Previous month:
July 2011
Next month:
September 2011

August 2011

Winston Churchill Liveblogs WWII: August 24, 1941


Radio Broadast: I thought you would like me to tell you something about the voyage which I made across the ocean to meet our great friend, the President of the United States…. Our party arrived in the newest, or almost the newest, British battleship, the Prince of Wales, with a modest escort of British and Canadian destroyers. And there for three days I spent my time in company, and I think I may say in comradeship, with Mr. Roosevelt, while all the time the chiefs of the staff and naval and military commanders, both of the British Empire and of the United States, sat together in continual council…. The meeting… symbolizes, in a form and manner which every one can understand in every land and in every clime, the deep underlying unities which stir and, at decisive moments, rule the English-speaking peoples throughout the world. Would it be presumptuous for me to say that it symbolizes something even more majestic, namely, the marshalling of the good forces of the world against the evil forces which are now so formidable and triumphant and which have cast their cruel spell over the whole of Europe and a large part of Asia? This was a meeting which marks forever in the pages of history the taking up by the English-speaking nations, amid all this peril, tumult and confusion, of the guidance of the fortunes of the broad toiling masses in all the continents, and our loyal effort, without any clog of selfish interest, to lead them forward out of the miseries into which they have been plunged, back to broad high road of freedom and justice. This is the highest honour and the most glorious opportunity which could ever have come to any branch of the human race….

The whole of Europe has been wrecked and trampled down by the mechanical weapons and barbaric fury of the Nazis. The most deadly instruments of war science have been joined to the extreme refinements of treachery and the most brutal exhibitions of ruthlessness and thus have formed a combine of aggression, the like of which has never been known…. [Hitler] made a treaty of non-aggression with Soviet Russia… to keep them quiet until he was ready to attack them…. [H]e hurled millions of soldiers with all their apparatus upon the neighbour he had called his friend with the avowed object of destroying Russia and tearing her in pieces…. Here is a devil who, in a mere spasm of his pride and lust for domination, can condemn two or three millions, perhaps it may be many more, of human beings to speedy and violent death….

Ah, but this time it was not so easy. This time it was not all one way. The Russian Armies and all the peoples of the Russian Republic have rallied to the defence of their hearths and homes. For the first time Nazi blood has flowed in a fearful flood. Certainly a million and a half, perhaps two millions of Nazi cannon-fodder, have bitten the dust of the endless plains of Russia…. For the first time in his experience mass murder has become unprofitable. He retaliates by the most frightful cruelties. As his armies advance, whole districts are being exterminated. Scores of thousands, literally scores of thousands of executions in cold blood are being perpetrated by the German police troops upon the Russian patriots who defend their native soil. Since the Mongol invasions of Europe in the sixteenth century there has never been methodical, merciless butchery on such a scale or approaching such a scale. And this is but the beginning. Famine and pestilence have yet to follow in the bloody ruts of Hitler's tanks.

We are in the presence of a crime without a name.

But Europe is not the only continent to be tormented and devastated by aggression. For five long years the Japanese military factions seeking to emulate the style of Hitler and Mussolini, taking all their posturing as if it were a new European revelation, have been invading and harrying the 500,000,000 inhabitants of China…. It is certain that this has got to stop. Every effort will be made to secure a peaceful settlement. The United States are labouring with infinite patience to arrive at a fair and amicable settlement which will give Japan the utmost reassurance for her legitimate interests. We earnestly hope these negotiations will succeed. But this I must say: that if these hopes should fail we shall, of course, range ourselves unhesitatingly at the side of the United States….

Hitler and his confederates have for some time past been adjuring and beseeching the populations whom they have wronged and injured to bow to their fate, to resign themselves to their servitude and, for the sake of some mitigation and indulgences, to collaborate--that is the word--in what is called the new order in Europe. What is this new order which they seek to fasten first upon Europe and, if possible--for their ambitions are boundless--upon all the continents of the globe? It is the rule of the Herrenvolk--the master race--who are to put an end to democracy, to parliaments, to the fundamental freedoms and decencies of ordinary men and women, to the historic rights of nations, and give them in exchange the iron rule of Prussia, the universal goose-step and the strict efficient discipline enforced upon the working classes by the political police, with the German concentration camps and firing parties, now so busy in a dozen lands, always handy in the background. There is the new order…. The ordeals… of the conquered peoples will be hard. We must give them hope. We must give them the conviction that their sufferings and their resistances will not be in vain. The tunnel may be dark and long, but at the end there is light. That is the symbolism and that is the message of the Atlantic meeting….

You will, perhaps, have noticed that the President of the United States and the British representative, in what is aptly called the Atlantic Charter, have jointly pledged their countries to the final destruction of the Nazi tyranny. That is a solemn and grave undertaking. It must be made good. It will be made good. And, of course, many practical arrangements to fulfil that purpose have been and are being organized and set in motion….

Three and a half years ago I appealed to my fellow-countrymen to take the lead in weaving together a strong defensive union within the principles of the League of Nations, a union of all the countries who felt themselves in ever-growing danger. But none would listen. All stood idle while Germany rearmed….

I am devoutly thankful that some eyes at least are fully opened to it while time remains. I rejoice to find that the President saw in their true light and proportion the extreme dangers by which the American people, as well as the British people, are now beset. It was indeed by the mercy of God that he began eight years ago that revival of the strength of the American Navy without which the New World today would have to take its orders from the European dictators, but with which the United States still retains the power to marshal her gigantic strength and, in saving herself, render an incomparable service to mankind….

And so we came back across the ocean waves uplifted in spirit, fortified in resolve…. We overtook one of the convoys which carry the munitions and supplies of the New World to Sustain the champions of freedom in the Old. The whole horizon-the whole broad horizon--seemed filled with ships. Seventy or eighty ships of all kinds and sizes, arrayed in fourteen lines, each of which could have been drawn with a ruler, hardly a wisp of smoke, not a straggler, but all bristling with cannon and other precautions on which I will not dwell, and all surrounded by their British escorting vessels, while overhead the far-ranging Catalina airboats soared, vigilant, protecting eagles in the sky.

And then I felt that hard and terrible and long-drawn-out as this struggle may be, we shall not be denied the strength to do our duty to the end.

Mike Konczal Pits Ezra Klein Against Ezra Klein


On the Point of Cramdown and What Obama Could Have Done: Ezra specifically points out housing as a place where action wouldn’t have made a large difference:

Or perhaps more could have been done on housing…. Most policies that would have dramatically improved the housing situation would have dramatically destabilized something else (the banks, for instance). And the policies that wouldn’t have been destabilizing would not have done as much as their proponents hoped. Let’s take, for instance, cramdown, in which bankruptcy judges could modify the principal on mortgages, and which is among the most popular of the policies offered. Last year, I asked Dean Baker, whose analyses of the housing market had been the most spot-on, what he thought of cramdown. “Cramdown is good,” he told me. “But I think people overstate the impact it would have. Most foreclosures don’t go through the bankruptcy process. It was 10 to 15 percent before the crisis, and let’s say it’s at 20 or 30 percent now. And it goes through a bankruptcy judge. They’re not necessarily going to be that sympathetic to debtors. Take an optimistic scenario where 30 percent went through bankruptcy, I’d be surprised if in more than half the cases the people could keep the home.”

Luckily, to set the stage for a counter-response, Ezra brings up the idea of a balance-sheet recession in a different post. It’s the Housing Debt Stupid:

If you take the Rogoff/Reinhart thesis seriously — and people should, and increasingly are – what distinguishes crises like this one from typical recessions is household debt. When the financial markets collapsed, household debt was nearly 100 percent of GDP. It’s now down to 90 percent. In 1982, which was the last time we had a big recession, the household-debt-to-GDP ratio was about 45 percent. The utility of calling this downturn a “household-debt crisis” is it tells you where to put your focus: you either need to make consumers better able to pay their debts, which you can do through conventional stimulus policy like tax cuts and jobs programs, or you need to make their debts smaller so they’re better able to pay them, which you can do by forgiving some of their debt through policies like cramdown or eroding the value of their debt by increasing inflation….

