Grasping Reality on TypePad, by Brad DeLong

Paul Krugman:

Axis of Depression: What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs.... It’s not as if the Fed is doing anything radical. It’s true that the Fed normally conducts monetary policy by buying short-term U.S. government debt, whereas now, under the unhelpful name of “quantitative easing,” it’s buying longer-term debt. (Buying more short-term debt is pointless because the interest rate on that debt is near zero.) But Ben Bernanke, the Fed chairman, had it right when he protested that this is “just monetary policy.” The Fed is trying to reduce interest rates, as it always does when unemployment is high and inflation is low.... So the case for Fed action is overwhelming....

But there are reasonable people — and then there’s the China-Germany-G.O.P. axis of depression.

It’s no mystery why China and Germany are on the warpath.... Both nations are accustomed to running huge trade surpluses.... The Fed’s expansionary policies... have the side effect of somewhat weakening the dollar... paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen....

But why are Republicans joining in this attack?

Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing.

Republicans, however, will have none of it, raising objections that range from the odd to the incoherent. The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation”... [not[ explain[ing] why we should fear inflation when the reality is that inflation keeps hitting record lows.... Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either.

So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Hence the axis of depression.... China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House...

Indeed, it is now clear that the right-wing objection to the policies of the Obama administration was not an objection to fiscal policy as an inappropriate policy modality for stabilizing nominal spending. It was, instead, an objection to the very idea that the government should try to serve as a stabilizing macroeconomic balance wheel.

The flow of economy-wide spending is low. Thus Ben Bernanke's Federal Reserve is moving to boost the flow. It is doing so by changing the mix of privately-held assets as it buys government bonds that pay interest in exchange for for cash that does not.

That is totally standard.

There is only slightly nonstandard thing. The bonds that pay interest the Fed is buying are not the usual three-month Treasury bills but seven-year Treasury notes instead. The Federal Reserve has to do this, because those are the shortest-duration Treasury bonds that now pay interest. It cannot reduce short-term interest rates below zero, and so it is attempting via this policy of “quantitative easing” to reduce longer-term interest rates.

And the right wing objects to this.

For decades I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. Governments pre-WWI and even more so pre-WWI did not take on the mission of keeping unemployment from rising high in economic downturns. Why not? There were three reasons, all of which vanished by the end of WWII.

1. There was then a hard-money lobby: a substantial number of very rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds. They had little--personally--at stake in a high level of capacity utilization and a low level of unemployment. They had a great deal at stake in stable prices. They wanted hard money above everything.

2. Back in those days the working classes that was hardest-hit by high unemployment did not generally have the vote. Where they did have the vote, they and their representatives had no good way to think about how they could benefit from stimulative government policies to moderate economic downturns, and they had no way to reach the levers of power in any event.

3. Knowledge about the economy was in its adolescence. Knowledge of how different government policies could affect the overall level of spending was closely held. It was--the American Free Silver Movement excepted--not the subject of general political and public intellectual discussion.

Today we have next to no hard-money lobby, for nearly everybody has a substantially diversified portfolio and suffers mightily when unemployment is high and capacity utilization and spending are low. Economists today know a great deal--albeit not as much as we would like--about how monetary, banking, and fiscal policies affect the flow of nominal spending, and their findings are the topic of a great deal of open and deep political and public intellectual discussion. And the working classes all have the vote.

But here we are, with Austerians. So cui bono? Who benefits from austerity in the U.S.? How in the North Atlantic can we have a large political movement pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register at the electoral polls? Why are politicians not terrified of their displeasure? And why are principles of nominal income determination that I thought had been largely settled since 1829 now not settled? Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that the first task of the government is to undertake strategic interventions in financial markets to stabilize the flow of economy-wide spending now a contested one?

Paul sees a material interest link: he sees German and Chinese governments that seek a continued large U.S. trade deficit to allow their export surpluses, Republican politicians who think trashing the economy is the way to majorities, and economists who think that supporting Republican politicians is the road to influence. I don't think that can be a complete explanation: very few people are comfortable living with the idea that they are villains wreaking destruction on the world for their own narrow advantage.

Thus I read Charles Calomiris's claim that it is inappropriate for the Federal Reserve to aim for a short-term nominal GDP growth rate above 5% per year no matter how high the unemployment rate, and I am simply bewildered...

Conor:

When California Flirted With Fascism | Politics | The American Scene: On several occasions, I’ve recommended Kevin Starr’s multi-volume history of California. Here’s a passage that is particularly striking, from page 176 of Endangered Dreams:

In early 1935 the City of Los Angeles established a Committee on Indigent Alien Transients, which reflected the bias of the city. Astonishingly, the committee openly defined an indigent alien transient ‘as being a transient entering the state of California without visible means of support and whose legal residence is foreign to the state of California.’ Thus the Committee, for all practical purposes, took California out of the Union. The City of Los Angeles would soon attempt to seize control of the state.

Long skilled in the techniques of rousting transients out of town after jailing them on vagrancy charges, the Los Angeles Police Department played an important role on the committee, on which the deputy chief of police sat as chairman. On 4 November 1935 the Committee on Indigent Alien Transients issued a report calling for the establishment of checkpoints manned by police and health officials at every major point of entry into the state. Transients who could not prove California residence, the report recommended, should be put into camps, preferably operated by the State Relief Administration, where they would be fingerprinted and their backgrounds checked for a criminal record. The report also called for “Vagrancy Penal Camps” for transients arrested on vagrancy charges. These penal camps would serve as labor pools for work upon roads, parks, and other public projects. Police should monitor all common carriers, railroads especially, and all main arterial highways in an effort to apprehend indigent alien transients seeking to enter the state. State and local officials, meanwhile, should form a statewide committee to supervise these activities: an extra-parliamentary task force responsible for sealing off the borders of California from transient migration.

Not surprisingly, these recommendations, offered with a straight face—with their suggestion of checkpoints, of preemptive arrests of those whose only crime was being poor in the Great Depression, of fingerprinting in forced labor camps, and, worse, of Vagrancy Penal Camps where thousands might be concentrated—did not meet with universal acceptance throughout the state. As paranoid as mainstream California might have become, it was not yet ready for such an unconstitutional, police state program.

Encouraged by local oligarchs, together with the City Council and the County Board of Supervisors, Los Angeles Police Chief James Davis, a spit-and-polish officer, resplendent in shiny black riding boots and a Sam Browne belt, brushed aside any constitutional scruples, of which the chief had few, and decided to go it alone. On 3 February 1936 Chief Davis dispatched 126 LAPD officers to sixteen crucial highway and railroad entry points throughout the state with orders to turn back any and all indigent transients who could not prove California residence. Within days, the Foreign Legion of Los Angeles, as it was soon called, had established checkpoints along the Oregon border in Del Norte, Siskiyou, and Modoc counties; in the central Sierra Nevada counties of Plumas, Lassen, Nevada, and Mono; in the city of Independence in Inyo County, and across the southern desert in the counties of San Bernardino, riverside, and Imperial. To maintain a semblance of legality, Chief Davis requested that his officers be locally deputized, which the sheriff of Del Norte County refused to do.

Among other things, this passage is a reminder that the current recession isn’t actually very much like The Great Depression, and that as astonishingly bad as today’s state and local officials are they’re not nearly so stark raving mad as the LAPD of old.

KD and DK:

Fed keeps its focus amid the criticism: The US is navigating tough economic times... the economy... is not growing fast enough to reduce very high levels of unemployment... considerable excess capacity in labour and product markets for some time to come... likely to keep inflation well below the 1¾ to 2 per cent level that Ben Bernanke, the chairman of the Federal Reserve, has identified as desirable.

In an action designed to improve the prospects for the economy, the Fed has announced a programme to expand its holdings of intermediate and long-term Treasury securities. This is intended to promote an easing in financial conditions, thereby boosting spending and promoting a return of inflation to a more desirable level....

Will these purchases lead to much higher inflation?... [I]ntense competition in labour and product markets has driven underlying inflation to its lowest level in decades. With these conditions unlikely to disappear soon, inflation expectations and inflation itself could fall further....

Will the purchases lead to adverse consequences for other countries that will overwhelm any benefits, even for the US? Lower interest rates on US Treasury securities... put downward pressure on the dollar’s foreign exchange value. Some decline in the currency’s foreign exchange value is a way that easier monetary policy has traditionally bolstered activity and prevented undesirable declines in inflation. A lower dollar along with lower interest rates and higher asset prices in the US are not ends in and of themselves but rather channels through which the US can achieve a more vigorous and sustainable recovery in the context of long-run price stability. This outcome is in everyone’s interest....

A good discussion of the Fed’s difficult policy decision certainly is in the public interest. But a discussion of this broader agenda would hold more promise than the finger-pointing at the Fed that has been so prominent in recent commentary...

I don't know. I do know that if I were an insurance executive it would take a lot of Dutch Courage to make me be the first to offer a first-dollar comprehensive plan through the exchanges.

Yet another reason it would be very good for every state to start up a public option--and tell the federal government it needs to help finance it or the state will wash its hands of the exchanges completely.

Aaron Carroll:

What will insurance in the exchanges look like?:  I was talking with some very nice insurance company executives and managers yesterday, and asked them about what they might offer in the exchanges.  It’s worth sharing some thoughts. The media, and thus the country, are fixated on the politics at a national level.  I’ve argued before that’s missing the point, as much of this will happen at a state level.  But I think we have spent far too much time discussing repealing or defunding the bill, and not nearly enough on what still needs to be done. For instance, we just told millions of people that they can go to the exchanges in 2014 and buy insurance.  There won’t be any lifetime or annual limits.  There won’t be denials for pre-existing conditions.  There won’t be any surcharges for having such conditions.  And it’s going to be “reasonably” priced.

