Grasping Reality on TypePad, by Brad DeLong

Entry by Paul Krugman:

Orwellian Centrism: [T]he Washington Post... I’m inside the Beltway right now, so I spared a peek — and for my sins ended up reading Dana Milbank, who praises Obama for punching the hippies. So far, so usual. But then I read this:

This is a hopeful sign that Obama has learned the lessons of the health-care debate, when he acceded too easily to the wishes of Hill Democrats, allowing them to slow the legislation and engage in a protracted debate on the public option. Months of delay gave Republicans time to make their case against “socialism” and prevented action on more pressing issues, such as job creation. Democrats paid for that with 63 seats.

Um, that’s not what happened — and I followed the health care process closely. The debate over the public option wasn’t what slowed the legislation. What did it was the many months Obama waited while Max Baucus tried to get bipartisan support, only to see the Republicans keep moving the goalposts; only when the White House finally concluded that Republican “moderates” weren’t negotiating in good faith did the thing finally get moving.

So look at how the Village constructs its mythology. The real story, of pretend moderates stalling action by pretending to be persuadable, has been rewritten as a story of how those DF hippies got in the way, until the centrists saved the day.

The worst of it is that I suspect Obama’s memory has gone down the same hole.

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

There should be resignations from the Washington Post every day.

Today, more than usual, they should be in disgust at the low quality of the thought expressed.

David Broder:

Centrist on the rise: [Barack Obama] has regained the economic initiative from the victorious Republicans, separated himself from the left of his own party and staked a strong claim to the territory where national elections are fought and won: the independent center... [by] opting to accommodate reality by acceding to the Republican demand for maintaining all the Bush tax cuts... yielding temporarily to the GOP on its insistence for preserving the top-bracket tax cuts.... [T]he $900 billion this deal will add to the national debt increases the pressure on Obama and Congress to undertake the kind of tough-love budgetary changes outlined by the presidential commission on deficits... improves the odds for tax reform, an effort that Obama is now perfectly positioned to lead...

If adding $900 billion to the national debt is a step toward fiscal responsibility and tax reform, why stop there? Why not add $3 trillion to the national debt? Or $9 trillion?

To say that we should add $900 billion to the debt because it increases the pressure on us to deal with our long-term fiscal problems is like saying that we should cut off our hand in order to increase the pressure on us to go to the doctor.

Don't get me wrong: I think the $900 billion deal is better than nothing--although I bitterly, bitterly regret Obama's failure to hold out for a short-term debt-limit increase and for long-term standby tax increases and spending cuts: "I will sign no bills that increase the debt looking ten years forward" ought to be his line in the sand.

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

The thoughtful and intelligent 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.

And:

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!

Let's try to think through whether it is money that matters or rather financial assets...

Since I am in Berkeley let's think of an economy with two occupations: baristas and yoga instructors. Baristas make lattes and yoga instructors teach you how to do the Downward-Facing Dog. Can there be a situation in which baristas have brewed more cups of coffee than than yoga instructors want to buy who are offering more yoga lessons than baristas want to take? 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 here Mill comes in: it is perfectly possible for there to be an excess supply of goods and services—for the current flow of aggregate demand for goods and services to be less than the cost of the goods and services currently being produced--if there is an excess demand for financial assets. 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...

Now does it have to be an excess demand for money?

Consider, first, a normal shift in demand: Berkeleyites decide that they want to spend somewhat less on lattes that make them jumpy, irritable, and stressed. Berkeleyites decide they want to spend somewhat more on yoga lessons in order to seek inner peace. Baristas find that they have brewed more lattes than they can sell. Some cut their prices and see their incomes fall, some cut back on hours, some find themselves unable to buy the shade-grown beans for their next round of production and are unemployed.

Yoga instructors find demand booming.

They schedule extra classes.

They work late into the night chanting “om mani padme hum” to satisfy demand.

They raise their prices.

They take on extra apprentices to help them carry the load.

Prices fall in the coffee industry. Prices rise in the fitness industry. Excess supply of coffee and baristas comes with excess demand for yoga lessons and yoga instructors.

In a short time the economy adjusts.

Labor exits the coffee industry and enters the yoga industry. And in a short while the economy has rebalanced with fewer baristas and more yoga instructors, the structure of production has shifted to accommodate the shift in demand, and there is no more excess unemployment.

But now consider, instead, what Jean-Baptiste Say and John Stuart Mill were talking about in 1829 with an excess demand for financial assets.

Consumers decide that they want to spend somewhat less on lattes purchased from baristas and to hold more bonds and more cash. Those with less than their new higher target of financial assets simply spending until somebody buys some of what they have to sell.

What happens in the coffee industry is the same thing that happened when there was a shift in demand from caffeine to inner peace. Baristas find that they have brewed more lattes than they can sell. Some cut their prices and see their incomes fall, some cut back on hours, some find themselves unable to buy the beans for their next round of production and are unemployed. Inventories of unsold beans and cold coffee pile up. Entrepreneurs looking at their growing piles of unsold inventory cut back on hours and production even more.

But there is no countervailing increase in spending, employment, and hours for yoga instructors.

Things then snowball. The unemployed baristas now have no incomes. They cannot afford to buy as many yoga lessons or, indeed, as much of the coffee made by other baristas. Employers cut back production and employment even more. Thus there is a second-round fall in demand which renders even more people unemployed--and then there is a third round. Moreover, everybody sees rising unemployment and falling incomes around them. Can you imagine a better signal to make you decide to try to hold onto more cash? Instead of cutting back on spending on coffee when you have less than $20 in your pocket, people start cutting back on all spending when they have less than $40 in their pocket. And the more the prices at which you can sell your goods falls and the higher unemployment climbs, the more desperate people are to pile up more cash in their wallets.

In a normal market adjustment--a fall in the demand for lattes and a rise in the demand for inner peace--the workers fired from the coffee industry would rapidly be hired into the yoga instructor industry. But this is not a normal market adjustment: this is depression economics.

Things would be different if we were on a gold standard there were a bus to Sacramento. Unemployed baristas would then say: "I'm unemployed, and the economy is way short of financial assets--I know! I'm going to take the bus to Sacramento and enter the gold-money producing industry by panning for gold!" Then labor would flow out of latte-making and into money-production, and we would have a normal adjustment process.

But our currently-unemployed have little ability to go down into their basement and make the assets of which the world economy is currently short--whether they are Federal Reserve notes or 30-Year Treasuries.

I cannot see that it makes a good deal of difference whether the financial excess demand is for liquid cash money, or for bonds as savings vehicles, or for the class of safe nominal assets. In each of these three cases it seems likely that you get downward pressure on demand for those industries that can fire people and little if any upward pressure on demand in any industries that can hire people.

You will respond that what I call a "shortage of bonds" is really a shortage of money, as the spending velocity of money will fall as demand for currently-produced goods and services falls. I would say that the spending velocity of money has fallen because people are short of savings vehicles, and so are holding on to their money as a second-best to holding bonds. I would then say that if we had the same amount of money but more savings vehicles--if the government sold bonds and bought a dam, things would be fine, but if we had the same amount of savings vehicles but more money--if the central bank bought bonds for cash--we would not be fine. It seems distinctly odd to call that situation a shortage of money...

Dean Baker believes that even if the financial crisis of 2007-8 had been handled perfectly, we would still be in a deep recession:

Beating Up On Brad DeLong: [DeLong]ees the core problem as a loss of $500 billion in housing wealth from excessive exuberance in a few markets pushing house prices too high. Due to poor regulation, this triggered the financial earthquakes of September 2008, putting us where we are today. My arithmetic is a bit different. I see the collapse of an $8 trillion housing bubble that was driving the economy. The collapse of this bubble cost us more than $1.2 trillion in annual private sector demand (@ 9 percent of GDP).... There is nothing in our economists' bag of tricks that gives us an easy mechanism for replacing 9 percent of GDP quickly, which leaves me wondering what the reality grasping Mr. DeLong been smoking?...

By the peak of the bubble in 2006, house prices were more than 70 percent above their trend level. This created more than $8 trillion in housing bubble wealth. This wealth drove the economy in two ways. It had a direct effect in propelling construction, which peaked at 6.2 percent of GDP, about 2.5 percentage points above its post-war average. The bubble wealth also lead to a huge surge in consumption -- through the long-known housing wealth effect. With a wealth effect of 5-7 cents on the dollar, the bubble would have been expected to lead to $400 billion to $560 billion in excess consumption demand.

When the bubble burst, consumption predictably plummeted. Throw in another $6 trillion in lost stock wealth and we get a decline of $600 billion to $800 billion in consumption. (The stock wealth effect is estimated at 3-4 cents on the dollar.)...

The huge overbuilding of the bubble years meant that there was an enormous oversupply of housing. Residential construction has fallen back by more than 3.0 percentage points of GDP or close to $500 billion a year.... Add in the loss of another $100-$200 billion in annual demand from non-residential construction.

This gets a total loss in annual demand of more than $1.2 trillion. Note that the financial crisis appears nowhere in this story. Exactly what mechanism do we have in the private economy for replacing $1.2 trillion in private demand in a short period of time?...

Frankly, I am at loss to understand the fixation on financial markets as an explanation for the crisis. Large firms are sitting on more than $2 trillion in cash. Furthermore, they can borrow much more at historically low interest rates. If there are good investment opportunities out there, we should expect these highly liquid large firms to be running wild taking advantage of them while their smaller competitors are crippled by a lack of access to credit. We don't see this. In fact, Wal-Mart, Starbucks and the rest of scaled back their expansion plans in recognition of the weak economy. Let's get this discussion back to reality. The problem was and is the housing bubble, let's not muddle the picture...

I think I differ from Dean in two big places:

First, the stock market decline is a consequence of the financial crisis--not of the housing bubble. And there is some double-counting in the wealth-effect-of-the-housing-stock, for one thing that people were buying with their housing wealth was bigger and even more leveraged houses. And I am inclined to see a 4% marginal propensity to consume out of housing wealth than a 7% one. So my point estimate of the housing-bubble-collapse-induced fall in the flow of nominal demand is not $1.2 trillion/year but rather $800 billion/year.

Second, the Federal Reserve saw the fall in demand from the collapse of housing wealth coming and took steps to offset it: it dropped the Federal Funds rate by 400 basis points from the winter of 2007 to the winter of 2008. The back-of-the-envelope number I have in my brain is that each basis point of decline in interest rates boosts nominal demand by $1.25 billion/year through the exchange-rate exports, the interest rate-investment, and the interest rate-wealth channels.

Thus as of the spring of 2008 I was looking at a demand shortfall of not $1.2 trillion/year but rather $300 billion/year--which is a one-year pause in growth and a 1% rise in the unemployment rate. It would have been one of the smaller post-WWII recessions. But then came the financial crisis, which turned a small post-WWII recession into the worst post-WWII recession.

Thomas Jefferson:

Letters: PROPERTY AND NATURAL RIGHT

To James Madison

Fontainebleau, Oct. 28, 1785

DEAR SIR, -- Seven o'clock, and retired to my fireside, I have determined to enter into conversation with you. This is a village of about 15,000 inhabitants when the court is not here, and 20,000 when they are, occupying a valley through which runs a brook and on each side of it a ridge of small mountains, most of which are naked rock. The King comes here, in the fall always, to hunt. His court attend him, as do also the foreign diplomatic corps; but as this is not indispensably required and my finances do not admit the expense of a continued residence here, I propose to come occasionally to attend the King's levees, returning again to Paris, distant forty miles. This being the first trip, I set out yesterday morning to take a view of the place. For this purpose I shaped my course towards the highest of the mountains in sight, to the top of which was about a league.

As soon as I had got clear of the town I fell in with a poor woman walking at the same rate with myself and going the same course. Wishing to know the condition of the laboring poor I entered into conversation with her, which I began by enquiries for the path which would lead me into the mountain: and thence proceeded to enquiries into her vocation, condition and circumstances. She told me she was a day laborer at 8 sous or 4d. sterling the day: that she had two children to maintain, and to pay a rent of 30 livres for her house (which would consume the hire of 75 days), that often she could no employment and of course was without bread. As we had walked together near a mile and she had so far served me as a guide, I gave her, on parting, 24 sous. She burst into tears of a gratitude which could perceive was unfeigned because she was unable to utter a word. She had probably never before received so great an aid. This little attendrissement, with the solitude of my walk, led me into a train of reflections on that unequal division of property which occasions the numberless instances of wretchedness which I had observed in this country and is to be observed all over Europe.

The property of this country is absolutely concentrated in a very few hands, having revenues of from half a million of guineas a year downwards. These employ the flower of the country as servants, some of them having as many as 200 domestics, not laboring. They employ also a great number of manufacturers and tradesmen, and lastly the class of laboring husbandmen. But after all there comes the most numerous of all classes, that is, the poor who cannot find work. I asked myself what could be the reason so many should be permitted to beg who are willing to work, in a country where there is a very considerable proportion of uncultivated lands? These lands are undisturbed only for the sake of game. It should seem then that it must be because of the enormous wealth of the proprietors which places them above attention to the increase of their revenues by permitting these lands to be labored.

I am conscious that an equal division of property is impracticable, but the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. The descent of property of every kind therefore to all the children, or to all the brothers and sisters, or other relations in equal degree, is a politic measure and a practicable one. Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise.

