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May 2010

is the U.S. Like Greece?

Paul Krugman says no, and has a graph:

Are We Greece? - Paul Krugman Blog -

And he spanks David Leonhardt:

Are We Greece?: David Leonhardt tries to draw parallels. But how strong is the parallel, really? I would really question this comparison:

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

Um, that’s comparing a (highly uncertain) projection of debt 20 years from now — a projection that’s based on the assumption of unchanged policy — with actual debt now. Actual US federal debt is only about half that high now.... Greek debt is projected to rise to 149 percent of GDP over the next few years — and that’s with the austerity measures agreed with the IMF.

Here’s a more or less apples-to-apples comparison... Auerbach-Gale projections... IMF projections for Greece, subtracting out... the austerity measures agreed in return for official loans.... [T]he United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t. Yes, the United States needs fiscal adjustment — Auerbach and Gale say that we have a long-run fiscal imbalance of 6-plus percent of GDP, although much of that could be closed by reining in health costs. But we really don’t look much like Greece.

Say It Ain't So, David...

Any story about the U.S. deficit today that does comparisons between the U.S. and Europe aiming to inform its readers really needs to make six points:

  1. Starting around 2020 the U.S. has to finally solve the problem that Ronald Reagan created in the 1980 presidential campaign with his claim that the federal government could tax like Alabama and spend like Connecticut and somehow everything would work out. It won't. The U.S. has another decade to decide whether it wants to tax like Alabama and spend like Alabama, or tax like Connecticut and spend like Connecticut.

  2. Financial markets continue to be astonishingly confident that the U.S. will in fact solve this problem: U.S. Treasury bonds continue to sell at astonishingly high valuations.

  3. As long as unemployment is unduly elevated--above 7.5%, say--our major economic ill connected with big deficits is not excessive deficits forecast for the 2020s and beyond but excessive unemployment and idle capacity now.

  4. An even larger U.S. budget deficit now would be a useful tool to help cure our major current economic ill by booting demand: right now the problem is not that our deficit is too large for the economy but that it is too small.

  5. Some fear that large deficits today are undermining financial market confidence in the long-term fiscal stability of the United States. So far there are absolutely no--absolutely no--signs in financial markets that our current large deficits: U.S. Treasury bonds continue to sell at astonishingly high valuations.

  6. Should financial markets begin at some point in the future to lose confidence in the long-term fiscal stability of the United States, that does not mean that the United States turns into Greece. Greece does not control the currency in which its government borrows. The U.S. does. That makes a huge difference.

By my count, David Leonhardt makes point (1) at great length, makes point (2) very briefly, doesn't make point (3) at all, doesn't make point (4) at all, doesn't make point (5) at all, and doesn't make point (6) at all.

Why not, David?

David Leonhardt:

In Greece, a Reflection of U.S. Debt Problems: It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can. Yet in the back of your mind comes a nagging question: how different, really, is the United States? The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today. The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country. Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator. Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government. Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals. The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint.

This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out.... “Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state.... Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility. It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit. As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt. As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs). Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear. Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient.

What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth. Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices. “It’s not a matter of whether we have the resources to solve our problems,” as Alan Krueger, the chief economist at the Treasury Department, says. “It’s a matter of political will.” For now at least, our elected officials are hardly the only ones who lack that will.

Eleanor Roosevelt Liveblogs World War II: May 12, 1940

Eleanor Roosevelt:

My Day: The news that Holland and Belgium had been invaded came over the radio on Friday morning, but I could not write about it that day. I had a curious sense of having lost the last vestige of hope that the imprint of civilization still made any dent on certain parts of the world.... [W]e, in the democracies, have prepared ourselves for a civilized, peaceful world, and we have almost forgotten that a bandit may turn up who does not understand our language nor hold to any of our beliefs.

There is little use in looking backwards. We have to face the realities of the present, and move step by step along a twisting way hoping that we act in the best way for the preservation of our civilization.... Many people say today that they want to live for democracy and I hope that in saying it they really know what they mean. To really mean that, here in this country, will require a firm determination to prove that democracy can work from the economic as well as from the political standpoint.... How to preserve the freedoms of democracy in a world that seems to be bent on destroying them, and how really to make democracy work at home prove that it is worth preserving. These are two things to achieve. These are the questions.... Let us pray that we shall have the courage and the honesty to strive for the right whatever the cost.

links for 2010-05-11

  • NS and TP: Cokie Roberts moderated Laura Bush's appearance at George Washington University... the crowd... didn't see the unusual happenings backstage: The former first lady's staff was sifting through the audience question cards, keeping some and discarding others, before handing an approved pile of questions to the award-winning journalist. Christine Cimino, public affairs director at the Smithsonian Associates, which hosted the event Thursday, told Yeas & Nays that narrowing down audience questions is "pretty standard for this type of thing." But vetted by the interviewee's staff?... Roberts... calling herself "an enormous Laura Bush fan." Roberts didn't return a call..."
  • MW: "So where do we go from here?... confront big choices. The first... is whether to go towards greater integration or towards disintegration. The answer has to be the former.... The second... will have to police divergence in upswings and cushion adjustment.... This is why a monetary fund is essential. Any such policing must influence the policies of both demand-deficient and excess-demand economies.... The third is how to facilitate changes in competitiveness. This means labour market reform. It may also mean legal means for adjusting nominal wages, on a one-off basis. The fourth is over how to reinforce solidarity.... The last is over how to restructure excess debt. This must be allowed. The alternative creates vast moral hazard, not among politicians, as has been feared, but among financiers. As my colleague, Wolfgang Münchau, has made plain, this is now a moment of truth, especially for Berlin. The survival of the eurozone is overwhelmingly in Germany’s long-term interests..."
  • GT: " it was Portugal and Spain, not Ireland, hogging the headlines last week. Why? Part of the explanation lies in Ireland’s underlying economic situation, which is not as bad as that of Greece or Portugal. Net debt to GDP, for example, in Ireland is projected to be about 50 per cent next year, half the level of Greece. But numbers alone do not tell the whole tale. There are two other, less tangible factors that appear to have played a role in the Irish story – and which are also influencing the way international investors look at government bond risk. One of these is the issue of political infrastructure or, more specifically, whether a country has the decision-making machinery in place to cut debt. The second is a question that financiers rarely worried about before: namely, social cohesion, and whether a government is able to impose tough choices on a society without sparking political instability, social turmoil or worse. Greece does not fare well on either of these counts..."
  • FP: "I have been an outspoken critic of Wall Street.... I continue to criticise banks, including Goldman, for their role in selling subprime mortgage deals. But I am troubled by government officials’ relentless focus on Goldman. They are firing at the wrong bank, with the wrong bullets. Goldman is not to blame for this financial crisis. Of the banks that dominated the market a few years ago, why would the government target the only one to survive the crisis financially intact? It is not because Goldman was unique. In Abacus 2007-AC1, Paulson & Co, a hedge fund, suggested securities for the deal and also bet against it in a swap with Goldman. That feature is not uncommon.... Nor is the government scrutinising Goldman because it posed any special danger during the meltdown.... [I]f the other big investment banks had made similar “net short” trades in 2007, there would not have been a financial crisis... why chastise the only prudent investment bank?"
  • CR&VR: "It's easy to imagine that this is a thoroughly 21st-century financial calamity, wrought by modern financial products and a hyper-connected global economy. But in fact, governments have borrowed to live beyond their means -- and have had trouble paying their debts -- for about as long as there have been governments. From the 14th through the 19th centuries, monarchies routinely resorted to debasing their currencies, expropriating private property and defaulting on their debts. And their failure to honor their obligations usually produced severe economic hardship for their populations. More recently, countries have often defaulted on their debts or been forced to restructure their payments. Some have done it multiple times; for the past 180 years, Greece has been in default about half the time..."
  • MC: "[M]any Labour MPs are against a Lib-Lab coalition, from across the party, and ministers too.... And remember the depleted Parliamentary Labour Party is full of MPs from areas like Scotland and northern England where Labour is in fierce competition with the Lib Dems.... The clincher for me though was a Lib Dem MP who is pretty sympathetic to Labour telling me this morning that a deal with the Conservatives was the only viable option. "I can't believe how much they've offered us," he said. "The Tories have basically rubbed out their manifesto and inserted ours. We'll have to cope for four or five years with our flesh creeping, but still.""

Is There Any Gold in Here?

There are 155 comments to Martin Wolf's question:

Must large capital inflows always end in crisis?

How many of them are worth reading?

(My answer to Martin Wolf's question "whether it is possible for countries to accept large net inflows of capital from abroad, without ending up in crisis" is "yes": If you: 1. borrow in your own currency; and 2. keep a reasonably tight rein on the leverage of your banks, real-estate firms, and operating companies; then you can accept large net inflows of capital from abroad without ending in a major crisis. And, of course, even if it does end in crisis the large net inflows may have done more good beforehand than is done by the harm of the crash. It depends: On what terms was the money offered? How does the workout proceed?)

The iPad Is a Force Multiplier for Martin Wolf

A correspondent notes:

Now that I have an iPad, the podcasts of Martin Wolf are accessible to me during the commute in a way that they simply were not before.... And now my chief complaint is that he doesn't do enough of them.... The iPad is going to be a huge boost to people who can talk coherently and intelligently at moderate length.

And who can remember to look into the camera as if it were a human being...

And to Think This Clown Is the de Facto Leader of the Republican Party...