This isn’t Monday morning quarterbacking; many people told Obama at the time to get cramdown as part of the second round of TARP, when the banks were vulnerable.  Obama decided against it, and his team showed no interest in followup.  This is after Obama campaigned on bankruptcy reform. But why does it matter?  The real value of cramdown for a “household-debt crisis” isn’t the debt-forgiveness part of it – though that’s a major part.  It is that it sets some clear boundaries on how the losses from the housing bubble get shared between debtors and creditors…. There are people right now who aren’t going to send their kids to college in order to put more money on a house that is 50% underwater.  If we think of homeowners as having “stock” (the equity spot) in a home – they are first in line to absorb the ups-and-downs of the market – when that equity is wiped out it isn’t clear what happens…. Normally win-win renegotiations would happen to prevent waves of foreclosures but there are a variety of incentive and informational problems in this new way of organizing mortgages. Meanwhile what has the administration done?  We looked at HAMP and its consequences are making the debt problem worse: mortgage debt actually increases in modification, re-defaults are high, total debt loads remain high, consumers aren’t put into a place where the debt load is sustainable.

This was known in advance….

Getting debt-to-income lower isn’t just a manner of numerics; it’s a matter of getting housing debt into a position where it is manageable for households.  That’s what isn’t happening, and the situation doesn’t look any better for the two years of dithering…

Economic Downturns, the Social-Darwinist Waltz, and the Navigation of the Starship Asgard

Starship Asgard

Tyler Cowen writes:

More rooftop-ready results on reservation wages: I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers…

It seems to me that this is one of the steps in what I have sometimes called the Social-Darwinist Waltz. It goes like this:

  1. People are skilled decision-makers and rational judges of their own interests.
  2. Markets are very good ways of coordinating social activity among skilled decision-makers who are rational judges of their own interest.
  3. Markets are the best way to organize pretty much everything.
  4. When markets go wrong and produce bad outcomes, it is almost always because the government has interfered and has mucked things up with command and bureaucracy.
  5. You say government has not intervened, and yet the market outcome still sucks?
  6. Well, it must be because some people are not skilled decision-makers and are not rational judges of their own interests.
  7. But their lack of skill and foresight is non-adaptive.
  8. Their lack of skill and foresight is blameworthy.
  9. And they should be punished.
  10. And in punishing them, the market outcome is good after all.
  11. It improves the breed.

It is, I think, very important for rational policy to halt the Social-Darwinist Waltz where Tyler is, at step 7, and not go on to step 8.

First, it is not likely that a society in which people were "better" in Tyler's sense at looking for jobs would produce better macroeconomic outcomes. People were much "better" at volunteering to work for lower wages during the Great Depression, and that did not help the situation. What we have now is bad. Active destabilizing deflation is worse. To assume that more individual "rationality" will make for a more "rational" collective outcome is often false--think Prisoner's Dilemma--and in this case is probably false.

Second, a system that for good outcomes requires that people act in ways people do not do is not a good system--and to blame the people rather than the system is to commit a major intellectual error.

Consider the system for navigating the Starship Asgard as it approaches a Horst Interspatial Congruency:

Opus116 1 pdf

That is a really bad system. When one person transposes an 8 and a 3 in the fifth and sixth decimal places of a hand calculation, the result should not be to send the starship hundreds of light years off course into uncharted space.

Similarly, in a well-functioning economy the failure of a critical mass of unemployed workers to realize that they really should drop their reservation wage because the economy is suffering from a nominal shock should not send the unemployment rate on a multiyear journey upward during which it kisses 10%.

About Three--or Is It Four?--Decades Late, But Welcome All the Same...

David Frum

Time to Downgrade the Journal’s Editorial Page: I’m uncomfortably aware that critiquing the Wall Street Journal editorial column is a job reserved for himself by The New Republic’s Jonathan Chait.... [But] in Chait’s absence, the Journal has launched an attack on Ben Bernanke and the Federal Reserve that is not only remarkable in its brutal mishandling of fact – but also for its possibly lethal intellectual consequences within the conservative world. Precisely because conservatives (rightly) hesitate to use aggressive fiscal policy to fight recessions, it is all the more urgent that we appreciate the reach of monetary policy. If we are pushed by ignorance or passion into a wrongheaded monetary policy, then we will have no answer whatsoever to the question: how do we create prosperity and employment in the near term?

So let’s go line by line through the Journal’s misinformation:

All the world’s right-thinkers are denouncing Rick Perry for suggesting this week that Texans would get “pretty ugly” with Federal Reserve Chairman Ben Bernanke if he guns the money supply any more between now and the 2012 election. His poor choice of words aside, the Texas Governor is right to put monetary policy front and center in the 2012 Presidential debate. Let’s stipulate that Mr. Perry, in his first week on the Presidential stump, was wrong to use the words “almost treacherous, treasonous” in referring to Mr. Bernanke.... [E]verybody knows Mr. Perry meant no literal harm and was indulging the irrational exuberance that is one of his trademarks.... The real news isn’t the rhetorical gaffe but the substance and politics of Mr. Perry’s demarche. Here we have a Presidential candidate, a Texas populist no less, laying out a position in favor of sound money...

This is all good partisan fun, but it does raise an interesting question: In what sense is Rick Perry a “populist”? As Andrew Gelman has exhaustively and I think decisively demonstrated, Texas Republicans are elected with the votes of the state’s richest people, not its poorest.... The Republican governor is being backed by at least six Super PACs. The key group, called Make Us Great Again, has the closest ties to Perry and is expected to be a multimillion-dollar operation that will run ads to back him. It was set up this month by Mike Toomey, an Austin lobbyist and an ex Perry chief of staff. It will also benefit from the fundraising muscle of G. Brint Ryan, the CEO of a Dallas tax firm who with his wife has donated $563,000 since 2001 to Perry’s campaigns....

Back to the Journal editorial:

The media trope of the week is that Mr. Perry is George W. Bush only more so, but he clearly isn’t the same on monetary policy. Mr. Bush, who first appointed Mr. Bernanke, was an easy-money, weak-dollar President. He and his former economic advisers still don’t understand how Alan Greenspan’s policies at the Fed contributed to the credit and housing manias that led to the financial meltdown that caused the GOP’s political undoing in 2008...

Do you see a dramatic departure [in the size of the monetary base] from the historic norm between 2002 and 2007? I sure don’t. So what’s the Journal talking about?...

Nobody – literally nobody – suggests that prosperity can be conjured from printing presses. The question before us is: what to do in the face of the worst economic collapse since the 1930s?... In 1934 as in 2009, an accommodating monetary policy can mitigate the crisis and open the way for the drivers of longer-term growth to resume operation. Milton Friedman got that two generations ago. Almost every working business economist on the planet gets it today.

It’s in the next paragraph that the Journal editors shift from misdirection to disinformation:

The Texas Governor has a better insight into middle-class economic anxiety than do most Washington-Wall Street elites. Americans intuitively understand that their after-inflation incomes haven’t risen for a decade. Even when incomes rose during the growth years from 2003-2007, the gains were undermined by the rising cost of housing, as well as by rising food and energy prices.

Wow. I mean truly: wow.... I remember when it was fighting words to point out that the median income actually declined between 2000 and 2007. Back then, we were supposed to believe that the Bush tax cuts had let loose a cascade of prosperity across the land. Now – poof! – the Journal has vaulted to exactly the opposite side of the position it vehemently upheld for half a decade....

Back when the Journal wanted to argue that incomes really had risen handsomely in the Bush years, its favorite trick was to aggregate wages and benefits. That made a nice-looking chart, even if it begged the question: “Am I really better off if my employer has to pay twice as much for knee surgery?” So possibly they have some compunction now treating the rise in healthcare costs as a bug rather than a feature. More plausibly: as improbable as it is to blame the Fed for the surge in oil prices after 2002, it would just utterly flunk the laugh test to try to blame the Fed for the increase in health costs. So down the memory hole with that...

Deconstructing Obama Administration Economic Policy:

Matthew Yglesias:

Imagining Better Yesterdays: What an awful lot of people seem to do, however, is look at alleged mistakes early in the administration, assume that they weren’t mistakes, reach the conclusion that this proves Obama’s nefarious intent, and then assume that absent nefarious intent Obama would be accomplishing tons of awesome new stuff right now. That involves a lot of logical leaps. The original sin here was not thinking seriously enough about the question “what will we wish we’d done if 30 months from now the BEA turns out to have been underestimating the recession?” It turns out to have been a serious one, but I don’t think it supports nearly the inferential weight that a lot of people seem inclined to put on it.