I asked what insurance companies might offer under those conditions.  After all, if it were really that easy to offer comprehensive insurance at a real discount, someone would already do it. Such insurance is going to have to come with restrictions.  There might be network restrictions (such as seeing only certain providers).  There might be gateways people don’t like.  And there might be other rules in place that people don’t anticipate.

My conversations lead me to believe that many people are expecting that the plans offered in the exchanges will be Medicare-like in many ways.  I feel like many people think they will have choice of doctor, choice of hospital, and the ability to dictate care.  I’m not seeing how insurance companies will be able to offer such products at prices people can afford.  As I talk to more and more people in the insurance industry, my thoughts seem confirmed.

I may be wrong, but I think it’s worth addressing.  Mistaken expectations have been, and continue to be, a real problem in health care reform.

Hoisted from Comments: Crying "Fire! Fire!!" in Noah's Flood Watch - Grasping Reality with Both Hands: Davis X. Machina said...

Not salt water economics, nor even fresh water economics, but holy water economics.

I disagree with Austin. I think that this is surprising and disappointing.

Austin Frakt:

News flash: Government meddles with Medicare plan payments: This, from Julie Appleby of Kaiser Heath News, really is not surprising, but it is disappointing:

In a surprising move, the Obama administration will extend special bonus payments meant to reward top-performing Medicare Advantage insurers to those that score only average ratings. The three-year plan goes beyond what the health law called for in creating the bonuses. The law says bonuses, which start in 2012, would go to insurers that scored at least four out of five “stars” on a set of quality measurements. Instead, a “demonstration project” authorized by Medicare officials will extend bonus payments to plans that score at least three stars. Based on this year’s star ratings, the change means 62 percent of all Medicare Advantage insurers — representing 84 percent of enrollees — will qualify for the quality bonuses, compared with only 14 percent of plans under the health law provisions. [...]

The total cost over the three years is $1.3 billion. Wall Street likes it: Barclays Capital analyst Joshua Raskin, in a report, called the decision a “clear and unexpected positive” for managed care stocks. But some consumer advocates expressed skepticism, wryly noting that lowering the bar for bonuses reminded them of the fictional Lake Wobegon, where all the children are above average. [...]

“It’s only been eight days since the election,” Raskin wrote in his report, “but the rollback of Medicare Advantage cuts got its first step forward.”

There are several things not to like about this. First, high quality won’t be achieved by paying for mediocrity. Second, the cuts to MA were part of the funding for expansion of health insurance. That they’re unraveling is both a cost issue and a political one. Opponents of the ACA said that the assumed savings from Medicare is not believable. Congress or CMS always gives it away.... Even if this only gives back a tiny fraction of the savings expected from Medicare, it just looks bad and gives critics of the health reform law ammunition. Third, it’s just another piece of evidence that administrative pricing doesn’t work. Give administrators the authority to fiddle with payments and they’re too heavily influenced by those getting paid. This has been a problem in Medicare for decades....

When will we get serious about this stuff? It really matters and we’re blowing it!

Joe Klein:

Obsessed with the Deficit — and Ignoring the Economic Mess: Why are we spending so much time and effort bloviating about long-term deficits and so little trying to untangle the immediate economic mess that we're in?

Perhaps it isn't a coincidence that so many of the people whinnying the loudest are prominent members of the financial community, the sector that has had the most to do with hollowing out our manufacturing base and creating the Ponzi scheme in housing that caused the 2008 bust. After all that uncreative destruction, they need to polish their high-minded credentials. (See how some Americans are facing the prospect of long-term unemployment.).

There is, for example, Glenn Hubbard, who was featured on the New York Times op-ed page recently in defense of the deficit commission, describing the problem this way: "We have designed entitlements for a welfare state we cannot afford." This is the same Glenn Hubbard who served as George W. Bush's chief economic adviser when Dick Cheney was saying that "Reagan proved deficits don't matter." One imagines that if Hubbard was so concerned about deficits, he might have resigned in protest from an Administration dedicated to creating them. But, no, he's here to speak truth to the powerless — to the middle-class folks whose major asset, their home, was trashed by financial speculators, thereby wrecking their retirement plans and creating the consumer implosion we're now suffering. Hubbard is telling them they now have to take yet another hit, on their old-age pensions and health insurance, for the greater good.

The obsession with long-term deficits is not limited to conservatives. Exuberantly wealthy center-left types who staged a leveraged buyout of the Democratic Party's economic policies in the 1980s — people like the deficit commission's Democratic co-chair, Erskine Bowles — have been reliable foghorns for long-term middle-class sacrifice. They tended to be big supporters of the irresponsible federal lenders Fannie Mae and Freddie Mac, and most egregiously, they shepherded the deregulation of the financial sector through Congress in the late 1990s. But unlike the Republicans, they trend toward fiscal responsibility. Pete Peterson, a nominal Republican who is a leader of this group, is in favor of higher taxes for the wealthy, means testing for Social Security and Medicare, serious cuts in the defense budget — and even a provision that would tax the profits of private-equity moguls as regular income instead of capital gains, a proposal that his former partner at the Blackstone Group, Stephen Schwarzman, compared to Hitler's invasion of Poland in 1939...

From Wikipedia: Darrell Issa:

Issa was born in Cleveland... describes himself as having been "a rotten young kid." Issa dropped out of high school and at 17 enlisted for a three-year tour in the Army, serving as a bomb disposal technician. Issa further recounted being part of the security entourage for President Nixon during the 1971 World Series, despite Nixon never having attended the event. Issa left the Army nearly two years early after being stripped of his duties as a bomb specialist.

A retired Army sergeant claimed that Issa stole a Dodge sedan from an Army post near Pittsburgh in 1971. The sergeant said he recovered the car after confronting and threatening him. Issa denied the allegation and no charges were filed. In 1972, Issa and his brother allegedly stole a red Maserati sports car from a car dealership in Cleveland. He and his brother were indicted for car theft, but the case was dropped. That same year, Issa was convicted in Michigan for possession of an unregistered gun. He received three months probation and paid a $204 fine.

He attended Kent State University at Stark in North Canton, Ohio and Siena Heights College in Adrian, Michigan, on an ROTC scholarship, earning a bachelor's degree in business administration in 1976. Upon graduation, he was commissioned as an officer in the United States Army, serving as a tank platoon leader and a computer research and development specialist, among other command roles. He left the Army in 1980 with the rank of captain. He later moved to Vista, California, a suburb of San Diego, where he now lives.

On December 28, 1979, Issa and his brother allegedly faked the theft of Issa's Mercedes Benz sedan. Issa and his brother were charged for grand theft auto, but the case was dropped by prosecutors for lack of evidence. Later, Issa and his brother were charged for misdemeanors, but that case was not pursued by prosecutors. Issa accused his brother of stealing the car, and said that the experience with his brother was the reason he went into the car alarm business.

A day after a court order was issued, giving Issa control of automotive alarm company A.C. Custom over an unpaid $60,000 debt, Issa allegedly carried a cardboard box containing a handgun into the office of A.C. Custom executive, Jack Frantz, and told Frantz he was fired. In a 1998 newspaper article, Frantz said Issa had invited him to hold the gun and claimed extensive knowledge of guns and explosives from his Army service. In response, Issa said, "Shots were never fired. ... I don't recall having a gun. I really don't. I don't think I ever pulled a gun on anyone in my life."

Issa made his fortune through his company, Directed Electronics Incorporated, that is most famous for its flagship product, the "Viper" car alarm. It bears a siren that is a recording of Issa's voice saying, "please step away from the car." As of 2004, Directed Electronics was North America's largest aftermarket automotive electronics manufacturer. Issa divested personal interest in Directed Electronics after being elected to public office, but he is the richest member of the House and the second richest in all of the 111th Congress. He is worth an estimated $251 million.

Hungary joins the Axis of Evil:

The Axis Pact between Japan, Germany, and Italy, 1940:

The Governments of Japan, Germany, and Italy consider it as the condition precedent of any lasting peace that all nations in the world be given each its own proper place, have decided to stand by and co-operate with one another in their efforts in Greater East Asia and the regions of Europe respectively wherein it is their prime purpose to establish and maintain a new order of things, calculated to promote the mutual prosperity and welfare of the peoples concerned. It is, furthermore, the desire of the three Governments to extend cooperation to nations in other spheres of the world that are inclined to direct their efforts along lines similar to their own for the purpose of realizing their ultimate object, world peace. Accordingly, the Governments of Japan, Germany and Italy have agreed as follows:

ARTICLE 1. Japan recognizes and respects the leadership of Germany and Italy in the establishment of a new order in Europe.

ARTICLE 2. Germany and Italy recognize and respect the leadership of Japan in the establishment of a new order in Greater East Asia.

ARTICLE 3. Japan, Germany, and Italy agree to cooperate in their efforts on aforesaid lines. They further undertake to assist one another with all political, economic and military means if one of the Contracting Powers is attacked by a Power at present not involved in the European War or in the Japanese-Chinese conflict.

ARTICLE 4. With a view to implementing the present pact, joint technical commissions, to be appointed by the respective Governments of Japan, Germany and Italy, will meet without delay.

ARTICLE 5. Japan, Germany and Italy affirm that the above agreement affects in no way the political status existing at present between each of the three Contracting Powers and Soviet Russia.

ARTICLE 6. The present pact shall become valid immediately upon signature and shall remain in force ten years from the date on which it becomes effective. In due time, before the expiration of said term, the High Contracting Parties shall, at the request of any one of them, enter into negotiations for its renewal.

With respect to Charles Calomiris's claim that it is inappropriate for the Federal Reserve to aim for a short-term nominal GDP growth rate above 5% per year no matter how high the unemployment rate...

David Beckworth writes:

Macro and Other Market Musings: A Defection from the "Open Letter to Bernanke": Over at FrumForum, Noah Kristula-Green gets some of the Open Letter to Ben Bernanke signers to discuss their motivations for doing so.  One of the signers, Charles W. Calomiris, looks like he does not belong on that letter:

There are many reasonable alternative views on how to target monetary policy. I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II, at least for the moment, I would neither be raising or lowering interest rates....

