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August 2010

Articles for Section 2 Student Oral Presentations

Articles for section 2 presentations:

  1. The Financial Times's "austerity debate" at, which has the first paragraphs of contributions and links to the larger pieces;

  2. The Economist's "Is inflation or deflation a greater threat?" at;

  3. The Economist's "Are current deficit reduction plans likely to boost growth?" at

A Forwarded Note from the Economics Department's GSI Coordinator

Juan Carlos Suarez Serrato wrote:

Dear Professors:

I'll keep it as brief as possible. I want to remind you of two things:

  1. Regarding enrollment inquiries. As the semester starts and students finalize their course selection you get many inquiries concerning enrollment. You can forward those questions to me, or head them off in the first place, by announcing that all enrollment questions should be sent to the department's Head GSI (me) at: [email protected].

  2. Regarding undergraduate courses with sections. These sections need to meet during the first week of classes, even if the first section meeting is before the first lecture. This serves two purposes: first, GSIs can take care of some housekeeping like arranging office hours and introducing themselves. Second, if your class has a waitlist, GSIs take attendance in order to drop any student that doesn't show up the entire first week (Thursday, August 26th through Wednesday, September 1st).


Juan Carlos Suarez Serrato
Head GSI, Econ Department

Notes on Course Materials for Econ 1

Three quick notes about the course materials for Econ 1:

  1. Note that you do not need the latest (9th) edition of the recommended textbook, Principles of Economics by Case, Fair, and Oster. The 8th edition (or earlier editions) would be perfectly sufficient. Currently, used copies of the 8th edition are extremely cheap at and other places online. We will not be using the MyEconLab resources, so don't worry about paying any licencing fee for this service when buying a used book.

  2. Note that the entire text of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations is available for free online at There is no need to purchase a physical volume if you do not wish to do so.

  3. Given the benefits to your grade you will definitely want to acquire an i>clicker. Everyone is expected to have one and bring it to every lecture (including the first one). You can find new or used clickers online (at, say, or locally at the ASUC Bookstore or Ned's. They can be used for other courses for the duration of your time at Cal, and they can also be sold back at the conclusion of the semester. Once you purchase a clicker, register it at with your name and 8-digit student ID.

More information and details to follow over the coming days.

Mike Urbancic, Head GSI

Yep. Totally Hosed...

The current state of Berkeley's webservers:

No Response from Application Web Server

There was no response from the application web server for the page you requested. Please notify the site's webmaster and try your request again later.

You know, the school year starts once a year, guys. It is something you can plan for--or outsource to an organization that understands traffic spikes.

links for 2010-08-24

No, I Don't Know Why Kevin Hassett Bothers. No, I Don't Know Why Bloomberg Prints Him

Kevin "Dow 36000" Hassett's

The biggest Keynesian stimulus in U.S. history was a bust.... [...] A 2002 study by economists Richard Hemming, Selma Mahfouz and Axel Schimmelpfennig of recessions in 27 developed economies from 1971 to 1998 found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn't, the study found...

Drives the mild-mannered Menzie Chinn into shrill unholy madness of a most desperate sort--perhaps because the moon is full. Menzie is, of course, 100% correct:

Chinn: I wish Dr. Hassett had quoted additional parts of the paper because a lot of subtleties were omitted in his "summary".... I'll quote....

Fiscal policy is Keynesian during recessions in closed economies, but the fiscal multiplier is quite small (i.e., it is unlikely to exceed unity).... [...] However, these conclusions do not preclude the possibility that, where the circumstances are right, fiscal expansions can be an effective response to a recession. The right circumstances would feature some or all of: excess capacity; a closed economy or an open economy with a fixed exchange rate; big government; expenditure-based fiscal policy; and an accompanying monetary expansion...

Gee, well, I'd say there's slack in the U.S. economy. [1] I'd also conjecture that the US economy is pretty closed relative to the majority of other observations in the study. I think I heard there was an expenditure (as opposed to tax reduction) component in the ARRA. [2] And finally, I believe I have heard that current monetary policy is quite expansionary. [3] Apparently, Dr. Hassett was unaware that any of these conditions applied to the United States in 2009-10.... I do wonder why Dr. Hassett had to go back to 2002 to find a study (well, actually, an out-of-context quote from a specific study). In the intervening time, the IMF has conducted many large scale, cross country analyses... a number of surveys of the size of multipliers have been conducted and published.... [I]n this case, I think I will forego Dr. Hassett's assessment, and put my faith in the assessments from private sector economists who do not have an ideological axe to grind. Below is Deutsche Bank's recent assessment of the impact of various fiscal stimulus measures on the level of GDP...

Identifying Cyclical vs. Structural Unemployment: A Guide for Slate Writers

Over at Slate, James Ledbetter says that he cannot referee between the two gangs of economists warring over the causes of high unemployment.

But he is wrong.

He can.

Here is how:

Suppose that you have not cyclical unemployment generated by a collapse in aggregate demand but structural unemployment generated by mismatch, suppose you have a situation in which the structure of demand by consumers is different from the jobs that workers are capable of filling. Suppose--this is Berkeley, after all--that we were in a nice equilibrium in which some workers were baristas making lattes and other workers were yoga instructors teaching classes and that all of a sudden we have had a big shift in demand: that consumers decide that they want few moments of wired, frenetic caffeination and more moments of inner peace.

What would we expect to find happening?

We would expect, first, coffee bars to stand empty as people hoarded their quarters for the next yoga lesson. We would expect coffee bars to fire baristas, and to close down. But we would also expect yoga studios to be crowded, and yoga instructors to be teaching extra classes, and working long hours, and raising their prices, and training ex-baristas to chant properly, do the downward-facing dog and the lizard, and teach others how to achieve inner peace.

The size and duration of the excess unemployment of ex-baristas might be substantial and long-lasting. It takes quite a while to retrain a barista as a yoga instructor. Those seeking training might have a difficult time getting the attention of and apprenticing themselves to the yoga instructors doing land-office business--given how mercenary and grasping and eager to catch the wave of the market we all know yoga instructors to be.

But depression in the coffee-bar sector and unemployment among ex-baristas would be balanced by exuberance in the yoga-studio sector, rising prices for yoga lessons, and long hours and high wages for yoga instructors.

That is what "mismatch" structura unemployment looks like--one sector depressed with a lot of idle excess labor, a second sector booming with rising wages and prices.

What do we have in America today?

Well, over the past three years...

  • employment in logging and mining has risen by 11 thousand
  • employment in construction has fallen by 2.1 million
  • employment in manufacturing has shrunk by 2.4 million
  • employment in wholesale trade has fallen by 437 thousand
  • employment in retail trade has fallen by 912 thousand
  • employment in transportation and warehousing is down by 333 thousand
  • employment in publishing, except internet is down by 147 thousand
  • employment in motion picture and sound recording is down by 34 thousand
  • employment in broadcasting, except internet is down by 41 thousand
  • employment in telecommunications is down by 54 thousand
  • employment in financial activities is down by 921 thousand
  • employment in professional and business services is down by 1.3 million
  • employment in educational services is up by 197 thousand
  • employment in health care is up by 789 thousand
  • employment in leisure and hospitality is down by 467 thousand
  • employment in other serivces is down by 32 thousand
  • employment by the federal government is down by 330 thousand
  • employment by state and local governments is down by 127 thousand.

All this in the decline from 137.83 million people employed in July 2007 to 129.95 million people employed in July 2010--a 7.88 million decline in employment during a period in which the adult population has grown by 6 million.

I see employment growth in (a) internet, (b) health care, and (c) logging and mining. I see employment declines everywhere else.

That does not look like a story of "mismatch" unemployment--in which demand shifts in a direction that the existing labor force cannot cope with, and the result is structural unemployment in declining sectors and occupations and boom times and rising wages and prices in those sectors and occupations to which demand has shifted. That does not look like that at all.

Gavyn Davies Says: Double Dip


US economy is slowing more than the Fed has recognised: I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve... the pick up in more sustainable sources of growth, notably consumers’ expenditure and capital investment, has so far been more anaemic than I had hoped, and the improvement in the labour market may be going into reverse. The Fed may soon be forced to confront the choice they most wanted to avoid, which is whether to extend quantitative easing, instead of allowing their programmes of unconventional easing to lapse, as they fervently hoped earlier this year. As recently as last week, the FOMC suggested that it had reduced its growth projections, but it still expected resource utilisation to rise, implying that GDP growth would be maintained above the 2.5 per cent trend into 2011. This sanguine view of the economy seems increasingly difficult to maintain....