It is very odd. One would think that--I thought that--there was a economic policy whiteboard in Obama's transition headquarters that started:

  1. Ensuring a strong, rapid economic recovery even if things turn out unexpectedly badly…

  2. What might we wish in three years that we had done today?

With those two things at the head of the whiteboard, it is very hard to make sense of Obama priorities and policies then and now in any way other than a systematic failure to mark beliefs to market.

Felix Salmon: How to Move 211 Tons of Gold to Venezuela


How to get $12 billion of gold to Venezuela: Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing…. [I]t would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas…. “It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses….

It seems to me that Chávez has four main choices here. He can… just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself…. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company…. Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious…. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way…. Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack. How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates. It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.

Department of "Huh?!": What Obama Could Have Done Department

Ezra Klein:

What could Obama have done?: I’ve spent a lot of time thinking about ways in which the past few years could have gone differently. I’ve even come up with a few. But none of them lead to dramatically better outcomes today. I can come up with scenarios in which President Obama accomplished somewhat less — perhaps by scaling back the health-care plan — and lost fewer seats in the midterm election. I can come up with scenarios in which the White House accomplished marginally more — perhaps by using the reconciliation process for an energy bill — but paid a greater political cost. I can come up with scenarios in which the stimulus was slightly more visible — perhaps it could have wiped out the payroll tax entirely — or slightly larger or included a long-term deficit reduction component.

But I’ve never been able to come up with a realistic scenario in which a lot more got done, the economy is in much better shape, and the president is dramatically more popular today.

  1. Use Reconciliation to get a second stimulus through Congress in the fall of 2009.
  2. Expand the PPIP to do $3 trillion of quantitative easing through the Treasury Department.
  3. Have a real HAMP to refinance mortgages.
  4. Use Fannie and Freddie to (temporarily) nationalize mortgage finance, refinance mortgages, and rebalance the housing market.
  5. Announce that a weaker dollar is in America's interest.
  6. Nominate a Fed Chair who takes the Fed's dual mandate seriously and pursues policies to stabilize the growth of nominal GDP.
  7. Appoint Fed governors who take the Fed's dual mandate seriously and support policies to stabilize the growth of nominal GDP.
  8. Take equity in the banks in January-March of 2009 and keep them from lobbying against financial reform.
  9. Use Reconciliation to pass an infrastructure bank.
  10. Use TARP money as a mezzanine tranche to fund large-scale additional aid to states and localities to reduce their fiscal contractions.

I think Ezra is simply wrong. There were a large number of things that Obama could have done--there are even things he could do now, if he wanted to.

The First Casualty of the S&P Downgrade of the U.S. Treasury... S&P President Deven Sharma.

David Gelles and John McDermott report:

Sharma to step down as S&P president: Deven Sharma is stepping down as president of Standard & Poor’s only weeks after the rating agency issued an unprecedented downgrade of the credit of the US, according to people familiar with the matter. Mr Sharma will remain as an adviser to S&P’s owner, McGraw-Hill, for four months and leave the company at the end of the year, they said. Mr Sharma will be replaced as S&P president by Douglas Peterson, chief operating officer of Citibank, the banking unit of Citigroup, they said. The downgrade of US credit on August 5 led to the worst single day fall in US equity prices since the depths of the financial crisis, and triggered weeks of global market volatility.

Why Is the New Republic Sending Me Emails Asking Me to Read Richard Posner?

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

If Richard Posner ever retracted or apologized for his confused, mendacious, and false sliming of Christina Romer, I missed it.

But in my email inbox this morning is a message from New Republic asking me to come by and read what he has to say about th dobomy:

Considering the extraordinary nature of our economic situation, we’ve decided to go in search of extraordinary economic solutions. Over the course of this week, TNR will feature a number of prominent economists and otherwise eminent thinkers offering novel ideas for pulling our economy back from the brink.

None of these ideas are guaranteed to work, and some of them can’t realistically be implemented given Washington’s political dysfunction. But at a time of rising fatalism, as Americans are hungering for glimmers of optimism, all of them should serve as much-needed food-for-thought….

Later this week: Contributions by Richard Posner…

So I asked: "Why Richard Posner?"

The reply:

Hi Brad,

Thanks for your e-mail.

We wanted the symposium to represent a range of voices and backgrounds and did not want to only include economists. Also, in 2009, Posner wrote “A Failure of Capitalism: The Crisis of ’08 and the Descent into the Depression.”

Seems to me that the New Republic would do much, much better if it focused on having a high-quality symposium that would inform its readers rather than one that seeks to "represent a range of voices and backgrounds and did not want to only include economists". Aggregators will survive only if they are good aggregators.

Menzie Chinn:

Econbrowser: I Am Even More Confused Now...: by Richard Posner's math...On August 25th he wrote, regarding Dr. Romer's August 6 speech:

The figure of $60 billion of $61 billion is too high. According to, the $61 billion figure is as of last week--seven weeks after the end of the second quarter. Since the rate of stimulus expenditures is said to be accelerating, the number for the second quarter is undoubtedly significantly lower. This makes the $40 billion in tax relief all the more important to Romer's argumente And if that figure consisted of actual rebate checks, or reductions in current withholding, then of course it should be included in the total outlays of the stimulus program. But in fact very little of it consists of rebates, which is why it is not recorded on the government's website as stimulus money spent and is why Romer should not have said that by the end of the second quarter the government had "spent" "more than $100 billion" in stimulus money. Almost all the tax relief provided for in the stimulus bill consists of reductions in taxes by individuals and businesses. The question is how many of those reductions have resulted in increased cash flow to taxpayers. If, for example, the reduction is reflected in reduced withholding, or a reduced payment of estimated tax by people who filed estimated returns on April 15, it should be counted as stimulus spending; it puts money in people's pockets. If it merely reduces their future tax liability, it does not. All that is certain is that not all that $40 billion in tax relief is stimulus money; not all, and, at a guess, not most, put money in people's pockets before the second quarter ended. [emphasis added]

For those readers new to this debate (which I had thought had been clearly resolved by explicit math), see the previous posts here: [1] [2] [3].

There's a moving window on the, so I can't see the cumulative $60 billion figure for end-June, but I do recall it. Better yet, Donald Marron recalls it. No one else has disputed the $60 billion figure.

In any case, apparently in this latest attempt to salvage his argument, Mr. Posner has given up on accusing Dr. Romer of deliberately lying about the $40 billion figure, and has moved on to redefining those funds. (By the way, I'm not sure I've seen him explicitly admit that dividing a quarterly figure by annualized GDP, as he does in his original post, is a mistake.) Specifically, he is saying that the $40 billion is partly decreased withholding, or shifting around of tax liabilities, and not entirely rebates. Mr. Posner does not provide any source for this assertion, and the language in Dr. Romer's speech (and footnote 4) seems to indicate otherwise.

Let's assume absolutely none of the $40 billion took the form of rebates. As I showed in my math in this post, assuming zero spending out of the tax component, one can easily obtain 4 ppts growth in 2009Q2 GDP, given that the "transfers" to the states are largely helping support continued spending on goods and services like teachers, civil servants, health services, etc.

I am of course working in the "old-fashioned" Keynesian mode that Mr. Posner says he prefers. If one hews to a real business cycle approach, or other approaches were the economy does not systematically deviate from full-employment, then none of the foregoing is relevant.

Update 8/28 12:20pm Pacific: See also Justin Wolfer's take on Posner.

Justin Wolfers:

Freakonomics » Posner, Redux: The confusing spectacle of Judge Posner blogging about macro continues. His latest missive appears particularly misguided.

To recap, Posner attacked CEA Chair Christina Romer for being too optimistic about the effects that fiscal stimulus had on second-quarter growth. According to Romer, the better performance of the economy in Q2 relative to Q1 was largely attributable to the economic stimulus. But Posner argues that $100 billion in stimulus spending in that quarter is simply too small relative to the size of the economy to make much of a difference. Throw in accusations of unethical or irresponsible behavior, and you have yourself an academic brouhaha.