If Calomiris believes in level targeting rather than growth rate targeting he definitely does not belong on that letter.  Below is a figure showing the level of nominal GDP, its trend, and its forecast through the end of 2011.  (Click on figure to enlarge.) The gap between actual and trend nominal  GDP in this figure is troubling, but more so is the fact that  it is projected to grow over the next year.  And yet folks are upset overQE2!  Nominal GDP is nothing more than total current dollar spending.  This is something the Fed can and should stabilize.  That real problem with the Federal Reserve is not that its doing QE2, but that it is failed to stabilize nominal spending in the first place.

But David has the wrong title. Charlie is not a defector from the anti-Bernanke letter. He signed the thing--and he clearly believes not in level-of-nominal-GDP targeting or in a mix but in growth-rate-of-nominal-GDP targeting alone.

God knows why anybody would ever believe that. But he does.

J. Bradford DeLong (1999), "Should We Fear Deflation?" Brookings Papers on Economic Activity 1999:1 (Spring), pp. 225-252:

[...]

J. Bradford DeLong and Lawrence H. Summers (1986), "Is Increased Price Flexibility Stabilizing?" American Economic Review 76:5 (December), pp. 1031-1044:

James Tobin (1975), "Keynesian Models of Recession and Depression," American Economic Review 65:2 (May), pp. 195-202:

John Maynard Keynes (1937), The General Theory of Employment, Interest and Money (London: Macmillan):

Gauti B. Eggertsson and Paul Krugman:

Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo approach: In this paper we present a simple New Keynesian-style model of debt-driven slumps – that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption: Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift, a Keynesian- type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

From my September 15, 2010 Econ 1 lecture:

Let me, once more, present to you how you should think about the topic of “depression economics.” This time, however, let me just provide you with the spine of the subject.

The US employment to population ratio over the last three years has crashed from 63.4 down to 58 point something percent of American adults. This collapse is not because we have forgotten how to make things. It is not because we’ve all decided we want to take longer vacations, or go back to school, or get in touch with our inner selves. It is not because our capital goods have mysteriously rusted away. This collapse in employment is the result of a collapse in spending, a generalized deficiency of aggregate demand, an excess of aggregate supply, pretty much everywhere in the economy.

There is only one sector I am aware of that is still at capacity: high-end restaurants within a mile of the capital in Washington DC. Those still appear to be at full employment and at full capacity. Nothing else in the economy is.

The question of why this should happen is an important one. Why should there be such crashes in the level of employment? How can it be that there is not enough spending, not enough demand in the system to put everyone who wants to work to work productively? Back in 1803 Jean-Baptiste Say observed that nobody makes except to use or to sell. and nobody sells except to buy. Thus, he argued there can be particular shortages of demand in some commodities balanced by excesses of demand for others. But “overall excess demand” is self-contradictory because everybody’s spending is someone else’s income and everyone’s income is then spent sooner or later on something. How is it that the economy can wedge itself into a position like it is in today? That is an important question.

And this question has an answer. The answer is that what we try to spend our money on does not have to be currently produced goods and services. Say’s Law says that if there is excess supply for something there has to be excess demand someplace else in the system is sound. But the excess demand does not have to be for currently-produced goods and services. The excess demand can be for financial assets. People can be trying to switch their spending away from currently-produced goods and services in order to build up the amount of financial assets they have.

That is what gets the economy wedged in a position of high unemployment—like it is today.

This is bad news for Say and good news for us. It is bad news for Say because it means there is a hole in his logic that the market system would always work well on a macroeconomic level. It is good news for us because it suggests a way to cure even a big down turn in employment and production. Such a downturn should have a cure in the form of a strategic financial intervention by the government. Find a way for the government to fix the excess demand in financial markets, and you fix the deficient demand for currently-produced goods and services—you fix the economy.

Historically, we have had three types of excess demand for finance that have produced big downturns in economies.

First, we have seen excess demand for bonds—for the pieces of paper corporations and the government issue that pay interest and eventually return your principal—for the savings vehicles that enable you to take your purchasing power, store it up, and use it in the future, with interest. When there is an excess demand for bonds—when planned savings is greater than planned investment—we then have downward pressure on the flow of currently-produced goods and services as individuals try to build up their stock of savings vehicles beyond what is possible. How large a downturn? We have a master equation from the income-and-spending approach to enable us to calculate how far the level of production will fall. We fix this kind of downturn by having the government do something to restore balance in the market for savings vehicles, the market for bonds. If it can reduce the demand for bonds or increase the supply, it can fix the excess demand for bonds and thus the deficient demand for currently-produced goods and services.

That is the type of downturn we saw in 2002. It is not the kind we have now. If it were, then bonds would be expensive—there would, after all, be high and excess demand for them. But right now risky bonds are cheap.

Second, we have also seen in history excess demands for liquid cash money. Such an excess demand produces a monetarist downturn as nearly everybody cuts back on their spending on currently-produced goods and services in order to try to build up their holdings of liquid cash money above what is possible. It is possible to tell when there is monetarist downturn: since everybody is trying to build up their stocks of liquid cash money, everybody is selling their other financial assets and thus their prices—stocks, bonds, whatever—and all their prices are low. That is not the kind of downturn we have today: today the prices of some financial assets—the liabilities of credit-worthy governments, for example—are very high.

In a monetarist downturn there is also a master equation to calculate the size of the fall in production: the quantity theory of money equation.

And here again we know how to fix the problem with the economy. If the Federal Reserve increases the stock of liquid cash money in people’s pockets enough by buying short term government bonds for cash, it relieves the excess demand for cash and so cures the deficient demand for currently-produced goods and services. That is the kind of downturn we saw in 1982.

Today, however, we have a third kind of downturn: a different kind of downturn than one generated by a shortage of money or of bonds, than a monetarist or a Keynesian downturn. We know we do not have a monetarist downturn because the prices of a number of non-money financial assets are very high. We know that we do not have a Keynesian downturn because the prices of some savings vehicles are very low. So what do we have?

We conclude that the excess demand in financial markets right now on the part of investors is an excess demand for safety: for high quality AAA-rated assets for people that hold in their portfolios. Prices of risky financial assets are low—there is no excess demand for them. Prices of safe financial assets are high—there is an excess demand for them.

Thus businesses and households have cut back on their spending on currently-produced goods and services as they all have concluded: “We don’t have enough safe assets in our portfolios. We need to stop spending so much until we build up our holdings of safe assets to a higher level.” And the fact that they cannot do so because there is a shortage of safe assets in the economy is what is keeping us wedged in this current situation of high unemployment and low capacity utilization.

Where did this excess demand for safe assets come from?

It came as a consequence of the deregulation of finance and of the securitization of mortgages, from the housing bubble and the crash, from the fact that then it turned out that investment banks that had created brand new derivative securities based on mortgages had not originated-and-distributed them but had, to a remarkable and astonishing degree, originated and kept them. They were supposed to sell off all the pieces o real estate risk in small bundles to savers all over the world. They did not.

When it turned out that these mortgage-backed securities were actually a lot riskier than had been claimed, the natural response was to fear. For not only were those securities exceptionally risky, but all debts of any financial organization thought to be holding any significant amount of mortgage-backed securities became risky as well. Thus the economy-wide supply of safe assets fell massively just at the very point in time when increasing uncertainty and the coming recession made everyone wish to hold more safe assets in their portfolios.

So what do we do now?

Cutting-edge macroeconomic theory—the theory of Say (1803) and Mill (1829)—tells us that we can fix the real-side economic downturn if we fix the excess financial market demand for safe assets. Successfully doing that would be a neat trick. Figuring out how to regulate financial markets so that we can keep it from happening it again would be an even neater trick.

So how is the government doing at this task?

There are two ways to look at it: half-full and half-empty.

The half-full way is that of Alan Blinder, adviser to the Obama campaign, and Mark Zandi, adviser to the McCain campaign. They have a paper claiming that if the government had simply stepped back in the fall of 2008 and let the economy “liquidate” itself, that right now our unemployment rate would be 16%.

The fact that the unemployment rate now is only 9.6% rather than 16%—Henry Paulson who was Bush’s secretary of the treasury and Tim Geithner who is Obama’s secretary of the treasury take pride in that as a substantial accomplishment: their policies have kept 6.5% of the American labor force from becoming unemployed.

The half-empty way is to say: “Wait a minute. The unemployment rate ought to be 5%. Even an generous estimate of how much extra structural unemployment there is in America today the unemployment rate should still not be much above 6%. But it is 9.6%. It is way above where it ought to be if the market were working smoothly and well. Policy simply has not done enough.”

That is the spine of the topic of depression economics.

New Deal or No Deal?: 3:30‐5:30 – Late Afternoon Session – STIMULUS & RESPONSE: Chair: Neil Fligstein, UCB:

• Bailouts & Financial Reform – Dean Baker, Center for Economic Policy Research, W.D.C.
• Is a New Financial Order Possible? – Barry Eichengreen, Economics, UC Berkeley
• Battered but Not and Beaten – Brad DeLong, Economics, Berkeley
• Job Creation & Destruction – Jesse Rothstein, Public Policy, UC Berkeley

Listen to the session

From Time:

BATTLE OF BRITAIN: Laws of War: Home Guardsman Harry Foulds was haled before the magistrates of Chatham, Kent, charged with theft from the Crown of a pistol, ammunition and a helmet which he had taken from a bailed-out German airman. Defense Counsel Gerald Thesinger based his case on Rex v. Broom, in the reign of William III, which was based in turn on a case tried during the reign of Henry VIII. These cases upheld the right of any British subject to retain any property he may be able to seize from "the King's enemy." "Therefore," argued Thesinger, "the property was never vested in the Crown."

Clerk of court: "Under your argument, Home Guards capturing tanks would be able to keep them?"

