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November 2010

Hoisted from the Archives: Greg Clark: The Secret History of the Industrial Revolution

Greg Clark:

The modest productivity growth rates of the Industrial Revolution owed mostly to productivity gains in one sector, textile manufacture. It was accidents of demand, demography, and trade that allowed innovations in this sector to have a much bigger impact than previous innovations of similar magnitude in terms of [aggregate economy-wide] productivity gains.... The southern two thirds of England saw almost no growth in output per capita or productivity growth in the Industrial Revolution.... Other places in Europe in the years 1200 to 1760 saw similar episodes of productivity growth that were as substantial as those in England from 1760 to 1860. Thus between 1550 and 1650 the Netherlands saw significant productivity advance.

The appearance that the Industrial Revolution in England represented a decisive break from the past is largely a product of the unusual demographic experience... demographic growth would have spurred industrialization absent any productivity advance... by driving up land rentals and creating urbanization... [spurring] enclosure of common lands, improvements in transportation, the expansion of coal mining, and perhaps also the fall in interest rates...


The aggregate productivity growth rate is just the sum of the productivity growth rates of individual sectors weighted by their share in national outputs.... The cotton textile industry experienced very rapid productivity growth in the Industrial Revolution era.... The estimated total factor productivity in spinning and weaving cotton cloth increased 22 fold from the 1770s to the 1860s, implying an annual productivity growth rate of 3.1% per year... cotton, and the associated industries of linen (assumed to have the same productivity growth as cottons) and woolens to overall TFP growth... of 0.26% out of 0.40%. Thus nearly two thirds of the productivity growth rate can be explained by essentially one set of innovations, and by industries that employed less than 10% of the labor force in 1851. The great mass of the economy, including agriculture, construction, services, and most manufacturing saw very little productivity increase. The gains in income per capita were thus the result of a lucky technological advance in one area....

Even with a textile revolution the effects of productivity growth in textiles on the TFP of the whole economy crucially depended on the ability of Britain to export these products on a large scale. Even though the share of cottons and woolens was never large, this share was only attained because of very substantial exports of cotton and woolen goods. Thus by the 1860s at least two thirds of English cotton goods output was exported, and about one third of woolens. These exports were traded in world markets for foods and raw materials demanded by England’s rapidly growing population. Had these industries produced only for the home market then the productivity growth rate from 1765 to 1865 would have dropped by a third....

[T]his ability to export textiles was a purely adventitious thing. Textile products were tradable, and the growing population of Britain required large imports of food and raw materials which had to be paid for by manufacturing exports....

[T]he effects of individual technical advances on aggregate productivity depend crucially on such accidental factors as the size of the sector affected and the price elasticity of demand. The nature of technological advance is generally that some new idea leads to a long period of productivity advance in an industry as the consequences of the new technique are played out. If demand is price inelastic then reductions in prices created by the early phase of a technological advance will limit or even reduce the share of expenditure on the good, so reducing the general productivity gains from further advances. Advances in cotton textiles in the Industrial Revolution had big impacts because textiles were a substantial share of expenditure by the 1760s and demand was price elastic....

Suppose that prior to the Industrial Revolution innovations were occurring randomly across various sectors of the economy - innovations such as guns, spectacles, books, clocks, painting, new building techniques, improvements in shipping and navigation – but that just by chance all these innovations occurred in areas of small expenditure and/or low price elasticities of demand. Then the technological dynamism of the economy would not show up in terms of output per capita or in measured productivity.

Thus... consider the introduction of the printed book by Gutenberg in 1445, again in the period where we can find no evidence of aggregate productivity growth, at least in England.... Output per worker increased by roughly 30 fold from manuscript production in the fourteenth century till the early nineteenth century... greater than the productivity advances achieved in the cotton textile industry over the Industrial Revolution period, though it took place over a much longer period. But the impact of these productivity gains in printing on the economy as a whole was unmeasurably small because the share of the economy devoted to printing always remained small... in 1851 only 0.8% of the population was employed in the paper making and printing businesses....

Another dramatic change in the years before 1600 was improvements in shipping and navigation which allowed access to the East by an all sea route. This was reflected in a dramatic fall in the sixteenth century in the price of eastern spices.... The price of pepper relative to English farm output prices fell to about one fifth its earlier level between 1570 and 1660. Yet again though this decline represented a host of technical and organization changes the economic impact was negligible given the dietary habits of the English....

If we want to locate the Industrial Revolution as the beginning of the era of sustained productivity growth then the [sixteenth-century] Dutch have as good a case as the British. If we want to locate it in the era of very widespread productivity growth affecting large sectors of the economy, then the US in the after the 1870s is the best candidate....


[T]he conclusion is that there was little productivity growth in the Industrial Revolution era beyond that explained by the technological revolution in textiles... the accident that textiles were exported on a large scale by 1800, explained by the need to import large quantities of food and raw materials given English population growth after 1760, accounts for a substantial fraction of the gains in productivity. The Industrial Revolution becomes very narrow. It can then be interpreted as just another isolated technological advance as European economies had been witnessing since at least the fifteenth century.

England had low transport costs to France and the Netherlands even in the middle ages... wages and output in England will be determined not by the land/labor ratio in England, but by the land/labor ratio in Europe as a whole. The English land/labor ratio will predict real wages and real output only in so far as it moves in sympathy with the European land/labor ratio. Otherwise if England ends with more labor compared to land than other European economies it will not experience a decline in output per worker with a constant technology, but will trade labor intensive products in exchange for land intensive products from elsewhere....

In the years 1300 to 1750 there is a remarkable concordance in the population movements across Western Europe, and English wages, output per head and population [appear to be] linked. But the Industrial Revolution was notable for England’s rapid population growth compared to the rest of Europe, and in particular compared to the Netherlands and France.... English population increased by 187% between 1770-9 and 1860-9 while a wide group of other European countries saw population increase by only 79%....

At the same time the addition of the acreage of North America, and improvements in the transport system that brought grain and timber from the East and South to Western Europe effectively expanded the land base of the whole continent.... The population fed and clothed by English agriculture did not expand from 7.5 million to 21 million between 1760 and 1860... but instead grew from 7.5 to 9.6 million... even this calculation does not take into account the effect of the expansion of the coal industry in substituting for the use of land to produce energy in the pre-industrial economy through growth of wood and furze. In combination imports and the coal industry effectively tripled the land area of England by the 1860s....

Thus England's economic growth looked so spectacularly different from the past after 1760 for three reasons: the demographic accident of the differential movement of population in England relative to the rest of Europe, the expansion of the land area effectively available to all of Europe through the opening up of the American Midwest and of the eastern Europe, and the expansion of the domestic coal industry...






Ryan Avent vs. Kevin Drum

Ryan Avent attempts to Kevin Drum smackdown:

Budget deficits: Austerity and reform: KEVIN DRUM critiques the recommendations of the chairmen of the deficit commission.... I don't think this holds water.... [O]ne good way to approach the deficit in a fashion that's relatively agnostic about the role of government is to reform the tax system to make it more efficient.... Now, the chairmen have left themselves open to criticism... they failed to include some obvious potential improvements in the efficiency of the tax code, like adoption of a carbon tax... they used much of the gains from their tax system reforms to cut rates. Mr Drum is right to say that a deficit commission should primarily be interested in applying whatever savings it finds to reduction of the deficit....

But the principle that tax reform is a healthy part of deficit reduction is a sound one...

I score this for Kevin Drum, 15-0. Tax reform is not deficit reduction. Tax reform is tax reform. Deficit reduction is deficit reduction. To put on the table an option for making the distribution of income worse by cutting the EITC and using the revenue raised to fund a reduction in high-income tax rates without putting on the table equivalent options for making the distribution of income better--well, Simpson and Bowles just did not do their job, and attempts to defend them are unconvincing.

Paul Krugman on Simpson-Bowles:

The Soft Bigotry of Low Deficit Commission Expectations: those who are defending the deficit commission on the grounds that there are some potentially good ideas in there are missing what the purpose of the commission was supposed to be.... [T]he commission... was supposed to produce a package that Congress would give an up and down vote. To do this... it would have to produce a package good enough to accept as is. And it didn’t do that.

Instead, it produced a package that may have had some good things in it, but also, remarkably, introduced a whole slew of new bad ideas that weren’t even in the debate before. A 21 percent of GDP limit on revenues? Cutting the top marginal rate to 23 percent? Sharp reductions in the government work force without, as far as anyone can tell, a commensurate reduction in the work to be done? Instead of cutting through the fog, the commission brought out an extra smoke machine....

[T]he commission was supposed to provide a finishing point for discussion. Instead, it produced a PowerPoint that is one part stuff that has long been on the table, one part conservative wish-list, and one part just weirdly ill-considered.

Winston Churchill Blogs About November 13, 1940

Winston Churchill:

After supper at the Soviet Embassy there was a British air raid on Berlin. We had heard of the conference [and of Molotov's visit to Berlin] beforehand, and though not invited to join in the discussion did not wish to be entirely left out of the proceedings....

When in August 1942 I first visited Moscow I received from Stalin's lips... an account.... "When Molotov," said the Marshal, "went to see Ribbentrop in November of 1940 you got wind of it and sent an air raid." I nodded.

When the alarm sounded Ribbentrop led the way down many flights of stairs to a deep shelter sumptuously furnished. When he got inside the raid had begun. He shut the door and said to Molotov: "Now that we are alone together, why should we not divide?"

Molotov said: "What will England say?"

"England," said Ribbentrop, "is finished. she is no more use as a Power.'

"If that is so," said Molotov, "why are we in this shelter, and whose are these bombs that fall?"

Neoliberal Economists Agonistes

Felix Salmon shifts ground from Charles Ferguson's Larry-Summers-Is-Corrupt to the alternative Larry-Summers-Has-Been-Intellectually-Captured-by-Wall-Street interpretation:

Summers’s incentives: But this misses the point: Summers had already been captured when he was Treasury secretary, and he was hired by DE Shaw partly because he was captured. Being captured is not some kind of intellectually dishonest overt bribe, where you truly believe A but profess to believe B because doing so makes you rich. It’s much more subtle than that, based partly in the wealth and success and sterling reputations of those (like your mentor Bob Rubin, perhaps) who believe B. And it’s a survivorship-bias thing, too: if you don’t believe B, you’ll never rise to the kind of position where your opinions matter as much as Larry’s do and did.... Summers has a pretty unique way of perceiving, analyzing, and solving problems. Many policymakers, including Barack Obama, value his particular insights. But the fact is that most of the time Summers seems to end up doing and proposing exactly what Wall Street would most want him to do. Pace Brad, he might well be fully aware of the problems with Wall Street. But yes, by using words like “Luddite”, he does dismiss those concerns, or persuade himself that the costs of acting on them are greater than the benefits...

This is, I think, a considerable improvement.

But "intellectually captured" does not capture it. It brings up images of that awful Star Trek episode where the gigantic disembodied brains bet on cage matches between Enterprise crew members with thrall collars on their necks.

Let me suggest a better metaphor: one of those bear traps that closes around the ankle. Not "captured," but rather "trapped"--something you could escape from by gnawing off a limb. And Larry was never trapped by belief in the efficient market hypothesis. Instead, he (and I) were trapped by belief in what I might as well call "Greenspanism."

