economy, a world in which the average student does not get multiple years of post-secondary education—in occupational or technical training or in professional or typical undergraduate studies—is one in which a large share of the population is languishing in fields that pay poorly or that are subject to competition from lower wage labour abroad or automation. And so it's distressing enough that educational attainment has ceased growing. If the declining trend were to continue—as with the share of students dropping out of high school rising, this is not at all impossible—then economic growth is likely to slow and to become more uneven.

7) GRAPH OF THE DAY:Via Jeff Weintraub:

Jeff Weintraub: 63% of Americans want to see Congress pass


It's a bit weird to see so much blame accruing to Rahm Emanuel for the administration's woes. Emanuel wasn't part of the campaign team. He was brought in to help govern. In that capacity, his primary job was shepherding the administration's agenda through the legislative process. Ugly as that process was, Emanuel -- and more to the point, Harry Reid and Nancy Pelosi -- did a fairly masterful job at it. In the Senate, Democrats got all 60 of their members to sign onto the same large, controversial bill. That's a legislative achievement unheralded in modern times. Bill Clinton didn't manage it on any bills of this size and scope, and neither did George W. Bush.

Then the game changed, and unexpectedly. Ted Kennedy's death wasn't unpredictable, but the loss of his seat was certainly a surprise. It wasn't, however, a surprise that's easy to track back to Emanuel.

If the administration has failed at anything, it's been holding public support for its bills. But that's not really Emanuel's job. That's where David Axelrod and the rest of the political team come into play. But it's not obvious that much can be done on this front. The best thing that could've happened to health-care reform was that Congress stuck to the timetable that Emanuel and the White House originally set. Once they decided not to do that -- and no Jedi mind tricks from the White House chief of staff were going to dissuade them -- the ugly and endless process was certain to erode support for the bill.


This will just break Neil's heart, as he does see me as a champion of fighting regionalism, but this CNN piece (from over at Atrios) is the sort of thing that, Jesus H. Christ on a crutch, gives me a headache. They send a reporter to literally Middle America, and surprise, discover that they don't much care for them Hollywood movies. Suuuurrr-prise! But one chunk of this report, to me, is symptomatic of a larger issue that grinds my molars. ANDERSON: We stopped by the Lebanon [Kansas -- ed.] hotspot, Ladow's Market, where one local told us Hollywood just can't relate to a farming way of life. UNIDENTIFIED MALE: They've never been back in here to know what it's like to actually have to make a living doing this.

You know what, Unidentified Male? You're right. I don't know what it's like to have to make a living farming. NOBODY DOES. For chrissake, only 17% of Americans live in rural settings anymore. Only 2 million of those people work on farms or ranches (USDA figures). Hell, only ten percent of the average farm family's income even comes from farming anymore (did you know that? I didn't. Funky). The median age of the United States is 37. I am more than willing to point out that the agriculture industry is a crucial, nay vital part of the American economic infrastructure generating a sizable amount of the GDP. But why in the name of John Deere's Blood-Soaked Wood-Chipper Gears, every time I hear a news report on what "real Americans" think do I wind up watching some farmer in their fifties and sixties bitch as they survey the blasted plains landscape behind them, and not only that, somehow their cultural observations are assumed to have more relevance than anyone else's?...

There are four times as many Americans living in urban than rural areas. There are four times as many people sucking back coffee in New York city alone than make a living farming. According to the Burea of Labor, there are just as many people employed in Architecture and Engineering as farming, hell, 3 million people working in Computer and Mathematical jobs. But when one of these "What does America think about culture" pieces comes on, do I ever see a mid-30's software engineer onscreen bitching about having to download BitTorrents of "The IT Crowd"? F--- and no.

Four million people in the US play World of Warcraft. And yet, do I ever hear: ANDERSON: We stopped by the gates of Ogrimmar in Durotar, on the east coast of Kalimdor, where one local told us Hollywood just can't relate to the level-grinding life. UNIDENTIFIED ORC: They've never been back here, questing Razormane or Drygulch Ravine, y'know ... or farming for Peacebloom and Silverleaf. They're out of touch. No. No I do not....

I grew up in Massachusetts, and we didn't go around nodding and saying "This is the very birthplace of America both geographically and ideologically, those idiots in Kansas have no idea what being a real American is, like we Commonwealth bastards." One would be considered insane. Whatever connection people in rural America have to the "idea" of America is the exact same as mine -- the Declaration of Independence and the Constitution. They are public documents, accessible by all (well, for now), and last time I checked the versions printed in textbooks in Kansas didn't have special magical ink and secret clauses not included in the versions handed out in the Northeast urban great city of Philadelphia where, if we remember, the damn things were actually written...

10) HOISTED FROM THE ARCHIVES: J. Bradford DeLong and Lawrence H. Summers (1992), "Macroeconomic Policy and Long Term Growth":

In light of the zero inflation targets that have been set in a number of countries, periodic proposals for a zero inflation target in the United States, the very low rates of inflation now prevailing in much of the industrialized world, and the commitment of many traditionally inflationary economies to a fixed exchange rates, it seems worthwhile to ask: can austerity be overdone? At the grossest level, the answer to the question is surely "yes." Monetary policies in the early years of the Depression in the United States by allowing a deflation that penalized debtors at the expense of creditors surely contributed to the depth of the Depression.... OECD experience does not permit a judgment of the merits of very low inflation, since the two countries with the lowest average inflation rates after 1955, Switzerland and Germany, have inflation rates that have averaged three percent per year, a rate at which prices double every generation.... [T]he macroeconomic strain associated with strong disinflation in New Zealand and Canada in recent years, and the extraordinary strains imposed on European countries as the ERM forced rapid disinflation up to its recent suspension, both point up the potential transition costs of moving to regimes of strict price stability.

These arguments gain further weight when one considers the recent context of monetary policy in the United States. A large easing of monetary policy, as measured by interest rates, moderated but did not fully counteract the forces generating the recession that began in 1990. The relaxation of monetary policy seen over the past three years in the United States would have been arithmetically impossible had inflation and nominal interest rates both been three percentage points lower in 1989. Thus a more vigorous policy of reducing inflation to zero in the mid 1980s might have led to a recent recession much more severe than we have in fact seen...

links for 2010-02-13

Production: Fourth Quarter Was Even Better than We Thought at the Time; First Quarter Looks Just OK...

Macroeconomic Advisers says:

In response to incoming data, especially on inventories... fourth-quarter GDP growth is poised to be revised up to 6.0%... incoming data are consistent with our tracking forecast for 3.1% growth of GDP in the first quarter.... Last week we did shave two-tenths from our forecast for first-quarter GDP growth--which now stands at 3.1%--largely because aircraft deliveries (from Boeing) were below expectations, but the general tenor of incoming data is consistent with our forecast for a continued recovery and solid GDP growth in early 2010...

The First Rule of Fat Club Is You Don't Talk About Fat Club...

Tummy Tuck - Hedgehogs - Jezebel

Katy Kelleher of Jezebel sends us to the Torygraph:

Tummy Tuck: Jezebel: 10 hedgehogs from Scotland have been sent to a "fat club" to help them drop the winter weight. Although extra-cute, the chubby hogs have a harder time rolling into a ball, which puts them at risk in the wild. [Telegraph]

And two comments win the thread:

Phyllis Nefler: 02/09/10: Something about hedgehogs look so fairy tale like to me. I feel like the should be able to talk to me about my evil stepmother's plans...

MegiEr: 02/09/10: You know a hedgehog that size in the fifties would have been considered hot...

DeLong Smackdown Watch: Health of the American Political System

Hoisted from Comments: MaryCh writes:

[H]ow does Dr. DeLong's second quarrel with Johnson & Broder's book - that the failure of health-care reform in 1994 was a policy debate only, and not a "metaphor" for the failure of the American political "System" - hold up?

In my end of the fevered swamp the answer would be something like 'not well,' or more verbosely, that it was the birth of a new model of political obstructionism in modern politics, or at least a big enough extension of politics as usual to qualify it as a change in type rather than merely a growth in scale.

The Fiscal Times Does Not Look Sustainable to Me...

The Fiscal Times - The Source For All Things Fiscal launches, with Stan Collender saying that:

Say Hello To The Fiscal Times: At least as far as I can tell, TFT is going to try to be a legitimate and unbiased fiscal news reporting organization.  The reporters on the team all have outstanding reputations for objective writing.  More important, those that I know would sooner sell apples on the street corner than have their integrity questioned by writing for a biased source...

Matthew Yglesias parries:

Matthew Yglesias: Shocking True Tales of Media Bias: I worked for the American Prospect... no one has ever told me what to write or what position to take. But nobody thinks The American Prospect is an “unbiased” news source. It’s very biased! The thing is that if you staff your publication with reasonably intelligent people you don’t need to give them explicit orders to conform.... When I was at TAP, most of my opinions were either in line with my editors or else were on subjects where the bosses didn’t have strong feelings. But there were also issues where my editors did have very strong feelings and I didn’t agree with their take, and so to make my life easier I tended not to focus on those issues. That’s just how life works.... The real issue with a news source isn’t whether it’s “unbiased” but whether or not it in some way enhances your understanding of the issues. The Peterson Foundation seems to have decided it wants to hire smart, capable people so I assume they’ll do smart, capable work...

And here I want to disagree with Matthew Yglesias: smart, capable people do not necessarily do smart, capable work--put them in a situation in which their incentives are wrong and dumb, incompetent people will muddle through while smart, capable people will wreak vast destruction.

The problem I feared with the Fiscal Times grew out of the fact that the first piece from it that surfaced, by Eric Pianin and Elain Povich on the Conrad-Gregg debt commission proposal, was very, very bad indeed. It started by saying that the national debt is like the outstanding carried balance your credit card--which is simply not true, unless your credit card lets you borrow at 2% per year (mine charges 18%). It continued by saying that Conrad and Gregg proposed a "special commission to make the tough decisions... broad power to force painful spending cuts and tax increases through Congress"--which was also simply false: the commission had no power to force anything through congress, in fact the commission's recommendations would have faced greater procedural hurdles in congress than standard proposals.