Thesinger: "Yes, subject to a military law which may apply to the capture of fortresses."

The magistrates upheld the 260-year-old decision of Rex v. Broom and freed Foulds, who was carried from the court by cheering crowds.

Josh Marshall on Glenn Thrush of Politico:

That's the Story? (#GalacticFail Edition): The Politico has a story up tonight [by Glenn Thrush] about how and why the bipartisan, everybody-get-along summit between President Obama and congressional Republicans ended up getting postponed... [becaues of] the GOP's distrust of Obama after he "crashed" their caucus retreat last January.... Now, because I think it's essential to understand the point, I'm going to quote the first three grafs of the piece [by Glenn Thrush] in full:

The roots of the partisan standoff that led to the postponement of the bipartisan White House summit scheduled for Thursday date back to January, when President Barack Obama crashed a GOP meeting in Baltimore to deliver a humiliating rebuke of House Republicans. Obama's last-minute decision to address the House GOP retreat - and the one-sided televised presidential lecture many Republicans decried as a political ambush - has left a lingering distrust of Obama invitations and a wariness about accommodating every scheduling request emanating from the West Wing, aides tell POLITICO. "He has a ways to go to rebuild the trust," said a top Republican Hill staffer. "The Baltimore thing was unbelievable. There were [House Republicans] who only knew Obama was coming when they saw Secret Service guys scouting out the place."

Honestly, I'm not even sure what to make of this. Not only does this version of events seem preposterous on its face, I didn't even realize this was their storyline. Let's start with this whole idea that Obama somehow just showed up and blew up their retreat. Crashed, ambushed, etc.... House Republicans invited Obama. And he accepted.... So was it an ambush? Well, My God, not even close. Here's the press release from Mike Pence, Chairman of the House Republican Conference, thanking the president on January 13th for "accept[ing] our invitation to meet with the Republican Conference later this month." And here's the Politico's write up... more than two weeks before these House Republicans who must have spent the month in a sensory deprivation chamber were stunned to see the president's motorcade driving up unannounced to crash their party. And if they'd forgotten here's the write-up from The Hill the day before the event:

Emboldened by an unexpected victory in Massachusetts and frustrated with a "partisan" State of the Union address, House Republicans are eager to meet with President Barack Obama on Friday.

So here they are all gunned up and eagerly awaiting President Obama's ambush of them that they didn't know anything about. I have to confess that I find it genuinely distressing that these folks can whip up a heap of blatant nonsense like this and it gets played pretty much at face value when a simple look through the archives of the half dozen or more sites that cover Washington show that the whole idea is laughable.

There are, I think, two possibilities:

1. Glenn Thrush does not think that checking what his own publication has written about the events is part of his job description.
2. Glenn Thrush wants to signal that he will whore for Republicans when asked.

In either case, we really deserve to have a much better press corps.

Biographical essay on Francis Y. Edgeworth:

In his boyhood at Edgeworthstown he would read Homer seated aloft in a Heron's nest. So, as it were, he dwelt always, not too concerned with things of the earth.

File Uploads:

• Summer Reading Assignment
• Syllabus
• Essay 1 Assignment

August 30: Introduction to Macroeconomics: Audio | Slides | Notes

• Articles for Section Oral Presentations: Section 2; Section 3; Section 4

• Ungiven NIPA/Circular Flow Lecture

September 1: Introduction to Depression Economics: Audio | Slides | Notes

• Articles for Section Oral Presentations: Sections 5-8

• Problem Set 1 (due September 15)

September 8: Downturns and Financial Markets: Keynesians and Monetarists: Audio | Slides | Notes

September 13: Dealing with the "Great Recession": Audio | Slides | Notes

• Problem Set 2

• Review of Depression Economics

September 15: Inflation Economics: Audio | Slides | Notes

September 20: Inflation Economics II: http://delong.typepad.com/econ_1_fall_2010/2010/09/files-for-september-20-econ-1-lecture-inflation-economics-ii-j-bradford-delong-uc-berkeley-fall-2010.html

• Solutions to Problem Set 1
• Problem Set 3
• Revised Econ 1 Syllabus
• Practice Midterm

September 22: Budget Economics: http://delong.typepad.com/econ_1_fall_2010/2010/09/files-for-september-22-econ-1-lecture-budget-economics.html

September 27: Budget Economics II:

• [Slides]20100922 for 20100927 Econ 1.pdf
• Six Lecture on Depression Economics: http://delong.typepad.com/econ_1_fall_2010/2010/09/six-lectures-on-depression-economics.html

September 29: Growth Economics: Background:

• Slides
• Audio

October 1: Pre-Midterm Review Session: http://delong.typepad.com/econ_1_fall_2010/2010/10/econ-1-pre-october-4-2010-midterm-review-session.html

More In-Section Presentation Articles:

• Section 13 (October 11-13): People making choices under constraints: “Box-office revenue up for 2009: It's not just higher ticket prices: More people are going to the movies, even as the recession has depressed consumer spending in nearly every other category,” by Ben Fritz. Los Angeles Times (December 14, 2009) http://latimes.com/business/la-fi-ct-boxoffice14-2009dec14,0,5678666.story
• Section 14 (October 13-18): A complex division of labor coordinated by a market: Leonard Read (1958), "I, Pencil" http://www.econlib.org/library/Essays/rdPncl1.html
• Section 15 (October 18-20): Supply and demand: “Food Prices Are Rising Worldwide: Weather, Oil Costs among Factors,” by Katherine Corcoran, Boston Globe, (March 30, 2008) http://tinyurl.com/8qkgnb
• Section 16 (October 20-25): Incentives and rewards: “In Praise of Price Gouging,” by John Stossel. Posted at Townhall.com, September 7, 2005. http://www.townhall.com/columnists/JohnStossel/2005/09/07/in_praise_of_price_gouging

October 6: Economic Growth II:

• Slides:
• Audio:
• Essay Assignment for October 13: http://delong.typepad.com/econ_1_fall_2010/2010/10/essay-assignment-for-october-13.html
• Section Assignments from the First to the Second Midterm: http://delong.typepad.com/econ_1_fall_2010/2010/10/section-assignments-from-the-first-to-the-second-midterm.html

October 11: Introduction to Microeconomics:

• Slides
• Audio
• Lecture Notes

October 13: Fundamentals of Supply and Demand:

• Slides
• Audio

• Lecture Notes

• Problem Set 4

October 18: Working with Supply and Demand:

• Slides
• Audio

October 20: Short Run and Long Run:

• Slides
• Audio

Problem Set 5

October 25: General Equilibrium:

• Slides
• Audio

October 27: Monopoly:

• Slides
• Audio

Problem+set+6-1

Monopolistic Competition:

• Slides
• Audio

Sample Midterm 2

Files for November 3 Lecture: Monopolistic Competition:

• Slides
• Audio

Solutions for Sample Midterm 2, and for Problem Sets 4, 5, and 6:

problem+set+4+solutions.pdf

problem+set+5+solutions.pdf

problem+set+6+solutions.pdf

Practice+Midterm+2+solutions.pdf

Files for November 10 "Externalities" Lecture:

• Slides
• Audio

Download Problem+set+7

Student Oral Presentation Articles for Week of November 15:

• Monday 1 PM through Wednesday 11 AM sections:
  • Edward Flattau: http://www.huffingtonpost.com/edward-flattau/externalities_b_778963.html
  • Don Cayo: http://www.vancouversun.com/technology/Cayo+Underpricing+nature+bounty+costs+trillions/3699974/story.html
• Wednesday 1 PM through Monday 11 AM sections::
  • Robert Frank: http://blogs.wsj.com/wealth/2010/11/09/giving-by-the-rich-altruism-or-just-a-tax-write-off/
  • Derrick Z. Jackson: http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2010/01/12/state_is_too_slow_in_banning_texting_while_driving/

November 15 "Public Goods and Asymmetric Information":

• Slides
• Audio

Friends really don't let friends vote Republican:

As Massachusetts Governor Romney noted when signing the Massachusetts equivalent of Section 1501:

Some of my libertarian friends balk at what looks like an individual mandate. But remember, someone has to pay for the health care that must, by law, be provided: Either the individual pays or the taxpayers pay. A free ride on the taxpayers is not libertarian.

Paul Krugman, last June:

Antipathy To Low Rates - : Richard Serlin, in comments at Mark Thoma’s place, makes a very good point about the efforts of Rajan and others to come up with a reason to raise interest rates even in the face of high unemployment and incipient deflation. He suggests that it reflects a general distaste for anything that looks like government intervention to support the economy:

I think the thinking of the libertarians and freshwater believers is that if there’s a recession, then the free market has a good reason for it. It’s a “real” business cycle phenomenon, and the best thing to do is let the free market have its recession or depression for as long as the free market wants (and we had some doozys before Keynes, and often). The Fed shouldn’t tamper with the free market, just like the fiscal branch of government shouldn’t. The Fed should just maintain zero inflation, or go on the gold standard. It shouldn’t try to manipulate the interest rates of the free market, or get involved in business cycles at all.

That sounds about right. The attitude on display from quite a few economists bears a distinct resemblance to Depression-era liquidationism, as described in Brad DeLong’s excellent but somehow never published book on the economic history of the 20th century:

the unwillingness to use policy to prop up the economy during the slide into the Depression was backed by a large chorus, and approved by the most eminent economists.

For example, from Harvard Joseph Schumpeter argued that there was a “presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future.” From Schumpeter’s perspective, “depressions are not simply evils, which we might attempt to suppress, butforms of something which has to be done, namely, adjustment to change.” This socially productive function of depressions creates “the chief difficulty” faced by economic policy makers. For “most of what would be effective in remedying a depression would be equally effective in preventing this adjustment.”

And Hayek found it:

still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production.

These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.

