links for 2010-02-24
Office Hours

Ten Pieces Worth Reading, Mostly Economics: February 24, 2010

1) Andy Sullivan: US stimulus added up to 2.1 mln jobs in Q4 2009:

WASHINGTON, Feb 23 (Reuters) - The massive stimulus package passed last year to blunt the impact of the worst U.S. recession in 70 years created up to 2.1 million jobs in the last three months of 2009, the non-partisan Congressional Budget Office said on Tuesday. The package boosted the economy by up to 3.5 percent and lowered the unemployment rate by up to 2.1 percent during that period, CBO said. The report comes as President Barack Obama and his fellow Democrats are pushing further measures to bring down the 9.7 percent unemployment rate before the November congressional elections.... CBO's new report closely resembles its initial estimates from March 2009, shortly after Obama signed the bill into law. Though the economy performed more poorly than predicted, that was not due to the ineffectiveness of the stimulus package, CBO said. "In CBO's judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects" of the stimulus, the research office said.

The package is likely to have the greatest impact this year, according to CBO. It is expected to boost GDP by between 1.4 percent and 4 percent and bring down the unemployment rate by between 0.7 percent and 1.8 percent in 2010, higher figures than last year when many of its programs were being set up. The impact is expected to trail off over the next two years. Direct purchasing of goods and services by the federal government and states have been the most effective provision of the act, CBO said. Among the least effective: a tax credit for first-time homebuyers and a tax cut for the wealthy. Since the start of the recession in December 2007, 8.4 million jobs have been lost. Though the economy started growing again last year, CBO chief Doug Elmendorf said at a congressional hearing that any recovery was likely to be slow.

2) Ben Armbruster: Santorum to GOP: Stimulus hypocrisy ‘does undermine your credibility.’:

Last weekend on ABC’s This Week, Gov. Arnold Schwarzenegger (R-CA) called out Republicans in Congress who voted against the Recovery Act, but then promote the money that it delivered to their districts. “I find it interesting that you have a lot of the Republicans running around pushing back on the stimulus,” he said. “Then they go out and they do the photo ops and they’re posing with the big check and they say, ‘Isn’t this great?’” Last night on Fox News, former GOP senator Rick Santorum agreed with Schwarzenegger’s comment:

SANTORUM: I would be very cautious if I were a Republican to do that. … I think the facts of the matter of what has happened after the stimulus package passed proved it hasn’t created a whole lot of jobs. But then to take money from that package and go out and do photo-ops talking about how many jobs it creates does undermine your credibility. [...] Members of Congress having opposed this plan then running out and saying here’s money I brought home to the district — that’s not to say your district doesn’t get the money. They would whether you do the photo- op or not. But I wouldn’t be out promoting it.

3) Ben Frumin: Jobs Bill Passes Major Hurdle After 5 GOPers Join Dems:

Five Republicans joined Democrats in a key cloture vote moments ago, allowing debate on a jobs package to move forward. After overcoming this hurdle, debate on the bill can begin. Sen. Scott Brown (R-MA) broke with his party and voted with the Democrats. So did Sens. Olympia Snowe (R-ME), Susan Collins (R-ME), Kit Bond (R-MO) and George Voinovich (R-OH). Sen. Ben Nelson (D-NE) was the only Democrat to break with his party. The final vote tally was 62-30.

It had been uncertain earlier in the day whether any Republicans would help Democrats reach 60 votes and overcome the threat of a GOP filibuster. With Sen. Frank Lautenberg (D-NJ) out of the Senate after being diagnosed with stomach cancer, Democrats needed at least two Republican votes to overcome a GOP filibuster threat. "Work with us on this," Senate Majority Leader Harry Reid said moments before the vote. "Show us you're serious about legislating." Reid also warned Republicans: Fail to support this bill, and the minority would "confirm their reputation as the 'Party of No.'" And after the vote? "I hope this is the beginning of a new day here in the Senate," Reid said. The bill, which is much smaller than some original proposals, would exempt businesses from paying Social Security payroll taxes this year after hiring from the nation's pool of millions of unemployed. The Build-America Bonds Act of 2009 would be renewed by the jobs bill. The scaled-down bill would also extend some tax breaks for small businesses, renew highway programs through December, and put $20 billion in the highway trust fund.