[T]he straws in the wind for Q3 are not very encouraging. The first graph shows the results of the New York and Philly Fed Surveys for August, along with the ISM Manufacturing Survey up to July. The Fed surveys suggest that the ISM survey may drop quite sharply when it is published on 1 September, perhaps to somewhere in the low 50s, compared with recent healthy readings of around 55. This indicator is widely watched, and it could trigger a major rethink about the strength of the economy. So too could the monthly US employment numbers, which are due to be published on 3 September. Initial claims for unemployment benefit have been rising ominously in recent weeks....

Previously optimistic private sector forecasters have been downgrading their central case, and the danger of a double dip is coming onto the radar screen.... No-one yet makes a double dip the most likely course of events in the US. But this is not very surprising, since economic forecasters almost never acknowledge the start of a recession until some months after it has actually taken place. Instead, they talk about “increased risks of recession”. It is interesting to note that both JP Morgan and Goldman Sachs now say that a double dip recession is about 25-30 per cent probable, which is what forecasters generally say when they are becoming really concerned that such an outcome could easily occur...

But Narayana Kocherlakota Was Supposed to Be the Really Smart and Reality-Based Minnesota Economist!

This was something that John Stuart Mill and Jean-Baptiste Say had gotten right in 1829.

Our problem is not that there is a shift in demand from construction to manufacturing, and we have to move workers from construction to manufacturing. Our problem is that there has been a shift in demand from currently-produced goods and services to safe high-quality assets and that as a result workers in goods-and-services-producing industries have been fired. There is no counterbalancing sector in which demand for employment is high, for what is in demand is high-quality safe AAA assets, and the lack of trust in the private sector is so great that no private business can make money by putting people to work creating high-quality safe AAA assets.

The only organizations that can do so are the solid gold governments of the world in which investors have confidence.

Yet at least seven of the seventeen people at the FOMC meeting do not get this.

This is tremendously disturbing. What is also disturbing is that there are only seventeen and not nineteen people at the FOMC meeting.

Hangover Theory At The Fed - Paul Krugman Blog -

Paul Krugman:

Hangover Theory At The Fed: This Jon Hilsenrath piece on the Fed is an impressive piece of reporting; it seems that somebody is talking out of school. And as Tim Duy says, it’s also depressing for anyone believing, as I do, that we’re sliding steadily into a long-run low-growth, high-unemployment trap, and that aggressive action by the Fed is urgent. But one more thing struck me: at least some members of the FOMC have bought into the hangover theory — the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble:

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted.

Here’s what Kocherlakota said in a speech after the meeting:

Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.

I tried, in that old piece on hangover theorists, to explain what’s wrong with this view in general. Among other things:

this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.

And this is strikingly true this time around. Kocherlakota would have us believe that there’s a big problem of mismatch because manufacturing is trying to hire, while construction has slumped.... Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.

Unfortunately, we’re not having an academic discussion here: right now, bad theory — theory completely at odds with actual experience — is having a real effect in blocking action.

As I said, if John Stuart Mill and Jean-Baptiste say can get this right in 1829, why can't Narayana Kocherlakota get it right in 2010?

Another Data Point that the Failure to Staff the Federal Government Has Been Obama's Biggest Failure

Matthew Yglesias:

Fed Split: Kill me now as the WSJ makes it clear that the FOMC is sharply divided over monetary policy: “At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.”

Sure would’ve been nice for Barack Obama to have had some nominees confirmed.

We Are Not Making It Up as We Go Along

But I share Paul Krugman's strong sense that many in the Pain Caucus are--that they start with a prejudice that more unemployment is somehow better, and look for arguments to justify that.

Paul Krugman:

Making It Up: [O]ther things equal, demand is higher, the lower the real interest rate. Do you really want to quarrel with that? But right now, thanks to the aftermath of the financial crisis, even a zero nominal rate, which is a slightly negative real rate, isn’t low enough to produce full employment.

In normal times, when the zero lower bound isn’t binding, this basic framework suggests that conventional monetary policy can play the key role in stabilization. So in normal times I’m all in favor of having the Fed take on the job of managing the business cycle, and basing fiscal policy on long-term concerns.

But now we’re up against the zero lower bound; and that changes everything.

The idea that it would be good if we could raise expected inflation comes straight out of this minimalist framework: the economy “wants” a negative real interest rate, and the only way to get that given the zero lower bound is to have positive expected inflation.

The case for fiscal expansion also comes out of this fairly straightforwardly: if you can’t raise employment by cutting interest rates, deficit spending — which doesn’t crowd out private spending when the interest rate doesn’t change — becomes a way to put unemployed resources to work.

The point is that I’m not making it up as I go along; I have a consistent view here, which yields unorthodox conclusions right now only because we’re in an unusual situation....

My sense, obviously, is that a lot of the people who want monetary tightening start from a prejudice — they just dislike the idea of easy money — and then look for some arguments to back up that prejudice. And that’s no way to do economics.

Liveblogging World War II

London, August 24, 1940:

Drew Middleton, The Sky Suspended: The Battle of Britain May 1940-April 1941: A baby cried. A woman woke, comforted it, opened her dress and gave it her breast. The woman looked up, 'Awful ain't it, but we can't get in to them big shelters and those ones on the street are terrible dangerous.'

When I came out I saw Micky's small figure standing by the door of his shelter. There was the rumbling roar of a stick of bombs falling across the river and that never-to-be-forgotten, belly-turning rustling, crackling and cracking sound of a building crashing. 'Someone's copped it,' said Micky.

As I left he said; 'Tell them we're not crying about it. It's like Churchill said, "It's up to us. But tell 'em it's no bloody picnic."'

Hermann Goering Liveblogs World War II: August 23, 1940

Hermann Goering orders:

Goering: to continue the fight against the enemy air force until further notice, with the aim if weakening the British fighter forces. The enemy is to be forced to use his fighters by means of ceaseless attacks. In addition the aircraft industry and the ground organization of the air force are to be attacked by means of individual aircraft by night and day, if weather conditions do not permit the use of complete formations.

links for 2010-08-23

DRAFT Syllabus Econ 1 Fall 2010 U.C. Berkeley


Economics 1: Principles of Economics

Department of Economics University of California at Berkeley Fall 2010

Course website:

Lecturer: J. Bradford DeLong [email protected] Evans 601
Head GSI: Mike Urbancic [email protected] Evans 508-2

Professor's Office Hours: Brad DeLong, Evans 601. Drop-in hours W2-4 and (most) F12-1 in Wheeler Auditorium.

Head GSI's Office Hours: Mike Urbancic Evans 508-2. Until September 7th: M2- 4:30 T11:30-2 W9-11:30 Th 9-11:30, 2-4:30 F11:30-2. After September 7th M4-5, T4-5


This syllabus is your contract for this course. You are responsible for it.

This is an introductory course in the principles of economics. The course covers both microeconomics and macroeconomics. Topics include: economic modeling; allocation of resources; firm decision-making; imperfect competition; economic analysis of unemployment, inflation, and economic growth; the role of government in the domestic economy; international trade and finance; and U.S. economic policies of the last quarter century. Primary emphasis is placed upon acquiring skills with which to analyze current economic issues.

As part of Berkeley's Undergraduate Student Learning Initiative (USLI), the Economics Department has developed learning goals for the Economics major. See The specific learning goals which this course aims to achieve are: CT1, understand everyday economic problems; CT2, use economic theory to understand and evaluate policy proposals; PS1, solve problems with clear solutions; CS1, communicate effectively about economic issues; LL2, primary data sources; LL3, understand the economic news.

Adding the Course:

The department relies completely on TeleBears for enrollment purposes. To add the course, first check the online schedule of classes to see which sections have space and then access TeleBEARS. Your chances are better if you choose a section that is underenrolled. If you are already on the waiting list but want to change your section choice, access TeleBEARS and use the change section option. Do not drop yourself from the course wait list, or you’ll lose your place “in line.” Simply change sections. See Head GSI Mike Urbancic, GSI Coordinator Juan Carlos Suarez Serrato (508-2 Evans, HeadGSI@econ. or Econ Undergrad Advisor Ginnie Sadil ([email protected]) for assistance.

Textbooks and Other Materials:

Strongly Recommended: Karl Case, Ray Fair, and Sharon Oster, Principles of Economics. The textbook is only recommended because Bob Reich, Laura Tyson, and I are writing our own and will be distributing electronic versions of draft chapters.

Recommended: Purchase of an iClicker—if you want to top off your problem set points, that is: up to half of missed problem set points can be made up by using your iClicker to respond to questions asked during class.

Required: Partha Dasgupta, Economics: A Very Short Introduction; Paul Seabright, The Company of Strangers; Milton Friedman and Rose Director Friedman, Free to Choose; Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Required books are available at the student bookstore (and elsewhere).