Whenever there are in any country uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labor and live on. If for the encouragement of industry we allow it to be appropriated, we must take care that other employment be provided to those excluded from the appropriation. If we do not, the fundamental right to labor the earth returns to the unemployed. It is too soon yet in our country to say that every man who cannot find employment, but who can find uncultivated land, shall be at liberty to cultivate it, paying a moderate rent. But it is not too soon to provide by every possible means that as few as possible shall be without a little portion of land. The small landholders are the most precious part of a state.

The next object which struck my attention in my walk was the deer with which the wood abounded. They were of the kind called "Cerfs," and not exactly of the same species with ours. They are blackish indeed under the belly, and not white as ours, and they are more of the chestnut red; but these are such small differences as would be sure to happen in two races from the same stock breeding separately a number of ages. Their hares are totally different from the animals we call by that name; but their rabbit is almost exactly like him. The only difference is in their manners; the land on which I walked for some time being absolutely reduced to a honeycomb by their burrowing. I think there is no instance of ours burrowing. After descending the hill again I saw a man cutting fern. I went to him under pretence of asking the shortest road to town, and afterwards asked for what use he was cutting fern. He told me that this part of the country furnished a great deal of fruit to Paris. That when packed in straw it acquired an ill taste, but that dry fern preserved it perfectly without communicating any taste at all.

I treasured this observation for the preservation of my apples on my return to my own country. They have no apples here to compare with our Redtown pippin. They have nothing which deserves the name of a peach; there being not sun enough to ripen the plum-peach and the best of their soft peaches being like our autumn peaches. Their cherries and strawberries are fair, but think lack flavor. Their plums I think are better; so also their gooseberries, and the pears infinitely beyond anything we possess. They have nothing better than our sweet-water; but they have a succession of as good from early in the summer till frost. I am to-morrow to get [to] M. Malsherbes (an uncle of the Chevalier Luzerne's) about seven leagues from hence, who is the most curious man in France as to his trees. He is making for me a collection of the vines from which the Burgundy, Champagne, Bordeaux, Frontignac, and other of the most valuable wines of this country are made. Another gentleman is collecting for me the best eating grapes, including what we call the raisin. propose also to endeavor to colonize their hare, rabbit, red and grey partridge, pheasants of different kinds, and some other birds. But I find that I am wandering beyond the limits of my walk and will therefore bid you adieu.

Yours affectionately.

Thos. Jefferson

Jay Bookman:

GOP voters often more reasonable than radicals they elect: Don’t Ask, Don’t Tell offers a telling illustration of how differently the modern Republican Party thinks and operates. In fact, I’m not aware of any other major political party behaving in this fashion in the nation’s history, and if anyone can demonstrate otherwise, please do. In the latest Gallup poll (see chart above), 67 percent of Americans say they would vote to end Don’t Ask, Don’t Tell.... [T]ake a look at the breakdown among Republicans. Forty-seven percent want to end DADT; 48 percent want to retain it. Even among self-described conservative Republicans, 39 percent say they want to end the policy and allow gay Americans to serve openly. Yet even though Republican voters are almost equally divided on the issue nationally, Republicans in the U.S. Senate voted almost unanimously against it, with just one GOP senator voting to end the filibuster yesterday afternoon.

Here’s an even more dramatic example, from the folks at Pew. Fifty-eight percent of Republican voters acknowledge that the best way to tackle the deficit is through a combination of tax increases and spending cuts. Just 32 percent say the answer is to focus mostly on cutting major programs. Even among self-described Tea Party members, 51 percent say the best way to address the deficit is through spending cuts and tax hikes, with just 39 percent advocating solving the problem through spending cuts alone. Yet you can’t get a Republican on the Hill to even utter the word “tax hike,” lest they be condemned as a RINO....

[I]t’s not merely that Washington Republicans won’t compromise with Democrats. They won’t compromise even with their own voters. The national party is in the grip of radicals who accept no deviation from the approved party line, and who demonstrate no tolerance for the broader, more reasonable range of opinions that exists within the Republican electorate they claim to represent.

Bruce Bartlett:

Tax Deal Puts Economy between a Rock and a Hard Place: given the economic situation, Obama had no choice but to do what he did. The question is, will it work?... The liberal theory is that the economy is suffering from a sharp falloff in aggregate demand. In short, people reduced spending and increased their saving to rebuild wealth lost to the collapse of the housing bubble and decline in the stock market. As sales fell, businesses laid off workers, which led to a further decline in spending as the unemployed tightened their belts and downsized their standard of living. The obvious response, if one accepts this theory, is for the federal government to step in and replace the lost private consumption with public spending on goods and services. Ideally, that would take the form of what economists call “public goods” that would contribute to the nation’s long-term productivity, while also providing short-run stimulus....

Keep in mind that one important constraint is the way people inevitably react to government tax or spending programs. Programs that just put money in their pockets don’t always encourage consumption because people tend to save windfalls....

In contrast to liberals, conservatives have never had a coherent theory of what caused the recession or a program designed to deal with its specific characteristics. In part, that is because there is no single school of conservative economics. Members of the so-called Austrian School, such as Congressman Ron Paul, basically oppose any stimulus. They think that economic imbalances caused by past government intervention in the economy are what caused the recession in the first place. Stimulus, in their view, will only make matters worse. The best thing is for government to get out of the way and allow the economy to readjust, no matter how painfully, which it will do faster without government interference.

Even most conservative economists view the Austrians as eccentric. Most would consider themselves to be monetarists to one degree or another. Monetarists, who follow the late economist Milton Friedman, think that fiscal policy (taxing and spending) is pretty much worthless. What really matters is monetary policy, which is under the independent control of the Federal Reserve. Following Friedman’s analysis of the Great Depression, monetarists thought that if the Fed just kept the money supply from declining then the economy would turn around relatively quickly by itself. Fed chairman Ben Bernanke considers himself to be a follower of Friedman and he moved heaven and earth to make sure that the money supply did not contract, as it did in the early 1930s. And because the banking system is the essential conduit for monetary policy, he threw out the rule book in late 2008, when the financial crisis was at its worst, to keep it afloat, lending vast quantities of money to prevent a financial implosion. And it worked. Without Bernanke’s quick, decisive action, it is very likely that we would have suffered the equivalent of another Great Depression. Unfortunately, it now seems clear that while monetary policy can prevent an economic collapse, it can’t stimulate a prostrate economy. When it tries to do so, the money just piles up in the banks, which are now sitting on more than $1 trillion that is unlent, primarily due to a lack of demand. If people aren’t buying houses, workers are unemployed, businesses aren’t expanding, and consumption is flat, there is no reason to borrow and no way to lend....

All along, there have been some conservative economists who argued that tax cuts were the only fiscal policy with the potential to raise growth. However, their arguments have been incoherent and contradictory. They said that government spending is bad because people discount the future taxes that will be necessary to pay off the higher debts – a mechanism that economists call “Ricardian equivalence.” But for some odd reason, they never say that debts arising from tax cuts will trigger the same response.

There are really only three ways that tax cuts could be stimulative. One would be to raise employment by reducing the “tax wedge” between the gross compensation paid by an employer and the net wage received by the worker.... While this is a plausible theory under normal economic circumstances, it doesn’t make much sense when the primary problem is insufficient demand for business output.... A second way tax cuts might raise growth would be to stimulate investment. Low taxes on the wealthy and big corporations, Republicans repeat ad nauseum, will lead to business expansion, new businesses and job creation. Again, this is a plausible theory under normal circumstances, but why would a business expand when it is perfectly able to satisfy existing demand from its current plant, equipment and labor force?... The final way tax cuts might stimulate growth is by giving consumers more money to spend. But we’ve seen from the experience of the 2008 tax rebate and the Making Work Pay Credit that this is an extremely inefficient method of increasing consumption. And of course, tax cuts are worthless to the millions of those that are unemployed because they have no income to tax. And let’s not forget that because of Republican tax policies in the 2000s, close to 50 percent of all tax filers paid no federal income taxes even before the economy collapsed.

All of this suggests that the tax deal to extend the Bush tax cuts and replace the Making Work Pay Credit with a 2-point cut in the payroll tax is very unlikely to raise growth much, if at all. The one and only justification for this initiative is that it is better than the alternative of raising taxes when the economy is still weak. Given Republicans’ dominance of Congress, Obama really had no choice but to cut a deal on their terms.

Joe Romm:

NASA: Hottest November on record, 2010 likely hottest year on record globally — despite deepest solar minimum in a century « Climate Progress: NASA released its monthly global temperature data, revealing November was easily the hottest in the temperature record.  The “meteorological year” — December to November — was also the hottest on record.  Calendar year 2010 appears poised to be the hottest on record. These records are especially impressive because we’re in the middle of a strong La Niña, which would normally cool off temperatures for a few months (relatively speaking), and we’ve been in “the deepest solar minimum in nearly a century.”

In the Western Desert of Egypt, the British "Operation Compass" attack on the Italian army continues:

World War II Day-By-Day: British 7th Armored Brigade (7th Armored Division) charges Northwest to the Egyptian coast at Buq Buq & takes the surrender of Italian 64th Infantry Division. Battleships HMS Barham & HMS Valiant, escorted by anti-aircraft ship HMS Coventry & 7 destroyers, bombard Italian positions further West at Sollum, Egypt, to prevent reinforcements being sent forward. Aircraft from aircraft carrier HMS Illustrious, escorted by 2 cruisers & 3 destroyers, attack Italian-held El Adem airfield at Tobruk, Libya. In 3 days, British have captured 237 guns, 73 tanks & about 38,000 Italian prisoners (as famously put by a Coldstream Guards officer “5 acres of officers & 200 acres of other ranks”)...

Does David Andolfatto really think that the pace at which firms hired new workers and the speed with which unemployed workers found jobs sped up as the recession hit?

Apparently so:

In a typical quarter, roughly 2,000,000 workers per month exited unemployment into employment. When the recession hits... look at what happens to the UE flow. While it does not rise as sharply as the EU flow, it rises nevertheless…and continues to remain high even as the EU flow declines. Is this surge in job finding rates among the unemployed consistent with the deficient demand hypothesis?

Wow. Just wow.

The pace of new hires falls by 30% as the recession hits: firms just don't see the demand to justify hiring at the normal pace.

But when firms hire, they hire not just the unemployed but the employed and the not-in-the-labor-force as well. With more than twice as many unemployed, a greater share of new hires now come from the currently unemployed than used to. But that does not mean any "surge in job finding rates among the unemployed." The rise in the average duration of unemployment tells us that there has been no surge in the job finding rates among the unemployed--rather the reverse.

This is not rocket science, people...

Adolf Hitler:

Berlin, Rheinmetall-Borsig Works -- Speech of December 10, 1940: Nowadays I do not speak very often. In the first place I have little time for speaking, and in the second place I believe that this is a time for action rather than speech. We are involved in a conflict in which more than the victory of only one country or the other is at stake; it is rather a war of two opposing worlds....

Forty-six million Britishers dominate and govern approximately 16 million square miles of the surface of the earth. Thirty-seven million Frenchmen dominate and govern a combined area of approximately 4 million square miles. Forty-five million Italians possess, taking into consideration only those territories in any way capable of being utilized, an area of scarcely 190,000 square miles. Eighty-five million Germans possess as their living space scarcely 232,000 square miles. That is to say: 85 million Germans own only 232,000 square miles on which they must live their lives and 46 million Britishers possess 16 million square miles.

Now, my fellow-countrymen, this world has not been so divided up by providence or Almighty God. This allocation has been made by man himself. The land was parcelled out for the most part during the last 300 years, that is, during the period in which, unfortunately, the German people were helpless and torn by internal dissension. Split up into hundreds of small states in consequence of the Treaty of Muenster at the end of the Thirty Years' War, our people frittered away their entire strength in internal strife.... While during this period the Germans, notwithstanding their particular ability among the people of Western Europe, dissipated their powers in vain internal struggles, the division of the world proceeded beyond their borders. It was not by treaties or by binding agreements, but exclusively by the use of force that Britain forged her gigantic Empire....

My fellow-countrymen, man does not exist on theories and phrases, on declarations or on systems of political philosophy; he lives on what he can gain from the soil by his own labor.... A man may live in a stony desert or in a fruitful land of plenty. This handicap can never be fully overcome by theories, nor even by the will to work. We see that the primary cause for the existing tensions lies in the unfair distribution of the riches of the earth.... [T]he right to live is at the same time a just claim to the soil which alone is the source of life. When unreasonableness threatened to choke their development, nations fought for this sacred claim. No other course was open to them and they realized that even bloodshed and sacrifice are better than the gradual extinction of a nation.... [H]ow can our people, its 360 per square mile, exist at all if they do not employ every ounce of brain power and physical strength to wrest from their soil what they need? This distinguishes us from the others. In Canada, for example, there are 2.6 persons per square mile; in other countries perhaps 16, 18, 20 or 26 persons. Well, my fellow-countrymen, no matter how stupidly one managed one's affairs in such a country, a decent living would still be possible. Here in Germany, however, there are 360 persons per square mile. The others cannot manage with 26 persons per square mile, but we must manage with 360....

[T]wo worlds are face to face with one another. Our opponents are quite right when they say: 'Nothing can reconcile us to the National Socialist world.' How could a narrow-minded capitalist ever agree to my principles? It would be easier for the Devil to go to church and cross himself with holy water than for these people to comprehend the ideas which are accepted facts to us today. But we have solved our problems....