He (and I) never were believers in the efficient markets hypothesis. How could we be? Look around: there are idiots! The market's prices are the results of a wealth-weighted voting mechanism: the more money you have, the bigger is your weight in the market's average. People who have done well in the recent past thus have more weight than people who have done badly. But those who have done well me be irrational trend-chasers who have been lucky and those who have done badly may be sober-sided fundamentalists whose time has simply not yet come. The questions of the degree to which the limited amount of risk-averse smart money can leverage itself and profit from all this noise in the market by reducing it is a fascinating and subtle one. But nobody thinks that the answer is that the noise simply does not matter, is ironed out into insignificance.

But let me switch to what I am really interested in. Let me talk about me. After all, my mind is what I know best. And it is the case that the most powerful lobe of my brain is the one that is always running an instantiation of the Larry Summers thought emulation module on top of its native wetware code:

What we did believe? We believed that the Federal Reserve could handle whatever financial crisis the markets could throw at it. We believed that the Federal Reserve had the policy tools, the risk management skills, and the incentives to firewall the real economy from financial dislocations, and to clean up whatever financial messes were left behind. There were solid reasons for these beliefs: they were called 1987, 1991, 1997, 1998, and 2001. In all of those episodes--some of them involving financial losses much greater than those of the initial subprime mortgage crisis--the Federal Reserve had successfully firewalled the real economy off from financial turmoil.

Once we had concluded that the Federal Reserve had the tools and the competence  to absorb financial shocks, the jaws of the trap snap shut. Leverage then appears to be a positive good rather than a danger. Why? Because if the past two centuries of financial market history prove anything, it is that the markets are woefully short of patent capital willing to bear risks. The financial rich are overwhelmingly the patient risk-bearers. The financial poor are those who sought safety, or who were unwilling or unable to hold their positions and wait for fundamentals to reassert themselves. Leverage then becomes a way of taking the money of the risk-averse of whom the market has too many--for that is what low long-term returns on "safe" portfolios tell us--and putting it too work in the hands of the too-few who will use it to take the long-term risks that the market, historically, has always handsomely rewarded. And financial sophistication becomes a way of concentrating and amplifying the rewards of risk-bearing to call forth additional risk-bearing capital to bolster the numbers of the too-few.

The argument is bullet-proof and correct--as long as Greenspanism is true doctrine, as long as the Federal Reserve does in fact have the policy tools, the risk management skills, and the incentives to firewall the real economy from financial dislocations, and to clean up whatever financial messes were left behind.

Here it is worth stressing that these intellectual commitments are not the result of being hypnotized by the princes of Wall Street. They are the result of disciplined and concentrated analysis of the historical patterns of asset prices and returns. They are the result of confidence in the intellectual power of the discipline of monetary economics as applied through the policy instrumentality of the Federal Reserve. And they are the result of the economists' insight that whenever there is an area of economic activity that pays huge, outsized rewards the odds are that we need more of it done.

But "captured" is the wrong word. "Trapped" is much better. And not trapped by the efficient market hypothesis. Trapped, instead, by confidence in modern central banking.

And while these intellectual commitments are certainly fueled by too-close attention to and admiration for central bankers, they are not especially closely tied to contacts with or worship of the princes of Wall Street.

Keynes and the FT

Robert Skidelsky says that when Keynes lectured at Cambridge about monetary theory, he would begin by reading an article from the FT (or occasionally tje Economist), and then ask: "What is the theory that lies behind this argument? Is it coherent? Could it be correct? How can we find out?" And that is how he would teach monetary theory at Cambridge.

What Should Macroeconomics Do?

What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course (save possibly Perry Mehrling's) was of little or no use in helping people who had read or taken them to read publications like the FT as they chronicled the downturn or understand the policy debates hosted by the FT.

At the very minimum, a macro course should teach people enough about the macroeconomy that they can then read the reporting of the FT. And it should teach people enough about the theoretical approaches that underpin policy advocacy that they can then understand and evaluate the policies proposed in contributions to the FT.

What would such a macroeconomics course look like?

It would, I think, teach the five still-live theories of the causes of economic downturns that underpin people's analyses:

  • The theory that high unemployment is produced by real wages stuck at too high a level for a full-employment economy to sustain. It must be suffered.

  • The theory that high unemployment today is the unavoidable consequence of past overinvestment. It must be suffered.

  • The monetarist theory that a downturn is the result of a shortage of liquid cash money which induces people desperate to build up their cash balances to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the money supply or increasing velocity and so reducing money demand.

  • The Keynesian--or is it Wicksellian?--or is it a Hicksian?--theory that a downturn is the result of a shortage of bonds, of vehicles that savings can use to transfer purchasing power into the future which induces people desperate to build up their assets to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of bonds or reducing savings.

  • The Minskyite theory that a downturn is the result of an overspeculation-caused panic that generates a shortage of safe high-quality assets, of vehicles that people to park their wealth and be sure it will not melt away while their backs are turned, which induces people desperate to build up their safe asset holdings to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of safe assets or restoring confidence and so diminishing the demand for safety.

All five of these theories need to be taught sympathetically, yet critically. They all make claims about how the world works that might be true--indeed, there are surely times and places when and where they are true--and that can and should be evaluated.

All five of these theories are best taught sympathetically by being taught historically: as long traditions of thought that smart people have used to try to understand a changing and confused world. Thus Minskyism from its nineteenth century roots with Walter Bagehot or perhaps Adam Smith grappling with nineteenth-century financial crises, Keynesianism from its roots in Knut Wicksell's studies of disturbances to the flow-of-funds, monetarism from its roots in John Stuart Mill trying to understand the first industrial downturn in England in 1825, overinvestment theories from their roots in Karl Marx grappling with the crisis of 1848, high-real-wage from its roots in Nassau Senior's examinations of technological unemployment in the pre-1850 Midlands--all tussling with a set of problems first raised by Jean-Baptiste Say and Thomas Robert Malthus.

That would be a macro course that would turn out graduates who could read the FT--and who would be of great value to all the employers who need people to process information from the FT.

Practical Politics for Dummies

Matthew Yglesias:

Results, Not Words: “[B]lame Republicans for failing to pass plan to fix the economy” is [not] a close substitute for “fix the economy.”... [T]he evidence that fixing the economy would help Democrats politically is overwhelming... he evidence that the plan/block/blame strategy would work is non-existent. People like me and Atrios would feel better about President Obama and his team if they made public statements that indicated that he roughly agrees with our take... [but] our emotional state has very little political relevance.... The things you would do to outline a bold progressive approach to fixing the economy are very different from the things you would do to try to get the GOP votes you need to pass economy-fixing legislation.

Liveblogging World War II: November 12, 1940

Winston Churchill:

The Prime Minister (Mr. Churchill) : Since we last met, the House has suffered a very grievous loss in the death of one of its most distinguished Members and of a statesman and public servant who, during the best part of three memorable years, was first Minister of the Crown.

The fierce and bitter controversies which hung around him in recent times were hushed by the news of his illness and are silenced by his death. In paying a tribute of respect and of regard to an eminent man who has been taken from us, no one is obliged to alter the opinions which he has formed or expressed upon issues which have become a part of history; but at the Lychgate we may all pass our own conduct and our own judgments under a searching review. It is not given to human beings, happily for them, for otherwise life would be intolerable, to foresee or to predict to any large extent the unfolding course of events. In one phase men seem to have been right, in another they seem to have been wrong. Then again, a few years later, when the perspective of time has lengthened, all stands in a different setting. There is a new proportion. There is another scale of values. History with its flickering lamp stumbles along the trail of the past, trying to reconstruct its scenes, to revive its echoes, and kindle with pale gleams the passion of former days. What is the worth of all this? The only guide to a man is his conscience; the only shield to his memory is the rectitude and sincerity of his actions. It is very imprudent to walk through life without this shield, because we are so often mocked by the failure of our hopes and the upsetting of our calculations; but with this shield, however the fates may play, we march always in the ranks of honour.

It fell to Neville Chamberlain in one of the supreme crises of the world to be contradicted by events, to be disappointed in his hopes, and to be deceived and cheated by a wicked man. But what were these hopes in which he was disappointed? What were these wishes in which he was frustrated? What was that faith that was abused? They were surely among the most noble and benevolent instincts of the human heart—the love of peace, the toil for peace, the strife for peace, the pursuit of peace, even at great peril and 1618 certainly to the utter disdain of popularity or clamour. Whatever else history may or may not say about these terrible, tremendous years, we can be sure that Neville Chamberlain acted with perfect sincerity according to his lights and strove to the utmost of his capacity and authority, which were powerful, to save the world from the awful, devastating struggle in which we are now engaged. This alone will stand him in good stead as far as what is called the verdict of history is concerned.

But it is also a help to our country and to our whole Empire, and to our decent faithful way of living that, however long the struggle may last, or however dark may be the clouds which overhang our path, no future generation of English-speaking folks—for that is the tribunal to which we appeal—will doubt that, even at a great cost to ourselves in technical preparation, we were guiltless of the bloodshed, terror and misery which have engulfed so many lands and peoples, and yet seek new victims still. Herr Hitler protests with frantic words and gestures that he has only desired peace. What do these ravings and outpourings count before the silence of Neville Chamberlain's tomb? Long and hard, hazardous years lie before us, but at least we entered upon them united and with clean hearts...

The Very Disappointing Derek Thompson Reaction to Liberal Criticism of Simpson-Bowles

It was disappointing.

The worst and most unfair part, I thought, was this slam against Kevin Drum:

The Disappointing Liberal Reaction to the Deficit Commission: The third most frustrating criticism comes from folks like Kevin Drum, who claims that any effort to reduce the deficit that isn't 98% health care reform isn't serious. The fact is, there are no feasible ways to definitively curb health care inflation starting today (if Kevin has some in mind we need to hear them!). We can shoot a thousand arrows at the medical inflation monster -- health care reform, to its great credit, does. We can nudge providers and customers away from pay-for-service, which rewards over-treatment. We can increase cost-sharing to help patients react to prices, increase transparency and quality through exchanges, and so on. But these are efforts, not answers. If we waited for the messianic Answer to health care inflation, we might never act on the budget. I can't imagine that's what Kevin would prefer. Instead, we should make the changes we can make today, slowly.

It is unfair because Kevin Drum is right: any effort to reduce the deficit that is not 98% health care reform is indeed not serious.

It is unfair because the things that Derek Thompson implies that Kevin does not talk about--"We can nudge providers and customers away from pay-for-service, which rewards over-treatment. We can increase cost-sharing to help patients react to prices, increase transparency and quality through exchanges, and so on. But these are efforts, not answers. If we waited for the messianic Answer to health care inflation, we might never act on the budget. I can't imagine that's what Kevin would prefer. Instead, we should make the changes we can make today, slowly"--are the kinds of things Kevin regularly talks about.

And it is unfair because Simpson and Bowles don't talk about how they are going to achieve any of this. Indeed, their only concrete, legislative, ready-to-go proposal is to raise the deficit from health care above its current-law baseline level: "Replace cuts required by SGR through 2015 with modest reductions while directing CMS to establish a new payment system, beginning in 2015, to reduce costs and improve quality."