November 12, 2004:

Brad DeLong's Semi-Daily Journal: A Weblog: Let Us Give Thanks (Wacht am Rhein Department): Daniel Drezner writes:

danieldrezner.com :: Daniel W. Drezner :: The dogs that don't bark in international relations: Newspapers, media outlets -- and, because we feed off them, blogs -- tend to focus on the violent hot spots in international affairs. This is entirely appropriate -- but occasionally, it's worth stepping back and remembering that there are parts of the globe where everyone has expected and predicted things to go "BOOM!" -- and yet, in fact, conditions have improved.

Yes. Let us give thanks that the most brutal and blood-soaked border in the world is quiet--a border inhabited on both sides by those bloodthirsty peoples who have been numbers one and two in terms of the most effective killers of foreigners for centuries.

Who am I talking about? The Germans and the French, of course

It is now 59 years and 9 months 65 years and 9 months since an army crossed the Rhine River bearing fire and sword. This is the longest period of peace on the Rhine since the second century B.C.E., before the Cimbri and the Teutones appeared to challenge the armies of the consul Gaius Marius in the Rhone Valley.

I wonder what they are? Perhaps: "Be a Minskyite!"?

The AEA Program

2011 AEA Annual Meeting Papers:

Jan 07, 2011 10:15 am, Sheraton, Governor's Square 15 American Economic Association

What's Wrong (and Right) with Economics? Implications of the Financial Crisis (A1) (Panel Discussion): Panel Moderator: JOHN QUIGGIN (University of Queensland, Australia) * BRAD DELONG (University of California-Berkeley) Lessons for Keynesians * TYLER COWEN (George Mason University) Lessons for Libertarians * SCOTT SUMNER (Bentley University) A defense of the Efficent Markets Hypothesis * JAMES K. GALBRAITH (University of Texas-Austin) Mainstream economics after the crisis

Mark:

Economist's View: Mankiw on QE2: Greg Mankiw:

QE2: ...I judge QE2 to be a small but risky step in the right direction.

Update: In his post, Mankiw says:

I do see some potential downsides.  In particular, the Fed is making its portfolio riskier.  By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.  If future events require higher interest rates, the Fed will end up making losses on its portfolio.  And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds.  Such a cash-flow deficit could potentially undermine the Fed's political independence (which is already not very popular in some circles).  Yet if the Fed tries to avoid these losses by failing to raise rates when needed, inflation could indeed become a problem down the road.  I trust the team at the Fed enough to think they will avoid that mistake.

Economics of Contempt emails:

Pretty absurd post on QE2 from Mankiw, don't you think? Calling the Fed the "hedge fund of last resort" is about as disingenuous as it gets. If the Fed is becoming a hedge fund, it's a hedge fund that only invests in Treasuries! Is Mankiw seriously worried about the risks of the Fed owning 10YR and 30YR Treasuries? I highly doubt it.

Seems to me that the risks of not doing anything about 10% unemployment are much greater than the risks of the Federal Reserve taking on a little bit of ten-year Treasury duration risk...

The Debt Commission Plan: No Deal

This comes from giving a fire chief's hat to a recidivist budget arsonist...

Double the money stock and you double nominal aggregate, Milton Friedman and Irving Fisher always says. And the first principle of monetarism is to keep nominal GDP on a stable growth path. Now Douglas Holtz-Eakin--who really does know better--says that Uncle Milton and Uncle Irving were wrong.

This is the most amazing thing I have seen... since John McCain picked Sarah Palin to be his running mate:

Noah Kristula-Green:

Fed Critics Argue Easy Money Won’t Fix Economy | FrumForum: On November 15th, the New York based think tank e21 released an “Open Letter to Ben Bernanke” criticizing the Federal Reserve’s intention of engaging in a policy of quantitative easing by purchasing $600 billion worth of U.S. government securities.... [T]he letter... did not [propose] alternative[s]....

FrumForum has been contacting the co-signers of the letter to find out what policies they would propose instead of monetary expansion.... Douglas Holtz-Eakin, President of the American Action Forum, told FrumForum that quantitative easing will not reduce unemployment or inflation.... He argued instead for a “pro-growth fiscal policy”, endorsing the tax reforms of the Bowles-Simpson deficit commission....

Nicole Gelinas of the Manhattan Institute argued... “The Fed should not try to be heroic in the absence of functional politics (on both sides).”... Gelinas called for solutions that bypassed the monetary policy apparatus. She called for regulators to “do their jobs when it comes to making sure that financial institutions are operating prudently and soundly” with a focus on getting foreclosures on defaulted homes....

Get rid of the bad debt, allow house prices to hit bottom, help harness future state and local government liabilities, invest in infrastructure, and create some semblance of market disciple for the financial industry, and you’re on your way to an end to the unemployment crisis.

Gregory Hess of Claremont McKenna College... [said] there was no role for monetary stimulus, “QE2 by the Federal Reserve will likely cause volatility in long term asset markets.... The reasons that banks do not want to lend and firms are hesitant to expand their activities is because of the rising size of government (which portends higher tax rates), the expiration of the tax cuts under President Bush, and the lingering air of economic uncertainty. These all inhibit growth....

Charles W. Calomiris... [said]....

I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II.... If there were evidence of a need for further loosening to raise the growth of nominal GDP... some quantitative easing might be a reasonable proposal....

Funny. I don't remember Charlie calling on the Federal Reserve to raise interest rates in 1983-1986 when Reagan was president and nominal GDP was growing at more than 10% per year...

Ronald I. McKinnon... argued for a gradual increase of short-term interest rates... the current regime promoted “a flood of hot money” into markets in Asia and Latin America....

David Malpass argues that the crux of the debate is that quantitative easing represents an expansion of “big government”:

[U]nless Fed asset purchases are in some way necessary to the economy’s survival, the assumed harm from an expansion of government, which is at the core of our principles of limited government, argue against Fed asset purchases...

This fishwrap is wrapping a fish--a Stanley Fish, that is--that smells well-past its sell-by date.

Felix Salmon does the intellectual garbage collection:

The rhetoric of tuition inflation: Let’s say I earn $50,000 a year, and a widget costs $1,000. Then my pay goes up 3%, while the cost of the widget goes up 10%—year after year. Would you say that the widget has been getting more affordable over time? Stanley Fish would. Fish is approvingly citing a new book from Robert Archibald and David Feldman, which he quotes saying that “for most families higher education is more affordable than it was in the past.”... I fear to think what statistical sleight-of-hand might be hidden in [Fish's] qualifier about “over long stretches of time,” especially since in recent years real college costs have continued to rise fast even as real median incomes have gone nowhere or shrunk. But in general this approach to gauging affordability is absolutely bonkers.... [A]nything can be considered “more affordable than it was in the past.” If the widget rises in cost by $100 and my annual pay goes up by $1,500, that does not in and of itself settle the question of whether the widget has become more affordable. What’s more... Fish’s take does seem to be at odds with its official blurb:

A technological trio of broad economic forces has come together in the last thirty years to cause higher education costs… A college education has become less reachable to a broad swathe of the American public.... This affordability problem has deep roots...

I’m also completely unconvinced by Fish’s explanation of the main reason behind cost inflation at colleges: "Chief among these is the change in the sophistication and cost of the technology that has at once transformed the setting of higher education and become one of the areas of knowledge higher education must impart to students."... [C]omputers are more expensive than pencils, and it’s surely true that some part of the typical college-tuition fee is spent on information technology. But we’re talking about fee inflation here: in order for Fish’s argument to hold water, IT costs at colleges would have to be rising faster than inflation year in and year out. Which strains credulity in a world where IT is getting steadily cheaper.... The fact is that technology is a way of reducing the costs of education much more than it is a factor in their growth...

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

Reclaiming our future

They call it a "debt reduction sales tax."

I am skeptical because one of the heads of the enterprise--Pete Domenici--is another Republican budget arsonist who now wants to wear a fire chief's hat. I cannot remember Domenici voting against any major Republican initiative that broke open the deficit or voting for any major Democratic initiative that reduced the deficit in all his time in Congress. A willingness to put your vote on the line for deficit reduction should be a precondition for "bipartisanship" on the deficit. And I do not think Domenici meets it.

Still, looks like a vast improvement over Simpson-Bowles...

The speed and extraordinary casualness with which the Pointless Pain Caucus is throwing overboard two hundred years of monetarist insights that proper macroeconomic policy is for the central bank to intervene strategically in financial markets to keep the flow of nominal spending on a stable path--that is amazing.

That it comes about as every day brings us more news of aggregate demand shortfall is mind-blowing.

Alan Rappeport:

Core US inflation falls to record low: Living costs in the US have been held down by a weakened economy in the past year, with prices for most goods and services recording their smallest annual rises on record in October. Signs of weak inflation will buttress the argument made by the Federal Reserve that it has leeway to engage in more quantitative easing without causing prices to overheat.... Labour department figures showed on Wednesday that the “core” consumer price index, measuring prices for US goods and services excluding food and energy, rose just 0.6 per cent year on year in October. That was weaker than economists had expected and marked the smallest such increase since records began in 1957.

“Today’s CPI report feeds into growing concerns that inflation is stabilising at a level too low for the comfort of the Fed,” said Michael Woolfolk, analyst at BNY Mellon Global Markets. From September to October, core prices remained unchanged for the third consecutive month. Falling prices for cars, trucks and clothes kept costs in check as businesses were forced to offer deep discounts to clear inventory. Overall, the CPI rose by 0.2 per cent in October and was up 1.2 per cent compared with the same month a year ago. The rise was fuelled by a 2.6 per cent monthly increase in energy costs, which have been inflated by higher petrol prices. Adding to price pressures was a tepid increase in housing costs. Rents account for about 40 per cent of the CPI and only rose by 0.1 per cent in October.

