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June 2010

Neville Chamberlain Liveblogs the Nazi Invasion of Czechoslovakia

Neville Chamberlain's speech to the Birmingham Unionist Association, March 17, 1939:

An Attempt to Dominate the World by Force: I had intended tonight to talk to you upon a variety of subjects, upon trade and employment, upon social service, and upon finance. But the tremendous events which have been taking place this week in Europe have thrown everything else into the background, and I feel that what you, and those who are not in this hall but are listening to me, will want to hear is some indication of the views of His Majesty’s Government as to the nature and the implications of those events....

Last Wednesday... German troops entered Czechoslovakia....

I have never denied that the terms which I was able to secure at Munich were not those that I myself would have desired. But, as I explained then, I had to deal with no new problem.... I have no need to defend my visits to Germany last autumn, for what was the alternative? Nothing that we could have done, nothing that France could have done, or Russia could have done could possibly have saved Czechoslovakia from invasion and destruction....

Bohemia and Moravia have been annexed to the German Reich. Non-German inhabitants, who, of course, include the Czechs, are placed under the German Protector in the German Protectorate... subject to the political, military and economic needs of the Reich.... Perhaps most sinister of all, we hear again of the appearance of the Gestapo, the secret police, followed by the usual tale of wholesale arrests of prominent individuals, with consequences with which we are all familiar.

Every man and woman in this country who remembers the fate of the Jews and the political prisoners in Austria must be filled today with distress and foreboding. Who can fail to feel his heart go out in sympathy to the proud and brave people who have so suddenly been subjected to this invasion, whose liberties are curtailed, whose national independence has gone? What has become of this declaration of “No further territorial ambition”? What has become of the assurance “We don’t want Czechs in the Reich”? What regard had been paid here to that principle of self-determination on which Herr Hitler argued so vehemently with me at Berchtesgaden when he was asking for the severance of Sudetenland from Czechoslovakia and its inclusion in the German Reich?...

If it is so easy to discover good reasons for ignoring assurances so solemnly and so repeatedly given, what reliance can be placed upon any other assurances that come from the same source?... [T]he events which have taken place this week... must cause us all to be asking ourselves: “Is this the end of an old adventure, or is it the beginning of a new?” “Is this the last attack upon a small State, or is it to be followed by others? Is this, in fact, a step in the direction of an attempt to dominate the world by force?”...

I do not believe there is anyone who will question my sincerity when I say there is hardly anything I would not sacrifice for peace. But there is one thing that I must except, and that is the liberty that we have enjoyed for hundreds of years, and which we will never surrender. That I, of all men, should feel called upon to make such a declaration--that is the measure of the extent to which these events have shattered the confidence... which... might have made this year memorable for the return of all Europe to sanity and stability.

It is only six weeks ago that I... pointed out that any demand to dominate the world by force was one which the democracies must resist.... I added that I could not believe that such a challenge was intended, because no Government with the interests of its own people at heart could expose them for such a claim to the horrors of world war.

And, indeed, with the lessons of history for all to read, it seems incredible that we should see such a challenge....

[N]o greater mistake could be made than to suppose that, because it believes war to be a senseless and cruel thing, this nation... will not take part to the utmost of its power in resisting such a challenge.... I have not merely the support, the sympathy, the confidence of my fellow-countrymen and countrywomen, but... the approval of the whole British Empire and of all other nations who value peace, indeed, but who value freedom even more.


links for 2010-06-30


Woot : Amazon, Woot, and You: But Mostly Woot

Matt Rutledge:

Woot : Amazon, Woot, and You: But Mostly Woot: Date: Weds,  30 June  2010
From: Matt Rutledge (CEO – Woot.com)
To: All Woot Employees
Subject: Woot and Amazon

I know I say this every time I find a picture of an adorable kitten, but please set aside 20 minutes to carefully read this entire email. Today is a big day in Woot history. This morning, I woke up to find Jeff Bezos the Mighty had seized our magic sword. Using the Arthurian model as a corporate structure was something our CFO had warned against from the very beginning, but now that’s water under the bridge. What is important is that our company is on the verge of becoming a part of the Amazon.com dynasty. And our plans for Grail.Woot are on indefinite hold.

Over the next few days, you will probably read headlines that say “Matt Rutledge revealed to be monstrous pseudo-human creation of Jeff Bezos.” You might even see this photo making the rounds. Rest assured that these rumors have nothing to do with our final decision. We think now is the right time to join with Amazon because, quite simply, every company that becomes a subsidiary gets two free downloads until the end of July, and we very much need that new thing with Trent Reznor’s wife on our iPods.

Other than that, we plan to continue to run Woot the way we have always run Woot – with a wall of ideas and a dartboard. From a practical point of view, it will be as if we are simply adding one person to the organizational hierarchy, except that one person will just happen to be a billion-dollar company that could buy and sell each and every one of you like you were office furniture. Nevertheless, don’t worry that our culture will suddenly take a leap forward and become cutting-edge. We’re still going to be the same old bottom-feeders our customers and readers have come to know and love, and each and every one of their pre-written insult macros will still be just as valid in a week, two weeks, or even next year. For Woot, our vision remains the same: somehow earning a living on snarky commentary and junk.

We are excited about doing this for all sorts of reasons. One, our business model is so vague that there’s no way Amazon can possibly change what it is we’re truly doing: preparing the way for the rise of the Lava Men in 2012. Also, our deal means that Jason Toon will finally be released from that Mexican jail owned by Zappos honcho Tony Hsieh. No, don’t lie, Tony, we’ve seen the paperwork. And we need a powerful ally in case Steve Jobs finally breaks down and comes after us for all our Apple jokes over the years. Don’t think of it as a buyout; think of it as NATO!

I will go through each of the above points in more detail later, but first, let me get to the top 5 burning questions that I’m guessing many of you will have.

TOP 5 BURNING QUESTIONS:

Q: F1RST!!!!

A: Okay, that’s not a question, but it is a good place to mention that our forums will still be policed by a team of moderators, as before. And also, Woot’s previous and always-in-effect privacy policy will still be just as always-in-effect, so don’t worry, there are no plans to suddenly give up or merge your forum data.

Q: Is Snapster leaving?

A: Are you kidding? He’s out the door about ten seconds after that check clea- that is to say, Snapster will continue as Woot.com CEO, just like before, and the rest of our staff’s not going anywhere either. Woot and all our various sites will continue to be an independently operated company full of horrible, useless products and an untalented jerkface writing staff, same as it ever was.

Q: Will the Woot culture change?

A: Amazon is interested in us because they recognize the value of our people, our brand, and our unique style of deep-tissue, toxin-releasing massage. And they don't want to start changing things now. Amazon's hoping our nutty Woot steez continues to grow and develop (and perhaps even rubs off on them a little). They’re not looking to have their folks come in and run Woot unless we ask them to, which incidentally you can do by turning off the bathroom lights and saying the word “Kindle” three times; a helpful Amazon employee will appear in the mirror. That said, Amazon clearly knows what they're doing in a lot of areas, so we’re geeked about the opportunities to tap into that knowledge and those resources, especially on the technology side. This is about making the Woot brand, culture, and business even stronger than it is today, and we expect that any changes will be for the better or we wouldn't bother with this endless paperwork.

Q: Where can I get one of those vuvuzelas?

A: Are you even paying attention?

Several months ago, when we were all sitting on Jeff Bezos’s bumper drinking orange Mad Dog and trying not to be noticed, we heard a voice in the distance yelling “You kids better not scratch my Mercedes or I’m calling the cops!” We ran. It was later that night when Amazon came by the house and said they liked our style and also wanted to get that money we owed them for messing up the chrome. We like to think that our relationship with Amazon will continue at this level for many, many, many years to come.

But we here at Woot are still a thoughtful company, so, at the end of the day, I watched the sunset, and its golden-hued glory made me think about two questions:

  1. Is there really a universal deity?
  2. Does such a thing preclude free will or are we humans in control of our own destiny?

After spending a lot of time falling asleep at the library while facing the philosophy books, I determined that the concept of destiny is a construct that allows man a gentle release from facing the terror of his existence, and that a Hyundai full of twenties would pretty much offer the same benefits. And so, I ultimately said YES!

This is definitely an emotional day for me. The feelings I’m experiencing are similar to what I felt in college on graduation day: excitement about getting a check from my folks combined with nausea from a hellacious bender the night before. I remember fondly that time when an RA turned on the lights and yelled “WHO OWNS THESE PANTS?” Except this time, the pants are a company, and the RA is you, and the sixty five hours of community service is a deal that will ensure the Woot.com experience can continue to grow for years and years and years, like a black mold behind the Gold Box. Join us, because together, we can rule the galaxy as father and son. Also, there will be six muffins waiting in the company break room, courtesy of the nice folks at Amazon.com. Welcome to the family!

Matt Rutledge
CEO, Woot


False Antonyms...

We have:

Barkley Rosser: ...the estimable Mark Thoma...

Adam Posen: ...the inestimable Paul Krugman...

As near as I can see, Barkley's and Adam's adjectives mean exactly the same thing--in spite of the fact that they are, structurally, antonyms.

Are there other words whose meaning is identical to that of their structural antonyms? "Flammable" and "inflammable," yes, but others?


Why, You Have a Better Chance of Learning About the World by Asking that Squirrel Out There than by Reading the Washington Post

Yes, we have long ago moved beyond the "why oh why can't we have a better press corp?" question to begging Warren Buffett and company to simply close the Washington Post down--they get more money, we get less misinformation. It is win-win.

Today Robert Waldmann teaches the lesson:

Washington Post Headline Writer, Part VII: The www.washington.com headline and abstract person has outdone himself or herself, writing:

CBO sees debt estimates soar. Analysts say health law has not improved budget and Obama's tax agenda will make things worse. Lori Montgomery

As Kevin Drum says: always click the link. Lori Montgomery actually wrote:

President Obama's overhaul of the health-care system has done little to improve the nation's budget outlook, congressional budget analysts said Wednesday.

So "little" has become none.... [W]ell down in the story we get to what Doug Elmendorf said:

The health-care overhaul made "steps in the direction of a sustainable fiscal policy. But they are small steps relative to the journey that will be needed for fiscal sustainability," CBO director Douglas Elmendorf said Wednesday....

Small "relative to the journey that will be needed for fiscal sustainability" is not little.... [A better] way of putting that would be "unimagninably huge, immense, and gigantic, but nowhere near as colossal as the long term budget shortfall".

So in the hands of the Washington Post, small "relative to the journey that will be needed for fiscal sustainability" becomes "small" and then "none"... hundreds of billions of dollars are zero....

Montgomery's next sentence missallocates blame

They also said the president's tax agenda -- including a pledge to extend an array of tax cuts for the middle class -- would only make things worse.

This is only true if one interprets "the president" to be George W Bush.... Montgomery is blaming Obama for not undoing all of the damage that Bush did.... Obama is blamed for the long run budgetary shortfall, because the huge gigantic improvements that he has achieved plus the huge gigantic and popular improvements which he has proposed are not huge and gigantic enough to undo all the damage the Republicans did when they were in control.