Brown issued the following statement about his vote: "I came to Washington to be an independent voice, to put politics aside, and to do everything in my power to help create jobs for Massachusetts families. This Senate jobs bill is not perfect. I wish the tax cuts were deeper and broader, but I voted for it because it contains measures that will help put people back to work.   I was disappointed with the continuation of politics-as-usual in the drafting of this bill, as it was crafted behind closed doors, without transparency and accountability.  I hope for improvements in that process going forward. All of us, Republicans and Democrats, have to work together to get our economy back on track. I hope my vote today is a strong step toward restoring bipartisanship in Washington."

4) Bruce Bartlett: On Starving the Beast:

The idea of using budget deficits as cover to cut spending that couldn’t otherwise be cut—a concept known as starving the beast—seems to be resurfacing (see here and here). This is a view I once held back in the 1970s. Just cut taxes, I thought, and pressure to balance the budget will manifest itself in the form of spending cuts that will reduce the size of government and increase growth, which would further reduce the size of government as a share of GDP. The problem is that this idea presupposed that there was significant support in Congress to reduce the deficit. Unfortunately, there has been no serious concern about the deficit in either party since the end of the Clinton administration. While both parties share some blame in this regard, there’s no question that more of it belongs to Republicans.... [T]he whole premise of starve-the-beast theory has gone straight down the toilet. Yet, to my amazement, Republicans and Republican lackeys continue to talk about cutting taxes with no corresponding spending cuts as if it is the height of fiscal responsibility. (See this silly Larry Kudlow column and Diane Rogers’ evisceration of it here.) When pressed, they fall back on "starving the beast" even though there is not one iota of evidence giving it operational meaning since at least 1996.... It has become, in fact, nothing but a license for Republican fiscal irresponsibility...


The Washington Post:

Editorial: The earth is warming. A chief cause is the increase in greenhouse gases accumulating in the atmosphere. Humans are at least in part responsible, because the oil, gas and coal that we burn releases these gases. If current trends persist, it’s likely that in coming decades the globe’s climate will change with potentially devastating effects for billions of people. Contrary to what you may have read lately, there are few reputable scientists who would disagree with anything in that first paragraph. Yet suddenly we’re hearing that climate change is in doubt and that action to combat it is unlikely. What’s going on?

Matthew Yglesias explains:

Shockingly, however, in their discussion of “what’s going on” they completely neglect to mention the fact that The Washington Post—home of one of the most influential op-ed pages in America—consistently publishes climate denialist tracts that seek to deliberately mislead the paper’s audience. Something the world certainly won’t miss when the Post and the vast majority of its fellow big city dailies are out of business is this kind of prissy evasion. If the rationale for publishing liars in the Post’s opinion section is that it’s important for the opinion section to represent the full range of the debate, then the Post needs to take into account the fact that this editorial stance is part of “what’s going on” in the climate debate. Alternatively, if they want to take the stance that accuracy matters to the owners and editors of the Washington Post, then they need to stand up to inaccurate and misleading writing in their own pages.

6) DELONG SMACKDOWN OF THE DAY: Paul Krugman: Brad DeLong’s Foolishness:

Brad looks at John Cochrane asserting that fiscal expansion does nothing but shift money around, and tries to figure out Cochrane’s model. It’s a hopeless quest. Ever since I got into this fight, I’ve been trying to explain that there isn’t any model there. Eugene Fama, at least, and perhaps Cochrane too, began this debate from a position of complete ignorance — not understanding at all the logic of Keynesian models (even for the purposes of debunking), and imagining that the savings-investment identity necessarily implies 100-percent crowding out. There was no deeper logic. And since then, what we’ve been witnessing is a simple matter of digging in, refusing to admit a mistake. I do not believe that Cochrane has, in his head or on the back of his envelope, a maximization-and-equilibrium model that justifies what he’s saying, or explains why, for example, Mike Woodford’s all i’s dotted and t’s crossed analysis is nonsense.

7) GRAPH OF THE DAY: We Don't Have an Excess of Home Builders Any More. We Haven't for Two Years:

HousingStartsVacancyRateJan.jpg (image)

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Arnold Schwarzenegger: GOP engaging in 'bogus talk' on health care:

While Republican leaders in Washington are urging President Barack Obama to start from scratch on a health care bill, California Gov. Arnold Schwarzenegger on Monday dismissed the idea as "bogus talk." It marked the second day in a row that Schwarzenegger strayed from his party's positions. On Sunday, he defended Obama's economic stimulus plan and chided elected officials, most of them Republicans, who oppose the overall stimulus but are quick to trumpet individual projects in their states that are paid for by the stimulus.