But the error was Posner’s. As it turned out, he was comparing apples and oranges. Actually, he was comparing a quarter of an apple with a whole apple: by contrasting the amount of stimulus spending in one quarter with an annual measure of gross domestic product, he understated the relative size of the stimulus by a factor of four. He then multiplied his error by comparing it with the change in an annualized growth rate, which overstates the change in quarterly GDP growth by a factor of four. Yes, he was right that his numbers suggested the stimulus was too small to make this much of a difference. But that’s because his numbers understated the relative size of the stimulus by a factor of four and overstated the claimed consequences by a factor of four. And so Posner was wrong by a factor of sixteen. (See if you can spot his correction or apology in his follow-up.)

But now Posner is back, talking about “Christina Romer’s More Than $300 Billion Mistake.” That $300 billion? Beyond stating that number in a headline, he never returns to it, so we don’t know if it’s a typo or a calculation. But reading the full piece, it becomes clear that his real target is that we’ve all been wrong in taking Romer at her word that in Q2 around $100 billion of the stimulus money went out the door. Posner now thinks that it was “too high.” To cut through some confusion, note that this reflects that $60 billion is direct government spending and $40 billion comes in tax reductions. But Posner says:

The figure of $60 billion of [sic] $61 billion is too high. According to, the $61 billion figure is as of last week — seven weeks after the end of the second quarter … the number for the second quarter is undoubtedly significantly lower.

You can see the data from, here.

The chart plainly shows that seven weeks after the end of Q2, $84.6 billion had been paid out, not $61 billion. But Romer’s claims are about the quarter that ended on June 30, and while I don’t have data for precisely that day (although I’m sure Romer does), you can extrapolate the green line backwards. By July 17, $67.4 billion had been spent, and it looks like about $3 to $4 billion per week is being spent. Extrapolating backwards two to three weeks to June 30, the total was probably right around, ummm … $60 billion.

And the other $40 billion? As Menzie Chinn rightly notes, Posner doesn’t think that taxpayers have received it, but he doesn’t say why.

I’m glad that there are folks who are going to monitor the claims of government economists closely, but unfortunately Posner has generated more heat than light. John Maynard Keynes reportedly said, “When the facts change, I change my mind.” My advice to Posner: when your understanding of the facts change, don’t keep attacking the facts, change your mind.

Department of "Huh?!": Irish Economy Edition

Microsoft Excel 1

It would never in a million years have occurred to me that anybody would claim that the red-circled uptick in measured Irish real GDP in the first quarter of 2011 was "a result which most Keynesian theories strongly predicted against".

It just wouldn't.

But here we have Tyler Cowen:

Facts about Ireland:

Yet despite cutbacks and tax rises, the country still chalked up a 1.3 per cent expansion in gross domestic product in the first three months of this year.

There is more here, and also here.  Mind you, this is not a stunning performance.  Nor can we expect it to continue, if the eurozone and America are headed for broader troubles, as indeed appears to be the case.  Nonetheless it’s a result which most Keynesian theories very strongly predicted against.  Ireland also achieved this during a weak time for its major trading partners.  Since the crisis started, Ireland’s cumulative adjustment has been about thirteen percent of gdp and now they are growing again.  Yet we are not hearing a peep about this.

I hope Kevin O'Rourke doesn't see this.

Just saying.

Nor would I favorably cite a piece like:

Irish economic growth set to double EU average: Danny McCoy declared, “Ireland’s growth potential is double the EU average and, despite the heavy burden of austerity, we have a much greater capacity to outgrow our debts than our EU neighbours.” He continued, “Ireland has a largely open and deregulated economy that supports entrepreneurship. We have the most favourable demographics in the EU, and our productivity performance is strong due to excellent labour market skills and world class flexibility in the workplace.”

without noting that McCoy's forecast of "double the EU average" is for 3.0% Irish growth in 2011 is at odds with the official forecast of 0.7%.

Joe Romm on Michael Mann and the "Hockey Stick"

Me? I had always thought that the "hockey stick" was more a measure of our ignorance of the pre-1800 climate--when you don't know much, your best estimate is going to be close to your sample mean and is not going to move around very much, while when you do know what is going on your estimates will track a quite possibly changing reality.

But since Mann and company first started their reconstructions, the evidence that we have now substantially exceeded past historic climate variability on a global scale has been piling up.

And now Joe Romm reports:

Climate Secret: NSF Quietly Closes Out Inspector General Investigation with Complete Vindication of Michael Mann: NSF Inspector General:  “Finding no research misconduct or other matter raised by the various regulations and laws discussed above, this case is closed.”

Two things we know with extremely high confidence:

  1. Recent warming is unprecedented in magnitude and speed and cause (so the temperature history looks like a Hockey Stick).
  2. Michael Mann, the lead author on the original Hockey Stick paper, is one of the nation’s top climatologists and a source of first-rate analysis.

We know these things because both the Hockey Stick and Mann have been independently investigated and vindicated more times than any other facet of climate science or any other climate scientist….  While the anti-science extremists who rule the Tea Party and the right-wing bunkosphere keep shouting lies about the Hockey Stick and Mann — and urging their followers to “shout down” science-based commenters on independent websites — the vindications of the science and the man are reported as quietly as if they came from the Whos of Whoville. And so after countless investigations — 3 in the U.K., 2 by Penn State, the EPA, the NOAA IG — that have all unanimously found the allegations against climate scientists and their research conclusions based on the hacked “ClimateGate” emails to be wholly unsubstantiated, a top GOP presidential candidate backed by the fossil fuel industry still gives voice to the Texas-sized lie (see “Denier Rick Perry Takes $11 Million from Big Oil, Then Claims Climate Scientists ‘Manipulated Data’ For Money“).

And so while Mann and the Hockey Stick were getting yet another full vindication (from Penn State) earlier this year, Fox News was trumpeting one final investigation:

But the final say will be in the hands of a skeptical inspector general at the National Science Foundation, the primary funder of the research into global warming. According to published documents obtained by, the IG must determine whether Penn State’s investigation was adequate. The Office of Inspector General confirmed that it will review the misconduct charges. A spokeswoman told that “in accordance with our research misconduct regulation, (45 C.F.R. part 689), when the OIG is provided with an institution’s investigation report, we review it for fairness, accuracy and completeness” — issues the investigation has already been faulted for….

The IG analyzed all of the charges “de novo” and concluded:

Finding no research misconduct or other matter raised by the various regulations and laws discussed above, this case is closed.

I have uploaded the full report here, but you can also go the NSF IG website here and insert “A09120086.”

Let me end with some key findings of the Penn State investigation:

“An Investigatory Committee of faculty members with impeccable credentials” has unanimously “determined that Dr. Michael E. Mann did not engage in, nor did he participate in, directly or indirectly, any actions that seriously deviated from accepted practices within the academic community for proposing, conducting, or reporting research, or other scholarly activities.”

His work “clearly places Dr. Mann among the most respected scientists in his field…. Dr. Mann’s work, from the beginning of his career, has been recognized as outstanding.“

So Mann isn’t merely a competent researcher.  He is one of the leading climate scientists in this country, which of course is precisely why the anti-science crowd has gone after him, much as they have with other leading climate scientists, including Hansen and Santer.

And that’s one more reason why the major media outlets who smeared and defamed him owe him an apology and a retraction — loud ones!