The German capacity for work is our gold and our capital, and with this gold I can compete successfully with any power in the world. We want to live in houses which have to be built. Hence, the workers must build them, and the raw materials required must be procured by work. My whole economic system has been built up on the conception of work. We have solved our problems while, amazingly enough, the capitalist countries and their currencies have suffered bankruptcy.

Sterling can find no market today. Throw it at any one and he will step aside to avoid being hit. But our Reichsmark, which is backed by no gold, has remained stable. Why? It has no gold cover; it is backed by you and by your work. You have helped me to keep the mark stable. German currency, with no gold coverage, is worth more today than gold itself. It signifies unceasing production. This we owe to the German farmer, who has worked from daybreak till nightfall. This we owe to the German worker, who has given us his whole strength. The whole problem has been solved in one instant, as if by magic.

My dear friends, if I had stated publicly eight or nine years ago: 'In seven or eight years the problem of how to provide work for the unemployed will be solved, and the problem then will be where to find workers,' I should have harmed my cause. Every one would have declared: 'The man is mad. It is useless to talk to him, much less to support him. Nobody should vote for him. He is a fantastic creature.' Today, however, all this has come true. Today, the only question for us is where to find workers. That, my fellow countrymen, is the blessing which work brings.

Work alone can create new work; money cannot create work. Work alone can create values, values with which to reward those who work. The work of one man makes it possible for another to live and continue to work. And when we have mobilized the working capacity of our people to its utmost, each individual worker will receive more and more of the world's goods.

We have incorporated seven million unemployed into our economic system; we have transformed another six millions from part-time into full-time workers; we are even working overtime. And all this is paid for in cash in Reichsmarks which maintained their value in peacetime. In wartime we had to ration its purchasing capacity, not in order to devalue it, but simply to earmark a portion of our industry for war production to guide us to victory in the struggle for the future of Germany....

I wish to put before you a few basic facts: The first is that in the capitalistic democratic world the most important principle of economy is that the people exist for trade and industry, and that these in turn exist for capital. We have reversed this principle by making capital exist for trade and industry, and trade and industry exist for the people. In other words, the people come first. Everything else is but a means to this end. When an economic system is not capable of feeding and clothing a people, then it is bad, regardless of whether a few hundred people say: 'As far as I am concerned it is good, excellent; my dividends are splendid.' However, the dividends do not interest me at all. Here we have drawn the line. They may then retort: 'Well, look here, that is just what we mean. You jeopardize liberty.'

Yes, certainly, we jeopardize the liberty to profiteer at the expense of the community, and, if necessary, we even abolish it. British capitalists, to mention only one instance, can pocket dividends of 76, 80, 95, 140, and even 160 per cent from their armament industry. Naturally they say: 'If the German methods grow apace and should prove victorious, this sort of thing will stop.' They are perfectly right. I should never tolerate such a state of affairs. In my eyes, a 6 per cent dividend is sufficient....

To take another instance, besides dividends there are the so-called directors' fees. You probably have no idea how appallingly active a board of directors is. Once a year its members have to make a journey. They have to go to the station, get into a first-class compartment and travel to some place or other. They arrive at an appointed office at about 10 or 11 A.M. There they must listen to a report. When the report has been read, they must listen to a few comments on it. They may be kept in their seats until 1 P.M. or even 2. Shortly after 2 o'clock they rise from their chairs and set out on their homeward journey, again, of course, traveling first class. It is hardly surprising that they claim 3,000, 4,000, or even 5,000 as compensation for this: Our directors formerly did the same - for what a lot of time it costs them! Such effort had to be made worth while! Of course, we have got rid of all this nonsense, which was merely veiled profiteering and even bribery....

Opposed to this there stands a completely different world. In the world the highest ideal is the struggle for wealth, for capital, for family possessions, for personal egoism; everything else is merely a means to such ends. Two worlds confront each other today. We know perfectly well that if we are defeated in this war it would not only be the end of our National Socialist work of reconstruction, but the end of the German people as a whole. For without its powers of coordination, the German people would starve. Today the masses dependent on us number 120 or 130 millions, of which 85 millions alone are our own people. We remain ever aware of this fact....

These are the two worlds. I grant that one of the two must succumb. Yes, one or the other. But if we were to succumb, the German people would succumb with us. If the other were to succumb, I am convinced that the nations will become free for the first time. We are not fighting individual Englishmen or Frenchmen. We have nothing against them. For years I proclaimed this as the aim of my foreign policy. We demanded nothing of them, nothing at all. When they started the war they could not say: 'We are doing so because the Germans asked this or that of us.' They said, on the contrary: 'We are declaring war on you because the German system of Government does not suit us; because we fear it might spread to our own people.' For that reason they are carrying on this war. They wanted to blast the German nation back to the time of Versailles, to the indescribable misery of those days. But they have made a great mistake.

If in this war everything points to the fact that gold is fighting against work, capitalism against peoples, and reaction against the progress of humanity, then work, the peoples, and progress will be victorious. Even the support of the Jewish race will not avail the others....

It was quite obvious: Who was I before the Great War? An unknown, nameless individual. What was I during the war? A quite inconspicuous, ordinary soldier. I was in no way responsible for the Great War. However, who are the rulers of Britain today? They are the same people who were warmongering before the Great War, the same Churchill who was the vilest agitator among them during the Great War; Chamberlain, who recently died and who at that time agitated in exactly the same way. It was the whole gang, members of the same group, who believe that they can annihilate nations with the blast of the trumpets of Jericho....

I waited for a month, because I thought that after the conclusion of the campaign in France the British would give up this method of warfare. I was mistaken. I waited for a second month and a third month. If bombs were to be dropped I could not assume the responsibility before the German people of allowing my own countrymen to be destroyed while sparing foreigners. Now, this war, too, had to be fought to its end. And it is being fought; fought with all the determination, with all the materials, with all the means and all the courage at our disposal. The time for the decisive conflict will arrive. You may be sure it will take place. However, I should like to tell these gentlemen one thing: It is we who shall determine the time for it. And on this point I am cautious. We might perhaps have been able to attack in the West during the autumn of last year, but I wanted to wait for good weather. And I think it was worth while waiting....

This struggle is not a struggle for the present but primarily a struggle for the future. I stated on September 3, 1939, that time would not conquer us, that no economic difficulties would bring us to our knees, and that we could still less be defeated by force of arms. The morale of the German people guarantees this. The German people will be richly rewarded in the future for all that they are doing. When we have won this war it will not have been won by a few industrialists or millionaires, or by a few capitalists or aristocrats, or by a few bourgeois, or by anyone else....

When this war is ended, Germany will set to work in earnest. A great 'Awake!' will sound throughout the country. Then the German nation will stop manufacturing cannon and will embark on peaceful occupations and the new work of reconstruction for the millions. Then we shall show the world for the first time who is the real master, capitalism or work. Out of this work will grow the great German Reich of which great poets have dreamed. It will be the Germany to which every one of her sons will cling with fanatical devotion, because she will provide a home even for the poorest. She will teach everyone the meaning of life.

Should anyone say to me: 'These are mere fantastic dreams, mere visions,' I can only reply that when I set out on my course in 1919 as an unknown, nameless soldier I built my hopes of the future upon a most vivid imagination. Yet all has come true.

What I am planning or aiming at today is nothing compared to what I have already accomplished and achieved. It will be achieved sooner and more definitely than everything already achieved. The road from an unknown and nameless person to Fuehrer of the German nation was harder than will be the way from Fuehrer of the German nation to creator of the coming peace.

: Saturday, 12 December 1998, 16:13 S E C R E T SECTION 01 OF 02 LONDON 000368 NOFORN SIPDIS DOE FOR GPERSON, CHAYLOCK EO 12958 DECL: 12/12/2018 TAGS EPET, ENRG, PGOV, RS">RS, NI SUBJECT: ENGLAND: RELIABILITY AND LONGEVITY OF UK-US RELATIONSHIP CONFIRMED REF: A. LONDON 365 B. LONDON 366 Classified By: Consul General Robbie Honerkamp for reasons 1.4 (B) and (D )

1. (S/NF) Summary: We're no strangers to love. You know the rules and so do I.
   A full commitment's what I'm thinking of. You wouldn't get this from any other guy.
   I just wanna tell you how I'm feeling. Gotta make you understand.

2. (C/NF) Chorus: Never gonna give you up, never gonna let you down, never gonna run around and desert you.
   Never gonna make you cry, never gonna say goodbye, never gonna tell a lie and hurt you.

3. (S/NF) We've known each other for so long Your heart's been aching but You're too shy to say it
   Inside we both know what's been going on We know the game and we're gonna play it
   And if you ask me how I'm feeling Don't tell me you're too blind to see

4. (C/NF) Chorus: Never gonna give you up, never gonna let you down, never gonna run around and desert you.
   Never gonna make you cry, never gonna say goodbye, never gonna tell a lie and hurt you.

5. (C/NF) Chorus: Never gonna give you up, never gonna let you down, never gonna run around and desert you. Never gonna make you cry, never gonna say goodbye, never gonna tell a lie and hurt you.

6. (C/NF) Background Singers: (Ooh, give you up) (Ooh, give you up) (Ooh) Never gonna give, never gonna give
   (Give you up) (Ooh) Never gonna give, never gonna give (Give you up)

7. (S/NF) We've know each other for so long Your heart's been aching but You're too shy to say it
   Inside we both know what's been going on We know the game and we're gonna play it
   I just wanna tell you how I'm feeling Gotta make you understand

8. (C/NF) Never gonna give you up, never gonna let you down, never gonna run around and desert you.
   Never gonna make you cry, never gonna say goodbye, never gonna tell a lie and hurt you.

9. (C/NF) Never gonna give you up, never gonna let you down, never gonna run around and desert you.
   Never gonna make you cry, never gonna say goodbye, never gonna tell a lie and hurt you.

10. (C/NF) Never gonna give you up, never gonna let you down, never gonna run around and desert you.
    Never gonna make you cry, never gonna say goodbye, never gonna tell a lie and hurt you. ASTLEY

Joe Romm reviewed and trashed Matthew Kahn's (very good) book Climateopolis. Matthew asked a question:

Dear Joe,

Have you read my book or merely poked around the 6 pages that Amazon offers for free from the 288 page book? Have you read any of my work on climate change?

Joe answered:

Actually, Amazon offers some 70 full pages of the book for free -- and through the search feature you can find even more of the content. Frankly, the most illuminating part of the book are the notes, as I discuss. Your other work on climate change is not germane. I dare say one can read a much higher fraction of your book online than the fraction of relevant climate science literature you apparently have read. Have you read even a few of the relevant posts on this blog? Even this post and this one would get you to much of the key literature.

I take that answer to be a "no."

Joe Romm is "reviewing" a book he has not read.

That is not good.

...with a claim that we should not do a good thing because we are not going to do an even better thing. Nomination entered by Timothy Lee:

The Implicit Message of the DREAM Act | Bottom-up: I have a lot of respect for my friend Reihan Salam, but boy was this frustrating to read:

As I understand it, the DREAM Act implicitly tells us that I should value the children of unauthorized immigrants more than the children of other people living in impoverished countries. If we assume that all human beings merit equal concern, this is obviously nonsensical. Indeed, all controls on migration are suspect under that assumption. Even so, there is a broad consensus that the United States has a right to control its borders, and that the American polity can decide who will be allowed to settle in the United States. Or to put this another way, we’ve collectively decided that the right to live and work in the U.S. will be treated as a scarce good...

So look, there are two basic ways to look at a political issue: on the policy merits and on how it fits into broader ideological narratives. On the policy merits, the case for DREAM is simple and compelling: there are hundreds of thousands of kids who, through no fault of their own, are trapped in a kind of legal limbo. We should provide them with some way to get out of that legal limbo. I can think of any number of ways to improve the DREAM Act, but this is the only bill with a realistic chance of passing Congress in the near future, and it’s a lot better than nothing.... We should let the DREAM kids stay here and we should be letting a lot more kids from poorer countries come here. Doing the one doesn’t in any way prevent us from doing the other.

OK, so that’s the policy substance. Now let’s talk about the politics.... Reihan is, I take it... [claiming] that DREAM helps a relatively small number of people, that the people it helps aren’t necessarily the most deserving, and that DREAM reinforces an objectionable political narrative.

I don’t think any of these claims stand up to scrutiny....

[D]oes passing DREAM “implicitly tell us” something we’d rather not be told? This is where I think Reihan is furthest off base.... [T]he fundamental question in the immigration debate is: do we recognize immigrants as fellow human beings... entitled to... empathy... or... treat them as opponents in a zero-sum world?... Most recent immigration reform proposals... are based on the latter premise: immigrants in general are yucky, but certain immigrants are so useful to the American economy that we’ll hold our collective noses and let them in under tightly control conditions.

The DREAM Act is different. The pro-DREAM argument appeals directly to Americans’ generosity and sense of fairness.... The hoops kids must go through to qualify for DREAM are focused on self-improvement for the kids themselves.... There’s no quota on the number of kids who are eligible, and at the end of the process the kids get to be full-fledged members of the American community. Nothing about this says that we should “value the children of unauthorized immigrants more than the children of other people living in impoverished countries.” I wish Congress would also enact legislation to help children of people living in impoverished countries. If Reihan has a realistic plan for doing that, I’ll be among its earliest and most enthusiastic supporters. Unfortunately, I think the political climate in the United States makes that unlikely to happen any time soon. But that’s not the fault of the DREAM Act or its supporters. And voting down DREAM will make more ambitious reforms less, not more, likely.

