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October 2010

The Measure of Our Inability to Do the Right Thing

Mark Thoma reads his Sunday New York Times before I do, and writes:

Economist's View: Romer: Now Isn’t the Time to Cut the Deficit: Christina Romer doesn't even bother to try to make an argument for additional fiscal intervention with an eye toward job creation. She has, apparently, given up all hope that fiscal policymakers will provide the additional help that the economy needs. Instead, she is doing her best to prevent Congress from making things worse...

Indeed. With the output gap at a post-WWII high, and with current forecasts projecting no shrinkage of the output gap at all over the next year, now is a time to twiddle all of the policy knobs the government has at its disposal up to 11: federal purchases increases, tax postponements, aid to states, partial or full nationalization of mortgage finance, loan guarantees, raising inflation targets, talking down the dollar, quantitative easing--especially since the expansion of government spending to offset the fall in private demand in the recession never happened.

But what Christina Romer feels is her best and highest use is to attempt to freeze policy and keep it from getting even worse:

Now Isn’t the Right Time to Cut the Budget Deficit: THE clamor to cut the budget deficit is deafening.... Make no mistake: persistent large budget deficits are a significant problem. Government borrowing in good times crowds out private investment and lowers long-run growth.... So the question is not whether we need to reduce our deficit. Of course we do. The question is when.

Now is not the time. Unemployment is still near 10 percent.... Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.

Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth.... The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits....

But once the economy has substantially recovered, the Federal Reserve will be ready to raise interest rates. At that point, the Fed could help maintain growth by instead continuing very low rates as the deficit is reduced. Waiting for conventional monetary policy to be back on line is like waiting for the anesthesiologist to arrive before doing surgery.

True believers might say we should never wait, because a slow-growing tumor could turn virulent. But we need to think about actual risks. Today, markets are willing to lend to the American government at the lowest 20-year interest rate since 1958. In the crisis of 2008 and 2009, money flowed to the United States because it was seen as the safest spot in the storm. There is no evidence that we have to act immediately.

Countries that enjoy the markets’ confidence have another reason to wait. Greece and other troubled nations on the periphery of the euro zone can no longer borrow at affordable rates. They must immediately cut expenditures and raise taxes, despite the terrible toll on employment and output. Countries like the United States, Germany and France can play an essential role as sources of growth and demand for the world economy. Strengthening our economies will help keep the world from slipping into another recession, and allow for continued healing of vulnerable financial markets here and abroad....

The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal.... History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect. And in an environment like today’s, when Congress has again agreed to pay-as-you-go rules, deviating from planned reforms forces countervailing actions. Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful...

China doesn't worry about how it must cut its budget deficit in the midst of an economic downturn.

Economist's View: What's the Big Idea?

Mark Thoma appears to despair:

What's the Big Idea?: I started this blog shortly after George Bush was reelected.... [T]he biggest factor was that I felt Democrats were being misrepresented in the media. CNN in particular comes to mind. In the run-up to the election, it was the same people day after day representing Democrats in the media, and I did not feel they were doing a good job -- at all -- of representing the Party's views on economics or anything else.... It was as though the TV shows would pick the most clueless, outlandish, easiest people to dismiss whenever they interviewed Democrats or pitted Democrats against Republicans. If only people knew who we really are, I would think, and what we actually stand for, certainly they would be persuaded. I never thought it would go anywhere, but starting the blog was part of the reaction to the feeling that Democrats in the silent majority needed to start speaking up and making their voices heard.

Now I'm frustrated again.... Right now, there is no voice, at least not one I can hear. There are plenty of Democrats talking with loud voices, more than ever I'd guess, but there is no leadership.... We finally have control of the ship, and the captain is wandering aimlessly. What is Obama's vision? Where are we trying to go? What is the grander goal that is being served by the polices and strategies he is pursuing? Yes, he gives good speeches, but what is the single theme that runs through them all to coordinate and steer the party toward this larger vision?...

And Josh Marshall says that there are rumors that Bill Clinton appears to half-despair:

Bill's Frustration: A report surfaced today that Bill Clinton is frustrated as heck that the Dems can't manage to get a coherent or persuasive message together for the midterms. And he's even doing what he can to get together good talking points for candidates and stump in all the right places to help save the Democratic majorities even if the current leaders can't manage it themselves.... [A]s you've seen if you've read what I've written over the last three months, I've been distressed by the Democrats' inability or unwillingness to grasp hold of what winning political issues there are in such a rough climate.

But let's not be born yesterday. Anyone over 35 has a good adult memory of the 1994 midterm. That's when Stan Greenberg was telling congressional candidates to run away from President Clinton, just two years after Stan helped engineer his election. Clinton was considered toxic politically in broad swathes of the country... [which] look an awful lot like the swathes where President Obama is toxic today.... [F]or all his political skills President Clinton couldn't do anything the stem the tide. He was impotent, diminished, helpless, crushed and all the rest. Being president is hard. Being president two years into your first term is hard. And being at the center of the polarizing political storm -- as Obama is today and Clinton was 16 years ago -- tends to wipe the political genius and midas touch and all the other good stuff right off of you. 10% unemployment doesn't make you look that good either.

This isn't justifying any mistakes. But I'm surprised how short the memories are of many people who do this political analysis thing for a living.

But Caren Bohan says that Barack Obama does not despair:

Obama accuses Republicans of peddling "snake oil" | TPM News Pages: President Barack Obama... accused Republicans on Friday of peddling discredited "snake oil ideas" about the economy.... Obama portrayed the embattled Reid as a champion for the middle class who stays awake at night worrying about people whose houses have been foreclosed. "You know, Harry's not the flashiest guy, let's face it," Obama told a crowd of about 9,000 people in Las Vegas. "Harry kind of speaks in a very soft voice. He doesn't move real quick. He doesn't get up and make big stem-winding speeches. But Harry Reid does the right thing."...

California Democratic Senator Barbara Boxer is facing a tough challenge from Republican Carly Fiorina, a former chief executive of Hewlett-Packard.... At a rally at the University of Southern California that drew more 37,000 people, Obama portrayed the election as a "choice between the policies that got us into this mess and the policies that will get us out." He acknowledged that economic woes made for a tough election climate for Democrats, but said Republicans seeking control of Congress did not have the answer. "They are clinging to the same worn-out, tired snake oil ideas that they were peddling before," Obama said, referring to Bush-era policies he blames for putting the economy in a deep hole that it is still struggling to climb out of...

Why Quantitative Easing Needs to Involve Securities Other than Government Securities

Paul Krugman writes:

How To Think About QE2 (Wonkish): Still on the run, so no long posts. But with all the talk about further quantitative easing by the Fed — QE2, for quantitative easing, the sequel — I think it’s worth sharing one way of thinking about what’s on the table — and why you shouldn’t be too optimistic about its effects. This isn’t original, although I don’t know who deserves the credit.

So, here it is: in effect, QE2 amounts to a decision by the US government to shorten the maturity of its outstanding debt, paying off long-term bonds while borrowing short-term. This should drive down long-term interest rates. But how much?

How do we get to this view? Think first of the Fed’s balance sheet. The Fed’s liabilities are the monetary base — currency in circulation, plus bank reserves. Those bank reserves are essentially short-term borrowing: the Fed pays a small interest rate on them, which is comparable to the interest rate on Treasury bills. More broadly, in a near-zero-rate world, cash — an official liability that pays no interest — is essentially equivalent to T-bills — another official liability that pays more or less no interest.

What happens when the Fed buys long-term government securities? If we consider the Fed and Treasury as a consolidated entity — which, for fiscal purposes, they are — then what happens is that some long-term federal debt is taken off the market, and paid for by issuing more short-term debt in the form of monetary base. It’s just as if Treasury sold 3-month T-bills and used the proceeds to buy back 10-year bonds.

So the question to ask is, how much do we think federal management of its maturity structure matters for the real economy? I think if you put it that way, most people wouldn’t be terribly optimistic.

Anyway, my jet-lagged thought for the day.

I would put it differently. The point--from one point of view, the neo-Wicksellian point of view--behind quantitative easing is to reduce the interest rate that matters for private business investment: the long-term, default-risky, systemic-risky, beta-risky, real interest rates at which private businesses finance their capital expenditures. You can reduce this flow-of-funds equilibrium interest rate and raise the level of economic activity in any neo-Wicksellian framework in two ways:

  1. Reduce the "safe" real interest rate on short-term, safe government bonds.

  2. Reduce the various premia--duration, default, systemic risk, and beta risk--between the rates the Treasury pays to borrow in T-bills and the rates businesses pay to borrow.

Conventional open-market operations that lower the nominal interest rate on T-bills accomplish the first. Once the nominal interest rate on T-bills has been pushed to zero, quantitative easing policies that create expectations of higher future inflation continue to lower the real interest rate on T-bills and thus help the situation.

Suppose, however, that the nominal interest rate on T-bills is zero and that you cannot alter inflation expectations--cannot commit to keeping your quantitative easing permanent, cannot commit to an exchange rate path, whatever, you cannot do it and inflation expectations are immovable. Then what?

Then, as Paul Krugman says, quantitative easing is working be altering the spread between the short-term safe T-bill rate and the long-term, systemic-risky, beta-risky, default-risky rate. How does it do that? Lloyd Metzler and James Tobin would say that it does so by altering relative asset supplies--by taking duration risk, systemic risk, beta risk, and default premia off of private savers' books and placing them on the government's books (and thus on the taxpayers, who are a very different group of people than are private savers). To the extent that quantitative easing thus involves assets whose risk characteristics are very similar--federal funds and two-year T-notes, say--we would not expect even a lot of quantitative easing to have much of an effect on anything.