We will use your bSpace email address. Be sure your email address registered with the University is correct, your spam filters are not set too tight, and that your inbox is not full. Emails are archived at

All announcements will be sent by email. Some announcements contain links to additional readings from current news sources. These readings are to be considered required assigned readings for the course.


33% of your grade will be based on the final exam (December 14). 17% will be based on each of the two midterms (October 4 and November 8). 25% will be based on problem sets and short essays (ten in all). 3% will be based on in-section presentations, and 5% section participation. The typical median grade in this course is a B-.

Participation in the iClicker exercises boosts your problem set grades, with a maximum iClicker score gaining you half of all possible problem set points. It is in your interest to do participate.

Discussion Section:

Section meets two hours per week. You must initially attend the section to which you are assigned by Telebears. If you do not attend your assigned discussion sections in the opening weeks of class, you will be removed from the class.

Once or twice during the term, you will make an oral presentation to your section based on an outside reading article.

Special Accommodations:

If you require special accommodations for exams or lecture due to learning or other disability, please speak with Head GSI Mike Urbancic before Labor Day. You will ultimately need to obtain the evaluation form from Disabled Students' Program (, 230 César Chávez Center).

Schedule and Assignments

0. Preliminaries

Summer assignment: * Read Dasgupta, Economics: A Very Short Introduction * Read pp. 1-31 of Seabright, The Company of Strangers * Read pp. ix-69 of Milton Friedman and Rose Director Friedman, Free to Choose * Read introduction and part I: chapters 1-5 of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

Section 1 assignment: CFO (Case, Fair, Oster), chapter 21, or equivalent readings on the circular flow of economic activity and the national income and product accounts.

1. Macroeconomics

1.1 Depression Economics
M Aug 30: The Great Recession of 2008-2010. CFO, chapter 22, pp. 435-442, or equivalent...
W Sep 1: Depression Economics. CFO, chapter 23
W Sep 8: Financial Crises and the Housing Bubble. CFO, chapters 11, 24

  • Essay 1: one page (250 words) on why you are choosing to take this course due at the start of lecture on Sep 8.

Section 4 assignment: read part II, chapter 2 of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Read pp. 106-133 of Seabright, The Company of Strangers

1.2 Inflation Economics
M Sep 13: Inflation Economics. CFO, chapter 22, pp. 442-446, chapter 26
W Sep 15: The Federal Reserve and Macroeconomic Management. CFO, chapters 25, 28

  • Problem set 1: depression economics due at start of lecture on September 15.

1.3 Budget Economics
M Sep 20: The Government's Resources and Promises: The National Debt and Budget Balance

W Sep 22: Fiscal Crisis, Capital Flight, Hyperinflation. CFO, chapter 19, 35 * Problem set 2: inflation economics due at start of lecture on September 22.

1.4 Growth Economics
M Sep 27: Total Output and Factors of Production: Technology, Organization, Labor, Capital, Education, Resources. CFO, chapter 22, pp. 446-8; chapter 32

Section 9 assignment: read part II, chapters 1,3-5 of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

W Sep 29: Sources of and Limits to Growth. CFO, chapter 36

  • Problem set 3: long-run budget/growth due at start of lecture on September 29


Section 11 assignment: read pp. 33-105, 134-150 of Seabright, The Company of Strangers

W Oct 6: Economic Knowledge as the Ultimate Free Lunch

Section 12 assignment: read pp. 151-264 of Seabright, The Company of Strangers

2. Microeconomics

2.1 Choice and Organization
M Oct 11: Economic Behavior: Choice, Scarcity, and Exchange. CFO, chapter 2
W Oct 13: Markets and Other Allocation Procedures

  • Essay 2: two-pages on human social large-scale cooperation due at start of lecture on October 13

Section 14 assignment: Read I:6-9 of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

M Oct 18: Working with Supply and Demand. CFO, chapters 3, 4, 5
W Oct 20: Production and Equilibrium in the Short Run and the Long Run. CFO, chapters 7, 8, 9

  • Problem set 4: supply and demand

M Oct 25: General Equilibrium and the "Efficiency" of "Perfect" Competition. CFO, chapter 6, 12

2.2 Market Power
W Oct 27: Monopoly. CFO, chapter 13

  • Problem set 5: short-run and long-run due in lecture on October 27

M Nov 1: Oligopoly. CFO, chapter 14
W Nov 3: Monopolistic Competition. CFO, chapter 15

  • Problem set 6: monopoly pricing due at lecture on November 3.


2.3 Market Failure
W Nov 10: Externalities. CFO, chapter 16
M Nov 15: Uncertainty and Asymmetric Information. CFO, chapter 17
W Nov 17: Increasing Return and Information Goods
M Nov 22: Poverty and Income Distribution. CFO, chapter 18

  • Problem set 7: externalities due at lecture on November 22.

Section 25 assignment: read part I, chapter 10 of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

W Nov 24: NO CLASS

3. Political Economy

M Nov 29: The "Mixed Economy"

Section 26 assignment: read part V of Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Read pp. 265-315 of Seabright, The Company of Strangers

W Dec 1: The Economic Theory of Politics. CFO, chapter 16, pp. 337-42

  • Problem set 8: social welfare due at lecture on December 1

Section 27 assignment: read pp. 70-310 of Milton Friedman and Rose Director Friedman, Free to Choose

4. Conclusion

M Dec 6: Economic Policies and Problems Today

T Dec 14: FINAL EXAM 11:30-2:30

Summer Reading Assignment for Econ 1, U.C. Berkeley, Fall 2010

Date May 9, 2010 4:04 PM PDT
From Brad DeLong
Subject Summer Assignments for Econ 1, Fall 2010
Body Before you show up here in the fall for Econ 1, please read:

  1. The whole book of Partha Dasgupta, Economics: A Very Short Introduction (ISBN #: 0192853457 Publisher: Oxford)

  2. The "Introduction" and chapters 1 through 5 of Book I (i.e., I:1-5) of Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (available for free on the web or free for Amazon Kindle or Apple iBooks; you can also buy a copy)

  3. Pp. 1-31 of Paul Seabright, In the Company of Strangers: A Natural History of Economic Life (ISBN #: 978-0691146461 Publisher: Princeton)

  4. Pp. ix-69 of Milton Friedman and Rose Director Friedman, Free to Choose (ISBN #: 978-0156334600 Publisher: Mariner)

Yes, there will be a quiz. :-)

Sincerely Yours,

J. Bradford DeLong
Professor of Economics

UPDATE: August 23: If you haven't done any of it yet, I would strongly recommend getting cracking on Dasgupta...

Hoisted from the Archive: Friedrich Hayek's "Shut Up and Be Grateful You Are Alive!" Argument

From July 8, 2003:

Note: Hayek and Democracy: I have long been of the opinion that Friedrich Hayek saw more deeply into why the market economy is so productive--the use of knowledge in society, competition as a discovery procedure, et cetera--than neoclassical economics, with its Welfare Theorems that under appropriate conditions the competitive market equilibrium (a) is Pareto-Optimal or (b) maximizes a social welfare function that is the sum of individual utilities in which each individual's weight is the inverse of their marginal utility of income.

I have also long been of the opinion that Karl Polanyi saw more deeply than Hayek into what the necessary foundations for a well-functioning and durable market economy--and good society--were.

But last night I ran into a passage that makes me wonder whether Hayek in his inner core believed that democracy had any value--even any institutional value--at all. It came on pp. 171-2 of Friedrich Hayek (1979), Law, Legislation and Liberty: The Political Order of a Free People vol. III (Chicago, Il.: University of Chicago Press: 0226320901):

Egalitarianism is of course not a majority view but a product of the necessity under unlimited democracy to solicit the support even of the worst.... It is by the slogan that 'it is not your fault' that the demagoguery of unlimited democracy, assisted by a scientistic psychology, has come to the support of those who claim a share in the wealth of our society without submitting to the discipline to which it is due. It is not by conceding 'a right to equal concern and respect’ to those who break the code that civilization is maintained…

Now it is certainly true that of the trio "Prosperity, Liberty, Democracy," Hayek puts prosperity first and liberty second--or, rather, that freedom of contract needs to be more closely safeguarded than freedom of speech, for if there is freedom of contract then freedom of speech will quickly reappear, but if there is no freedom of contract than freedom of speech will not long survive. But the passage above makes me wonder whether democracy has any place in Hayek's hierarchy of good things at all.