DeLong Smackdown Watch: Walras' Law and Say's Law Edition

Nick Rowe asks:

What Does Cutting-Edge Macroeconomics Tell Us About Economic Policy for the Recovery?: You see, Say(1803) (lovely way to express this, by the way) was very nearly right. Suppose we start in equilibrium, then there's a sudden desire to stop buying newly-produced goods and buy land instead. Either the price of land rises to equilibrium or it doesn't. If the price of land rises to equilibrium, then people stop wanting to buy land and return to buying newly-produced goods. If the price of land stays fixed (it's sticky, or whatever) people cannot buy land because nobody is willing to sell. So they have to buy something else with their income instead, or else hoard money.

Ultimately there are only two things an individual can do with his income, if everybody else is trying to do the same thing: buy newly-produced goods, where there are plenty of willing sellers in a general glut; or hoard money, by not buying things, which nobody else can stop you doing.


What Does Cutting-Edge Macroeconomics Tell Us About Economic Policy for the Recovery?: OK Brad, a challenge for you:

A general glut means an excess supply of newly-produced goods. You say that a general glut can be caused by an excess demand for financial assets: which could be money, bonds, or safe assets. Is it theoretically possible for a general glut to be caused by an excess demand for something that is neither a financial asset nor a newly-produced good? For example, could it be caused by an excess demand for: land, old houses, old books, antique furniture etc.? Or, what about intermediate cases, like an excess demand for gold, where new and old gold is identical, but new production is very small and inelastic compared to the existing stock?

My position is that a general glut can only be caused by an excess demand for the medium of exchange. An excess demand for any of those other assets can only cause a general glut if it spills over into an excess demand for the medium of exchange. The distinction between financial and non-financial assets is irrelevant. Why should it matter?

I'm trying to smoke out your inner quasi-monetarist!

The way Say expresses it in 1803 is roughly as follows: nobody makes anything unless they intend to use it or sell it, and nobody sells anything unless they intend to buy something with the proceeds of the sale. Thus, "by the metaphysical necessity of the case," as John Stuart Mill was to put it, there has to be the purchasing power to buy everything offered for sale--there can be particular gluts of commodities, but every market in which there is excess supply must be balanced by another in which there is excess demand.

This is an anticipation of what we now call Walras' Law: that the sum across all markets of all excess demands must equal zero. And it was John Stuart Mill who pointed out the hole in Say's argument: you can have an excess supply of all currently produced goods and services if you have an excess demand for financial assets, specifically for money. As Mill put it:

Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells.... [I]t may very well occur that there may be... a very general inclination to sell with as little delay... accompanied with an equally general inclination to defer all purchases.... It is true that this state can be only temporary and must even be succeeded by a reaction of corresponding violence... [but] this is no more than may be said of every partial over-supply.... It must, undoubtedly, be admitted that there cannot be an excess of all other commodities and an excess of money at the same time. But those who have... affirmed that there was an excess of all commodities never pretended that money was one of these commodities.... What it amounted to was that persons in general... liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute...

Where I think Mill's explanation is incomplete is in his reference to "money... in request, and all other commodities... in comparative disrepute." When money is in request and all other commodities in disrepute, one of those commodities is corporate bonds. Hence people should be dumping corporate bonds as they try to build up their cash holdings. Hence the prices of corporate bonds should be low. But in 2001 we had relatively high prices of corporate and government bonds--low interest rates all across the board--so that there wasn't a shortage of money in particular. What there was was a shortage of savings vehicles for carrying purchasing power from the present into the future, a shortage of bonds and other assets that serve as such savings vehicles--and money is one such vehicle. And today we have relatively high prices for government bonds and other safe assets. What there is a shortage of safe assets--and money is one such safe asset.

This matters because the monetarist cure for a downturn--for a general glut of currently-produced commodities--is to expand the money stock via open market operations, via purchases of short-term government bonds for cash. When the key excess demand in financial markets is an excess demand for money, that works: you expand the supply of money and reduce the excess demand for cash and so people are no longer scrambling to cut back on their spending on currently-produced goods and services to build up their cash balances.

However, things are different when the key excess demand is a demand for savings vehicles or for safe assets. Here, I think, the zero bound on interest rates is crucial. Bonds can go to par at which point they become perfect substitutes for cash and cannot go any higher. Other safe nominal assets can go to par at which point they become perfect substitutes for cash and cannot go any higher. And that zero-bound property is what gets the economy stuck in a general glut.

When the key excess demand is a demand for savings vehicles--for bonds--open-market operations don't work: you buy bonds for cash but you haven't done anything about the excess demand for bonds, bonds go to par and cannot go any higher and there is still an excess demand for bonds, and so people keep scrambling to cut back on their spending on currently-produced goods and services to build up their bond balances. And when the key excess demand is a demand for safe high quality assets, open-market operations still don't work: you buy safe government bonds for cash but you haven't done anything about the excess demand for safe assets, all safe assets go to par and cannot go any higher and there is still an excess demand for bonds, and so people keep scrambling to cut back on their spending on currently-produced goods and services to build up their safe asset balances.

But suppose the excess demand were for some other non-currently produced asset--Nick's examples are land, old houses, old books, and antique furniture--could that produce a general glut? Walras Law would say yes, I think. But it would also say that the monetarist cure--buy bonds for cash--would alleviate the problem: create an excess supply of money and people will try to spend down their cash balances and that will boost demand for currently-produced goods and services, leaving you with an excess demand for old furniture and an excess supply of money.

It is the fact that the key excess demand is for a broader financial asset class than mere cash money that is, I think, the key to why the monetarist cure is likely to fail--or at least to be supplemented by policies that make sure that not just the supply of liquid cash money but the supply of safe assets in general or savings vehicles in general increases in order to cure a downturn.

It Is Not Just for the Sake of Journalism That We Need to Shut the Washington Post Down Today

It looks as though the Post has become a deeply corrupt and disfunctional educational company. Matthew Yglesias:

Yglesias » Kaplan, Inc: The Washington Post company['s] biggest source of revenue is... Kaplan... its low-performing for-profit university unit is its biggest source of growth as Tamar Lewin points out in an excellent NYT piece:

Over the last decade, Kaplan has moved aggressively into for-profit higher education, acquiring 75 small colleges and starting the huge online Kaplan University. Now, Kaplan higher education revenues eclipse not only the test-prep operations, but all the rest of the Washington Post Company’s operations.... [O]nly 28 percent of Kaplan’s students were repaying their student loans. That figure is well below the 45 percent threshold that most programs will need to remain fully eligible for the federal aid on which they rely....

[T]he basic business model of the Washington Post Company... is... [to] say “in exchange for paying us money, we’ll provide you education services that pay off in the long run.” Potential customers... avail themselves of taxpayer-subsidized loans in order to take the Post up on their offer. But 72 percent of the Post’s customers find that they’re actually unable to repay those taxpayer-subsidized loans.... [T]he Obama administration has proposed that taxpayers stop subsidizing programs with dismal performance rates.... [T]he Post would prefer to keep on getting free money from taxpayers and thus “spent $350,000 on lobbying in the third quarter of this year, more than any other higher-education company.”... Donald Graham has personally “gone to Capitol Hill to argue against the regulations in private visits with lawmakers... [h]is newspaper, too, has editorialized against the regulations.”... [E]very member of congress is now on notice that the city’s most influential newspaper is prepared to go to bat for its corporate partners.

Shut it down today, please.

Macro Advisers: Okun's Law Is Working Well. Nothing to See Here. Move Along

There has long been some question of whether there is something to explain in divergence between production and employment in this downturn. Macro Advisors says not:

Macroadvisers: Swings in Hours and Productivity in the Recession and Recovery — Unusual or Not?: Our model for hours understands the recent experience of hours, and given actual data on output, it therefore explains most of the swings in productivity over the last few years. Stated simply, nearly the entire decline in hours between the second quarter of 2007 and the third quarter of 2009, as well as most of the surge in productivity that occurred in 2009 and early 2010, is accounted for by the model. The model also easily accounts for the softening of productivity in the second quarter and it more than accounts for the rebound in productivity in the third quarter.

The model understands these swings to be due largely to cyclical factors, including changes in output and in labor utilization, and in changes in the growth of business capital stocks. Movements in total factor productivity (TFP) have for the most part been a secondary factor in accounting for swings in productivity and hours in recent years — except in the second quarter, when a temporary weakening in TFP growth contributed to the decline in productivity. The model more than accounts for the rebound in productivity growth in the third quarter. Indeed, it “expected” an increase 1.1 percentage points larger than actually occurred, reflecting both a positive swing in the cyclical contribution and a rebound in TFP growth.

Some have argued that productivity was inexplicably strong during the recent surge. A possible reason is that employers might have slashed their labor forces by more than what was warranted out of concern that demand would weaken by substantially more than it did. As a result, productivity was unsustainably high. However, we are not inclined to agree because our model understands well both the level and recent growth of productivity.

Harold Pollack on Barack Obama


President Obama: I love you, but you need to raise your game: Judging by recent press reports, the White House is apparently folding on the Bush tax cuts for people with incomes exceeding $250,000. On several levels, this is one of the most depressing episodes of the entire Obama presidency.... [C]aving in on this issue amounts to bad social and fiscal policy. (See Jonathan Chait’s several hundred columns making the rubble bounce on this theme.) The Bush tax cuts on the $250,000+ group squander $700 billion over the next decade. Especially in these hard times, when it’s a heavy political lift to finance basic services, that is vastly irresponsible.... People who earn more than $250,000 per year can afford to pay a few percentage points more, as they did during the Clinton era....

[T]he Center on Budget and Policy Priorities calculates that permanent extension of Bush tax cuts for upper-income taxpayers has an almost eerily similar impact on federal deficits as does the entire unfunded liability of our Social Security system. Somehow, all that scary talk about deficits and Social Security’s genuine but manageable long-term shortfall doesn’t carry over to this numerically equivalent issue in tax policy.

Perhaps most depressing, this episode illustrates the periodic preemptive surrenders that are frustrating to the President’s closest supporters....

To give up on this issue backtracks on a clear campaign plank... concedes to Republicans a mandate they have not earned.... The “American people” do not support tax cuts for the wealthy. Nor, for that matter, do majorities support the deficit commission’s fundamentally conservative vision of limited government....

President Obama.... I am one of your proud and strong supporters. I will continue to be. Yet it’s time for you to raise your game...

The Last Word on Simpson-Bowles: What Kevin Drum Said

Is the Deficit Commission Serious? | Mother Jones.png

Simpson and Bowes are simply not serious. Oursourced to Kevin Drum:

Is the Deficit Commission Serious? | Mother Jones: I've been trying to figure out whether I have anything to say about the "chairman's mark" of the deficit commission report that was released today. In a sense, I don't. This is not a piece of legislation, after all. Or a proposed piece of legislation. Or even a report from the deficit commission itself. It's just a draft presentation put together by two guys. Do you know how many deficit reduction proposals are out there that have the backing of two guys? Thousands. Another one just doesn't matter. But the iron law of the news business is that if people are talking about it, then it matters. So this report matters, even though it's really nothing more than the opinion of Alan Simpson and Erskine Bowles. So here's what I think of it, all contained in one handy chart....