Thus a quantitative easing program that is going to have bite should involve Federal Reserve purchases of long-term risky private assets rather than merely long-term U.S. Treasuries. Hiring PIMCO as an agent to manage a long bond index portfolio naturally comes to mind--if one could avoid its front-running.

And, of course, the most effective quantitative easing program of all would involve the Federal Reserve issuing reserve deposits and using that purchasing power to buy the assets that are the furthest away in their risk characteristics from short-term government bonds: bridges, dams, the human capital of American citizens, police protection, research and development. The best quantitative easing program of all is a money-financed fiscal stimulus, as Jacob Viner said back in 1933:

It is often said that the federal government and the Federal Reserve system have practiced inflation during this depression no and that no beneficial effects resulted from it. What in fact happened was that they made mild motions in the direction of inflation, which did not succeed in achieving it.... [If] a deliberate policy of inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks...

Does Bank of America Need to File Its Paperwork?

I am with Duncan Black on this one:

Eschaton: I'm not as optimistic that judges will be all that concerned about whether banks actually have standing to foreclose. People in those homes are bad and owe somebody money and deserve to be chucked out. It doesn't really matter who they owe the money to.

Joe Nocera thinks Bank of America is in trouble:

Bank of America’s Foreclosure Mess Won’t Disappear Quickly: Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist.... Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears. Thus the bank’s central position is that, since it is so doggone obvious that the homeowners can’t pay their mortgages, the fact that the affidavits might not have complied with the law shouldn’t cause anyone to break into a sweat.... The prospect of a second legal assault is more recent. Shortly before the earnings call, Bank of America received a letter from a lawyer representing eight powerful institutional investors, including BlackRock, Pimco and — most amazing of all — the New York Federal Reserve. The letter was a not-so-veiled threat to sue the bank unless it agrees to buy back billions of dollars worth of loans that are in securitized mortgage bonds the investors own..... Mr. Moynihan and Mr. Noski made it clear that Bank of America was going to use hand-to-hand combat to fight back these claims. “We’re protecting the shareholders’ money,” Mr. Moynihan said. Mr. Noski questioned whether the investors even had the right to bring the case. “We continue to review and assess the letter and have a number of questions about its content including whether these investors actually have standing to bring these claims,” he said.

So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.

Apparently, being the biggest bank in the country means never having to say you’re sorry...

links for 2010-10-23

A Centrist Critique of Obama

In my inbox:

When it turned out that "post-partisanship" actually meant creating a consensus among wealthy people about how best to repair the damage of the Bush years without in any other way disturbing the status quo—well, who could blame independent voters for being disappointed?

Can I Call for Replacing the Milibands as the Heads of Britain's Labour Party with Ed Balls?

Ed Balls, August 26:

‘There is an alternative’: I am very grateful to Bloomberg for giving me the opportunity to come here this morning to respond to the bullish speech given from this same platform by George Osborne 10 days ago. That speech is the clearest articulation of the Cameron-Clegg Coalition strategy for this parliament. In it, their Chancellor repeated his claim that fiscal retrenchment through immediate and deep public spending cuts to reduce the fiscal deficit would build financial market confidence in the UK economy, keep interest rates low and secure economic recovery by boosting private investment. And the Chancellor once again declared that his was the only possible credible course....

This is a risky and dangerous time for the world economy. History teaches us that economic recovery following a large-scale financial crisis can be slow and stuttering. In the US, the debate is not about fiscal tightening but whether further stimulus is needed.... Here in Britain we have seen, in recent days, MPC member Martin Weale warn of the risk of a double-dip recession as a result of the current fiscal tightening. But whether our economy continues to recover or slips back into sustained slow growth – even recession again – is not just a concern for Treasury ministers and financial analysts. Whether our leaders make the right calls now on growth and jobs, the deficit, public spending and welfare reform will determine the future of our country for the next decade or more and shape the kind of society we want to be.

I do believe we face a choice as a country – on the economy and the future of our public services and the welfare state. And today I want to respond to what I believe was a fundamentally flawed speech ten days ago: - wrong in its analysis of the past; - reckless in its diagnosis of the current situation; and - dangerous in its prescription for the future.

This week’s IFS analysis of the June Budget has confirmed what we already knew – that the Coalition’s economic and fiscal strategy is deeply unfair. In this speech I will argue that it is also unnecessary, unsafe for our economy and unsafe for our public services too....

We do need a credible and medium-term plan to reduce the deficit and to reduce our level of national debt – a pre-announced plan for reducing the deficit based on a careful balance between employment, spending and taxation – but only once growth is fully secured and over a markedly longer period than the government is currently planning.... [B]y ripping away the foundations of growth and jobs in Britain – David Cameron, Nick Clegg and George Osborne are not only leaving us badly-exposed to the new economic storm that is coming, but are undermining the very goals of market stability and deficit reduction which their policies are designed to achieve. Far from learning from our history it is my fear that the new Coalition government is set to repeat the mistakes of history – and that George Osborne’s declaration of ‘cautious optimism’ on this platform a fortnight ago may go down in history alongside Norman Lamont singing in his bath.

But it is not too late to change course....

First, let me say why I think it is so important for me – and indeed every other candidate who seeks to lead the Opposition – to stand up now and challenge the current consensus that – however painful – there is no alternative to the Coalition’s austerity and cuts. Because as someone who was at the heart of the decision on whether Britain should join the Euro, it seems incredible to me that such fundamental and far-reaching economic decisions are being taken by the coalition government with so little debate and – let us be clear – with no mandate from the British people for their rise in VAT or immediate and deep spending cuts. Yes, there is plenty of discussion up and down the country about where the axe should fall on public services – as my opposite number Michael Gove has discovered. There are intense disputes, not least within the Conservative Party, about whether welfare reform can deliver the impact and savings claimed by Iain Duncan Smith. And there are very important arguments taking place about the universality of benefits, and the age at which pension-related entitlements should kick in.

These are all important debates. But the fundamental questions we face now – Is it right to be cutting billions of pounds from public services and taking billions of pounds out of family budgets this financial year and next? what will that do to jobs and growth? and ultimately, what will that mean for the deficit? – are almost ignored.

Yes, there are some important warning voices – Anatole Kaletsky, Paul Krugman, Lord Skidelsky, David Blanchflower to name a few – who have written powerful critiques on the comment pages of the broadsheets. But for the most part, the political and media consensus has dictated that the deficit is the only issue that matters in economic policy, that the measures set out in the Budget to reduce it are unavoidable, and that there is no alternative to the timetable the Budget set out....

So the first lesson I draw from history is to be wary of any British economic policy-maker or media commentator who tells you that there is no alternative or that something has to be done because the markets demand it. Adopting the consensus view may be the easy and safe thing to do, but it does not make you right and, in the long-term, it does not make you credible. We must never be afraid to stand outside the consensus – and challenge the view of the Chancellor, the Treasury, even the Bank of England Governor – if we believe them to be wrong.

But there is a second lesson too – which is also very pertinent at the present time for the Labour opposition and those of us who aspire to be the next Labour leader: it’s not enough to be right if you don’t win the argument. For – as Keynes found in 1925 and 1931 and Alan Walters found in 1990 – being right in the long run and well-judged by history is no great comfort.... [T]o sit back and wait for the pain to be felt is a huge trap for Labour... it is time for Labour to take on and win the argument with David Cameron, Nick Clegg, George Osborne and others who share their views.... [W]e cannot start waging the argument for a credible alternative path for growth, jobs, continued recovery and the eventual reduction of the deficit without first setting out why we believe the new government has got it so fundamentally wrong....

So let me turn to George Osborne’s speech and his triumphant espousal of the current consensus....

So first, is the current economic situation all Labour’s fault, the consequence irresponsible levels of public spending and borrowing in the early part of the last decade?... [I]t is a question of fact that we entered this financial crisis with low inflation, low interest rates, low unemployment and the lowest net debt of any large G7 country – and the second highest levels of foreign investment too.... [O]ur low debt position, our low inflation and low interest rates meant that we were the only government in post-war British history which – faced with recession and deflation – had both the will and the means to fight it through a classic Keynesian response... the effects of our actions are clear to see from the data on jobs, growth and the public finances from the first half of this year, before George Osborne’s ‘Emergency Budget’....

But rather than continue with a strategy that was working, George Osborne is doing the exact opposite. As the second storm looms on the horizon, everything he is doing is designed to suck money out of the economy and cut public investment, while his tax rises and benefit cuts will directly hit household finances at the worst possible time.... George Osborne was fond of saying – wrongly – that the Labour government had failed to fix the roof while the sun was shining. What he is now doing is the equivalent of ripping out the foundations of the house just as the hurricane is about to hit....

So what of George Osborne’s second contention – strongly supported by Nick Clegg – that the demand from the international money markets for fiscal consolidation is so strong that Britain and other countries must cut the deficit to avoid a ‘Greek-style’ financial crisis?... I do not have to tell this audience that what matters for credibility is not how tough politicians talk, but if their plans work and can be delivered..... Britain faces no difficulty servicing its debts as recent debt auctions have demonstrated – and the term structure of our debt is long thanks to the brilliant work of the Debt Management Agency. As US economist Brad DeLong said last month:

History teaches us that when none of the three clear and present dangers that justify retrenchment and austerity – interest-rate crowding-out, rising inflationary pressures on consumer prices, national overleverage via borrowing in foreign currencies – are present, you should not retrench.”

And yet in recent months, as Britain has followed the rest of Europe down a reckless commitment to immediate deficit reduction, we are now seeing very real worry in financial markets as fears of stagnation or even a double-dip recession grow....