If +1 is an article that does a perfect job of informing its readers, 0 is an article that leaves its readers no better but no worse off than before, and -1 is an article that actively misleads its readers--well, then Povich and Pianin are a -2. It smells: don't say that the commission will have powers to "force painful spending cuts and tax increases" when it doesn't because you are dumb and incompetent. You are much more likely to say false things like that if you are smart and capable--but have decided that you are in the business of boosting Judd Gregg's reputation as a deficit hawk rather than in the business of informing your readers.

So now the Fiscal Times has launched for real. How is it doing? We start with a score of -2 out of a possible maximum of 1, for an initial -200%. I took a random trawl through their website:

Neil Irwin: Fed Reserve Hopes Exit Strategy Will Up Market Confidence:

When you've flooded the economy with trillions of dollars, mopping up is no easy task. That's the reality the Federal Reserve is confronting as it starts to explain how it will undo the aggressive growth-supporting steps that were put in place when the economy was in its deep dive -- and begins to be clearer about when that may happen. But it is a fraught exercise. Federal Reserve leaders and private economists expect the jobless rate to remain high for years, despite a dip in the unemployment rate to 9.7 percent in January, and the Fed could make the situation worse if it moves too abruptly. In the meantime, financial markets have shown new signs of fragility, swooning in the past three weeks, including a 1 percent drop in the stock market Monday that drove the Dow Jones industrial average to close under 10,000 for the first time in three months...

This "swooning"--a 7% decline in the S&P. By my count, there have been 12 larger short-term declines in the past three years, so "swooning" is something the market does once every three months. Interest rates... the long end of the yield curve is about 12 basis points higher than it was three weeks ago and 8 basis points lower than it was five weeks ago.

Call this a zero. It conveys some information about how the Federal Reserve is thinking about unwinding extraordinary monetary policy, but readers are not well-served by being told to overinterpret market movements.

Calvin Woodward and Martin Crutsinger: Fact Check: Obama Budget Leap of Faith Growth:

President Barack Obama's proposed budget relies on a commission without teeth to help his administration wrestle the deficit out of the danger zone. It forecasts stronger economic growth than most economists expect and calls on Congress to cut programs that lawmakers cherish. All budgets from the White House are leaps of faith of some sort. This one is no exception. The economic forecasts used in setting spending priorities are in line with independent expectations for now. After that, though, the administration's projections appear ever more fanciful...

Of the three things that Woodward and Crutsinger call "fanciful," one is that the budget proposes things that congress is unlikely to adopt. That strikes me as simply wrong: it is the business of the budget to propose things and say how much they cost. Call this a +0.6.

Aiofe White: Europe Searches for Way Out of Debt Crisis:

The euro is under siege — and the next few days will be crucial. Financial markets are betting heavily that Greece's crushing debt could drag down the entire eurozone...

This gets a -1. The Greek economy is simply not large enough to "drag down the entire eurozone."

Jeannine Aversa: Bernanke Outlines Plan for Pulling in Stimulus Aid:

Prepare for the end of record-low interest rates, Federal Reserve Chairman Ben Bernanke says. Just not yet. Higher rates on credit cards, home equity loans and some mortgages will follow the Fed's eventual pullback of the trillions it injected into the economy. Savers will benefit, though. As rates gradually climb, certificates of deposit and savings accounts will finally pay more. Bernanke indicated Wednesday that the Fed is still months away from raising rates or draining most of the stimulus money it injected to rescue the financial system. For now, the global recovery remains too fragile to pull back much on government stimulus. Europe is facing a debt crisis. And President Barack Obama is making a push to cut taxes to stimulate job creation.

Bernanke discussed the Fed's plans in prepared remarks to a House committee hearing that was postponed because of the East Coast snowstorm. Bernanke chose to release the testimony because of interest from investors and others...

A +1. We are now at -1.4 for five articles--for a score of -28%.

Stan Collender: A Commission Can't Work Unless Republicans Come Aboard:

Henry Aaron does a very good job explaining why commissions in general and budget commissions in particular aren't the political panacea some make them out to be. But he stops short of providing the real reason a budget commission created by presidential order will have problems. No, it's not what Republican Senator Judd Gregg says; his position that it won't be worth the effort because Congress will not have committed in advance to take up whatever the commission recommends at best is disingenuous subterfuge. The real reason it's not likely to succeed is that congressional Republicans don't want to participate. At least that's the word I'm hearing with increasing frequency and stridency from the GOP leadership. Even though the White House budget commission will allow the Republicans to name half of the House and Senate members, the leadership is talking about refusing to do so. That refusal either would stop the commission before it gets started, or force the Democratic members to do precisely what a commission is intended to avoid: a deficit reduction plan associated with just one party and, therefore, mired in the same partisan political muck that is typical of federal budget politics these days...

Another +1.

Katherine Reynolds Lewis: Treasury Reaps Big Returns on TARP Investments:

The Treasury has recouped nearly a third of the $545 billion it invested to help rescue U.S. financial institutions and in some cases has reaped substantial returns on those investments. The strong showing is preliminary, as much of the government’s investment in banks is still outstanding. But it contrasts sharply with widespread criticism that the government bailout of Wall Street was excessive and costly to taxpayers. The Treasury, for example, made a nearly 24 percent return on its investment in American Express Co., 20 percent on its rescue of Goldman Sachs Group and nearly 17 percent from Morgan Stanley Group....

"The perception that most of the public had, that this was money poured down a rat hole, was always wrong," said Douglas J. Elliott, a fellow at the Brookings Institution. "We've gotten more back than we expected because the financial sector and even the economy turned around a lot faster than we thought."... Critics decried the government bailout as an excessive rescue of Wall Street fat cats at the expense of taxpayers and other sectors of the economy, and the Treasury's handling of the program remains a major point of contention on Capitol Hill.

To be sure, the government's $70 billion investment in American International Group (AIG) and the $85 billion spent to bail out General Motors Corp. and Chrysler Group LLC are unlikely ever to turn a profit, leaving the overall TARP program in the hole...

The flat contradiction of the headline by the "to be sure.." sentence gets this a -1.

Merrill Gooozner: Rise of the Machines:

Just before Christmas, 41-year-old Michael Kelley decided he wanted a whole-body imaging exam, the heavily advertised service touted on television by celebrities like Oprah Winfrey. He didn’t smoke, wasn’t overweight, and didn’t have elevated cholesterol. "I’m pretty normal for a guy my age," he said. No matter. The electrical engineer scheduled a full-body X-ray computed tomography or CT scan at Virtual Physical.... About an hour after checking in, Kelley left the clinic clutching a manila envelope with high-resolution 3-dimensional images of most of his major body systems, including the insides of the major coronary arteries pumping blood to and from his heart. "They said I was fine, no plaque," he said. Kelley paid $1,400 for a CT scan to confirm what he and his doctor already knew — he was perfectly healthy.

High-tech medical imaging advances, along with robotics, new devices, body parts, and pharmaceuticals have changed almost every aspect of health care and improved the quality of life for young and old alike.

The U.S. leads the world in creating state-of-the-art diagnostic and therapeutic treatments with the potential to work miracles in millions of patients. But the miracles come at a stiff price. Unlike other industries where technology has helped lower costs by eliminating waste and increasing productivity, technology has become a major factor in increasing health care costs. In a January 2008 report, the Congressional Budget Office concluded that "roughly half of the increase in health care spending during the past several decades was associated with the expanded capabilities of medicine brought about by technological advances." One reason for this dichotomy is the overuse and misuse of technology as preventive medicine...

A +1 for the substance, and another +1 for the headline: +2.

Jill Drew: Profile: CBO Director Doug Elmendorf:

When the elevator opens onto the fourth floor of the Ford House Office Building, a half dozen blocks from the U.S. Capitol, a visitor is greeted by a wooden bookshelf displaying printed reports and little else in the bare, broad passageway. Unlike the ornate surroundings of the Speaker of the House or the Senate Majority Leader, the halls of the Congressional Budget Office exude none of its power as an inner sanctum of policy pronouncements. And CBO Director Douglas W. Elmendorf apparently likes it that way...

With that lead, a zero.

Tom Herman: Resurrection of the Estate Tax:

On New Year's Day, the federal estate tax, dubbed the "death tax" by critics, died unexpectedly. But don't even think about writing its obituary. Many lawyers and accountants predict that Congress probably will restore the tax retroactively to Jan. 1 this year. However, nobody knows when lawmakers will act or precisely what the resurrected tax will look like. Nothing may be certain except death and taxes. But this year, there is no certainty about taxes after death. All the questions swirling around this grisly topic have created thorny issues for many wealthy people and their tax advisers. "It's a real mess," says Herbert Nass, a New York City trusts and estates lawyer and author of two books on wills and estate tax-related topics. He is handling a case involving a very wealthy person who died earlier this year. Will that person's estate have to pay a federal estate tax this year or not? Also, he wonders, "Will we need to liquidate assets in the estate in order to pay the federal estate taxes, if any?" And how can wealthy clients plan their affairs in view of all the uncertainty?

Last year, tax advisers and political analysts assumed that Congress would surely take action before 2010 and not leave the issue in limbo. "It certainly seemed to me that the dynamics of a deal were there" before this year, says Douglas Holtz-Eakin, a former director of the Congressional Budget Office and the director of economic policy for Sen. John McCain when the Arizona senator ran for president in 2008. The House did approve legislation restoring the tax, but the Senate didn't act. Now, with important midyear elections coming up later this year, the estate tax outlook is growing increasingly cloudy, and tax specialists see a wide range of possible outcomes...

A huge amount of throat-clearing. Twenty paragraphs. Should have been five--with the first paragraph being, in total, "We don't know what's going to happen to the estate tax, but it is likely to return in some form. Here are four scenarios, ranked by my guesses of their probability."

A +0.4.

That gives us a final score of 1 for 10 articles, or 10%. A very unimpressive debut.

Looking at the masthead, I see a bunch of people who don't belong in any forum that aims to inform the public--Michael Tanner, Joseph Antos come to mind immediately. After his December 31, 2009 Washington Post article it is hard to have any confidence in Eri Pianin. But there are some very good people associated with the operation--Edmund Andrews, John Berry, and Merrill Goozner are always worth reading.