Sam Brittan wrote somewhere that Hayek is an odd combination of market libertarian and social conservative--that his "free people" are always "submitting to the discipline" required by society's current moral conventions. Indeed, there are places where Hayek goes further and limits what a "free people" can do even more--where his idea of "freedom" seems to be freedom to (a) transact at the market's current prices, and (b) shut up and be grateful. Witness Friedrich Hayek (1976), Law, Legislation and Liberty: The Mirage of Social Justice vol. II (Chicago, Il.: University of Chicago Press: 0226320839), p. 93:

While in a market order it may be a misfortune to have been born and bred in a village where... the only chance of making a living is fishing... it does not make sense to decribe this as unjust. Who is supposed to have been unjust?--especially... if these local opportunities had not existed, the people in question would probably never have been born at all… [for lack of] the opportunities which enabled their ancestors to produce and rear children...

It seems to me that this "shut up and be grateful you were ever born" proves far too much, and is far too powerful an argument to be true, for it can be used in defense of any imaginable social order:

While in a feudal order it may be a misfortune to have been born and bred a serf owing three days a week of labor on the lord's demesne... it does not make sense to decribe this as unjust... if feudalism had not existed, the people in question would probably never have been born at all...

While under the Roman Imperium it may be a misfortune to have been born a slave to Marcus Porcius Cato... it does not make sense to decribe this as unjust... if the Roman Imperium had not existed, the people in question would probably never have been born at all...

While in the American colonies it may be a misfortune to have been born a slave to Thomas Jefferson... it does not make sense to decribe this as unjust... if Virginia slavery had not existed, the people in question would probably never have been born at all...

Department of "Huh?!": HAMP Edition

Tracy Alloway:

Moving targets, US housing edition: If at first you don’t succeed . . . move the goal-posts. In the grand tradition of stimulus policy gone wrong, that seems to be just what the US Treasury has done in relation to its Hamp mortgage modification programme. Via Mike Konczal over at Rortybomb, who attended one of the blogger-meets at the Treasury last week:

They are sticking by HAMP. The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative – it’s explicitly extend-and-pretend, and also fairly cynical.

For sure the narrative has changed, given that the March 2009 press release announcing details of Hamp carried the headline: “Relief for Responsible Homeowners One Step Closer Under New Treasury Guidelines.” Not relief for banks, or stalling foreclosures — but for homeowners.

H. G. Wells Interviews Vladimir Lenin, 1920

Vladimir Lenin in 1920:

Even now, all the agricultural production of Russia is not peasant production. We have, in places, large scale agriculture. The Government is already running big estates with workers instead of peasants, where conditions are favourable. That can spread. It can be extended first to one province, then another. The peasants in the other provinces, selfish and illiterate, will not know what is happening until their turn comes...

From H.G. Wells's Russia in the Shadows, 1920:

Russia in the Shadows: I was very curious to see him, and I was disposed to be hostile.... I encountered a personality entirely different from anything I had expected to meet.... The shrill little pamphlets and papers issued from Moscow in his name, full of misconceptions of the labour psychology of the West and obstinately defensive of the impossible proposition that it is the prophesied Marxist social revolution which has happened in Russia, display hardly anything of the real Lenin mentality as I encountered it.... [T]he set ideas and phrases of doctrinaire Marxism... may be the only language Communism understands.... Left Communism is the backbone of Russia to-day; unhappily it is a backbone without flexible joints, a backbone that can be bent only with the utmost difficulty and which must be bent by means of flattery and deference....

The Kremlin as I remembered it in 1914 was a very open place, open much as Windsor Castle is, with a thin trickle of pilgrims and tourists in groups and couples flowing through it. But now it is closed up and difficult of access... passes and permits... filtered and inspected.... This may be necessary for the personal security of Lenin, but it puts him out of reach of Russia, and, what perhaps is more serious, if there is to be an effectual dictatorship, it puts Russia out of his reach. If things must filter up to him, they must also filter down, and they may undergo very considerable changes....

Lenin... a little figure at a great desk in a well-lit room.... I had come expecting to struggle with a doctrinaire Marxist. I found nothing of the sort.... Our talk was threaded throughout and held together by two—what shall I call them?—motifs. One was from me to him:

What do you think you are making of Russia? What is the state you are trying to create?"

The other was from him to me:

Why does not the social revolution begin in England? Why do you not work for the social revolution? Why are you not destroying Capitalism and establishing the Communist State?

These motifs interwove, reacted on each other, illuminated each other. The second brought back the first:

But what are you making of the social revolution? Are you making a success of it?

And from that we got back to two again with:

To make it a success the Western world must join in. Why doesn't it?

In the days before 1918 all the Marxist world thought of the social revolution as an end. The workers of the world were to unite, overthrow Capitalism, and be happy ever afterwards. But in 1918 the Communists, to their own surprise, found themselves in control of Russia and challenged to produce their millennium.... At a hundred points—I have already put a finger upon one or two of them—they do not know what to do. But the commonplace Communist simply loses his temper if you venture to doubt whether everything is being done in precisely the best and most intelligent way under the new régime. He is like a tetchy housewife who wants you to recognise that everything is in perfect order in the middle of an eviction.... Lenin, on the other hand, whose frankness must at times leave his disciples breathless, has recently stripped off the last pretence that the Russian revolution is anything more than the inauguration of an age of limitless experiment. "Those who are engaged in the formidable task of overcoming capitalism," he has recently written, "must be prepared to try method after method until they find the one which answers their purpose best."...

Did I realise what was already in hand with Russia? The electrification of Russia?

For Lenin, who like a good orthodox Marxist denounces all "Utopians," has succumbed at last to a Utopia, the Utopia of the electricians. He is throwing all his weight into a scheme for the development of great power stations in Russia to serve whole provinces with light, with transport, and industrial power.... Projects for such an electrification are in process of development in Holland and they have been discussed in England, and in those densely-populated and industrially highly-developed centres one can imagine them as successful, economical, and altogether beneficial. But their application to Russia is an altogether greater strain upon the constructive imagination. I cannot see anything of the sort happening in this dark crystal of Russia, but this little man at the Kremlin can; he sees the decaying railways replaced by a new electric transport, sees new roadways spreading throughout the land, sees a new and happier Communist industrialism arising again. While I talked to him he almost persuaded me to share his vision.

"And you will go on to these things with the peasants rooted in your soil?"

But not only are the towns to be rebuilt; every agricultural landmark is to go.

"Even now," said Lenin:

all the agricultural production of Russia is not peasant production. We have, in places, large scale agriculture. The Government is already running big estates with workers instead of peasants, where conditions are favourable. That can spread. It can be extended first to one province, then another. The peasants in the other provinces, selfish and illiterate, will not know what is happening until their turn comes....

It may be difficult to defeat the Russian peasant en masse; but in detail there is no difficulty at all. At the mention of the peasant Lenin's head came nearer to mine; his manner became confidential. As if after all the peasant might overhear.

It is not only the material organisation of society you have to build, I argued, it is the mentality of a whole people. The Russian people are by habit and tradition traders and individualists; their very souls must be remoulded if this new world is to be achieved. Lenin asked me what I had seen of the educational work afoot. I praised some of the things I had seen. He nodded and smiled with pleasure. He has an unlimited confidence in his work.

"But these are only sketches and beginnings," I said.

"Come back and see what we have done in Russia in ten years' time," he answered...

H. G. Wells Liveblogs the Consolidation of the Bolshevik Regime

Wells, 1920:

The vindictive French creditor, the journalistic British oaf, are far more responsible for these deathbed miseries [of Russia] than any communist...

From H.G. Wells, Russia in the Shadows, 1920:

Russia in the Shadows: We spent a fortnight and a day in Russia, passing most of our time in Petersburg, where we went about freely by ourselves, and were shown nearly everything we asked to see.... In Petersburg I did not stay at the Hotel International, to which foreign visitors are usually sent, but with my old friend, Maxim Gorky. The guide and interpreter assigned to assist us was a lady I had met in Russia in 1914, the niece of a former Russian Ambassador to London. She was educated at Newnham, she has been imprisoned five times by the Bolshevist Government, she is not allowed to leave Petersburg because of an attempt to cross the frontier to her children in Esthonia, and she was, therefore, the last person likely to lend herself to any attempt to hoodwink me. I mention this because on every hand at home and in Russia I had been told that the most elaborate camouflage of realities would go on, and that I should be kept in blinkers throughout my visit....

[T]he harsh and terrible realities of the situation in Russia cannot be camouflaged... it is hardly possible to dress up two large cities for the benefit of two stray visitors.... Our dominant impression of things Russian is an impression of a vast irreparable breakdown. The great monarchy that was here in 1914, the administrative, social, financial, and commercial systems connected with it have, under the strains of six years of incessant war, fallen down and smashed utterly. Never in all history has there been so great a débâcle before. The fact of the Revolution is, to our minds, altogether dwarfed by the fact of this downfall. By its own inherent rottenness and by the thrusts and strains of aggressive imperialism the Russian part of the old civilised world that existed before 1914 fell, and is now gone. The peasant, who was the base of the old pyramid, remains upon the land, living very much as he has always lived. Everything else is broken down, or is breaking down. Amid this vast disorganisation an emergency Government, supported by a disciplined party of perhaps 150,000 adherents—the Communist Party—has taken control. It has—at the price of much shooting—suppressed brigandage, established a sort of order and security in the exhausted towns, and set up a crude rationing system.