Back at the start of the Clinton Administration National Review annointed Rush Limbaugh "the leader of the opposition." Ever since, it has been true: he has been the de facto leader of the Republican Party.

And he is truly a clown: his latest clown show is his claim that the addition of the XIII Amendment abolishing slavery made the Constitution imperfect.

Media Matters:

Why is Rush Limbaugh defending slavery?: Rush Limbaugh attacked Supreme Court nominee Elena Kagan for citing former Justice Thurgood Marshall's statement that the Constitution as originally written was "defective"... because it [before the XIII Amendment] permitted slavery and did not guarantee women's suffrage.


This is who Elena Kagan idolizes, Justice Marshall, who said the Constitution as originally drafted and conceived was 'defective'...

Clean house, Republicqns. Until you get rid of this clown, no American has any business giving money to, working for, or voting for any Republican candidate.

How Can I Not Drop Everything and Spend the Rest of Today Reading This Book?

From Francis Spufford, Red Plenty (Faber and Faber):

In the twentieth century Russians stopped telling skazka. And at the same time they were told that the skazka were coming true. The stories' name for a magic carpet, samolet, 'self-flyer', had already become the ordinary Russian word for aeroplane. Now voices from the radio and the movie sreen an television began to promise that the magic tablecloth samobranka, 'self-victualler', would soon follow after. "In our day" Nikita Khrushchev told a crowd in the Lenin Stadium of Moscow on 28 September 1959:

the dreams mankind has cherished for ages, dreams expressed in fairtytales which seemed sheer fantasy are being translated in to reality by man's own hands...

He meant, above all, the skazka's dreams of abundance. Humanity's ancient condition of scarcity was going to end, imminently. Everybody was going to climb the cabbage stalk... and arrive in the land where millstoners revolved all by themselves.

Whenever they gave a turn, a cake and a slice of bread with butter and sour cream appeared, and on top of them a pot of gruel.

Now, instead of being the imagined compensation for an empty belly, the sour ream and the butter were truly going to flow.

And, of course, Khrushchev was right. That is exactly what did happen in the twentieth century, for hundreds of millions of people.... But Khrushchev believed that the plenty of the stories was coming in Soviet Russia, and coming because of something Soviet Russia possessed and the hungry lands of capitalism lacked: the planned economy. Because the whole system of production and distribution in the USSR was owned by the state... it could be directed, as capitalism could not, to the fastest, most lavish fulfilment of human needs. Therefore it would easily out-produce the wasteful chaos of the marketplace. Planning would be the USSR's own self-turning millstone, its own self-victually tablecloth.

This Russian fairytale began to be told in the decade of famine before the Second World War, and it lasted officially until Communism fell. Hardly anyone believed it, by the end.... But once upon a tiem the story of red plenty had been serious: an attempt to beat capitalism on its own terms, and to make Soviet citizens the richest people in the world. For a short while it looked--and not just to Nikita Khrushchev--as if the story might be coming true. Intelligence was invested in it, as well as foolishness: a generation's hopes, and a generation's intellectual gifts, and a tyrannys guilty wish for a happy ending. This book is about that moment. It is about the cleverest versino of the idea, the most subtle of the Soviet attempts to pull a working samobranka out of the dream country. It is about the adventures of the idea of red plenty as it came hopefully along the high road...

Should We Ban Naked CDSs?

I say, narrowly, no--that if we can get proper clearing, transparency, and capital adequacy requirements in place banning naked CDOs would not do any good and would do a little bit of harm. But it is a close call. And if we can't get proper clearing, transparency, and capital adequacy requirements in place then we should ban them.

Let's go back to first principles. The direct benefits of having more developed, liquid, and sophisticated financial markets are threefold:

  • They allow people to buy insurance: people facing or holding too much of one particular risk can trade piece of it away to others, and so make a win-win deal: the buyer of insurance makes a negative expected value bet but one that, given the magnitude of the distress that would be caused if the risk became reality, they are happy to make; the sellers of insurance make a positive expected value bet.

  • Saving and investment: people with wealth who went to spend later can make win-win deals with people with ideas who need financing to turn those ideas into productive and profitable enterprises.

  • People who have done research and learned information about the structure and likely evolution of the market can bet on their knowledge: they win because they make their positive expected-value bets, and everyone else wins because after they have bet financial market asset prices better reflect fundamental social values and scarcities, and so are better guides to private and public economic planning.

The disadvantages of having more developed, liquid, and sophisticated financial markets are fourfold:

  • People who are excessively and irrationally averse to risks can trade those risks away at a price, and so lose wealth because they are shrinking at shadows.

  • People are are excessively and irrationally unconcerned about risks can trade to accept those risks, and so lose wealth because they are excited by the thrill of tossing the dice.

  • A more developed financial market is one in which it is easier to make money by unfairly appropriating somebody else's information through insider trading.

  • A more developed financial market is a more fragile market: when prices move suddenly and bankruptcies and failures to deliver emerge, it destroys the web of trust in asset values that the smooth intermediation of the circular flow of economic activity requires, and the result is depression.

In general, you want to set up your financial markets so that they do as good a job as possible at (i) rewarding those who work hard doing research into fundamental values, (ii) matching individuals with wealth to save with entrepreneurs with ideas to try out, and (iii) enabling those who want to shed diversifiable risk to do so. And you want to set up your financial markets to minimize (i) the irrationally risk-averse's ability to throw away their money, (ii) the irrationally risk-loving's ability to throw away their money, (iii) the unfair appropriation of other people's information through insider trading, and (iv) the chance that a chain of bankruptcies and failures-to-deliver will disrupt the web of trust, cause a flight to liquidity and quality, and create a depression in the real economy.

There is an eighth consideration, however, and which way it cuts---whether it is a benefit or a disadvantage--is unclear:

  • A more developed financial market increases the chance that somebody who thinks market prices are too low and wants to buy will find a counterparty who thinks that market prices are too high and wants to sell.

This eighth consideration is definitely not win-win. One of the two parties is definitely wrong--prices right now are, if they are not exactly right, either too high or too low. Both think that they are getting a good deal, but both cannot be correct. As far as the two parties are concerned, these trades are at best zero-sum and probably less than zero sum: risk is, after all, increased.

However, when all the people making too-high and too-low bets meet in the marketplace prices move until the number who think prices are too high (and are willing to put their money behind that belief) equals the number who think prices are too low (and are willing to put their money behind that belief). This reveals the balance of opinion, and so moves financial market asset prices to a place where they better reflect fundamental social values and scarcities, and so are better guides to private and public economic planning.

On the other side of the argument, somebody is holding a portfolio that is based on false beliefs about the way the world works. Such people are especially likely to fail when reality comes calling--and so encouraging these directional-bet transactions increases the chance that, when reality comes calling and when prices move suddenly, they go bankrupt or fail to deliver--and that destroys the web of trust in asset values that the smooth intermediation of the circular flow of economic activity requires, and the result is depression.

George Soros believes that this last consideration should lead us to limit the extent to which our financial markets are friendly to directional bets. Thus he calls for the banning of "naked" credit default swaps:

George Soros Says Credit Default Swaps Need Much Stricter Regulation: AIG failed because it sold large amounts of credit default swaps (CDS) without properly offsetting or covering their positions. What we must take away from this is that CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them. Instituting this rule would tame a destructive force and cut the price of the swaps....

CDS came into existence as a way of providing insurance on bonds against default. Since they are tradable instruments, they became bear-market warrants for speculating on deteriorating conditions in a company or country. What makes them toxic is that such speculation can be self-validating. Up until the crash of 2008, the prevailing view -- called the efficient market hypothesis -- was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don't deal with the current reality, but with the future -- a matter of anticipation, not knowledge....

[B]eing long and selling short in the stock market has an asymmetric risk/reward profile. Losing on a long position reduces one's risk exposure, while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. This asymmetry discourages short-selling. The second step is to recognize that the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry... exerts a downward pressure on the underlying bonds.... The third step is to recognize reflexivity, which means that the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect... bear raids on financial institutions can be self-validating.... AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule.... The unlimited shorting of bonds was facilitated by the CDS market.... Many argue now that CDS ought to be traded on regulated exchanges. I believe that they are toxic and should only be allowed to be used by those who own the bonds, not by others who want to speculate against countries or companies...

Tim Geithner disagrees:

Seeking Alpha: My own sense is that banning naked (CDS) volumes is not necessary and wouldn’t help fundamentally in this case. It’s too hard to hard to distinguish what’s a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome.... [T]he absolutely essential thing is that there is more capital held against these positions so we never again face the situation where those types of judgments could imperil the system...

I call this one, narrowly, for Geithner: The key elements are clearing, transparency, and capital adequacy requirements that maximize the flow of information into market prices from the fact that people with money are willing to put it on the line to back their predictions and that minimize the chances of disruption of the web of trust.

Oberkommando des Heeres Liveblogs World War II: May 11, 1940


After crossing the borders of Holland, Belgium and Luxembourg, the German West Army has repulsed the enemy border troops everywhere in Holland and Belgium and, despite the [enemy's] destruction of countless bridges, and despite obstructions of every kind, is on the offensive and advancing rapidly.

Paratroops and airborne troops have landed and are about to carry out their security missions.