In another sign of trouble for the US housing market, the commerce department reported that new home construction fell to its lowest level in 18-months, as a glut of homes already on the market weighed on building activity. Housing starts fell by 11.7 per cent to an adjusted annual rate of 519,000 last month. That was the lowest level since April 2009 and left starts down by nearly 2 per cent compared with the same month the previous year...

Hoisted from Comments: Kevin Quinn writes:

Seminar: Matt Ridley: How Prosperity Evolves - Grasping Reality with Both Hands: Like James C. I find it prima facie puzzling that Smith appeals to what he clearly means to be a "disposition to truck and barter" for its own sake. Why isn't self-interest plus differences in opportunity costs across people enough to get the ball rolling? Here is what I think is the answer: Smith sees most of the differences between people in productive ability to be the result of, not the pre-condition for specialization. I become good st x by specializing in x as you become good at y by specializing in y. So Smith wants, in effect, to rule out the sub-optimal equilibrium in which no one specializes, so there are no significant differences between us, so there is no incentive to specialize. That's what a non-instrumental propensity to truck and barter does - or so it seems to me.

Smith appeals to a natural propensity because he believes in a natural propensity.

"Self interest plus differences in opportunity cost" doesn't get the butcher providing you with meat in exchange for money: it gets the butcher slaughtering you, selling you as long pig, and then bribing the policeman to look the other way with an order of ribs.

And what "self interest plus differences in opportunity costs" gets you from the barber does not bear thinking about...

dr2blog does the intellectual garbage pickup:

David Brooks, dishonest or stupid, does it matter?: From today’s NYT editorial column (2010-11-16, no links for liars):

To start with, the economy has not responded as the modelers projected, either in the months after the stimulus was passed or this summer, when it was supposed to be producing hundreds of thousands of jobs.

So. What WERE the modelers saying, as far back as, say, Feburary 27, 2009?

We Are Going to Need a Bigger Stimulus: And he quotes Paul Krugman, who writes columns for the same section of the same paper as David Brooks:

Yikes. And if the data on new unemployment claims are any indication (which they are), the economy is continuing to plunge at least as fast. As Brad DeLong says, I think we’re going to need a bigger stimulus.

And then Brooks writes, “It’s been harder to dismiss morality as a phantom concern, too.”

I dunno. Works ok for him. Telling lies has always been a low act on my moral scale.

Duncan Black on the Obama Administration:

Eschaton: If Things Were Better They'd Be Better: There is a weird unwillingness to admit that maybe they got the policy wrong too. It's one thing to argue that they got the best they could get out of Congress, though I think that's a dubious claim too, but I think if I traveled back in time to January of 2009 and explained to them where the economy would be in November of 2010 and projected to be in December of 2011 they probably would have done some things differently.

He is commenting on Matthew Yglesias:

Yglesias » Obama’s Obsessive Focus: What I find more troubling is Obama’s remark about his obsessive focus on policy in his first two years in office. Politicians say things that aren’t true all the time, but what you really need to worry about is when they start believing those things. And this is the kind of self-pitying half-truth that I worry people in the White House actually believe.... The way this narrative goes is that the country was struck by a terrible economic crisis in late 2008. That crisis required measures that were unpopular but successful and the President is now paying the price for their unpopularity. There’s some truth in all of that, but the more important truth is much more simple if economic conditions today we good or rapidly improving, then the President would be popular and his anti-recession measures would be seen as vindicated. But conditions aren’t good, they’re not rapidly improving, and the President isn’t popular.

What’s more, whatever Obama was personally focused on “obsessively” it’s just not the case that the policy outputs of the Obama administration reflect an obsessive focus on improving the economic situation. The American Recovery and Reinvestment Act was deeply shaped by a desire to avoid politically damaging accusations of waste, fraud, and abuse rather than shaped to get maximum stabilization bang for the buck.

The administration forgot to appoint anyone to Fed vacancies for over a year.

And the Affordable Care Act is providing zero (if not negative) short-term stimulus out of a politically motivated desire to achieve a deficit-negative 10-year CBO score.

Duncan and Matthew are right. The Obama Administration was blindsided by the seriousness of the economic situation--their Plan A was OK given what they did not know in December 2008, but two months later it was clear that a Plan B was needed, and then a Plan C and a Plan D. And the Obama Administration never came out with any Plan B, C, or D for the macroeconomy other than "hope we get lucky."

Ezra Klein watches newly-elected Republican House member Andrew Harris (R-MD) demonstrate why he should immediately resign his post and let himself be replaced by somebody who is more intelligent:

GOP legislator frets over 28 days without insurance -- but what about 30 million he'd leave uninsured?: It's worth dwelling for a moment on the reaction of Rep. Andy Harris, an incoming legislator who staunchly opposes the new health-care law and ran promising its repeal, to news that he'd had to wait a month for his government-funded health-care benefits to kick in:

Republican Andy Harris, an anesthesiologist who defeated freshman Democrat Frank Kratovil on Maryland’s Eastern Shore, reacted incredulously when informed that federal law mandated that his government-subsidized health-care policy would take effect Feb. 1 – 28 days after his Jan. 3rd swearing-in. “He stood up and asked the two ladies who were answering questions why it had to take so long, what he would do without 28 days of health care,” said a congressional staffer who saw the exchange. ... “Harris then asked if he could purchase insurance from the government to cover the gap,” added the aide.

The point is... Harris's fear at being uninsured... whatever else you think of the health-care law, it really does keep people from being uninsured...

"Purchas[ing] insurance from the government to cover the gap" is what we call the "public option."

Ezra Klein reproduces a three-year old graph from the CBPP. It was from before the financial crisis--so that the level from which the debt-to-GDP ratio starts is some 25% higher than in the graph--burt a similar graph constructed today would otherwise look much the same:

At the far right of the graph we can see our long-run deficit problem, out beyond 2040. That is caused by rising projected government health-care spending and only by rising projected government health care spending. That is fixed by health-care reform and only by health-care reform.

In the short run, the deficit is not a problem but an opportunity. We want deficit spending now with so much slack in our economy and so many people unemployed.

In the medium run... well, as the chart shows, we don't have a deficit problem unless congress creates one by extending the Bush-era tax shifts without PAYGO.

Thus our medium-run deficit is easily dealt with: Obama promises to veto any bill that hits his desk that does not conform to PAYGO--that does not leave the national debt at least unchanged after a decade; and then Obama keeps his promise.

He can do it. He has the power. All it takes is a stroke of the pen.

"They did the mutagenesis. They created the mutant mice. But then they forgot to label the cage..."

That is all.

Atrios:

Eschaton: Grim: Philly Fed Survey of Professional Forecasters:

We are very happy to have Matt Ridley here, to talk about what I think is the foundational issue in economics. The very first paragraph of the second chapter of Adam Smith's Wealth of Nations says that economic prosperity rests on the:

division of labour... not originally the effect of any human wisdom... [but] the necessary... consequence of a certain propensity in human nature... to truck, barter, and exchange one thing for another...

The fact that human group sociability and solidarity is based on exchange rather than, as with chimpanzees, grooming each other or, as with dogs--well, I don't think I should go there--has, Adam Smith thought, extraordinary consequences. I think Smith was right. So does Matt Ridley. He is here to tell us about them.

Guardian review of The Rational Optimist:

Then we modern humans arrived, and within 100,000 years or so not only devised fish hooks and farming, but steam engines, cellophane and one-click buying. What makes us so different? Why have we come so far so quickly when our hominid predecessors were stuck in a rut for thousands of generations? Matt Ridley has a simple answer. Trade. As he sees it, we owe the forward march of humankind to the benefits of barter. Homo erectus had a large brain and probably a rudimentary language. But they never saw the point of making things they could swap. Once we cottoned on to this trick, there was no stopping us. I am dexterous but weedy. You are strong but clumsy. I make the hooks and you catch the fish – and together we achieve something that neither of us could manage on our own.

Ridley makes a strong case for this thesis. He takes us from the hunter-gatherers who first ventured out of Africa up to the modern moguls of Silicon Valley, and shows how humanity has built innovation on innovation in its never-ending search for new gizmos that people will want to buy. From this perspective, specialisation is the essence of humanity, and self-sufficiency a misguided myth. If you really had to make everything yourself, you would be back in the stone age, scrabbling around with hand axes. Far better to work at one thing and let the market supply the rest...

The problem with our economy is not that something bad happened to our productive capacity while the flow of nominal spending continued to blip along, it is that something bad happened to the flow of nominal spending and that carried real production and employment down with it. At the moment our flow of nominal spending at $14.7 trillion per year is some 12% below its pre-2008 trend. And in the absence of any 12% decline in prices and wages, that shortfall in spending has to produce our current macroeconomic distress: there is not enough "money" to support enough of a flow of spending to chase all the goods we could produce. We don't have a deficiency of real supply (for whatever reason). We have a deficiency of nominal demand.

That's what John Walter Bagehot would say. That's what Irving Fisher would say. That's what Jacob Viner would say. That's what Milton Friedman would say.

And they would say that it is a central bank's business to intervene in asset markets to boost the flow of nominal spending back to what everybody expected it to be and counted on it being

But now we have a bunch of economists and non-economists behaving very badly: saying not only that the government shouldn't boost its spending but that the central bank shouldn't buy bonds for cash either.

Paul Krugman does the intellectual garbage collection

Liquidationists of the World, Unite!: OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either. This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings... then declared in 2007 that there was no reason to worry about the credit market?

But the real question is, what is their model of the mess we’re in?... I know what my model is.... Obviously, these guys disagree. But what is their model? How do they think we got into a crisis that has depressed employment all around the advanced world? I don’t think they have an answer; I think all they have are wild stories about how Obama’s Sharia-law Marxism has unnerved business, or something, with the effects mysteriously spreading to Spain and Latvia.

And in the name of whatever it is they believe, they’re doing their best to ensure that the slump goes on.

Indeed. It is amazing.