Ten Things Worth Reading, Mostly Economics: February 12, 2010

1) Martin Wolf: Europe needs German consumers:

Greece fills the role of such a sinner... the country has fabricated its figures. Yet Ireland and Spain have also experienced dramatic fiscal deteriorations.... These countries were not long-term fiscal sinners. The conventional wisdom also declares that once fiscal adjustments have been made and flexibility introduced, the affected economies can return to growth.... This conventional wisdom is, alas, nonsense.... So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output....

What would happen if governments [like Spain or Ireland] also slashed their spending? In an economy without monetary or exchange-rate offsets to austerity, any reduction in spending is likely to lead to at least an equivalent short-run reduction in output.... [W[hat is one to make of comparisons with Germany’s “competitive disinflation” of the early noughties? The answer is that they are irrelevant. First, Germany’s fiscal deficit peaked at only 4 per cent of GDP in 2003. Second, Germany was able to offset extreme domestic demand weakness with robust external demand... as much as 70 per cent of the increase in Germany’s GDP between 1999 and 2007 was accounted for by the increase in its net exports.

Germany needs to return the favour. More precisely, the only way for eurozone countries to slash huge fiscal deficits, without their economies collapsing, is to engineer another private-sector credit bubble or a huge expansion in net exports. The former is undesirable.... So what is to be done? If the aim is to avoid disaster, the answer is temporary fiscal support for the struggling countries, robust aggregate demand in the eurozone as a whole and a substantial rebalancing of that demand, led by Germany....

Alternatively, the vulnerable countries could be left to dangle in the wind. But a currency union whose core country not only exports deflation, but also stands aside as members collapse is in deep trouble. Germany alone can decide whether it wants this union to prosper, or not.

2) Henry Banta: Republicans are locked in a passionate embrace with a corpse and won't let go:

The failures of Long Term Capital Management, Enron, WorldCom, the stock market crash of 1987, and the collapse of the dot-com bubble had left [the Price-is-Right version of the Efficient Markets Hypothesis] in serious trouble. But after 2008, as Alan Greenspan, one of its main proponents for many years, told a Congressional committee, the “whole intellectual edifice collapsed.” The “efficient market” still has its hard core defenders but their ranks are in disarray and suffering notable defections. This has been described in considerable length by Justin Fox in his book “The Myth of the Rational Market.” A shorter version is in Ken Davidson’s “Reality be Damned, The Legacy of Chicago School Economics” in The American Interest, November/December, 2009. More recently the story has been given a gossipy treatment in a recent article in the New Yorker by John Cassidy (January 11, 2010). Perhaps the most devastating is the remarkable mea-culpa by Judge Richard Posner.... Despite catastrophic events, it is folly to expect the suffering of millions and an onslaught of inconsistent facts to wipe out an economic theory whose tenets were and still are so convenient for so many powerful economic interests. At present the defenders of the efficient market hypothesis are engaged in trying to pin the cause of the financial crisis on the government. (If the financial crisis was the result of government policies, then one could still plausibly claim the market to be rational, efficient, etc.) Their targets include the mortgage practices of the quasi-government lenders, Fannie Mae and Freddie Mac, the Community Reinvestment Act of 1977, the low interest rates of the Federal Reserve, and a pessimistic speech by President George W. Bush. The problem with this “blame-the-government” approach is the disproportion between these purported causes and economic effects. As Paul Krugman noted, “[N]one of the proposed evil deeds of policy makers were remotely large enough to cause problems of this magnitude unless markets vastly overreacted. That is, you have to start by assuming wildly dysfunctional markets before you can blame the government for the crisis; and if markets are that dysfunctional, who needs the government to create a mess?”

3) Derek Thompson: Bipartisan Jobs Bill Receives Bipartisan Boos:

Sens. Max Baucus and Charles Grassley released a wide-ranging jobs bill, which everybody agrees has a decent chance to get bipartisan support and a better chance to create a disappointing number of jobs. The bill provides an exemption from Social Security payroll taxes for every worker hired in 2010. The exemption is capped at $106,800. It also provides a $1000 tax credit reward for keeping the employer on payroll for more than a year. The cost: $13 billion over 10 years. The bill also allows companies to write off up to $250,000 of certain capital expenses. The problem, everybody seems to agree, is that the reason most employers aren't hiring is not that they are afraid of incurring more payroll taxes. Instead, it's that there is not enough demand for their products or services to boost profits they would use to hire more workers.

The derision for this bipartisan bill is -- sigh -- bipartisan. Hugh Hewitt scoffs at the idea that employers will respond to a $1000 gimmick. Steve Benen and other liberals think the bill is way too small to work. I've been back and forth on the potential success of tax incentives for hires. My history of writing about hiring tax credits is long, but the history of their unqualified success is short. When the CBO looked at the 1970s New Jobs Tax Credit, they found... well, very little evidence to prove either its efficacy or wastefulness. A bit of cheeriness to end: CBO's economic models project that the payroll tax credit is one of the more efficient ways to stimulate employment -- bested only by increasing aid to the unemployed (who'll spend it quickly, making unemployment insurance a no-brainer way to lift sagging demand).

4) Philip Elmer-Dewitt: Apple can build a $500 iPad for $240:

Silicon Valley's teardown analysts these days don't even wait for the body to arrive before publishing their autopsy reports. Case in point: the estimated bill-of-materials for Apple's (AAPL) iPad issued Wednesday by iSuppli, an El Segundo, Calif., company that specializes in so-called virtual teardowns. Retail prices for the device, which is scheduled to start shipping in March, range from $499 for a 16GB Wi-Fi-only model to $829 for a 64 GB version that also works with AT&T's (T) 3G network.

Using the components described in the product's spec sheet and making educated guesses about who might supply them, iSuppli... estimates that Apple's mark-up ranges from 117% for the low end unit to $147% for the high. The most profitable model would appear to be the mid-range, 3G-ready 32-GB iPad, with a sticker price of $729 and an estimated manufacturing cost of $287.15...

5) Institute for New Economic Thinking:

The Institute for New Economic Thinking is an organization, started with a grant from George Soros and headquartered in New York City, which supports creative thought and open discourse to advance reform in economic thinking and policy worldwide. In hosting conferences and funding research grants, INET seeks to confront the flawed mechanisms in our economic and financial infrastructure and develop of new paradigms in economic understanding.

Mission: To develop and support a community of scholars to create fresh insight and thinking in economic theory and reliably inform those responsible for designing and making economic policy.

6) Robert Allen: Engel's Pause: A Pessimist's GUide to the British Industrial Revolution:

[T]he British economy from 1760 to 1913... passed through a two stage evolution of inequality. In the first half of the nineteenth century, the real wage stagnated while output per worker expanded. The profit rate doubled.... After the middle of the nineteenth century, real wages began to grow in line with productivity, and the profit rate and factor shares stabilized. An integrated model of growth and distribution... includes an aggregate production function that explains the distribution of income, while a savings function in which savings depended on property income governs accumulation. Simulations... show that technical progress was the prime mover behind the industrial revolution. Capital accumulation was a necessary complement. The surge in inequality was intrinsic to the growth process. Technical change increased the demand for capital and raised the profit rate and capital`s share. The rise in profits, in turn, sustained the industrial revolution by financing the necessary capital accumulation. After the middle of the nineteenth century, accumulation had caught up with the requirements of technology and wages rose in line with productivity.

7) GRAPH OF THE DAY: CBO's Guesses of the Effectiveness of Stimulus Measures:

Bipartisan Jobs Bill Receives Bipartisan Boos - The Atlantic Business Channel

8) SECOND GRAPH OF THE DAY: Via Jeff Weintraub:

Jeff Weintraub: 63% of Americans want to see Congress pass

9) BEST NON ECONOMICS THING I HAVE READ TODAY: HBlake Hounshell and Jeffrey Goldberg:

Blake Hounshell: Israel is using up a lot of the goodwill it had built up in the 1990s, when eminent statesmen like Yitzhak Rabin and Shimon Peres made good-faith efforts toward peace with the Palestinians. Since then, the country has been governed by a series of unimaginative right-wing leaders who have pandered constantly to their settler base and chosen to solve political problems through the use of force. Benjamin Netanyahu and his Likud Party may have their fingers on the pulse of their public right now, but their agenda is not one that appeals to most Americans, who strongly support Israel's right to exist but have little interest in underwriting the permanent occupation of the West Bank.

Jeffrey Goldberg: Hounshell has it right. It seems as if many people in the American elite have decided that Israel is just as dysfunctional (and, sometimes, as brutal) as its Arab foes. Americans don't like intractable crises, and the Israeli government needs to understand this (it needs to understand, as well, that young American Jews are less likely to be reflexive defenders of Israel than their parents are).  At the risk of repeating myself (unavoidable on a blog, I guess), it will be risky for Israel to pull out its settlements from the West Bank, but it will be fatal for Israel to remain in the settlements, for moral and demographic reasons. What Israel needs is a leader who will step forward and say, "Here is the way things should look," and then present an outline for the creation of a viable Palestine. The settlers will go nuts, but that's what they do. Hamas will go nuts, because that's what it does. But Hounshell is right: What is needed is a Rabin. I tend to think that Netanyahu has the potential to be this leader. Maybe it's more a hope than a reality at this point, but only someone from the right can bring the majority of Israelis to the painful compromises that are obviously necessary. And, to make the obvious point, one of the reasons this compromise is necessary is because American public opinion is one of Israel's most important battlegrounds.

10) HOISTED FROM THE ARCHIVES: DeLong (1997): Review of Haynes Johnson and David Broder, The System: The Death of Health Care Reform in 1993-1994:

I had been avoiding reading The System--Washington reporters Haynes Johnson and David Broder's account of the catastrophic collapse of the Clinton Administration health care reform effort--for a number of years. The worst hours of my life in 1993-1994 were those I spent providing analytical support for health care reform. I watched the catastrophe approach and then saw the crash, the product of a three-fold bankruptcy: moral, intellectual, and political.

The moral bankruptcy was on the part of the Republican Party's power structure, which thought (correctly) that placing the government into total gridlock was a road to political success, and cared not at all for making public policy better along any dimension.

The intellectual bankruptcy was on the part of President Clinton and the senior White House domestic policy staff, which never solved the puzzle of how to construct and sell a plan to make the American health care system better, and which was totally clueless with respect to how to construct a coalition to support reform.