Luftwaffe units, flying in relays, are supporting the advance of the Army by bombing columns and troop camps, and by damaging or destroying roads, railway lines and bridges. Their sweeping reconnaissance has brought clear information about enemy army movements. Furthermore, on May 10, massed forces of the German Luftwaffe led the first grand assault on the root of the enemy air force in France, Belgium and Holland. 72 airfields were attacked, 300-400 enemy aircraft destroyed on the ground, large numbers of airfield installations and hangars destroyed by fire and explosions...

links for 2010-05-10

Winston Churchill Liveblogs World War II: May 10, 1940

Winston Churchill: May 10, 1940:

Then for the first time I spoke. I said I would have no communication with either of the Opposition parties until I had the King's Commission to form a Government. On this the momentous conversation came to an end, and we reverted to our ordinary easy and familiar manners of men who had worked for years together and whose lives in and out of office had been spent in the friendliness of British politics. I then went back to the Admiralty, where, as may well he imagined, much awaited me.

The Dutch Ministers were in my room. Haggard and worn, with horror in their eyes, they had just flown over from Amsterdam. Their country had been attacked without the slightest pretext or warning. The avalanche of fire and steel had rolled across the frontiers, and when resistance broke out and the Dutch frontier guards fired an overwhelming onslaught was made from the air. The whole country was in a state of wild confusion.

The long-prepared defence scheme had been put into operation; the dykes were opened, the waters spread far and wide. But the Germans had already crossed the outer lines, and were now streaming down the banks of the Rhine and through the inner Gravelines defences. They threatened the causeway which encloses the Zuyder Zee. Could we do anything to prevent this?

Luckily, we had a flotilla not far away, and this was immediately ordered to sweep the causeway with fire and take the heaviest toll possible of the swarming invaders. The Queen was still in Holland, but it did not seem she could remain there long.

As a consequence of these discussions, a large number of orders were dispatched by the Admiralty to all our ships in the neighbourhood, and vlose relations were established with the Royal Dutch Navy. Even with the recent overrunning of Norway and Denmark in their minds, the Dutch Ministers seemed unable to understand how the great German nation, which up to the night before had professed nothing but friendship, should suddenly have made this frightful and brutal onslaught Upon these proceedings and other affairs an hour or two passed. A spate of telegrams pressed in from all the frontiers affected by the forward heave of the German armies. It seemed that the old Schlieffen plan, brought up to date with its Dutch extension, was already in full operation...

links for 2010-05-09

Kevin Drum Provides Democrats with Good SCOTUS Advice

Kevin Drum:

Some Kagan Contrarianism | Mother Jones: maybe it's time for all of us to tone it down on the whole Anthony Kennedy thing. The more we talk about how the next nominee needs to be someone who can wrap Kennedy around their little finger, the more likely Kennedy is to get grouchy and peeved about the whole thing. So let's all just keep this between ourselves from now on, OK?

A Message for Students in the Fall 2010 Instantiation of Econ 1 at U.C. Berkeley

Before you show up here in the fall for Econ 1, please read:

  1. The whole book of Partha Dasgupta, Economics: A Very Short Introduction (ISBN #: 0192853457 Publisher: Oxford)
  2. The "Introduction" and chapters 1 through 5 of Book I (i.e., I:1-5) of Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (available for free on the web or free for Amazon Kindle or Apple iBooks; you can also buy a copy)
  3. Pp. 1-31 of Paul Seabright, In the The Company of Strangers: A Natural History of Economic Life (ISBN #: 978-0691146461 Publisher: Princeton)
  4. Pp. ix-69 of Milton Friedman and Rose Director Friedman, Free to Choose (ISBN #: 978-0156334600 Publisher: Mariner)

Yes, there will be a quiz. :-)

Sincerely Yours,

J. Bradford DeLong
Professor of Economics

Adobe vs. Apple in the Thunderdome

Jeff Croft: On the Android Flash demo at FlashCamp Seattle: Yesterday... FlashCamp Seattle.... In the opening keynote, Ryan Stewart, a Flash Platform evangelist at Adobe, demoed Flash Player 10.1 running on his Nexus One phone. When I realized he was going to show it, I got excited — I’ve been wanting to see how well Flash really works on a phone for years... “Well, this one isn’t going to work, but does anyone have a Flash site they’d like to see running?” Someone shouted out “Hulu.” Ryan said, “Hulu doesn’t work,” and then wrapped up his demo, telling people if they wanted to try more sites they could find him later and he’d let them play with his Nexus One. At that point, I tweeted thusly:

Flash on Android demo crashes twice. Speaker says “What site would you like to see?” Someone says “Hulu.” Speaker says, “Hulu doesn’t work.”

I made no attempt at judgement or analysis — I simply reported what I’d seen, as best I knew how in 140 characters. Now, 24 hours later, that tweet has been retweeted 300+ times.... I felt some responsibility to re-visit it, add a bit of context, and perhaps a bit of my own analysis.... Let’s all be very clear about something: Flash on Android is beta. It’s to be expected that it’s crashy and buggy.... Adobe’s in a tough spot. Flash has been taking a (mostly undeserved) beating in the media recently, and I’m sure they feel like they have to show they’ve got something.... I hope Adobe gets Flash working well on Android soon. Flash is still one of the greatest tools we as web developers have.... But... the question on my mind is: by the time Adobe has Flash working well on mobile, will anyone still care?

Winston Churchill Liveblogs World War II: May 9, 1940

Winston Churchill: May 9, 1940:

After the debate was over [Neville Chamberlain] asked me to go to his room, and I saw at once that he took the most serious view of the sentiment of the House towards himself. He felt he could not go on. There ought to be a National Government. One party alone could not carry the burden. Someone must form a Government in which all parties would serve, or we could not get through. Aroused by the antagonisms of the debate, and being sure of my own past record on the issues at stake, I was still disposed to fight on.

This has been a damaging debate, but you have a good majority. Do not take the matter grievously to heart We have a better case about Norway than it has been possible to convey to the House. Strengthen your Government from every quarter, and let us go on until our majority deserts us...

If I Were a Conservative, I Would Be Too Embarrassed to Show My Face in Public

low-tech cyclist gets on base:

Cogitamus: Can We Just Dump Robert J. Samuelson In a Sewer Right Now?: Today's offal is Robert J. "Not-Paul" Samuelson's pet theory that the reason our politics in general is so "poisonous[ly] polariz[ed]" is that "politics increasingly devotes itself to making people feel good about themselves -- elevating their sense of self-worth and affirming their belief in their moral superiority." Not-Paul might have a point if the two parties were largely fighting over issues of little real-world significance but fraught with moral implications - if most current partisan issues were likely to have no wider impact than the debates over midnight basketball or Terry Schiavo.  If that's what our politics looked like, he'd have a case. So does he?  He continues: "Global warming is about "saving the planet." Abortion and gay marriage evoke deep values, each side believing it commands the high ground. Certainly, President Obama pitched his health-care plan as a moral issue"...

Jonathan Chait hits a single to shallow left field, advancing the runner to second:

Michael Barone's Hoovernomics: Michael Barone thinks the Obama administration gave out stimulus money to state governments as a pay off to public employee unions: "Why did districts with state capitals rake in so much money? Because one-third of the stimulus dollars went to state and local governments. The obvious purpose was to shield public employee union members from the economic distress and uncertainty faced by so many Americans in the private sector..."

Since it's pretty clear that Barone does not understand the theory he's arguing against, let me sum it up... in a severe recession, the government wants to pump demand into the economy through deficit spending. The federal government does this in part through "automatic stabilizers" -- during a recession, the decline in income and profits decreases tax revenue, and the increased need for food stamps, jobless benefits and other programs increases. States, however, are required to balance their budgets. Since revenues are falling and expenditures rising automatically, this forces them to cut spending and/or raise taxes automatically just to stay level. In other words, state fiscal policy has a large pro-cyclical effect, deepening the recession. The states lay off police officers, and then those officers stop going out to eat, forcing the local restaurant to lay off waitresses. Etc. The purpose of providing aid to state and local governments is to help soften the pro-cyclical effect. Even with that aid, state government jobs have decreased by 5%, and local government jobs by 4%, over the last year. The ideal fiscal policy during a massive economic crisis would be to temporarily increase the number of government employees, in order to soak up some of the enormous slack in the labor market. Mainstream economists believe aid to state and local governments is one of the most efficient ways to stimulate the economy...

Ezra Klein loads the bases:

Ezra Klein: Shelby Steele cannot imagine that other people think health-care reform is important: In a Wall Street Journal op-ed attempting to explain why Obama stuck to "health-care reform when jobs are a far more pressing problem," Shelby Steele uses the word "grandiosity" four times... "narcissistic" four times. But the word "uninsured" does not appear.... Nor does the word "deficit." No mention is made of the stimulus, which is a massive jobs bill... nor of the smaller jobs bills.... For Steele, it is not even worth considering the possibility that Obama pursued health-care reform -- like a half-dozen or so presidents before him -- because it was important... he does not even feel the need to reject it in his op-ed. He just ignores its possible existence. That makes for a model that has a lot of trouble accounting for Nancy Pelosi and Drew Altman and Atul Gawande and Jonathan Cohn and everyone else who fought for this reform but wasn't named "Barack Obama."... I have trouble imagining how someone can be interested enough in American politics to want to write an op-ed on the subject, but so unaware -- or uninterested -- in even basic facts about policy that this is the op-ed they'd write.