  • Discretionary spending (the light blue bottom chunk) isn't a long-term deficit problem. It takes up about 10% of GDP forever. What's more, pretending that it can be capped is just game playing: anything one Congress can do, another can undo. So if you want to recommend a few discretionary cuts, that's fine. Beyond that, though, the discretionary budget should be left to Congress since it can be cut or expanded easily via the ordinary political process. That's why it's called "discretionary."

  • Social Security (the dark blue middle chunk) isn't a long-term deficit problem. It goes up very slightly between now and 2030 and then flattens out forever. If Republicans were willing to get serious and knock off their puerile anti-tax jihad, it could be fixed easily with a combination of tiny tax increases and tiny benefit cuts phased in over 20 years that the public would barely notice. It deserves about a week of deliberation.

  • Medicare, and healthcare in general, is a huge problem. It is, in fact, our only real long-term spending problem.

To put this more succinctly: any serious long-term deficit plan will spend about 1% of its time on the discretionary budget, 1% on Social Security, and 98% on healthcare. Any proposal that doesn't maintain approximately that ratio shouldn't be considered serious. The Simpson-Bowles plan, conversely, goes into loving detail about cuts to the discretionary budget and Social Security but turns suddenly vague and cramped when it gets to Medicare. That's not serious.

There are other reasons the Simpson-Bowles plan isn't serious. Capping revenue at 21% of GDP, for example. The plain fact is that over the next few decades Social Security will need a little more money and healthcare will need a lot more. That will be true even if we implement the greatest healthcare cost containment plan in the world. Pretending that we can nonetheless cap revenues at 2000 levels isn't serious.

And their tax proposal? As part of a deficit reduction plan they want to cut taxes on the rich and make the federal tax system more regressive? That's not serious either.

Bottom line: this document isn't really aimed at deficit reduction. It's aimed at keeping government small. There's nothing wrong with that if you're a conservative think tank and that's what you're dedicated to selling. But it should be called by its right name. This document is a paean to cutting the federal government, not cutting the federal deficit.

Worst Things About Simpson-Bowles

On Thu, Nov 11, 2010 at 6:04 AM, Sydelle Moore wrote:

The Big Question: What is the best and the worst recommendation from the president's debt commission?

Well, two things tie for the worst thing about the president's deficit-reduction commission.

The first is Barack Obama's decision to take a long-time budget arsonist like Alan Simpson--somebody who never found a budget-busting Republican initiative he could not vote for or a deficit-reducing Democratic initiative he could not vote against--and give him a fire chief's hat. As a result, Alan Simpson's ideas are now not Alan Simpson's ideas but instead the "recommendation[s][ from the president's debt commission."

The second is the capping of federal health spending growth at GDP+1%/year. That means that, adjusting the aging of the population, the government is supposed to spend a smaller share of incomes on health care as each year passes. That would require not just the repeal of the Affordable Care Act but the elimination of Medicare as we know it.

The best idea... is it cutting schools for soldiers' kids? Or is it paying for reductions in the top income tax rate by cutting the Earned Income Tax Credit so that there are once again lots of families in America where a parent works full time and yet the kids are still in poverty?


Brad DeLong

Keeping the Fourth Online-Learning Revolution from Flaming Out into Disaster

Most people do not know that our current online-learning revolution is actually the fourth. The first was made by Aristocles son of Ariston and Aristoteles son of Nicomachus when they created the philosophy book to help those who could not find or could not afford their own personal Sokrates to learn. The second came with the invention of the medieval university so that those who could not afford to buy and own all the books they needed could nevertheless meet in groups to hear them read aloud and take notes. The third came with Gutenberg's making books cheap enough so that intellectuals could own all that they wanted. And the fourth is today.

We will not manage the fourth revolution unless we first figure out why the third revolution--that eliminated the original raison d'etre of the medieval university did not destroy but rather strengthened the university. What, exactly, were the useful intellectual functions that the university performed that meant that it could not be fully replaced by sitting on a log under a tree surrounded by your stack of books?

My outline of the problem is here.

Commenters respond:

eightnine2718281828mu5 said: "What is it about the institution of the university that allowed it to survive the third online-learning revolution?" signalling

Omega Centauri said: Beyond signalling, which is important, I think we need some interactive intelligence. Its tough to get a deeply challenging subject mastered from online stuff alone. What if I don't really understand the Poincare conjecture? (Heck I can't even spell it). Will that mean that by about chapter 11 I'll hit some intellectual brickwall I don't know how to get through? If I had a sharp teacher, he could insure some crucial but tricky foundational principle is really mastered. But, online (and in a hurry usually), its just to easy to slip past something important, then find out too late that you've build your whole intellectual understanding of XXX -on a house of cards.... Now, even really good wetware computers (actual flesh and blood neuronal processors) have trouble doing this. Training a computer to..... Wish I had a clue.

jeremy said: I thought you were actually going to comment on how today's distance learning is 4th rate...I am thinking of the U of Phoenix, and other for-profit distance learning programs. There are some decent distance learning opportunities available. For instance, while I lived in Germany I used archives of recorded calculus courses from a university in North Carolina to learn 1st year calculus. I also took a 4th year statistics course online through Iowa State. Those courses served a very specific purpose, but the lecturer's impact was not very high. The interaction level was near zero for me, but I learned the material. I probably could have just read the books and done some of the problems at the end of each chapter and done just as well on the tests. It's really tough for a first rate mind to give you a first rate lecture through distance learning. I don't even think lecturers try; you might as well just find out what the book is, read it on your own, and later find a better class a few levels up at a campus nearby.

MBH said: "No philosopher understands his predecessors until he has re-thought their thought in his own contemporary terms." PF Strawson. As an online PhD student who studied undergraduate philosophy at a brick and mortar school, I agree with the above comments that signaling and interaction preserved the university after the cost of books could have made it obsolete. But not just any kind of signaling: hinting in the Wittgensteinian sense. For instance, if I start to read Kant -- online -- without any background, his metaphysics may baffle me. But if the facilitator presents a supplemental lecture that proposes "For Kant, phenomena is to software as noumena is to hardware..." then I can go on. And not just any kind of interaction either. To make sure the class understands, the facilitator may begin a thread in which every student must rephrase an aspect of Kant's metaphysics in their own words. Whether the rephrasing matches or mismatches the meaning, the facilitator can track the students' understanding. That would prevent the problem that Omega raises above.

Hopefuly Anonymous said: universities, and lectures for that matter, provide paternalistic structure for those that lack autodidactic discipline. We should make it easier for those with autodidactic discipline to get credentialed (licensing exams) without trying to extract wealth from them or creating other inefficient barriers.

Pat D said: I propose there were actually five revolutions. The first 3 are the same as what you propose above. But along the way, the quantity of first-rate thinkers increased due to earlier revolutions. Therefore, the fourth revolution is each classroom apprenticed to a (near-)first-rate thinker, rather than being read the work of a first-rate thinker. In other words, the best classrooms today are not following the lector style, but are instead akin to Socrates teaching a group of students. Your proposed fifth revolution is about decreasing the price of a service provided by the fourth revolution. In a broader sense of online learning, you don't need to worry about it going bust - Wikipedia is increasingly popular, and MIT provides free lectures via iTunes University. UPhoenix is just the "missing link" in this evolution, one that we should not worry about going extinct.

Jed Harris said: Why do these answers focus on the student - teacher or student - content relationship, when the student - student interaction looms so large in the actual experience? Teaching and content are useful, but peer interaction is an essential part of the process -- quite possibly the most essential part. Even for very content intensive domains. Look at the student groups studying together in the engineering library. Look at how graduate students spend time in their offices and labs. Even the university doesn't value or facilitate this mutual support nearly enough. Current distance learning makes it nearly impossible.

derek said: Books were cheaper than your own personal Socrates, but still expensive, and still not a substitute for your own personal Socrates. Universities arose to address the "still expensive" part, but they survived the printing press by evolving to address the "still no substitute for your own personal Socrates" part. (when i went to uni we really did have our own personal Socrates; that was his actual name)

bad Jim said: Perhaps it was the explosive growth of knowledge which accompanied the printing press that made the university even more valuable than before. Before Gutenberg, and the Reformation, the chief output of the university was clerics; afterwards the output included lawyers and physicians and most crucially teachers of all kinds, because learning had become valuable to accountants and mechanics and sailors and so on. With the invention of science universities became the place where science was mostly taught and mostly done, and it remains so to this day. It may not be beside the point that the work of a student is facilitated by living among other students whose lives are similarly devoted and governed by the same schedule, or that there are synergies produced by a concentration of bright and motivated young people. Although it's possible for a serious student to educate itself with nothing but a large enough library, it doesn't happen often enough to be considered a serious alternative. The internet hardly changes that.

Greg said: Different types of leverage. The book was a simple force multiplier, allowing the thoughts of the thinker to be absorbed by more people. The university system, as well as further multiplying force (at the cost of some imperfections), also had a large element of guidance. This guidance is the quality that guaranteed the survival of the university system when printed books came. The printed book was again a simple force multiplier, but vastly more powerful than the scribe-written book. It enabled the expansion of the university system among other effects. The next form of instruction must retain the guidance introduced with the university, and must require less labour from the teacher, who can then focus on the students for whom the regular guidance is not working. In this way, the work of the teacher will be leveraged. Aplia and companies like it are making a start on this. However, the next major step suggested by the "force multiplier versus guidance" analysis is a new guidance system: instructional software that can monitor the student's eye tracking and other behaviour in real time, ask questions, and adapt the instruction in real time to deal with incomprehension, loss of focus, and so on, in exactly the same way that a one-on-one tutor does now. It shouldn't be hard to get something that does 80 percent of the job and knows when to kick the problem upstairs. This "force multiplies" the guidance provided at universities. Obviously the above does not apply to leading-edge graduate study, which must still be operated on the apprentice/collegial system, but to undergraduate/early graduate teaching and to labour force skill acquisition.

Greg said in reply to Jed Harris: "Teaching and content are useful, but peer interaction is an essential part of the process -- quite possibly the most essential part." Yes, students learn from each other because they can't afford personal tutors. Affordable computation and machine vision should allow us to change this.

Neal said: The basis of learning to date is accountability. While there is nebulous blather about the importance of face-to-face, the real value of face-to-face was in accountability. You were there, you were expected to learn, and you were expected to produce evidence of your learning. People, and especially students, are weaselly creatures. I was a student, I know people who have students, and I am a father to students. They are weaselly creatures. The danger to the value of an on-line education is the pretending that the weaselly factor does not exist. The embedded nature of what was learned in the face-to-face accountability is replaced by what? I know how my children skitter and skate through the "inter-web net-tubey" thing and there is very little of value that remains after the interaction. Quick solutions seized from here and there, on-line boards and chats for the "smart" persons answer, "cut and paste", done, and on to another round of COD4.