Standing outside the White House after meeting privately with Obama on Monday, Schwarzenegger touted the economic stimulus plan yet again. "I think the stimulus package has been very successful so far, and I think California has benefited tremendously," he said.

Schwarzenegger also said it's good that the president is reaching out to Republicans as he prepares for this week's health care summit with congressional leaders. "Since half of the people are Republicans, why would you exclude Republicans?" he asked. "Then half of the people hate you for having done health care reform." He sided with Obama on the question of the starting point for the talks, saying it would be wrong to begin all over in preparing health care legislation for Congress to consider. "I think any Republican that says you should start from scratch, I think that's bogus talk, and that's partisan talk," the governor told reporters.

9) STUPIDEST THING I HAVE READ TODAY: John McCain, as observed by Barney Frank:

Rep. Barney Frank (D-Mass.) completely unloaded on John McCain last night, blasting the Arizona Republican for making "pathetically untrue" and "cowardly" statements about TARP. McCain made a stir yesterday when he told the Arizona Republic that he voted for TARP because he had been misled by then-Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke. He also said that President Bush had asked him to suspend his campaign and come back to Washington for negotiations. Democrats ridiculed the move as a political stunt.

Appearing on MSNBC last night, Frank said both of those claims were dishonest. Addressing McCain's claim that Bush asked the nominee to come back to Washington, Frank was blunt:  "This is such a pathetically, obviously untrue statement. Those of us who were there know it." Frank said it was clearly McCain's own decision to insert himself into the negotiations because he wanted to play the hero. "He reminded me of kind of Andy Kaufman as Mighty Mouse: 'Here I come to save the day,'" Frank quipped. Frank then took on McCain's claim that Paulson and Bernanke had misled him about the proposal. "For him to blame Paulson or Bernanke is cowardly," Frank said. "This was Bush. Paul and Bernanke were acting for George Bush." He added: "I've gone beyond being disappointed for John McCain to feeling sorry for him."

10) HOISTED FROM THE ARCHIVES: Brad DeLong (December 2007): Three Cures for Three Crises:

A full-scale financial crisis is triggered by a sharp fall in the prices of a large set of assets that banks and other financial institutions own, or that make up their borrowers' financial reserves. The cure depends on which of three modes define the fall in asset prices.

The first -- and "easiest" -- mode is when investors refuse to buy at normal prices not because they know that economic fundamentals are suspect, but because they fear that others will panic, forcing everybody to sell at fire-sale prices. The cure for this mode -- a liquidity crisis caused by declining confidence in the financial system -- is to ensure that banks and other financial institutions with cash liabilities can raise what they need by borrowing from others or from central banks. This is the rule set out by Walter Bagehot more than a century ago: Calming the markets requires central banks to lend at a penalty rate to every distressed institution that would be able to put up reasonable collateral in normal times....

In the second mode, asset prices fall because investors recognize that they should never have been as high as they were, or that future productivity growth is likely to be lower and interest rates higher. Either way, current asset prices are no longer warranted. This kind of crisis cannot be solved simply by ensuring that solvent borrowers can borrow, because the problem is that banks aren't solvent at prevailing interest rates... applying the Bagehot rule would be wrong. The problem is not illiquidity but insolvency at prevailing interest rates. But if the central bank reduces interest rates and credibly commits to keeping them low in the future, asset prices will rise. Thus, low interest rates make the problem go away, while the Bagehot rule -- with its high lending rate for banks -- would make matters worse....

The third mode is like the second: A bursting bubble or bad news about future productivity or interest rates drives the fall in asset prices. But the fall is larger. Easing monetary policy won't solve this kind of crisis, because even moderately lower interest rates cannot boost asset prices enough to restore the financial system to solvency. When this happens, governments have two options. First, they can simply nationalize the broken financial system and have the Treasury sort things out -- and reprivatize the functioning and solvent parts as rapidly as possible. Government is not the best form of organization of a financial system in the long term, and even in the short term it is not very good. It is merely the best organization available. The second option is simply inflation. Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets. Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business...