And The Mighty Shrill One Cleans Up:

They Can’t Imagine - Paul Krugman Blog - Jonathan Chait seems puzzled by a Michael Barone column in which Barone can’t imagine that a key part of the Obama stimulus plan, aid to state governments, had any purpose other than to reward unionized government workers. Chait’s puzzlement made me think of Ezra Klein’s somewhat similar puzzlement over a column by Shelby Steele, in which Steele attributed Obama’s push for health care reform to “grandiosity” and “narcissism” — never once mentioning that Obama might have, well, wanted to cover the uninsured.

I think these commentaries are revealing of two things. One is the closing of the conservative mind. I’d like to think that I have a reasonably good understanding of conservative economic doctrine and conservative views on health care; I disagree, but I do know what they have been saying in recent years. Barone and Steele, by contrast, act as if utterly unaware of what people like me, or the president, have been saying and writing: no idea that standard textbook economics says that you should sustain government spending in a recession, no idea that liberals have been trying to get universal health insurance for three generations.

The other thing is the way incomprehension becomes demonization. Because conservatives don’t understand at all what the other side believes, everything becomes a conspiracy theory: Obama must be indulging his grotesque ambition, because who could possibly believe that doing what he did is a good idea?

Every time someone talks about reaching across the partisan divide, remember this: one side literally can’t understand what the other wants.

links for 2010-05-08

  • This paper subjects seven different structural models, all used heavily by policymaking institutions, to fiscal stimulus shocks using seven different fiscal instruments. The most important result is that there is considerable agreement across models on both the absolute and relative sizes of different types of fiscal multipliers. Three other conclusions stand out. First, the size of many multipliers is large, particularly for spending and targeted transfers. Second, fiscal policy is most effective if it has some persistence and if monetary policy accommodates it. Third, permanent fiscal stimulus has significantly lower initial multipliers, and reduces output in the long run.
  • GL: "So why did the Post put a so-called news story about the book... on Page 1? And why did it fail to cite its lies instead of just saying that the main-stream media had pointed some out. All the story did was quote the Obama campaign and others as saying the hatchet man, Jerome Corsi, was wrong. And then quote Corsi as saying he was right. The Post couldn’t bring itself to do what a newspaper should do and tell its readers what was true and what was false.... Newspapers like the Post used to tell the truth to its readers, no matter who was offended. The truth always offends someone. But now they can’t do that, unless it’s buried on an inside page without the particulars that the truth demands. They’re too worried about losing readers they’ve already lost." The reporter was Eli Saslow, who is--for no reason I can imagine--still working for the Post two years later.
  • AF: "Few Americans should be satisfied with the way the government pays private health insurance plans that participate in the Medicare Advantage program. Taxpayers pay 14 percent more to insure a beneficiary through the Advantage program than through traditional, fee-for-service Medicare, the program’s “public option.”... There should be a better way to pay Advantage plans, one less likely to be a taxpayer rip-off or to contribute to swings in plan availability and generosity. In fact there is.... Under a competitive pricing system plans bid their price to provide a standard set of services. The amount the government pays a plan reflects bids offered by all competing plans.... The critical component missing from the Advantage program is payments related to bids. Instead, payments are based on a formula established by Congress. The[se] differences... are related to taxpayer and beneficiary dissatisfaction with the Advantage program."
  • DB: "While Greece's problems can be attributed in large part to a lack of fiscal discipline, this is clearly not the case with Spain and Ireland, both of whom had budget surpluses and low debt to GDP ratios prior to the downturn. Portugal is a more ambiguous case. The euro would not be facing a crisis if only Greece and Portugal, two relatively small economies, were facing difficulties.... The Post also gets the necessary remedies confused.... [T]he issue is less the budget problems, but rather that the fixed exchange rate precludes and effective process of economic adjustment.... Greece and the other troubled countries...y can neither lower interest rates nor decrease the value of their currency to offset the contractionary impact of deficit reduction. As a result, deficit reduction can lead to a downward spiral in which lower output leads to a higher budget deficit, requiring further cuts, and therefore causing a further drop in output."

I Think the Last Line I Have Quoted Is the Funniest Thing I Have Ever Heard...

James Iry:

One Div Zero: A Brief, Incomplete, and Mostly Wrong History of Programming Languages: 1801 - Joseph Marie Jacquard uses punch cards to instruct a loom to weave "hello, world" into a tapestry. Redditers of the time are not impressed due to the lack of tail call recursion, concurrency, or proper capitalization.

But it was multi-threaded...

1842 - Ada Lovelace writes the first program. She is hampered in her efforts by the minor inconvenience that she doesn't have any actual computers to run her code. Enterprise architects will later relearn her techniques in order to program in UML.

1936 - Alan Turing invents every programming language that will ever be but is shanghaied by British Intelligence to be 007 before he can patent them.

1936 - Alonzo Church also invents every language that will ever be but does it better. His lambda calculus is ignored because it is insufficiently C-like. This criticism occurs in spite of the fact that C has not yet been invented.

1940s - Various "computers" are "programmed" using direct wiring and switches. Engineers do this in order to avoid the tabs vs spaces debate.

1957 - John Backus and IBM create FORTRAN. There's nothing funny about IBM or FORTRAN. It is a syntax error to write FORTRAN while not wearing a blue tie.

1958 - John McCarthy and Paul Graham invent LISP. Due to high costs caused by a post-war depletion of the strategic parentheses reserve LISP never becomes popular[1]. In spite of its lack of popularity, LISP (now "Lisp" or sometimes "Arc") remains an influential language in "key algorithmic techniques such as recursion and condescension"[2].

1959 - After losing a bet with L. Ron Hubbard, Grace Hopper and several other sadists invent the Capitalization Of Boilerplate Oriented Language (COBOL) . Years later, in a misguided and sexist retaliation against Adm. Hopper's COBOL work, Ruby conferences frequently feature misogynistic material.

1964 - John Kemeny and Thomas Kurtz create BASIC, an unstructured programming language for non-computer scientists.

1965 - Kemeny and Kurtz GOTO 1964...

There is more, which is very funny, if you have lived the appropriate life.

Preparing for Econ 1

And now that one semester is... dead and staked... it is time to start preparing for the next one.

U.C. Berkeley: Fall 2010: Econ 1 starts its journey down the slipway...

Instructor: J. Bradford DeLong,, 9257080467.
Head Section Leader: Michael Urbancic.


  • Partha Dasgupta, Economics: A Very Short Introduction
  • Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (available for free on the web or free for Amazon Kindle or Apple iBooks; you can also buy a copy)
  • Paul Seabright, In t The Company of Strangers: A Natural History of Economic Life
  • Milton Friedman and Rose Director Friedman, Free to Choose
  • Karl Case, Ray Fair, and Sharon Oster, Principles of Economics (Upper Saddle River, NJ: Prentice Hall, 2009) (9th ed., but 8th or 7th will do fine) (recommended)


  • iClicker (optional: for those of you who want to earn a few extra-credit points)



Q: Why so many books? A: This is Berkeley, the best public university in the world. If you are not in the rapid-information-assimilation-and-processing business, this is not the university for you.

Q: Why is the textbook only recommended? A: We--that is, Laura Tyson, Bob Reich, and Brad DeLong--are writing our own. We will be handing out our draft chapters. But there is something to be said for having a net under you the first time you perform on the flying trapeze...

Q: Doesn't that mean that we are guinea pigs--experimental animals? A: Yes, but the life of an experimental animal can be a very interesting and fulfilling one.

Q: Will we flunk? A: Probably not--although the curve will not be especially high. Grading: 33% final, 33% midterms, 20% problem sets (0, late, check-, check, check+), 5% in-section presentations, 5% outside readings and reports, 4% section participation... Miss one midterm, other midterm double-weighted... +5% extra credit for iClicker

Q: What will we be doing in sections? A: A number of things. Exercises will be distributed in lecture, and some section time will be spent doing them and going over them. Some timd will be spent going over the (right) answers for the weekly problem sets, and prepping for the exams. There will be the inevitable clean-up in section for those times when the lecturer has totally lost his mind, or just been maddeningly vague and unclear. There will be in-section oral presentations on assigned additional outside readings from the news--and there will be one- or two-page reports on those readings. There will be discussions. There may be section-specific online discussions as well. There will definitely be in-section discussion and review of the in-lecture iClicker questions. All students should make their section leaders their friends: they will, after all, be grading them.


Lectures: MW 12 @ Wheeler Auditorium.
Sections: Various.


