Things get really mind-blowing when one reads Mr Blanchard's explanation of why economists used to think that a higher inflation target wasn't necessary:
The danger of a low inflation rate was thought, however, to be small. The formal argument was that, to the extent that central banks could commit to higher nominal money growth and thus higher inflation in the future, they could increase future inflation expectations and thus decrease future anticipated real rates and stimulate activity today.
In other words, it was fine to have low inflation, because if monetary policy ever got wedged up against the zero bound, then the central bank could simply work to raise long-run inflation expectations. But that's just what Mr Bernanke is now refusing to do. This would seem to make the case for a higher target, in good times and bad, much stronger. If it seems likely that skittish central bankers will be reluctant to do what's necessary to raise inflation expectations when they're caught against the zero bound, then it makes sense to do what you can to keep them out of that situation.
Spain, with its 20% unemployment rate and exploding budget deficit, sees in Greece an image of its own future. Or, if it doesn’t, the markets do. Portugal and Italy are little better. Like Greece, these countries now face sharp budget cuts. Like Greece, they can’t devalue to encourage exports. Like Greece, they face deep recessions. Like Greece, they will be tempted to ask for help. All of this raises the obvious question: Was the real mistake creating the euro in the first place? Since I was one of the few Americans to advocate a single European currency, you would be justified in asking: Am I having second thoughts?
My answer is no, creating the euro was not a mistake, but it could still be a mistake in the making. The Greek crisis shows that Europe is still only halfway toward creating a viable monetary union.... Completing its monetary union requires Europe to create a proper emergency financing mechanism. Currently, other member states can provide assistance to Greece only by bending the rules.... When Europe’s leaders do help, it makes the public and markets think that they are being dishonest. If it is the Lisbon Treaty that creates these problems, then the Lisbon Treaty should be changed. Moreover, assistance should come not just with conditions, but with temporary control of the national budget by a committee of “special masters” appointed by the European Union. Mere promises by the recipient, history tells us, are not enough. No doubt, countries to which these measures are applied will express outrage. Well, no one is forcing them to take the money. Worried about moral hazard? Here’s your solution. Note also that this would also be a much more effective disciplining mechanism than the defunct Stability and Growth Pact.
You might well ask: how would Californians feel if their state was forced to turn over its budget temporarily to a special master appointed by President Barack Obama’s administration? Actually, they would probably feel okay. The special master would not be a fellow Californian, but he would be a fellow American. People would understand that he was acting in the interest of the state as well as the country. They would also be reassured by the fact that California sends representatives to Washington, D.C., where the special master’s marching orders would be issued...
[T]here’s a huge tendency among journalists to underrate the extent to which macroeconomic conditions drive everything in politics.... John Sides reviews the data....
The economy explains about 75% of the variance in trust.... Of course the economy is not the only important factor. But it gets far less attention than it deserves when the hand-wringing begins.... More people will trust the government again when times are good, even if government ain’t. One reason this kind of thing doesn’t get as much attention as it deserves, of course, is that it’s against the professional interests of the political operative class to admit that objective macroeconomic factors are what drives most political outcomes. But this one again highlights how insane it was of Democrats in the White House and on Capitol Hill to ignore Christina Romer when she said the economy needed a $1.2 trillion stimulus and deliver a $700 billion stimulus instead.
We can argue about whether the White House or the Hill was the main locus of the madness, but it was truly mad. More effective macroeconomic stabilization policy would have made Obama more popular and made the public more confident in the ability of the government to govern. That, in turn, almost certainly would have improved the situation facing congressional Democrats. Ironically, it’s the very vulnerable Democrats who were most inclined to trim the stimulus who are now most likely to pay the price for their own short-sightedness.