The political bankruptcy was on the part of the Democratic congressional majorities in House and Senate, which ultimately failed to pass even a ghost of a bill to reform America's health care system along any dimension. The combination of these three bankruptcies has left America in 2000 with a health-care system even more wasteful and inefficient and even worse at delivering health care to the poor than we had a decade ago.

Participating in this was a dark experience. And it left me with a profound sense of guilt: a lot of people would lose the chance for better medical care because my side--me, my political allies, and those whom we had chosen to lead us--failed to do our job. But this past weekend I picked up The System and read it on the planes while on the way back from Yellowstone. I found it a good book: largely accurate, an engaging read, fair (and sometimes more-than-fair) to all the participants. It reminded me of why my political commitments are what they are, and solidified them. I did have three quarrels with the book:

  • Because Johnson and Broder are journalists whose principal sources are politicians and "media affairs people" and not policy analysts, they show little sign of understanding the substance of health care policy.

  • Johnson and Broder take the failure of health-care reform as a "metaphor" for the failure of the American political "System." It wasn't a metaphor for anything. It was a policy debate...

links for 2010-02-12

Ten Economics Pieces Worth Reading: February 11, 2010

1) Simon Johnson and James Kwak: 13 Bankers:

13 Bankers describes the rise of concentrated financial power and the threat it poses to our economic well-being. Over the past three decades, a handful of banks became spectacularly large and profitable and used their power and prestige to reshape the political landscape. By the late 1990s, the conventional wisdom in Washington was that what was good for Wall Street was good for America. This ideology of finance produced the excessive risk-taking of the past decade, creating an enormous bubble and ultimately leading to a devastating financial crisis and recession.

More remarkable, the responses of both the Bush and Obama administrations to the crisis–bailing out the megabanks on generous terms, without securing any meaningful reform–demonstrate the lasting political power of Wall Street. The largest banks have become more powerful and more emphatically “too big to fail,” with no incentive to change their behavior in the future. This only sets the stage for another financial crisis, another government bailout, and another increase in our national debt.

The alternative is to confront the power of Wall Street head on, which means breaking up the big banks and imposing hard limits on bank size so they can’t reassemble themselves. The good news is that America has fought this battle before in different forms, from Thomas Jefferson’s (unsuccessful) campaign against the First Bank of the United States to the trust-busting of Teddy Roosevelt and the banking regulations of the 1930s enacted under Franklin Delano Roosevelt.  13 Bankers explains why we face this latest showdown with the financial sector, and what is at stake for America.

2) Carrie Bay: PPIP Funds Purchase $3.4B in "Toxic" Mortgage Securities:

The Treasury released its initial PPIP report Friday, detailing the first concrete progress made under the program since it was announced nearly a year ago as a means of relieving banks of soured real estate assets. So far, the PPIP funds have amassed a total of $24.8 billion to buy up mortgage-backed securities (MBS) – $6.2 billion in private capital, which was matched dollar-for-dollar by the Treasury, as well as another 12.4 billion of debt capital provided by the Treasury. About 14 percent of that-$ 3.4 billion-has been deployed to acquire securities that meet the program guidelines, meaning they were issued prior to 2009 and were originally rated AAA before the real estate crash sent values and loan performance plummeting. As of December 2009, roughly 87 percent of the PPIP portfolio holdings are private residential mortgage-backed securities (RMBS), or $2.97 billion. Thirteen percent of the funds’ bond purchases consist of commercial mortgage-backed securities (CMBS), or $440 million.From <>:

3) Gerald Prante and Patrick Fleenor: Distributional Analysis of President Obama’s Fiscal Year 2011 Budget Policies:

This Tax Foundation Fiscal Fact takes a preliminary look at the distributive effects of President Obama's budget, released last week.... [T]his Fiscal Fact looks at fiscal year 2012 so as to avoid complications that come about as a result of the fiscal-calendar year split of the Bush tax cuts set to expire on Dec. 31, 2010....

Overall, the results show Pres. Obama increasing the level of income redistribution to low-and-middle income families, while families in the top 1 percent of the income spectrum would face higher taxes and therefore more redistribution. The primary driver of this result is Pres. Obama's expiration of the Bush tax cuts for high-income families, as well as his proposed 28 percent value limitation on itemized deductions...

4) Kris Cox: President's Budget Requests $266 Billion to Support Economic Recovery:

In light of the still tenuous nature of the economic recovery, President Obama’s budget request of $266 billion for temporary provisions to support and speed economic recovery is necessary, reasonably sized, and well targeted. Some news outlets, focusing on the budget’s $100 billion for a new “jobs initiative,” have reported that the budget proposes only $100 billion for temporary, economy-boosting measures. But, in addition to the funds for the new jobs initiative, the budget includes $166 billion in temporary extensions of some provisions of the American Recovery and Reinvestment Act (ARRA), which are contributing to economic recovery but will soon expire. (See Table 1.) The size of the President’s request — $266 billion — is consistent with recent estimates by a number of economists.... Mark Zandi of Moody’s recently called for additional measures of about $250 billion. The temporary tax cuts and expenditure increases included in the budget appear well designed to help ensure that the economy averts a double-dip recession and attains (and sustains) a reasonable rate of economic and job growth.

Among the expiring provisions that the President proposes to extend is one that temporarily increases the federal share of state Medicaid costs to help states meet the increased need for Medicaid as people lose their jobs and health care coverage. To make the recovery package as effective as possible, Congress also should devote part of the funding for the jobs initiative to helping states avert layoffs in education and other public services.... The President’s budget does not detail the specific provisions that its new jobs initiative should include. As Congress crafts a package to sustain and create jobs, it should consider using part of the funding to extend ARRA’s State Fiscal Stabilization Fund, which is helping states maintain education and other services such as public safety and law enforcement during the recession...

5) Robert Allen: How Prosperous were the Romans? Evidence from Diocletian’s Price Edict (301 AD):

The paper compares the standard of living of labourers in the Roman Empire in 301 AD with the standard of living of labourers in Europe and Asia from the middle ages to the industrial revolution. Roman data are drawn from Diocletian’s Price Edict. The real wage of Roman workers was like that of their counterparts in the lagging parts of Europe and much of Asia in the middle of the eighteenth century. Roman workers earned just enough to buy a minimal subsistence consumption basket. Real wages were considerably higher in the advanced parts of Europe in the eighteenth century, as they had been in Europe generally following the Black Death in 1348-9.

6) GRAPH OF THE DAY: Robert Allen: Labourer's Wages in the Roman Empire Compared:

7) SECOND GRAPH OF THE DAY: The U.S. Treasury Yield Curve

U.S. Treasury - Daily Treasury Yield Curve

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Rick Perlstein Schools Grover Norquist on the Diane Rehm Show for Tuesday February 9, 2010:

10:00The Tea Party Movement: Some Tea Party activists hope to shift from organizing political rallies to winning elections. What's behind the movement's appeal and its potential political impact.


10) HOISTED FROM THE ARCHIVES: DeLong (2003): A Shiver in My Spine: Chevauchee:

One side effect of having the text of 10,000 books from Project Gutenberg newly-downloaded onto your laptop is that you can read the introduction to Chaucer's Canterbury Tales while proctoring your undergraduate exam. But I just ran across a passage that puts a shiver in my spine, a passage about the KNIGHT'S son, the SQUIRE:

With him there was his son, a younge SQUIRE,
A lover, and a lusty bacheler,
With lockes crulle as they were laid in press.
Of twenty year of age he was I guess.
Of his stature he was of even length,
And wonderly deliver, and great of strength.
And he had been some time in chevachie,
In Flanders, in Artois, and Picardie,
And borne him well, as of so little space,
In hope to standen in his lady's grace.

"...had been some time in chevauchee..." (as it is usually spelled).

Let me tell you how the Hundred Years War (during which Geoffrey Chaucer was an English government functionary) worked. An English army ventures into France. The French have more knights, more horses, and lots of castles. As long as the French harass the English--cutting off detachments, ambushing vanguards, surprising foraging parties--the English will (a) fail to take territory (for besieging castles is difficult and time consuming, and (b) find their army attrited away. Only if the English can induce the French to charge the English longbow archers while they are entrenched behind their wooden stakes can the English win a pitched battle, and in the aftermath of a massive victory like Crecy or Poitiers or Agincourt press forward and pick up the mass surrenders that gain them provinces.

So how can the English kings and princes persuade the French to charge the longbows? The answer the English found was the chevauchee: send your cavalry and your archers (who can march pretty fast) through French provinces, moving as fast as possible, burning and killing everything in their path. Perhaps the destruction will enrage the French enough that they will lose their heads and charge. Perhaps the French will feel that they must fight--whether it is good tactical ground for them or not--out of a sense of duty to their vassals and serfs. Perhaps the English get a pitched battle fought under favorable tactical circumstances. If not, they will come home having suffered few casualties, and laden with at least some booty, having had a merry time burning crops, burning villages, and killing peasants, and extorting valuables from small walled towns that do not want to risk the chance that the English army would halt and attempt a full siege.

That is what's hidden beneath Chaucer's three merry lines:

And he had been some time in chevachie,
In Flanders, in Artois, and Picardie,
And borne him well, as of so little space,

Truly this is the kind of activity after which one can "hope to standen in his lady's grace."

Right now I'm seeing burned French villages and butchered peasants in my mind's eye, and contrasting it with Chaucer's further description of the SQUIRE:

Embroider'd was he, as it were a mead
All full of freshe flowers, white and red.
Singing he was, or fluting all the day;
He was as fresh as is the month of May.
Short was his gown, with sleeves long and wide.
Well could he sit on horse, and faire ride.
He coulde songes make, and well indite,
Joust, and eke dance, and well pourtray and write.
So hot he loved, that by nightertale
He slept no more than doth the nightingale.
Courteous he was, lowly, and serviceable,
And carv'd before his father at the table.

The past is truly another country. (Of course, much of the world in the present is another country--all of the world outside the borders of the U.S.A. is another country, in fact.)

links for 2010-02-11

Hoisted from Comments: Robert Waldmann on Barack Obama's "Throat Clearing"

"Obama presents the arguments against his conclusion first, then works to the conclusion. He did that on every known issue in "The Audacity of Hope." By now, he should know that he shouldn't do that--that political reporters are perfectly willing to quote his general throat clearing and ignore his specific statement and that they are even willing to quote only his hedges and qualifications and not mention his policy proposal..."