Depression Economics: M Aug 30: The Great Recession of 2008-2010 W Sep 1: Depression Economics W Sep 8: Financial Crises and the Housing Bubble

Inflation Economics: M Sep 13: Inflation Economics W Sep 15: The Federal Reserve and Macroeconomic Management

Budget Economics: M Sep 20: The Government's Resources and Promises: The National Debt and Budget Balance W Sep 22: Fiscal Crisis, Capital Flight, Hyperinflation

Growth Economics: M Sep 27: Total Output and Factors of Production: Technology, Organization, Labor, Capital, Education, Resources W Sep 29: Sources of and Limits to Growth M Oct 4: MIDTERM EXAM W Oct 6: Economic Knowledge as the Ultimate Free Lunch


Choice and Organization: M Oct 11: Economic Behavior: Choice, Scarcity, and Exchange W Oct 13: Markets and Other Allocation Procedures M Oct 18: Working with Supply and Demand W Oct 20: Production and Equilibrium in the Short Run and the Long Run M Oct 25: General Equilibrium and the "Efficiency" of "Perfect" Competition

Market Power: W Oct 27: Monopoly M Nov 1: Oligopoly W Nov 3: Monopolistic Competition M Nov 8: MIDTERM 2 EXAM

Market Failure: W Nov 10: Externalities M Nov 15: Uncertainty and Asymmetric Information W Nov 17: Increasing Return and Information Goods M Nov 22: Poverty and Income Distribution

Political Economy: M Oct 20: The "Mixed Economy" W Dec 1: The Economic Theory of Politics M Dec 5: Economic Policies and Problems Today W Dec 7: Economic Policies and Problems Tomorrow

Tying Up the Threads: F Dec 10: FINAL REVIEW F Dec 17: FINAL EXAM 11:30-2:30

Winston Churchill Liveblogs World War II: May 8, 1940

Winston Churchill: May 8, 1940:

On the second day, May 8, the debate, although continuing upon an Adjournment Motion, assumed the character of a Vote of Censure, and Mr. Herbert Morrison, in the name of the Opposition, declared their intention to have a vote. The Prime Minister rose again, accepted the challenge, and in an unfortunate passage appealed to his friends to stand by him. He had a right to do this, as these friends had sustained his action, or inaction, and thus shared his responsibility in "the years which the locusts had eaten" before the war. But to-day they sat abashed and silenced, and some of them had joined the hostile demonstrations.

This day saw the last decisive intervention of Mr. Lloyd George in the House of Commons. In a speech of not more than twenty minutes he struck a deeply-wounding blow at the head of the Government. He endeavoured to exculpate me: "I do not think that the First Lord was entirely responsible for all the things which happened in Norway." I immediately interposed, "I take complete responsibility for everything that has been done by the Admiralty, and I take my full share of the burden." After warning me not to allow myself to be converted into an air-raid shelter to keep the splinters from hitting my colleagues, Mr. Lloyd George turned upon Mr. Chamberlain. "It is not a question of who are the Prime Minister's friends. It is a far bigger issue. He has appealed for sacrifice. The nation is prepared for every sacrifice so long as it has leadership, so long as it has leadership, so long as the Government show clearly what they are aiming at, and so long as the nation is confident that those who are leading it are doing their best." He ended, "I say solemnly that the Prime Minister should give an example of sacrifice, because there is nothing which can contribute more to victory than that he should sacrifice the seals of office."...

I had volunteered to wind up the debate, which was no more than my duty... because of the exceptionally prominent part I had played in the use of our inadequate forces during our forlorn attempt to succour Norway. I did my very best to regain control of the House for the Government in the teeth of continuous interruption, coming chiefly from the Labour Opposition benches. I did this with good heart when I thought of their mistakes and dangerous pacifism in former years, and how only four months before the outbreak of the war they had voted solidly against conscription. I felt that I, and a few friends who had acted with me, had the right to inflict these censures, but they had not. When they broke in upon me I retorted upon them and defied them, and several times the clamour was such that I could not make myself heard....

When I sat down at eleven o'clock the House divided. The Government had a majority of 81, but over 30 Conservatives voted with the Labour and Liberal Oppositions, and a further 60 abstained. There was no doubt that in effect though not in form, both the debate and the division were a violent manifestation of want of confidence in Mr. Chamberlain and his Administration...

links for 2010-05-07

  • BE: "First, the IMF and the European Commission can encourage Greece to reach a social consensus on restructuring and reform by showing that the creditors will also contribute.... Second, Portugal and Spain must do more to convince the markets they are not Greece.... Third, to give the Iberians time, the ECB will have to support their bond markets.... Fourth and finally, the Germans need to support European growth by spending more."
  • AD: "The Congressional Budget Office issued a briefing paper yesterday concluding that climate pricing will slightly reduce employment overall in the United States, because green jobs gains won’t quite offset other job losses. Unfortunately, this paper will likely be misquoted and misunderstood repeatedly. It’s not what it seems. Properly understood, it should give us confidence that the clean-energy path is our best option by far for a high-employment future. Too bad CBO didn’t just say that. You could read the summary and never guess."

Winston Churchill Liveblogs World War II: May 7, 1940

Winston Churchill: May 7, 1940:

The many disappointments and disasters of the brief campaign in Norway caused profound perturbation at home, and the currents of passion mounted even in the breasts of some of those who had been most slothful and purblind in the years before the war. The Opposition asked for a debate on the war situation, and this was arranged for May 7. The House was filled with Members in a high state of irritation and distress. Mr. Chamberlain's opening statement did not stem the hostile tide. He was mockingly interrupted, and reminded of his speech of April 4, when in quite another connection he had incautiously said, "Hitler has missed the bus." He defined my new position and my relationship with the Chiefs of Staff and in reply to Mr. Herbert Morrison made it clear that I had not held those powers during the Norwegian operations.

One speaker after another from both sides of the House attacked the Government, and especially its chief, with unusual bitterness and vehemence, and found themselves sustained by growing applause from all quarters. Sir Roger Keyes, burning for distinction in the new war, sharply criticised the Naval Staff for their failure to attempt the capture of Trondheim. "When I saw," he said, "how badly things were going I never ceased importuning the Admiralty and War Cabinet to let me take all responsibility and lead the attack."

Wearing his uniform as Admiral of the Fleet, he supported the complaints of the Opposition with technical details and his own professional authority in a manner very agreeable to the mood of the House. From the benches behind the Government Mr. Amery quoted, amid ringing cheers, Cromwell's imperious words to the Long Parliament: "You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!" These were terrible words, coming from a friend and colleague of many years, a fellow Birmingham Member, and a Privy Counsellor of distinction and experience...

Note to Self: Stray Thoughts on Some Undergraduate Majors Here at Berkeley that I Do Not Influence at All...

Listening to the graduating students...

Those majoring in peace and conflict studies, development studies, and rhetoric...

It seems, reading through the lines of what they say, that the modal teacher in those programs approaches their educational mission as though they have a dire and urgent need to deprogram young minds that have been enslaved to the harsh market-ueber-alles doctrines of neoliberal capitalism and classical economics.

The problem is that these nineteen year olds are from the upper-middle class of twenty-first century California and are at base do-gooder meritocrats deeply suspicious of large greedy corporations that repeatedly and recurrently try to sell them junk that they don't really need. They have not only not been programmed by the ideologies of neoliberal market capitalism and classical economics, they barely know that they exist at an ideological level.

So their teachers come off, much of the time, as people who look like they are engaged in a desperate hand-to-hand struggle with a vicious antagonist--but one who is not only invisible but who isn't really there--and so they come off as unbalanced themselves...

If you are going to turn every class into a wrestle with the ghosts of Milton Friedman, Friedrich Hayek, Robert Nozick, Ronald Reagan, and Margaret Thatcher, you will look silly unless you first make sure your students know who you are wrestling with, and why your struggle is such a desperate one--why their arguments have force and power...

Designed by Cthulhu...

I refer to the Social Science Building at U.C. Davis. The logic of the building is utterly alien to our monkey brains... If there is a logic, that is...

links for 2010-05-06

  • SB: "“market fundamentalism”, which had no real existence outside North America, is now well and truly dead. Let us take two sayings that embody it. First there is the rhetorical question: “What should you do if you found a $100 bill on the street?” The Chicago answer is supposed to be: “You wouldn’t. Somebody would have picked up the bill long ago.” The response presupposes a combination of extreme rationality and extreme selfishness, which does not always prevail. The second is the slogan: “Government is not the answer. It is the problem”... you cannot really believe that; and I hope that I have never said it, even in my most anti-statist moments. There is a third utterance to which I would plead guilty. This is to quote the great English 18th-century man of letters, Samuel Johnson: “There are few ways in which a man can be more innocently employed than in getting money.” That can scarcely stand up after the latest asset-price bubble and ensuing credit crunch."
  • RG: "Harry Reid will make sure that an amendment to break up megabanks and cap their size comes up for a vote, the Senate majority leader said. He added that he was leaning heavily toward voting for the amendment, cosponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.). Reid will also support an amendment from Sen. Bernie Sanders (I-Vt.) that will authorize an audit of the Federal Reserve, he said."
  • EK: "I think John Thune's explanation of Bob Corker's occasional heterodoxies is what they call a "Kinsley gaffe": "I think he’s a guy who’s willing to get down into the weeds," said South Dakota Sen. John Thune, who is No. 4 in GOP leadership. "Because he immerses himself in that and understands it so well — the positions he adopts may not always be the ones that everyone else in our conference comes to." It is true that if you understand policy, you'll frequently come to conclusions at odds with those of the Senate Republican Conference.... It's obviously not a bad thing that Thune is standing up for a more moderate member of his party. But I'd still stick with Thune's original comment.... If members of the Senate were more knowledgeable about, and more driven by, policy concerns, they'd end up in very different places than they actually do. Wyden-Bennett, for instance, would be the law of the land..."
  • TC: "By proposing a financial reform... identical to the one proposed by Sen. Chris Dodd, D-Conn., Republicans have passed up an opportunity to simultaneously appeal to their base, by returning to their alleged principles of limited government, and appeal to much of the middle, by waging a populist battle against Wall Street's corporate-welfare queens who panhandle on Capitol Hill. Republicans favoring limited government over a "pro-Wall Street" policy would have been out of character, to be sure, but events were conspiring to make such a free-market populist stance possible. For one thing, the bankers had already abandoned the GOP. Wall Street was even longer on the Democrats in 2008 and 2009 than it had been on mortgage-backed securities in 2005 and 2006. You wouldn't know this reading most newspapers, but Obama raised more money from Wall Street than any candidate in history, and more money from Goldman Sachs than every Republican running for president, House, and Senate, combined."
  • PK: "Thank you, James Glassman. The remarkable arrogance of your analysts memo — your employer has apologized, but the damage is done — has helped clarify where things really stand.... No, this isn’t the Dow 36,000 Glassman. Yes, there are two of them; this is the better one, although that isn’t saying much."
  • MY: "Cantor was involved in the somewhat farcical GOP rebranding effort known as the National Council for a New America which was supposed to be a “new effort to revive the image of the Republican Party”. Soon after, they held an event at a Virginia pizza parlor at which Cantor was asked about his ideas for reducing health care costs and he didn’t have any. Instead he noted that he doesn’t like the UK’s National Health Service. Now via Matt Corley, it seems Cantor has totally given up afyer that one event and then a 12 month hiatus: “Cantor spokesman John Murray said despite 5,000 positive news hits, the ‘relentless attacks from the left’ became overwhelming to the whip office soon after its launch.” A conservative policy and messaging dynamo that folds if it gets attacked by the left? That’s what they’ve got? The real issue seems to be that NCNA violated congressional ethics rules."
  • Pandora’s Briefcase: It was a dazzling feat of wartime espionage. But does it argue for or against spying?