Barry Eichengreen:

Europe’s Inevitable Haircut : What once could be dismissed as simply a Greek crisis, or simply a Greek and Irish crisis, is now clearly a eurozone crisis. Resolving that crisis is both easier and more difficult than is commonly supposed.... Greece has a budget problem. Ireland has a banking problem. Portugal has a private-debt problem. Spain has a combination of all three. But... all must now endure excruciatingly painful spending cuts. The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed. But since none of these countries has a national currency to devalue, they must substitute internal devaluation for external devaluation. They have to cut wages, pensions, and other costs in order to achieve the same gain in competitiveness needed to substitute external demand for internal demand.

The crisis countries have, in fact, shown remarkable resolve in implementing painful cuts. But one economic variable has not adjusted with the others: public and private debt. The value of inherited government debts remains intact, and, aside from a handful of obligations to so-called junior creditors, bank debts also remain untouched. This simple fact creates a fundamental contradiction for the internal devaluation strategy: the more that countries reduce wages and costs, the heavier their inherited debt loads become.... So if internal devaluation is to work, the value of debts, where they already represent a heavy burden, must be reduced. Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off. Mortgage debts, too, must be written down....

These are reasonable objections, but they should not be allowed to lead to unreasonable conclusions. The alternatives on offer are internal and external devaluation. European leaders must choose which one it will be. They are united in ruling out external devaluation. But internal devaluation requires debt restructuring.... This is not rocket science. It has been done before. But there are three prerequisites for success.

First, bondholders will need to be reassured that their new bonds are secure.... Second, countries must move together.... Finally, banks that take losses as a result of these restructurings will need to have their balance sheets reinforced. The banks need real stress tests, not the official confidence game carried out earlier this year....

Now we get to the hard part. All of this requires leadership. German leaders must acknowledge that their country’s banks are dangerously exposed to the debts of the eurozone periphery. They must convince their constituents that using public money to provide sweeteners for debt restructuring and to recapitalize the banks is essential to the internal devaluation strategy that they insist their neighbors follow...

Ryan Avent:

American deficits: The deal, and the yields | The Economist: [Y]ields that rise because the government's solvency is in question are very different from yields that rise because the private sector is competing for the private savings government has lately gobbled up. Which kind of rise in yields are we seeing now?... Over the whole of the past week, yields have been generally flat, even as it became clear that a deal on the Bush tax cuts was likely. And most of the budget impact in the deal is attributable to the tax extensions that were expected to pass. But the "new stimulus" in the deal—the payroll tax cut and the accelerated depreciation for businesses—was close to a policy surprise. These measures were actually unanticipated by markets. And so it stands to reason that most of the jump in yields is likely due to their inclusion.

What's important to note is that these aspects account for basically all of the new stimulus... but... only add modestly to the budget impact... so it seems reasonable to conclude that most of the rise in Treasury yields is due to improved expectations for the American economy...

Paul Rosenberg:

Open Left:: Obama's time-warp: I've talked about this before, but evidently not nearly enough.  Two major points:

1. Obama is a raging ideologue.  He is not a pragmatist.  "Pragmatism" is his ideological rhetoric, nothing more.  It's progressives who are the real pragmatists today.  Not all of them, and not all of the time, but it's pragmatism to note that the war on terrorism is a miserable failure, and we need to try something else.  It's also pragmatism to note that (a) law & order responses to terrorism generally work a whole lot better than military responses and (b) soft power--including efforts at dialogue, understanding, humanitarian aid and the like--works a whole hell of a lot better than blowing people to bits.  It's fact-hating ideology to oppose such measures. Likewise, it's pragmatism to use cheap money (damn near free) to invest today in putting people back to work building the green tech and human infrastructure of tomorrow as a way to get out of the recession.    It's fact-hating ideology to reject this as "discredited Keynesianism". And it's scientifically-based pragmatism to get atmospheric CO2 down below 350ppm as soon as possible.  It's fact-hating ideology to reject this as "politically naive" or "extreme" or whatever, as if physics and chemistry give a damn about hominid politics. Starting to see a pattern here, are we?

2. But here's something more to help fill out the picture.... When Bush came in and blew a hole in the hard won balanced budget by giving tax cuts to millionaires, it was finally irrefutable to even the die-hards that it had all been a fools game and that the DLC experiment was a failure. It was clear that the Republicans had become ideologically bankrupt political terrorists and the Democrats had basically done their dirty work for them. Barack Obama, however, has never agreed with that. Indeed, Sargent is right that he primarily sells himself as a conciliator and a bipartisan deal maker who is doing the best he can in a hostile situation. But then Clinton did too. In fact, all Democrats have thought that since the 1980s. The problem for Obama is that unlike Clinton, the experiment in "pragmatic, non-ideological" politics in the age of GOP nihilism has already been tried. And it failed. (They may have had a nice party for a while, but the hangover is one for the books.) He's living in the past and liberals are trying to drag him into the present.... The exact reverse of Obama's standard Versailles-approved shtick.  Turns out that he's the one wedded to the failed policies of the past. The point here is simple: Once upon a time it was at least plausible to argue that liberals were wedded to outmoded ideas and ways of viewing things.... They needed to try new ideas.  And so we did.... We got a president impeached as the result of the 5-year witch-hunt.  We got a presidential election stolen in plain sight by the Supreme Court, while Versailles applauded. We got a balanced budget which the GOP immediately plundered to plough enormous wealth into their their rich and super-rich base.  In short, we got an epic political and policy failure.  That's what digby is reminding us of. So, after all that, one can no longer adopt the Clintonian policy position on the grounds of pragmatism.  Although it had some limited successes, that position overall has proven itself to be a spectacular failure.  Ergo, those who continue pushing it are doing so as a matter of ideology (or pure corruption, take your pick). Now, because of past history, they may adopt a rhetoric of "pragmatism" and even profess an ideology of "pragmatism" ("We're doing this to solve America's problems.")  But the clear reality is that there's nothing whatsoever actually pragmatic about what they're doing.  They're either shallow, clueless, unreflective ideologues, or else they're simply shills.

Noam Scheiber:

Barack Obama, Tax Cuts, 2012, And David Axelrod: Inside A Divided White House: By any measure, the first few weeks after the midterms were hardly encouraging. The president gave a low-energy press conference, then jetted off to Asia for ten days; the advisers he left behind seemed rootless and out of sorts.... [T]he White House settled on the contours of a plan: Obama would refocus on reforming government and transcending partisanship—something they felt voters craved. “It was back to the first principles he stood by in the campaign,” says the strategist. This was, among other things, the impetus behind embracing a ban on congressional earmarks and freezing federal pay. Both initiatives raised hackles among congressional Democrats and liberals, and stirred suspicions that Obama was bent on Dick Morris–style triangulation. But the charge is unfair. Obama has a longstanding appetite for good-government initiatives....

[T]he Obama people and even many on the Hill believe the elections have altered this dynamic. “The Republicans for the first time share some responsibility for cleaning up the mess,” says Chris Van Hollen, soon to be the ranking Democrat on the House Budget Committee. It’s one reason, adds the White House–friendly strategist, that “we’re probably in a better position now than if we’d barely held control of the House.” Nowhere is the continuity motif more evident than the president’s midcourse personnel decisions. So far, the White House has replaced its budget director, national security adviser, and Council of Economic Advisers chair with internal candidates.... Other than Larry Summers’s replacement at the National Economic Council, where the administration has hinted at a fresh face, the only real possibility for a high-profile outsider is chief of staff.... Last summer, John Podesta, the Clinton ex-chief of staff who runs the influential Center for American Progress, became alarmed at the lack of pushback against the Bush tax cuts. To goad the administration into action, he organized a debate between Treasury Secretary Timothy Geithner and Douglas Holtz-Eakin, a former adviser to John McCain. Podesta’s gambit was only a partial success. Geithner, who’d previously weighed in on the issue, joined the campaign to bury the upper-income cuts when they expire in January. But, except for one forceful speech in September, the president stayed mostly on the sidelines.

The missteps that led to the likely two-year renewal of the Bush tax cuts highlight the danger in the White House’s aversion to course corrections....

Within the administration, the split over whether to mount a tax-cut offensive broke down largely along wonk-operative lines. The wonks spent the last year mystified that the White House was ducking the fight when the substantive merits were so one-sided. The operatives brooded that the politics could abruptly turn against them, despite polling showing little public appetite for the upper-income cuts. “They view it through the class warfare stuff—Kerry in 2004, Gore in 2000,” says one administration official. “They worry that they’ll get painted as lefties, tax-raisers.” At key moments, including one internal discussion this spring, the political team declined to make a concerted push before Election Day. “The political people were like, ‘It’s a mess, let’s not deal with it now,’ ” says another official involved.... The operatives were rightly put off by the cowardice of Senate Democrats. What they didn’t grasp was the structural advantage of a White House in framing a debate. The West Wing’s reluctance to exploit this advantage was a bitter irony given that polls showed Obama to be highly effective on the tax question as a candidate. “Obama thinks there are campaigns and there’s governing, and never the twain shall meet,” laments one Democratic consultant. Indeed, in his statement on the compromise, Obama seemed to relish a return to the issue in 2012...

Oooh boy.

Barack Obama:

TRANSCRIPT of Dec 6 press conference: Well, look, I’ve got a whole bunch of lines in the sand. Not making the tax cuts for the wealthy permanent — that was a line in the sand. Making sure that the things that most impact middle-class families and low-income families, that those were preserved — that was a line in the sand. I would not have agreed to a deal, which, by the way, some in Congress were talking about, of just a two-year extension on the Bush tax cuts and one year of unemployment insurance, but meanwhile all the other provisions, the Earned Income Tax Credit or other important breaks for middle-class families like the college tax credit, that those had gone away just because they had Obama’s name attached to them instead of Bush’s name attached to them.

So this notion that somehow we are willing to compromise too much reminds me of the debate that we had during health care. This is the public option debate all over again. So I pass a signature piece of legislation where we finally get health care for all Americans, something that Democrats had been fighting for for a hundred years, but because there was a provision in there that they didn’t get that would have affected maybe a couple of million people, even though we got health insurance for 30 million people and the potential for lower premiums for 100 million people, that somehow that was a sign of weakness and compromise.

Now, if that’s the standard by which we are measuring success or core principles, then let’s face it, we will never get anything done. People will have the satisfaction of having a purist position and no victories for the American people. And we will be able to feel good about ourselves and sanctimonious about how pure our intentions are and how tough we are, and in the meantime, the American people are still seeing themselves not able to get health insurance because of preexisting conditions or not being able to pay their bills because their unemployment insurance ran out.

That can’t be the measure of how we think about our public service. That can’t be the measure of what it means to be a Democrat. This is a big, diverse country. Not everybody agrees with us. I know that shocks people. The New York Times editorial page does not permeate across all of America. Neither does The Wall Street Journal editorial page. Most Americans, they’re just trying to figure out how to go about their lives and how can we make sure that our elected officials are looking out for us. And that means because it’s a big, diverse country and people have a lot of complicated positions, it means that in order to get stuff done, we’re going to compromise. This is why FDR, when he started Social Security, it only affected widows and orphans. You did not qualify. And yet now it is something that really helps a lot of people. When Medicare was started, it was a small program. It grew.

Under the criteria that you just set out, each of those were betrayals of some abstract ideal. This country was founded on compromise. I couldn’t go through the front door at this country’s founding. And if we were really thinking about ideal positions, we wouldn’t have a union.

So my job is to make sure that we have a North Star out there. What is helping the American people live out their lives? What is giving them more opportunity? What is growing the economy? What is making us more competitive? And at any given juncture, there are going to be times where my preferred option, what I am absolutely positive is right, I can’t get done.

And so then my question is, does it make sense for me to tack a little bit this way or tack a little bit that way, because I’m keeping my eye on the long term and the long fight — not my day-to-day news cycle, but where am I going over the long term?

And I don’t think there’s a single Democrat out there, who if they looked at where we started when I came into office and look at where we are now, would say that somehow we have not moved in the direction that I promised.

Take a tally. Look at what I promised during the campaign. There’s not a single thing that I’ve said that I would do that I have not either done or tried to do. And if I haven’t gotten it done yet, I’m still trying to do it.

And so the — to my Democratic friends, what I’d suggest is, let’s make sure that we understand this is a long game. This is not a short game. And to my Republican friends, I would suggest — I think this is a good agreement, because I know that they’re swallowing some things that they don’t like as well, and I’m looking forward to seeing them on the field of competition over the next two years.

Paul Krugman comments:

The Sorrow And The Self-Pity: There is a case for the tax cut deal, as the best of a very bad situation. But Obama did not help that case yesterday by lashing out at “purists”. Leave aside the merits for a moment: what possible purpose does this kind of lashing out serve? Will activists be shamed into recovering their previous enthusiasm? Will Republicans stop their vicious attacks because Obama is lashing out to his left? It was pure self-indulgence; even if he feels aggrieved, he has to judge his words by their usefulness, not by his desire to vent. This isn’t about him. And beyond that, who are these purists? Yes, a few people on the left refused to support health reform over the lack of a public option — but not many. To the extent that Obama has had trouble selling that plan, “purists” weren’t a factor; his own lack of effective messaging was.