DeLong Smackdown Watch: Say's Law, Walras' Law, and Monetary Policy

I think this is directed at me...

Nick Rowe:

Worthwhile Canadian Initiative: Say's Law, Walras' Law, and monetary policy: People (and firms and governments) face budget constraints. If people formulate their demands and supplies of goods reflecting that budget constraint, then we get Walras Law. The individual's planned purchases of goods must be financed by planned sales of goods, including money. So the value of each individual's excess supplies of goods must equal his excess demand for money. Aggregate across all individuals (plus firms and governments) and we get Walras' Law: the value of the excess supplies of goods must equal the excess demand for money....

[That] would only be right if we are talking about notional excess demands and supplies. A notional demand or supply of apples is the amount of apples that people would want to buy or sell if they ignored any constraints on the quantity of other goods they were able to buy and sell.... Walras' Law is true if it is interpreted to be speaking about notional excess supplies and demands. But if we are out of equilibrium, there will be excess demands in some markets, and/or excess supplies in other markets, and people will not be able to buy or sell as much as they want to, because they won't always be able to find willing buyers or sellers. They will be quantity constrained. The insight of Clower and Patinkin was to recognise that quantity constraints in one market will spillover into demands and supplies in other markets. If I want to buy apples, but can't because there's an excess demand for apples, I might decide to buy pears instead. If I want to sell labour, but can't because there's an excess supply of labour, I might decide to buy less carrots. In disequilibrium, people (and firms and governments) face quantity constraints as well as budget constraints. If people formulate their demands and supplies of goods to maximise utility subject to their budget constraint and subject to quantity constraints, we get constrained (or effective) demand and supply functions, not notional demand and supply functions.

I go to the supermarket with $10 in my pocket planning to buy $10 worth of apples and no pears. Those are notional demands. Excess demand for apples $10, and excess supply of money $10. Walras' Law applies. But when I get to the store there are no apples, so I re-maximise my utility function, including that quantity constraint, and decide to buy $10 of pears. Excess demand for apples $10 (because I still want the apples). Excess demand for pears $10 (because I can't buy apples). Total excess demand for goods (apples plus pears) $20. But what's the excess supply of money corresponding to that excess demand for goods? $20? But I only have $10 in my pocket....

In a Walrasian economy, with one big market, and a unified decision, Walras' Law is true. The sum of the excess supplies for goods will equal the excess demand for money (though it is hard to see what "money" could mean in such an economy"). But in a monetary exchange economy, with N markets, there are N decisions, and N different definitions of the excess demand for money, each corresponding to one of those N decisions.... But that total excess demand for money across all markets won't correspond to any economically meaningful concept. It does not represent the extra amount of money that people want to hold.

Now, what's all this got to do with monetary policy in the current recession (if anyone's still reading)?

If the problem is a deficiency of aggregate demand, then firms have an excess supply of output.... Households have an excess supply of labour. They want to sell more labour but cannot.... So the output market shows an excess supply of output matched by an excess demand for money (by firms). But firms don't want to hold that money; they want to spend it on labour.... What's happening in the bond market?... suppose the bond market is in equilibrium, either because interest rates adjust quickly, or because people are indifferent between holding additional bonds and additional money. Then there is no excess demand for money in the bond market.

If you accept my description in the above two paragraphs, then the current recession is a monetary phenomenon... fiscal policy, if successful, must be a continuation of monetary policy by other means. It is an attempt to reduce the demand(s) for money. It works, if it does work, either by reducing the private demand(s) for money (increasing velocity), or because the government has a lower demand for money than the private sector, so switching demand from the private to government sector increases the average velocity of circulation.

There is an excess demand for money in the output market. And another excess demand for money in the labour market. But this does not mean that firms and households want to hold more money; if they got it they would want to spend it (or most of it). So the central bank would not need to create anywhere near as much money as those excess demands for money would indicate.... Just because one market is satiated with money does not mean that the economy as a whole is satiated with money. In a monetary exchange economy, there are as many different excess demands for money as there are goods (excluding money). If central banks "run out of ammunition" in one market, they can just switch to one of the other N-1 markets. And the market for very short term and very safe and very liquid bonds is a very peculiar market for central banks to be operating in anyway, just because they are so close to money. If we used apples for money, it would be like the central bank operating in the market for pears. At the right relative price, apples and pears might become perfect substitutes, and open market operations might become irrelevant...


We Want Confidence: But In what?

Nick Rowe:

Worthwhile Canadian Initiative: Confidence: In what?: It's a very old argument, and there's some truth in it. Financial crises and recessions are caused by a loss of confidence. And policies that might normally help end the recession might actually make things worse, if they worsen confidence.

Confidence in what? The problem right now is that there is too much confidence: in money, and perhaps in government bonds too. And too little confidence in real investment, and perhaps in corporate bonds and shares too. Everybody wants to hold money, and government bonds. Nobody wants to spend money on real investment and on the corporate bonds and shares that finance real investment. If you accept that diagnosis, then you want policies that worsen confidence in money, and perhaps in government bonds too. And if you worsen confidence in money, so that people try to get rid of it, and spend it, that should increase confidence in real investment, because firms will be able to sell the extra goods produced by that investment.


Jeffrey Goldberg Says: Who Are You Going to Believe: Me, or Adolf Hitler?

Jeffrey Goldberg, June 30, 2010, quoting Yaacov Lozowick:

There was no Nazi invasion of the Sudetenland, no invasion of Slovakia, hardly one of Austria and even less of Bohemia...

Adolf Hitler, March 15, 1939:

Last Sunday the die was cast.... [I have] given the order for the invasion by the German troops and for the incorporation of Czechoslovakia into the German Reich...

Yep. The un-toilet trained Jeffrey Goldberg has defecated on our internet yet again...

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


Jeffrey Goldberg:

A Brief Follow-Up on Glenn Greenwald's Nazi Analogy: From Yaacov Lozowick:

Glenn Greenwald today compared the German invasion of Austria, the Sudetenland and Czechoslovakia, with the American invasion of Iraq. By the end of the same post he hedges his bets, and adds that he's not really making the comparison, unless he is but he isn't. Having seen the firestorm of protest he ignited, he than adds three times that he didn't make the comparison.... Here's my input, on a point no-one else seems to be noticing: There was no Nazi invasion of the Sudetenland, no invasion of Slovakia, hardly one of Austria and even less of Bohemia. Nazi Germany brutally invaded many countries, but those weren't among them. Go check the history books and see if I know what I'm talking about. Glenn Greenwald surely doesn't.

The "non-invasion" of Czechoslovakia, according to William L. Shirer, The Rise and Fall of the Third Reich:

Hitler than said all there was to say.... "And so last Sunday, March 12[, 1939,] the die was cast.... He has given the order for the invasion by the German troops and for the incorporation of Czechoslovakia into the German Reich."

"Hacha and Chvalkovsky," noted Dr. Schmidt," sat as though turned to stone...". But Hitler was not quite through....

The German Army [Hitler continued] had already marched in today [March 15,] and at a barracks where resistance was offered it had been ruthlessly broken.

Tomorrow morning at six o'clock the German Army was to enter [Bohemia] from all sides and the German Air Force would occupy the Czech airfields. There were two possibilities.... [F]ighting. In that case, resistance would be broken by brute force. The other possibility was that the entry of the German troops would take place in a peaceful manner, in which case it would be easy for the Fuehrer to accord Czechoslovakia a generous way of life of her own, autonomy, and a certain measure of national freedom.

He was doing all this... to protect Germany. If last autumn Czechslovakia had not given in the Czech people would have been exterminated. No one would have prevented him doing it. If it came to a fight... in two days the Czech Army would cease to exist. Naturally some Germans would be killed too and this would engender a hatred which would compel him [Hitler said," in self preservation, not to concede autonomy....

The hours were passing. At six o'clock the troops would march in. He was almost ashamed to say it, but for every Czech battalion there was a German division...


Arita Hachiro Liveblogs World War II: June 30, 1940

Arita Hachiro:

Greater East Asia Co-Prosperity Sphere: In order to realize world peace, it seems to be the most natural step that peoples who are closely related to one another geographically, racially, and economically should first form a sphere of their own for coexistence and co-prosperity and establish peace and order within that sphere, and at the same time secure a relationship of common existence and prosperity with other spheres....

The countries of East Asia and the regions of the South Seas are geographically close, historically, racially, and economically very closely related to each other. They are destined to cooperate and minister to one another's needs for their common well-being and prosperity, and to promote peace and progress in their regions. The unification of all these regions into a single sphere on the basis of common existence and assuring thereby the stability of that sphere is, I think, a natural conclusion...


More Notes on David Leonhardt on White House Views of the Recovery: Why the Line Wobble?

I had thought that the settled White House line was that the normal sources of recovery are not present when a recession is caused by a financial crisis, and that as a result a post-financial crisis recovery tends to look like an "L" rather than a "V". Given that, I thought the White House line was, the fact that we are recovering at all--that it looks like we are going to get a "U"--is both a miracle and testimony to the strength and power of the administration's stimulative policies.

David Leonhardt says that his sources inside the White House are pushing a rather different line. David Leonhardt writes:

Economic Scene - Betting That Cutting Spending Won’t Derail Recovery - NYTimes.com: An internal memo from White House economists to other senior aides last week noted that policy makers “necessarily tend to focus on the impediments to recovery.” But, the memo argued, the economy’s strengths, like exports and manufacturing, “more than make up for continued areas of weakness, like housing and commercial real estate”...

And he is skeptical about it:

That optimistic take, however, is more debatable today than it would have been a month or two ago. As is often the case after a financial crisis, this recovery is turning out to be a choppy one.... The parallels to 1937 are not reassuring.... Given this history, why would policy makers want to put on another fiscal hair shirt today?...

Either I am misinformed and wrong about what the White House analysis of the state of the economy is supposed to be, or some freelancer willing to leak paper to David is engaged in a line wobble--which doesn't strike me as a terribly constructive thing to be doing.


Invisible Bond Market Vigilantes: Duncan Black Is Not Shrill Enough Department

Duncan Black is shrill, but not shrill enough:

Monetizing Indebtedness: Frankly we should consider it, but it isn't happening, and nor is there any evidence that the big money people perceive that it's happening. Basically it's the Alan Greenspan culture. They know something should be happening (rising inflation and interest) but it isn't. But invisible beings perceive it might be happening, even though if such a perception existed it would show up in interest rates.

We need to go more levels of meta. The exhaustion of the U.S. government's debt capacity and the consequent steep spke in U.S. interest rates:

  • is not happening
  • is not expected to happen
  • is not perceived by anyone to be expected to happen
  • is not perceived by anybody to be perceived by anyone to be expected to happen.

What stage have we reached? The claim is that we must move to fiscal austerity right now because:

  • invisible people whom nobody can see perceive that somebody perceives that somebody else perceives that the exhaustion of U.S. debt capacity might be about to happen.