Liveblogging World War II: November 11, 1940

Carrier vs. battleships: the "battle" of Taranto:

World War II Day-By-Day: Day 438 November 11, 1940: At 11 PM, 21 Fairey Swordfish (11 with torpedoes and 10 carrying bombs) attack the Italian fleet at Taranto, taking off from British carrier HMS Illustrious.... 6 Italian battleships and 3 cruisers lie at anchor in the outer harbour.... Torpedoes sink 1 battleship, the Conte di Cavour, and damage 2 others, Littorio and Caio Duilio.... [B]ombing of the inner harbour is ineffective. 2 Swordfish are shot down (1 crew of 2 killed, 1 crew of 2 taken prisoner). The remaining 19 Swordfish return safely to HMS Illustrious by 2.30 AM next morning...

The Fourth Online-Learning Revolution

We can only provide quality online and distance-learning experiences today if we understand that what we are living through is not the first but rather the fourth online-learning revolution.

Let me back up fifteen hundred years:

The best way to train intellectuals is, as the Phaedrus of Aristocles son of Ariston called “Plato” claims that Socrates said, via discussion and apprenticeship to an excellent thinker. Compared to that any alternative—reading a book, say—was wanting. Books, Plato reports Socrates saying, are:

unfortunately like painting; for the creations of the painter have the attitude of life, and yet if you ask them a question they preserve a solemn silence.... You would imagine that they had intelligence, but if you want to know anything and put a question to one of them, the speaker always gives one unvarying answer.... [T]hey are tumbled about anywhere among those who may or may not understand them, and know not to whom they should reply, to whom not: and, if they are maltreated... cannot protect or defend themselves.... [But] an intelligent word graven in the soul of the learner... can defend itself, and knows when to speak and when to be silent.... [H]e who knows the just and good and honourable... will not seriously incline to “write” his thoughts “in water” with pen and ink, sowing words which can neither speak for themselves nor teach the truth adequately to others.... [Rather] the dialectician, who, finding a congenial soul, by the help of science sows and plants therein words which are able to help themselves and him who planted them... making the possessors of it happy to the utmost extent of human happiness...

However, there are not that many excellent thinkers. And they have too few apprentices. It is possible to train intellectuals via apprenticeship to a not-so-excellent thinker, of whom there are many. But Plato at least thought that such an apprenticeship was a third-rate experience, vastly inferior to the second-rate experience that is reading a book of the teaching of a first-rate intellectual. We know that Plato thought this, for he wrote the Phaedrus and his other dialogues—and that is the only way we know of Socrates.

Thus the first online-learning revolution, the first adaptation of technology to higher education, came in 390 BC when to cut the costs of education and allow for more students Plato invented the philosophy book and substituted it for the in-person teacher, thus leveraging the words and thoughts of Socrates (or at least of Plato’s version of Socrates) over many more people and many more millennia than Socrates could himself teach in person.

Books, however, were very expensive back in the days of manuscript production. According to “The Secret History of the Industrial Revolution” by U.C. Davis’s Gregory Clark, the price of books in the early fourteenth century was perhaps 100 times their price today. We in the post-industrial North Atlantic today are perhaps 100 times better-off in material things than were our medieval predecessors. Thus a single book in 1300 cost as large a share of a typical person’s income then as $50,000 is today: acquiring a single book was as great a relative investment and expenditure as a full year of a private college—tuition, fees, room, and board—is today. Plato’s invention of the philosophy book was a technological advance in education, but it was not a large enough advance.

It was not a large enough advance because in medieval Europe bishops and kings found that they needed staffs. Bishops needed theologians and experts in canon law. Kings needed judges and administrators. How best to train all these additional intellectuals? Providing each would-be theologian and judge and canon lawyer and administrator with the books they needed to study was prohibitively expensive. They needed an alternative

The solution that mid-medieval Europe hit upon was the system of the western university, the system that originated in Bologna and Paris. Assemble all those who wished to learn a book in one place. Have somebody—a reader, in Latin a lector, in modern English a lecturer—read the book aloud to them as they sat before him in a group and took their notes. At 4000 words an hour for twenty hours a week a student could absorb about thirty books a year in his time at university. Admittedly the notes he took away and the memory of hearing the book were third-rate compared to the second-rate possession of the book of a first-rate thinker. But it was good enough. And so the western medieval universities grew and flourished. This was the second online-learning revolution.

Then came the third online-learning revolution: the printing press of Johann Gutenberg, and the seventy-year explosion of print culture that followed. By 1500 a book was no longer the same share of income as $50,000 is today but was rather more like the share of $2,000 today. The extraordinary expense of books that had provoked the foundation of the western university and the institution of the group lecture was over. Now everybody could have their own copy of the books they needed. The necessity for gathering all would-be intellectuals together in a few towns and having them sit in groups listening to a speaker had passed.

Yet the university survived. The lecture class survived. They survive to this day. And they have grown and flourished—even though their original reason for being, the tremendous expense of books, is now more than 500 years in the past.

Today we are in the middle of a fourth online-learning revolution. To properly understand and manage it, however, we need to understand something crucial about the third online-learning revolution. What is it about the institution of the university that allowed it to survive the third online-learning revolution? For the fourth will be a catastrophic bust and distance-learning will die—unless we figure out how to replicate online those features of the university which kept it alive in the post-Gutenberg years after the third online-learning revolution.

Felix Salmon Has the Number of Bowles-Simpson

What did Obama expect when he took a serial budget arsonist and put a fire chief's hat on his head?

It's not even that a single Republican legislator has signed on to this thing.

Felix Salmon:

The deficit commission’s plan: [D]epressing on both the big-picture and the little-picture level.... [G]rowth in health-care costs automagically is brought down to GDP + 1% “by establishing a process to regularly evaluate cost growth, and take additional steps as needed if projected savings do not materialize”. But healthcare inflation is a gruesomely difficult nut to crack, and if the CBO simply assumed that it could be solved so easily in 2020, its projections would look much rosier too. Beyond that, the biggest savings proposed by the commission are in various parts of the federal payroll. Nothing else remotely moves the needle: the next biggest saving, beyond the punt of the “cut-and-invest committee”, comes from a reduction in the rate of growth of foreign aid.... Meanwhile, some of the small savings have to be seen to be believed. The deficit commission, charged with coming up with a bold plan to bring the nation’s finances into order, really does propose:

  • Increasing the amount of time spent on instant messenger, to reduce travel costs;
  • “Reduce copying use by putting the default option on copiers to double-sided”;
  • Merging the Commerce Department with the Small Business Administration; *Charging a fee to Smithsonian visitors.
  • Etc....

[B]On the other hand, bold ideas in terms of new taxes — carbon taxes, wealth taxes, Tobin taxes, consumption taxes, you name it — are nowhere to be seen.... [A] large dash of wishful thinking, a bunch of tax cuts (!), and even a cap on the amount of tax revenues that the government can bring in. How that’s meant to help reduce the deficit I have no idea.

Obama vs. Pelosi

Friends ask me if I am going around the bend. I think I am. Here is some evidence as to my psychological state.

I read Nancy Pelosi:

On the Proposal Released by Co-Chairs of the Fiscal Commission: Our nation is facing two challenges: the need to create jobs and address our budget deficit. Any viable proposal from the President’s Fiscal Commission must strengthen our economy, but it must do so in a fair way, focusing on how we can effectively promote economic growth.

This proposal is simply unacceptable. Any final proposal from the Commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare. And it must strengthen America’s middle class families–under siege for the last decade, and unable to withstand further encroachment on their economic security.

I read Barack Obama:

The President will wait until the bipartisan fiscal commission finishes its work before commenting. He respects the challenging task that the Co-Chairs and the Commissioners are undertaking and wants to give them space to work on it. These ideas, however, are only a step in the process towards coming up with a set of recommendations and the President looks forward to reviewing their final product early next month.

And I find myself thinking I would be a happier camper if Pelosi were president instead of Obama.

Never thought I would think that, I must say...

Obama's Next NEC Director

At the moment the lead candidates to replace Larry Summers as NEC Director--big shoes to fill--appear to be Roger Altman and Gene Sperling. I think both of them would probably do very well. But there are other people who I think would also be very good. And the professional economist in me wants somebody who thinks more like an economist. I don't think the administration has enough economists in it's top ranks.

So let me throw out a few names of people who would, I think, be as good as Roger and Gene--and who also think more like economists:

  • Lael Brainard
  • Alan Blinder
  • Larry Meyer
  • Roger Ferguson
  • Laura Tyson
  • Jason Furman

And iI would add Farrell to the list of Altman and Sperling--those who would probably do very well at the job but who do not especially think like economists...

World Bank President Zoellick Clarifies That (a) He Did Not Mean What He Said, and (b) He Does Want to Become the Stupidest Man Alive

If you say on Tuesday that you are in favor of using:

gold as an international reference point of market expectations about... currency values...

you cannot then say on Wednesday that you are:

not proposing to judge whether currencies are undervalued or overvalued by looking at their price in gold...

You cannot say that, that is, unless you really are making a serious run for the crown of Stupidest Man Alive.

Robert Zoellick's Financial Times op-ed was composed of:

  • Two paragraphs of praise for his patron James Baker as the Greatest Policymaker of All Time (with not a mention of Baker's prime role as creator of the global imbalances with which we now struggle).

  • Five paragraphs of mush.

  • A call for a return to some gold-standard-ish international monetary system: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."

Now he says that anybody who read him as meaning what he said was wrong.

Matthew Yglesias:

Yglesias » Zoellick Clarifies That He’s Not for a Gold Standard, He’s Just Mumbling Incoherently: We had a lot of excitement yesterday over World Bank President Robert Zoellick seeming to call for a return to a Bretton Woods-style global gold standard system. Today at the G-20 meeting, though, he clarifies that that’s not what he meant. However, he doesn’t seem to be able to explain what it is he is proposing:

Mr. Zoellick said he thinks the coming monetary system will include a number of reserve currencies, including the dollar, euro, yen and, increasingly, the yuan, though he says the dollar is likely to remain “dominant.” He’s deliberately sketchy on the role he envisions for gold, calling it a “reference point” and an “alternative monetary asset.”... His main point, he said, was to point out that the stupendous rise in gold is a signal that markets are uncertain about the stability of the current exchange system. But he said he wasn’t proposing to judge whether currencies are undervalued or overvalued by looking at their price in gold...

Yglesias comments:

I really don’t think Zoellick can blame outside observers for choosing to interpret him as making coherent, albeit misguided, comments rather than just offering up meaningless jibberish. What does this mean? Transitioning, over time, away from near-universal reliance on the dollar as a reserve currency is an important subject. But why mention gold in this context unless you have a real gold-related proposal?

Masters of Negative Five Dimensional Chess

About the Obama Entitlement Commission, starring budget arsonists wearing Fire Chief hats.

In my inbox right now:

I don't know if my favorite part is adding co-pays to the VA or cutting the schools for soldiers' kids. Or the 23% top tax rate.

Yes, the Entitlement Commission Was an Unforced Error by the Obama Administration

At the time I asked why you would take a budget arsonist like Alan Simpson and give him a Fire Chief hat. I never got a good answer.

Now they are throwing people out of their press conference:

Catfood Commission Presser: Update: Alex Lawson was thrown out of the press conference because he’s not “press”...

Yes, a hideous unforced error:

Commission Co-Chair Proposal:

Cap revenue at or below 21% of GDP...