On taxes: there might be more forgiveness now if Obama had shown any sign of fighting before now. A new article by Noam Scheiber confirms the impression I and others had that the administration really didn’t push Congress to take up the issue:

Within the administration, the split over whether to mount a tax-cut offensive broke down largely along wonk-operative lines. The wonks spent the last year mystified that the White House was ducking the fight when the substantive merits were so one-sided. The operatives brooded that the politics could abruptly turn against them, despite polling showing little public appetite for the upper-income cuts. “They view it through the class warfare stuff—Kerry in 2004, Gore in 2000,” says one administration official. “They worry that they’ll get painted as lefties, tax-raisers.”

Let me add that Obama has never, as far as I can recall, pointed out that these horrible tax increases on the rich the GOP warns about would bring rates back to what they were under Bill Clinton — a time of enormous prosperity. But then, Obama has always had a weirdly hard time making the case that the Clinton economy refuted Reaganism. Add in the White House’s repeated validations of the right-wing position on the evils of public spending, from the spending freeze to the pay freeze, the appointment of a conservative Democrat and a paleo-conservative Republican to head the debt commission, etc. — and now Obama expects trust and praise from progressives?

What’s particularly striking is that Obama seems passionate about denouncing his progressive critics, even as he has nice words for the people who have spent two years trying to destroy him.

So look: there’s a policy issue here, and it’s a tough one; you trade off the stimulus Obama extracted now for the increased likelihood that low taxes for the rich will be made permanent, crippling policy for decades to come. But there’s also a character issue: what we really don’t need right now is a president who blames everyone but himself, and seems more concerned with self-justification than with sustaining the alliances he needs.

Aimai:

Echo: Look, the fault here lies with the Obama administration. If you are going to broker a deal with your party's worst enemies and engage in negoitations with extortionists and hostage takers you damned well better be sure you have all your supporters lined up behind you--Obama didn't.  He clearly didn't have a real agreement with Pelosi, the Senators or his own left/progressive base.  He could have, and he should have.  He tried to be the middle man, literally, and he has essentially written a check he can't cash.       I'm really sorry about that. I supported Obama in the past--raised money for him, door knocked for him and I will do so in the future. I'm am totally opposed to a primary of a sitting Democratic President. And I personally think Obama's a pretty good guy and pretty smart and well intentioned. But this was an absolute tragedy of mamoth proportions--a total failure of leadership and logic.  You just don't fuck with your core supporters and their principles and then lecture them on TV and call them losers and jerks. You do that privately. You do that with love. You do that with key opinion leaders on your side--and I don't mean David Broder.     If you want to broker a deal with the Republicans you should have had the SEIU, Kos, and every single person you had any expectation had any kind of following on your side first. Even if you had to bribe them or flatter them or whatever the fuck. That's only logical. I'm not saying that because I believe in feelings first, politics second but because Obama needs people on his side. He clearly needs the Senate and the House to support him in this bargain.     This is about to blow up in his face and when it does it also blows up in the party's face and in his supporters faces. That seems to be something that Obama and his supporters just don't get.  His public humiliations are our public humiliations. And when he has a triumph (as he sees it) he either undersells it by failing to attack the Republicans and the wealthy and with a follow up karate chop to the neck or he spoils the whole fucking thing by going off on his own supporters for being too idealistic or too I don't know what.     There are legitimate differences about this compromise. We're all really happy about the unemployment money but the fact of the matter is that Obama and the dems have lost the first round of tax issues and lots of us agree with Digby that the payroll tax holiday is very likely to be a time bomb that we can't defuse later.  Obama and his administration keep hoping that things will magically get better economically and they will finally be able to govern logically and technologically.  I doubt that things will get better economically and even if they do Obama has himself helped sew the seeds of future trouble by playing up the deficit, trying to find common ground with the republicans, and generally undercutting progressives and progressive values as "idealistic" and foolish and unrealistic and negative.       And its all so absurd. Just don't insult your own voters. Just don't do it. Whatever your personal feelings.  It can never be a good idea.     aimai

Barack Obama:

TRANSCRIPT of Dec 6 press conference: Well, look, I’ve got a whole bunch of lines in the sand.... So this notion that somehow we are willing to compromise too much reminds me of the debate that we had during health care. This is the public option debate all over again. So I pass a signature piece of legislation where we finally get health care for all Americans, something that Democrats had been fighting for for a hundred years, but because there was a provision in there that they didn’t get that would have affected maybe a couple of million people...

I had thought that there were three possibilities with respect to the public option:

• Only a couple of million sign up.
• Only a couple of million sign up, but the existence of the public option would exert enormous competitive pressure on the rest of the exchange system.
• It would turn out that Medicare-for-all would offer the best price/performance tradeoff and the public option would grow to dominate the exchanges.

And I thought that a big reason for the public option was that we had literally no idea what the probabilities of those three possibilities were.

So I do not see how anyone can claim that it was "a provision... that would have affected maybe a couple of million people..."

Barack Obama:

TRANSCRIPT of Dec 6 press conference « FeudArt: This is why FDR, when he started Social Security, it only affected widows and orphans. You did not qualify. And yet now it is something that really helps a lot of people.

Does anybody have any idea what the frack Obama is talking about here, or why he would think something like this, or why he would say something like this?

SOCIAL SECURITY ACTP.L. 74-271\, approved August 14, 1935, 49 Stat. 620.

AN ACT

To provide for the general welfare by establishing a system of Federal old-age benefits, and by enabling the several States to make more adequate provision for aged persons, blind persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws; to establish a Social Security Board; to raise revenue; and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled...

No restriction to widows and orphans here...

So far the count is five...

How did we get here? Paul Rosenberg teases:

Open Left:: Same as it never was: Economics as if the 20th Century never happened.: Thanksgiving weekend I read a lot of stuff relating to economics that I wanted to write about... Brad DeLong's paper, Battered But Not and Beaten, prepared for a late October conference.  I still think it's valuable to consider as much for what it reveals as for what it's puzzled and confused by. In a later diary, this will stand in contrast to a much more lucid overview of our present confused state contained in a more recent paper presented last Wednesday at a Roosevelt Institute panel in NYC, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson....

DeLong's problem is deceptively easy to solve from a distance, particularly by economic laypeople such as myself: he was deeply ensconced in a reality-based discourse, and reality had absolutely nothing to do with it.... DeLong was deeply ensconsed in a fantasy of economic rationality, and the crude realtiy of capitalist unreason smashed his poor little fantasy to bits. DeLong proceeds to give a reasonably lucid account of everything we've been through.... DeLong ticks off seven different types of action that the government could have taken--either fiscally, or monetarily (via the Federal Reserve).... DeLong goes on to note that yes, Senatorial obstruction (mostly, though not entirely from Republicans) was a big part of the problem.... Originally, I was going to offer some critique of DeLong's blind spots.  But... another paper has been published which does a remarkable job of making sense of what ultimately befuddles DeLong.  It's not centered on Obama's circle, but it encompasses that circle as it illuminates a much broader shift in the dynamics of economic hegemony.  I'll discuss that paper, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson, in a diary later today or tomorrow.

But alas, I don't think he delivers:

Open Left:: "A World Upside Down?"--a field biology approach to economic chaos: "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson. It was not the primary purpose of this paper to provide therapy for DeLong, merely a side-benefit.... As I understand DeLong, he was summing up his prolonged experience of struggling against the rise of unreason in economic policy-making since late 2008, when the Wall Street crash precipitated the Great Recession. He was, in effect, trying to understand the rise of unreason using the tools of reason--always a dicey proposition, at best.... Ferguson and Johnson succeed... Ferguson's Investment theory of party competition, which focuses attention on economic blocks, rather than median voters....

In... investor-driven systems, the meaning of political competition is very different from its analogue in classical democratic theory: political parties dominated by large investors try to assemble the votes they need by making very limited appeals to particular segment of the potential electorate.... [O]n all issues affecting the vital interests that major investors have in common, no party competition will take place.... Unless significant portions of it are prepared to try to become major investors in their own right, through a substantial expenditure of time and (limited) income, there is nothing any group of voters can do to offset this collective investor dominance.... [T]hey focus attention on a financial crisis brought about in the context of a financial sector recently come to a state of such complete dominance over the rest of the world's largest economy that no one else's interests really count for anything when push comes to shove....

Earlier this summer, in the midst of the greatest economic crisis since the Great Depression, economic policy turned upside down. Instead of promoting recovery and expanding employment, central banks and political elites suddenly focused on cutting budget deficits and raising interest rates. Forget the famous "conservative counterrevolution" in policymaking since the late nineteen seventies - the break with past practice is real and dramatic. Save for a handful of exceptions, like Margaret Thatcher and, far more equivocally, Ronald Reagan, from the end of World War II until a few months ago, even conservative governments threw in the towel when they saw the Invisible Hand waving goodbye....

They have no grand unified theory of everything to explain how thinking has shifted.....But the point is, from Ferguson and Johnson's perspective there is no great mystery here to be unriddled.  The desire to reimpose the disastrous austerity economics of Hoover and Mellon precedes any theoretical foundations. It grabs whatever it can. So long as the need to explain itself can be rendered "inoperative", then who really cares, anyway?  Brad DeLong?  Who is he?  Some guy with a blog?  Paul Krugman?  Isn't he always cranky about something?

There is a good deal more that might be said about this--and that I plan to say, as soon as I've sorted out the clearest way of fitting them together...

Finance is a very powerful interest group, and finance is interested in deregulation. But finance is not interested in austerity.

Back before World War I finance was interested in austerity: their assets were primarily nominal debt, and relatively safe nominal debt as well. They wanted hard money. They did not care much about capacity utilization or employment. But nowadays finance's portfolios are as diversified as anybody's, and financiers lose as much from slack capacity and low demand as anybody.

So right now we have Austerians--our Pointless Pain Caucus--without there being any politically-powerful investor group that benefits from austerity.

Econ 210a: Spring 2011: January 19, 12-1: Why We Study Economic History:

The four required articles for "Why We Study Economic History" together make up a morality play. The hope is that you will read them and thereafter swear to pay a great deal of attention to the history of the economy and of what economists have said lest you wind up like, well, like Eugene Fama--a very smart guy trying to think important issues through over a weekend and getting them wrong.

R.G. Hawtrey's 1925 Economica article is two things. First, it is a piece of analytical backing for the British Treasury's early interwar position that expansionary fiscal policy had no role at all to play in dealing with Britain's interwar high unemployment problem. Second, it is an attempt to do the macroeconomics of nominal (and real) spending determination without thinking hard enough about what the determinants of money demand are. Hawtrey believes that spending is proportional to money-holdings without there being any systematic relationship between (a) the predictability of an organization's spending and the money holdings wanted to back £1 of annual spending flow, or (b) the short-term opportunity cost of holding money and the money holdings wanted to back £1 of annual spending flow. Hawtrey, however, we can excuse: he is one of the first people to try to think these issues through systematically.

John Hicks's 1937 Econometrica paper is there to show how Hawtrey ought to have done his analysis: Hicks does nominal spending determination in a three-good model--money, bonds, and currently-produced commodities--and does it correctly. Second,

These papers are on the reading list to set you up for Eugene Fama's 2009 weblog post, which is also two things. First, it is an attempted political intervention into the debate about the proper shape of macroeconomic policy in early 2009. Second, it is howlingly, stunningly, appallingly wrong. As best as I can see, Eugene Fama believes not just that changes in government purchases cannot alter nominal GDP, but that nothing can alter nominal GDP. There is nothing in his model that distinguishes the government from any other entity, and thus by the time he has gotten to the end of his argument he has proved to his satisfaction that the flow of nominal spending through the economy must be at all times invariant to everything.

The fascinating thing from my perspective is not that Fama is dumb: he is not dumb--far from it. But in this piece he appears to be not very... wise, not very... well-read, not very... curious about the world. It is impossible for anybody who had ever read Hawtrey and Hicks and remembered anything at all from them to ever make the basic analytical mistake that Fama makes. And it is impossible for anybody who has looked at nominal spending over any time period to advance a model in which nominal spending is invariant to everything without immediately concluding that something would be very wrong.

And these three papers then set you up for Paul Krugman's diagnosis--a controversial diagnosis--about why economists did so badly at recognizing the vulnerabilities that were going to produce our current macroeconomic downturn and then advising governments on how to deal with it.

Last on the reading list for "Why We Should Study Economic History" are the two optional articles: R.M. Solow's and D.N. McCloskey's briefs for how taking economic history seriously innoculates you against the kinds of errors exhibited by Fama and chronicled by Krugman.

Required:

• R.G. Hawtrey (1925), "Public Expenditure and the Demand for Labour," Economica 13 (March), pp. 36-48 http://www.jstor.org/stable/2548008

• John Hicks (1937), "Mr. Keynes and the 'Classics': A Suggested Interpretation," Econometrica 5:2 (April), pp. 147-159 http://www.jstor.org/stable/1907242

• Eugene Fama (2009), "Bailouts and Stimulus Plans" (January 13) http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html

• Paul Krugman (2009), "How Did Economists Get It So Wrong?" New York Times Magazine (September 2) http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html

Optional:

• Robert Solow (1985), "Economic History and Economics," American Economic Review 75:2 (May), pp. 328-331 http://www.jstor.org/stable/1805620

• D.N. McCloskey (1976), "Does the Past Have Useful Economics?" Journal of Economic Literature 14:2 (June), pp. 434-61 http://www.deirdremccloskey.org/docs/pdf/Article_92.pdf

Can anybody think of any (short) articles that do the job these do better, so that I can improve the readings I assign the graduate students for their third economic history class?