Which brings us to the issue of George Osborne’s cautious optimism.... I would like him to point to the precedent from British economic history which says that, with slowing growth in our main trading partners and companies de-leveraging, it is possible for public sector retrenchment to stimulate private sector growth and job creation. The 1930s and 1980s proved the opposite.... For all George Osborne’s talk of ‘deficit-deniers’ – where is the real denial in British politics at the moment?... Against all the evidence, both contemporary and historical, he argues the private sector will somehow rush to fill the void left by government and consumer spending, and become the driver of jobs and growth.

This is ‘growth-denial’ on a grand scale.

It has about as much economic credibility as a Pyramid Scheme....

Then – having blamed the Labour government for his cuts plan, and insisted the markets are guiding his hand – George Osborne went on to make a further bold claim.... The Chancellor says that there is no alternative.... George Osborne includes in his charge Alistair Darling and David Miliband, who have suggested the lesser plan of halving the deficit over four years. I told Gordon Brown and Alistair Darling in 2009 that – whatever the media clamour at the time – even trying to halve the deficit in four years was a mistake. The pace was too severe to be credible or sustainable. As both history and market realities teach us, the danger of too rapid deficit reduction is that it proves counter-productive....

But whatever our competing visions for the economy, growth and deficit reduction, there is also a wider and more fundamental issue at stake which could be easily forgotten or postponed as we focus on how best to protect the current status quo in terms of growth, jobs and living standards.

It is the fairness of our society....

David Cameron has a narrow view of the role of the state – that it stifles society and economic progress. I have a wider view of the role of state – a coming together of communities through democracy to support people, to intervene where markets fail, to promote economic prosperity and opportunity.

He has a narrow view of justice – you keep what you own and whatever you earn in a free market free for all. My vision of a just society is a wider view of social justice that goes beyond equal opportunities, makes the positive case for fair chances, recognises that widely unequal societies are unfair and divisive and relies on active government and a modern welfare state to deliver fair chances for all.

Far from thinking that electoral success is based on the shedding or hiding of values, I believe we now need to champion those values and the importance of a fairer Britain – to show we are on peoples’ side after all.

Labour’s next leader needs a much stronger, clearer vision of the fairer Britain we will fight for – very different from the unfairness and unemployment the Coalition’s savage and immediate cuts will cause...

No, Our Excess Unemployment Today Is Not Structural

The Young, the Old, the Unemployed » New Deal 2.0

In three years, however--unless the Federal Reserve or the Obama administration take much stronger action than they are currently contemplating--it will be.

Mike Konczal:

The Young, the Old, the Unemployed: Roosevelt Institute intern Charlie Eisenhood dug up this data on the unemployment rate by age and education.... September 2010.... December 2007 when the recession started.... Here is the difference between the two, along with the percent increase....

What jumps out for me? College educated 20-24 year olds have the highest percentage increase in unemployment. This should go against a structural unemployment story, as college educated people have the ‘freshest’ skills and incredibly high mobility. It’s worth pointing them out in particular because if their careers hit a rough spot, hysteresis sets in and they’ll have serious wage losses years down the road (see this classic White House blog post on the subject by Peter Orszag).

Their situation is also important because the crisis is often seen as a small deal for college educated workers.

The other thing that jumps out at me is that the unemployment rate for everyone 55-64 has more than doubled. One thing we aren’t talking about enough is that someone who is 60 and has been unemployed for a year isn’t going to find a decent job again. Other ways of looking at the labor search outcomes of 55-64 year olds are even more worrying. Why don’t we temporarily lower the retirement age, conditional on a bunch of hoops? Why don’t we give them some relief, rather than raising the retirement age (a subject likely to be at the center of the December debate), when 55-64 year olds have had such a large increase in unemployment?

Paul Krugman: British Fashion Victims

Paul Krugman:

British Fashion Victims: In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.

And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.

No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain....

[T]here’s no question that Britain will eventually need to balance its books with spending cuts and tax increases. The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax. But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history....

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack. Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth. Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.


Robert Citino:

On Being a Wiking » HistoryNet: Last week I was contacted by Joshua Green, Senior Editor at Atlantic Monthly.  Seems there is a candidate running for Congress in northwestern Ohio who has been part of a Waffen-SS re-enactor group. Their aim, like that of re-enactors everywhere, was to "live history," in this case the history of the 5th SS Panzer Division, a multinational mechanized formation nicknamed "Wiking."  Green wanted to know my thoughts about the Division and those who would re-enact it.  I said some negative things, and I stick by them:

What you often hear is that the [Wiking] division was never formally accused of anything, but that's kind of a dodge. The entire German war effort in the East was a racial crusade to rid the world of 'subhumans,' Slavs were going to be enslaved in numbers of tens of millions. And of course the multimillion Jewish population of Eastern Europe was going to be exterminated altogether. That's what all these folks were doing in the East. It sends a shiver up my spine to think that people want to dress up and play SS on the weekend.

This story has "had legs."... In the manner of these things, some people have agreed, some have disagreed, and I've gotten eMails running the gamut.  Hey, no surprise there.  This is America. But there is one further thing I've noticed:  the number of notes I've gotten from re-enactors protesting their innocence and accusing me of accusing them of–I don't know–all being Nazis, I guess. Such notes I consider to be completely unnecessary. In my line of work, I know somewhere between 100 and a bazillion re-enactors of all stripes. It seems like a neat hobby, and for those who really do the prep work involved in a good re-enactment, it can be a learning experience of the first order. They take their fair share of grief from outsiders, I suppose, but I say: Here's to the re-enactors!

I'd like to remind my re-enactor friends, though, to beware of the company they keep.... I really don't think it's good for the anyone in the "Living History" community to be dressing up in the uniform of a criminal organization. The war in the east was more than a mere military campaign, and the Waffen-SS wasn't just "soldiering." They were fighting a "war of extermination" (Vernichtungskrieg). The historical record of the Waffen-SS is as clear as you can get, it isn't a pretty one, and I think there are better ways to spend your free time.

PS: For a discussion of the "Wehrmacht problem" in the wargaming and scholarly community alike, take a look at the interesting recent book by Ronald M. Smelser and Edward J. Davies II, The Myth of the Eastern Front: the Nazi-Soviet War in American Popular Culture. I don't agree with everything the authors have to say, but it was a fascinating book to read.

links for 2010-10-22

The Berkeley EHL

The Institute for New Economic Thinking is giving Berkeley money for economic history: Project Leader: Barry Eichengreen: The Berkeley Economic History Laboratory, headed by Barry Eichengreen of University of California Berkeley, was awarded a grant by the Institute for New Economic Thinking to ramp up the production of historically literate economists capable of contributing to the policy debate.

The grant seeks to expand the supply of economic historians doing policy-relevant research, by doubling or tripling the annual output of Berkeley PhDs specializing in economic history. The grant offers fellowships to attract additional candidates to the field, expands seminar budgets to allow for additional presentation and discussion of work in progress, and provides grants for exploratory archival visits and digitization of historical data.

The larger purpose of the grant is to produce change in the field of economics by making it a more fundamentally historical, institutional, and empirical social science.

Standards of Living

Matthew Yglesias:

Yglesias » The Consumer Surplus Era: This seems like a good time to trot out Karl Smith’s handy demonstration of the difference between a given sector’s contribution to GDP and its sector to consumer welfare.... The gap between what a given sector contributes to measured GDP and what it contributes to human well-being has always been with us. But the ways in which digital technology makes the non-commercial production and dissemination of information goods viable opens up vast new horizons of consumer welfare. Whether or not someone would enjoy manufacturing automobiles in his spare time as a hobby and distributing them to hundreds of thousands of people for free, it’s not possible to do. The marginal cost of building a car is pretty high, distributing cars is difficult, and the start-up costs of building a car factory are enormous.

Producing information goods—software, text, music, etc.—and distributing it on the internet isn’t like that at all.

Consequently, the realm of activities with gigantic divergence between measured GDP and welfare value is vastly expanding in ways that I don’t think policymakers and civil society donors are yet responding to in fully appropriate ways. The case for finding ways to directly and indirectly subsidize the creation of such goods is extremely strong. But more generally, I think we should expect the significance of this kind of thing to expand in the future. After all, the most active and intense hobbyists are typically senior citizens who, thanks to being retired, have the time and inclination to indulge their passions and desire for recognition and community. But the current cohort of senior citizens in the developed world has very weak digital skills.

The British Conservatives Have No Theory


Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne.

Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain?

Cameron, Clegg, and Osborne don't tell us.

They don't tell us because they are clueless dorks.

They don't even have a theory about how the economy will avoid a double dip.

They hope that--somehow, some way--Mervyn King will save them from themselves.

But if they actually carry through with their policies, I don't see how he can.

Ryan Avent:

Austerity: Cut to the bone: A TIDE of austerity has swept over much of Europe since markets rebelled at high debt levels in Greece and elsewhere in the spring. Still, the world is watching in amazement as Britain's new government prepares to enact budget cuts that have not inaptly been called revolutionary. Yesterday, George Osborne, the government's chancellor of the exchequer, stood before Parliament and detailed the scope of the plan, which will slash government spending by £81 billion over four years in an aim to reduce Britain's deficit from its present 11% of GDP to 2%.

[T]he scale of the cuts is... breathtaking. The police budget will fall by 20%. Spending on social housing will fall by three-fifths.... Nor will the damage be confined to the public sector. The government is a significant buyer of goods and services from private firms, after all. PwC, a consultancy, said the other day that it thinks that another half a million private jobs could go over the coming five years as a direct consequence of public-sector austerity....