Robert Waldmann said...: I think it is important to read the whole Obama quote and not some bits removed from context and pasted together (no doubt honestly). I quote Sargent's quote

QUESTION: Let’s talk bonuses for a minute: Lloyd Blankfein, $9 million; Jamie Dimon, $17 million. Now, granted, those were in stock and less than what some had expected. But are those numbers okay?

THE PRESIDENT: Well, look, first of all, I know both those guys. They’re very savvy businessmen. And I, like most of the American people, don’t begrudge people success or wealth. That’s part of the free market system. I do think that the compensation packages that we’ve seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.

QUESTION: Seventeen million dollars is a lot for Main Street to stomach.

THE PRESIDENT: Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don’t get to the World Series either. So I’m shocked by that as well. I guess the main principle we want to promote is a simple principle of “say on pay,” that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay. The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs’ success and ultimately will make the performance of American businesses better."

I trust everyone has read both questions and answers in full. The rest of this comment can be skipped, but it is best not to discuss what Obama said without reading the text.

The statement about not begrudging people who are rich is abstract and made before Obama addressed the specific issue of the two bankers. I'm pretty sure Obama is wrong about the American people who might not begrudge the richness of many of the rich but who sure do want to tax the rich more. Also in the specific case, most Americans clearly do begrudge the fact that top bankers still have jobs let alone 7 or 8 figure bonuses.

Note that when he gets around to the question of what is to be done, he agrees with Brad's proposal and adds a demand that shareholders get more control.

What we have here is that Obama presents the arguments against his conclusion first, then works to the conclusion. He did that on every known issue in "The Audacity of Hope."

By now, he should know that he shouldn't do that -that political reporters are perfectly willing to quote his general throat clearing and ignore his specific statement and that they are even willing to quote only his hedges and qualifications and not mention his policy proposal.

Also, Gore did not claim that he invented the internet.

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

Deficit Projections: Ooh Boy...

The Financial Times needs to do better quality control over its commentators:

Peter Orszag says:

budget summary.pdf

That's right. Peter Orszag is currently forecasting that the U.S. federal debt held by the public will be 70.8% of GDP--the debt held by the public less financial assets held by the government will be 63.2% of GDP.

But Niall Ferguson says, in the Financial Times: / Comment / Opinion - A Greek crisis is coming to America: What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch.... Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time...

63.2% < 100%
70.8% < 100%

I have no idea why Niall Ferguson thinks that debt held by the public will be greater than 100% of GDP in two years. I have no idea why Niall Ferguson thinks that Peter Orszag predicts that debt held by the public will be greater than 100% of GDP in two years.

And, naturally, that is not all.

Niall Ferguson writes:

Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did...

And I wonder: who does he think ever said otherwise? The advocates of fiscal stimulus I know begin their arguments for it with, "since zero interest rates plus quantitative easing are proving insufficient..." Or does he just want his readers to think that advocates of fiscal stimulus think that demand would be the same if the Federal Reserve were setting short-term interest rates at 5%--without saying so, and even though I am not aware of any advocates of fiscal stimulus who believe that?

And I read:

First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped...

And once again I wonder: who is he talking about? The proponents of stimulus I know are now saying that it has been about as effective as they expected--but that the problem has turned out to be much bigger than we thought in December 2008 when the policies were designed.

And I read:

Second, there is a good deal of “leakage” from open economies in a globalised world...

And I think: that's not an argument against fiscal stimulus, that's an argument for coordinated fiscal stimulus--an argument that has been a key part of the discussion over the past two years, even though Ferguson doesn't seem to know it.

And I read:

Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect. For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.... Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries... by the Federal Reserve and reserve accumulation by the Chinese monetary authorities. But now the Fed is phasing out such purchases... the Chinese have sharply reduced their purchases.... Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year...

To this the right answer is: perhaps, but probably not. Look at the yield curve:

U.S. Treasury - Daily Treasury Yield Curve

If ten-years go from 3.5% to 5.5%, then 30 years will go from 4.6% to 6.2%--and holders of thirty-year bonds will lose forty percent of their wealth. The private holders of thirty-year bonds, and there are many of them, are all making a very large and powerful bet that Morgan Stanley and Niall Ferguson are wrong.

And, indeed, if health-care reform had passed and been signed last month, the long-term deficits in the budget projections would now be melting away as the snow in Washington will melt away at the end of this week...

Well, That Was Quick!: Everybody on Obama on Blankfein's and Dimond's Bonuses

Ed Luce gets my defense of Barack Obama's unwillingness to go for full-fledged bank-bashing out onto the intertubes:

Obama says bonuses are part of free market: However, others pointed out that Mr Obama has to walk a fine line between the need to share the anger and pain of the voters on the bonuses and the objective of talking up asset prices to encourage the big banks to lend. They also pointed out that JPMorgan Chase, in particular, withdrew from the subprime market well before the crash and thus helped counterbalance the speculation.

“It is a very difficult line for the president to walk,” said Brad DeLong, economics professor at Berkeley. “This isn’t 1933 when there is zero private investment and when you can call out the money changers in the temple. There are opportunities to talk up asset prices and get more credit flowing and Obama needs also to pay attention to that.”

Mr Obama’s shifting rhetoric may also be a consequence of the breakdown in bipartisan talks in the Senate over the White House’s financial regulatory reform legislation.

Last week, Chris Dodd, chairman of the Senate banking committee, said talks with Richard Shelby, the ranking Republican, had failed. “The Republicans have chosen a scorched-earth strategy,” said Mr DeLong. He added: “They believe their success lies in the failure of everything the president tries to do.”

Me? I think Wall Street CEOs wealth needs to be tied to their firms: if their firms go broke--or would have gone broke in the absence of government rescue--they should go broke. Bank shareholders ought to be writing compensation contracts that enforce that, as indeed Silicon Valley VCs do.

And since bank shareholders don't write such contracts, the government needs to change the law to force such Silicon Valley compensation schemes onto the banking sector.

That said, I think Jamie Dimond deserves all the money he is getting: JPMorganChase was a stabilizing speculator in the financial crisis, doing what we want it to do, he showed a great deal of guts in guiding the bank to a position short subprime before the crash, and he should be rewarded.

Lloyd Blankfein I'm not so sure of. Yes, he got Goldman Sachs out of the subprime business and hedged its mortgage risk before the crash. But he did that by having the firm take on an enormous amount of AIG risk--and they did not do their due diligence on AIG.

My guess is that Goldman Sachs would have gone bankrupt in the fall of 2008 without government support, and that JPMorganChase would have survived--the only very large bank that would have survived, I think.

Obama Threatens Recess Appointments Eight Months Late

Obama should have done this eight months ago:

Obama Threatens Recess Appointments: In a surprise visit to the WH press room today, Pres. Obama threatened to make recess appointments if holds on his non-controversial nominees aren't lifted. The threat comes just a day after Sen. Richard Shelby (R-AL) dropped holds on more than 70 pending nominees -- holds he placed after a dispute with the WH over earmarks for his home state. Obama said he told Congressional leaders, with whom he met at the WH today, that he would make recess appointments if the Senate does not act on his nominations. "We can't afford to allow politics to stand in the way of a well-functioning government," Obama said. He pointed to GSA administrator Martha Johnson, whose nomination was held up for 9 months by Sen. Kit Bond (R-MO) in a dispute over a federal building in Kansas City. Johnson's nomination was confirmed last week in a 96-0 vote. Last week, CongressDaily reported that Shelby had placed holds on every one of Obama's pending nominations as he tried to force the WH to cave on several earmarks. Yesterday, Shelby released the holds without getting his concessions. Obama said he asked leaders for a "stop to these holds" which can go on for several months. "Surely we can set aside partisanship and do what's traditionally been done to confirm these nominations," Obama said. When the Senate delays nominations, "that's not advise and consent," said Obama. "That's delay and obstruct."

Now it's much too late to threaten recess appointments: it's time to make them. If I were BHO, I would make 20 recess appointments this weekend (starting with the two Federal Reserve governors).

links for 2010-02-10

Five Pieces Worth Reading: February 10, 2010

1) Ryan Avent: Small Business:

What's the biggest problem? "Small business owners entered 2010 the same way they left 2009, depressed," said William Dunkelberg, NFIB chief economist. "The biggest problem continues to be a shortage of customers." That will tend to make life hard on a businessman. Of course, that biggest of problems won't be going away until the economy begins adding more jobs than it's destroying, and obviously small businesses aren't there yet. The Obama administration is betting that by creating an incentive to hire, it will change the math—firms will move from cutting jobs on net to adding jobs on net, which will increase the number of customers out there, which will, in turn, feed more hiring. Hopefully, that will be enough, but the proposed $33 billion looks awfully small given the 15 million unemployed.

2) Michael Derby: Fed’s Yellen: U.S. Rates Too Hot for China:

A top Federal Reserve official said Monday U.S. monetary policy is too hot for China and Hong Kong and explained any trouble those nations ultimately face because of this situation arises from their own foreign exchange policies. “Because both the Chinese and Hong Kong economies are further along in their recovery phases than the U.S. economy, current U.S. monetary policy is likely to be excessively stimulatory for them,” Federal Reserve Bank of San Francisco President Janet Yellen said. “However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery,” she wrote in a bank Economic Letter published Monday. The central banker said that if China wants to prevent U.S. policies from overheating its economy and driving inflation, it will have to do something about its foreign exchange policy. “Increased exchange rate flexibility could mitigate growing inflationary concerns, and also act toward easing global imbalances and encouraging the development of the household sector, a shift the Chinese government now officially says it wants,” Yellen said.

3) Duncan Black:

Message: Focused On Jobs: It's the actual jobs that matter, not the trying to look like you're doing something on jobs. Realities of Congress, blah blah blah, but occasionally it'd be nice if that charismatic guy in the White House would try to move public opinion.

4) WORST ACT OF JOURNALISTIC MALPRACTICE I HAVE SEEN TODAY: Elisabeth Rosenthal of the New York Times misusing Roger Pielke as an expert on climate change. Outsourced to Ken Caldeira:

Does Roger Pielke Jr really believe that Pachauri is exaggerating the climate change problem in order to obtain more funds for his nonprofit research center? If Pielke is going to make insinuations in the New York Times about the ethics of Dr Pachauri, he owes it to us to make his beliefs clear. He should state clearly which of the following two statements he believes: (a) Dr Rajendra Pachauri is exaggerating the climate change problem in order to obtain more funds for his nonprofit research center. (b) Dr Rajendra Pachauri is not exaggerating the climate change problem in order to obtain more funds for his nonprofit research center.