(Yes, I know that I cannot assign four--even short--articles for every hour I teach, but you have to start somewhere...)

February 2, 12-1: Slavery, Serfdom, and Wage Labor:

Evsey Domar (1970), "The Causes of Slavery or Serfdom: A Hypothesis," Journal of Economic History, pp. 18-32

Stanley Engerman and Kenneth Sokoloff (1994), "Factor Endowments, Institutions and Differential Paths of Development Among New World Economies: A View from Economic Historians of the United States" NBER Working Paper no. 10066 http://papers.nber.org/papers/h0066.pdf

Karl Marx and Friedrich Engels (1848), "Manifesto of the Communist Party" http://www.marxists.org/archive/marx/works/1848/communist-manifesto/

Karl Marx (1847), "Wage Labour and Capital" http://www.marxists.org/archive/marx/works/1847/wage-labour/index.htm

February 2, 1-2: Agricultural Revolution:

• Peter Timmer (1969), "The Turnip, The New Husbandry, and The English Agricultural Revolution," Quarterly Journal of Economics 83:3 (August), pp. 375-395 http://www.jstor.org/stable/1880527

• Gregory Clark (1992), "The Economics of Exhaustion, the Postan Thesis, and the Agricultural Revolution," Journal of Economic History 52:1 (March), pp. 61-84 http://www.jstor.org/stable/2123345

• George Grantham (1989), "Agricultural Supply During the Industrial Revolution: French Evidence and European Implications," Journal of Economic History 49:1 (March), pp. 43-72 http://www.jstor.org/stable/2121417


• Robert Allen (2008), “The Nitrogen Hypothesis and the English Agricultural Revolution: A Biological Analysis,” Journal of Economic History 68, pp.182-210. http://journals.cambridge.org/action/displayIssue?jid=JEH&volumeId=68&issueId=01&iid=1740956

Can anybody think of any (short) articles that do the job these do better, so that I can improve the readings I assign the graduate students for their first economic history class?

January 19, 12-1: Why We Study Economic History:

• R.G. Hawtrey (1925), "Public Expenditure and the Demand for Labour," Economica 13 (March), pp. 36-48 http://www.jstor.org/stable/2548008

• Eugene Fama (2009), "Bailouts and Stimulus Plans" (January 13) http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html

• Paul Krugman (2009), "How Did Economists Get It So Wrong?" New York Times Magazine (September 2) http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html

• Robert Solow (1985), "Economic History and Economics," American Economic Review 75:2 (May), pp. 328-331 http://www.jstor.org/stable/1805620

January 19, 1-2: The Malthusian Economy:

• Jared Diamond (1987), "The Invention of Agriculture: The Worst Mistake in the History of the Human Race," Discover http://tinyurl.com/dl20090112d

• Gregory Clark (2005), A Farewell to Alms draft of chapters 2 and 3 http://tinyurl.com/dl20090112e http://tinyurl.com/dl20090112j

• M. I. Finley (1965), "Technical Innovation and Economic Progress in the Ancient World," Economic History Review NS 18:1, pp. 29-45 http://tinyurl.com/dl20090112f

Ryan Grim:

Mary Landrieu: 'Obama-McConnell Plan' Is 'Almost Morally Corrupt': Mary Landrieu, a conservative Democratic from Louisiana, lashed out Tuesday at President Obama's deal with congressional Republicans that allows tax cuts for the wealthy to be extended for two years. Extending the tax cuts for those making more than a million dollars a year is borderline immoral, Landrieu charged. "I'm going to argue forcefully for the nonsensicalness and the almost, you know, moral corruptness of that particular policy," said Landrieu, walking into a meeting with Vice President Joe Biden and Senate Democrats. "This is beyond politics. This is about justice and doing what's right."

Landrieu was fuming about the deal. On her way into the meeting, she slammed the tax-cut extension as a needless giveaway, adding, "That's all I have to say." But it wasn't. She emerged from the meeting a few moments later to continue prosecuting her case to reporters.

It's what I'm calling the Obama-McConnell plan. We're going to borrow $46 billion from the poor, from the middle class, from businesses of all sizes basically to give a tax cut to families in America today, that despite the recession, are making over a million dollars. I mean, this is unprecedented. Unprecedented. I want to repeat that....

Landrieu added, however, that she had yet to make a decision on the final package and was speaking strictly about the extension of tax cuts for the wealthy.

It is not clear how much leverage they have. But they might have some:

Pelosi attacks Obama-GOP tax plan as House Democrats signal fight: Russell Berman: House Majority Leader Steny Hoyer said Tuesday there was “no consensus or agreement reached by House leaders” on the deal Obama negotiated with the GOP, while Speaker Nancy Pelosi (D-Calif.) criticized GOP provisions in the agreement. In a post on Twitter, Pelosi said the GOP provisions in the tax proposal would add to the deficit and help the rich without creating jobs. The GOP provisions “help only wealthiest 3%, don't create jobs & add tens of billions to deficit,” the Pelosi tweet said. The Speaker expanded on her criticism of the Republican proposals in a statement that notably withheld any commitment of support. 

We will continue discussions with the president and our caucus in the days ahead. Democratic priorities remain clear: to provide a tax cut for working families, to promote policies that produce jobs and economic growth, and to assist millions of our fellow Americans who have lost their jobs through no fault of their own.

Hoyer (D-Md.) at his weekly press conference reiterated Democratic opposition to extending tax cuts for the wealthy and said House leaders would be discussing the deal with the Democratic Caucus “over the next few days.” “We'd like the Senate to move first on this issue,” Hoyer told reporters. He said House Democratic leaders gave no commitment to the president:

We had a long meeting yesterday with the president, and there was at that point in time consensus or agreement reached by the House leadership. There was a discussion. It took some time, but there was no agreement reached.

The full caucus plans to meet Tuesday evening to consider the proposal. Hoyer stopped short of saying House Democrats would demand changes to the deal, but he warned: “It’s got to pass both houses.” Earlier on Tuesday, Rep. Chris Van Hollen (D-Md.), assistant to the Speaker, also said House Democrats had not signed off on the deal. He said he would meet with the caucus Tuesday to discuss it...

The debt-limit increase and two-year periods for all of the bill's provisions are obvious things to hold out for.

Most especially: where is the increase in the debt limit? If you reduce current tax collections you increase the debt the government has to sell. Any reduction in current tax collections should have a debt-limit increase attached to it automatically. I thought this deal had one. But it does not. Why not?

Dan Frommkin

Concession On Tax Cuts Sends Obama Fans To New Level Of Despair: Brad DeLong, an economics blogger and Clinton administration Treasury official, told HuffPost Tuesday:

The thing that's disappointing is the level of tactical professionalism that the core Obama White House has exhibited..., I would expect a much greater recognition of the tactical realities of the ground on which they work than they appear to possess.... My impressions was that the Clinton team had a much, much firmer grasp of what was attainable and what was not, and where to push and where not to."

As for Obama's jabs at progressives at the press conference: "That's not effective coalition maintenance," DeLong said.

Sudeep Reddy:

Fed Officials Push For Fiscal Stimulus: Top Federal Reserve officials are pressing lawmakers to pair a long-term plan for deficit reduction with new short-term fiscal stimulus to boost an economy that the central bank admits needs more help than it can provide. Fed Chairman Ben Bernanke has tucked support for a two-part fiscal strategy into speeches, and has pushed it behind the scenes with lawmakers, offering a boost both to deficit hawks and to proponents of spending more or taxing less in the near term. Fed Vice Chairman Janet Yellen, in a speech on Wednesday, amplified Mr. Bernanke's call:

We need, and I believe there is scope for, an approach to fiscal policy that puts in place a well-timed and credible plan to bring deficits down to sustainable levels over the medium and long terms while also addressing the economy's short-term needs.

Ms. Yellen didn't elaborate on the latter.

Even if the central bank's controversial bond-buying initiative works as its proponents hope, Fed officials acknowledge it will only do a little to boost growth and bring down unemployment... three-tenths of a percentage point....

In public, Mr. Bernanke has called for a fiscal program "that combines near-term measures to enhance growth with strong, confidence-inducing steps" to reduce the deficit. "There are limits to what can be achieved by the central bank alone," he said in a speech last month. In meetings with lawmakers, he has avoided specifics so as not to step on political terrain, leaving his views open to interpretation. "He's never defined what short-term stimulus is to me," said Sen. Bob Corker (R., Tenn.), who met with Mr. Bernanke last month. "I'm going to take that to mean keeping our tax rates where they are for at least a couple of years while we wrestle with the tremendous spending issues"...

Ryan Avent:

Fiscal policy: A good deal (under the circumstances): NO REASONABLE person interested in improving the American economy and insuring against debt troubles would draw up the policy compromise that seems to have been reached in Washington this week. But no reasonable person starting from scratch would design America's sclerotic political institutions.... In this imperfect political world, the agreement to temporarily extend all of the Bush tax cuts, extend unemployment insurance, and temporarily reduce payroll tax rates and allow enhanced business expensing looks like a pretty good outcome for the American economy. The sharp criticisms levied at it by both the Democrat base and the country's real deficit hawks are both overstated.... What about the deficit hawks? Obviously, it would be nice if Congress had passed, at some point, measures amounting to a credible path toward medium-term deficit reduction. But no majority exists that's willing to pass such measures, mainly because legislators don't actually care that much about the deficit, mainly because American voters don't actually care that much about the deficit. A full expiration of the tax cuts would have been straightforwardly bad policy; the American economy isn't fit to handle a broad and substantial rise in tax rates (and neither does it need one, given the current market taste for American debt). The cuts for the rich don't add nearly as much to the deficit as the cuts for the rest, and the deal for temporary extension further reduces the fiscal burden (although pundits are right to be nervous about the fact that renewal will be on the table in an election year). The rest of the package simply isn't that big a budget deal; the other policies add up to about $300 billion over two years, which isn't going to make or break the budget.

It's worth continuing to argue for sensible deficit-reduction policy. But it's difficult for me to see movement within Congress for meaningful deficit reduction until bond markets provide pressure. And the shortest way to get there is via a strong economic recovery...

Felix Salmon:

Tax cuts, Oprah-style: The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!... This is expansionary fiscal policy, alright, but a large chunk of it is concentrated in exactly in those areas — like tax cuts for the rich — which have the lowest multipliers when it comes to kick-starting economic recovery. What the country needs is spending, and this bill instead looks very likely to give us hundreds of billions of dollars of saving. The unemployment-insurance and payroll-tax aspects of the deal will be welcomed as exactly the kind of stimulus this economy needs: substantially all of them will be spent rather than saved. But the middle- and upper-class tax cuts, paid for by extra borrowing by Treasury, will be used in large part to pay down personal debt...

Paul Krugman:

There Are No Deficit Hawks In Congress: It’s a point barely worth making, but the tax cut deal demonstrates, for the umpteenth time, that self-proclaimed deficit hawks are frauds. We can’t afford unemployment benefits or public investment, the fake hawks say — but when it come to cutting taxes on the rich, money is literally no object. It’s just possible, as Atrios says, that some journalists don’t understand this; if you do up-close-and-personal reporting, judging politicians by what they say and how they come across rather than by the content of their proposals, you might actually be snookered. But again: none of the people who claim about the deficit actually view it as anything more than a stick with which to beat down progressive ideas.

David Dayen:

Is the Tax Cut Cave a Stimulus Gambit?: I brought this up a few days ago, and now it’s being seen as the best face of a capitulation on the Bush tax cuts. Ezra, who I assume is speaking for the White House here, lays that out:

The White House has stopped negotiating for ideal — or even acceptable — tax policy and moved to negotiating stimulus policy. The Bush tax cuts will pump about $100 billion into the economy over the next two years. They’re not the most stimulative way to spend $100 billion, but they’re more stimulative than not spending it, or than raising taxes. And they won’t be alone.... [R]ather than paring the tax cuts and the deficit back, they’re making both larger. If you’re of the mind that the economy needs all the extra help it can get right now — and you should be — this is a lot more extra help than anyone expected Republicans and Democrats would agree to give it. And from a political perspective, if you believe that what matters for elections is the economy — and you should — then it’s worth it for the White House to lose news cycles in 2010 if it means adding jobs by 2012.

I think this is worth giving some attention.... [I]s this better than nothing? Yes. But it’s not the entire story. With an expanding budget deficit, we can expect the tea party-infused House to put forward substantial deficit reduction bills.... You have a lot of attention paid to the Catfood Commission report, to the extent that there’s a supermajority in the Senate next year interested in deficit reduction.... So I don’t think you can look at this stimulus in a vacuum. In a world where the Bush tax cuts expire, you have a credible argument from the perspective of Democratic deficit hawks in the Senate – who are the people who matter here, as they will hold the keys on deficit reduction – that the issue has been dealt with in the near term. In a world where this tax cut-heavy stimulus goes into place, they’re likely to whine and argue for major spending cuts to offset the hit to the deficit. In other words, I doubt you get $300 billion in stimulus in the coming year, when all is said and done. In fact, I’d expect far less than that.... I think this claim of a $300 billion stimulus is a little dubious.