If the private sector does trim half a million jobs due to austerity, it will come on top of the half million public sector positions that will be done away with as part of the cuts. Buttonwood does a good job explaining why such austerity is unthinkable in much of the world, and especially America. And he notes:

The second lesson concerns the division between spending cuts and tax rises. History suggests that it is better to concentrate on the former if you want the plan to succeed. But there is no getting away from the fact that this will affect the poor most; since they are the chief recipients of benefit payments.... The package creates the understandable impression that the poor are paying the price for the folly of the bankers....

From an economic standpoint, the most pressing question is how this will affect the British economy. Mr Osborne is counting on the Bank of England to pick up the slack created by budget cutting, but the Bank has its work cut out for it. It will be very difficult to encourage private borrowing amid such substantial cutbacks.... For now, Mr Osborne and the ruling government are the heroes of deficit hawks and supporters of a small state the world over. But Britain's conservatives have gambled heavily. If deep budget cuts amid economic weakness send the economy plunging back into recession, the government may be unable to make the cuts stick, and austerity could be discredited around the world. If disaster is avoided, it will strengthen the hand of fiscal conservatives everywhere. It would be an exciting experiment to watch if so many livelihoods weren't caught in the balance.

They aren't even holding a King, Queen, 10, and 9, and drawing to an inside straight: they are holding a Deuce, a 5, an 8, and a Jack and claiming that they are drawing to an inside straight.

All Ur Stonehenge Photoz R B Long To Uz????


From /.:

All Your Stonehenge Photos Are Belong To England: Posted by samzenpus on Thursday October 21, @12:32AM: from the we'll-take-that dept.: An anonymous reader writes

English Heritage, the organization that runs and manages various historical sites in the UK, such as Stonehenge, has apparently sent letters to various photo sharing and stock photo sites claiming that any photo of Stonehenge that is being sold violates its rights, and only English Heritage can get commercial benefit from such photos. In fact, they're asking for all money made from such photos, stating: 'all commercial interest to sell images must be directed to English Heritage.' As one recipient noted, this seems odd, given that English Heritage has only managed Stonehenge 'for 27 of the monument's 4,500 year old history.'

All Ocean Ports Are in the Same Place...

NewImage.jpg far as the costs of shipping non-spoilable non-urgent commodities, that is.

Ethan Zuckerman:

…My heart’s in Accra: [T]he cost of shipping water from a bottling plant in Yaqara, Fiji to Cambridge, Massachusetts. I was interested in unpacking the everyday mystery of container shipping – how is it possible that we can sell a product for a couple of dollars a bottle despite shipping it 8,000 miles around the world – and in the odd idea that atoms might be more mobile than bits, as we get lots more Fiji water in the US than Fijian music, movies or news.

My estimate then was that... it would cost $0.21 for a liter bottle of Fiji water to make the 8,000 mile journey.... a small fraction of the retail price of a bottle of “premium” imported bottled water....

I got a few details wrong.... That comes out to $0.18 per liter.... These new figures come from my new favorite toy, Maersk’s online shipping rates calculator.... To use Maersk’s calculator, you need to register with the site, download a client browser certificate and accept three server certificates from Maersk before you can access their secure site. But once you do, it’s just a few short clicks before you can calculate the cost of shipping a 20′ container of “umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof” (yes, that’s one of the available categories, along with “bone and meal”, “ores, slag and ash” and “straw, esparto, other plaiting materials and articles of straw, esparto, other plaiting materials) from Auckland to Dubai: $2451.02.

The main thing I’ve found playing with Maersk’s calendar: distance doesn’t matter as much as demand. Americans buy a lot of atoms from China. The Chinese don’t buy nearly as many from the US. A 40′ container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07....

As I poke through these maps, schedules and tariffs, I feel like I’m glimpsing a secret world... the sense that these routes and rates, the infrastructure that supports an economy where transPacific bottled water is possible, are the ley lines of globalization, radiating a mysterious and sinister power.

What Would Milton Friedman Say About Fed Policy Under Bernanke? -

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David Beckworth emails:

Greetings from Texas. Since you just had a post on Milton Friedman, I thought you might like this Op-Ed I coauthored on him. It is in the Investor’s Business Daily today and makes the case that Friedman would be calling for more Fed action.

And here it is:

What Would Milton Friedman Say About Fed Policy Under Bernanke?: [W]at would Milton Friedman say about our current monetary policy?

First, [he would say that] low interest rates do not necessarily mean monetary policy is loose.

Friedman criticized the policies of the Fed in the 1930s and the Bank of Japan in the 1990s on this very point. Both central banks claimed to be highly accommodative at these times, pointing to low interest rates as evidence of easy monetary policy. Friedman countered, however, that low interest rates may reflect a weak economy rather than easy monetary policy.

Back in 1997, in fact, he called the idea of identifying low interest rates with easy monetary policy an interest-rate fallacy. The only time low interest rates do indicate loose monetary policy is when they are below the neutral interest-rate level.... The implication for today's Fed is that although its target federal funds rate is low, its stance still may not be very stimulative given that the neutral interest rate is also low....

Second, [he would say that] the Fed should aim to stabilize inflation expectations. In his 1992 book "Money Mischief," Friedman called for legislation requiring the Fed to stabilize the spread between the nominal yield on regular Treasury bonds and the real yield on inflation-protected Treasury bonds (TIPS).... Friedman wanted the Fed to target expected inflation, and to promote price stability. As a forward-looking approach, this would also avoid the "long and varying lag" problems associated with backward-looking monetary policy...

links for 2010-10-21

Why oh Why Can't We Have a Better Press Corps? (Yet Another Atlantic Monthly Edition)


Henry Farrell on Clive Crook:

Expertise — Crooked Timber: Clive Crook on his blog today

idolizing experts and disdaining the supposedly ignorant masses is at least as dangerous. The intelligent use of experts is not straightforward. Technical expertise tends to be narrow, sometimes extremely narrow. Many policy-oriented experts are only too pleased to exceed their limits, pronouncing widely and authoritatively on matters they understand hardly any better than non-experts.

My immediate reaction while reading this was that even if the underlying claim is right, it still sounds a bit rich when it comes from someone whose paid job is every week to pronounce widely and authoritatively on matters where he does not possess any obvious expertise. And then I read the next sentence.

Economists and climate scientists spring instantly to mind.

Most readers of Crooked Timber are probably unaware of the little spot of bother that Crook got into over climate science a couple of months ago....

I have no direct knowledge of the intervening discussions which led to Crook publishing rather substantially amended versions of his original posts some weeks later. But whatever their motivations, they represent a quite remarkable volte face. This bit in particular presents a striking contrast....

I am not competent to discuss the science, and do not pretend to be. But here is what I see when I read the “trick” email and then the Penn State report. An explanation is required. The report offers only half an explanation: “trick” means “statistical method”. No contrary opinions are sought or heard. On this basis the report finds “no substance” in the criticism.

Suggestions that it is hard to ‘keep a straight face’ while entertaining the notion that climate scientists had meant the word ‘trick’ to refer to a statistical method and that Mann’s account “strains credulity” have been replaced with vaguely-worded platitudes about the “judgment calls” involved in dealing with data series that have gone funny in recent decades. The claim... that it is an ‘insult to one’s intelligence’ to suggest that the Climategate emailers were not being deliberately misleading has disappeared entirely.

I don’t know exactly why Crook climbed down in this abject fashion. To use his own term, these posts are “mealy-mouthed apologies,” albeit “mealy-mouthed apologies” of the kind that clearly had some considerable difficulty making it past the craw.... It is obvious to anyone who spends any time at all with statistically minded scientists (and social scientists) that they commonly use the term ‘trick’ in just the way that the reports suggest it was used. When a statistician talks about e.g. a clever statistical trick, they are usually not suggesting that they want to lie with numbers, and you are likely to get very confused if you think that they are.

Hence, Crook’s imputation that the “trick” was surely employed toward dishonest ends, was not only potentially libelous, but a clear demonstration that he simply didn’t know what he’s talking about. He had no expertise on the topic, and under his own rules, should have shut up about it. If he had, it would have spared him some considerable embarrassment.

Summing up, I can certainly understand why Crook has an animus against climate scientists. I can even understand why, in some intellectually confused fashion, he links discussions of climate science to the question of what happens when people pronounce confidently on topics where they have no legitimate expertise, and suffer the painful consequences. But his memory seems to be malfunctioning. It wasn’t the climate scientists who got their arses handed back to them on a plate. It was Clive Crook. I trust he’ll be grateful for the reminder.

It Is Not Just John Maynard Keynes, It Is Milton Friedman Who Is Being Thrown Over the Side

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Any time that the views of Milton Friedman are denounced as those of a left-wing semi-socialist kook, something has gone very, very wrong.

Has something gone very very wrong? Yes, it has.

Landon Thomas covers the train wreck, but does not include my observations about not Keynes but Friedman:

Cuts in Britain Ignore Views of Keynes: The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.... George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch. He argued forcefully that Britons, despite stumbling growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle classes because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit.... [A]cross Europe, where the threat of a double-dip recession remains palpable, what is most surprising is not simply that governments from Germany to Greece are slashing public outlays but that the debate hinges more on how fast to do so....

“Everything Keynes established about the primacy of maintaining demand at a steady pace is gone,” Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully. “Europe obviously thinks it can focus on sound finances while the U.S. manages world demand,” he said in a telephone interview, “but unfortunately we are not doing that.”...

[I]n Europe there is hardly a policy maker to be found who is making the argument that governments need to spend more, not less. This is particularly true in Britain, where a combination of collapsing tax revenues and government spending to prop up banks and support the unemployed during the financial crisis has contributed to a budget deficit equal to 11 percent of G.D.P., second highest in Europe after Ireland....“In the U.S., central bank memory is ingrained in the Depression, while in the U.K. it is being bailed out by the I.M.F.,” said Michael Saunders, an economist with Citigroup in London. “That gives policy makers different sets of priorities.”... An opinion poll on Sunday revealed that while the public worries about the fairness of cuts and the government jobs to be lost, 45 percent supported the program, with 23 percent opposed...