It probably means nothing--it all depends on what "revenue" means. But if it means something it is going to be a disaster as health care costs rise. You cannot implement PPACA's health-insurance exchanges without a subsidy pool. And if the money to pay for that subsidy pool has to fit under a 21% of GDP revenue cap, it simply does not work.

[P]rojections assume health care spending growth is kept to GDP+1%...

Oh my God! Ration city, here we come!

What clowns vetted this thing?

A 23% top marginal tax rate?

Hoo boy!

More Republicans Lying All the Time, About Everything

Ladonna Pavetti does the intellectual garbage cleanup:

Killing Expired Program Won’t Save Money: Yesterday, the Republican Study Committee issued a press release announcing one of its first ideas for tackling spending:  eliminating the TANF Emergency Fund, which the RSC says would save $25 billion over the next decade “by restoring welfare reform.”  There are so many problems with this proposal that it’s hard to know where to begin.   Here are the facts:

  • The TANF Emergency Fund no longer exists.  It expired on September 30.  You can’t achieve savings by ending a program that has already ended.

  • Nobody has ever proposed spending $25 billion on the fund.  Earlier this year the House passed a bill to extend it for one year, at a cost of $2.5 billion — one-tenth of the savings that the RSC claims.

  • The TANF Emergency Fund is welfare reform.  In fact, the fund represents welfare reform at its best:  it has enabled states to expand work-focused programs within TANF despite high unemployment and a weak economy.  Using the fund, states placed about 250,000 low-income parents and youth in subsidized jobs, mostly in the private sector.

As we’ve explained before, the RSC’s claim that the TANF Emergency Fund “incentivizes states to increase their welfare caseloads” is simply wrong.  States didn’t have to increase their caseloads to qualify for money from the fund.  In fact, some states whose caseloads had sharply declined despite the recession used money from the fund to help create subsidized jobs or provide one-time assistance to families in crisis (such as help paying a back rent or utility bill for a family facing eviction).

In addition, people receiving TANF assistance funded through the Emergency Fund had to meet the same stringent work requirements imposed on other TANF recipients. They had 12 weeks to find a job — an extremely difficult task in today’s labor market — after which they had to meet their work requirement through other work activities, such as unpaid work. A limited number of recipients were permitted to pursue short-term education and training.

The TANF Emergency Fund reduced unemployment in communities across the nation that were hard hit by the recession, and it brought businesses, non-profits, and government agencies together to provide jobs for people who were eager to work to support their families.  When it ended on September 30th, tens of thousands of people lost their jobs — and more will lose their jobs by the end of the year as states scale back or close down their subsidized jobs programs.  That, of course, is the exact opposite of what the economy needs right now.

Friends really do not let friends vote for, work for, or contribute to the Republican Party.

Delong Smackdown Watch: ProGrowth Liberal

Over at Econonospeak, PGL writes:

EconoSpeak: One Quibble with Brad DeLong’s Platform for the Bipartisan Technocrats: Let me endorse almost all of Brad’s platform for the bipartisan technocrats which is what he says Robert Rubin should be saying. It is classic Rubinomics endorsing long-term fiscal restraint with short-term fiscal stimulus:

Recovery: when every fired local, state, and federal worker takes a private sector job down as well and when the U.S. government can borrow at today's absurdly-low terms, it is criminal stupidity not to pull government spending forward into the present and push taxes back into the future (all within the ten-year PAYGO rule, of course). Since the macroeconomic situation is worse now than it was ever projected to get when the first Recovery Act was passed and since the U.S. government can borrow on better terms now than it could at the time of the first Recovery Act, it is time for a second Recovery Act--fifty percent federal government purchases and aid to the states, fifty percent tax cuts--somewhat larger than the first was.

Accelerating government purchases is a no-brainer (except to those political fools who govern us by saying “no” to anything that comes from the Obama White House). Federal revenue sharing is another no-brainer.

My quibble is with Brad’s suggestion that half of the 2nd Recovery Act should be half from tax cuts. Why? Well in the standard Keynesian model, the impact effect from a dollar of tax cuts is dampened by the marginal propensity to consume as at least some of the tax cut is saved even by borrowing constrained households. For households that are not borrowing constrained, pushing taxes back has no effect on consumption demand today. In other words, the more of the supposed fiscal stimulus that comes from tax cuts – the less bang for the buck we get. Was not this one of the problems with the first Recovery Act?

Indeed. PGL is correct--the bang-for-buck is likely to be lower.

But this is supposed to be a platform for bipartisanship, after all, and bipartisanship requires giving the masters of the Republican Party a big share of the cookies all of the time.

Republicans Lying All the Time About Everything

Sudeep Reddy of the Wall Street Journal finds that he is a target:

Palin Responds to Real Time Economics and We Respond: Real Time Economics yesterday looked at Sarah Palin’s remarks about monetary policy to a trade association conference. On Monday night, she responded on Facebook:

Ever since 2008, people seem inordinately interested in my reading habits. Among various newspapers, magazines, and local Alaskan papers, I read the Wall Street Journal. So, imagine my dismay when I read an article by Sudeep Reddy in today’s Wall Street Journal criticizing the fact that I mentioned inflation in my comments about QE2 in a speech this morning before a trade-association. Here’s what I said: “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.” Mr. Reddy takes aim at this. He writes: “Grocery prices haven’t risen all that significantly, in fact.” Really? That’s odd, because just last Thursday, November 4, I read an article in Mr. Reddy’s own Wall Street Journal titled “Food Sellers Grit Teeth, Raise Prices: Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies.”

The article noted that “an inflationary tide is beginning to ripple through America’s supermarkets and restaurants…Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months.” Now I realize I’m just a former governor and current housewife from Alaska, but even humble folks like me can read the newspaper. I’m surprised a prestigious reporter for the Wall Street Journal doesn’t.

Sudeep Reddy responds:

Our post on Monday examined the assertion that grocery prices “have risen significantly over the past year or so.” That view is not supported by the facts. A broad measure of food prices from the Labor Department shows prices rose at an average annual rate of less than 0.6% in the first nine months of the year. September’s increase in food prices — 1.4% for food and beverages at an annual rate — was low by historical standards.(In fact, the lowest average annual inflation rate on record was 1.4%, in 1992.) Commerce Department inflation data show a similarly slow year-over-year increase for food prices, 1.3%. While some items in the shopping cart have risen in price (ground chuck beef is up 4.8%) and others have decreased (bananas are down 5.3%), overall food price inflation has been historically low for the past year. This is not surprising. Weak demand, high unemployment and thrifty shoppers have led retailers to keep many prices from rising despite the rising cost of some commodities, including coffee and sugar.

The Nov. 4 Wall Street Journal article noted, in its first sentence, “the tamest year of food pricing in nearly two decades.” It does indeed report that supermarkets and restaurants are facing cost pressures that could push their retail prices higher — but it hasn’t happened yet on a large scale. Critics of the Fed’s quantitative easing policy are focused primarily on concerns about potential future inflation.

Friends really do not let friends vote for, work for, or contribute to the Republican Party.

Morality Plays...

Interfluidity appears to accuse me of being immoral because I am amoral, or something like that...

To the contrary, I say that our duties to be intelligent, reality-based, wise stewards of our resources, and brave are moral duties. Stupidity, addiction of fantasy, needless poverty, and cowardice are not moral virtues.


Tragedy of the technocrats: [H]uman affairs are a morality play, and economics, if it is to be useful at all, must be an account of human affairs.... It should be no surprise that human collectives choose policies destructive of GDP or employment growth when they deem those policies to be wrong or unjust. Individual human beings act against their material interests all the time.... There is a reason why people are asking What Would Milton Friedman Do? in the same way a Christian might ask what Jesus would do. The technocratic interlude for which Brad DeLong yearns was built upon scripture that Milton Friedman both penned and evangelized. We are in a period of Reformation now, with all the turmoil that suggests, and the outcome is not predetermined. Simply assuming the parishioners will remain faithful, or lamenting that they ought to remain faithful, is no way to win the argument....

It is easy, in the context of prevailing norms, to argue that [in bad times] governments should be prudent in the same way as households.... The most obvious moral counterplays, appeals to altruism in the face of misery, are vulnerable to vilification of the “undeserving poor” — people whose lack of diligence left them without “skills”, deadbeats who partied on debt they cannot now repay...

The principle to which Interfluidity refers is that when times are bad--when your present and expected future resources fall--you should cut back on your commitments. The fact is that these are bad times for private economic actors: their current incomes have fallen, and the high interest rates charged them means that their future resources are worth a lot less than they used to be when translated into claims on today.

But things are completely different for the government.

The terms on which the U.S. government today can borrow are extraordinarily, unbelievably good. The government's current resources have declined with the decline in tax revenue, but the taxes the government will receive in the future are--according to a bunch of calculations John Cochrane made when he came to Berkeley to give a seminar--worth roughly four times as much when translated into claims on goods, services, and labor today as they were worth three years ago. The resource constraints binding private economic actors have become much tighter. But the resource constraints binding the government have--because of the extraordinary falls in interest rates--become much looser. And high unemployment and slack capacity mean that the terms on which the government can get goods, services, and labor are significantly more advantageous than they were three years ago.

Every single particle of logic is crying out that now is the time for the government to pull its spending forward from the future into the present and push its taxes from the present back into the future.

The argument that "governments should be prudent in the same way as households" is not a moral argument: it is a stupid argument. It blindly closes its eyes to the reality that times feel very different for credit-worthy governments than for potentially insolvent private economic actors, and that what is prudence for the second is sheer idiocy for the first.

To claim that there is a moral case against the policy recommendations of technocracy today is to claim that there is a moral case for stupidity, a moral case for fantastic disconnection from reality, a moral case for needless poverty, and a moral case for cowardice.

And I really do not think Interfluidity wants to make that argument.

Republicans Are Really Weird, Chapter CCVII

Ben Armbruster:

In 2008, Bush Said He ‘Probably Won’t Vote For’ McCain: With stories about President Bush’s new memoir dominating the headlines this week, Financial Times Westminster correspondent Alex Barker reports on his “favourite Bush anecdote,” which he writes, “for various reasons we couldn’t publish at the time. Some of the witnesses still dine out on it“:

The venue was the Oval Office. A group of British dignitaries, including Gordon Brown, were paying a visit. It was at the height of the 2008 presidential election campaign, not long after Bush publicly endorsed John McCain as his successor.

Naturally the election came up in conversation. Trying to be even-handed and polite, the Brits said something diplomatic about McCain’s campaign, expecting Bush to express some warm words of support for the Republican candidate.

Not a chance. “I probably won’t even vote for the guy,” Bush told the group, according to two people present.“I had to endorse him. But I’d have endorsed Obama if they’d asked me.”

Barker said that British officials looked “dumbfounded” and that Brown’s “poker face gave way to a flash of astonishment.”

I Always Thought That Glenn Beck Was Really Working for the Russians...

Yep. He is denouncing "Puppet Master" George Soros for funding revolutions against Soviet domination in Eastern Europe in the 1980s...

Send lawyers, guns, and money!

(Of course, we here at Berkeley are now funded by a Soros-sponsored institute. That means, I guess, that Beck disapproves of us because we are against the Communist Russians too...)