Three Representative Reactions to the CBO's Long-Term Budget Outlook

At 6 AM PDT this morning there emerged: http://cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf

Sample reactions:

Democrat:

We understand the current-law baseline--it says that PAYGO and health-care reform do what their enabling laws say that they do, and that they bend the deficit curve, and get us to near balance. They are, as CBO agrees, the largest long-run deficit-reducing policy changes in American history. We are proud of that--the task now is to make sure that the health-care spending restraint they apply is smart restraint, that cuts fat and not meat and bone out of our health care system.

But the alternative fiscal scenario... We don't understand. It's as if CBO has decided that every single cost-saving and revenue-increasing provision of the PPACA is going to be repealed on December 31, 2020 at the end of its ten-year budget window, and that thereafter we are going back to pre-March business-as-usual. I understand that the alternative baseline is supposed to take current law and add to it those legislative changes that CBO believes will have overwhelming congressional support when they come to the floor. But how is total repeal of the cost-saving and revenue-increasing provisions of the PPACA supposed to have overwhelming congressional support? Yes, there is the example of the Medicare doc fix. But the doc fix is an anomaly--nearly every other payment change over the past generation has, once enacted, stuck and not been repealed due to political pressure.

I can see not believing that all of the cost-saving and revenue-raising provisions of the PPACA will stick beyond 2020. But none of them? That makes no sense.

Republican:

Elmendorf. That partisan little *&@^#. If he didn't think ObamaCare would bend the long-run health-care cost curve, he should have said so nine months ago--rather than waiting until today.

Technocrat:

This alternative fiscal baseline scenario... it clearly needs to be better motivated. It's no longer what it was originally--that we all know that the R&D tax credit and the Medicare doc fix are permanent policies, and we all know that the only reason congress extends them for a year at a time and only a year at at time is that threatening businesses and doctors with their expiration is a marvelous fund-raising tool, so let's be honest budgetarily and include in our baseline all the things that we inow congress will do because congressional support for the underlying policies is overwhelming.

Now the alternative fiscal scenarios is... something else. There is now an 8% of GDP wedge between the 75-year fiscal balances as calculated by current law and by the alternative scenario. Lots of the changes from current law in the alternative baseline are things that do not have overwhelming congressional support now, and that it is not clear why anybody should think that they will have overwhelming congressional support in 2020 let alone 2050.

The alternative baseline is now based on judgments about the strength of the doctors' lobby and about the configuration of American rent-seeking politics rather than being merely an attempt to construct an honest baseline. It's not clear to me that CBO has the expertise to make such judgments. It is clear to me that if it is going to make them, it needs to back tyhem up much more comprehensively than it has done.


Doug Elmendorf Speaks! The Message I Hear: Stick to PAYGO and We Are OK...

Our budget is more-or-less balanced over the next 75 years under the current-law baseline, but Doug doesn't believe it:

Long-Term Budget Outlook: The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. In this scenario, CBO assumed that:

  • Medicare’s payment rates for physicians would gradually increase (which would not happen under current law), and that
  • several policies enacted in the recent health care legislation that would restrain growth in health care spending would not continue in effect after 2020. In addition, under the alternative scenario,
  • spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario. More important,
  • CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP, near their historical average....

Neither of those scenarios represents a prediction by CBO of what policies will be in effect during the next several decades—but these projections, encompassing two very different sets of policy assumptions, provide a clear indication of the serious nature of the fiscal challenge facing the nation.

The message I hear from this is: stick to PAYGO and we are fine. If Congress has to pay for every deviation from current law it passes--if everything that moves truly has to be deficit-neutral, as Milton Friedman first recommended back in the late 1940s that spending and tax bills needed to be conjoined twins--then things are under control.

If not--if Congress waives PAYGO on a routine and ongoing basis for big-ticket items, as it always has in the past under Republican rule and sometimes does under Democratic rule--we are in trouble.

Worth stressing is the magnitude of the gap: the magnitude of policies that CBO thinks will not be continued and that will not be paid for when they are changed, starting with the doc fix...

http___cbo.gov_ftpdocs_115xx_doc11579_06-30-LTBO.pdf.png


UPDATE: OK. Page 69. CBO has marked down the long-run share of tax revenue in the economy over the next 75 years under the alternative scenario by what looks to be 0.8% of GDP, and has given no credit at all for spending restraint via PAYGO and the PPACA...

http___cbo.gov_ftpdocs_115xx_doc11579_06-30-LTBO.pdf-1.png

http___cbo.gov_ftpdocs_115xx_doc11579_06-30-LTBO.pdf-2.png

http___cbo.gov_ftpdocs_115xx_doc11579_06-30-LTBO.pdf-3.png


What Is CBO Doing with Its Long-Term Budget Outlook.

Last year the 75-year fiscal gap was 3.2% of GDP under the current-law baseline and 8.1% under the alternative fiscal scenario.

This year--thanks to PAYGO and health-care reform--the 75-year gap under PAYGO is 0.7% of GDP--and under the alternative fiscal scenario is 8.7% of GDP.

That is a huge delta--both the effectiveness of the PPACA inr estranging cost growth and in the gap between current laws and congressional business-as-usual...


Signs of a Not-Good Payroll Number on Friday...

ADP has a number:

Private nonfarm payroll employment increased by 13,000 from May to June on a seasonally adjusted basis, according to the ADP National Employment Report™.  This is below consensus expectations of a 60,000 increase.


links for 2010-06-29

  • AP: "European politicians, particularly in Germany, are visibly sick of Americans and others telling them that imposing uniform austerity beyond Greece and Portugal is in error. But facts are facts, and it is an error. The experience of the Asian Financial Crisis is directly relevant, and the willingness of the IMF to reconsider its position in the time since would be a good example to follow. What matters is getting policies right, not adhering to a foolish consistency, either in policy recommendations across countries or in publicly taken positions."
  • JG&DW: "The recession that began in late 2007 severely reduced state tax revenue and increased demand for many public services. In the near term, institutional and political factors limit the options states have for cutting spending and raising taxes. Aid to states in the federal economic program is winding down next year and the situation is likely to get worse before it gets better. Painful budgetary choices lie ahead for many states, though the drag on the national economy should be modest."
  • "Contained in the Healthy San Francisco program is a mandate on employers in San Francisco to offer health insurance coverage to their employees. If failing to do so, the employer can meet the requirement by paying into the public program. Small employers and non-profits are exempt. A very similar approach was adopted in many of the national health care reform proposals. The Golden Gate Restaurant Association unsuccessfully challenged this requirement in the 9th U.S. Circuit Court of Appeals in 2008. Today, the US Supreme Court decided to not hear the final appeal from the Restaurant Association, ending their battle to eliminate this employer mandate."
  • MY: "Will Wilkinson notes that “a solid background in the philosophy of science is especially useful when it comes to explaining why many economic theories fail to meet the basic standards of adequate science.” That certainly seems true to me.... [I]t would be better if ideas as good as Minsky’s could be put into a more formal framework since that would make them more useful. But the correct ordering is... start with theories that are doing some good and try to make them formal to make them more useful. Starting with formalisms that would be useful if they were accurate, and then endlessly tweaking the inputs so that in retrospect they give you the right answer... there’s a reason policymakers don’t rely on this work."
  • HB, CR, & LR: "There are currently nearly 15 million Americans unemployed, with the unemployment rate hovering at or just under 10 percent for nearly a year. At the end of May, nearly half of those unemployed... have been out of work and actively seeking a job for at least six months... there are nearly five workers actively searching for work for every job available, compared to just one and a half job searchers per job opening before the Great Recession began. Worse still, the labor market problems we see right now will be with us for some time. The massive employment hole left by the Great Recession will take years to fill. If we added 218,000 private sector jobs each month... it would still take almost five years to fill the hole. That’s why ensuring that unemployment insurance reaches the unemployed remains a critical component of any serious effort to help stem the harmful effects of this recession and to help the American economy recover."
  • MT: "When I first heard her say that, I thought to myself, "That has to be a joke. It's sarcasm, right?" But then I went back and replayed the clip – no sarcasm! She meant it! If I'm hearing [Lara] Logan correctly, what Hastings is supposed to have done in that situation is interrupt these drunken assholes and say, "Excuse me, fellas, I know we're all having fun and all, but you're saying things that may not be in your best interest! As a reporter, it is my duty to inform you that you may end up looking like insubordinate douche bags in front of two million Rolling Stone readers if you don't shut your mouths this very instant!" I mean, where did Logan go to journalism school – the Burson-Marsteller agency?"
  • RA: "Positive experiences with budget cuts are almost always associated with devaluations, which are off the table for euro area members. They're usually combined with structural reforms, but Ireland has already rid itself of much of the burdensome economic rules that held back its economy in earlier decades. Austerity can also boost growth by reducing interest rates, but this isn't helpful when markets shrug off the cost-cutting (as they have where Ireland is concerned) or when rates are already low (as they are in America and Britain)... it's far from clear that austerity can ultimately lead to growth in an environment where global demand remains weak and many countries are simultaneously making fiscal (or other economic) adjustments. Economists observed high debt levels and market panic and seemed to assume that austerity for every country with a big deficit was the right prescription. That may well prove to have been a big mistake."
  • MY" "Take, for example, the slides (PDF) Paul Krugman posted yesterday that accompany a talk he gave on whether there’s a causal link between income inequality and giant economic collapses. The barest outline of a case that there is such a link is that you have two giant increases in inequality, one that ended with the Great Depression and one that ended with the current recession. The barest outline of a case against the existence of such a link is that it’s hard to understand what the causal mechanism here. This, though, is one stab at identifying a mechanism.... Maybe inequality leads to growing indebtedness and this leads to financial crisis. Maybe."
  • DD: "If this isn’t a Lucy-with-the-football moment, I don’t know what is. Brian Beutler reports that Hill aides told him President Obama’s Treasury Department sided with Scott Brown in the waning moments of the Wall Street reform conference committee, favoring his loophole for the Volcker rule designed to help asset management companies in Massachusetts. In the process they shot a giant hole through the efforts to stop the mega-banks from investing in private equity or hedge funds, allowing them to use up to 3% of Tier One Capital. Even the two main Senators involved in crafting a strong Volcker rule, Carl Levin and Jeff Merkley, consider the “de minimus” exception a “flaw” that is “problematic,” though they highlight other protections and provisions on proprietary trading. The point is, if you asked them whether they favored the Brown loophole, they would have said no. And at the key moment, the Obama Treasury Department stood with Scott Brown and carried the loophole over the line."
  • MK: "And speaking as someone who has taken graduate coursework in “continental philosophy”, and been walked through the big hits of structural anthropology, Hegelian marxism and Freudian feminism, that graduate macroeconomics class was by far the most ideologically indoctrinating class I’ve ever seen. By a mile. There was like two weeks where the class just copied equations that said, if you speak math, “unemployment insurance makes people weak and slothful” over and over again. Hijacking poor Richard Bellman, the defining metaphor was that observation that if something is on an optimal path any subsection is also an optimal path, so government just needs to get out of the way as the macroeconomy is optimal absent absurdly defined shocks and our 9.6% unemployment is clearly optimal. (An unfair description perhaps, but I wasn’t an actual student."