It is, I would say at once, the only possible Government in Russia at the present time. It is the only idea, it supplies the only solidarity, left in Russia. But it is a secondary fact. The dominant fact for the Western reader, the threatening and disconcerting fact, is that a social and economic system very like our own and intimately connected with our own has crashed.

Nowhere in all Russia is the fact of that crash so completely evident as it is in Petersburg.... In 1914 I loafed agreeably in the Petersburg streets—buying little articles and watching the abundant traffic. All these shops have ceased. There are perhaps half a dozen shops still open in Petersburg. There is a Government crockery shop where I bought a plate or so as a souvenir, for seven or eight hundred roubles each, and there are a few flower shops. It is a wonderful fact, I think, that in this city, in which most of the shrinking population is already nearly starving, and hardly any one possesses a second suit of clothes or more than a single change of worn and patched linen, flowers can be and are still bought and sold. For five thousand roubles, which is about six and eightpence at the current rate of exchange, one can get a very pleasing bunch of big chrysanthemums. I do not know if the words "all the shops have ceased" convey any picture to the Western reader of what a street looks like in Russia. It is not like Bond Street or Piccadilly on a Sunday, with the blinds neatly drawn down in a decorous sleep, and ready to wake up and begin again on Monday. The shops have an utterly wretched and abandoned look; paint is peeling off, windows are cracked, some are broken and boarded up, some still display a few fly-blown relics of stock in the window, some have their windows covered with notices; the windows are growing dim, the fixtures have gathered two years' dust. They are dead shops. They will never open again.

All the great bazaar-like markets are closed, too, in Petersburg now, in the desperate struggle to keep a public control of necessities and prevent the profiteer driving up the last vestiges of food to incredible prices.... The roads along which these tramcars run are in a frightful condition. They have not been repaired for three or four years; they are full of holes like shell-holes, often two or three feet deep. Frost has eaten out great cavities, drains have collapsed, and people have torn up the wood pavement for fires. Only once did we see any attempt to repair the streets in Petrograd. In a side street some mysterious agency had collected a load of wood blocks and two barrels of tar. Most of our longer journeys about the town were done in official motor-cars—left over from the former times. A drive is an affair of tremendous swerves and concussions. These surviving motor-cars are running now on kerosene. They disengage clouds of pale blue smoke, and start up with a noise like a machine-gun battle. Every wooden house was demolished for firing last winter, and such masonry as there was in those houses remains in ruinous gaps, between the houses of stone.

Every one is shabby; every one seems to be carrying bundles.... These bundles that every one carries are partly the rations of food that are doled out by the Soviet organisation, partly they are the material and results of illicit trade.... The Soviet Government rations on principle, but any Government in Russia now would have to ration. If the war in the West had lasted up to the present time London would be rationing too—food, clothing, and housing. But in Russia this has to be done on a basis of uncontrollable peasant production, with a population temperamentally indisciplined and self-indulgent. The struggle is necessarily a bitter one. The detected profiteer, the genuine profiteer who profiteers on any considerable scale, gets short shrift; he is shot. Quite ordinary trading may be punished severely. All trading is called "speculation," and is now illegal. But a queer street-corner trading in food and so forth is winked at in Petersburg, and quite openly practised in Moscow, because only by permitting this can the peasants be induced to bring in food....

The peasants look well fed, and I doubt if they are very much worse off than they were in 1914. Probably they are better off. They have more land than they had, and they have got rid of their landlords. They will not help in any attempt to overthrow the Soviet Government because they are convinced that while it endures this state of things will continue. This does not prevent their resisting whenever they can the attempts of the Red Guards to collect food at regulation prices. Insufficient forces of Red Guards may be attacked and massacred. Such incidents are magnified in the London Press as peasant insurrections against the Bolsheviks. They are nothing of the sort. It is just the peasants making themselves comfortable under the existing régime.

But every class above the peasants—including the official class—is now in a state of extreme privation. The credit and industrial system that produced commodities has broken down, and so far the attempts to replace it by some other form of production have been ineffective. So that nowhere are there any new things. About the only things that seem to be fairly well supplied are tea, cigarettes, and matches. Matches are more abundant in Russia than they were in England in 1917, and the Soviet State match is quite a good match. But such things as collars, ties, shoelaces, sheets and blankets, spoons and forks, all the haberdashery and crockery of life, are unattainable. There is no replacing a broken cup or glass except by a sedulous search and illegal trading. From Petersburg to Moscow we were given a sleeping car de luxe, but there were no water-bottles, glasses, or, indeed, any loose fittings. They have all gone. Most of the men one meets strike one at first as being carelessly shaven, and at first we were inclined to regard that as a sign of a general apathy, but we understood better how things were when a friend mentioned to my son quite casually that he had been using one safety razor blade for nearly a year....

And this spectacle of misery and ebbing energy is, you will say, the result of Bolshevist rule! I do not believe it is. I will deal with the Bolshevist Government when I have painted the general scenery of our problem. But let me say here that this desolate Russia is not a system that has been attacked and destroyed by something vigorous and malignant. It is an unsound system that has worked itself out and fallen down. It was not communism which built up these great, impossible cities, but capitalism. It was not communism that plunged this huge, creaking, bankrupt empire into six years of exhausting war. It was European imperialism. Nor is it communism that has pestered this suffering and perhaps dying Russia with a series of subsidised raids, invasions, and insurrections, and inflicted upon it an atrocious blockade. The vindictive French creditor, the journalistic British oaf, are far more responsible for these deathbed miseries than any communist...

Moderate Muslims

Clair Berlinski:

Moderate Islam and the Things People Miss: I posted a link to our conversation about whether Islam itself is the enemy to my Facebook page. Some of my friends here in Istanbul (who are Moslems, and, as the word "friend" suggests, not my enemy) weighed in with responses that I think confirm my assertion that the Islamic world is not monolithic. In particular, my friend Babür left a long, thoughtful response....

I later left this comment: I've just walked down a street filled literally with thousands of Moslems of exactly the kind many people are seriously arguing do not exist. I saw them with my own eyes, as I have every day for the past five years. With so many other questions in the world, why waste time debating this? Book a ticket to Istanbul, spend an afternoon here, have a lovely time, drink some tea, meet friendly, tolerant, warm, welcoming Moslems (mostly), and see for yourself. They exist! They're my neighbors and my friends! Babür, is there anyone at our gym, for example, who would not describe himself as a Moslem? Would any member of our gym endorse terrorism, honor killing, forcing me to wear the hijab, or subjecting me to a dhimmi tax? The idea is so absurd it's beyond discussion -- and yet we're discussing it.

Theo Spark found the conversation sufficiently interesting to link to it in his blog. He described the discussion as a "raging debate." I notice that his post has been picked up at Right Wing News. So now this chat among my friends is a raging and somewhat public debate, I guess. The odd thing is that the "raging debate" is about whether moderate Moslems exist. That they do is a proposition so easily verifiable that I don't even have to leave my apartment to do it. I can just look out the window.

But no one even noticed the snake pit of controversy embedded in Babür's claim that Shi'a Islam is a heresy. Now, as people who know the Islamic world well will tell you, that is--what is it Andrew Sullivan calls it?--the money quote. You just watch and see how much more blood is yet to be spilled over that claim. And no one even noticed it--their attention was elsewhere.

Why Oh Why Can't We Have a Better Press Corps?

Before Ross Douthat started writing for the New York Times, he was (almost always) interesting, (usually) smart, and rarely bats--- insane.


Outsourced to Dana:

Who are you callin’ unassimilated?: Douthat gets some pushback on his earlier post concerning assimilation.   His argument was simply that he thinks that bigotry can be justified because it, like procedural liberalism, helps immigrants assimilate. It looks bad when you state it like that without running it through the pomposity generator...

What happened?

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

There Is No "Bond Bubble"

The Taylor Rule And The 201CBond Bubble201D (Wonkish) - Paul Krugman Blog -

Long-term Treasury bond prices are about where they ought to be: they consist of a normal duration discount, plus a valuation term because they are a hedge against today's extra large risk of (some forms of) macroeconomic disaster, plus the standard expectations of future federal funds rate terms, plus a term for lowered long-term inflation expectations in the future.