So let me add the rest of what I said that Landon Thomas should have included in his article. Let me point out that it is not just Keynes that is being thrown over the side, but Milton Friedman and his teachers--most notably Jacob Viner--as well.

And let me doing so by turning the microphone over to Milton Friedman and listen to what he says of those who preach fiscal (and monetary!) austerity during depression:

[A] debate on Keynes between Abba P. Lerner and myself... in the late 1940s.... Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom... that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by "easy money" policies thereafter; that the only sound policy was to let the depression run its course, bring down money and costs, eliminate weak and unsound firms.... It the was London School (really Austrian) view that I referred in to my "Restatement" when I spoke of "the atrophied and rigid caricature [of the quantity theory]... described by the proponents of the new income-expenditure approach, and with some justice."...

The intellectual climate at Chicago had been wholly different. My teachers... blamed the monetary and fiscal authorities for permitting banks to fail.... [T]hey issued repeated pronunciamentos calling for governmental action to stem the deflation... "large and continuous deficit budgets to combat the mass unemployment and deflation of the times... Federal Reserve banks systematically pursue open-market operations with the double aim of facilitating necessary government financing and increasing the liquidity of the banking structure." ... Keynes had nothing to offer those of us who had sat at the feet of Simons, Mints, Knight, and Viner....

[A] talk Viner delivered in Minneapolis on February 20, 1933, on "Balanced Deflation, Inflation, or More Depression."...

It is often said that the federal government and the Federal Reserve system have practiced inflation during this depression no and that no beneficial effects resulted from it. What in fact happened was that they made mild motions in the direction of inflation, which did not succeed in achieving it....

[If] a deliberate policy of inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks...

Why Are Clarence and Virginia Thomas Still Harrassing Anita Hill?

Andy Borowitz has the how-to-deal-with-the-situation guide:

News Desk: Shouts & Murmurs: Three Things to Do When Clarence Thomas’s Wife Calls You: Like many Americans, over the past several years I have been the recipient of multiple unwelcome voicemails from the wife of Supreme Court Justice Clarence Thomas. These calls have come in the middle of the night, at the crack of dawn, even at the dinner hour favored by telemarketers. Regardless of the time of day, all of these voicemails have one thing in common: she always sounds like she’s drunk-dialing me, except she appears to be completely sober.

I know what you’re saying: “It’ll never happen to me. Virginia Thomas doesn’t even have my phone number!” Well, that’s what I thought, and several years of trauma counseling later, I’ve come to realize (the hard way) what a fool’s paradise I was living in. Consider this: according to a recent study, the odds of Virginia Thomas leaving a threatening voicemail for you are higher than those of Christine O’Donnell correctly identifying the First Amendment. With those grim statistics in mind, here are three simple steps you can take if and when Mrs. Clarence Thomas calls:

  1. Start apologizing the moment you hear her voice. Remember, like a bear at a campsite, Virginia Thomas does not want to eat you, she’s only after your food, and in this case, your apology is the only thing protecting you from Mrs. Thomas mauling you to death. If apologizing does not work, clap your hands loudly into the receiver in the hopes of scaring her away.

  2. When she says, “This is Virginia Thomas,” reply, “No, this is Virginia Thomas. Who’s calling? Wait a minute—is that you, Anita Hill?” When she denies being Anita Hill (and she will), say, “There you go again, with your infernal lies. This is like Clarence’s confirmation hearings all over again. You disgust me, Anita Hill.” With any luck, accusing her of being Anita Hill will disorient her long enough for you to summon help.

  3. Get in the habit of answering your phone, “Long Dong Silver residence.”

One final note: if you get a call in the middle of the night and there is silence on the other end, that is not Virginia Thomas. That is Clarence Thomas.

Barack Obama Is Once Again Far Off Message

Ezra Klein watches the train wreck:

Ezra Klein - Why does Obama keep telling reporters there are 'no shovel-ready projects'?: Perhaps I should've written this post before interviewing Jared Bernstein, the vice president's chief economist, on the same subject. But if you read that interview closely, you'll see a White House that doesn't exactly know what to do with the president's comments. The administration doesn't think the stimulus failed. At the end of the day, the law met its spending targets. As promised, it dispensed with 70 percent of the funds within two years. Most of the remaining money will pay out when projects that are underway reach completion. Today, the White House released a video in which Austan Goolsbee, the chairman of the Council of Economic Advisers, argues that the intervention saved the job market (though by looking only at private-sector jobs, he stacks the deck, as the public sector is where recent job losses have been concentrated).

So why did the president tell Peter Baker -- and before him, David Brooks -- that there are no "shovel-ready programs"? Those were three of the most important words used to sell the program -- and the president's decision to walk them back is giving plenty of ammunition to his enemies. And shovel-ready is not a controversial concept: It's what Rep. Pete Sessions, the Dallas conservative, called his city's rail project when he wrote Transportation Secretary Ray LaHood asking for some of the stimulus funding that he opposed.

And Sessions is no isolated case: Over the past two years, the stimulus has funded more than 15,000 transportation projects. In total, it's funded more than 75,000 projects. Those efforts weren't ready for shovels the morning after the bill passed, but it didn't take more than a couple of months to break ground on many of them, and all of them hit within the stimulus's two-year target range.

And even if the president was disappointed by the progress, why is he giving ammunition to the stimulus's critics only weeks before the midterm election? He couldn't have told Baker they'd conduct the interview Nov. 3?

The big news on the stimulus going into November should've been this report from the Center for Public Integrity pulling together the many, many letters Republican lawmakers sent asking the administration to use the stimulus to fund projects in their district and saying, forthrightly, that those projects would create jobs and improve the economy. Obama should be going around the country, setting up a podium at each of those projects and making clear just what it is the stimulus did, and just what it was that Republicans opposed. Instead, he's telling reporters that the foundational phrase of his sales pitch for the stimulus was a mistake, which implies to voters that the Republicans are right when they say the stimulus didn't work.

File this one under "unforced errors," I guess.

And here is poor Jared Bernstein trying to deal with the damage:

Ezra Klein - Are there 'shovel-ready projects?' An interview with Jared Bernstein.: Ezra Klein: The president has now told at least two journalists that "there’s no such thing as shovel-ready projects.” He obviously believes it. But what, exactly, does he mean?

Jared Bernstein: The president definitely had some initial frustration that projects were taking longer to get up and running than he wanted. About 100 days into the stimulus, the president and the vice president spoke to the agencies about speeding things up and laid out ambitious targets. And ultimately, they met and exceeded every one of those targets. The fact is that there are more than 75,000 infrastructure projects up and running today and creating jobs.

EK: What were the targets? How did the White House judge whether the stimulus was working?

JB: The most salient target was to spend 70 percent by September 30th, 2010. And we hit that target. We expected to have saved or created around 3.5 million jobs by this point, and according to the estimates of outside evaluators like the Congressional Budget Office, we hit that target, too. If you want more targets, read the report from the vice president that we released last week. It lists more of the specific goals the president set at that 100-day mark, like seeing 100 airports being improved, 1,500 highways being improved, 360 military facilities being repaired, and many more, by September 2009. And the agencies met or exceeded every one of those goals.

EK: You said you've spent about 70 percent of the money in the first two years. Where's the other 30 percent?

JB: The rest of that money is obligated, meaning that it's supporting projects that are under contract but are not yet completed. The way the spending works is that we don't provide the final check until the project is done. Just like if you pay someone to add on to your house, you make some initial payments, but you don't let go of all the money until the project is done. So the majority of that 30 percent are payments to come for projects that aren't finished. Then there are some tax receipts that are slotted to pay out over the next few months and things like Medicaid and food assistance.

EK: None of this really explains Obama's disappointment with shovel-ready projects. You're saying the work fulfilled expectations. He keeps telling reporters that it didn't.

JB: Very early on in the Recovery Act, the VP went to visit this bridge in Pennsylvania that was a good candidate for repair. He asked “how shovel-ready is it?” It happened that the engineer was there and said, “hold on, I’ve got the blueprints right over here in my car.” He actually got them and showed them to the VP. They quickly got a transportation grant to fix the bridge but didn’t start construction for a few months because the local government didn’t want to have to divert traffic patterns until the summer. Now the project is completed. That’s just the way these things unfold sometimes. There’s often going to be some wiggle between approval and shovels in the ground. The point is there are now tens of thousands of projects creating good jobs and we should build on that momentum.

EK: The White House is asking Congress to put in a lot more money for infrastructure repair. But a lot of my readers are skeptical. We've spent more than $100 billion, we've started more than 75,000 projects, we're skeptical that this spending can come online as quickly as we'd like to see it move. Is there really more to do, and can it be done in an effective manner?

JB: This isn't hard to conceive of once you spend some time in this world: One program I liked in the Recovery Act was the 48C tax credit to incentivize the production of clean energy manufacturing products here in the United States. Thanks to this program, we've broken ground on nine new advanced-battery factories, and we think we can double that in the next few years and give the U.S. a global footprint in that industry. The smart grid program installed more than two million smart meters. There's just so much to be done in the infrastructure space, whether that's repairing our infrastructure or building out things like smart-grid systems and high-speed rail.