It's 1937 Again!

David Leonhardt:

Betting That Cutting Spending Won’t Derail Recovery: The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome. In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth. Longer term, it’s still impossible to know which prediction will turn out to be right. You can find good evidence to support either one.... [R]ecent economic numbers have offered some reason for worry, and the coming fiscal tightening in this country won’t be much smaller than the 1930s version. From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product. Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once. From 2009 to 2011, the tightening in the United States will equal 4.6 percent of G.D.P., according to the International Monetary Fund. In Britain, even before taking into account the recently announced budget cuts, it was set to equal 2.5 percent. Worldwide, it will equal a little more than 2 percent of total output.

Today, no wealthy country is an obvious candidate to be the world’s growth engine, and the simultaneous moves have the potential to unnerve consumers, businesses and investors, says Adam Posen, an American expert on financial crises now working for the Bank of England. “The world may be making a mistake, and it may turn out to make things worse rather than better,” Mr. Posen said. But he added — after mentioning China, India and the relative health of the financial system, today versus the 1930s — that, “The chances we’re going to come out of this O.K. are still larger than the chances that we aren’t.”

I think that Adam Posen has a different definition of "OK" than I do. A jobless recovery and prolonged unemployment above 8% is, to my way of thinking, definitely not OK.

Leonhardt:

[T}he initial stages of our own recent crisis were more severe than the Great Depression. Global trade, industrial production and stocks all dropped more in 2008-9 than in 1929-30, as a study by Barry Eichengreen and Kevin H. O’Rourke found. In 2008, though, policy makers in most countries knew to act aggressively. The Federal Reserve and other central banks flooded the world with cheap money. The United States, China, Japan and, to a lesser extent, Europe, increased spending and cut taxes. It worked. By early last year, within six months of the collapse of Lehman Brothers, economies were starting to recover. The recovery has continued this year, and it has the potential to create a virtuous cycle. Higher profits and incomes can lead to more spending — and yet higher profits and incomes. Government stimulus, in that case, would no longer be necessary.

An internal memo from White House economists to other senior aides last week noted that policy makers “necessarily tend to focus on the impediments to recovery.” But, the memo argued, the economy’s strengths, like exports and manufacturing, “more than make up for continued areas of weakness, like housing and commercial real estate.” That optimistic take, however, is more debatable today than it would have been a month or two month ago. As is often the case after a financial crisis, this recovery is turning out to be a choppy one. Companies kept increasing pay and hours last month, for example, but did little new hiring. On Tuesday, the Conference Board reported that consumer confidence fell sharply this month. And just as households and businesses are becoming skittish, governments are getting ready to let stimulus programs expire, the equivalent of cutting spending and raising taxes. The Senate has so far refused to pass a bill that would extend unemployment insurance or send aid to ailing state governments. Goldman Sachs economists this week described the Senate’s inaction as “an increasingly important risk to growth.”

The parallels to 1937 are not reassuring.... Given this history, why would policy makers want to put on another fiscal hair shirt today? The reasons vary by country. Greece has no choice.... Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction. Spain falls into this category, and even Britain may.

Then there are the countries that still have the cash or borrowing ability to push for more growth, like the United States, Germany and China, which happen to be three of the world’s biggest economies. Yet they are also reluctant.... The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.

Finally, the idea that the world’s rich countries need to cut spending and raise taxes has a lot of truth to it. The United States, Europe and Japan have all made promises they cannot afford. Eventually, something needs to change. In an ideal world, countries would pair more short-term spending and tax cuts with long-term spending cuts and tax increases. But not a single big country has figured out, politically, how to do that. Instead, we are left to hope that we have absorbed just enough of the 1930s lesson.


Timothy Burke on Why the Washington Post Would Do Us All a Favor by Shutting Down Now

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

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Islands in the Mire « Easily Distracted: Try to imagine, if you will, a person buried alive, growing desperately weak, fighting and struggling... to reach up through the dirt in order to grab some nearby stones to pile on top of his grave.

That’s what watching the contemporary scene of mainstream journalism is like these days. Every day there’s some new bit of incremental suicide. Just take the last week. We had mainstream reporters taken by surprise because a reporter used access to a source in order to report the news rather than as an end in itself. I especially loved the TV journalist midway through this Jon Stewart segment who scolds Michael Stanley, saying that he won’t be given access to the same sources in the future. We had writers like Caitlin Flanagan continuing to write out their own mental hang-ups as if they were peer-reviewed social science and being given significant soapboxes by major press organizations to do so.

And we had David Weigel, resigning because in a listserv he expressed opinions about the people he covered.

Nobody wants the press to be objective. Demands for objectivity are the same as diving to the ground clutching your ankle in the World Cup: they’re meant to play the referee into calling a foul (or refusing to call one). What most readers want is a press that cares about the truth. This is not the same thing as objectivity. Most of the time it’s exactly the opposite, particularly when the truth is subtle, contradictory or ambiguous, as it often is. If I came across a reporter covering American politics who did not have pungent, strong opinions about the personal character of most of the people he was covering, I’d assume he was a dullard, incompetent, a zombie or an alien. Or some mixture of those.

A reporter who is interested in the truth is going to need to have the mental discipline to see issues from multiple angles, and to have a lack of ego when it counts, to have the ability to detach from their own customary or comfortable perspective. That also is not the same thing as objectivity, and it most certainly is not the lack of a customary perspective. Journalism is not compiled at the Vulcan Science Academy.

What reporters need is skill with the getting and processing of information and the ability to communicate what they’ve learned clearly, vividly and concisely. As far as I can see, that describes Weigel pretty well. But his bosses decided to act as if they were a bunch of Victorian spinsters getting the vapors at the sight of a man’s naked ankle because of his public comments, when they’ve very evidently tolerated (even welcomed) reportage and commentary with vastly more contempt for truthful inquiry...


Rajiv Sethi: On Blogs and Economic Discourse

Rajiv Sethi:

Rajiv Sethi: Athreya argued... that most such blogging is done by ill-informed hacks who ought to be ignored while properly trained experts (such as himself) are left in peace.... The original post has been taken down but (as a telling reminder that no public statement can subsequently be made private in this day and age) a copy may be viewed here.

The response from the accused was swift and brutal....

I'd like to take this opportunity to reiterate and expand upon a couple of points that I have made in previous posts about the rapidly changing role of blogs in economic discourse.

My view of the matter is almost diametrically opposed to that of Athreya: I consider these changes to be both irreversible and potentially very healthy. In a post commemorating the birthdays of two excellent economics blogs, I made this point as follows (see also Andrew Gelman's follow-up):

The community of academic economists is increasingly coming to be judged not simply by peer reviewers at journals or by carefully screened and selected cohorts of students, but by a global audience of curious individuals spanning multiple disciplines and specializations. Voices that have long been silenced in mainstream journals now insist on being heard on an equal footing. Arguments on blogs seem to be judged largely on their merits, independently of the professional stature of those making them. This has allowed economists in far-flung places with heavy teaching loads, or those who pursued non-academic career paths, to join debates. Even anonymous writers and autodidacts can wield considerable influence in this environment, and a number of genuinely interdisciplinary blogs have emerged...

This has got to be a healthy development. One might persuade a referee or seminar audience that a particular assumption is justified simply because there is a large literature that builds on it, or that tractability concerns preclude reasonable alternatives. But this broader audience is not so easy to convince. Persuading a multitude of informed, thoughtful, intelligent readers of the relevance and validity of one's arguments using words rather than formal models is a far more challenging task than persuading one's own students or peers. If one can separate the wheat from the chaff, the reasoned argument from the noise, this process should result in a more dynamic and robust discipline in the long run...


Why the Republican Party Should Shut Itself Down Today, for the Good of the Country

Kevin Drum:

Boehner vs. Boehner: Now that the Republican caucus has apparently decided to unanimously oppose any reform of our financial system, House GOP leader John Boehner explains his party's objections to the final bill reported out of conference last week:

This is killing an ant with a nuclear weapon.

And here is Boehner's spokesman "explaining" what he meant:

It's clear Boehner is not minimizing the crisis America faced — he is pointing out that Washington Democrats have produced a bill that will actually kill more jobs and make the situation worse.

So here's a question: do the standards of journalism require us to take this explanation at face value? I mean, it's obvious to a fourth grader what Boehner meant: he thinks there were only minor problems with the financial system before the crash, and we just don't need anything more than a few tweaks here and there to fix things up. He decidedly was minimizing the problems on Wall Street during the years that led up to the crisis.

But do we now have to pretend that's not what he meant simply because his press flack says that's not what he meant? Or can we act like adults and interpret his remark in the obvious way? Stay tuned for media reaction later today to find out.

Here is one off-the-record email in my archives from a journalist who watched the video of an interview with Boehner--a different interview--but who works for an organization that still requires not "objectivity" but rather "neutrality" from its reporters:


Mollie Panter-Downes Liveblogs World War II: June 29, 1940

The New Yorker's Letter from London:

It would be difficult for an impartial observer to decide today whether the British are the bravest or merely the most stupid people in the world. The way they are acting in the present situation could be used to support either claim. The individual Englishman seems to be singularly unimpressed by the fact that there is now nothing between him and the undivided attention of a war machine such as the world has never seen before.... One morning this week, postmen slipped officla pamphlets in withthe mail, telling householders just what to do if Britain is invaded. Official advice is to stay at home unless told by the proper authorities to leave, "because, if you run away, you will be machine-gunned from the air, as were civilians in Holland and Belgium..."


Evil Consequences of Listening to the Pain Caucus

Calculated Risk:

Calculated Risk: Ireland: Austerity in Action: From Liz Alderman in the New York Times: In Ireland, a Picture of the High Cost of Austerity

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

...

Rather than being rewarded for its actions, though, Ireland is being penalized. ... Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

...

The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate.

As the Irish government cut the budget, the economy contracted faster and the deficit as a percent of GDP increased.

And how will they break the downward cycle? Export to England and America ...

[T]he government is pinning nearly all its hopes on an export revival to lift the economy. Falling wage and energy costs, and a weaker euro, have improved competitiveness.

This approach works for one country - or a few - but not if every country is doing it.

And Duncan Black comments:

Austerity: The approach can work...if your currency can devalue. Ireland's currency is the Euro, which has devalued some, but not nearly as much as it "should" for the benefit of Ireland, Greece, Spain, etc. The bond vigilantes don't like economic policies which turn your economy to shit. This is very surprising!!

And Paul Krugman:

A Terrible Ugliness Is Born: Liz Alderman offers an excellent, if depressing, portrait of Ireland in austerity. To fully appreciate its significance, you want to juxtapose it with what the apostles of austerity are saying. Jean-Claude Trichet:

“As regards the economy, the idea that austerity measures could trigger stagnation is incorrect,” Trichet said, according to an English-language transcript published on the ECB’s Internet site. “I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Uh-huh.