For a man with a $49,000 salary, donating all of his consulting fees to nonprofit organizations would ordinarily be seen as a sign of professional integrity and dedication. It is outrageous that Pielke attempts to turn this around and use it to insinuate an ethical lapse. It makes one wonder about Pielke’s motives.

5) STUPIDEST THING I HAVE READ TODAY: James Buchanan: Economists Have No Clothes:

What function must the whole financial-monetary structure perform in an ideally working market economy? This question is relatively easy to answer. The financial-monetary structure must be neutral in its allocative effects. It must be limited to the facilitation of exchanges (to the reduction of transactions costs)...

If other economists have no clothes, then I suspect James Buchanan must have neither clothes, skin, organs, or bones. The financial-monetary sector does a lot more than facilitate exchange--a problem that was solved by the invention of coinage under Gyges King of Lydia 2800 years ago. The financial-monetary structure does facilitate exchange, but that is only one of its roles. Its major role is to transform the forms of wealth that exist in the economy into forms of wealth that savers want to hold. The forms of wealth that exist in the economy are long-term illiquid risky projects and organizations that require a good deal of supervision and oversight. The forms of wealth that savers want to hold are short-term liquid safe assets that can be left to manage themselves. To move from one to the other financiers must (a) find people tolerant of bearing risk, (b) people willing to monitor and oversee, (c) people to make markets to create liquidity, while (d) betting that the law of large numbers can keep the whole thing from crashing down as they try to maximize their profits by paying the minimum to outside risk bearers, monitors, and market-makers. "[N]eutral in its allocative effects... limited to the facilitation of exchanges," FEH!!

Economic Theory and Economic History

One reason to study economic history is so that you do not in the future make mistakes like that made by the economics profession in rejecting High Development Theory between 1970 and 1990.

Paul Krugman writes:

The Fall and Rise of Development Economics: [T]he [Albert] Hirschman I know is the author of The Strategy of Economic Development.... [W]hile I am a great admirer of The Strategy of Economic Development, I do not think that it was helpful to development economics. That may sound paradoxical, but I'll try to explain....

I regard the intellectual strategy that Hirschman adopted in writing that book as an understandable but wrong response to what had become a crisis in the field of economic development. Perversely, the very brilliance and persuasiveness of the book made it all the more destructive....

"[H]igh development theory"... was and is highly persuasive as at least a partial explanation of what development is about... for a stretch of about 15 years in the 1940s and 1950s it was deeply influential.... Yet in the late 1950s high development theory rapidly unravelled, to the point where by the time I studied economics in the 1970s it seemed not so much wrong as incomprehensible. Only in the 1980s and 1990s were economists able to look at high development theory with a fresh eye and see that it really does make a lot of sense....

[T]he crisis of high development theory in the late 1950s was neither empirical nor ideological: it was methodological. High development theorists were having a hard time expressing their ideas in the kind of tightly specified models that were increasingly becoming the unique language of discourse of economic analysis. They were faced with the choice of either adopting that increasingly dominant intellectual style, or finding themselves pushed into the intellectual periphery. They didn't make the transition, and as a result high development theory was largely purged....

Hirschman's Strategy appeared at a critical point.... It is a rich book, full of stimulating ideas. Its most important message at that time, however, was a rejection of the drive toward rigor.... Hirschman said that both the theorist and the practical policy-maker could and should ignore the pressures to produce buttoned-down, mathematically consistent analyses, and adopt instead a sort of muscular pragmatism.... Along with some others, notably [Gunnar] Myrdal, Hirschman didn't wait for intellectual exile: he proudly gathered up his followers and led them into the wilderness... they perished there.

The irony is that we can now see that high development theory made perfectly good sense.... But... to see that, we need to adopt exactly the intellectual attitude Hirschman rejected: a willingness to do violence to the richness and complexity of the real world in order to produce controlled, silly models that illustrate key concepts.

This paper, then, is a meditation on economic methodology, inspired by the history of development economics, in which Albert Hirschman appears as a major character... not a villain... a tragic hero....

[H]igh development theory... [is] the view that development is a virtuous circle driven by external economies... countries, according to this view, remain underdeveloped because they have failed to get this virtuous circle going, and thus remain stuck in a low level trap. Such a view implies a powerful case for government activism as a way of breaking out of this trap.... The distinctive features of high development theory came out of its explanation of the nature of the positive feedback that can lead to self-reinforcing growth or stagnation... the self-reinforcement came from an interaction between economies of scale at the level of the individual producer and the size of the market. Crucial to this interaction was some form of economic dualism, in which "traditional" production paid lower wages and/or participated in the market less than the modern sector... modern methods of production are potentially more productive... but their productivity edge is large enough to compensate for the necessity of paying higher wages only if the market is large enough. But the size of the market depends on the extent to which modern techniques are adopted, because workers in the modern sector earn higher wages and/or participate in the market economy more than traditional workers. So if modernization can be gotten started on a sufficiently large scale, it will be self-sustaining, but it is possible for an economy to get caught in a trap in which the process never gets going. The clearest and simplest version of this story is in the original paper by Rosenstein Rodan (1943) himself....

[M]ainstream economics was, by the late 1950s, becoming increasingly hostile to the kinds of ideas involved in high development theory... economics was going through an extended period in which increasing returns to scale, so central to that theory, tended to disappear from discourse.... Why did that present a problem? Because economies of scale were very difficult to introduce into the increasingly formal models of mainstream economic theory....

A friend of mine who combines a professional interest in Africa with a hobby of collecting antique maps has written a fascinating paper called "The evolution of European ignorance about Africa." The paper describes how European maps of the African continent evolved from the 15th to the 19th centuries.... The coastline of Africa was first explored, then plotted with growing accuracy, and by the 18th century that coastline was shown in a manner essentially indistinguishable from that of modern maps.... On the other hand, the interior emptied out. The weird mythical creatures were gone, but so were the real cities and rivers. In a way, Europeans had become more ignorant about Africa than they had been before... improvement in the art of mapmaking raised the standard for what was considered valid data. Second-hand reports of the form "six days south of the end of the desert you encounter a vast river flowing from east to west" were no longer something you would use to draw your map. Only features of the landscape that had been visited by reliable informants equipped with sextants and compasses now qualified....

Between the 1940s and the 1970s something similar happened to economics. A rise in the standards of rigor and logic led to a much improved level of understanding of some things, but also led for a time to an unwillingness to confront those areas the new technical rigor could not yet reach.... Economics has always been unique among the social sciences for its reliance on numerical examples and mathematical models. David Ricardo's theories of comparative advantage and land rent are as tightly specified as any modern economist could want. Nonetheless, in the early 20th century economic analysis was, by modern standards, marked by a good deal of fuzziness. In the case of Alfred Marshall, whose influence dominated economics until the 1930s, this fuzziness was deliberate....

From the point of view of a modern economist, the most striking feature of the works of high development theory is their adherence to a discursive, non-mathematical style.... [W]hy didn't high development theory get expressed in formal models? Almost certainly for one basic reason: high development theory rested critically on the assumption of economies of scale, but nobody knew how to put these scale economies into formal models. The essential problem is that of market structure. From Ricardo until about 1975, what economists knew how to model formally was a perfectly competitive economy... but there is no general theory of how... firms who have substantial market power... will set prices and output.... Since the mid 1970s economists have broken through this barrier in a number of fields: international trade, economic growth, and, finally, development. The way they have done this is essentially by making some peculiar assumptions that allow them to exploit the bag of tricks that industrial organization theorists developed for thinking about such issues in the 1970s.... In the 1950s, although the technical level of the leading development economists was actually quite high enough to have allowed them to do the same thing, the bag of tricks wasn't there. So development theorists were placed in an awkward bind, with basically sensible ideas that they could not quite express in fully worked-out models. And the drift of the economics profession made the situation worse. In the 1940s and even in the 1950s it was still possible for an economist to publish a paper that made persuasive points verbally.... It seems safe to say that such a paper would have been unpublishable any time after 1970, if not earlier.

Some development theorists responded by getting as close to a formal model as they could... others at least professed to see a less formal, less disciplined approach as a virtue rather than an awkward necessity. It is in this light that one needs to see [Albert] Hirschman and [Gunnar] Myrdal.... [T]heir books marked the end, not the beginning of high development theory.... What marked Myrdal and Hirschman was not so much the novelty of their ideas but their stylistic and methodological stance. Until their books, economists doing high development theory were trying to be good mainstream economists. They could not develop full formal models, but they got as close as they could.... Myrdal and Hirschman abandoned this effort, and eventually in effect took stands on principle against any effort to formalize their ideas.

One imagines that this was initially very liberating.... Yet in the end it was a vain stance. Economic theory is essentially a collection of models. Broad insights that are not expressed in model form may temporarily attract attention and even win converts, but they do not endure unless codified in a reproducible--and teachable--form. You may not like this tendency; certainly economists tend to be too quick to dismiss what has not been formalized (although I believe that the focus on models is basically right). Like it or not, however, the influence of ideas that have not been embalmed in models soon decays. And this was the fate of high development theory. Myrdal's effective presentation of the idea of circular and cumulative causation, or Hirschman's evocation of linkages, were stimulating and immensely influential in the 1950s and early 1960s. By the 1970s (when I was myself a student of economics), they had come to seem not so much wrong as meaningless. What were these guys talking about? Where were the models? And so high development theory was not so much rejected as simply bypassed....

The exception proves the rule. [W. Arthur] Lewis's surplus labor concept was the model that launched a thousand papers, even though surplus labor assumptions were already standard among development theorists, the empirical basis for assuming surplus labor was weak, and the idea of external economies/strategic complementarity is surely more interesting. The point was, of course, that precisely because he did not mix economies of scale into his framework, Lewis offered theorists something they could model using available tools...