Recent Studies Vindicating the Hockey Stick:

  1. Temperatures of North Atlantic “are unprecedented over the past 2000 years and are presumably linked to the Arctic amplification of global warming” — Science (2011)
  2. GRL (2010):  “We conclude that the 20th century warming of the incoming intermediate North Atlantic water has had no equivalent during the last thousand years.“
  3. JGR (2010):  “The last decades of the past millennium are characterized again by warm temperatures that seem to be unprecedented in the context of the last 1600 years.”
  4. Human-caused Arctic warming overtakes 2,000 years of natural cooling, “seminal” study finds (2009)
  5. Unprecedented warming in Lake Tanganyika and its impact on humanity (2010)"

John Quiggin on the End of the Strongman

John Quiggin:

The end of tyranny: seemingly imminent downfall of Muammar Gaddafi may not represent “the end of history”, but, for the moment at least, it’s pretty close to being the end of tyranny, in the historical sense of absolute rule by an individual who has seized power, rather than acquiring it by inheritance or election…. Forty-odd years ago, this kind of government was the rule rather than the exception in most regions of the world (notably including South America and the Communist bloc), and was represented even in Western Europe by Franco and Salazar. Now, there’s Mugabe… a couple of shaky-looking strongmen in the ‘stans, and that’s about it…. There’s Kim jr, Assad jr and Castro minor… all of whom inherited their positions, as of course, did the remaining absolute monarchs. More surprising to me are the number of cases where classic tyrants, having established one-party states, have been succeeded by self-selecting oligarchies – China is the most striking example. Looking at the evidence of the past, I would have predicted that such oligarchies would either collapse in short order or see the emergence of a new tyrant, but there is no sign of that for the moment.

I don’t have a good theory to explain the rise of so many tyrants in the modern period, beginning with Bonaparte (or maybe Cromwell), or the sudden disappearance of this form of government from around the mid-1960s. But it seems that it’s a development worth noting.

Economic Stimulus--Through Fixing the Housing Market and Other Initiatives

Mike Konczal:

On The Housing Market as a Driver of Stimulus: There was a New York Times editorial today calling for providing relief to the housing market through aggressive policy:

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans…. The administration needs better ideas. It can start by working with Fannie Mae and Freddie Mac, the government-run mortgage companies, to aggressively reduce the principal balances on underwater loans and to make refinancing easier for underwater borrowers. If the president championed aggressive action, and Fannie and Freddie, which back most new mortgages, also made it clear to banks that they expect principal reductions, the banks would feel considerable pressure to go along…. Reducing principal is a better solution than lowering interest rates, because it reduces payments and restores equity. Bankers resist, because it could force them to recognize losses they would prefer to delay. The administration has resisted, in part because principal reductions are seen as rewarding reckless borrowers…

This reflects a lot of other analysis, including New Bottom Line’s recent report “Win-Win Solution” that calls for principle writedowns to create a million jobs.

Jonathan Cohn wrote about how any new stimulus that is proposed needs to be focused on three things: size, speed and smarts.  Jared Bernstein’s FAST stimulus program is an example of this.  I think getting the housing and foreclosure markets under control is a good idea in and of itself; an added benefit is that it’ll help with the recovery…. Let’s stick with the simpler one of mass refinancing of underwater mortgages; we’ll come back to principal write-downs in future posts, but they apply even more to all three categories.  For size, Columbia Stern NYU economics professor Chris Mayer argues that getting homeowners who are underwater to refinance into record-low rates “Fannie Mae and Freddie Mac could face a one-time loss of $40 billion to $60 billion because the new HARP loans would pay lower interest rates, Mayer said. The cost would be offset by fewer defaults and it would put $50 billion to $70 billion a year in homeowners’ pockets, he said.”  (Here’s an FAQ he wrote on this.)  That’s a fair amount of money for stimulus – not enough to get us where we need to go, but definitely something.

Even better, once the can is kicked speed is going to be relatively quick.  There’s no environmental review to conduct or long-delay in actually getting this into motion; underwater consumers who want to knock a few hundred dollars off their mortgages are well-incentivized to initiate, carry out and make sure this gets completed themselves.  It outsources much of the bureaucratic requirements to those consumers who stand to benefit. Also it is well targeted to help the economy where it is hurting the most.  There is a direct correlation between the amount of underwater mortgages and unemployment (and the relationship holds for states with deeply underwater mortgages and unemployment)…

Jonathan Cohn:

Size, Speed, And Smarts: Three Essential Ingredients Of A New Jobs Program: President Obama’s plan to give a major economic speech after Labor Day means that, finally, Washington is going to have a serious conversation about creating jobs. And it can't come a moment too soon…. [T]he best policy conversations start with what we should do, not with what we can (or can’t) do…. [H]ere are three essential elements of a successful jobs agenda….

Size. This one can be said very simply. The jobs program should be big…. Mark Zandi… suggests that gross domestic product will grow at an annualized rate of near 2 percent this year and 3 percent next year…. Okun’s Law tells us that in order to reduce the unemployment rate by 1 percentage point, GDP needs to grow 2 percent faster than trend for a year…. Over the next two years, GDP is projected to be between $15 and 16 trillion annually. Do the math, as [Jeff] Liebman suggests, and you're getting to the neighborhood of $400 billion a year…. Liebman was from from the only economist talking in those terms…. Here's Dartmouth’s Andrew Samwick, who was a presidential adviser during the early years of the Bush Administration, via e-mail:

It really depends on what you spend it on. If you are going to do things that are temporary and don't change people's long-term expectations, then you will need to pump in more money. If instead you do things like spend $250 billion a year for four years, and spend it on closing our public infrastructure gap, then households and businesses will likely make complementary investments -- because the public investments raise the returns to the private investments…

Speed: The economy needs help. And it needs help now…. But when it comes to putting people back to work right away, infrastructure programs, in particular, can be slow. The whole point of the infrastructure bank, for example, is to subject every proposal to rigorous cost-benefit analysis. That takes time. One way around this problem is to change some of the rules for public works – and, as Gary Burtless of Brookings explains, applying some lessons the federal government learned after the 1994 Northridge earthquake in Southern California:

The feds learned a bitter lesson from San Francisco’s very slow spending of federal aid dollars after the World Series earthquake a few years earlier. Wanting to avoid a repetition of that fiasco, the federal gov’t told CA and L.A. that the U.S. earthquake relief dollars had to be spent within a specified period. It worked. L.A. repaired its wrecked freeways much faster than the Bay area fixed its wrecked highways and bridges…

Jared Bernstein, who also served in the Obama Administration and now works at the Center on Budget and Policy Priorities, continues to talk up the “FAST” proposal that would finance a burst of school repair and renovation projects around the country…. Of course, that also strengthens the case for other kinds of interventions that have quick effects. Extending unemployment insurance is one obvious policy initiative that satisfies this criteria, as Burtless points out:

Helping the long-term unemployed through direct transfers (unemployment benefits, generously subsidized health insurance) is sensible policy from the perspective of its anti-recession effects (the target population will spend the money faster than you or I) and from a humanitarian viewpoint.

It’s also a strong argument for direct assistance to local and state governments, which could use the cash immediately to plug budget holes – and stop laying off workers, the way they are doing now.

Smarts. Yes, I was trying for three “S”s, just to make this post a little more memorable. But it’s also a good principle. And I mean smart in the sense of fiscally smart. Deficits aren’t a problem right now, notwithstanding what so many politicians and pundits have been saying. But they will be a problem in the future. That’s an argument for offsetting economic boosters with spending cuts and/or revenue increases in the future. Fortunately that is easy to do…. But there’s another way to make these proposals smart: To make them expire when economic conditions improve. In an ideal world, extra unemployment insurance and aid to the states would act as truly “automatic” stabilizers, to borrow the economics lingo. In other words, they would start when the economy in bad shape and end when the economy has recovered, no longer requiring separate acts of Congress as each new emergency arises. An easy way to do that is to link their duration explicitly to an economic indicator – and say, for example, that one or the other or both would end when unemployment declines below a reasonable threshold of 7 percent.

So there you have it. The ideal jobs package would inject hundreds of billions of dollars into the economy as quickly as possible – but in a way that paid for itself over the long run and, ideally, diminished automatically once a strong recovery is under way. The administration could do a portion of this on its own, whether by using Fannie Mae to help distressed homeowners or getting China to help U.S. exports by revaluing its currency. The Fed could obviously lend a hand, maybe a big hand, as well. But to meet these criteria, Congress would have to take some action.

Jared Bernstein:

FAST!: I recently suggested a national infrastructure program to repair, insulate, and green the nation’s public schools.  As described here, this is a “dialable” concept that could go from meeting the maintenance backlog to more ambitious retrofits and technology upgrades. Now I’ve even got a name for it, Fix America’s Schools Today, or FAST.  I think it’s a smart way to get a lot of people who really need jobs back to work, fix a critical part of our institutional infrastructure, save energy costs, provide kids with a better, healthier learning environment, and do so in way that everyone can see and feel good about each morning when they drop their kids at school…

Clive Crook vs. Clive Crook: Why Oh Why Can't We Have a Better Press Corps?