The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.

And Ryan Avent is downright shrill:

From <>:

Markets: An ugly day: BUTTONWOOD has been, if anything, more bearish than I am, and markets keep reinforcing his outlook. Here he is this morning:

As I write, European markets have fallen more than 2% and are flirting with some round numbers that make headlines when they are broken (5,000 on the FTSE 100, 6,000 on the Dax). The Dow has opened with a near-200 point loss. Renewed fears about the health of European banks are one factor. Doubtless it doesn't help that the Greeks are on strike and that Nouriel Roubini has called in the FT for Greece to restructure its debt. And the sharp fall in US consumer confidence will just add to the worries. But the news of the day is from China, or rather from New York where the Conference Board has recalculated its estimate of the leading economic index from 1.7% to 0.3%. That's a miscalculation on a Uruguayan-referee scale. But investors have to cope with a lot of Chinese data which they fear may be massaged in an optimistic direction, so they are inclined to taske seriously any signs of weakness.

American markets have continued to head down and are off nearly 3% at present. A larger than expected decline in American consumer confidence has reinforced the initial downward movement. What's really troubling, however, is the related drop in commodity prices and the continued downward movement in Treasury rates. The 10-year is below 3%, and still falling.

This is not a good sign. This does not look like confidence in global recovery. And the sad thing is that this trajectory has been fairly obvious for months now, if not longer. Policymakers, and especially central bankers need to be doing more.


A Week in Which the Ten Year Bond Rate Drops Below 3% Is Not a Week to Call for Austerity...

Kevin Warsh demonstrates why he was a very bad choice for the Federal Reserve Board:

U.S. Government Bonds, Treasury & Municipal Bond Yields - Bloomberg

Paul Krugman comments:

The Conventional Superstition: The Conventional Superstition Calculated Risk points us to a speech by Kevin Warsh that strikes me as almost the perfect illustration of the predicament we’re in, in which policy is paralyzed by fear of invisible bond vigilantes. Warsh isn’t an especially bad example — but that’s the point: this is what Serious People sound like these days. The bottom line of Warsh’s speech — although expressed indirectly — is that it’s time for fiscal austerity, even though the economy remains deeply depressed; and no, the Fed can’t offset the effects of fiscal contraction with more quantitative easing. In short, the responsible thing is just to accept 10 percent unemployment.

And why is this the responsible thing? On fiscal policy,

market forces are often more certain than promised fiscal spending multipliers.

Um, but those market forces are currently willing to lend money to the US government [for ten years] at an interest rate of 3.05 percent. But never mind:

unanticipated, nonlinear events can happen

So it’s these “unanticipated, nonlinear events” that are “more certain” than the direct effects of fiscal policy? I’m confused.

And on monetary policy,

The Fed’s institutional credibility is its most valuable asset, far more consequential to macroeconomic performance than its holdings of long-term Treasury securities or agency securities. That credibility could be meaningfully undermined if we were to take actions that were unlikely to yield clear and significant benefits.

OK, but why, exactly, does it help the Fed’s institutional credibility to do nothing to help a deeply depressed economy?

The point here is that Warsh’s argument basically rests on assertions not about what markets are saying now, but about presumed market reactions to policy. And these assertions about how markets will react are: (a) not based on any actual evidence; (b) assume that markets will behave irrationally. This goes for both fiscal and monetary policy. Again, right now the bond market doesn’t seem worried about US solvency. And rationally, stimulus spending shouldn’t change that view: with the long-term real interest rate well below 2 percent, current borrowing has only a trivial effect on the long-run state of the budget. You may say that markets will see short-run austerity as a signal of our willingness to make long-run sacrifices; but why? What the United States needs to do in the long run, mainly controlling health care costs and increasing revenue, has nothing to do with the question of whether we have a second stimulus package.

On monetary policy: again, the large expansion of the Fed’s balance sheet so far doesn’t seem to have worried markets: right now, the 10-year TIPS spread is 1.9, showing no sign of exploding inflationary expectations. And for that matter, a rise in inflation expectations would actually be a good thing right now, encouraging more spending — unless you believe that markets will someone react badly, for reasons not specified, to the Fed’s impaired “credibility” defined as … well, I’m not sure what.

So what we’ve got here is an assertion that bad things will happen if you do certain things, without either any evidence to that effect or any explanation of why those things should happen. Yes, maybe bond markets will punish us if we don’t slash spending right now; also, maybe we’ll have bad luck if we step on cracks, or fail to turn aside when Basement Cat crosses our path. But why does this pass for judicious policy discussion?


The Basic Story of "Modern" Macroeconomics as a Failed Research Program

Paul Krugman:

Learned Helplessness In Macro: the basic story of “modern” macro runs like this:

  1. Lucas and his disciples agree that the economy looks Keynesian — that is, it surely looks as if monetary and fiscal policy have real effects — but argue that an equilibrium approach with imperfect information can explain why, while rejecting Keynesian policy implications. And they ridicule Keynesian economics.

  2. By 1980 — three decades ago! — it is already clear that the Lucas project has failed. Equilibrium models with imperfect information cannot, in fact, explain key facts about business cycles, especially the way recessions persist even though everyone knows that they’re in a recession.

  3. Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down; they decide to forget about what they used to know about the apparent effects of demand shocks, and explain the business cycle in terms of real shocks.

  4. This approach also falls short; in an attempt to rescue the models, ever more epicycles are added, and whatever clarity may once have existed gets lost.

  5. Freshwater economists declare that the business cycle is deeply puzzling, and that we need much more research before we can make policy recommendations.

In short, what we’re looking at is learned helplessness. Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.

It’s only if you’re committed to a failed research project — a project that failed a generation ago, but refused to admit it — that you’re baffled.


links for 2010-06-28


A Republican Party that Really, Really Doesn't Want Any Black or Hispanic People Voting for It Ever Again...

After last summer's Sotomayor circus, the Republicans are back for more--this time starring Elena Kagan in the center ring as the honorary Negro!

Christina Bellantoni for TPM:

Thurgood Marshall Takes Center Stage At Kagan Hearings: Looks like Senate Judiciary Republicans have at least one unified talking point today: Justice Thurgood Marshall, the first African-American to ever serve on the Supreme Court, was an "activist judge." As Elena Kagan kept on her listening face, multiple senators slammed both Marshall's judicial philosophy and her service as his clerk in the late 1980s. Ranking member Sen. Jeff Sessions (R-AL) criticized Kagan for having "associated herself with well-known activist judges who have used their power to redefine the meaning of our constitution and have the result of advancing that judge's preferred social policies," citing Marshall as his son, Thurgood Marshall Jr., sat in the audience of the Judiciary Committee hearings.... Marshall['s]... name came up 35 times. President Obama's name was mentioned just 14 times today. Sessions said Kagan's reverence for Marshall "tells us much about the nominee," and he meant that... as an indictment....

"There's no doubt that he was an activist judge," Sen. Orrin Hatch (R-UT) said on MSNBC today when taking a break from the hearing. Hatch lauded Marshall's role in helping African Americans "be more accepted in society," but criticized his decisions on the court. "Let's admire the man for the great things he did, but let's not walk over and wipe out the things that really didn't make sense as an obedient student of the practice of law," Hatch said.... Here's a key portion of Kyl's statement:

In another case, Ms. Kagan said that the Supreme Court should take the case because "it's even possible that the good guys might win on this issue." I'm concerned about her characterization of one party as the good guys. Too often it sounds to me like Ms. Kagan shares the view of President Obama and Justice Marshall that the Supreme Court exists to advance the agenda of certain classes of litigants. In another case, Ms. Kagan wrote that there is no good reason to place an exclusionary rule before this court, which will doubtlessly only do something horrible with it....

It remains to be seen what, if any, resonance the GOP's strategy of attacking a famed civil rights activist and esteemed Supreme Court jurist will have either with their base or those unconvinced about Kagan's fitness for the court.... Salt Lake Tribune's Thomas Burr caught up with Hatch after the hearings and the senator wasn't sure he would have voted to confirm Marshall. "Well, its hard to say," Hatch told Burr.


The FT Has Finally Let Jared Bernstein Out...

The Economic Advisor to the Vice President writes:

Deficit reduction is not the enemy of jobs: It is all too common for Washington’s economic debates to feature strongly held views with little underlying logic or evidence. The debate over whether the Obama administration should emphasise job growth or deficit reduction is only the most recent example.... America’s economy badly needs two policies that critics say pull in opposite directions: more government support for jobs and a credible path toward fiscal sustainability.... In the current economic moment jobs and deficit reduction are friends, not enemies.

It is a friendship unique to times like the present. When the economy gets back up to speed, the key to debt reduction in the US will once again be paying for federal spending in real-time, and dealing with rising health costs.... Yet policymakers should know that a dollar spent by the government [in times like] today adds less to the deficit than a dollar spent when the economy is at full strength. In normal times deficit spending is like adding water to a glass that is already full. Public spending just displaces private.... But when you have so many people out of work... the outcome is different. As economist Brad DeLong recently noted, at times like this “there is no crowding out of private investment; on the contrary, there is likely to be crowding in”. We saw just this in our 2009 Recovery Act, which is using matching grants and tax credits to encourage private investors to come off the sidelines and finance the expansion of new industries – and new jobs – most often associated with clean energy. The existence of all this excess capacity keeps interest rates and inflation low, so monetary policy is not compelled to mop up any overflow.

Such short-term, temporary spending does not add to medium- or long-term debt burdens. Spending that gets into the system, acting to offset a collapse in private demand, and then scaling back as the private sector comes back online, has only a minor impact on longer-term debt.

At $787bn, the Recovery Act is far larger than any of the new targeted stimulus jobs programmes the president is now proposing. Even a programme of this magnitude adds less than a half a per cent to the deficit-to-GDP-ratio by 2012, and nothing to the growth in the debt-to-GDP ratio for the rest of the decade.

These economic relationships are not unknown, so why is it proving so hard to pass legislation related to temporary jobs measures? One reason may be that members of Congress believe that, since the worst is over, now is the time to hand the growth baton back to the private sector. This is the same mistake made in the late 1930s, when it threw the country back into depression....

It would be wrong to overstate this friendship between job growth and deficit reduction: this is not... a free lunch. But... today’s conditions mean the real cost of helping to preserve important jobs is now as much as 40 per cent below the budgetary cost....

[W]e do not have too many moments when unused capacity creates a friendship between growth and deficits. But if we fail to recognise this one, we risk unnecessarily condemning millions of American families to pain that could, should and must be avoided.

Write "long-term fiscal sustainability" instead of "fiscal sustainability" Jared!

And I would not say 40%. I would say 70% once you allow for the dependence of business investment on current corporate profits. And if there is hysteresis in unemployment, it would go higher.