And, of course, the most astonishing thing about the rejection of High Development Theory is that it is the oldest of all proper economic theories:

The greatest improvements in the productive powers of labour... seem to have been the effects of the division of labour.... To take an example... from a very trifling manufacture... in which the division of labour has been very often taken notice of, the trade of a pin-maker: a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire; another straights it; a third cuts it; a fourth points it; a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business; to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind, where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth, part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.

In every other art and manufacture, the effects of the division of labour are similar.... The division of labour, however, so far as it can be introduced, occasions, in every art, a proportionable increase of the productive powers of labour. The separation of different trades and employments from one another, seems to have taken place in consequence of this advantage. This separation, too, is generally carried furthest in those countries which enjoy the highest degree of industry and improvement; what is the work of one man, in a rude state of society, being generally that of several in an improved one. In every improved society, the farmer is generally nothing but a farmer; the manufacturer, nothing but a manufacturer. The labour, too, which is necessary to produce any one complete manufacture, is almost always divided among a great number of hands. How many different trades are employed in each branch of the linen and woollen manufactures, from the growers of the flax and the wool, to the bleachers and smoothers of the linen, or to the dyers and dressers of the cloth!...

This great increase in the quantity of work, which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and, lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.

As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited... by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for.

There are some sorts of industry, even of the lowest kind, which can be carried on nowhere but in a great town. A porter, for example, can find employment and subsistence in no other place. A village is by much too narrow a sphere for him; even an ordinary market-town is scarce large enough to afford him constant occupation. In the lone houses and very small villages which are scattered about in so desert a country as the highlands of Scotland, every farmer must be butcher, baker, and brewer, for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade. The scattered families that live at eight or ten miles distance from the nearest of them, must learn to perform themselves a great number of little pieces of work, for which, in more populous countries, they would call in the assistance of those workmen. Country workmen are almost everywhere obliged to apply themselves to all the different branches of industry that have so much affinity to one another as to be employed about the same sort of materials. A country carpenter deals in every sort of work that is made of wood; a country smith in every sort of work that is made of iron. The former is not only a carpenter, but a joiner, a cabinet-maker, and even a carver in wood, as well as a wheel-wright, a plough-wright, a cart and waggon-maker. The employments of the latter are still more various. It is impossible there should be such a trade as even that of a nailer in the remote and inland parts of the highlands of Scotland. Such a workman at the rate of a thousand nails a-day, and three hundred working days in the year, will make three hundred thousand nails in the year. But in such a situation it would be impossible to dispose of one thousand, that is, of one day's work in the year....

When the division of labour has been once thoroughly established, it is but a very small part of a man's wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for. Every man thus lives by exchanging, or becomes, in some measure, a merchant, and the society itself grows to be what is properly a commercial society.

A free copy of The End of Influence to the first commenter who identifies where this passage comes from...

Historical Document: Le Chant des Partisans

Anna Marly, Joseph Kessel, and Maurice Druon: Le Chant des Partisans:

Ami, entends-tu le vol noir des corbeaux sur nos plaines ?
Ami, entends-tu les cris sourd du pays qu'on enchaîne ?
Ohé partisans, ouvriers et paysans, c'est l'alarme !
Ce soir l'ennemi connaîtra le prix du sang et des larmes.

Montez de la mine, descendez des collines, camarades,
Sortez de la paille les fusils, la mitraille, les grenades ;
Ohé les tueurs, à la balle et au couteau tuez vite !
Ohé saboteur, attention à ton fardeau, dynamite ...

C'est nous qui brisons les barreaux des prisons, pour nos frères,
La haine à nos trousses, et la faim qui nous pousse, la misère.
Il y a des pays où les gens aux creux du lit font des rêves
Ici, nous, vois-tu, nous on marche et nous on tue, nous on crève.

Ici chacun sait ce qu'il veut, ce qu'il fait, quand il passe ;
Ami, si tu tombes, un ami sort de l'ombre à ta place.
Demain du sang noir séchera au grand soleil sur les routes,
Sifflez, compagnons, dans la nuit la liberté nous écoute.

Dianne Rehm Show: Social Insurance

A correspondent writes:

>Awesome exchange just now on Dianne Rehm between Rick Perlstein and Grover Norquist.

Grover tried to say he doesn't want Social Security destroyed and doesn't have a Leninist view of his movement. "He's lying," Rick said, which persuaded Grover to call him a "snotty liberal." The whole exchange had Rehm cracking the ruler and demanding civility.

Then Rehm asked him to clarify his SS position and he essentially said he wanted to end it.

links for 2010-02-09

Pretending that Nothing Is Wrong When Your Hair on Fire Does Not Send a Good Signal...

That the Greek government claims not to know that it badly needs help is a very strange thing to do if it wants to restore market "confidence"--investors are more likely to trust and have confidence in a government that they think is not made up of clowns:

Greece Says Call for Aid Would Send ‘Worst Signal’: Greek Finance Minister George Papaconstantinou said he can’t call for outside aid as his government struggles to cut the European Union’s largest budget deficit. “The worst possible signal which we could send out is one calling for outside help,” he said in an interview with Bloomberg Television in Athens yesterday. “We will tackle the deficit,” he said, adding that tax revenues in January exceeded forecasts “by some percentage points”...

About Frank Foer, Editor of the New Republic: Is He a Spineless Cowardly Slug? Or Is He a Human Being?

Frank Foer, editor of the New Republic, has a guy who writes for him named Leon Wieselter:

Leon Wieselter: Something Much Darker: I will conclude this unpleasantness here, though there are more rants by [Andrew] Sullivan that merit attention. Criticism of Israeli policy, and sympathy for the Palestinians, and support for a two-state solution, do not require, as their condition or their corollary, this intellectual shabbiness, this venomous hostility toward Israel and Jews. I have striven for Israeli-Palestinian reconciliation, and territorial compromise, and two states, for many decades now, but Sullivan’s variety of such right thinking is completely repugnant to me. There are decent and indecent ways to advocate change. About the Jews, is Sullivan a bigot, or is he just moronically insensitive? To me, he looks increasingly like the Buchanan of the left...

Andrew Sullivan is not an anti-semitic bigot.

The question is whether Frank Foer is a human being.

If he is, Leon Wieseltier's connection with the New Republic will be severed before the snow starts falling in Washington Tuesday at lunchtime.

If Frank Foer is, instead, a spineless, cowardly slug uninterested in the downward spiral of the New Republic and of the trashing of his own reputation, Wieselter will continue to do his thing.

God knows Andrew Sullivan has been on my s--- list since the days he decided to prostitute his position as editor of the New Republic by promoting Betsy McCaughey and Charles Murray. And he has been on my super-s--- list since the day he decided he would get some street cred with Republicans by prostituting his intellect as leader of the anti-Paul Krugman hit squad. Andrew Sullivan has, I agree, serious problems. But Leon Wieseltier and Frank Foer have much more serious ones.

Andrew Sullivan is no anti-semitic bigot.

Ten Mostly Economics Pieces Worth Reading: February 9, 2010

1) Jim Hamilton: Yes the future deficits are worrisome: [A]t the moment we're observing an amazing willingness of investors and foreign central banks to lend to the U.S. Treasury... 2-year notes paying the lowest yield on record.... So if the government were to borrow another dollar today, invest in anything with a positive rate of return, and repay the sum in two years, it would indeed be a great deal.

Those remarkably low yields at the moment in my mind are a result of a flight to safety... people are afraid to hold anything other than treasuries... not so much a market vote in favor of the U.S. Treasury as it is a market vote against everything else. But the question before us is, what will the situation be another two years down the road.... Krugman's position is that we should trust the term structure of interest rates to give us the answer. If markets anticipate an explosion of short-term interest rates a few years down the road, why is anyone today buying the longer term debt at such low yields?...

2) John Cassidy interviews Paul Samuelson: Rational Irrationality:

The rational expectations approach isn’t just an economic theory: it is an austere theory of human behavior. It assumes that consumers and businessmen are ultra-rational, and that they are endowed with complete knowledge of how the world operates. In one famous adaptation of this idea, Robert Barro, who is now at Harvard, argued that increases in government spending had little or no impact on GDP: they merely prompted people to save more because they know that, ultimately, the increases in spending would have to be financed by higher taxes. Samuelson expressed skepticism about this idea, noting that during the Reagan era there had been enormous budget deficits but no concomitant rise in private saving.

“I’m about as rational a person as you could get, but did I set up a sinking fund to pay off my taxes? No. Was I lazy and irrational? No...At bottom, I’m in the Herbert Simon camp of limited rationality. People are rational, but you are always doing things in a hurry and with limited information. The last thing you can do is a big optimization problem down to five decimal places.”

3) Rob Stavins sniffs the glue: Any Hope for Meaningful U.S. Climate Policy? A Somewhat Positive View:

The current conventional wisdom – broadly echoed by the news media and the blogosphere – is that comprehensive, economy-wide CO2 cap-and-trade legislation is dead in the current U.S. Congress, and perhaps for the next several years. Watch out for conventional wisdoms!  They inevitably appear to be the collective judgment of numerous well-informed observers and sources, but frequently they are little more than the massive repetition of a few sample points of opinion across the echo-chamber of the professional news media and the blogosphere. Keep in mind that the conventional wisdom as recently as June of 2009 had it that – with the Waxman-Markey bill having been passed triumphantly by the House of Representatives – Senate action would follow; the only question raised by many commentators was whether the final legislation could be sent to the President for his signature by the time of the Copenhagen climate talks in December.  My, how the conventional wisdom has changed! But over the past nine months, the politics have not fundamentally changed.  In June of 2009, passage of meaningful climate legislation in the Senate was already unlikely, because of the terrible economic recession in which the country found itself, and – of even greater political salience – lingering high rates of unemployment.  And with the lack of Republican support for the stimulus bill, the relatively small (partisan) margin by which the House passed Waxman-Markey, the then-upcoming challenges of health care and financial regulatory reform dominating the legislative calendar, and concerns voiced about climate legislation by moderate Senate Democrats, success in the Senate was always a long-shot.

4) Felix Salmon: Helicopter-Firehose Trichet:

Warren Mosler has an interesting and provocative remedy for Europe’s current fiscal woes: the European Central Bank should simply print 1 trillion euros, and hand it out, on a pro-rated basis, to all the Eurozone states. This is a per-capita payment: it would be based on population, not on GDP, with the highest-population countries getting the most money. Mosler reckons that spending would be unaffected, because the Eurozone countries are already up against their Maastricht limits, and that therefore inflation wouldn’t be affected either. More importantly, he says, the Eurozone debt ratios would come down, by say 5 percent of GDP across the board.