Paul Krugman:

The Taylor Rule And The “Bond Bubble”: Here’s a thought for all those insisting that there’s a bond bubble: how unreasonable are current long-term interest rates given current macroeconomic forecasts?... I decided to use the simplified Mankiw rule, which puts the same coefficient on core CPI inflation and unemployment... the Fed funds rate is a linear function of core CPI inflation minus the unemployment rate... a scatterplot for 1988-2008.... Now, take the CBO projection, which calls for unemployment to fall very slowly, and core inflation to stay low for quite a while too. Here’s what it implies... four years of near-zero short-term interest rates. Does a 10-year rate of 2.6 percent still sound so unreasonable? And bear in mind that I’m not using some doomsayer’s forecast; I’m using the staid folks at the CBO.... I asked what interest rate on a 10-year security would yield the same present value as investing in short-term debt at the predicted rates, and rolling it over each year... 2.6 percent.

The Taylor Rule And The 201CBond Bubble201D (Wonkish) - Paul Krugman Blog -

Here’s what I think is going on: aside from the obviously intense desire of some of the bond bubble folks to see a fiscal crisis — they’ve been planning for it, and they’re not going to take no for an answer — my sense is that a lot of people just can’t bring themselves to face the reality that we’re likely to be in a zero-interest world for a long time. They just keep assuming that the Fed is going to raise rates soon, even though there is absolutely nothing about the macro situation that would justify such a rate increase. But once again: if you take standard economic forecasts seriously, they point to near-zero short-term rates for a very long time, which in turn justifies low longer-term rates.

I See No Pass Here...

I understand that "Grant's Pass" is the name of a town on the I-5 in southern Oregon. But where is the real Grant's Pass? I see nothing like a pass here...

H.G. Wells on the Bolsheviki, 1920

From H.G. Wells, Russia in the Shadows, 1920:

Russia in the Shadows: Now who are these Bolsheviki who have taken such an effectual hold upon Russia? According to the crazier section of the British Press they are the agents of a mysterious racial plot, a secret society, in which Jews, Jesuits, Freemasons, and Germans are all jumbled together in the maddest fashion. As a matter of fact, nothing was ever quite less secret than the ideas and aims and methods of the Bolsheviks, nor anything quite less like a secret society than their organisation.... I find the Bolsheviks very much what they profess to be. I find myself obliged to treat them as fairly straightforward people. I do not agree with either their views or their methods, but that is another question.

The Bolsheviks are Marxist Socialists. Marx died in London nearly forty years ago; the propaganda of his views has been going on for over half a century. It has spread over the whole earth and finds in nearly every country a small but enthusiastic following. It is a natural result of worldwide economic conditions. Everywhere it expresses the same limited ideas in the same distinctive phrasing. It is a cult, a world-wide international brotherhood. No one need learn Russian to study the ideas of Bolshevism. The enquirer will find them all in the London Plebs or the New York Liberator in exactly the same phrases as in the Russian Pravda. They hide nothing. They say everything. And just precisely what these Marxists write and say, so they attempt to do.

It will be best if I write about Marx without any hypocritical deference... a Bore of the extremest sort... vast unfinished work, Das Kapital... phantom unrealities as the bourgeoisie and the proletariat... maundering away into tedious secondary discussions... pretentious pedantry. But before I went to Russia on this last occasion I had no active hostility to Marx. I avoided his works, and when I encountered Marxists I disposed of them by asking them to tell me exactly what people constituted the proletariat. None of them knew. No Marxist knows. In Gorky's flat I listened with attention while Bokaiev discussed with Shalyapin the fine question of whether in Russia there was a proletariat at all, distinguishable from the peasants. As Bokaiev has been head of the Extraordinary Commission of the Dictatorship of the Proletariat in Petersburg, it was interesting to note the fine difficulties of the argument. The "proletarian" in the Marxist jargon is like the "producer" in the jargon of some political economists, who is supposed to be a creature absolutely distinct and different from the "consumer." So the proletarian is a figure put into flat opposition to something called capital. I find in large type outside the current number of the Plebs, "The working class and the employing class have nothing in common." Apply this to a works foreman who is being taken in a train by an engine-driver to see how the house he is having built for him by a building society is getting on. To which of these immiscibles does he belong, employer or employed? The stuff is sheer nonsense.

In Russia I must confess my passive objection to Marx has changed to a very active hostility. Wherever we went we encountered busts, portraits, and statues of Marx. About two-thirds of the face of Marx is beard, a vast solemn woolly uneventful beard that must have made all normal exercise impossible. It is not the sort of beard that happens to a man, it is a beard cultivated, cherished, and thrust patriarchally upon the world. It is exactly like Das Kapital in its inane abundance, and the human part of the face looks over it owlishly.... A gnawing desire grew upon me to see Karl Marx shaved....

But Marx is for the Marxists merely an image and a symbol, and it is with the Marxist and not with Marx that we are now dealing. Few Marxists have read much of Das Kapital. The Marxist... adopts Marx as his prophet simply because he believes that Marx wrote of the class war... prophesied a triumph for the employed person, a dictatorship of the world by the leaders of these liberated employed persons (dictatorship of the proletariat), and a Communist millennium.... Now this doctrine and this prophecy have appealed in every country with extraordinary power to... young men of energy and imagination... imperfectly educated, ill-equipped, and caught into hopeless wages slavery in our existing economic system. They realise in their own persons the social injustice, the stupid negligence, the colossal incivility of our system; they realise that they are insulted and sacrificed by it; and they devote themselves to break it and emancipate themselves from it. No insidious propaganda is needed to make such rebels; it is the faults of a system that half-educates and then enslaves them which have created the Communist movement wherever industrialism has developed....

When I was a boy of fourteen I was a complete Marxist, long before I had heard the name of Marx. I had been cut off abruptly from education, caught in a detestable shop, and I was being broken in to a life of mean and dreary toil. I was worked too hard and for such long hours that all thoughts of self-improvement seemed hopeless. I would have set fire to that place if I had not been convinced it was over-insured. I revived the spirit of those bitter days in a conversation I had with Zorin, one of the leaders of the Commune of the North. He is a young man who has come back from unskilled work in America, a very likeable human being and a humorous and very popular speaker in the Petersburg Soviet. He and I exchanged experiences, and I found that the thing that rankled most in his mind about America was the brutal incivility he had encountered when applying for a job as packer in a big dry goods store in New York. We told each other stories of the way our social system wastes and breaks and maddens decent and willing men. Between us was the freemasonry of a common indignation.

It is that indignation of youth and energy, thwarted and misused, it is that and no mere economic theorising, which is the living and linking inspiration of the Marxist movement throughout the world. It is not that Marx was profoundly wise, but that our economic system has been stupid, selfish, wasteful, and anarchistic. The Communistic organisation... has suggested to them an idea of a great conspiracy against human happiness concocted by a mysterious body of wicked men called capitalists.... [W]hen the crash came in Russia, when there remained no other solidarity of men who could work together upon any but immediate selfish ends, there came flowing back from America and the West to rejoin their comrades a considerable number of keen and enthusiastic young and youngish men, who had in that more bracing Western world lost something of the habitual impracticability of the Russian and acquired a certain habit of getting things done, who all thought in the same phrases and had the courage of the same ideas, and who were all inspired by the dream of a revolution that should bring human life to a new level of justice and happiness. It is these young men who constitute the living force of Bolshevism....

This Bolshevik Government is at once the most temerarious and the least experienced governing body in the world. In some directions its incompetence is amazing. In most its ignorance is profound. Of the diabolical cunning of "capitalism" and of the subtleties of reaction it is ridiculously suspicious, and sometimes it takes fright and is cruel. But essentially it is honest. It is the most simple-minded Government that exists in the world to-day.

Its simple-mindedness is shown by one question that I was asked again and again during this Russian visit. "When is the social revolution going to happen in England?" Lenin asked me that, Zenovieff, who is the head of the Commune of the North, Zorin, and many others.... According to the Marxist theory the social revolution should have happened first in the country with the oldest and most highly developed industrialism.... Instead they find Communism in power in Russia.... Behind the minds of many of these Bolsheviks with whom I talked I saw clearly that there dawns now a chill suspicion of the reality of the case, a realisation that what they have got in Russia is not truly the promised Marxist social revolution at all, that in truth they have not captured a State but got aboard a derelict. I tried to assist the development of this novel and disconcerting discovery. And also I indulged in a little lecture on the absence of a large "class-conscious proletariat" in the Western communities.... Their dearest convictions struggled against my manifest candour. They are clinging desperately to the belief that there are hundreds of thousands of convinced Communists in Britain, versed in the whole gospel of Marx, a proletarian solidarity, on the eve of seizing power and proclaiming a British Soviet Republic. They hold obstinately to that after three years of waiting—but their hold weakens.