Because Obama chose the wrong people to chair it. Stan Collender on the clown show that was Simpson-Bowles

Bowles-Simpson Offers Lessons on the Deficit: I am one of the people who never thought the deficit reduction commission co-chaired by Erskine Bowles and Alan Simpson had much chance of succeeding.... The Bowles-Simpson commission was set up on a pass-fail basis, and it unquestionably failed.... Some of those who have tried the hardest to impose an alternative definition have an ulterior motive because they supplied staff to the commission and were deeply involved in the plan’s development. To say the least, their position that the plan should be viewed as a success has to be treated skeptically.

Some people are taking solace in the fact that more than a simple majority supported the plan, but my strong suspicion is that the 11 supporters were actually an overstatement. Several members likely announced their support for the plan only after they were certain it wouldn’t be adopted....

[L]essons from Bowles-Simpson are important.... First... commissions seldom work when it comes to revenue and spending... [that] most of the questions can’t be answered objectively... dooms from the start almost every effort to do what commissions are supposed to do: take the politics out of what is an inherently political decision.... Second, Bowles-Simpson showed clearly that any commission... has to make a convincing case to the public for its proposals in order to be successful... Bowles-Simpson didn’t do this.... Third... staffing is almost always a critical element.... My commission relied on Treasury staff and a few paid outside consultants; Bowles-Simpson seemed to rely on staff on loan from outside organizations with an interest in the outcome. This is a huge problem in general; in this case it also called the commission’s objectivity into question.

Poor Stan actually thought that the Republicans might have meant it when they campaigned on how important it was to reduce the budget deficit. Silly Stan: Republican politicians believe in nothing at all:

Is The Tax Deal The Ultimate Irony Or Hypocrisy?: After making the budget deficit not just a campaign issue but the campaign issue of 2010, one of the very first legislative things the Republicans in Congress will do after the election is agree to a tax cut and extension of unemployment benefits (and god knows what else) that will...wait for it...increase the deficit.  The two-year increase in the deficit because of the deal will be greater than the stimulus bill the GOP railed against during the election. This is either one of the most exquisite ironies or extraordinary hypocrisies in the history of American politics.  It ranks right up there with Lyndon Johnson campaigning against Barry Goldwater in 1964 by criticizing his plan to increase military activities in Vietnam and then, after the election, having the Pentagon do many of the things he had criticized Goldwater for suggesting.

Most of this round of stimulus does look to be relatively low bang-for-buck, and it is not paid for over ten years, but it does look to me as though it is better than a poke in the eye with a sharp stick.

Cogitamus:

Greg Ip:

Fiscal policy: Austerity delayed: FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts. Austerity will have to wait.... Barack Obama and Republican and Democratic leaders in Congress struck a deal on a massive new package of stimulus and tax cut extensions, worth some $800 billion next year alone (around 5% of GDP)....

[T]his is good news for the economy: the prospect of inadvertent fiscal tightening was the biggest cloud hanging over the 2011 outlook.... The package comes in two parts. The first is an extension of all of George Bush’s tax cuts for the next two years. Mr Obama acquiesced to an extension for the upper 2%, bowing to the reality that he did not have 60 votes in the Senate to extend only the cuts for the lower 98%. Tax credits for child care, education and for low-income wage earners are also extended for an additional year. The second part is an injection of short-term fiscal steroids: a two-percentage point cut in the Social Security payroll tax for workers for one year, worth $120 billion (that’s double what Mr Obama’s “making work pay” credit was worth), one year of complete expensing of business equipment, worth $200 billion, and a 13-month extension of emergency unemployment insurance benefits.... While the stimulative boost next year is probably worth some $800 billion, or roughly 5% of GDP, the 10-year cost is lower largely because tax deferred by accelerated business investment expensing will eventually be paid....

It is... a depressing reminder that for all the talk of a new era of austerity in America, politicians here still find it easier to give money away than to take it back.... Thoughtful economists, including those advising Mr Obama, think the ideal fiscal package would couple short-term stimulus with medium-term consolidation. We got the first in spades tonight, but there is still no sign of the second.... A debt crisis has never been likely for America, much less imminent. But it looks to me that while the odds remain low, they went up tonight. By putting off the expiration of the tax cuts to the month after the next presidential election, the negotiators have again set us up for another nail-biting collision between the economic and political calendars. Hopefully the markets will remain as tolerant as they have so far.

That the package isn't paid for over ten years is a real shame. And I have to figure out whether it is really $800 billion.

But if it is this has to count as a big win for Obama.

Duncan Black:

Eschaton: [Reporters] Know Even Less Than What They Say: On the twitter machine Tim Fernholz wrote:

A reporter just asked how the WH would convince Blue Dogs to vote for budget-busting tax cuts. LOL.

I suppose there's a small chance this reporter was being sneaky and trying to elicit an answer along the lines of:

The Blue Dogs don't give a s--- about the deficit, all they care about are tax cuts for corporations and rich people along with subsidies for favorite campaign donors.

But it's more likely that the reporter does not actually know that the Blue Dogs don't give a s--- about the deficit, all they care about are tax cuts for corporations and rich people along with subsidies for favorite campaign donors, and instead believes they truly care about the deficit. Which they don't.

Hoisted from Comments: Robert Waldmann writes:

DeLong has been duly smacked down, but I'm not sure your correspondents have proven that you were unfair to the deficit hawks at the OMB. Your revision suggests "Battered but Not and Beaten" was more than fair to them.

The center block in the Senate just voted against cloture on a bill to extend only tax cuts on family income under $250,000. They did not do so, because the Baucus bill would add trillions to the 10 year deficit. They did so because it wouldn't add additional hundreds of billions (I submit that Russ Feingold is not a member of the center block).

When it's time to vote, they demonstrated that they don't give a damn about the deficit. Also OMB staffers are supposed to know about managment of budgets. They should be cautious when claiming they understand how to manage Senators. Pretending that they can communicate with Ben Nelson is like pretending that they can communicate with the dead. It isn't plausible, and they are likely to end up looking like fools.

The above paragraph should not be construed as suggesting that I believe that the honorable Senator Nelson is brain dead.

20101203 for 20101206 Econ 1.pdf

General Richard O'Connor's Western Desert Force, composed of the British 7th Armoured Division, British 16th Infantry Brigade and Indian 4th Infantry Division leaves Mersa Matruh in Egypt for a five-day raid on the Italian army that has invaded Egypt.

There are a number of concepts, capabilities, and observations that we do not expect you to remember and carry in the forefront of your brains long beyond the final exam. However, we do expect you to have them in the forefront of your brains at the time of the final exam.

We hope that thereafter they will live on as a neuronal ghost so that when you run across these issues again, you will say "oh yeah..."--and be able to relearn them quickly.

From the "macro" portion of the course, we would like you to be able to, on the final:

1. Explain the accounting system we use to assess the overall state of the economy, the National Income and Product Accounts, and use it.
2. Explain why real GDP per capita, the unemployment rate, and the inflation rate are economic variables of especial interest.
3. Explain why nominal interest rates, real interest rates, and stock prices are also key economic variables.
4. Explain why Jean-Baptiste Say was so confident in 1803 that a general glut--a situation in which there seemed to be deficient demand for pretty much every currently-produced commodity and excess demand for none, leading to high unemployment and idle factories--was impossible.
5. Explain what had made Jean-Baptiste Say change his mind and admit the possibility of a general glut of deficient economy-wide demand by 1829.
6. Explain the hole in Say's Law: how you can have deficient demand for pretty much every currently-produced commodity if you have excess demand for financial assets.
7. List the three types of excess demand for financial assets that have, historically, led to large downturns in employment and capacity utilization.
8. Explain how to use observations of the pattern of asset prices to understand what type of excess financial asset demand is generating any particular economic downturn.
9. Explain how the type of downturn determines the most effective cure--an excess demand for liquid cash money being best cured by a monetarist expansion of the money stock, an excess demand for bonds to serve as long-term savings vehicles being best cured by a Keynesian expansionary fiscal policy, and an excess demand for safety being best cured by banking policy that provides government guarantees to shaky private assets.
10. Explain the two parts of the "Bagehot rule" for dealing with a Minskyite excess-demand-for-safe-financial-assets downturn.
11. Evaluate the policies followed by the Bush and Obama administrations toward the current downturn in light of the "Bagehot rule."
12. Calculate the likely size of the deflationary gap produced by an excess demand for bonds in the Keynesian income-expenditure model.
13. Calculate the likely size of the deflationary gap produced by an excess demand for money in the monetarist quantity-theory-of-money model.
14. Calculate the likely size of the inflationary gap produced by an excess supply of money in the monetarist quantity-theory-of-money model.
15. Explain the reasons behind the Phillips Curve downward-sloping inverse relationship between inflation and unemployment.
16. Explain how changes in the natural rate of unemployment and expected inflation affect the position of the Phillips Curve.
17. List the three types of inflation expectations.
18. Calculate how the inflation rate will evolve over time in response to changes in the money stock under static, adaptive, and rational inflation expectations.
19. Explain the circumstances under which inflation expectations are likely to be static, adaptive, or rational.
20. Explain why, as far as the government is concerned, Milton Friedman always said: "To spend is to tax."
21. List and evaluate the arguments for running a government deficit and a government surplus.
22. Explain why the long-term budget outlook for the U.S. government looks grim.
23. Explain why the long-term budget outlook for the U.S. government looks a lot better after the passage of PPACA--the 2010 Health Care Reform.
24. Explain why the long-term budget outlook including the estimated effects of PPACA may well be overly rosy.
25. List the different paces of economic growth before the Neolithic Revolution, in the Agrarian Age, since the Commercial Revolution, and since the Industrial Revolution.
26. Explain why the pace of economic growth has sped up so much over time.
27. Explain why before the Industrial Revolution increases in GDP went essentially 100% into increases in population and not at all into increases in GDP per capita.
28. Explain why this pre-industrial pattern was broken by the Demographic Transition.
29. Project the population of the world forward.
30. Assess the relative importance of accumulation and innovation in accounting for economic growth.
31. Explain the sources of differences across countries in GDP per capita levels.
32. List factors and policies likely to accelerate economic growth.
33. List factors and policies likely to retard the pace of economic growth.

Brian Montopoli of CBS News:

Poll: Sarah Palin Favorable Rating Just 22 Percent: Palin is viewed favorably by just 22 percent of Americans, according to the poll - including less than half (44 percent) of Republicans.... Forty-eight percent of Americans have an unfavorable view of Palin. That includes... 22 percent of Republicans...

Peter Brown:

An ABC/Washington Post poll taken last month found that Republicans were split 47% to 46% on whether she was up to serving as president...

Lexington of the Economist:

Lexington: The qualities of Sarah Palin: In contrast, a recent poll found that the obverse of Mrs Palin’s stellar ratings among Republicans...

44-22 favorable-unfavorable and 47-46 qualified to be President simply are not "stellar" ratings. They aren't.

Lexington should not pretend that they are.

Suggestions?

What is the second most important thing for you come one student remember? It is how stringent the requirements for any form of "market efficiency" are: how many ways a market economy can go wrong and go badly wrong. I count seven ways that market economies can and do go badly wrong:

First, the market will go wrong if the wealth distribution is wrong. The market judges value by willingness to pay, and the rich are much more willing to pay them the poor, and those without wealth or income have no willingness to pay at all. If your wealth and income are zero, then the market literally does not care whether you live or die--it is of no interest to it at all.

Second, the market will go wrong if commodities do not have the proper characteristics. Remember: rivalry, excludability, and also information--people have to know what they are buying. An absence of or imperfect rivalry--increasing returns to scale in production or consumption of any sort--and the market will go wrong. An absence of or imperfect excludability--free-rider problems of any sort, or any failure of property rights definition or enforcement--and the market will go wrong. An absence of good information about exactly what you are buying or selling--adverse selection or moral hazard problems of any sort--and the market will go wrong.

Third, the market will go wrong if market agents do not take the prices at which they buy and sell as given but rather have some control over the prices at which they transact. The belief that the market is efficient hinges on the absence of market power--as well as on the proper income distribution, and on the proper characteristics of commodities.

Fourth, the market will go wrong if prices do not equalize quantities supplied and quantities demanded at every moment. "Price stickiness" for any sociological or psychological reasons disrupts the market's ability to function.

Fifth, the market will go wrong if Say's Law breaks down. If there is substantial downward pressure on spending on currently-produced goods and services because of an excess demand for financial assets of a kind that the private sector cannot immediately and instantaneously generate on a large scale, then the market will go wrong and we will have a downturn and a depression. If there is substantial upward pressure on spending on currently-produced goods and services because of an excess supply of financial assets of a kind that the private sector cannot immediately and instantaneously shed, then the market will go wrong and we will have a burst of inflation that will disrupt the functioning of the price system.

Sixth, the market will go wrong whenever its prices function as forecasting mechanisms. A proper forecasting mechanism would weigh each individual's opinion by the precision of his or her knowledge. A market tends on the contrary to weigh each individual's opinion by his or her wealth. This means that whenever economic processes tend to revert to seem average level that the market is likely to get things wrong, for when prices rise above average those who are optimistic become richer and their opinions carry more weight and so prices tend to rise further above their likely long-run fundamental values. Bubbles and crashes, manias and panics, are thus built into the system.

Seventh, the market will go wrong whenever individuals are bad judges of their own long-term interests--note that I say when, not if. Humans are very bad at assessing and dealing with risk. Humans are not that great at appropriately weighting different conflicting pieces of information. And humans are absolutely horrible at dealing with substances or patterns of behavior that can be addictive.