Now Cliff Asness, Richard X. Bove, Jim Chanos, Nicole Gelinas, James Grant, Roger Hertog, Seth Klarman, William Kristol, David Malpass, Dan Senor, Amity Shlaes, Paul E. Singer, Peter J. Wallison, and Geoffrey Wood never bothered to learn the economics of Irving Fisher, Jacob Viner, and Milton Friedman, so they don't know any better,

But those who certainly do know better include Michael J. Boskin, Charles W. Calomiris, Kevin A. Hassett, Gregory Hess, Douglas Holtz-Eakin, Ronald I. McKinnon, and John Taylor certainly do know better.

And John F. Cogan and Niall Ferguson certainly ought to have learned enough by now to know better...

Hoisted from comments: ogmb:

Let No One Else's Work Evade Your Eyes!: Speaking of...

Already having been branded a liar by former Chancellor Gerhard Schröder, ex-US President George W. Bush's intelligence has now been questioned by Schröder's former spokesman. (...)

"We noticed that the intellectual level of the (US president) was exceedingly limited," Uwe-Karsten Heye, Schröder's former government spokesman, told the television news station N24 on Wednesday in reference to Bush. "As such, it was difficult for us to communicate with him." Heye continued: "He had no idea about what was going on in the world. He was so fixated on being a Texan. I think he knew every longhorn in Texas."

http://www.spiegel.de/international/world/0,1518,728482,00.html

The future is always uncertain--and how uncertain it is fluctuates. When the future is more than unusually uncertain, economic players want the security of extra financial asset holdings before they are willing to spend to put people to work. It is, then, the business of the government to make sure that they have the amount and the kinds of financial assets they need to sleep easily. That was one of the insights of John Maynard Keynes. That was one of the insights of Milton Friedman.

Uncertainty about the future cannot be eliminated. But its harmful macroeconomic consequences can be neutralized.

Matthew Yglesias preacheth the lesson:

Uncertainty and Aggregate Demand: [T]he notion that the economy is being held back by a mysterious increase in “uncertainty”... is no different from the standard Keynesian diagnosis. Indeed, Keynes himself put uncertainty front and center in his diagnosis of the business cycle....

Policymakers can’t make it cease to be the case that the future is uncertain. Policymakers can observe, however, that if economic actors’ level of uncertainty about the future increases that would manifest itself as an increased demand for money. Increased demand for money is a funny beast. Normally if demand for one kind of good or service falls, demand for other goods or services has to rise. But if what people demand is money itself then we find ourselves mired in a general glut, a shortfall of aggregate demand. Which is to say you’d be in just the normal Keynesian situation and you’d want to get out of it in just the normal Keynesian way—looser monetary and fiscal policy to bolster aggregate demand, soak up the excess capacity, and return us to a low-idleness equilibrium.

So if for whatever reason businessmen or politicians or media figures or anyone else feels more comfortable expressing the situation as one caused by “uncertainty” that’s fine. But the name of the game is still fiscal and monetary expansion. But instead the proposed cure typically seems to be “shift public policy in a more rightwing direction.” That wouldn’t do anything about uncertainty or a shortfall in aggregate demand. It’s just a faux-sophisticated way of saying “I’m a rich businessman who wants politicians to cater to my interests more.”

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

Clive Crook:

Clive Crook - How Obama should curb the deficit: As for the [Simpson-Bowles] plan, it is good.... One can quarrel with many items... and not just over details. The overall fiscal adjustment may be too mild. It takes decades to balance the budget (though public debt starts to decline more promptly). Also, the chairmen adopt the goal of holding revenues at no more than 21 per cent of gross domestic product indefinitely, without saying why. That number is questionable; so is the intention to hold it constant. Ageing of the population, by itself, will tend to push the revenue requirement higher...

One does wonder how Clive Crook thinks public debt can decline before the budget is balanced. If the budget is balanced, the public debt is constant. That is what it means to balance the budget: you don't have to sell extra bonds to raise the public debt.

Either he is using the wrong concept of "public debt," or he is using the wrong concept of "budget balance"--or both.

More important, perhaps, is that Crook says that the plan is both not bold enough and too draconian: the "fiscal adjustment may be too mild" but also "holding revenues at no more than 21 per cent o gross domestic product... is questionable.... Ageing... by itself... push[es] the revenue requirement higher..."

It's really not good when you find yourself saying that the meal is both too spicy and too bland.

Ta-Nehisi Coates does the honors:

Confederate Hair Tonic: In this instance, it must be said that Williams is practicing history in the manner of a phrenologist practicing brain surgery--with similarly ghastly results. In raising primary sources to the level of indisputable fact, Williams employs a methodology which does not merely argue for the existence of black Confederate legions, but for UFOs, orcs, the Dover Demon, elves and magic. The sable Confederate arm is too modest. Surely, Nessie awaits. I would not demand that history remain solely the property of professionals. But I  would simply see a basic commitment to honesty from academics plying a borrowed trade. 

What makes Williams spiritualism so appalling is that like his forebears, he is preying on a deep pain. It is utterly agonizing for Americans--regardless of color--to face the Civil War as it was. No honest broker of history can fail to admire the military exploits of Stonewall Jackson or Nathan Forrest. It is utterly discomfiting that the same honest broker must admit that these men charged backwards into history. What Walter Williams offers here is a credentialed con--a way of avoiding the agony of American history, of ducking the mixed inheritance that is our responsibility.  It is American citizenship on the cheap. It is lard packaged as a salve. It is charlatanism. And it should always be known as such. 

November 15 "Public Goods and Asymmetric Information":

• Slides

YouTube - Mario Savio Memorial Lecture - Elizabeth Warren:

The scary thing is that apparently George W. Bush doesn't remember enough about his presidency for his ghostwriter to write Decision Points simply from listening to him talk.

Chris McGreal of the Grauniad:

George Bush accused of borrowing from other books in his memoirs: George Bush's memoirs were billed as offering "gripping, never before heard detail" of his time in the White House. Now it appears that Decision Points is not so much the former president's memoirs as other people's cut and pasted memories. Bush's account is littered with anecdotes seemingly ripped off from other books and articles, even borrowing without attribution – some might say plagiarising – from critical accounts the White House had previously denounced as inaccurate.

The Huffington Post['s Ryan Grim] noted a remarkable similarity between previously published writings and Bush's colourful anecdotes from events at which he had not been present. Bush borrows heavily from Bob Woodward's account Bush at War, which the White House criticised as inaccurate when it was published in 2002. He also appears to take chunks from a book written by his former press secretary Ari Fleischer.

Bush recounts a meeting between Hamid Karzai and a Tajik warlord on the Afghan president's inauguration day, which he used as an example of hope for the future of the country. The former president writes: "When Karzai arrived in Kabul for his inauguration on 22 December – 102 days after 9/11 – several Northern Alliance leaders and their bodyguards greeted him at an airport. As Karzai walked across the tarmac alone, a stunned Tajik warlord asked where all his men were. Karzai responded: 'Why, General, you are my men. All of you who are Afghans are my men.'" The Huffington Post notes that the account and the quote are lifted almost verbatim and without attribution from a New York Review of Books article by Ahmed Rashid.

Bush also lifts a quote from an interview John McCain gave to the Washington Post on Iraq and then presents it as though McCain had said it to him.

Even where Bush is present and is quoting himself, he appears to have had his memory jogged by the accounts of others without finding much to add. Many of the borrowed lines are taken from Woodward's Bush at War, with the former president's accounts of meetings bearing a striking similarity to Woodward's. Bush's publisher has suggested that only confirms the accuracy of Decision Points. Others have suggested it is a reflection of two traits the former president was often criticised for – lack of original thought and laziness.

Bush also quotes Woodward's writings almost word for word in places. Where Woodward writes: "The second option combined cruise missiles with manned bomber attacks," Bush says: "The second option was to combine cruise missile strikes with manned bomber attacks." And where Woodward's book says: "The third and most robust option was cruise missiles, bombers and what the planners had taken to calling 'boots on the ground'," Bush says: "The third and most aggressive option was to employ cruise missiles, bombers and boots on the ground." Bush manages to remember exactly the same shouts as Woodward from the crowd at Ground Zero after the 9/11 attacks – "Do not let me down!" and "Whatever it takes" – even though there must have been a slew of them. He appears to have borrowed from the memoirs of Fleischer in relating an anecdote about a hospital visit to meet injured survivors of the 9/11 attack on the Pentagon...

William the Bastard asserted the right to kill and torture--but he admitted that he had to justify what he had done to his tenants-in-chief afterwards. George W. Bush and Barack Obama say that what they do doesn't have to be explained and doesn't get to be reviewed by anybody.

Dahlia Lithwick:

The baby steps that have taken the United States from decrying torture to celebrating it: [N]o criminal charges will be filed against those who destroyed the evidence of CIA abuse of prisoners Abu Zubaydah and Abd al-Rahim al-Nashiri. We keep waiting breathlessly for someone, somewhere, to have a day of reckoning over the prisoners we tortured in the wake of 9/11, without recognizing that there is no bag man to be found and that therefore we are all the bag man.

President Barack Obama decided long ago that he would "turn the page" on prisoner abuse and other illegality.... What he didn't seem to understand... is that what was on that page would bleed through.... There's no getting past torture. There is only getting comfortable with it. The U.S. flirtation with torture is not locked in the past or in the black sites or prisons... it's feted on network television and held in reserve for the next president who persuades himself that it's not illegal after all.

In his new memoir, Decision Points, former President George W. Bush boasts that he not only granted his permission to water-board detainees but did so cowboy-fashion—with the words "Damn right." This admission has elicited barely a ripple of self-doubt among an American public that reconciled itself long ago to the twin propositions that torture can sometimes be legal and that every terror suspect is always a ticking time bomb. Bush's contention that American torture "helped break up plots to attack American military and diplomatic facilities abroad, Heathrow airport and Canary Wharf in London, and multiple targets in the United States," has been largely rejected by British officials. (You may recall that earlier claims that Bush-era torture of Khalid Sheikh Mohammed led to the interruption of a plot to crash planes into the Library Tower in Los Angeles, were roundly debunked by my colleague Timothy Noah, who has shown that the Library Tower plot was disrupted in 2002, before the United States had even captured KSM, much less begun to torture him.)...