4) Adam Ozimeck: Canadian Catholics and School Choice:
A new paper by David Card, Martin Dooley, and Abigail Payne looks at Ontario’s unique public school system, which includes secular public schools and Catholic public schools open only to Catholics, to estimate the impacts of school choice and school competition: "For non-Catholics, the Ontario system functions like a typical public system in the U.S. with a single monopoly provider. For the 40% of children with Catholic backgrounds, however, the system is effectively a voucher program with two competing suppliers. Although choice is limited to Catholics, the financial incentives to compete for Catholic students potentially impact the quality of schooling for all students. Our goal is to measure the effects of these incentives using standardized student test score gains between 3rd and 6th grade." They find that a more competitive school market, where a higher percentage of students are Catholic, leads to better performance in both Catholic and secular public schools. They estimate that if school choice was made available to all students, rather than just the Catholic students, overall performance would increase overall 6th graders standardized test scores by 6-8% of a standard deviation. These results reinforce the idea that the impact of charter schools and voucher programs shouldn’t just compare the performance of students admitted to the programs to those that aren’t, since the main impact may be to increase test scores throughout the entire school system.
5) GRAPH OF THE DAY: Realized Equity Risk Premium:
6) BEST NON-ECONOMICS THING I HAVE READ TODAY: Buce: Appreciation: Kate Brown's Report from Nowhere:
Kate Brown has written a wonderful book, A Biography of No Place: From Ethnic Boderland to Soviet Heartland , on the shadowy roots of statehood in the void between Poland, Russia, the Ukraine and heaven knows what else, fit to stand on the shelf with Benedict Anderson's Imagined Communities and John Scott's Seeing Like a State, but she seems to have paid the price for it by spending a lot of her youth in disagreeable, not to say muddy, places.... Brown asserts that it was the Soviets who did most to imposes nationalist/ethnic identities in Eastern Europe--ironic, for an ideology so committed to internationalism--and then turned on its progeny when they began to stand on their own feet. Her particular focus is Dovbysh, once Marchlevsk, once burned (i.e., from above, from Moscow) with the peculiar destiny of becoming a center of Polish culture and society.... "In order to reform" she continues, "modernizing societies first take stock.... Jews were relatively easy to count.... Germans too were distinguished by religion and tradition..."
The Polish population, however, was more ambiguous. Although the official statistics listed the population of Poles in the Marchlevsk territory as 70 percent of the total population, less than half of tht number actually spoke Polish; fewer than half of those spoke it well and used it daily.... When asked to state their nationality, many peasants replied simply "Catholic." One peasant said he spoke quite well the "Catholic language." Other peasants said they spoke po-chlopski, "in the peasant way," or "in the simple way" (pro-prostomu) or "the languge of here" (tutai'shi). Investigators went form location to location reporting that no two villages were alike, each place contained a different blend of language, ethnicity and social composition.
This sometimes-comical chasm of bewilderment and incomprehension certainly doesn't excuse, but it may help to explain, the epidemic of paranoia, emanating first from Stalin himself, that turned the Bolshevik regime into an enemy of the people...
7) STUPIDEST DELIBERATIVE BODY EVER: *The United States Senate, as observed by Paul Volcker:
Congress has never been more dysfunctional than it is right now, and its preventing progress on crucial financial reform, lamented Former Fed Chairman Paul Volcker in an interview aired Sunday on CNN’s “Fareed Zakaria GPS.” “Capitol Hill -- the Senate – is dysfunctional. I’m very disturbed by the trend in the government generally and its inability to get together and do things,” said Volcker, who serves as a top outside economic adviser to President Barack Obama. Volcker said he had hopes that financial reform would prove an exception to that trend. “This is a relatively neutral subject politically," he said. "The need is so clear here, and its not an ideological issue – it shouldn’t be anyway…. It’s a practical issue. And I’m disturbed that they can’t get together.”
To illustrate the degree of dysfunction, Volcker pointed to the fact at a time when reforming the financial system is such a priority the Senate still hasn’t confirmed high-level Treasury officials. In contrast, in 1969 he was nominated as undersecretary of treasury by Inauguration Day and confirmed about a week later, Volcker recalled. “We are more than a year after the inauguration and neither the undersecretary for international [affairs] or the undersecretary for domestic finance – you don’t have them. It’s not because people haven’t been put forward. It took them a long time to get them nominated and an impossible amount of time to get them confirmed. … What’s going on here?” Volcker asked. “How can the Treasury effectively function … without the top officials in place that are needed. … What’s the matter with this government that we can’t even get together and get the administration installed.”
8) STUPIDEST THING I HAVE READ TODAY: Harry Reid, as observed by Barbara Krivat:
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...