Expansionary Government Spending to Boost the Economy Was Not Tried--Except, of Course, in China

Even More On The Origins of the Deficit -

Paul Krugman

Even More On The Origins of the Deficit - Let’s look at trends in GDP, spending, and revenues over two periods — one designed to capture “normal” growth, the other the economic crisis.... During the pre-crisis period, spending grew slightly faster than GDP — that’s Medicare plus the Bush wars — while revenue grew more slowly, presumably reflecting tax cuts. What happened after the crisis? Spending continued to grow at roughly the same rate — a bulge in safety net programs, offset by budget-slashing at the state and local level. GDP stalled — which is why the ratio of spending to GDP rose. And revenue plunged, leading to big deficits.

But I’m sure that the usual suspects will find ways to keep believing that it’s all about runaway spending.

Department of "Huh?": Do They Understand What's in the Health Care Bill? Edition


I don't know what the hell these people think that they are saying. There is no way that you can argue that, because of the health-care reform bill, workers who want minimum wage jobs will be unable to find them.

John Goodman:

The $6-an-Hour Health Minimum Wage | John Goodman's Health Policy Blog: Most people intuitively know that the worst thing government can do in the middle of the deepest recession in 70 years is enact policies that increase the expected cost of labor. Yet that is exactly what happened last spring, with the passage of the Affordable Care Act (ACA). How bad is it? Right now we’re estimating the cost of the minimum benefit package that everyone will be required to have at $4,750 for individuals and $12,250 for families.... In four years’ time, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour...

Arnold Kling:

Health Care Costs and Wages: John Goodman writes,

In four years' time, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour or about $27,331 a year. (I think you can see already that no one is going to want to hire low-wage workers with families.)

Read the whole thing. As you know, I have been making similar points, but I don't blame the new health care law so much. This is already an issue before the new law takes effect...

Tyler Cowen:

Marginal Revolution: Sentences to ponder:

In four years' time, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour or about $27,331 a year.

That's John Goodman, via Arnold Kling.

Repeat after me:

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

There is no employer mandate in the bill. Employers will still be able to offer workers $7.25/hour to work.

Department of "Huh?!": Tim Geithner Edition


Tim Geithner:

Dollar: Geithner Vows US Will Not Devalue Dollar: U.S. Treasury Secretary Timothy Geithner vowed on Monday that the United States would not devalue the dollar for export advantage, saying no country could weaken its currency to gain economic health. "It is not going to happen in this country." Geithner told Silicon Valley business leaders of devaluing the dollar.... "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive," Geithner added. "It is not a viable, feasible strategy and we will not engage in it." Answering audience questions before the Commonwealth Club of California in Palo Alto, he said the United States needed to "work hard to preserve confidence in the strong dollar."

Tim Geithner:

In a luncheon with Silicon Valley business leaders Monday, U.S. Treasury Secretary Timothy Geithner said the Chinese yuan is "significantly undervalued."... The G20 finance ministers and central bank governors at the meetings in Gyeongju, South Korea are expected to tackle head-on the disparities in currency policies that are distorting capital flows in the hopes of achieving a more coordinated approach. But U.S. officials have put most of the blame on China's highly restrictive exchange rate regime, which until recently had kept the yuan largely pegged to the dollar. The United States is pressuring China to allow the value of its yuan to rise to take some pressure off capital flows and to rebalance its economy away from exports.... Geithner said in Palo Alto that he believes China will continue to lift the value of its yuan currency to aid the rebalancing of its economy away from exports and toward domestic growth.

Asked how much higher China should allow the yuan to rise, Geithner said: "Higher." "You can't know how far it should go. What you know now is that it's significantly undervalued which I think they acknowledge and it's better for them, and of course very important for us, that it move. And I think it's going to continue to move," Geithner said.

Marty Peretz, Anti-Muslim Bigotry, Rand Paul, Jonathan Chait, and Tbogg

Tbogg writes:

Rand Paul Is A Filthy Genocidal Muslim Mudperson | TBogg: I just wanted to say something really horrible about Rand Paul... [that] would not upset the delicate sensibilities of The New Republic’s Jonathan Chait...

Jonathan Chait, you see, was upset because Rand Paul's opponent Jack Conway called Paul an un-Christian Aqua-Buddha worshipper:

Sympathy For Rand Paul: The ugliest, most illiberal political ad of the year may be this one, from Kentucky Democrat Jack Conway.... I actually don't doubt the implication of the ad, namely that Rand Paul harbors a private contempt for Christianity. He's a devotee of Ayn Rand, who is a fundamentally anti-Christian thinker. And much of Paul's history, which he is frantically covering up in an attempt to pass himself off as a typical Republican, suggests among other things a deep skepticism about religion. The trouble with Conway's ad is that it comes perilously close to saying that non-belief in Christianity is a disqualification for public office. That's a pretty sickening premise for a Democratic campaign.

But as Tbogg notes:

I figured that calling Paul a sub-human tent-sniffing camel-rapist would not upset the delicate sensibilities of The New Republic’s Jonathan Chait since it has never stopped Chait from cashing a paycheck signed by his boss Marty Peretz.

Here is Mark Feeney on the case of Marty:

After blog post, Peretz again in a firestorm: The scene at Harvard looked less like the ’10s than the ’60s. Students stood outside the Science Center chanting “Harvard, Harvard, shame on you, honoring a racist fool!’’ When Martin Peretz, the object of the protest, left the building that Saturday late last month, they trailed behind, heckling and taunting him through Harvard Yard.... Five decades ago, Peretz had been on the other side of the bullhorns and banners.... Now he was being denounced as an anti-Muslim bigot for comments he had written for his blog on The New Republic’s website.

"But, frankly, Muslim life is cheap, most notably to Muslims," Peretz, the magazine’s owner and editor in chief, wrote Sept. 4. "I wonder whether I need honor these people and pretend that they are worthy of the privileges of the First Amendment which I have in my gut the sense that they will abuse." A week later, Peretz apologized for the First Amendment comment....

More than 500 students at Brandeis University, Peretz’s alma mater, signed a petition calling on him to apologize, and Harvard withdrew an invitation for him to speak last month at the 50th anniversary celebration of the university’s social studies program.... Anti-Muslim sentiment has been on the rise.... [T]he Martin Peretz Undergraduate Research Fund would be announced to honor him and the social studies program. Peretz, as assistant professor then lecturer, had taught in the program for many years. The protest took place outside the program’s anniversary celebration.

"It’s like this was waiting to happen, almost," said Joseph Finder, a novelist and friend of Peretz’s since the early ’80s. "For so many years, he’s [ticked] off so many people with so many impolitic or outrageous statements. And there are a lot of people in the academy who are jealous of that power he has. Or there are journalists who didn’t get a job or he’s attacked before."... A sign of the eminence of Peretz’s friends is that $500,000 had been raised for Peretz’s Undergraduate Research Fund before the blog post. A sign of their devotion is that after the controversy started and there were calls for Harvard to reject the money another $150,000 was donated. (Harvard declined to dissociate itself from the fund.)

The man whom The Christian Science Monitor had described in 1974 as a "socialist millionaire professor" had come a long way. "The fact is that Peretz has the social and economic guns to be a bigot," Atlantic senior editor Ta-Nehisi Coates wrote on the magazine’s website last month, "to then be defended by even those who acknowledge his bigotry, and finally be honored at the highest levels of American academia."

Peretz’s Harvard proteges include Jamie Gorelick, a former deputy attorney general, film director Edward Zwick, CNBC personality Jim Cramer, and Washington Post columnist E.J. Dionne. A steady stream of talented Harvard students would move on after graduation to The New Republic, including future editors Michael Kinsley, Hendrik Hertzberg, and Andrew Sullivan....

Critics have charged him with being not just a defender of Israel, but also prejudiced against Arabs. In 2007, Glenn Greenwald, now a blogger for Salon, wrote on his website that "The New Republic is led by someone who harbors — and routinely expresses — what can only be described as pure bigotry towards Arabs and Muslims." Comments Peretz has made on his blog include the application of a barnyard epithet to the description of Jerusalem as "the third holiest city of Islam," on Sept. 8; writing in 2007 that "it is characteristic of the Arabs, who have almost no physicists to speak of... to make their politics a shabby substitute for science"; and to note of Arab extremists, in 2006, "I know that since their passions emerge from Muslim religious belief I should treat them with respect. I can’t. OK, why don’t you try?..."



Kevin Drum:

Is Gridlock Good?: The only other thing I can think of that the administration screwed up seriously is mortgage reform. Again, though, that would have been politically difficult even if they had played all their cards perfectly. Like it or not, the American public hates the idea of seeing their neighbors get bailed out from stupid mortgages. It makes them feel like saps: we scrimped and saved and bought a house we could afford and we're getting nothing. Joe and Betty down the street lived the high life, took out a NINJA loan they knew was way more than they could afford, and now they're getting a taxpayer-funded bailout and living easy. That's not a vote getter.

I think Bruce way overestimates the value of perception. Sure, a better communications strategy might have helped. Getting healthcare done faster might have helped. Beyond that, though, people are mostly reacting to actual pain, and there's surprisingly little Obama could have done about that. A gigantic stimulus and more aggressive action from the Fed might have done the trick, but Republicans and centrist Dems flatly wouldn't have allowed the former and the president has no leverage over the latter. Failing that, balance sheet recessions just take a long time to work through. There's not a lot Obama could have done to change that.

The Treasury had enormous flexibility and freedom to use TARP money to grease the deals for large-scale mortgage reorganization, even with cramdown. And it is hard to object to policies if the Treasury makes money on the deal.

The Obama administration in early 2009 was not nearly as constrained as Kevin Drum imagines.

Compound Interest and Social Discount Rates

John Holbo on Greg Mankiw:

Compound Interest, the Doctrine of Equivocation, and Social Discount Rates — Crooked Timber: In a sense the problem is this: on the assumption that future people are people, too, the wonders of compound interest make it seem insane to do anything but save for five centuries hence.