Clive Crook, April, 2011:

Congress could let recovery crumble: Fiscal policy, properly measured, is moving abruptly from neutral to contractionary. To make matters worse, Republicans in Congress are playing an outrageous game of brinkmanship over the budget…. [W]hatever Congress can do to undermine confidence and add to uncertainty, it is doing. Just as the private sector shows signs of reviving, Capitol Hill is threatening to drag it back down….

The housing market continues to pose the biggest danger. Most sectors of the economy expanded their payrolls in March but residential construction is still crippled. House prices have not found a floor and the foreclosure crisis goes on….

The fiscal outlook clinches the point…. The federal stimulus was mostly absorbed in offsetting the automatic tightening of fiscal policy by individual states, whose borrowing is strictly constrained. The federal stimulus was big but, in the aggregate, fiscal support for the recovery has been modest. Now the federal stimulus is running down and many states are embarking on severe and immediate spending cuts and tax increases….

In a democracy people are supposed to get the politicians they deserve. What on earth did Americans do to deserve these?

Clive Crook, February 2009:

Fiscal stimulus: repent at leisure: [I]f ever a rushed extravagant purchase was likely to induce a touch of buyer's remorse, it is this one. Republicans have a point when they complain about the inordinate length of the bill…. Republicans are right to say that not a single senator or congressman voting for it can have read it…. Not every unread piece of legislation costs taxpayers $800 billion. It isn't too much to ask that the politicians voting for this law, even if they had to make an exception, had read it first.

It will be interesting to see what is hiding in those 1,400 pages. Some disturbing early discoveries have already been reported. For instance, the bill appears to reverse or at any rate undermine the Clinton welfare reforms. It appears to ban the hiring of skilled immigrants in much of the finance industry. It appears to cap finance-industry pay much more aggressively than the Obama administration has proposed. Even if you don't think these ideas are harmful or unworkable or both, as I do, you have to admit that they deserved more of an airing than they received--which is virtually none--before they became law.

Needless to say, the Recovery Act did not ban the hiring of skilled immigrants in finance, or put aggressive caps on finance industry pay, or undermine the Clinton-era welfare reforms.

Hoisted from Paul Krugman's Archives: Insufficient Obama Economic Stimulus Department

Paul Krugman:

Early Stimulus Worries: Some readers have asked for cites in which I warned early on that the Obama stimulus was too small and would end up being seen as a failure. Here’s my initial math. Here’s my reaction on the ARRA’s passage. And here’s my early take on the political economy. I really wish I hadn’t been right.

January 8, 2009:

The Obama Gap: Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed…. [T]he Obama plan is nowhere near big enough to fill this “output gap.”… The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come. Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts….

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough. Now, fiscal stimulus can sometimes have a “multiplier” effect…. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50. But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending…. [T]he Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

Why isn’t Mr. Obama trying to do more?

Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing — and this week’s C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy…. Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects — that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.

Or is the plan being limited by political caution?...

Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

February 12, 2009:

Failure to Rise: By any normal political standards, this week’s Congressional agreement on an economic stimulus package was a great victory for President Obama. He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!

Or maybe not. These aren’t normal times, so normal political standards don’t apply: Mr. Obama’s victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama’s postpartisan dreams….

In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts. And the rhetorical response of conservatives to the stimulus plan — which will, it’s worth bearing in mind, cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged…. [T]he ugliness of the political debate matters because it raises doubts about the Obama administration’s ability to come back for more if, as seems likely, the stimulus bill proves inadequate.

For while Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough… The Congressional Budget Office… predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked.

Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue…. The plan sketched out by Tim Geithner, the Treasury secretary, wasn’t bad, exactly. What it was, instead, was vague…. Over all, the effect was to kick the can down the road. And that’s not good enough….

I’ve got a sick feeling in the pit of my stomach — a feeling that America just isn’t rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice. There’s still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can’t.

March 8, 2009:

Behind the Curve: President Obama’s plan to stimulate the economy was “massive,” “giant,” “enormous.” So the American people were told, especially by TV news, during the run-up to the stimulus vote. Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.

Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve….

There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?

On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring. “Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. To be sure, leaders are supposed to sound calm and in control. But in the face of the dismal data, this remark sounded out of touch. And there was no hint in the interview of readiness to do more…. As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery ... well, you get the picture.

Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along? Republicans are now firmly committed to the view that we should do nothing…. The broader public, by contrast, favors strong action…. But will that support still be there, say, six months from now? Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed. But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.

Yes, Virgina, the Recovery Act Worked Best in Texas

... even though the unemployment rate did rise to 8.3%.

Jared Bernstein:

Over the last few years, government jobs have been awfully consequential in Texas: 47% of all government jobs added in the US between 2007 and 2010 were added in Texas.... [T]he state lost only 53,000 jobs.  But looming behind that number are large losses in the private sector (down 178,000) and large gains (up 125,000) in government jobs. Gov Perry has a funny way of going about that “inconsequential” thing.  According to many news accounts from back in the Recovery Act days:

Turns out Texas was the state that depended the most on those very stimulus funds to plug nearly 97% of its shortfall for fiscal 2010, according to the National Conference of State Legislatures.

Now, I’ve got no problem with a state government using Recovery Act funds to retain or create jobs.  In fact, the figure and quote above shows Texas to be following a traditional Keynesian game plan: as the private sector contracts, turn to the public sector to temporarily make up part of the difference...

Very Good News from Libya...

... as another dictator falls.

Things could still go very wrong in Libya. But today it looks very much as though they are going very right.

UPDATE: And a correspondent reminds me of Chris Bertram's claim that NATO support means that the Libyan Revolution is illegitimate:

[T]he involvement of France, the UK, and the “international community”... fundamentally changes the nature of what’s going on.... I don’t know if the uprising could have succeeded. The news was contradictory—with frequent reports by Gaddafi that he’d taken cities proving to be false—but, on the whole, it was not encouraging. I’d certainly rather have a no-fly zone (if it works, which is a big if) than the uprising defeated and mass killings by the Gaddafi family in revenge. But a successful popular uprising is no longer a possibility either. Most of the Libyan people have now been cast into the role of passive victims.... [E]ven if Gaddafi falls (which I hope he will) the successor regime will lack the legitimacy it might have had, and will no doubt be resented and undermined by nationalist Gaddafi loyalists biding their time and representing it as the creature of the West...

And National Review wishes Gaddafi was still in power:

Qaddafi’s fall imminent - By Andrew C. McCarthy: The Libyan mujahideen (a/k/a the “rebels”) have reportedly entered Tripoli, captured at least one of Muammar Qaddafi’s sons, and are closing in on Qaddafi’s compound. It appears that those who wanted Qaddafi supplanted by an unknown that is known only to include virulently anti-American Islamists are about to get their wish. Here’s hoping that they are right and I am wrong about what happens next.

The Financial Times Says: Obama Needs a New Policy Staff and a New Political Staff

That, at least, is how I read it.

The Financial Times:

It is time for an Obama reset: "Barack Obama, like the US economy whose fate is bound up with his own, is in a slump. Since the shameful debt-ceiling battle, events have landed one blow after another: the Standard & Poor’s downgrade, a run of bad economic figures, crashing markets and growing fears of a second recession. With the US longing for new direction and the president’s ratings badly on the slide, Mr Obama headed off on his summer holiday.

Complaints about that last point, of course, are as unfair as they are traditional. By any standards, especially those of his predecessor in the White House, Mr Obama works hard. But the symbolism was a pity. The vacation followed a puzzling campaign-style bus tour of the Midwest, in which Mr Obama stressed two themes: the need to move beyond partisan squabbling and the irresponsibility of the Republican party. Lately the White House message has, to put it charitably, lacked focus.

Mr Obama has promised to announce a detailed initiative on jobs when Congress returns from its own vacation. Unfortunately this may serve only to underline his limited capacity to influence domestic policy, since the plan will go nowhere without backing in Congress – and it is unlikely to get far while Republicans smelling blood control the House of Representatives.