9) DELONG SMACKDOWN WATCH OF THE DAY: Henry Farrell: DeLong, Scott and Hayek: Another, more homely
Brad criticizes Scott’s discussion of the much-cited tasteless tomato arguing that it are an example of market success rather than failure – people bought tasteless tomatoes because they were cheap. This seems to me to have a bit of a flavor of a revealed preferences argument, and also to miss the point. I lived in Florence for three years, a city which has cheap and delicious tomatoes.... I strongly suspect that the deliciousness of the tomatoes had a lot to do with informal relationships between the small shops where you bought the tomatoes, the small companies that delivered them, and the small farms from where they were bought. Certainly, this would be consonant with the research that I and many others have done on the Italian political economy and how it works. Italy protects small businesses and local communities in a lot of ways. This means that it misses out badly on certain economies of scale. It also means that certain kinds of high quality production are possible in Italy that are difficult or impossible to replicate elsewhere – a myriad of small firms cooperating to produce final goods through purely informal means. Hence the success, for example, of Italian sunglasses, shoes, and (the rather unglamorous topic of my own research) packaging machinery. All of these build on forms of informal knowledge that would likely be damaged in a more standard market economy, where collaboration happened (to the extent that it did), within the hierarchy of the firm, or through arms-length contracts. Thus, there are trade-offs. Italian firms in small-firm districts are excellent at gradual innovation and refinement of knowledge – in part because of their reliance on metis. They are not so good at producing profound, industry-changing forms of innovation. They also tend to stick closer to home than their equivalents in other countries (somewhat ironically, they replicate the logic of Avner Greif’s mediaeval Maghribi merchants far more than the behaviour of his Genoese traders).
To return to the more homely example of food, Florence has an excellent restaurant culture, where you can eat out cheaply and incredibly well if you avoid the tourist traps. But it systematically emphasizes local cuisine, along with a few imports from the South (pizza and pasta) and the north (some Bolognese and Milanese dishes). Chinese food in Florence is (or was when I was there) terrible, and Indian food was relatively very expensive and no better than mediocre.... In contrast, most US cities of my experience have a lower overall standard of food, but a much greater variety of restaurants producing different cuisines, sometimes at a quite high standard of quality....
This allows me to come back to the roots of my disagreement with Brad. Brad is a fan of markets, and believes that they contribute in very important ways to human freedom. I agree with him on this. But I think that Brad sometimes underemphasizes the real trade-offs that markets may involve, and overstates his criticisms of people who are concerned with these trade-offs. Sometimes, perhaps often, these trade-offs are relatively slight – as Brad says, many forms of redundant local knowledge can be discarded without compunction. Sometimes, these trade-offs are real, but still worthwhile – while we should acknowledge the costs of markets, we should acknowledge that the benefits of introducing them are higher. And sometimes they are not worth paying – there are areas of social life where marketization has more downsides than advantages. (the question of which areas of social life fall under which category is obviously important, but this post is much too long already)...
10) HOISTED FROM THE ARCHIVES: DeLong (August 2002): Wealth Satiation:
At what level of material wealth does one become, completely, totally, utterly sated? How much stuff--how many things--how much power to buy and control does one have to have before one can say "enough is enough," stop playing the game for increased wealth, and start playing some other, different game? Here is discouraging psychological evidence from publishing magnate and Rolling Stone founder Jann Wenner. It turns out that--at least as far as he is concerned--wealth in nine figures isn't enough yet to make him not care...
Premium Blend: A group weblog from the editors of Corante: What's your number? How much is enough? It may be more than you think: ''I had a fascinating conversation recently with Jann Wenner, the founder of Rolling Stone. Here's a guy who's probably got three or four hundred million dollars--he's got a Gulfstream II and a house here and a house there, and you can't imagine what trappings he could want from the next level. But he's got this gleam in his eye because he's telling me about how he spent the weekend with Paul Allen. He said that Paul Allen didn't have a GII, he had two 757s. They flew over to, like, Nice, and then they got into Paul's helicopter, which took them to Paul's boat, which stays sort of off the coast of southern France. And I could tell that Jann was picturing himself at the next level--the multi-billionaire. And I was fascinated by that because, holy shit, if that's not enough for Jann, why do I think I'm going to be able to get off the conveyor belt?''