Whenever the system falls into any one of these seven arenas of psychological, behavioral, or institutional myopia and market failure, the market will go wrong. A good government will put its thumb on the scale in order to offset all of these seven forms of market failure. A great government will have foresight and take care to structure political-economic institutions to make these seven arenas of myopia and market failure as small as possible.

Remember this too. Keep it as an active process running on your wetware always. Lay up this idea in your heart and in your soul. Bind it for a sign upon your hand, that they may be as frontlets between your eyes. Teach it to your children when thou sittest in thine house, when thou walkest by the way, when thou liest down, and when thou risest up. And write them upon the door posts of thine house, and upon thy gates: that thy days and the days of thy children--or at least the commodities they own--may be multiplied.

http://www.epi.org/page/-/pdf/112910-uiextension.pdf

The Honorable Barack Obama
President of the United States
The White House
1600 Pennsylvania Avenue, N.W. Washington, D.C. 20500

The Honorable Nancy Pelosi
Speaker of the United States House of Representatives
Washington, D.C. 20515

The Honorable John Boehner
Minority Leader of the United States House of Representatives
Washington, D.C. 20515

The Honorable Harry Reid
Majority Leader of the United States Senate
Washington, D.C. 20515

The Honorable Mitch McConnell
Minority Leader of the United States Senate
Washington, D.C. 20515

November 29, 2010

Dear Mr. President, Speaker Pelosi, Majority Leader Reid, Congressman Boehner, and Senator McConnell:

Congress must decide whether to continue the Emergency Unemployment Compensation program (EUC), a decision that will directly affect millions of families and the entire economy. Authorization for the additional benefits Congress has been providing since the passage of the American Recovery and Reinvestment Act in February 2009 expires tomorrow, November 30, and millions of unemployed workers will soon be affected. I write you out of concern for the jobless, who through no fault of their own, cannot find work in an economy with only one job vacancy for every five unemployed workers, and who depend on EUC to pay their rent or mortgage, pay for groceries and gas, and pay for their heating bills and other utilities.

But I write also out of concern for the economy. Together with Lawrence Katz of Harvard University, I gathered the signatures of 33 prominent economists on the attached statement, which warns that letting the Emergency Unemployment Compensation program expire will weaken the economy by reducing the spending of the unemployed and overall consumer demand. All of us agree that EUC should be extended for another 12 months and that there is no danger that continuing to provide extended unemployment insurance benefits will materially raise overall unemployment. We also agree that deficit financing for EUC is prudent and will not contribute significantly to long-term deficits.

We hope that you act swiftly to renew these benefits, for the good of the economy and the well-being of millions of deserving Americans who depend on them.

Sincerely,

Lawrence Mishel President of the Economic Policy Institute

Greg Mankiw writes:

Greg Mankiw's Blog: My Agnosticism about UI: A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits.  I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI.... I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.... It is plausible to me that UI benefits should last longer when the economy is weak.  The need for increased aggregate demand is greater, and the impact on job search may be weaker.  But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right.  It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.

I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general.  I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around."  That issue is, as I tell my students, more a matter of political philosophy than it is of economics.

This does surprise me.

I would have thought he would have said that continuing our current extension of unemployment insurance benefits to 99 weeks is a good idea:

1. Continuing the current extension is an expansionary short-run fiscal policy, the economy badly needs more expansionary short-run fiscal policy, and it is one of the few expansionary short-run fiscal policies that might get enacted in the current political climate.

2. Down the hall at Harvard he has Raj Chetty, who has thought as carefully as anybody about the pros and cons of unemployment benefits and about the optimal structure unemployment insurance. Cf. Chetty (2004), "Optimal Unemployment Insurance When Income Effects are Large" http://www.economics.harvard.edu/files/faculty/1238_ui_income.pdf. Down the hall at Berkeley I have Emmanuel Saez, who has also thought as carefully as anybody about the pros and cons of unemployment benefits and about the optimal structure unemployment insurance. Cf. Landais, Michaillat, and Saez (2010), "Optimal Unemployment Insurance Over the Business Cycle" http://elsa.berkeley.edu/~saez/landais-michaillat-saezNBER10UI.pdf. Both build on Baily (1978), "Some Aspects of Optimal Unemployment Insurance." Both conclude that an unemployment benefit-market wage of about 50% is about right unless you are in a state of affairs in which continuation of unemployment benefits for a particular group is materially reducing the total economy-wide level of employment. Since right now it seems to me highly likely that continuation of unemployment benefits for all groups are raising and not lowering employment--it is a fiscal stimulus in a 10% unemployment rate environment, after all--I don't see any technocratic argument for reducing the benefit-length ceiling below its current 99 weeks at all.

3. With respect to unemployment benefits and progressive income redistribution. Well, we do need more progressive income redistribution--remember that we are in a country where a generation ago the top 0.01% of households took 1% of total income, and now they take 6%. But that did not enter into my thinking. Remember: your unemployment benefits are an increasing function of your previous wage--it is an insurance program that redistributes to those who have lost as a result of the recession much more than a welfare program that redistributes to the poor. The belief that in a risk-averse world good government policy should reduce and spread risks is a somewhat different thing from a belief that good government policy equalizes incomes and makes everybody dress in identical blue overalls.

Mark Evanier:

Mel Torme: ORIGINALLY PUBLISHED 7/9/99

I want to tell you a story...

The scene is Farmers Market — the famed tourist mecca of Los Angeles.  It's located but yards from the facility they call, "CBS Television City in Hollywood"...which, of course, is not in Hollywood but at least is very close. Farmers Market is a quaint collection of bungalow stores, produce stalls and little stands where one can buy darn near anything edible one wishes to devour.  You buy your pizza slice or sandwich or Chinese food or whatever at one of umpteen counters, then carry it on a tray to an open-air table for consumption. During the Summer or on weekends, the place is full of families and tourists and Japanese tour groups.  But this was a winter weekday, not long before Christmas, and the crowd was mostly older folks, dawdling over coffee and danish.  For most of them, it's a good place to get a donut or a taco, to sit and read the paper.

For me, it's a good place to get out of the house and grab something to eat.  I arrived, headed for my favorite barbecue stand and, en route, noticed that Mel Tormé was seated at one of the tables.

Mel Tormé.  My favorite singer.  Just sitting there, sipping a cup of coffee, munching on an English Muffin, reading The New York Times.  Mel Tormé. I had never met Mel Tormé.  Alas, I still haven't and now I never will.  He looked like he was engrossed in the paper that day so I didn't stop and say, "Excuse me, I just wanted to tell you how much I've enjoyed all your records."  I wish I had. Instead, I continued over to the BBQ place, got myself a chicken sandwich and settled down at a table to consume it.  I was about halfway through when four Christmas carolers strolled by, singing "Let It Snow," a cappella. They were young adults with strong, fine voices and they were all clad in splendid Victorian garb.  The Market had hired them (I assume) to stroll about and sing for the diners — a little touch of the holidays.

"Let It Snow" concluded not far from me to polite applause from all within earshot.  I waved the leader of the chorale over and directed his attention to Mr. Tormé, seated about twenty yards from me.

"That's Mel Tormé down there.  Do you know who he is?" The singer was about 25 so it didn't horrify me that he said, "No." I asked, "Do you know 'The Christmas Song?'" Again, a "No." I said, "That's the one that starts, 'Chestnuts roasting on an open fire...'" "Oh, yes," the caroler chirped.  "Is that what it's called?  'The Christmas Song?'" "That's the name," I explained.  "And that man wrote it."  The singer thanked me, returned to his group for a brief huddle...and then they strolled down towards Mel Tormé.  I ditched the rest of my sandwich and followed, a few steps behind.  As they reached their quarry, they began singing, "Chestnuts roasting on an open fire..." directly to him.

A big smile formed on Mel Tormé's face — and it wasn't the only one around.  Most of those sitting at nearby tables knew who he was and many seemed aware of the significance of singing that song to him.  For those who didn't, there was a sudden flurry of whispers: "That's Mel Tormé...he wrote that..." As the choir reached the last chorus or two of the song, Mel got to his feet and made a little gesture that meant, "Let me sing one chorus solo."  The carolers — all still apparently unaware they were in the presence of one of the world's great singers — looked a bit uncomfortable.  I'd bet at least a couple were thinking, "Oh, no...the little fat guy wants to sing." But they stopped and the little fat guy started to sing...and, of course, out came this beautiful, melodic, perfectly-on-pitch voice.  The look on the face of the singer I'd briefed was amazed at first...then properly impressed.

On Mr. Tormé's signal, they all joined in on the final lines: "Although it's been said, many times, many ways...Merry Christmas to you..."  Big smiles all around. And not just from them.  I looked and at all the tables surrounding the impromptu performance, I saw huge grins of delight...which segued, as the song ended, into a huge burst of applause.  The whole tune only lasted about two minutes but I doubt anyone who was there will ever forget it.

I have witnessed a number of thrilling "show business" moments — those incidents, far and few between, where all the little hairs on your epidermis snap to attention and tingle with joy.  Usually, these occur on a screen or stage.  I hadn't expected to experience one next to a falafel stand — but I did...

Economics deals with those things that we want but that are "scarce." We economists care about commodities whenever there are not enough of them for all of us to be satisfied that we have all that we want. Under those circumstances societies then have to--we have to--figure out whether it is worth making more of these scarce commodities. And then, if we do make more of them, we then need to figure out who is going to get to use them.

Where things are not scarce (the air, for example), that is not economics. Where we do not, care that is not economics either. Where things are both scarce and where we care, we have the economic problem.

How ought a society to go about dealing with the economic problem? How should we--collectively--decide whether it is worth our while to make more of any particular commodity? And if we do decide to make more of them, how ought we to decide who is been going to get use them?

At this point I need to pause and note two facts about the world. Most scarce things that we care about are "rival." And most scarce things that we care about are "excludable." By "rival" I mean the only one person can use it at a time. I am now using this iPad to read my lecture notes. Because I am now using it, you cannot be. By "excludable" I mean that it is relatively easy to keep someone from making use of a commodity. I can keep your cows from eating my grass by putting up a barbed-wire fence.

Because commodities are "rival," somebody's use of a particular good imposes an opportunity cost on the rest of society. Because I am using this iPad, there is one fewer iPad for the rest of you to use. My use restricts your opportunities. A good economic system would make me take account in my decision-making of any reduction in your opportunities and resources that might be caused by my actions.

This is where the market economy comes in.

Let us assign each newly-produced commodity a particular person. Call this person the "owner." Let the owner decide who is going to get to use the commodity. Let the owner exclude all others who from using the commodity. And let the owner charge the designated user he or she has decided upon a "price" for the right to make use of this commodity.

This simple institutional arrangement has a huge number of advantages as societal mechanism for planning and coordinating the production and distribution of scarce, rival, excludable commodities.

It solves the problem of production--what commodities we should try to make more of. Individuals look forward into the future and recognize that others will be willing to pay them high prices for commodities they greatly desire. That gives individuals an incentive to figure out how to make more of those scarce, rival, excludable commodities that are scarcest.

It solves the problem of economizing--of how to get people to economize on their own consumption and not hog too great a share of society's total resources for themselves. Because they have to pay the owners the prices the owners ask, their eyes may be bigger than their stomachs but their wallets generally will not be.

It solves the problem of distribution--of determining who is going to get to use newly-produced commodities. The owner has an incentive to choose the person willing to pay the highest price--and the person willing to pay the highest price is, in some sense, the person who values it the most, to whom it is scarcest.

Moreover, it solves the problem of coordination: As long as market prices are free to move to equalize quantities supplied and demanded, there does not need to be any huge centralized computer bureaucracy keeping track of everything and making sure that plans add up. The market will coordinate itself.

And it solves the problem of information: In a market economy with commodities with owners, decision-making is pushed out to the periphery of society where people already know what is going on. You don't need any huge centralized computer bureaucracy collecting and processing information--and where people do discover that there are things that they don't know but need to learn, why knowledge of something and that somebody else would like to learn it is also a commodity and those who know those two facts are its owners.

It is hard to imagine a simpler institutional framework--owners and prices--that could solve those five problems so very well.

At this point I need to pause and point out a lucky consonance between the requirements of a societal institution for producing and allocating rival, excludable, scarce commodities on the one hand and the psychological propensities of us East African Plains Apes on the other. That we believe that things are ours and that we own them is perhaps not so surprising--it appears deeply deeply engraved in mammalian psychology. Squirrels certainly act as though they believe that they "own" nut-foraging sites. Dogs believe that they "own" bones. We East African Plains Apes, however, not only believe that we own things--we like to give them away. We are animals that solidify our own societal bonds via relationships of gift-exchange. And it is this psychological propensity to engage in gift-exchange--what Adam Smith called our natural propensity to truck, barter, and exchange in such a way that both sides are happy because they feel that they have gained something from the deal--that serves as the underpinning of our market economy.

That is the first thing I want you to remember from this course: The market economy, based on deep human psychological propensities, is an extraordinarily effective societal instrumentality for planning and coordinating the production and distribution of scarce, rival, excludable commodities.

Remember this. Keep it as an active process running on your wetware always. Lay up this idea in your heart and in your soul. Bind it for a sign upon your hand, that they may be as frontlets between your eyes. Teach it to your children when thou sittest in thine house, when thou walkest by the way, when thou liest down, and when thou risest up. And write them upon the door posts of thine house, and upon thy gates: that thy days and the days of thy children--or at least the commodities they own--may be multiplied.