Indeed. If long-term real interest rates are as Mankiw describes them, then either the future must be so filthy rich and so satiated with wealth that there is no point in saving, or it is profoundly irrational to consume more than bare subsistence today because the opportunity cost in terms of how much you are impoverishing the future is so large.

The Fiscal Commission Was Another Enormous Unforced Obama Administration Error


Ezra Klein:

Ezra Klein - Americans prefer tax increases to benefit cuts: In Washington, the fiscal commission -- and the elite consensus -- favors sharp spending cuts over tax increases as a way to plug the entitlement hole. In the country, the preference is just the opposite.... [T]his holds true for every single age group. We're not looking at a situation where the elderly oppose benefit cuts in large numbers, but other demographics are more favorably inclined. In fact, it's the young who are most steadfastly opposed to benefit cuts:

The Federal Reserve Is Going to Wait Until After the Election to Move: Eighteen Months Late and at a Third of the Scale the Economy Calls For

The Unbearable Slowness of Understanding -

Paul Krugman:

The Unbearable Slowness of Understanding: [Sewell Chan's New York Times] article about how the Fed is gradually coming to realize that low inflation and a liquidity trap might be a problem fills me with despair. I mean, we’ve been there for two years.... Yet we’ve spent most of the last two years worried about the wrong things — inflation, crowding out, invisible bond vigilantes.

Even now, we get things like this:

Many economists remain confident that the United States will avoid the stagnation of Japan, largely because of the greater responsiveness of the American political system and Americans’ greater tolerance for capitalism’s creative destruction. Japanese leaders at first denied the severity of their nation’s problems and then spent heavily on job-creating public works projects that only postponed painful but necessary structural changes, economists say.

There are multiple things wrong with that paragraph — but what on earth would give one reason to consider our political system “responsive”? The truth is that we’re responding worse than Japan did.

And yes, I’m depressed about it.

Buce Asks: "Why Oh Why Can't We Have a Better Press Corps?" (Niall Ferguson/NPR Edition)


Underbelly: The Nation's Premier Broadcast Organization Takes a Dive Before Niall Ferguson: Faithful readers will recognize Ferguson as an entertaining teller of tales who has somehow developed the idea that he is a Man of Vision.   That's to be expected, I guess; once you bear the weight of two named Harvard professorships, it would be surprising if you retained any sanity at all.  So it is hardly surprising that we heard stuff like this:

He beat up on Paul Krugman for endorsing Depression-era deficit spending, without seeming to grasp that Krugman's complaint is that we spent too little in the Depression: caught between Roosevelt's diffidence and the counter-cyclic pressure from the states (sound familiar?) we were left with the need of a great war to bail us out.

He sniped about "Keynesianism" but than morphed into an attack on quantitative easing as if he can't tell the difference between fiscal policy and monetary --i.e., precisely the distinction that lies at the heart of the conflict between Keynes and his free-market critics.

He seems to be under the impression that the Depression was an era of isolated national, as distinct from global, markets.  Dear God, has this man never heard of the Gold Standard?

As I say, Ferguson can pontificate all he wants and nothing I can say will slow him down. But what was the reporter doing while all this was going on?  Twittering his publicist?  I should think that one of DeLong's Political Econ majors ought to be able to pick up on and challenge (seeming) absurdities like this. Why,oh why, as one might say, can't we have a better radio show?

Still, why the introductory hippy punching? Does Buce have to establish that he is a Serious Person?

I often think Brad DeLong goes over the top in his criticism of the press but I hope he wasn't listening to the NPR interview with Niall Ferguson (on All Things Considered) tonight or they would have had to call for the paramedics...

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

Dean Baker points out that David Segal over at the New York Times is not doing much better:

The White House KNOWS That a Foreclosure Moratorium Will Hurt Bank Profits, the NYT Doesn't Know What the White House Thinks: The mind readers at the NYT told readers that:

The Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy [emphasis added]."

It is easy to see how a foreclosure moratorium might hurt bank profits.... However, it is not easy to see the chain of events whereby a foreclosure moratorium hurts the broader economy. Certainly Housing Secretary Shaun Donovan couldn't produce a credible story in the piece in the Huffington Post cited in this article.

Donovan uses the absurd story of a young woman who just bought a foreclosed property who he claims would have been unable to achieve her dream of homeownership if a foreclosure moratorium were in place.

Huh? Doesn't the housing secretary know that there is a huge inventory of foreclosed homes that banks are holding off the market waiting for better times? If the pipeline of newly foreclosed homes was temporarily stopped by a moratorium, this inventory would easily keep the market well-supplied with foreclosed properties for long into the future.

And, wasn't one of the main purposes of HAMP to slow the process of foreclosure? The argument was that this slowing was necessary to stabilize the market. Does the Obama administration want to slow or speed up the process of foreclosure, or both? And are both essential for the housing market?

Yes, the Washington Post Should Shut Down Today (Why Oh Why Can't We Have a Better Press Corps?)

And anyone currently working for it who wants to retain their honor, or their reputation, or have a future in journalism should abjectly apologize and look for another job.

The Washington Post:

How not to help homeowners: Right now, the national home vacancy rate is about 10.9 percent -- well above the historical average of 7.7 percent.... [I]t will take until mid-2012 to work through this excess inventory, which amounts to about 4 million homes. Anything that delays this process also postpones the inevitable bottoming out and ultimate stabilization of the U.S. housing market -- and the resumption of broader economic growth. Indeed, banks have already aborted many sales because of concerns over documentation, costing would-be home buyers thousands of dollars each and leaving their families in limbo....

There are big lessons to be learned, especially about how mass securitization of poorly underwritten home loans may have swamped the states' antiquated, cumbersome property registration and foreclosure procedures. It is also true that the scandal underscores the failure of the Obama administration's efforts to prevent foreclosures....

The robo-signed affidavits at issue were part of a technical review of documents, not the actual determination of a borrower's delinquency. By the time robo-signers put pen to paper, default had been well established. An ironic consequence of diverting staff to fixing affidavits now is that it leaves fewer people to modify salvageable loans...

And Dean Baker comments:

Banks Can Hire More Workers: Tell the Post: The Washington Post apparently thinks that banks have a fixed number of employees. This is the only meaning that can be attached to their warning in an editorial arguing a foreclosure moratorium that: "An ironic consequence of diverting staff to fixing affidavits now is that it leaves fewer people to modify salvageable loans."

See, the way this would work is the banks would realize that they need more workers to handle the foreclosure process in a way that complies with the law. (You know, the law, what the rest of us have to obey.) The banks would run help wanted ads, maybe even in the Post, and employ some of the millions of people who have lost their jobs in the downturn. Hiring more workers would of course lower bank profits and dip into executive bonuses, but that is the way things are supposed to work in a market economy.

Yes, the Washington Post Should Shut Down Today (Why Oh Why Can't We Have a Better Press Corps?)

And anyone currently working for it who wants to retain their honor, or their reputation, or have a future in journalism should abjectly apologize and look for another job.

First we have Robert Samuelson:

Can the Fed still rejuvenate the economy?: It is widely, though not universally, assumed that the Federal Reserve will soon move to bolster the economy by trying to nudge down long-term interest rates.... [T]he move would be something of an act of desperation, reflecting a poverty of good ideas to resuscitate the economy.... Chairman Ben Bernanke makes periodic speeches arguing that the Fed still has ample policy tools to revive the economy and reduce the appalling unemployment, despite lowering its short-term interest rate to zero. The reality is otherwise; the Fed's remaining tools are arcane, weak, or both....

Still, there are dangers. When the Fed buys Treasury bonds, it pumps dollars into the economy.... [I]f all the cheap money spurs much higher economic growth, many of these reserves will turn into loans and raise the specter of higher inflation -- "too much money chasing too few goods."... [T]here would be enormous pressure on the Fed not to raise rates while unemployment remains high...

Growth strong enough that inflation begins to rise from its current suboptimally low levels is simply not a problem. It is an advantage.

UPDATE: Dean Baker is on the case:

Robert Samuelson is Worried More Quantitative Easing Could Spark Strong Growth: I'm not kidding, read it for yourself.... [W]e're sitting here in the most prolonged downturn since the Great Depression, with the inflation rate closing in on zero, and Samuelson is worried that we may get a burst of growth that could lead to higher inflation. Only in the Washington Post.

Fifty One Herbert Hoovers

Why Have Deficits Exploded? -

Fiscal Expansion on the spending side has simply not been tried.

Paul Krugman:

Why Have Deficits Exploded?: For all those commenters saying that we must have had a surge in government spending — I mean, look at the deficit! — a simple picture.

Government spending has continued to rise more or less on its pre-crisis trend. Revenue has plunged, because the economy is deeply depressed.

Other questions?

It May Be a Week or Two too Early to Assign This Problem, But...


Proposed additional problem for U.C. Berkeley Econ 1, Fall 2010, Problem Set 5:

12) Let us now leave Euphoric State and the town of Avicenna. Let us drive across the bridge over the bay to the city of Holy Frank. And then let us drive 50 miles south along the Royal Road to the town of Old Stick. In Old Stick we find Crony Capitalism University--endowed by one of the early governors of Euphoria with money he diverted from the railroad connecting the state of Euphoria with the outside world.