The interesting thing is that given recent weakness in the euro, something along these lines — if not quite as explicit — seems to be already priced in, to some degree. I don’t think anybody in Europe is particularly worried about inflation right now; if anything, deflation is more of a problem, especially in the PIIGS. The big question, of course, is whether and how anybody at the ECB would ever let something like this happen, given its much-vaunted independence. Deflation worries might have to pick up quite a lot before it happens, and even then it’ll be a very tough sell among the European central-banking crowd.

5) Richard Kline: Bank Securitization Woes Only Beginning « naked capitalism:

Kicked the can down the road is what was done, by the powers that be in Autuman in New York 08. Yves [Smith]: “The banks made legal representations and warranties regarding the loans they sold. If the loans fell short of the contractually agreed upon standards, the seller has to make good in some form . . . .” I’ve been waiting for this shoe to drop for some time. And it is telling that it is the outer ring parties to all this who are turning to the courts; the GSEs, the re-insurers, and the like. It has been clear that the strategy of the inner ring crumbs of the oligarchy from Autumn 07 on has been for the Guvmint to buy the toxic bonds or other obligations from them at near face, or in Plan A’ to guarantee their present holders against all losses below small first-hit threshhold. “Y’know, like the RTC; cause we’re systemically necessary.” [Except the RTC took the assets of closed concerns but let's not let the facts confuse the narrative.] So the inner ring crumbs to the subcrime spree have been holding out for the government to step up and take the loss for them, that is the other 99% of the citizenry. If necessary, they are prepared to hold out for years, telling that Beltway coterie to kick the can another ten yards at a time, while paying out to swap weasals and stoats victorious at the elections until some quisling crew can be got into office who will mash a thumbprint on this design, natch.

Why did the Guvmint kick the can? Panic? The more apt question is, Why is the Guvmint still kicking the can? My view, stated previously in these illustrious pixels, is that Bernanke, Summers, Geither, Emanuel, Rubin, et. al. are delusional. They don’t think we had a crash but a panic. They are convinced that ‘values’ aren’t reflected in current ‘prices,’ and that the latter will bounce back as soon as ’stability’ returns. And at that point, the Guvmint won’t have to take the toxic waste from the oligarchs because the plutonium will be magically morphed back into gold. Nobody has told these well-placed, egocentric mooks that the ASBs were ALWAYS plutonioum, just with a little gold paint splotched on them by JPM and GS and Merrill or just with straw pasted on by Countrifried and Indyfai and WhoKnu. These sub-geniuses in halls of power didn’t bother to read the instuctions on the Japanese model kit for Bolstering Bailous they’ve assembled upon our amber waves of grain. Those instructions read, “Squeeze hard so that the pieces hold together until the Old Reality Glue sets, time to cure on the order of ten myriads.” I.e. shortly after Hell freezes over first: twenty years and counting and the Japnese Model hasn’t produced any recovery for their real economy...

6) Robert Reich: The President's Job's Initiative Doesn't Measure Up:

Barack Obama... wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit.... So what does he do? A little bit more stimulus spending, but stimulus spending... coming out of savings from money already authorized to be spent on the bank bailout....

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now -- an economy fundamentally out of balance -- we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can't run deficits so they're wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That's a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama's "new" stimulus... is not nearly enough...

7) VIDEO OF THE DAY: Cohen and DeLong (2010), The End of Influence: When Other Countries Have the Money, at the Center for American Progress:

8) GRAPH OF THE DAY: Greece, Ireland, and Portugal are not a threat to the euro. (Italy and Spain, however...):

Euro perspective - Paul Krugman Blog -

9) BEST NON-ECONOMICS THING I HAVE READ TODAY: Matthew Yglesias: Tears in Rain:

Google’s already brought us the Nexus One, and apparently DARPA is working on the Nexus 6: "The Pentagon’s mad science arm may have come up with its most radical project yet. Darpa is looking to re-write the laws of evolution to the military’s advantage, creating 'synthetic organisms' that can live forever — or can be killed with the flick of a molecular switch."... Joking aside, it would be nice to live in a world where a larger share of cutting-edge US government biological research was being undertaken for medical purposes—to help people, in other words—rather than to find new and better ways to kill people.

At any rate, here’s a bioweapon who’s sad that his makers have turned off his molecular switch:

10) HOISTED FROM THE ARCHIVES: Brad DeLong's Thought of the Day (from November 7, 2009: never posted):

There was a sense of urgency a year ago: a belief on the part of all of the policymkers entering the Obama administration that there was great uncertainty and so that they should try a great many things--quantitative easing, inflation targeting, banking-sector recapitalization, RFCs, federal assumption of tail risk, fiscal expansion. The fear was that any one of these might not work or might not work well, and that we would then be left with double-digit unemployment for years.

And now?

Now we are looking at a 50-50 chance of double-digit unemployment for years.

With Great Power Comes Great Responsibility to Use That Power...

Ryan Avent writes, apropos of:

Safety in dollars: Run for cover | The Economist

Safety in dollars: Here's a look at the recent relationship between the euro and the dollar... a long run of euro appreciation, then a sudden reversal amid the flight to safety associated with the 2008 financial crisis, then a return to appreciation, and finally another bout of dollar strengthening. The reversal there at the end of 2009 and the beginning of 2010 is just what you'd expect to happen amid growing fears of sovereign debt problems in the euro zone. Such issues would increase the desire for safe havens and dampen the demand for euros, both of which trends would boost the dollar....

[America] is the issuer of the world's reserve currency.... [It] can borrow cheaply amid crisis.... America is somewhat insulated from market pressures to address deficits. Which, again, is nice when you need to provide stimulus...

It is nice when you need to provide stimulus if you then in fact provide the stimulus. The fact that the U.S. government is ideally positioned as the reserve-currency hegemon to serve as the locomotive of global recovery is very nice. But it needs to live up to the role--and right now we aren't: a declaration that the congress is "focused on jobs" and passage of a $100B job-creating stimulus bill is just not big enough.

If the dollar were falling and long-term Treasury bonds were falling, I would think differently. But they aren't.

More from Mark Elvin: An Oldie and Very Goody

The section on China's medieval "industrious" commercial revolution from Mark Elvin (1973), The Pattern of the Chinese Past (London: Methuen: 0413286304):

Chapter 9: the revolution in agriculture:

Mark Elvin, chapter 9 from The Pattern of the Chinese Past

Start of chapter 10: the revolution in transportation:

Mark Elvin, start of chapter 10 from The Pattern of the Chinese Past

When Other Countries Have the Money

Center for American Progress writeup:

Reviving the American Empire: America will still be a leader, perhaps the leader, but no longer the boss,” said Stephen S. Cohen, a Senior Fellow at the Center for American Progress, professor at University of California, Berkeley, and co-author of The End of Influence: When Other Countries Have the Money at a CAP event last Friday on America’s global position. Cohen was joined by co-author J. Bradford DeLong, fellow professor at U.C. Berkeley and Nina Hachigian, Senior Fellow at CAP and co-author of The Next American Century: How the U.S. Can Thrive as Other Powers Rise.

The inevitable “rebalancing of powers in the global economy” has generated conflicting book titles that steer the American public in one of two ways: The End of Influence or The Next American Century, said CAP Executive Vice President Sarah Rosen Wartell, who introduced the event. This polar view on America’s global standing depicts our future as either dire or promising with little room in between. If we want to influence change, Wartell said, we need to ask, “how do we shape that future ourselves?”

The United States emerged as the dominant economic, cultural, and military power in the world after World War II. As other nations began to develop, moving from agriculture to industry, they needed someone to buy their end products. Peasants in developing countries have little purchasing power, so the United States stepped in and bought “stuff” from all over the world, said Cohen. “We got the government out of the economy” and bought half of China’s GDP. “We imported so much more than we exported that now we cannot pay it off.”

The “United States, which had been a capital surplus high-savings country,” has become the world’s biggest borrower, said DeLong and the U.S. government is the world’s second biggest borrower. Seventy percent of our current debt happened since 2000. Rising income inequality created a negative cultural pattern where people “overleveraged” themselves to financially compete with one another, and all of this constrained the economic power of the United States and its government in a way that we hadn’t felt since 1917. DeLong suggests that this will be the “end of market liberalism,” which could turn the United States into a “normal country” without absolute power.

For the “past 10 years we fumbled our ability to move into the real industries of the future,” said DeLong. Finance became our major economic industry instead of electronic or bio-technological innovation. The best and the brightest chose to work for the financial sector instead of medicine, science, and engineering. We outsourced so much opportunity that we are no longer leaders in high tech or other industries we pioneered. This stunted innovation, and only served to increase the income gap.

DeLong suggested that the Obama administration can begin to fix this dilemma by appointing “competent economists” to the Federal Reserve Board to reduce and eliminate global imbalances that trap the United States and China in financial terror.

“Ninety-eight percent of economists think a weaker dollar will help the economy,” but it is a difficult sentiment to express without being seen as treasonous, Cohen explained. The value of the dollar must drop in order for us to save more. Our goods will become cheaper, we will export more, and bring down the trade deficit. But, at the same time, as we stopped importing from growing industrial economies, we might seen to be abandoning them and isolating ourselves.

Such isolation is impossible as the “world is getting smaller” because of globalization and communication, said DeLong. People all over the world will ask, why are the United States’ upper and middle classes so rich while we are so poor? This question coupled with the planet’s resource scarcities is the key political problem of the next 50 years.

The United States can no longer mobilize the resources we once could for the greater global good. Despite this fact and the macabre title of Cohen and DeLong’s book, the “end of American influence is nowhere on the horizon,” according to Hachigian. United States leadership is still “desperately needed” as no other powers are ready to take charge. We are experiencing a decline relative to rising powers such as China and India, but we’re coming off “such a high base” that doomsday is not near. Moreover, the answers to the most pressing problems for Americans are through collaboration with other powers. The United States should be brokering and facilitating consensus building on important issues such as climate change. That global leadership combined with cultural hegemony that declines at a much slower pace than cash “makes us quite influential.”