[A]s Ronald Reagan's former Solicitor General Charles Fried has argued in Because It Is Wrong... for all that torture hurts our enemies, it invariably hurts us even more.... "In the past we have prosecuted American soldiers who engaged in the equivalent of waterboarding. We have also prosecuted German and Japanese commandants who ordered it. Some were even executed."... [T]he Bush spin on the old Nixonian formulation... it's legal if my lawyer tells me it's legal—has become the law of the land.... As Nan Aron explains, the "my lawyer ate it" defense has been deemed illegal since Nuremburg. Now it's a get-out-of-jail-free card.

Eric Holder and Barack Obama have taken pains to tell the American people that water-boarding is illegal torture. So what? That's just their opinion. President Bush disagrees. The persistent failure to hold anyone accountable at any level for years of state-sanctioned abuse speaks louder than their words. It has taken this issue from a legal question to a matter of personal taste. What we choose to define as torture is now just another policy disagreement, like extending the Bush tax cuts or picking a caterer. This is precisely the kind of sliding-scale ethical guesswork the rule of law should preclude.

Those of us who have been hollering about America's descent into torture for the past nine years didn't do so because we like terrorists or secretly hope for more terror attacks. We did it because if a nation is unable to decry something as always and deeply wrong, it has tacitly accepted it as sometimes and often right.... It demands the shielding of torture photos and the exoneration of those who destroyed torture tapes just a day after the statute of limitations had run out.... All this was done in the name of moving us forward, turning down the temperature, painting over the rot that had overtaken the rule of law. Yet having denied any kind of reckoning for every actor up and down the chain of command, we are now farther along the road toward normalizing and accepting torture than we were back in November 2005, when President Bush could announce unequivocally (if falsely) that "The United States of America does not torture. And that's important for people around the world to understand." If people around the world didn't understand what we were doing then, they surely do now...

The 400,000 Jews in Warsaw are sealed off in the Warsaw Ghetto.

From the Fiscal Times:

All responsible budget analysts agree that the United States faces a daunting deficit problem. It should be addressed soon. But how soon is not clear. After the recovery is well under way, most would agree, and certainly before the debt/GDP ratio gets too large. What is not clear is what “well under way” means and whether it will happen soon enough to prevent to debt/Gross Domestic Product ratio from getting too large. The Bowles-Simpson plan would start deficit reduction in fiscal 2012, which starts on October 1, 2011, not even eleven months from now. Since unemployment is likely then to still be in the vicinity of 9 percent or higher, that is too soon, as premature deficit reduction could intensify and lengthen the recession. This is not a minor issue, as nothing more effectively depresses revenues and generates deficits than a weak economy.

Even more troubling... is the program... 70 percent of the deficit reduction under the Bowles- Simpson “mark” would come from spending cuts.... The steady-state spending level... would be 20.5 percent of GDP. That is lower than spending averaged from 1980 to 2008 when none of the baby boomers had yet retired and claimed Social Security and Medicare and when spending on health care per person was a minor fraction of what it will be in 2020.

Other problems:

• The plan calls for a reduction from baseline in federal health care spending of about one-third by 2040, but doesn’t say how that target will be achieved.

• The plan would block grant Medicaid.... The result would be powerful incentives to cut benefits.

• The plan presents four options for modifying the tax system, but doesn’t endorse any. All would tax capital gains as ordinary income, which means doubling the rate on them.

• All tax plans would end or curb deductions for charitable contributions... at the same time that the principal programs supporting these very [vulnerable] populations – Medicare, Medicaid and Social Security -- would be slashed....

• Social Security benefits would eventually be cut by 25 percent for people earning $43,000 today and by 40 percent for those earning $100,000. Note the double whammy—less Social Security and no tax- sheltered savings plans. The plan actually contains some modest increases in Social Security benefits, so that it actually increases the deficit until well after 2020

• The plan says it would fix the Medicare fee cuts for doctors scheduled for next month, but it doesn’t say how – other than to establish a new payment system to reduce costs and improve quality.

• The plan would freeze salaries of federal employees for three years, cut the federal work force by 10 percent, and dump 250,000 contract employees. To offset these cut backs, the plan calls for an increase in productivity of federal workers, but it doesn’t say how....

[T]he shortcomings in their proposals are profound. It is vague in key elements, sets targets and then calls on some committee or group to do something unspecified if the targets are not being met.... [T]he draft plan is replete with magic asterisks.... It sets targets for overall spending and taxation so low that it will be impossible to sustain even basic promises to provide pension and health benefits....

There is a better way. The first element should be a large new... value-added tax.... Second... long-term budget reduction... hinges on the control of health care spending. Such control is not possible without vigorous implementation of health care reform.... [T]he Affordable Care Act... is a start. More to the point, it is the only game in town.

Third... Bowles-Simpson... will have to rely on spending curbs. But relying on spending cuts to achieve 70 percent of the deficit reduction requires setting spending targets so low that it calls to mind the quip attributed to the man enjoying a drink in the bar on the Titanic: “I asked for ice,” he said, “but this is ridiculous.” Or, as the British say: “Less would be more.”

As I say, Simpson-Bowles is a significant unforced error by the Obama administration.

A correspondent claims:

I got this message this morning from the place where I usually donate blood, and it gave me a giggle.

Your generous blood donations through Memorial Blood Centers will help save lives and fight hunger this holiday season.

Ah! The children of the night! What music they make!

Coventry, from Wikipedia:

Coventry Blitz : The raid that began on the evening of 14 November 1940 was the most severe to hit Coventry during the war. It was carried out by 515 German bombers, from Luftflotte 3 and from the pathfinders of Kampfgruppe 100. The attack, code-named Operation Mondscheinsonate (Moonlight Sonata), was intended to destroy Coventry's factories and industrial infrastructure, although it was clear that damage to the rest of the city, including monuments and residential areas, would be considerable. The initial wave of 13 specially modified Heinkel He 111 aircraft of Kampfgruppe 100, were equipped with X-Gerät navigational devices, accurately dropping marker flares at 19:20.[18] The British and the Germans were fighting the Battle of the Beams and on this night the British failed to disrupt the X-Gerät signals.

The first wave of follow-up bombers dropped high explosive bombs, knocking out the utilities (the water supply, electricity network and gas mains) and cratering the roads, making it difficult for the fire engines to reach fires started by the follow-up waves of bombers. The follow-up waves dropped a combination of high explosive and incendiary bombs. There were two types of incendiary bomb: those made of magnesium and those made of petroleum. The high explosive bombs and the larger air-mines were not only designed to hamper the Coventry fire brigade, they were also intended to damage roofs, making it easier for the incendiary bombs to fall into buildings and ignite them.

At around 20:00, Coventry Cathedral (dedicated to Saint Michael), was set on fire for the first time. The volunteer fire-fighters managed to put out the first fire but other direct hits followed and soon new fires in the cathedral, accelerated by firestorm, were out of control. During the same period, fires were started in nearly every street in the city centre. A direct hit on the fire brigade headquarters disrupted the fire service's command and control, making it difficult to send fire fighters to the most dangerous blazes first. As the Germans had intended, the water mains were damaged by high explosives; there was not enough water available to tackle many of the fires. The raid reached its climax around midnight with the final all clear sounding at 06:15 on the morning of 15 November.

In one night, more than 4,000 homes in Coventry were destroyed, along with around three quarters of the city's factories. There was barely an undamaged building left in the city centre. Two hospitals, two churches and a police station were also among the damaged buildings. Approximately 600 people were killed (the precise death toll has never been established) and more than 1,000 were injured.

In the Allied raids later in the war, 500 or more heavy four-engine bombers all delivered their 3,000-6,000 pound bomb loads in a concentrated wave lasting only a few minutes. But at Coventry, the German twin-engined bombers carried smaller bomb loads (2,000–4,000 lb), and attacked in smaller multiple waves. Each bomber flew several sorties over the target, returning to base in France to rearm. Thus the attack was spread over several hours, and there were lulls in the raid when fire fighters and rescuers could reorganise and evacuate civilians. As Arthur Harris, commander of RAF Bomber Command, wrote after the war "Coventry was adequately concentrated in point of space [to start a firestorm], but all the same there was little concentration in point of time".

The raid destroyed or damaged about 60,000 buildings over hundreds of hectares in the centre of Coventry, and is known to have killed 568 civilians. The raid reached such a new level of destruction that Joseph Goebbels later used the term Coventriert ("Coventrated") when describing similar levels of destruction of other enemy towns. During the raid, the Germans dropped about 500 tonnes of high explosives, including 50 parachute air-mines, of which 20 were incendiary petroleum mines, and 36,000 incendiary bombs....

In his 1974 book The Ultra Secret, Group Captain F. W. Winterbotham asserted that the British government had advance warning of the attack from Ultra: intercepted German radio messages encrypted with the Enigma cipher machine and decoded by British cryptanalysts at Bletchley Park. He further claimed that Winston Churchill ordered that no defensive measures should be taken to protect Coventry, lest the Germans suspect that their cipher had been broken. Winterbotham was a key figure for Ultra; he supervised the "Special Liaison Officers" who delivered Ultra material to field commanders.

However, Winterbotham's claim has been rejected by other Ultra participants and historians who argue that while Churchill was indeed aware that a major bombing raid would take place, no one knew what the target would be. Peter Calvocoressi was head of the Air Section at Bletchley Park, which translated and analysed all deciphered Luftwaffe messages. He wrote "Ultra never mentioned Coventry... Churchill, so far from pondering whether to save Coventry or safeguard Ultra, was under the impression that the raid was to be on London."