More Lies and Doublespeak from the Orwellian Pages of National Review

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

Kevin Williamson almost tells it straight, but he cannot do so:

Goodbye Supply Side: There are two schools of thought about the Reagan tax cuts. The conventional conservative view: They spurred investment, entrepreneurship, and real economic growth, helping to resuscitate the post-Carter economy, and, by doing so, they paid for themselves. The conventional liberal view: They were an ill-considered product of starve-the-beast ideology and produced crippling deficits, inaugurating a new era of fiscal irresponsibility only briefly transcended during the golden years of the Clinton presidency.

Here’s a different take: They never happened.

Now that is just plain wrong. The "they never happened" take is the conventional liberal view--the reson that they have been crippling to the economy and are the height of fiscal irresponsibility is precisely because "they never [really] happened": that they were tax deferrals, not tax cuts. As the late Milton Friedman liked to put it, "to spend is to tax": you're only choice is whether you are going to tax smart and tax now or tax stupid and tax later.

But Williamson cannot say that the conventional liberal view is correct--not in the Orwellian confines of National Review.

He goes on:

Properly understood, there were no Reagan tax cuts... you don’t get Reagan tax cuts without Tip O’Neill spending cuts... we haven’t really had any tax cuts to speak of — we’ve had tax deferrals. Reagan and his congressional allies had an excuse.... But George W. Bush and the concurrent Republican majorities in both houses of Congress didn’t manage to cut spending, either.... [P]oorly applied supply-side analysis has infantilized Republicans when it comes to the budget. They love to cut taxes but cannot bring themselves to cut spending: It’s eat dessert first and leave the spinach on the table....

[T]his is both bad politics and bad policy... conservatives... disheartened by the Republican spending excesses... abandoned the GOP in the elections of 2006 and 2008.... This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing.

Some people are more sensible about that Laffer Curve talk. Laffer, for instance. Arthur Laffer, whose famous (and possibly apocryphal) back-of-the-napkin diagram launched supply-side tax policy, readily concedes that the growth effects of tax cuts are oversold in the political debate.

Does every tax cut pay for itself? No. I think Irving Kristol wrote that, once — and then did a pretty good job of arguing for it. But if some guy running for Congress in Clayton County, Texas, says all tax cuts pay for themselves, what do we want to do? Go after him with a shotgun? Sure, they’re going to cite me, and there’s very little I can do about it. But there’s the same amount of ignorance on the other side, ignoring the economic feedback effects of tax cuts.

"We know we Republicans are lying, but it's really the Democrats' fault" is not a terribly attractive place to be.

Hoisted from the Archives: What Is Wrong with Senate "Investigations" and with the "Washington Post"

Thinking about the Sanders amendment to the Dodd Senate financial regulations bill makes me think it is time to hoist this from archives. From June 2006:

Republican Senate "Investigations" and the Washington Post: Agents of Satan? Or Baal-Zebub Himself/: Why oh why can't we have a better press corps?

Dear Ms. Marcus:

Thanks for your thoughtful and intelligent email, with its question of why, given that "we all write and say and even blog things that we could have done better... you seem always to leap to the assumption that the people making these errors are lazy 'idiots,' to use your favorite term, rather than individuals who are trying, hard, to do their jobs and, perhaps on deadline, fell short of the ideal." It's a good question.

Let me give one of eight or so examples of my personal experiences with Washington Post reporters in which I found it impossible to believe that they were "trying, hard, to do their jobs." It is a March 2, 1995 Washington Post article by Clay Chandler, "Treasury Aides' Memos Warned of Peso Plunge," about the 1994-1995 Mexican financial crisis, which in the version in the Post archives reads:

Treasury Undersecretary Lawrence H. Summers... was warned of potential economic problems in Mexico in at least three separate memos during the eight months before the peso's collapse, according to sources familiar with the documents.... Two of the memos from Summers's subordinates -- one written in April and the other in September -- recommended he pay careful attention to papers written by Rudiger Dornbusch, a Massachusetts Institute of Technology economist widely respected for his expertise on developing Latin American economies.... A third memo, passed from staff to Summers through Deputy Assistant Treasury Secretary Timothy F. Geithner in late November, warned that the Mexican economy had seriously deteriorated and recommended the Treasury Department begin "contingency planning" in anticipation of a possible financial slump in the Latin nation.

These documents, whose authenticity was not disputed by Treasury Department officials, could bolster critics of the administration's handling of the Mexican crisis who charge that officials missed warnings of trouble. Treasury Department spokesman Howard Schloss said the memos buttressed the administration's argument that officials were on top of events.... Senate Banking Committee Chairman Alfonse M. D'Amato (R-N.Y.), who plans hearings on the administration's handling of the Mexican bailout [said]... "We're getting the runaround.... This is absolute and total nonsense.... I know darn well that the administration received information that should have alerted any prudent person that there were problems with the Mexican economy and then ignored it and withheld it from the Congress."...

A earlier version of the article--the one that made it into the Treasury Department's daily clips--included a short quote from one of the three memos that D'Amato leaked to Chandler: "bottom line: peso overvalued." It's those four words that make me believe that I was the author of the April memo. And the "bottom line: peso overvalued" quote was ripped from context: that wasn't my bottom line, but Rudi Dornbusch's bottom line. My assessment was that Rudi was very smart and thoughtful but wrong, and that the magnitude of capital inflows to Mexico was likely to be large enough to make yet another peso crisis highly unlikely. Would that we in the Treasury staff had been smart enough to warn Larry Summers in April (or even September) 1994 that a peso crisis was likely or even moderately probable rather than, in April, an unlikely possibility and, in September, a possibility. We weren't.

When we went to talk to D'Amato's staff about this, we were told:

Save your breath. It's politics. D'Amato doesn't think that staff warned Larry and that he ignored staff. Dole wants to be in a good political position if this Mexico thing goes south in a serious way.

I asked the Treasury public relations staff if I should go talk to Chandler, and they said: No. Chandler knew that the "papers" by Rudi Dornbusch weren't private documents written for the Treasury and withheld from Congress, but rather things that the Brookings Institution printed up in editions of 7000 and had prominently discussed in its conference room. Chandler knew that the documents D'Amato leaked to him had no passages that supported D'Amato's "theory" that Larry and Lloyd Bentsen had refused to heed our warnings--if they had such passages, after all, Chandler would have quoted them in his story.

So what was Chandler doing? The assessment of the Treasury public relations staff was that Chandler thought that he had not been getting enough private advance leaks from the Treasury, and was sending us a message:

Nice little Treasury Department you have there. Wouldn't it be a shame if anything happened to it? I'm the Washington Post's chief economics correspondent. I deserve more private leaks. Or I can hurt you: I'll become D'Amato's partisan mouthpiece.

I could multiply examples. Take, oh, the Washington Post on February 8, 2005, with Jonathan Weisman's claim that there is:

a heated debate among economists... [over whether] stock market... [returns can] meet the president's expectations [of an average return of 6.5% per year]...

Out of all those Weisman talked to, the "heated debate" turns out on to be (a) on one side me, Dean Baker, Paul Krugman, Doug Fore, Richard Jackson, Ed Keon, Jeremy Siegel, various unnamed economists at the Mannheim Research Institute, Kevin Hassett, and Donald Luskin all saying that the forecast is too optimistic--that stock returns are likely to be lower or economic growth faster than the forecast--(b) in the middle Bush's Council of Economic Advisers, refusing to say that they forecast stock returns to average 6.5% per year if the long-run economic growth rate is 1.9% per year, but saying only that stock returns will be "healthy"; and (c) on the other side as defenders of the Bush position only Steve Goss of Social Security (a good guy trapped in an impossible position) and an anonymous "White House economist" who doesn't want to take the reputational hit of having his name revealed.