Westward the Course of Empire Takes Its Way...

Gee. I go off to Ohio State and Barry Eichengreen becomes depressed:

Is America Catching the “British Disease?”: Imperial overreach, political polarization, and a costly financial crisis.... [I]t is important to understand the nature of the British disease.  It was not simply that America and Germany grew faster than Britain after 1870.... The problem was Britain’s failure in the late nineteenth century to take its economy to the next level. Britain was slow to move from the old industries of the first Industrial Revolution into modern sectors like electrical engineering which impeded the adoption of mass-production... failed to adopt precision machinery that depended on electricity, which prevented it from producing machined components.... The same story can be told about other new industries like synthetic chemicals, dyestuffs, and telephony, in all of which Britain failed to establish a foothold. The rise of new economic powers with lower costs made employment loss in old industries like textiles, iron and steel, and shipbuilding inevitable. But Britain’s signal failure was in not replacing these old nineteenth-century industries with new twentieth-century successors.

Is America doomed to the same fate? Answering this question requires understanding the reasons behind Britain’s lack of technological progressiveness... Britain failed to put in place an effective competition policy. In response to the collapse of demand in 1929, it erected high tariff walls. Sheltered from foreign competition, industry grew fat and lazy. After WWII, repeated shifts between Labour and Conservative governments led to stop-go policies that heightened uncertainty and created chronic financial problems. Herein lies the most convincing explanation for British decline. The country failed to develop a coherent policy response to the financial crisis of the 1930’s. Its political parties... remained at each other’s throats... politics grew fractious... policies erratic... finances increasingly unstable.

In short, Britain’s was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America’s fate.

What, Felix, Is Wrong, Exactly, with Proposing to Give Every American Family a Sparkly Unicorn for Diwali?

Felix Salmon writes:

Brad DeLong’s fiscal manifesto : Brad DeLong is fed up with vague hand-waving from technocrats... So he comes up with his own seven-point “platform for the bipartisan technocrats of the center”, which “everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today”....

DeLong... has performed two important services... translated technocratese into stark policy proposals, and he’s demonstrated that the technocrats in question might as well be talking about giving every US family a free unicorn for all that their wishes will ever come true.

Let’s hope (against hope) that when the technocrats continue the debate, they’ll have been paying attention to both messages.

I'm not sure I understand this last point: how are we supposed to "pay attention to this second message"? I mean, are we talking "Hige sceal þe heardra! Heorte þe cenre! Mod sceal þe mare, þe ure mægen° lytlað!" or what?

And, yes, you are right about the regressive nature of the carbon tax...

What Have the Romans Ever Done for Us?


Charles Sorrel of Wired:

1,800-Year-Old Roman Multitool | Gadget Lab | Well, it turns out that back somewhere between A.D 201 to 300, a clever Roman, probably named MacGyvericus, invented the multitool. And not just some weird, old-fashioned multitool, either. MacGyvericus’ tool is startlingly similar to the modern Swiss Army Knife, now part of the collection of the Fitzwilliam Museum in Cambridge, England... a knife, spike, pick, fork and a spatula... a useful spoon on the end, making it likely that this iron and silver artifact, found in somewhere in the Mediterranean countries, was meant for eating with.

What it is is 100 percent awesome, and just makes me love the Romans even more...

In Which Bob Zoellick Makes His Play for the Stupidest Man Alive Crown

The last thing that the world economy needs right now is another source of deflation in a financial crisis. And attaching the world economy's price level to an anchor that central banks cannot augment at need is another source of deflation--we learned that in the fifteen years after World War I.

Which is why Bob Zoellick says that we need it.

Alan Beattie watches the intellectual train wreck:

Zoellick seeks gold standard debate: Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank. Writing in the Financial Times, Robert Zoellick, the bank’s president since 2007, says a successor is needed to what he calls the “Bretton Woods II” system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971. Mr Zoellick, a former US Treasury official, calls for a system that:

is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.... The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.... Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”

They do not. They simply do not. That is not true. Markets are using gold as a speculative asset and a hedge. They are not using it is a medium of exchange, a unit of account, or a safe store of nominal value.

He really may be the Stupidest Man Alive.

Alan Beattie politely says:

Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks...

Department of "Huh?!" (Structural Unemployment Edition)

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

Allison Schrager:

Fiscal policy: Digging oneself into a hole?: A few weeks ago I heard Robert Solow, Nobel Laureate for his work on economic growth, say fiscal stimulus via government spending was necessary and the most effective tool we currently have to reduce unemployment. Paul Krugman has not been shy about advocating a similar position. At last week's Buttonwood gathering Joe Stiglitz also favoured a Keynesian style push. Chicago’s Ragu Rajan was more sceptical, and thought it would be better to focus on long-term structural problems like a labour force that lacks globally competitive skills and income inequality. The Minneapolis Fed’s Narayana Kocherlakota also doubts how effective stimulus will be when it seems that much of unemployment is structural and not easily remedied by government expansion...

I know of no evidence that much of unemployment is structural and not easily remedied by government expansion.

If unemployment were structural, and not easily remedied by government expansion, inflation right now would be stable or rising. It is not:

Meltzer Misleads -

This is not rocket science, people!

The Wall Street Journal Op-Ed Page Lies All the Time, About Everything

Meltzer Misleads -

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

Allan Meltzer dropped off my list of reliable commentators in the late 1990s, when he accused Larry Summers and Bob Rubin of breaking the law during the Mexican Peso Crisis of 1995. Now he has woken Paul Krugman's ire:

Meltzer Misleads: Reading Allan Meltzer’s latest, you might think that the CPI and the PCE deflator — two alternate measures of inflation — were telling dramatically different stories about what was happening to the US economy.... Yes, there was brief bulge in the PCE deflator early this year — which in itself raises questions about how reliable a measure it is. But basically, both show a steady trend toward lower inflation. Which is, by the way, the opposite of what Meltzer told us to expect.

Indeed. Meltzer:

Meltzer: Milton Friedman vs. the Fedm: In the late 1980s, former Fed Chairman Alan Greenspan encouraged everyone to watch... the PCE deflator. Since then, the Fed has used that measure as its inflation target. Recently, without much publicity, the Fed switched to the consumer price index (CPI). The reason? From 2003 to 2009, the two measures moved together. In 2010, they diverged—and the CPI shows substantially less inflation than the PCE. Even so, the most recent PCE deflator shows inflation running at around 1.2% annually, about where the Fed says it wants to hold the inflation rate. And it has been between 1.5% and 1.8% for a year. There is no sign of deflation.

The Fed says that it wants to hold the inflation rate at 2% per year, not 1.2% per year.

Oh Boy...

Mark Thoma:

Economist's View: "Federal Reserve Reflects on its History": Bernanke says he's not trying to create inflation as a means of stimulating the economy:

After its big move to boost economy, Federal Reserve reflects on its history, by Neil Irwin, Washington Post: ...Fed Chairman Ben S. Bernanke and a long list of past and present Fed officials gathered this weekend for a conference on the history of the central bank.... Speaking at the "Return to Jekyll Island" conference sponsored by the Atlanta Fed, Bernanke argued that the steps are not as revolutionary as many observers in the financial markets and the news media have suggested.

There's a sense out there that, quote, quantitative easing or asset purchases are some completely foreign, new, strange kind of thing and we have no idea what... is going to happen. Quite the contrary - this is just monetary policy.... It will work or not work in much the same way that ordinary, more conventional, familiar monetary policy works.... I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy.

"We're not in the business of trying to create inflation," Bernanke said. Rather, he said, the Fed is trying to avoid a further drop in inflation...

And Mark Thoma is upset:

Since an increase in inflationary expectations is one potential way to stimulate the economy, Bernanke is "blocking one of the main channels through which his policy might actually work."

Yep. This is not good at all. "Crying 'Fire! Fire!' in Noah's Flood" indeed...

Where is the Ben Bernanke who had such a willingness to do what economic stability required in the fall of 2008? What happened to him?

Why Are the Technocrats of the Center Missing in Action?

Robert Rubin disappoints Felix Salmon:

Rubin’s unhelpful fiscal exhortations: Oh dear, what have I signed up for? No sooner do I agree to start blogging more about economic journalism than I find this op-ed from Robert Rubin in the FT. It’s a pretty sorry specimen, and I do hope it’s not representative of the genre. The op-ed, which is written in borderline-unreadable technocratese, has a simple structure: there are headwinds in the economy. What should we do about them? Spending more might be problematic. Expansionary monetary policy likewise. So what should be done? The administration should be more business-friendly. And it should put together a “serious fiscal plan”.

Rubin is long on assertion and scaremongering, and short on actual argument.... It’s really hard for me to see how Rubin gets to his “likely on balance” conclusion that stimulus will be counterproductive. Does Rubin really think it probable that the announcement of extra government spending would cause some kind of crazy market crash? And “business uncertainty about future economic conditions and policy” is a pretty weak replacement for the bond vigilantes....

Rubin is incredibly light on the specifics of exactly what he means by “real, trusted and enacted long-term structural deficit reduction.”... Rubin wants to see “public investment and reform in economically critical areas, such as education, healthcare costs, infrastructure, immigration and others”; he gives no corresponding list of areas which might see spending cuts. And his list of tax hikes is limited to letting the Bush tax cuts on income over $250,000 a year expire. Which is all well and good, but is hardly going to move the needle on the debt/GDP ratio. Rubin ratchets up the unintended irony in his conclusion:

Despite substantial legislative actions over the past year and a half, there is widespread and serious concern about the willingness to work across party and ideological lines and to make the tough decisions, necessary to meet our challenges.

Well yes, Bob. But how do you expect the government to make tough decisions if you, a semi-retired technocrat with no public office at all, can’t even bring yourself to name them? It’s all well and good to talk about fiscal prudence in the abstract: the difficult thing is enacting it in reality. And you’re not being remotely constructive on that front.


It is disappointing.

And it is not just Rubin: all the bipartisan technocrats of the center appear to be wringing their hands and calling for a plan without saying what it should be.

Here is what Rubin should have said.

Here is the platform for the bipartisan technocrats of the center:

  • Ten-Year PAYGO: a 2/3 supermajority in both houses commitment to ten-year PAYGO starting now, and a pledge by every president and presidential candidate that they will veto all bills that do not meet ten-year PAYGO standards. Everything Congress passes must be projected to reduce the outstanding national debt within ten years.

  • "Starting now" means starting now: no middle-class tax cut this month or next month without a pay-for within ten years. Taking current law rather than current policy as our baseline and requiring PAYGO for everything gets our 25-year fiscal gap down to 1.2% of GDP (as opposed to 4.8% of GDP) and gets our 50-year fiscal gap down to 0.8% of GDP (as opposed to 6.9% of GDP). Our long-run deficit problem is overwhelmingly due to things that Congress is about to do, not things that Congress has done.

  • Carbon tax: a 1.0% of GDP carbon tax is the best policy to provide American businesses with the incentives they need to invent the clean energy technologies of the future. Half of it should be channeled into the Social Security Trust Fund to improve its solvency. Half should be used to help close our remaining operating fiscal gap.

  • Pick-your-poison: Additional stand-by tax increases and stand-by spending cuts to close the remaining 0.3% of GDP long-run fiscal gap.