The best the president can do is rally public support for specific new measures. He could have been doing that in the Midwest. He could be doing it this week. Why the delay? Lack of economics heft in the White House may be a factor: the members of a once-outstanding economics team have left and have not been replaced by experts of like calibre. The ability to frame policy and present it authoritatively is not what it should be. In broad terms, the needed elements are plain: further short-term stimulus combined with credible longer-term fiscal restraint. Cut the payroll tax, extend jobless benefits and subsidise new jobs; then curb entitlement spending by raising the retirement age. Neither party in Congress is willing to embrace both sides of that proposal. The only hope of changing this is for Mr Obama to reset his presidency. Be bold. Lead more forcefully. Since all else has failed, put a serious plan to the country and win the argument.

Success in this would be far from guaranteed and the political risk is obvious. But the alternative, tactically and substantively, is worse – and Mr Obama no longer has much to lose.

Department of "Huh?!": Freddie DeBoer and Chris Bertram Edition

Matthew Yglesias, Jan 17, 2011:

Pas D’Ennemi à Gauche : Freddie DeBoer writes, among other things:

Many of the young, upwardly-mobile bloggers out there take their cues from Matt Yglesias and Ezra Klein. I don’t begrudge either of them their policy preferences, even while I disagree with them. But each represents, in his own, the corruption and capitulation that comes with prominence and success in this culture. I genuinely don’t know what the hell happened to Matt Yglesias…. He is now one of the most vocal of the neoliberal scolds, forever ready to define the “neoliberal consensus” as the truth of man and to ignore left-wing criticism. Indeed, I’m not sure that you could even understand that he has critics from his left, judging by what he chooses to discuss on his blog. This is a particularly cruel way to erase the left-wing from the discourse: to pretend that it doesn’t exist.

I don’t really know what it means to criticize a writer for holding that his own views are “the truth of man.” Obviously, I agree with my political opinions and disagree with those who disagree with me…. [W]hile I’ll cop to being a “neoliberal” I don’t acknowledge that I have critics to the “left” of me. On economic policy, here are the main things I’m trying to accomplish:

  • More redistribution of money from the top to the bottom.
  • A less paternalistic welfare state that puts more money directly in the hands of the recipients of social services.
  • Macroeconomic stabilization policy that seriously aims for full employment.
  • Curb the regulatory privileges of incumbent landowners.
  • Roll back subsidies implicit in our current automobile/housing-oriented industrial policy.
  • Break the licensing cartels that deny opportunity to the unskilled.
  • Much greater equalization of opportunities in K-12 education.
  • Reduction of the rents assembled by privileged intellectual property owners.
  • Throughout the public sector, concerted reform aimed at ensuring public services are public services and not jobs programs.
  • Taxation of polluters (and resource-extractors more generally) rather than current de facto subsidization of resource extraction.

Is this a “neoliberal” program?… I recognize that the shoe fits to a considerable extent. I’d say it’s liberalism…. I recognize that many people disagree with this agenda, and that many of those who disagree with it think of themselves as “to the left” of my view. But I simply deny that there are positions that are more genuinely egalitarian than my own. I really and sincerely believe that liberalism is the best way to advance the interests of the underprivileged and to make the world a better place. I offer “further left” people the (unreturned) courtesy of not questioning the sincerity of their belief that they have some better solutions, but I think they’re mistaken…

Matthew Yglesias, July 18, 2011:

What Is The Alternative To ‘Neoliberalism’?: The fact that Doug Henwood disagrees with me about monetary policy has suddenly turned into a sprawling cross-blog discussion of “neoliberalism” and its discontents. Personally, I find the argument to be infuriatingly devoid of content…. Neo-liberals tend to favor a combination of market mechanisms and technocratic solutions to solve social problems…. Neoliberals… favor progressive taxation. Non-neoliberals criticize this agenda as not politically workable in the long-term. And they counterpose as their alternative, more workable agenda, . . . what? Kevin Drum offers this effort:

I don’t know the answer either. But as I said a few months ago, “If the left ever wants to regain the vigor that powered earlier eras of liberal reform, it needs to rebuild the infrastructure of economic populism that we’ve ignored for too long. Figuring out how to do that is the central task of the new decade.” It still is.

So I really, strongly, profoundly agree with this. The moment someone comes up with a workable idea on this front, please sign me up. But if there’s no idea to debate, then there’s no idea to debate. Debating the desirability of devising some hypothetical future good idea seems kind of pointless to me.

This is too bad, because I think Henwood and I actually started out with a reasonably concrete disagreement on an important point. I think that better monetary policy, though hardly the solution to all of America’s ills, could do a lot to reduce unemployment. His view seems to be not just that a more thorough economic restructuring would be desirable, but that it’s strictly necessary to achieve recovery. In my view, that’s factually mistaken. Better monetary policy over the past several years would, I believe, have produced a much shallower and shorter recession and left progressive politics with a much stronger hand to play on all kinds of other questions.

Matthew Yglesias, July 26, 2011:

Beyond The Top One Percent: John Quiggin makes the case that redistribution of income away from the top 1 percent is essentially the only thing that matters in American politics. After all, as Willie Sutton said, “that’s where the money is.”

I’m all for that, but I really do think it’s an unduly limited view of political life. Even with several decades of median wage stagnation, the fact of the matter is that the median American household has quite a lot of money compared to the median household of almost every other country. And yet, I think there are a lot of other respects in which quality of life in the United States falls short. We spend a lot of time in traffic jams. We have both a frighteningly high murder rate and a frighteningly high level of incarceration. Our health care system is very inefficient. Americans work very long hours and have unusually little vacation time. It’s not clear to me that any of these issues can be usefully tackled primarily by focusing on higher taxation of the very wealthy.

What’s more, even in narrowly economic terms, I do think there’s a real need to tackle the issue of scarcity. The different debates about “gentrification” are instructive in this regard. The basic shape of the issue is that with housing in limited supply, those with less money will tend to be pushed out by those with more money. The result is very inegalitarian from the perspective of quality of life. And yet even if the income gap were narrowed, the scarcity would remain and it would still be the case that the richer households push out the poorer ones. To me, it’s an indication that we need to spend a fair amount of time thinking about the scarcity as such and ameliorating it. In America today, a house in a safe neighborhood with good public schools featuring a convenient commute to the central business district of an economically vibrant city is a scarce commodity. This scarcity is a problem — or perhaps an interlocking set of problems — that, like the inefficiency of the health care system and the brutal inefficacy of the crime control system needs to be tackled on its own terms.

Chris Bertram, August 5, 2011:

The problem with “left” neoliberalism: I think that something like [Matthew] Yglesias’s general stance would be justifiable if you believed… income levels reliably indicate real levels of well-being, at least roughly… [and] that an improvement in real well-being counts for more, morally speaking, if it goes to someone at a lower rather than a higher level of well-being…. This view assigns no instrinsic importance to inequality as such. If the best way to improve the real well-being of the worst off is to incentize the talented (thereby increasining inequality) then that’s the right thing to do.

Now inequalities in wealth and income can matter for [a left neoliberal Yglesias]… [but] not because they are of intrinsic significance… rather because they can translate into lower levels of real well-being for the worse off. Cue Amartya Sen… Fred Hirsch on positional goods, cue Michael Marmot and Wikinson & Pickett on health (and other welfare) outcomes consequent on inequality as such. Likewise if you think that high levels of inequality undermine social solidarity and political equality and that those also have impacts on real well being, then you’ll have a further reason to be concerned about the consequences of inequality for real lives of ordinary people. People like me think these things matters a lot for real levels of well-being…. Add to these concerns some worries about the natural and social environment. If you think that neoliberal policies are also often associated with an erosion of the natural environment and of the social commons (I do) then you’ll have further reason to believe that rises in inflation-adjusted income don’t give you the true picture about real levels of well-being…. [I]t is probably the case that extra money does very little for the rich. But it really does make the lives of the poorest better off, other things being equal. The trouble is, that as far as I can see, other things aren’t equal and their inequality leads to all the bads in the preceding paragraph…

Chris Bertram, August 4, 2011

What they don’t ask: Unfortunately, the question never came. Until these questions get asked though, we’ll still have a political debate dominated by the assumption that growth-promoting policies will provide people with better lives, even though it seems that they won’t. (Which doesn’t, of course, establish that in the absence of such policies things wouldn’t get even worse.) To protect and improve the real living standards of ordinary people, we need to get redistribution explicitly onto the agenda and not just allow the assumption that rising tides lift (the key political assumption of “left neoliberalism” it seems to me) to stand…

Chris Bertram, May 22, 2011:

The fragmenting coalition of the “left”, some musings: [T]he elite, quasi-neoliberal “left” has a spectacular record of failure since the mid 1970s. This goes for the US as well, where Democratic adminstrations (featuring people such as Larry Summers in key roles) have done little or nothing for ordinary people. Given the failures of that current, there is less reason than ever for the rest of us to line up loyally behind them for fear of getting something worse….