Let us say that every year 1000 freshmen arrive at CCU and all immediately think about buying a BMW convertible. They are, you see, mostly from Angel-Queen City and have not walked anywhere since they started kindergarten. CCU is half a long mile in the Euphoric sun down an avenue of palm trees from even the shops of Old Stick. Suppose that the selling price of BMW convertibles is $55,000. Suppose that each of the 1000 freshmen thinks that the value of a BMW convertible as transportation is $50,000. But there is a catch. Each student who owns a BMW convertible feels $10 worth of utility happier--call it spite--for each of his or her 1000 peers who does not own a BMW convertible. Each student who does not own a BMW convertible feels $10 of utility unhappier--call it envy, or regret--for each of his or her 1000 peers who does own a BMW convertible. Thus the first student to show up would feel no regret if he or she did not buy (for nobody else owns one) but would receive 999 x $10 = $9,990 worth of spite plus $50,000 worth of transportation if he or she were to buy a BMW convertible:

a) Will the first freshman student to show up at CCU buy a BMW convertible?

b) How many of the 1000 freshmen students to show up at CCU will buy BMW convertibles?

c) What will be the total consumer surplus received by the 1000 freshman students of CCU from their purchase of BMW convertibles?

d) Suppose that there is ample parking around CCU--this is suburban Euphoria, after all--but all of it is on university land. Suppose you are the chair of the Department of Economics at CCU, and the President of CCU asks you how much the university should charge freshmen for parking spaces. What do you think is the right price to charge for parking? And why?

Skeptical of the Federal Reserve


Matthew Yglesias writes:

Yglesias » Degrees of Monetary Skepticism: I had a little exchange on Twitter yesterday about “monetary policy skeptics”... it’s useful to draw some distinctions.... [Some] people... are “skeptical” in the sense of “skeptical that monetary policymakers will in fact do what’s necessary” (this is the view of Atrios, Goldman Sachs’ Jan Hatzius, etc.)[, while others are]... “skeptical” in the sense of “skeptical that monetary measures can be made to work” which I believe is the view of Mark Thoma and Dean Baker and others.... [A] lack of clarity on these points sometimes confuses people about what happened in Japan....

[S]ome readers... [think] that the Bank of Japan spent a lot of time trying to create inflation and failed. That’s not really what happened. Instead, the Bank of Japan spent a fair amount of time trying to fight deflation and had limited but real success. They always indicated, however, that they wanted “price stability” not inflation and certainly not catchup level-targeting of anything. This kind of stop/start policymaking does exactly what it’s supposed to do... it can’t really lift the price level or the economy. But that’s not to say policymakers don’t have the ability to say that unorthodox measures will remain in place until full employment resumes... they’ve simply chosen not to do so.

The two shade into each other. If the Federal Reserve could undertake small, simple, powerful interventions to return the economy to full employment, it would probably do so. But if it requires very large and very complicated interventions--well, is it because the measures it is willing to do are too weak too work, or is it because it is not willing to do what is needed? To some degree the answer is both.

And, no, I don't think buying $1 trillion of long-term Treasury and GSE bonds will do it. You are just acting on the duration and the government interest rate risk premiums, and that's probably not enough to give you real traction on the private spending side.

Blue Texan on the Republican Base

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At FireDogLake, Blue Texan:

All Together, Now: The Tea Party Isn’t About Economic Insecurity: In his op-ed today, the normally razor sharp Frank Rich makes the same mistake I keep seeing over and over from the chattering classes.

Don’t expect the extremism and violence in our politics to subside magically after Election Day.... The only development that can change this equation is a decisive rescue from our prolonged economic crisis.


Anyone who thinks the Teabaggers’ unhinged “anger and bitterness” will subside in the face of an improving economy really needs to take a closer look at objective polling on the Teabaggers and review the 1990s. The ’90s was a time of economic prosperity, but because there was a Democrat in the White House, the far-right was in full freakout mode. Back then, Clinton/Gore’s black helicopters were coming for their guns and right-wing “patriots” like Tim McVeigh and Eric Rudolph roamed the countryside. But they weren’t called the “Tea Party.” They were the Angry White Men.

These angry white men are one legion in a grassroots movement that has rewritten the political equation of the 1990s, and in the process helped to transform the Republican Party … An army of conservative grassroots groups has mobilised middle-class discontent with government into a militant political force, reaching for an idealised past with the tools of the onrushing future: fax machines, computer bulletin boards, and the shrill buzz of talk radio. They have forged alliances with the Gingrich generation of conservatives and strengthened their hand as the dominant voice within the GOP family.

Sounds familiar, yes? It’s the same crowd.... Teabaggers are lily white and well off... not the people getting kicked out of their houses... not unemployed... not bearing the brunt of the Great Recession. They’re just doing what they do when Democrats are in charge. Obama’s death panels and FEMA camps have replaced Clinton’s black helicopters.

And of course, the fact that this president’s middle name is Hussein and he’s Muslim and black, well, that’s just a few extra scoops of nuts on the wingnut sundae. These are John Birch Society types, and the crashing of the global economy — a direct result of the plutocratic “free market” [sic] orgy they helped usher in — is just a convenient excuse to act out. That’s all it is.

Liveblogging World War II: October 17, 1940


Wendell Willkie:

: I AM delighted to be here in St. Louis. I have a very pleasant recollection of my visit here prior to the Republican National Convention. Tonight I want to talk to you upon a subject about which my convictions are very deep and very strong. It is of course true that the people who live on the sea coasts of these United States, on the Atlantic and the Pacific, are closer to the problem of foreign affairs than are the people who live in the interior. But I am sure the people who live on the sea coasts will agree that a policy for the United States cannot be a true policy, it cannot be a realistic policy, unless it gives full expression to the ideals and the hopes of this great American interior....

[T]onight I want to confine my discussion to the last four or five years. In those four or five years the Administration in Washington has been very active in foreign affairs. It has been active, so it tells us, in promoting the cause of peace. And it has tried to persuade the American people of the wisdom of its foreign policy. There are some people in America today who admit frankly that this Administration has failed in its most elementary duties at home. They admit frankly that the New Deal has demoralized American industry, created widespread unemployment and brought America to the verge of bankruptcy. And yet these same persons tell us that this Administration has been so wise and so effective in its foreign policy that it ought to be re-elected for a third term....

I do not think the New Deal has been either wise or effective in foreign affairs. I do not think it has contributed to peace. As a matter of fact, I believe it has contributed to war. And I believe so because of a fundamental misunderstanding, a fundamental failure to understand, the role that America must play among the nations of the earth.... Winston Churchill in 1937... said that if the Washington Administration had permitted economic recovery in the United States Hitler would have been checked. But what did the Washington Administration do? Now please don't take it in the language of Wendell Willkie,take it in the language of Winston Churchill, one year later,namely, in 1938, and again I quote him. "Economic and financial disorder in the United States,"said Mr. Churchill in 1938, "not only depresses all sister countries, but weakens them in those very forces which either mitigate the hatreds of race or provide the means to resist tyranny. The first service which the United States canrender the world cause is to become prosperous and also to become well armed."...

Those oceans are indeed broad. We can say with the utmost confidence, standing here in the center of America: We do not want to send our boys over there again. And we do not intend to send them over there again. And if you elect me President we won't. But by the same token I believe if you re-elect the third-term candidate they will be sent. We cannot and we must not undertake to maintain by arms the peace of Europe....

The role of the United States among the nations is not the settlement of boundary disputes or of racial disputes. It is not the maintenance of a balance of power in Europe. The role of the United States... is to create purchasing power and to raise the standard of living, first for ourselves, and as a result of raising it for ourselves, thereby raising the standard of living for others. That is the aim. When we fail in that aim we weaken the democratic world....

What do we find standing between our free institutions which we cherish and the barbaric philosophy of slavery to the State? We find, we find Great Britain. We find the heroic British people standing... Canada.... Australia and in Asia. As we stand here looking out to the east and to the west we find the British people living on the very rim of our freedom. So I ask again: What is the role under these circumstances that the United States should play in this war-torn world? What is this role to which the New Deal says it is so indispensable?

Is it that we should send an expeditionary force over there? Is it that we should join again in a foreign war? Is that the role to which the New Deal thinks itself indispensable? Is that the reason for the provocative statements, the gratuitous insults, the whispers, the rumors that keep coming out of Washington? I ask the question frankly. I ask it in deadly earnest. Because you and I know that that is not our role. We cannot send an expeditionary force out to that rim. We have no such force. And even if we had that force it would do no good. It isn't what those people need. It isn't even what they've asked us for.

The reinforcement of that rim of freedom can be accomplished in one way. And only in one way. It can be accomplished only by a thing that the New Deal does not understand, namely, production. We must produce more, and more, and more. We must produce airplanes. We must produce hundreds of other things. That is our role. That is the role that we must employ to reinforce that rim of freedom.... We are not even making those things in any substantial quantity.... And why is this?... It is because for the past five years this Administration which knew, which could not help from knowing what was happening in the world, failed utterly and failed completely to grasp the real function of America in a war-torn world. This Administration failed to see—failed most tragically to see—that the key to war, as well as the key to peace, is America, American production, production....

[E]verything we send to Britain is a sacrifice to our own defense. We must make the awful choice as to whether to supply Britain or ourselves first. We cannot supply either one adequately, much less both. I have said before that I am in favor of aiding Britain at some sacrifice to our own defense program. But I want to point out here, that it is a sacrifice, and that sacrifice is entirely due to the New Deal's fault....

America has contributed to make this crisis in the world today. And the men responsible for that fact are the men of the third-term party, who are seeking re-election, strange as it may seem, on the international issue.... Our role, therefore, in peacetime is to produce, to raise the purchasing power, to lift the standard of living, not alone of ourselves but of others.... And our position in wartime is exactly the same. It is still production—production to reinforce the rim of freedom far beyond our borders. The failure of America to produce, whether in peace or in war, makes havoc of the democratic world.

Let us be very clear about that. The fact that the New Deal stopped the recovery that was coming about in 1937 helped wreck France and England and helped to promote Hitler...