Among the most amusing things in this queer intellectual situation are the repeated scoldings that come by wireless from Moscow to Western Labour because it does not behave as Marx said it would behave. It isn't red—and it ought to be. It is just yellow.

My conversation with Zenovieff was particularly curious.... "You have civil war in Ireland," he said. "Practically," said I. "Which do you consider are the proletarians, the Sinn Feiners or the Ulstermen?" We spent some time while Zenovieff worked like a man with a jigsaw puzzle trying to get the Irish situation into the class war formula. That jigsaw puzzle remained unsolved, and we then shifted our attention to Asia.... Zenovieff, assisted by Bela Kun, our Mr. Tom Quelch, and a number of other leading Communists, has recently gone on a pilgrimage to Baku to raise the Asiatic proletariat....

I did my best to find out from Zenovieff and Zorin what they thought they were doing in the Baku Conference. And frankly I do not think they know. I doubt if they have anything clearer in their minds than a vague idea of hitting back at the British Government through Mesopotamia and India, because it has been hitting them through Kolchak, Deniken, Wrangel, and the Poles...

Winston Churchill Liveblogs World War II: August 22, 1940

Former Naval Person to President Roosevelt:

I am most grateful to you.... I had not contemplated anything in the nature of a contract.... [W]e had decided in Cabinet to offer you naval and air facilities off the Atlantic coast quite independently of destroyers or any other aid. Our view is that we are two friends in danger helping each other as far as we can....

Although the air attack has slackened in the last few days and our strength is growing in many ways, I do not think that bad man has yet struck his full blow. We are having considerable losses in merchant ships on the North-Western Approaches, now our only channel of regular communication with the oceans, and your fifty destroyers, if they came along at once, would be a precious help.

links for 2010-08-21

Eleanor Roosevelt Liveblogs World War II: August 21, 1940

Eleanor Rooseelt:

My Day by Eleanor Roosevelt, August 21, 1940: My first stop yesterday morning was at the WPA office in New York City, where WPA interviewers are accepting applications from people now on WPA who wish to be allowed to take a training course in one of the New York City training schools. The Board of Education also checks the information which each individual gives. Fifty percent of the people taking these courses come from WPA and there are, of course, a great many more applications than can be accepted.

I talked to one man who wanted to take a course in telegraphy. It was nine years since he had given up this occupation, but he felt he wished to return to it. I asked the officials what they did with people who could not immediately be taken into some defense industry and they said they were able to place about fifty percent of them on WPA programs in some work along the lines of the skills which they had gained, or had regained during training.

It seems to me that there is a hitch somewhere when the flow from training to jobs is not fairly rapid. When one reads of the necessity for speed in production, one cannot help wondering why this flow of men into jobs is not more rapid. As I understand it, after skilled and semi-skilled workers have been trained and re-employed, the reservoir of young people will be trained to fill the normal increases that should come in these industries. This is where the NYA and CCC, with greatly increased mechanical facilities, will be called upon to do their share of the job. It will be, however, a defense job, and should, I believe, not be considered only from the point of view of doing something for young people, but also of doing a very necessary piece of work in the defense of the country.

I Think Felix Salmon Misses the Issue

The lesson Felix draws is that off-the-record briefings are fine and on-the-record briefings may not be.

The lesson I draw from the incident Felix Salmon is thinking about is that off-the-record briefings are fine--if the people the senior government officials are talking to are people who understand the substantive policy issues and are not playing gotcha. If the people the senior government officials are talking to are people who either do not understand the substantive policy issues or are playing gotcha (or both), then off-the-record briefings are not fine at all.

And, of course, if the audience for the briefing is made up of people who understand the substantive policy issues and are not playing gotcha, then on-the-record briefings are fine too.

Felix Salmon:

Why Treasury briefings are off the record | Analysis & Opinion |: Having a meeting with a Treasury official is interesting and worthwhile, although I admit that my mind did wander in parts, when the conversation got too political.... Nasiripour is reporting, for instance, that at this meeting a senior Treasury official “said that home prices will likely decline in the near future” and “argued that taxpayers should continue to prop up small banks due to their exposure to toxic assets”. I don’t recall either statement, but I was neither taking detailed notes nor recording the conversation. It would be great if we could simply go to the tape and report exactly what was said and who said it. But then the news cycle would glom onto the “X said Y” story, in a world where administration officials can get fired if they say the wrong thing. Putting the whole conversation on background makes it almost impossible to turn the briefing itself into a news event, and that in turn allows officials to speak without worry that their words will end up being used against them in the kind of fevered political-media frenzy which regularly appears out of nowhere and nothing in Washington...

But this misses the issue. The issue is that, after the meeting with senior Treasury officials (including Secretary Geithner) that Salmon says allowed officials to speak "without worry that their words will end up being used against them in the kind of fevered political-media frenzy which regularly appears out of nowhere and nothing in Washington," their words ended up being used against them in the kind of fevered political-media frenzy which regularly appears out of nowhere and nothing in Washington. For Mike Allen went back to his keyboard and wrote:

--ADMINISTRATION MINDMELD: The virtue of action on Social Security is that it demonstrates the ability to begin to affect the long-run deficits. Social Security isn't the biggest contributor to the problem -- that's still health-care costs. But ti could help a little bit, buy time, and strengthens the odds of a political consensus behind other spending cuts or tax increases. Most importantly, it would establish more CREDIBILITY with the MARKETS. The mood of the world at the moment (slightly excessive, from the administration's point of view) is that if you don't do anything with spending cuts, it doesn't get you credibility.

And he--apparently--published it in Politico on August 19, 2010. Tim Fernholz writes:

The American Prospect:

Sure makes it seem like the administration wants to cut Social Security, doesn't it?

By chance, I was at the same deep-background briefing where Allen had his "mindmeld," and I have to say, I don't think he's got it right.... The official believed that the largest consensus was forming around an undefined plan to support the long-term solvency of Social Security and was discussing why that hypothetical plan might help bolster political will for other deficit-reduction ideas. The official would note that Social Security is already solvent for decades.

The most important omission from Allen's item is that the official concluded the conversation by noting that Social Security is not a generous benefit compared to other public pensions around the world and that cutting benefits, even years in advance, would be difficult to justify.... Allen doesn't mention that the official cited Paul Krugman when talking about Social Security's contributions to the deficit. Finally, the reason the administration official was interested in credibility before the markets is so the government could borrow more money for temporary fiscal stimulus....

It's hard to dispute Allen's interpretation without being able to post direct quotes, but hopefully this adds some much-needed context. At least, let it be a lesson to take these unsourced items with a shakerful of salt...

Deep History

John Gordon, I think, badly mistakes the difficulty of hanging onto culture and technology and building it up if you cannot stay in one place and cannot write.

Still, very interesting:

Gordon's Notes: The new history is deep history: When we think about science, most of us think of dramatic breakthroughs. We think Darwin and Wallace, Einstein and Bohr, Copernicus and Curie and we imagine everything changed overnight. Most science, however, develops in bits and pieces, twisting and turning, waxing and waning, until, after thirty years, things are new. Even the dramatic shifts, like natural selection, took decades to get from radical to mainstream.

If you’re at all curious about things, you notice this in a single lifespan. Consider deep history; the story of humans from 150K to 3K years ago. In the past 30 years discoveries from genomics, climate research, linguistics, plant research, translation, anthropology and archaeology, combined with the revision of old biases, have dramatically changed our understanding of deep history. In each case, of course, computation has been a fundamental driver. That’s how it works – new instruments make new science. It’s been growing slowly from all directions, but the sum is a very different world from what some of us learned in the 1970s. The human brain is evolving and changing far more dramatically than we imagined, and that evolution has not slowed with modernity. Our concepts of human speciation are being transformed; there were many “species” of human coexisting into deep history – and, like dogs and wolves, they probably crossed often.

Pre-agricultural humans were far more populous and widespread than we once imagined; the large populations of pre-invasion (early agricultural and hunter-gatherer) North America probably reflect worldwide pre-agricultural patterns. Even after the development of agriculture and writing we see thousand year intervals of relative stasis in China, Egypt and Mesopotamia. How could this be when our fundamental technologies change in decades?... What did humans do in Georgian caves for 30,000 years? Thirty thousand years of waving and sewing and nothing changes?! They could not have had the same brains we have. They seem more... Neandertal.

Fascinating times, and there’s much more here than I can address in one post. That’s why I’m adding a new tag (label) for this blog -- “deep history” in anticipation of much more to come...