If there really were a "heated debate among economists," shouldn't Weisman have been able to find one person outside the administration--hell, one person inside the administration besides Steve Goss--willing to go on the record saying that they endorse the long-run forecast of 1.9% per year real GDP growth and 6.5% per year stock returns? While Weisman is writing his story, I'm getting phone calls from Bush's Council of Economic Advisers asking me to please not say that they made Steve Goss's forecast. They accept it, the CEA says, because it's Steve Goss's bureaucratic role as Chief Social Security Actuary to make such forecasts. They do not endorse it.

Now most of my experiences with Post reporters have been very pleasant, and most of the time the story that emerges--at least my part of the story--seems fair. But there is a difference between the experiences I have had with a subset of Post reporters, like Clay Chandler and company, and the experiences I have when I deal with reporters from the news pages of the Wall Street Journal, the Financial Times, or the Economist--who are genuinely trying their best...

Surveillance Over the Federal Reserve: On the Sanders Amendment to the Dodd Senate Financial Regulation Bill

This afternoon, if I am correctly informed, President Obama is going to come out in opposition to Vermont Senator Bernie Sanders's amendment to the Senate financial regulation bill calling for the GAO to regularly audit the Federal Reserve's conduct of monetary policy.

My left-wing friends are not surprised but are, once again, disappointed. "Doesn't Obama know who his friends are?" they ask, with the answer being: "No." "Doesn't Obama recognize that Federal Reserve governance and policymaking is badly broken?" they ask, with the answer once again being: "No." Has Obama made any proposals to improve Federal Reserve governance and policymaking?" they ask, and the answer is: "No." "Of the five seats on the Federal Reserve Board of seven that he has had the opportunity to fill," they say, "Obama filled one early with Dan Tarullo, filled the chairmanship by reappointing Ben Bernanke--a dedicated public servant and excellent monetary economist and policymaker but certainly no Democrat, and has simply left the other seats empty, two of them for more than a year (although he did six days ago announce names of candidates whom he would nominate, although he has not yet nominated them). Doesn't this extraordinary lack of concern for the issue and lack of action on what is in the president's power indicate an extraordinary dropping of the baton on Federal Reserve issues? Hasn't he forfeited his authority to set out the Democratic Party's position on these issues, and shouldn't we be very grateful than somebody--in this case, Bernie Sanders--is picking up the baton and running with it?"

And when they put it that way, I cannot say "no" to anything they say.

And I have no doubt that Federal Reserve governance and policymaking is broken. Ben Bernanke ought to be in the center of opinion when the Federal Open Market Committee deliberates--not on its left wing. A large number of votes on the FOMC are held by people whose background and expertise is, at best, orthogonal to the skills needed to make monetary policy in the twenty-first century. The Federal Reserve suffers from problems of values and problems of analysis. The problem of values is that a great many of those making policy do not take the Federal Reserve's dual mandate seriously--that they are tremendously upset at the thought that inflation might rise above 2% per year in some future scenarios but utterly unconcerned with the fact that unemployment is kissing 10% and projected to decline only very slowly. The biggest example of the problem of analysis is the failure of the Federal Reserve in the mid-2000s to understand just how vulnerable our economy had become to a run on the shadow banking system and just how overleveraged and overexposed to tail risk shadow banks' portfolios had become. It's not that I am saying I should have the job: I didn't understand these things either. But I did not have regulatory oversight authority to dig into the workings of big banks to figure out what was going on.

Bernie Sanders wants to move Federal Reserve governance and policymaking in a positive direction by removing a 1978 restriction on the GAO's ability to audit the Federal Reserve. At the moment a 1978 law prohibits the GAO from looking at (i) deliberations and actions on monetary policy matters by the Federal Reserve Board, (ii) communications related to monetary policy by Federal Reserve staff and policymakers, and (iii) transactions executing decisions of the FOMC. He would remove these restrictions on what the GAO can investigate, and require the Federal Reserve to publish what banks have borrowed and are borrowing from it, and on what terms.

The Federal Reserve's opposition to the Sanders amendment appears to have three parts:

  • The Federal Reserve does not want to have its elbow joggled by the Congress or the GAO.
  • The Federal Reserve does not want members of congress routinely hunting through transcripts searching for quotes that they can take out of context and use for destructive purposes. Currently members of congress have to do real work to accomplish this, and the Federal Reserve wants to keep it that way.
  • The Federal Reserve is worried that if the GAO begins to routinely audit monetary policy, the quality of its own internal deliberations will suffer. People will keep quiet rather than discuss things that they think might be damaging to their reputations if taken out of context. And people will keep quiet rather than discuss things that they think might be damaging to their reputations if taken in context--things that they don't want public but that are nevertheless shaping their thinking and decision-making. In any policymaking process, you want the considerations that are actually shaping people's views and actions out on the table where they can be discussed, examined, evaluated, and judged, rather than kept in the back of people's minds unchallenged because whatever they say now will show up in six months in the next GAO report. It is the executive privilege argument--only the "executive" in this case is the Federal Reserve Board and the FOMC.

If I can summarize the Federal Reserve's position, it is that detailed scrutiny of its internal processes and thoughts is something that should be left to rare after-the-fact investigations that attempt to understand crucial moments and decisions, and that having the Federal Reserve have to all the time live naked inside a glass house would have a chilling effect on the quality of its work.

Bernie Sanders's position, on the other hand, is that the Federal Reserve clearly missed some big things in the mid-2000s, and more eyes on the issues might have helped. If the GAO had been asking why Chairman Alan Greenspan was so unconcerned with issues of housing finance that were clearly distressing and perplexing Governor Ned Gramlich and if the Federal Reserve had been forced to answer more pointed questions more directly, perhaps mistakes could have been avoided.

If I thought the Federal Reserve were working reasonably well--that what we have here is a problem of analysis, a failure to take one of many potential sources of risk seriously enough--it would be easy. I find myself flashing back to the last time I saw Tim Geithner in the flesh, in... I think it was... the summer of 2005. Two now-senior members of the Obama administration and I were peppering him with questions about the stability of the U.S. financial system: What would happen if foreign central banks suddenly stopped buying dollar assets? Did JPMorganChase have control of its derivatives book? Would Lehman Brothers survive a sudden 25% fall in the value of the dollar, or had underlings written enough out-of-the-money puts and other derivatives on foreign exchange that a five-sigma move in the dollar would bankrupt it? And Geithner convinced me, at least, that he and the Federal Reserve Bank of New York were on the case: properly conducting their mission of surveillance over banks' positions in the foreign exchange derivatives market and ready with contingency plans to deal with a dollar-centered global foreign exchange crisis should one occur.

Only that was not the crisis we had...

I really wish that we had been peppering him with questions about the rating agencies and mortgage-backed CDOs and about whether firms that claimed to be following the originate-and-distribute model really were distributing. I know that I said often in 2005 and 2006 that subprime and the housing bubble were not a big threat to cause a financial crisis and a deep recession because "the banks are not holding onto these loans but are instead selling them off--it's not as though leveraged financial institutions are holding these things; a real-estate crash would probably have small macroeconomic effects just as the dot-com crash did." It would have been nice if somebody inside the Fed had back then been doing the legwork to establish that I was wrong...

If I thought the Federal Reserve were working reasonably well then the appropriate response is not an expanded regular GAO audit but instead an expanded Humphrey-Hawkins process: to throw more resources both from Congress and from the Federal Reserve into a greatly expanded "risks and contingency plans" section of the Federal Reserve's Humphrey-Hawkins documents.

But my problem is that I do not think that the Federal Reserve is working reasonably well. I do not think that the dominant views of monetary policy in the FOMC right now are informed by American values and a reality-based assessment of the state of the economy. That a good many of the people speaking and voting in the FOMC are the wrong people to do so did not matter (much) when the Federal Reserve was dominated by the incredibly charismatic (yes, I mean that) philosopher-central banker-princes of William McChesney Martin, Arthur Burns, Paul Volcker, and Alan Greenspan, but it matters now.

So I am willing to defer to President Obama's judgment that the Federal Reserve's desire for a modicum of central banker privilege is worth respecting, and that the Sanders amendment is the wrong treatment for the disease. I am willing to do so, in large part, because I think the problems are not those that detailed routine investigations of staff communications would solve: the staff of the Federal Reserve do, it seems to me, overwhelmingly have a reality-based vision of the economy, conduct thorough and appropriate analyses of risks and scenarios, and understand the Federal Reserve's dual mandate.

But I ask President Obama: What is your alternative? What is your alternate plan for improving the quality of Federal Reserve decisions--for getting policymakers who properly understand the state of the economy and who believe in the Federal Reserve's dual mandate? It's very hard to beat something--even a bad something--with nothing. And you have had... eighteen months, with only the appointment of Dan Tarullo and the reappointment of Ben Bernanke to show for it.

links for 2010-05-05

Most useful email of the day: telling me dinner tonight not at Adagia but Greens instead. What should I order?

Complete and Total Disproof that Firms Always Engage in Rational Economic Behavior

That the New York Times publishes this:

Casey Mulligan: Was It Really a Bubble?

The answer is yes, it was a housing bubble.

There were fundamental reasons for housing prices to rise in the 2000s:

  • a low cost of finance from the global investment shortfall
  • a higher expected cost of energy that increases locational rents
  • the filling-up of those parts of America within short commuting distance of highly desirable locations
  • a shift from a belief that nationwide housing prices will be stable over time because of the Ricardian margin to a belief that there will be some of an upward secular trend.

All of these are reasons for U.S. real housing prices to rise in the 2000s.

None of them are sufficient reason for what we saw in the 2000s.