  • Private add-on Social Security accounts: At their option, all Americans can add up to 2% of their Social Security wages to a private Social Security account run through the U.S. government's Thrift Savings Program. Private contributions will be matched two-for-one by the federal government out of carbon tax revenue

  • Recovery: when every fired local, state, and federal worker takes a private sector job down as well and when the U.S. government can borrow at today's absurdly-low terms, it is criminal stupidity not to pull government spending forward into the present and push taxes back into the future (all within the ten-year PAYGO rule, of course). Since the macroeconomic situation is worse now than it was ever projected to get when the first Recovery Act was passed and since the U.S. government can borrow on better terms now than it could at the time of the first Recovery Act, it is time for a second Recovery Act--fifty percent federal government purchases and aid to the states, fifty percent tax cuts--somewhat larger than the first was.

  • Certainty: The principal sources of uncertainty in American economics right now are three: we don't know how the long-run fiscal gap will be closed (but we think it will be), we don't know how our health-care system will be reformed and transformed (but we know it will be), and we don't know what our policy toward global warming will be in a generation (but we know that we will have one). The best things the government could do to diminish uncertainty would be to: (1) commit immediately to the full implementation of the version of RomneyCare-plus-cuts-in-Medicare-and-taxes-on-gold-plated-health-plans that was this year's PPACA, (2) commit immediately to a long-run climate policy in the form of a carbon tax coupled with research incentives for future energy technologies, and (3) commit immediately to a plan to cover the long-term fiscal gap.

That's a seven-point plan. That's a seven-point plan that everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today.

The Pointless Pain Caucus Is Inventing Reasons on the Fly to Object to Quantitative Easing...

Paul Krugman:

Bernanke And The Shibboleths - [W]e have an excess of desired saving over desired investment, even at a zero interest rate.... How did this happen?... [O]ver-borrowing in the past has left large parts of the world credit-constrained, forced to deleverage... even a zero interest rate isn’t enough to persuade the unconstrained players to increase spending by enough to offset these cuts. Yet interest rates can’t go below zero; which poses a problem. For the world as a whole, savings must equal investment.... So this incipient excess of savings leads to a depressed world economy, in which income falls to match the amount people are able/willing to spend.

So what can policy do?

  1. It can try to achieve negative real interest rates by creating expectations of inflation....

  2. Alternatively, governments can step in and spend while the private sector won’t.

  3. Finally, central banks can try to circumvent the zero lower bound.... [W]e only have zero rates at the short end, and it’s possible, though not certain, that you can get at least some traction by buying those longer-term bonds.

But now that we’re in this situation, VSPs around the world are objecting to all of these possible actions. Inflation targets are horrible because we must have price stability. Fiscal policy is unacceptable because we must have balanced budgets. QE is outrageous because that’s not what central banks are supposed to do.

Notice that in each case the objection is based on a shibboleth. Price stability is treated as an absolute virtue, without any model to explain why. The same with budget balance. And those who are horrified at the idea of expansionary monetary policy have been inventing concepts on the fly to justify their position.

The simple fact is that we have a global excess supply of savings, which is doing terrible things to workers. The reasonable thing is to do something about it; it’s deeply unreasonable, and deeply irresponsible, to invent reasons not to act...

Economic History at U.C. Berkeley

Kathleen Maclay:

11.02.2010 - Grant launches Berkeley Economic History Lab: The University of California, Berkeley's Department of Economics is the recipient of a $1.25 million grant from the Institute for New Economic Thinking (INET) to develop a Berkeley Economic History Laboratory. The new lab will train economists to be more historically literate so they can better contribute to policy debates.... The award is the largest of 30 first round grants announced recently by the institute, which was established in 2009 with a $50 million pledge from financier George Soros to improve economics through educational initiatives, conferences and grants. It further boosts the field of economic history at UC Berkeley's economics department, already home to one of the nation's leading graduate programs for economic historians. The Berkeley Economic History Laboratory (BEHL) was proposed by UC Berkeley economic historian Barry Eichengreen, who will serve as its principal investigator.

"It took the most serious financial crisis in 80 years – unfortunately – to remind economists of the value of historical knowledge and analysis," said Eichengreen. "We now need to capitalize on that awareness by increasing the supply of young scholars with historical training and skills who can contribute to the debate over economic and financial reform." "If there is a 'Berkeley School,' its distinguishing characteristic is the use of historical materials to address policy-relevant issues of current concern," Eichengreen wrote in the lab proposal. Eichengreen was joined last Thursday in a conversation on campus about the new lab with INET executive director Robert Johnson and fellow UC Berkeley economic historians Bradford J. DeLong and Christina Romer. "You guys are going to be the generators of new economic thinking," Johnson told economics students in the audience.

Romer, recently back at UC Berkeley after serving as chair of President Obama's Council of Economic Advisors, stressed the importance of using history as a tool to help answer "enormous questions that have effects on the entire planet." As examples, she cited the economic crisis's impact on long-term growth, impacts of the federal stimulus package on jobs and prospects for the Federal Reserve Bank's anticipated quantitative easing to boost the banking system's money supply.

Eichengreen said the lab should help leverage UC Berkeley's existing strengths in economic history, encourage other institutions to forge similar paths, and "not only train specialist economic historians, but also infuse a historical sensibility into the work of economists who self-identify as working in other areas." All this, he said, will help make economics a more fundamentally historical, institutional and empirical social science.

With INET funds, the department will increase the number of historically literate economists doing policy-relevant research and newly-minted UC Berkeley graduates with Ph.Ds in economic history.... UC Berkeley's Department of Economics has one of the only top-ranked Ph.D. programs in the nation that requires a semester-long introduction to economic history for all first-year students, who must earn a B- or better to advance their studies and write a dissertation...

Might Health Care Reform Save Money More Quickly than I Expect?


Kolstad and Kowalski: Evidence from Massachusetts on the Impact of Health Care Reform: [T]he Massachusetts reform gives us a novel opportunity to examine the impact of expansion to near-universal health insurance coverage among the entire state population.... We use a difference-in-difference strategy that compares outcomes in Massachusetts after the reform to outcomes in Massachusetts before the reform and to outcomes in other states.... [R]eform increased insurance coverage among the general Massachusetts population. Our main source of data is a nationally-representative sample of approximately 20% of hospitals in the United States. Among the population of hospital discharges in Massachusetts, the reform decreased uninsurance by 36% relative to its initial level. We also find that the reform affected utilization patterns by decreasing length of stay and the number of inpatient admissions originating from the emergency room. Using new measures of preventive care, we find some evidence that hospitalizations for preventable conditions were reduced... hospital cost growth did not increase after the reform in Massachusetts relative to other states.

Tim Pawlenty vs. John Boehner

A Republican who still has some sense of honor vs. one who does not.

Alex Seitz-Wald watches the cat fight:

How House Republicans Are ‘Lying To You’ About Spending Cuts: [M]ost Republicans in Congress refuse to propose specifics that would actually cut spending in any significant way. Recognizing the extreme unpopularity of cutting Social Security and Medicare, and the aversion of their base to military cuts, these self-styled fiscal conservatives often take entitlement and defense spending off the table, removing nearly 60 percent of the federal budget from scrutiny. Of the remaining spending, another sizable portion goes to debt payments — which are untouchable — and most Republicans also take homeland security and other security spending off the table, leaving only a small fraction of the total federal budget from which to find cuts.

Despite this stark reality, Republicans still try to claim the mantle of fiscal responsibility....

Appearing on MSNBC’s Morning Joe today, Minnesota Gov. Tim Pawlenty... [tells us that] anybody says they want to cut spending but won’t touch entitlements or defesne is “lying to you”:

HOST: What are you going to cut?

PAWLENTY: If you look at a pie chart of federal outlays, discretionary spending being the red, non-discretionary being the blue. The blue is already over the over the half way mark and it’s growing in double digits. Anybody who comes in here and tells you they’re not going to cut anything other than waste fraud and abuse, they’re not going to touch entitlements — they’re lying to you. If you want to deal with the spending issue, in terms of total federal outlays, you got to deal with interest on the national debt, Social Security, Medicare, Medicaid — if you have the time I can walk you through my ideas. But that’s the truth, you got to do entitlement reform, particularly if you’re going to hold defense harmless...

Austin Frankt: Keep Your Eye on the Prize

Was health care reform worth it? Yes:

Austin Frakt: Beyond Washington | The Incidental Economist: The principal way in which health reform is good for health is that it provides access to insurance for tens of millions of Americans. A secondary way is that it aims to increase the efficiency and quality of our health system through payment incentives and reduction of health care of low marginal value, in exchange for increasing provision of health care with high marginal value.

But let’s just take insuring the uninsured. Many, many, many, many, many, many studies using the best statistical techniques find that insurance is good for health. Aaron and I have written about them numerous times, so I won’t do a literature review in this post. (Follow the “many” links provided above.)

Given the importance of health reform for health, the interpretation of the question “Was health reform worth it?” in political terms, and only political terms, misses a lot. Even if health reform is responsible for a significant part of the mid-term’s outcome–and I don’t think it was–that it was worth it is not even a question in my mind. If one thinks that our health insurance system requires major reform, and I believe it does (who doesn’t?), then that’s the right thing to do. In fact, it was the right thing to do years ago.

Was health reform worth it? Looking beyond Washington and focusing on health, the answer is clearly “yes.” Even if the politics don’t justify it, the health of Americans does.

Department of "Huh?!" (Sebastian Mallaby Edition)

"Huh?!" is Greg Ip's reaction to Sebastian Mallaby of the Council on Foreign Relations, which has indeed fallen on sad times:

QE2 and the Fed: QE is unconventional monetary policy, but it is monetary policy nonetheless. When either conventional or unconventional monetary policy eases, certain things are supposed to happen: long-term yields fall, stocks rise, the exchange rate declines. All of which is happening now. If the Fed had just cut the Federal funds rate from 3.5% to 2.75% (roughly the equivalent of what its $600 billion in Treasury purchases should achieve), we should have expected exactly the same results, without [Mallaby's] sturm und drang about currency wars.... [C]urrency manipulation... unsterilised foreign-exchange intervention, for example, such as the Swiss National Bank and Bank of Japan.... But that’s not what the Fed is doing. It is simply trying to do to long-term rates what it has already done with short-term rates....

I think [Mallaby's confusion] stems from a misconception of what QE does.... Purchasing bonds with newly-created bank reserves will only expand the overall domestic supply of credit if banks on-lend the extra reserves. That is not happening.... Nor does QE create foreign liquidity; the Fed can do many things, but printing foreign currency is not one of them....

The Fed does not create Brazilian reals: but it may make investors willing to pay more for real-denominated assets. Before foreign countries try to resist that, they should first ask if they should. Many of these countries need to reorient their economies from exports to domestic demand. A higher currency helps. And if it’s happening too quickly, they can use macroprudential regulation at home....

One thing other countries should not do is ask America to leave unused one of the few effective policy tools it has left to stimulate the domestic economy. The world needs higher unemployment and deflation in America like a hole in the head.

Indeed. If there was one big lesson from 2008-2009, it is that the rest of the world has an even greater interest in full employment in America than America does.