I Am Proud that Eboo Patel Is an American

Buce sends us to Eboo Patel:

Underbelly: In America, We Don't Do That: Patel on the "Mosque": The last thing I intended to do when I got up this morning was a pair of posts on the "Ground Zero Mosque."[1] But Eboo Patel (via Glenn Greenwald) wraps it up with such pristine clarity that he gets 10 points for craftsmanship, whatever he gets for content.  "Lemon" is CNN Anchor Don of that ilk:

Lemon:  Don't you think it's a bit different considering what happened on 9/11?  And the people have said there's a need for it in Lower Manhattan, so that's why it's being built there.   What about 10, 20 blocks . . . Midtown Manhattan, considering the circumstances behind this?  That's not understandable?

Patel:  In America, we don't tell people based on their race or religion or ethnicity that they are free in this place, but not in that place --

Lemon:  [interrupting] I understand that, but there's always context, Mr. Patel . . . this is an extraordinary circumstance.  You understand that this is very heated.  Many people lost their loved ones on 9/11 --

Patel: Including Muslim Americans who lost their loved ones. . .

Lemon:  Consider the context here.  That's what I'm talking about.

Patel:  I have to tell you that this seems a little like telling black people 50 years ago:  you can sit anywhere on the bus you like - just not in the front.

Lemon:  I think that's apples and oranges - I don't think that black people were behind a Terrorist plot to kill people and drive planes into a building.  That's a completely different circumstance.

Patel:  And American Muslims were not behind the terrorist plot either.

[1] Not a mosque, and not at ground zero.  I know

The Irrational Fad and Fashion That Is Belief in a Bond Bubble

Paul Krugman:

Bond Madness: Things are looking bleak for the economy; Goldman Sachs (no link) is predicting that 2nd quarter GDP growth will be revised down to 1.1%, and it’s downhill from here. Yet from late 2009 until just the other day, all the Very Serious People were mainly concerned about the possibility of surging interest rates. Why?

I was looking back at some of my own notes about what happened last fall. At the time, there was serious consideration among the Obama people of pushing for some kind of second stimulus; what its chances might have been is hard to say. But the point is that they backed off. Why? My understanding is that they bought into the big scare of the time, which was that there was a “carry trade bubble” in the bond market, and terrible things would happen when it burst. No, this never made sense. Anyone who looked at recent Japanese history should have realized that with a depressed economy, low rates could and did last a very long time. And some of the scenarios being proposed were just plain bizarre: the bond bubble will burst, and this will plunge us into recession, and the Fed will have to buy up government debt, and this will mean inflation too. Really.

And then the whole story shifted: suddenly it wasn’t the carry trade, it was sovereign debt risks, we’re all Greece.

And now there’s a new one: you see, low interest rates will cause deflation. Really (near the end).

And though the story shifts, the moral is always the same: the little people have to suffer.


Appeasing the Bond Gods: Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover, even though unemployment remained disastrously high across much of America and Europe, creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits. Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math. Never mind the numbers, they declared: immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments, driving up their borrowing costs and precipitating a crisis. Look at Greece, they said.

The skeptics countered that Greece is a special case, trapped by its use of the euro, which condemns it to years of deflation and stagnation whatever it does. The interest rates paid by major nations with their own currencies — not just the United States, but also Britain and Japan — showed no sign that the bond vigilantes were about to attack, or even that they existed.

Just you wait, said the austerians: the bond vigilantes may be invisible, but they must be feared all the same.

This was a strange argument even a few months ago, when the U.S. government could borrow for 10 years at less than 4 percent interest. We were being told that it was necessary to give up on job creation, to inflict suffering on millions of workers, in order to satisfy demands that investors were not, in fact, actually making, but which austerians claimed they would make in the future.

But the argument has become even stranger recently, as it has become clear that investors aren’t worried about deficits; they’re worried about stagnation and deflation. And they’ve been signaling that concern by driving interest rates on the debt of major economies lower, not higher. On Thursday, the rate on 10-year U.S. bonds was only 2.58 percent.

So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away. It’s hard to convey the sheer audacity of this argument: first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets; now we’re being told to ignore what those markets are actually saying because they’re confused....

It seems almost superfluous, given all that, to mention the final insult: many of the most vocal austerians are, of course, hypocrites. Notice, in particular, how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy. But that won’t stop them from continuing to pose as deficit hawks whenever anyone proposes doing something to help the unemployed.

So here’s the question I find myself asking: What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?

Ricardo Caballero: There Is No Bond Bubble

Ricardo Caballero says there is no bond bubble because people really really want safe nominal assets and there are not very many of them--so naturally their price is very high:

Economics: No, there is a shortage of safe assets: Ricardo Caballero our guest wrote on Aug 20th 2010, 15:37 GMT:

IT IS not a bubble. It simply reflects a massive shortage of (what are perceived to be) safe assets.

This shortage was present before the crisis, which is largely what led to the securitisation and tranching boom. However, the crisis destroyed the private supply of these assets, and the recent European crisis destroyed part of the public supply of safe assets. Moreover, each of these crashes raised perceived uncertainty and hence the demand for safety, thus the quantity gap keeps growing, and the yield of the few remaining "safe" assets has to implode in order to restore equilibrium.

Whether people should really really want safe nominal assets so much is a question that I think should be answered "no." But high bond prices are not a bubble--not the result of inconsistent expectations that violate transversality conditions. Ricardo is right.

links for 2010-08-20

The Economist Gets One Very Wrong

A beat sweetener so sweet as to send us all into hyperglycemic collapse:

Mitch Daniels: The right stuff: The right stuff: Indiana's governor is a likeable wonk. Can he save the Republicans from themselves and provide a pragmatic alternative to Barack Obama? THE governor does not like to keep people waiting. On a recent morning this small man leapt out of a trooper’s Toyota (Indiana-made) while it was still moving. He burst into a tiny chamber of commerce and began joking with businessmen, teachers and farmers. He is comfortable with most people in most places. He can command a boardroom. He has moseyed through enough fairs to know how to sign a goat—on its left side, so as not to write against the grain of its coat. After some small talk with the chamber, he introduced himself formally: “Mitch Daniels, your employee in public service.”

Most Americans know little or nothing of Mr Daniels. He does not tweet. “I’m not an interesting enough person,” he explains. He is a Republican who had never heard of 9/12, Glenn Beck’s tea-party group, before The Economist mentioned it to him. But he is good at one thing in particular: governing.

Wonks have long revered Mr Daniels...

No, we have not. No, we do not. When Mitch Daniels was in a position of power and authority, responsible as Director of OMB for maintaining fiscal sanity, he simply did not do his job: Mitch Daniels Did Not Do His Job: One of the threads of Ron Suskind's The Price of Loyalty is that Mitch Daniels simply did not do his job as Bush's OMB Director. The OMB Director is the principal--indeed, the only--voice inside the White House for fiscal prudence, for trying to ensure that the money the government spends is spent well and that the resources the government raises are adequate for the spending plans the White House evolves. While he was Bush OMB Director, Daniels simply did not do his job.

Page 219: Mitch Daniels became agitated. He blurted out, "Well, yes, but if you can't do the right thing when you're at 85 percent approval, then when can you do the right thing? I think it's time to say no." Everyone looked with surprise at Daniels--he has a way of expressing what others are thinking but don't say. Often, he'd find himself doubling back when he got an arched brow from Cheney or Rove...

And page 296: The Commerce Secretary echoed much of what had been said.... As usual, not a real discussion, O'Neill thought as he looked over at [Mitch] Daniels.... He knew Daniels was focused on the perils of rising deficits, but it would take gumption to air those concerns in a room full of tax cut ideologues. "I think we need to balance concerns," Daniels said.... "You need to be out front on the economy, but I am concerned that this package may not do it. The budget hole is getting deeper... we are projecting deficits all the way to the end of your second term." From across the table came glares from the entire Bush political team. Daniels paused.... "Ummmm. On balance, then, I think we need to do a [tax cut] package... accelerate the rate cuts and the double taxsation of dividends..." O'Neill looked with astonishment at Daniels... turn 180 degrees in midsentence...

Shame on the Economist. It can do a lot better.

Scoring the PPACA

Bruce Bartlett has a very good catch:

The Untold Medicare Improvement: My Fiscal Times column today looks at the latest Medicare trustees report. It shows an enormous improvement in Medicare’s finances due to passage of the Affordable Health Care Act. Oddly, the Obama administration seems reluctant to take credit for this improvement, apparently because an accompanying memo from Medicare’s actuaries predicted that Congress would increase payments to health care providers. What everyone apparently has missed is that the problem identified by the actuaries was part of the law when last year’s report was prepared. Therefore, all of the savings shown in this year’s report compared to last year’s report are still perfectly valid. They have nothing to do with the problem identified in the actuaries’ memo.