Listening to Arson

And we are live at Project Syndicate:

Listening to Arson: I had always thought that Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president’s deficit-reduction commission. Simpson was a noted budget arsonist when he was in the Senate. Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass. Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being.

You don’t pick an arsonist to head the fire department, I thought when Obama named him co-chair of the National Commission on Fiscal Responsibility and Reform.

But perhaps I am ungenerous. Perhaps Simpson has had a change of heart. Perhaps he has traveled his own road to Damascus, come face-to-face with what he had done and who he was, repented, and wanted to repair some of the damage to America and its long-run economic growth prospects that he had caused.

Even in that case, however, naming those who misbehave to important positions of high trust and acclaiming them as bipartisan statesmen gives the next generation really lousy incentives. And it’s not as though Congressional Republicans think they owe enough to Simpson for him to swing a single vote in either chamber of the legislature.

Obama officials assured me that Simpson had, indeed, had a change of heart; that he was a smart man with a sophisticated understanding of the issues; that he could sway reporters and get them to describe the commission’s advice as “bipartisan” (even though he could not sway actual legislators); and that he would be a genuine asset to the substantive work of the commission.

John Berry recently wrote in the online journal The Fiscal Times that not even that is true. Simpson is “condescending and derisive – and wildly wrong about important parts of the Social Security system's past.” Moreover, Simpson apparently does not understand that, as commission co-chair, his job is to build a broad coalition for necessary and mutually beneficial policy changes.

Indeed, Berry reports that Simpson now believes that it would be unfair to use general revenues to pay for any portion of Social Security benefits. In other words, the large surplus in the Social Security trust fund, which is made up of government bonds that general revenues are earmarked to pay for, does not really exist and cannot be drawn upon. In his interview with Alex Lawson, “Simpson maintained,” Berry wrote, "that “Social Security is already insolvent because it is paying out more than it is getting in tax revenue.” Never mind that the plan since 1983 has been for Social Security to tax more than it spends for a full generation and then use the built-up surpluses to spend more than it taxes.

“There is no surplus in there. It’s a bunch of IOUs,” Berry reports Simpson as having said. “Listen. It’s two-and-a-half trillion bucks in IOUs which have been used to build the interstate highway system and all of the things people have enjoyed since it has been set up.”

Simpson is not making sense. All investments are IOUs. A General Electric bond is just that – a promise by the General Electric Company to pay its creditors. A dollar bill is an IOU from the government, just like a Social Security Trust Fund bond is.

Perhaps the most bizarre of Simpson’s claims that are quoted by Berry is that the Social Security Commission of 1983 “never knew there was a baby boom....” The baby boom, of course, started immediately after World War II and peaked in 1960. As Berry writes: “Alan Greenspan, who headed...[that] commission...would tell Simpson something different. The big demographic shift that began right after World War II was precisely why...taxes were raised and benefits were cut [in 1983] – to build up a trust fund surplus so benefits could be paid.”

Four centuries ago, the consensus, in Western Europe at least, was that good and even adequate government in this fallen world was inevitably a rarity. Democracy always degenerated into mob rule, monarchy into tyranny, and aristocracy into oligarchy. Even when well run, democracy took little interest in the distant future, aristocracy took little interest in the well-being of those whom Simpson calls the “little people,” and monarchy took little interest in anything other than legitimate succession.

Then, at the end of the eighteenth century, the founders of the United States of America and their intellectual successors claimed that this pessimism about government was unwarranted. “The science of politics...like most other sciences,” claimed Alexander Hamilton, “has received great improvement....The regular distribution of power into distinct departments...legislative balances and checks...judges holding their offices during good behavior; the representation of the people in the legislature by deputies of their own election...are means, and powerful means, by which the excellences of republican government may be retained and its imperfections lessened or avoided...”

Perhaps Hamilton was too much the optimist. When I look at Barack Obama’s deficit commission – indeed, look at governance worldwide – I see many imperfections, but few or no examples of excellence.


Is Macroeconomics Hard?

Is Macroeconomics Hard?

"Math is hard," said Malibu Barbie, famously--and a ton of criticism came down on her for the implicit message that her auditors should go off and do other, easier, things instead and leave the math to the trained professionals. Is macroeconomics hard in this sense? I confess that I do not think so. I think that macro is pretty easy...[1]

Let's go back in time almost two centuries, to the days when--first after the end of the Napoleonic Wars and then in 1825-6--the nascent intellectual community of economists confronted the question of whether the circular flow of economic activity as mediated by the market system could break down and the economy become afflicted by a "general glut" of commodities.

There was no question that there could be a "glut" of particular commodities. An example may make this clear:

Suppose--this is Berkeley, after all--that households decide that they want to spend less than they have been spending on electricity to power large-screen video and audio entertainment systems and more on yoga lessons to seek inner peace. The immediate consequence--within the "market day," as late-nineteenth century British economist Alfred Marshall would have put it--of this shift in preferences is excess demand for yoga instructors and excess supply of electric power. Prices of electricity (and of large-screen TVs, and of audio systems) fall as unsold inventories pile up in stores and as generators spin down and stand idle. Yoga instructors, by contrast, find themselves overscheduled, working ten-hour days, and stressed out--and find the prices they can charge for their lessons going through the roof. Workers in electric power distribution and in video and audio production and sales find that they must either accept lower wages or find themselves out on the street without jobs.

Over time the market system provides individuals with changing incentives that resolve the excess-supply excess-demand disequilibrium and restore the economy to equilibrium balance. Seeing the fortunes to be earned by teaching yoga, more young people learn to properly regulate their svadisthana chakra and teach others to do so. Seeing unemployment and stagnant wages in electrical engineering, fewer people major in EECS. The supply of yoga instructors grows. The supply of electrical engineers shrinks. Wages of yoga instructors fall back towards normal. Wages of electrical engineers rise. And balanced equilibrium is restored.

Thus we understand how there can be a glut of a particular commodity--in this case, electric power. And we understand that it is matched by an excess demand for another commodity--in this case, yoga instructor services to properly align your svadisthana chakra.

But can there be a general glut, a glut of everything?

Some economists early in the nineteenth century said yes--and that the economy was experiencing one, and that the fact that such "general gluts" could manifest themselves was a problem with the market system that economists needed to figure out how to solve. Thomas Robert Malthus was the most prominent of those who protested. He agreed that the then-fashionable economic theory said that a glut in one market had to be balanced by a surplus of excess demand in another. But, he said, so much the worse for economic theory:

Malthus on Ricardo: [A]ccording to [Ricardo's]... theory of profits... the master manufacturers would have been in a state of the most extraordinary prosperity, and the rapid accumulation of their capitals would soon have employed all the workmen that could have been found. But, instead of this, we hear of glutted markets, falling prices, and cotton goods selling at Kamschatka lower than the costs of production. It may be said, perhaps, that the cotton trade happens to be glutted; and it is a tenet of the new doctrine on profits and demand, that if one trade be overstocked with capital, it is a certain sign that some other trade is understocked. But where, I would ask, is there any considerable trade that is confessedly under-stocked, and where high profits have been long pleading in vain for additional capital? The [Napoleonic] war has now been at an end above four years; and though the removal of capital generally occasions some partial loss, yet it is seldom long in taking place, if it be tempted to remove by great demand and high profits; but if it be only discouraged from proceeding in its accustomed course by falling profits, while the profits in all other trades, owing to general low prices, are falling at the same time, though not perhaps precisely in the same degree, it is highly probable that its motions will be slow and hesitating...

Jean-Baptiste Say defended the theory. He wrote to Malthus claiming that theory was sound, and that the idea of a "general glut" was logically inconceivable:

Letters to Mr. Malthus: I shall not attempt, Sir, to add... in pointing out the just and ingenious observations in your book; the undertaking would be too laborious.... [And] I should be sorry to annoy either you or the public with dull and unprofitable disputes. But, I regret to say, that I find in your doctrines some fundamental principles which... would occasion a retrograde movement in a science of which your extensive information and great talents are so well calculated to assist the progress.... What is the cause of the general glut of all the markets in the world, to which merchandize is incessantly carried to be sold at a loss?... Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own. To the proprietor of the mines whence this money is obtained, it is a production with which he purchases such commodities as he may have occasion for.... From these premises I had drawn a conclusion... “that if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets to produce.”... [W]henever there is a glut, a superabundance, [an excess supply] of several sorts of merchandize, it is because other articles [in excess demand] are not produced in sufficient quantities... if those who produce the latter could provide more... the former would then find the vent which they required.... You, on the contrary, assert that there may be a superabundance of goods of all sorts at once; and you adduce several facts in favour of your opinion. M. Sismondi had already opposed my doctrine...

As the young John Stuart Mill put it, the core of the argument of Say, Ricard, and their school was that:

There can never, it is said, be a want of buyers for all commodities; because whoever offers a commodity for sale, desires to obtain a commodity in exchange for it, and is therefore a buyer by the mere fact of his being a seller. The sellers and the buyers, for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another...

Thus a general glut was as impossible as a square circle or a solid gas.

Yet Say changed his mind. By 1829, in his analysis of the British financial panic and recession of 1825-6, Jean-Baptiste Say was writing that there could indeed be such a thing as a general glut of commodities after all: "every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared..."

The general glut, Say wrote in 1829, had been triggered by a panicked financial flight to quality which had led the Bank of England to shrink its liabilities:

The Bank [of England], legally obliged to redeem its banknotes in specie... [t]o limit its losses... forced the return of its banknotes, and ceased to put new notes into circulation. It was then obliged to cease to discount commercial bills. Provincial banks were in consequence obliged to follow the same course, and commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old. As the bills that businessmen had discounted came to maturity, they were obliged to meet them, and finding no more advances from the bankers, each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared among merchants and among bankers, who having placed more bills in circulation than their personal wealth could cover, could no longer find guarantees to cover their issues beyond the undertakings of individuals, many of whom had themselves become bankrupt...

What was going on?

The answer was nailed by John Stuart Mill in that same year.

Mill's explanation: there was indeed a "general glut" of newly-produced commodities for sale and of workers to hire. But it was also the case that the excess supply of goods, services, and labor was balanced by an excess demand elsewhere in the economy. The excess demand was an excess demand not for any newly-produced commodity, but instead an excess demand for financial assets, for "money":

Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells... there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible.... In order to render the argument for the impossibility of an excess of all commodities applicable... money must itself be considered as a commodity....

Those who have... affirmed that there was an excess of all commodities, never pretended that money was one of these commodities.... What it amounted to was, that persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute....

The result is, that all commodities fall in price, or become unsaleable.... [A]s there may be a temporary excess of any one article considered separately, so may there of commodities generally, not in consequence of over-production, but of a want of commercial confidence...

How, exactly, should economists characterize the excess demand in financial markets? Where was it, exactly? That became a subject of running dispute, and the dispute has been running for more than 150 years, with different economists placing the cause of the "general glut" that was excess supply of newly-produced goods and of labor at the door of different parts of the financial system.