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

I am now good enough at typing on the iPad virtual keyboard that typing a full paragraph is now easy--that the machine no longer gets in my way.

However, anything longer than a paragraph is still difficult, and still not comfortable, and if I had to guess I would guess that it will never be comfortable.

That is all.

What the iPad virtual keyboard really needs are arrow keys. Too much of the time you are trying to get the cursor to a certain place in a text-entry field... And you wind up a letter or two off... And then you poke again at the text-entry field with your index finger... And you wind up a letter or two off again...

Wow! I guess the chancellor's declaration that we were going to cut classes short by a week and have a reading period was effective! The campus feels deserted...

A Somewhat Worse ADP Payroll Number than I Was Expecting

In the email inflow:

Private nonfarm payroll employment increased by 32,000 from March to April on a seasonally adjusted basis, according to the ADP National Employment Report™. This is in line with consensus expectations for this figure of a 28,000 increase...

Far, far below the 130K a month or so needed to keep the unemployment rate from drifting upward in the CPS...

But better than a number on the far side of zero.

links for 2010-05-04

  • PK: "[A]s visible pollution has diminished, so has public concern over environmental issues.... This decline ... would be fine if visible pollution were all that mattered — but it isn’t, of course.... As the... crises of the 1960s and 1970s faded... conservatives began pushing back.... Much... demands that environmental restrictions be weakened. But... also an attempt to construct a narrative in which advocates of strong environmental protection were either extremists — “eco-Nazis,” according to Rush Limbaugh — or effete liberal snobs trying to impose their aesthetic preferences on ordinary Americans.... Then came the gulf disaster.... For the most part, anti-environmentalists have been silent.... True, Mr. Limbaugh — arguably the Republican Party’s de facto leader — promptly suggested that environmentalists might have blown up the rig to head off further offshore drilling. But that remark probably reflected desperation: Mr. Limbaugh knows that his narrative has just taken a big hit."
  • JW: "My C shelves begin, controversially, with Orson Scott Card, who was one of my favourite authors for a long time but whom I can no longer read. I started reading him with Hot Sleep and A Planet Called Treason in the early 80s, and I stopped in 1997, so I have read absolutely everything up to then and nothing since. I stopped reading him because he said in his book on how to write that the best way to get readers engaged was to have appealing innocent characters and torture them, and after that I kept seeing that he was doing that and it kept jerking me out of the story. Probably his best book, certainly his best known, and beginning a series, is Ender’s Game. It’s probably fair to say if you don’t like that you won’t like any of his work. If you prefer fantasy, Seventh Son begins the Alvin Maker series which is an alternate early America with folk magic. If you want a standalone, The Folk of the Fringe is a fix-up that contains some of his most powerful writing."

High International Finance

Martin Wolf asks:

Must large capital inflows always end in crisis?: The question I wish to pose for the next two weeks is whether it is possible for countries to accept large net inflows of capital from abroad, without ending up in crisis. If not, how do we manage a world of capital mobility?...

The answer, however, is "yes." If you:

  1. Borrow in your own currency; and
  2. Keep a reasonably tight rein on the leverage of your banks, real-estate firms, and operating companies;

then you an accept large net inflows of capital from abroad without ending in a major crisis.

And, of course, even if it does end in crisis the large net inflows may have done more good beforehand than is done by the harm of the crash. It depends: On what terms was the money offered? How does the workout proceed?

The Future of Social Security

If the Social Security program remains as specified in current law, then sometime between 2032 and 2070--call it a 50% chance of happening by 2042--the Social Security Administration's trust fund balance at the U.S. Treasury hits zero.

At that point, one of three things happen:

  1. The Social Security Administration continues to write Social Security checks as usual, the Treasury continues to pay them, and the Treasury begins sending the SSA notices that it is overdrawn...

  2. The Commissioner of Social Security announces that inasmuch as the Social Security Administration does not have the funds to pay Congressionally-mandated benefits and cannot spend money it does not have, that he or she is reducing all checks proportionately so that the amount of money to be paid out matches what is flowing into the trust fund. At first, this is a benefit cut of 24% relative to what the law envisions, and the size of the relative benefit cut grows over time...

  3. The Commisioner of Social Security directs the SSA to continue to write checks as usual, and the Secretary of the Treasury directs that Social Security checks in excess of what is in the trust fund are to be dishonored and returned for insufficient funds. One in four Social Security checks than start bouncing...

Which of these scenarios will actually occur in 2042 (or whenever) if no changes are made to current law depends on politics and personnel in the future. We don't know what will happen. But that is what the threat point appears to be if no agreement is reached on reforming the Social Security system over the next generation.

Now comes Jane Hamsher to write that House Budget Committee Chair is a bad person:

Budget Hawk John Spratt and the “Grand Bargain” on Social Security: John Spratt, Chairman of the House Budget Committee, was recently appointed by President Obama to the Debt Commission... “secret meetings” in 1997 authorized by Clinton Chief of Staff Erskine Bowles... negotiating a deal between Clinton and Newt Gingrich that included  partial privatization of Social Security.

Last week... Bill Clinton spoke openly about the secret agreement... in 1997... to take money out of Social Security and place it in private accounts.... Clinton agreed to take the political heat for privatization, and the plan only fell through when the Monica Lewinsky affair exploded and Clinton was afraid to take the hit in the polls.... Clinton initially reached out to Bill Archer, the Republican head of the Ways & Means Committee, while Bowles contacted Gingrich.  “They both believed that any effort to update Social Security would require government to incorporate some measure of choice, and that meant some form of privately managed account,” writes Gillon.... It’s unknown what position Spratt took in those talks.  But around that time, in  April of 2008, the Charlotte Observer covered a speech by Spratt before the Rock Hill Chamber of Commerce (Lexis):

Spratt favors supplementing Social Security with a private savings plan that would either be mandatory “or else so attractive that everyone would sign up for it.” He also advocates investing about 20 percent of the Social Security trust fund in the stock market....

Early in 2009 Robert Kuttner wrote in the Washington Post that Pete Peterson was helping the White House  in that effort, as were “leading ‘blue dog’ (anti-deficit) Democrats such as House Budget Committee Chairman John Spratt of South Carolina and his counterpart in the Senate, Kent Conrad of North Dakota.”  Kuttner said that “the deficit hawks are promoting a ‘grand bargain’ in which a bipartisan commission enacts spending caps on social insurance as the offset for current deficits.” Put Spratt down as “open to Social Security benefit cuts” and a history of support for some type of privatization.

As I understand Spratt's position now and back in 1997 and as I understand Clinton's position back in 1997, it is that:

  1. Congress enacts option (1) above: if and when Social Security taxes are not sufficient to pay traditional Social Security benefits, traditional benefits will be cut so that they can be paid by taxes.
  2. Some of the Social Security trust fund will be invested in the stock market in hope of getting a higher rate of return--but the Treasury will guarantee to make the Social Security trust fund whole if and when its stock market investments ever turn out to be net losses.
  3. Congress also raises Social Security taxes--only it calls them "contributions" to "private accounts."
  4. Social Security taxpayers get some choice as to how to invest their "private account" "contributions"--accepting more risk in the hope of higher return, or not.
  5. Any gains or losses from investments in "private accounts" stay with the taxpayer in whose name the investments were made.

This deal would allow (1) Democrats to say that they have no allowed the diversion of a single dollar of Social Security taxes away from the current system; (2) Democrats to say that they have strengthened the Social Security system as a whole by reinforcing its finances and raising its financial resources; (3) Republicans to say that they have kept the Democrats from throwing more money down the well that is the unsustainable and outmoded twentieth-century Social Security system; (4) Republicans to say that they have created private accounts for every American.

It seems to me that this position would be a fine place to wind up--but that it is not a bargaining position from which Democrats should start. This is, in fact, where I envisioned and hoped we were going in 2005: with private accounts as an "add on, not a carve-out" to the Social Security system as it currently exists.

It also seems to me that this position is not well-described by Jane Hamsher's characterization of it as "some type of privatization" and "Social Security benefit cuts." It is more complicated than that. If you think that the 2042 outcome if no change is made in the law is option (2) then it is a benefit cut. If you think that the 2042 outcome if no change is made in the law is either option (1) or option (3) it is not. And it is "privatization" only if funding "private accounts" with money not currently earmarked to flow to the Social Security system is "privatization"--which seems to me to simply be not the case.

The Financial Times and the London Economist Lose Their Minds

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

Mattt Yglesias:

Matthew Yglesias: [Gordon Brown] is... being punished for an economic crisis he didn’t cause, couldn’t have stopped, and has actually handled quite well. The global financial meltdown was not unique to Britain.... And thanks to... Brown... kept the UK out of the Euro... presided over substantial stimulus the British economy is actually weathering the recession pretty well.... Conditions aren’t great--they’re actually quite bad--but the situation is much better than what you see in other European countries....

[The] FT, in the course of endorsing David Cameron, concedes that “As a crisis manager, Gordon Brown has been a better premier than his critics claim” and simply doesn’t say anything about the substance of the Tories’ opposition to stimulus, a policy that had it been adopted would have sank the economy.

The Economist does take this issue head-on and concludes that the Tories “were wrong to oppose the economic stimulus after the banking crash” but endorses them anyway....

Britain confronted a giant economic challenge and the center-right party responded with such bad policies that even center-right business-focused newspapers think they were wrong, but... [urge] voters are urged to vote Tory anyway...