The contestants are:

  1. Fisher-Friedman: monetarism: a depression is the result of an excess demand for money--for those liquid assets generally accepted as means of payment that people hold in their portfolios to grease their market transactions. You fix a depression by having the central bank boost the money stock. Eliminating the excess demand for money also brings the goods and labor markets into balance and out of excess supply.

  2. Wicksell-Keynes (Keynes of the Treatise on Money, that is): a depression happens when there is an excess demand for bonds--for ways of moving purchasing power from the present into the future. The workings of the banking system lead the market rate of interest to be above the natural rate of interest which balances the supply of funds saved and the demand for funds to finance business investment. You fix a depression by either reducing the market rate of interest (via expansionary monetary policy) or raising the natural rate of interest (via expansionary fiscal policy) in order to bring them back into equality. Then, with no more excess demand for bonds, the goods and labor markets will also be back in balance and out of excess supply.

  3. Bagehot-Minsky-Kindleberger: a depression happens because of a panic and a flight to quality, as everybody tries to sell their risky assets and cuts back on their spending in order to try to shift their portfolio in the direction of safe, high-quality assets--which, of course, everybody cannot all do at the same time. The excess demand is an excess demand for high-quality AAA assets in particular, not of money (although outside money and some inside money are AAA assets) and not of bonds (some of which are AAA assets, but not all). You fix a depression by restoring market confidence and so shrinking demand for AAA assets and by increasing the supply of AAA assets. Eliminating the excess demand for high-quality assets is eliminated will bring the goods and labor markets out of excess supply and back into balance.

From the perspective of this Malthus-Say-Mill framework Keynes's General Theory is a not entirely consistent mixture of (1), (2), and (3)...

Note that these financial market excess demands can have any of a wide variety of causes: episodes of irrational panic, the restoration of realistic expectations after a period of irrational exuberance, bad news about future profits and technology, bad news about the solvency of government or of private corporations, bad government policy that inappropriately shrinks asset stocks, et cetera. Nevertheless, in this Malthus-Say-Mill framework it seems as if there is always or almost always something that the government can do to affect asset supplies and demands that promises a welfare improvement over, say, waiting for prolonged nominal deflation to raise the real stock of liquid money, of bonds, or of high-quality AAA assets. Monetary policy open market operations swap AAA bonds for money. Quantitative easing that raises expected inflation diminishes demand for money and for AAA assets by taxing them. Non-standard monetary policy interventions swap risky bonds for AAA bonds or money. Fiscal policy affects both demand for goods and labor and the supply of AAA assets--as long as fiscal policy does not crack the status of government debt as AAA and diminish rather than increasing the supply of AAA assets. Government guarantees transform risky bonds into AAA assets. Et cetera...

And then there are, of course, those who never read their John Stuart Mill of 1829, and who never noticed that Jean-Baptiste Say in 1829 had retracted his 1803 claim that a general glut is impossible. They continue claim that a depression is not an economic disequilibrium that can be cured by proper government policy at all--but rather an economic equilibrium that can only be made even less pleasant by government intervention. Think of Karl Marx, Friedrich Hayek, Ludwig von Mises, Andrew Mellon, Robert Lucas, et cetera.

This fraction maintains that in a depression there is no excess supply of goods and labor in any meaningful sense. But, instead, they say:

  • goods and labor markets are in balance--no government policy to raise employment and production is welfare-increasing--it is just that technological regress has lowered the productivity of labor, and employment is low because real wages are low and workers would rather be unemployed; or

  • goods and labor markets are in balance---no government policy to raise employment and production is welfare-increasing--it is just that workers have an increased taste for leisure that has raised their reservation wage, and employment is low because real wages are high and businesses would rather not hire; or

  • goods and labor markets are in balance---no government policy to raise employment and production is welfare-increasing--it is just that previous overinvestment has given us a capital stock that is too large and misallocated, and employment is low because workers cannot quickly be redeployed into jobs in the consumption goods sector; or

  • goods and labor markets are in balance---no government policy to raise employment and production is welfare-increasing--it is just that workers have mistaken nominal shocks for real shocks, and think that real wages are lower than they are because they misperceive the price level.

It is pretty clear that they are wrong. Indeed, John Stuart Mill and Jean-Baptiste Say back in 1829 had pretty clear and convincing arguments that this no-disequilibrium fraction is wrong. And Mill's and Say's arguments have not become less clear and convincing in the past 180 years.

I like this Malthus-Say-Mill framework. I think that this framework allows me to at least characterize every position on our current macroeconomic dilemmas that I have heard--like, for example, that the advocates of austerity are convinced that further debt issue by the U.S. government will crack the U.S. Treasury bond's status as a safe asset and thus increase, not decrease, the excess demand for AAA assets and increase, not decrease, the excess supply of recently-produced commodities and labor.

And it is not rocket science.

But it is, however, cutting-edge economics--cutting edge for 1829, that is.


[1] People who, along with me, took Olivier Blanchard's Economics 2410b course in spring 1983 will note how closely this tracks what Olivier was trying to teach us in the three classes--the week and a half--he spent on Lloyd Metzler's "Wealth, Savings, and the Rate of Interest." (The only distinction Metzler is missing that I think is needed is the distinction between safe and risky bonds.) And, of course, Edmond Malinvaud's Theory of Unemployment Reconsidered


The Economist: The Washington Post Sets Itself on Fire

His bosses at the Washington Post were shocked, shocked to learn that David Weigel was not a "conservative"--never mind that he was Ron Paul-supporting and Bob-Barr volunteering--and so decided that he was not fit to cover the conservative movement for them.

So Marcus Brauchli, Raju Narisetti, and company set themselves and their paper on fire.

Democracy in America watches, horrified:

Weigelgate: The Washington Post sets itself on fire | The Economist: IT'S a bit late to say anything likely to have an impact about the Washington Post's decision to fire Dave Weigel last week.... I find the notion that he is a "liberal" (as Politico's Ben Smith and the Atlantic's Jeffrey Goldberg put it) to be incomprehensible, unless one defines that label to encompass everyone who is not a movement conservative. Mr Weigel is a non-doctrinaire libertarian and, as Mr Tomasky puts it, an anti-denialist. Much of his reporting on the conservative and tea-party movements is strictly the facts, ma'am, but he also thinks (quite rightly) that some of the people involved in contemporary American politics and political media are demagogues or fools, and in his more opinionated writing he doesn't hesitate to say so....

But even if Mr Weigel had voted for Dennis Kucinich, what would it matter? Are liberals incapable of reporting on conservatives? Are conservatives incapable of reporting on liberals? Are libertarians incapable of reporting on anyone besides Ron Paul? By asking Mr Weigel to resign, the Post is reverting to a discredited model of political media.... [R]eaders, unable to figure out what the journalists are trying to say, gradually turn to more honest blogs instead.

Furthermore, the paper has failed to defend an employee targeted by a politically motivated smear campaign. It's bad enough for Republican politicians to be forced to repent for making disparaging comments about Matt Drudge and Rush Limbaugh; if reporters are to be held to the same ignoble standard, we're in trouble. I would hesitate before going to work for an employer who would consider firing me over political quips I'd made in emails and tweets before I was hired....

The Nation's Max Blumenthal becomes the focus of jeering scrums when he shows up at conservative gatherings, and... well, actually I'm not aware of any conservative writers who encounter difficulties at liberal gatherings. But perhaps there are some. In any case, it's very hard for reporters at ideologically liberal outfits to do what Dave Weigel does so well: to cover conservatives and the tea-party movement without, yourself, being a conservative. And that's what makes the Post's failure to defend Mr Weigel so disappointing...


Liveblogging World War II: June 28, 1940

The U.S. Congress passes the Smith Act:

Smith Act - Wikipedia, the free encyclopedia: The Alien Registration Act or Smith Act (18 U.S.C. § 2385) of 1940 is a United States federal statute that makes it a criminal offense for

Whoever, with intent to cause the overthrow or destruction of any such government, prints, publishes, edits, issues, circulates, sells, distributes, or publicly displays any written or printed matter advocating, advising, or teaching the duty, necessity, desirability, or propriety of overthrowing or destroying any government in the United States by force or violence, or attempts to do so; or Whoever organizes or helps or attempts to organize any society, group, or assembly of persons who teach, advocate, or encourage the overthrow or destruction of any such government by force or violence; or becomes or is a member of, or affiliates with, any such society, group, or assembly of persons, knowing the purposes thereof - Shall be fined under this title or imprisoned not more than twenty years, or both, and shall be ineligible for employment by the United States or any department or agency thereof, for the five years next following his conviction...

It also required all non-citizen adult residents to register with the government; within four months, 4,741,971 aliens had registered under the Act's provisions...


Changing the Rules of the U.S. Senate by Majority Vote in Midstream

Jon Walker:

Byrd Did Not Just Write the Book on Senate, He Rewrote Its Rules: Howard Metzenbaum (D-OH) and James Abourezk (D-SD) performed a post-cloture filibuster... by offering a slew of amendments... forcing a roll-call vote for each.... Byrd raised a point of order to require the chair [Mondale] to rule all post-cloture dilatory amendments out of order. When Metzenbaum and Abourezk lost their appeal of the chair’s ruling, Byrd used the new precedent to rule all of their amendments out of order. With this he created the precedent that a bill, after securing the needed cloture vote, could not be stopped.

Just one year later, Byrd... afraid that the nominee would face a double filibuster: the motion to proceed to executive session and then the motion to proceed to the first nominee. So... Byrd offered a motion to proceed to executive session to consider the first nominee. This was declared a violation of Senate precedent, but Byrd won a simple majority appeal of the ruling by a 54-38 vote.... [I]n 1979, Byrd faced the possibility of a filibuster of several of his proposed rule changes at the beginning of a new Congress. He stated clearly that he believed in the right of a simple majority of Senators to change the rules as Congress began its session. The threat, while never executed, helped Byrd enact many changes to Senate rules....

Byrd, the man who was seen as the great defender of Senate tradition, did not hesitate to use a simple majority vote to change the rules...


Greg Sargent Opens Fire on the Anonymice Inside the Washington Post Newsroom

If I were Marcus Brauchli, I would think that perhaps ten employees from the Washington Post print side of a decade ago add value to the enterprise--and think hard about whether any of the rest were worth keeping.

Greg Sargent writes about his Washington Post colleagues:

A little message to Jeffrey Goldberg's anonymous Post sources: [H]ere's a response to the anonymous sources inside the Post who used Jeffrey Goldberg's blog to urinate on the type of opinionated journalism that Weigel, Ezra Klein and others (myself included) practice. The sources told Goldberg that practitioners of this type of journalism are not real reporters:

This is really about the serial stupidity of allowing these bloggers to trade on the name of the Washington Post.

It makes me crazy when I see these guys referred to as reporters. They're anything but. And they hurt the newspaper when they claim to be reporters."

The cowardly hiding behind anonymonity is pathetic enough. But let's take on the substance... a "real" reporter ... is accurate on the facts and fairly represents the positions of subjects... has a decent sense of what's newsworthy and important to readers... if readers come away... more informed....

[C]aring what happens in politics... [does not] interfere with this mission.... There's no basis whatsoever for the B.S. charge that revealing a point of view of necessity compromises the integrity of the actual information purveyed.... Why did readers feel more informed by Weigel's stuff about the Tea Partiers than they did by hundreds of more "objective" articles about the topic that appeared in scores of "neutral" publications? If the reporting on these blogs isn't "real," then why do other news orgs consistently follow up on their scoops?... Time for those who are anonymously dissing this form of journalism to just shut the hell up...

I think Greg gets one thing wrong: I don't think "urinate" is the right verb. I think the right verb is "defecate".


As to whether what the anonymice do is journalism... time to go to the videotape:

Brad DeLong: What Is Wrong with the Culture of the Washington Post: 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... Summers... was warned of potential economic problems in Mexico in at least three separate memos.... Two of the memos from Summers's subordinates... recommended he pay careful attention to papers written by Rudiger Dornbusch.... A third... 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.... Senate Banking Committee Chairman Alfonse M. D'Amato (R-N.Y.) [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 likely to be wrong.... 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.... 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.... 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?... [S]ending 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 to be:

(a) 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 on the side that the forecast is too optimistic--that stock returns are likely to be lower or economic growth faster than the forecast, or both

(b) Bush's Council of Economic Advisers in the middle, 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"

(c) 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 the forecast. They do not endorse it....

[And] what am I to conclude when I run into Susan Schmidt and James Grimaldi, who on October 18 [2005] write:

...Abramoff, whom DeLay once described as "one of my closest and dearest friends"...

and who last week write:

...DeLay, a Christian conservative, did not quite know what to make of Abramoff, who wore a beard and a yarmulke. They forged political ties, but the two men never became personally close...

?

Either the first story requires an in-line fact-check like "(of course, it is the business of politicians to have hundreds if not thousands of closest and dearest friends)"; or the second requires an in-line fact check like "(even though DeLay once described Abramoff as one of his closest and dearest friends)." Without those in-line fact-checks, at least one of the two is highly mendacious. In fact, both probably are: real reporters would include both in-line fact checks.


The View That the U.S. Government Is on the Verge of Reaching Its Debt Capacity and Cracking the Treasury Bond's Status as Safe Asset in the World Economy Is...

...surprisingly widely held, especially inside the Federal Reserve, but simply insane.

Paul Krugman:

The Invisible Bond Vigilantes Continue Their Invisible Attack: Ten-year bond rate now down to 3.05 percent. Clearly, we must slash spending immediately to satisfy the market’s demands...

St. Louis Fed: FRED Graph

U.S. Treasury - Daily Treasury Yield Curve


Tim Lee on Why the Washington Post Is Dying

Tim Lee:

Dave Weigel and the Decline of the Post | Bottom-up: Things have gotten so grim that the paper is flailing, trying one strategy after another in hopes of hitting on a strategy that will work. Hiring Dave and Ezra Klein was apparently one such attempt. Unfortunately, the paper didn’t do its homework. They seem not to have read enough of Dave’s past work to realize that his style of reporting was fundamentally different from the style practiced by other reporters at the Post. When they finally realized this fact, they rather ludicrously blamed Dave for his failure to be “impartial,” despite the fact that Dave has never pretended to be.

There’s a tendency among professional blogger types to cluck their tongues and say that the Post just needs to start behaving in a more bloggy fashion and everything will be OK. But I think that largely misses the point. Hiring opinionated reporters can be a good strategy in general, but it’s probably not a good strategy for the Washington Post. A large, bureaucratic organization like the Post is almost certainly incapable of nurturing the kind of quirky, bottom-up culture you that produces successful bloggers. And the business strategy of the Post requires that it appeal to a broad audience. You don’t do that by hiring some bloggers who offend liberals and other bloggers who offend conservatives; that will just alienate everyone.

The decline of the ethic of journalistic impartiality is just one facet of the larger decline of cellulose-based information technologies that are the foundation of the Washington Post‘s business. Late-20th-century print journalists fooled themselves into thinking that the journalistic culture of large daily newspapers was the gold standard for journalists in general. In reality, each medium has its own distinctive style. The Internet is still a young medium, and so it’s too early to say what the new culture will look like. But the key point is that the optimal style for online journalism is something that will be discovered by trial and error. Abstract arguments about journalistic ethics are sort of beside the point.

One correction: the Washington Post never wanted to be perceived as impartial in the sense of an umpire with good eyesight who called balls and strikes as he or she saw them. The Washington Post wanted to be perceived as neutral in that roughly half its calls would go for the establishment Democrats and half its calls would go to the establishment Republicans. There are very big differences. For one thing, a neutral paper is bound to be untrustworthy as a source of information.

And this is why we can't have a better press corps right now.


UPDATE: Also, a lack of class:

Right Now - This blog is no longer active

No "David Weigel has resigned from the Washington Post. He did excellent work for us and we wish him success in his future endeavors..."


America Speaks!

Matthew Yglesias:

Public Opinion and Social Security: Political scientists Benjamin Page and Lawrence Jacobs have an excellent paper (PDF) on the foolishness of the Peterson Institute’s “America Speaks” event and the extremely strong public consensus in favor of Social Security. The whole thing’s worth a read, but the key takeaway lines are: “Support for Social Security is strong and widespread across the population, including among young people. Many more Americans want to increase spending on Social Security than want to decrease it, and that has been true for decades. Virtually any sort of benefit cut is opposed by substantial majorities of Americans.”

Of course, many more Americans want to keep taxes on the non-rich where they are than want to increase them.

Me? I'd simply uncap FICA, wait five years, and then see what the projections tell us.


Attempted DeLong Smackdown Watch: Unsuccessful Attempt by Kartik "Malibu Barbie" Athreya

In terms reminiscent of Malibu Barbie's "math is hard," now comes Kartik Athreya from the Richmond Federal Reserve Bank to say "Economics Is Hard":

Matthew Yglesias, John Stossel, Robert Samuelson, and Robert Reich... [are] exceedingly unlikely... [to] have anything interesting to say about economic policy....

Deficits, short-term interest rate targets, sovereign debt are all chewed over with a level of self-assuredness that only someone who doesn’t know more could. The list of those exhibiting this zest also includes, in addition to those mentioned above, some who might know better. They are the patron saints of the “Macroeconomic Policy is Easy: Only Idiots Don’t Think So” movement: Paul Krugman and Brad Delong. Either of these men will assure their readers that it’s all really very simple....

[M]acroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers, vice versa...

The argument appears to be:

The majority of the training of new Ph.D.s in their macroeconomic coursework is giving them a way to come to grips with the feedback effects that are likely present....

Writers who have not taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) cannot meaningfully advance the discussion on economic policy....

[E]conomics is far, far, more complicated than most commentators seem to recognize. Because if they did, they could not honestly write the way they do now.... [J]ust below the surface of all this chatter... there is a vibrant, highly competitive, and transparent scientific enterprise... the public remains largely unaware of this work....

How can this be changed? A precondition for the market delivering this is a recognition by the general public that they are simply being had by the bulk of the economic blogging crowed. I hope to have alerted you to the giant disconnect that exists between the nuanced discussion that occurs between research economists and the noise (some of it from economists!) that one sees in the web or the op-ed pages of even the very best newspapers of the US. As a result, my hope is that the broader public will ask for a slightly higher bar when it comes to economics, rather than self-selecting int oblogs thatmerely confirm half-baked views that might have been acquired from elsewhere...

I'm going to duck out of this one, and leave it to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.

He will explain to Kartik Athreya that someone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas:

Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move. The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables...

If Narayana is right, Kartik is wrong. I'm betting on Narayana.


links for 2010-06-27


James Morley on the Failure of "Modern" Macroeconomics

Larry Meyer once claimed, I am told by perhaps-unreliable sources, that the slash-and-burn campaign conducted throughout macroeconomic theory by the Lucas-Prescott faction's main effect had been to ensure that he had next to no competitors in forecasting the current state and likely future direction of the economy--and that while this was profitable for him it was not terribly healthy for the profession.

James Morley of Macroeconomic Advisers, LLC: In a recent essay, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledged that modern macroeconomics failed during the recent financial crisis.... Kocherlakota associates modern macroeconomics with a particular school of thought... that an economic model with “deep structural parameters” related to preferences and technology for households and firms should provide more reliable forecasts... the “microfoundations” approach to macroeconomics.... Kocherlakota explains the recent failure of modern macroeconomics as due to... [their] lack [of] sufficient complexity, especially in terms of their treatment of financial markets... [and] that the models are driven by “patently unrealistic shocks”.

However, the rehabilitation of modern macroeconomics requires a different tack than suggested by Kocherlakota....

[A] simple DSGE model [with deep structural parameters] is able to mimic the apparent AR(1) dynamics in real GDP growth... by assuming... exogenous technology shock... with an AR coefficient that happens to be the same... a rabbit was stuffed into the hat and then a rabbit jumped out of the hat.... After more than two decades of earnest promises to do better... models now “explain” variables like real GDP, inflation, and interest rates as the outcome of more than just serially-correlated technology shocks. They also consider serially-correlated preference shocks and serially-correlated policy shocks....

[I]t is perhaps useful to revisit Kocherlakota’s essay on modern macroeconomics. He writes:

In terms of fiscal policy (especially short-term fiscal policy), modern macro modeling seems to have had little impact. The discussion about the fiscal stimulus in January 2009 is highly revealing along these lines. An argument certainly could be made for the stimulus plan using the logic of New Keynesian or heterogeneous agent models. However, most, if not all, of the motivation for the fiscal stimulus was based largely on the long-discarded models of the 1960s and 1970s....

[T]he natural question that arises when reading his last sentence is “discarded by whom?” Certainly, it is not by policymakers trying to predict the quantitative effects of fiscal stimulus. The answer to “discarded by whom?” that Kocherlakota clearly has in mind is “modern” macroeconomists....

It is a safe bet that future versions of DSGE models will incorporate more complicated financial sectors and allow for different types of fiscal policies. And guess what? The new-and-improved DSGE models will turn out to imply (ex post) that the Great Recession was actually due to serially-correlated financial intermediation shocks and suboptimal fiscal policy. Alas, these conclusions will be driven much more by the DSGE framework than by the data....

[I]n terms of really predicting the crisis, the award obviously goes to theories of endogenous financial crises inspired by the ideas of Hyman Minsky. Formal evaluation of these more narrative approaches is hard and there may be an element of the “stopped-clock syndrome” at play. But it would be foolish to dismiss such theories out of hand. In particular, a ludicrous notion sometimes expressed in the ivory towers of academia is that, for Minsky to be taken seriously, his ideas need to be put into a DSGE model. Instead, the converse is true. For DSGE models to be taken more seriously outside of academia, they need to explain and predict as well as Minsky. And serially-correlated preference and technology shocks aren’t going to do it!...