Haven’t things always been a bit like this, though? Well not really. Once it was possible for people on the left to pretend that differences among us were primarily about means. We all shared the same sort of egalitarian, science-fictiony, abundancy, holding hands, economic democracy vision of the far-off future, but some people were more committed to electoral persuasion than others. (I realise there was a great deal of dishonesty, self-deception, wishful thinking and delusion about that pretence, but it had some kind of reality.) Now the overt differences of aim and value between various currents calling themselves “left” are deep and irreconcilable. So what are those currents:

The technocratic quasi-neoliberal left…. Pro-globalisation, pro-market, pro-growth: keep the masses happy by improving their living standards. It’s the economy, stupid. Prone to witter self-regardingly about “grown-up” politics. Fixated on electoral competition with the right, with winning elections the essential prerequisite to changing anything…. In power, this group (or those who think like them) have achieved very little. They certainly haven’t done much to stem the rise of inequality, to protect working-class communities from the winds of globalisation, to end poverty, or, for that matter, to protect the environment. Their attitude to those to their left has been to call for discipline and silence, for fear of frightening the median voter, coupled with hostility, ridicule, character assassination. Their appeal to the left has always and only been that they are slightly less bad than the full-on right wing…

Mammoth Failures of Economic Governance

Gavyn Davies:

What went wrong with the global recovery?: As recently as six months ago, mainstream economic forecasters were expecting real GDP growth to be comfortably above trend in 2011, and surveys of business activity were hitting new peaks. Of course, everyone knew that the underlying condition of the western economies was still very weak, but that did not seem to be sufficient to prevent a continuing normalisation of economic activity, with GDP returning slowly towards pre-recession trends.

We now know that these expectations were extremely complacent. Real GDP growth in the US has slumped to around 1 per cent annualised in the first half of the year, and continental Europe has performed no better in Q2. Forecasters like Goldman Sachs and JP Morgan now estimate that the probability of renewed recession in the US is around one third. So what has gone wrong?...

Two adverse factors have been at work on the supply side of the global economy. The natural disasters... global oil supplies....

Now let us turn to factors which relate exclusively to the demand side of the global economy. First, macroeconomic policy has been tightened.... [E]xpenditure cuts by the state and local government sectors.... In the UK, fiscal tightening has been running at about 2 per cent per annum, and in peripheral Europe the austerity programme is now much bigger than that.... [T]he extent of the tightening which has occurred in 2011 has come as a surprise.... Furthermore, self inflicted policy failings in the US and the eurozone in recent weeks have resulted in financial stress and widening credit spreads.... The final factor, which could turn out to be the most enduring, is the process of debt deleveraging in the western economies. This has left households in a much weaker state to cope with oil and policy shocks than is normally the case. Instead of dipping into savings when faced with temporary shocks, households have rapidly reduced their spending, so a weakening in consumption has been one of the main demand side causes of the global slowdown.

Economists like Richard Koo and Ken Rogoff talk of “balance sheet recessions” and a “second great contraction” as if they are entirely unfamiliar developments. They certainly are different from the recessions we have seen outside of Japan in the post-war period, but they could equally be described as a chronic and persistent shortage of demand...

I think that this is wrong. Koo and Rogoff (and Reinhart) make the point that these are not entirely unfamiliar developments: indeed, those of us who knew our economic history, or even what happened in Japan in the 1990s, were familiar with them.

The first real big question is: why have mainstream economic forecasters been so optimistic, at every stage, over the past four years? The second real big question is: why did policy makers believe them to such an extent that they made no plans for what to do if things broke for the worse: The third real big question is: why haven't policymakers reacted to the market's downgrading of prospects by taking steps to stabilize demand?

These are all mysteries to me.

Juan Cole: The Great Tripoli Uprising | Informed Comment

Juan Cole:

The Great Tripoli Uprising | Informed Comment: As dawn broke Sunday in Libya, revolutionaries were telling Aljazeera Arabic that much of the capital was being taken over by supporters of the February 17 Youth revolt. Some areas, such as the suburb of Tajoura to the east and districts in the eastrn part of the city such as Suq al-Juma, Arada, the Mitiga airport, Ben Ashour, Fashloum, and Dahra, were in whole or in part under the control of the revolutionaries. Those who were expecting a long, hard slog of fighters from the Western Mountain region and from Misrata toward the capital over-estimated dictator Muammar Qaddafi’s popularity in his own capital, and did not reckon with the severe shortages of ammunition and fuel afflicting his demoralized security forces, whether the regular army or mercenaries. Nor did they take into account the steady NATO attrition of his armor and other heavy weapons.

This development, with the capital creating its own nationalist mythos of revolutionary participation, is the very best thing that could have happened. Instead of being liberated (and somewhat subjected) from the outside by Berber or Cyrenaican revolutionaries, Tripoli enters the Second Republic with its own uprising to its name, as a full equal able to gain seats on the Transitional National Council once the Qaddafis and their henchmen are out of the way. There will be no East/West divide. My hopes for a government of national unity as the last phase of the revolution before parliamentary elections now seem more plausible than ever. Tellingly, Tunisia and Egypt both recognized the TNC as Libya’s legitimate government through the night, as the Tripoli uprising unfolded. Regional powers can see the new Libya being born….

By 8 am Sunday morning Libya time, fighters from Nalut and elsewhere in the Western Mountain region had begun coming into Tripoli to give aid to the people who made the uprising. The revolutionaries’ advance into the capital is entitled “Operation Mermaid Dawn.”

One way or another, it seems clear that the Libyan Revolution has entered its last phase, and that this phase could well end abruptly in the next days. If Qaddafi’s own capital is so eager to be rid of him, his support is much thinner than many observers had assumed. His troops in Zawiya and elsewhere are increasingly refusing to engage in hand to hand combat, running away when the revolutionaries show up, and at most sitting in a truck and bombarding the revolutionaries from a distance (but thereby making themselves targets of NATO war planes and helicopters). The esprit de corps of the revolutionaries is, in contrast, high.

Why the Republican Party Needs to Be Eliminated as a Political Force Immediately

and we need to pray to The One Who Is that the next party that picks up its pieces is less dedicated to making America poorer in the hope that it will redound to its partisan advantage.

Greg Ip:

The Republicans’ new voodoo economics: When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed. It’s safe to say that GOP opinions of the Fed have slipped a bit since. Texas Gov. Rick Perry, a newly declared candidate for president, said it would be “treasonous” for Greenspan’s successor, Ben Bernanke, to “print more money between now and the election” in an effort to boost the economy. Other candidates have been equally damning if slightly less extreme.... If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more, routinely labeling Obama’s stimulus as ineffective, or worse, counterproductive. They want balanced budgets, the sooner the better....

This, too, is at odds with the party’s earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.

Certainly, some of this rhetoric is just political opportunism. The Fed and the stimulus package are handy proxies for Republicans’ real target, which is Obama....

[S]omething more fundamental is going on: The economic ideology of the Republican Party has changed.... Liberals and conservatives in the United States have long differed on how much the government should meddle in individual markets, whether for energy or health care. But they have largely agreed that the government should have at least some role in smoothing out the ups and downs of the business cycle.... But this is the consensus that many Republicans in effect now reject. In their view, the government has no more role meddling in the business cycle than in any other market: "Many of our problems can be traced to a misguided belief by politicians that the American economy is something that can be controlled or micromanaged or influenced positively by government intervention and borrowing,” House Speaker John Boehner (R-Ohio) said in a speech in May.... This is not to be confused with supply-side economics, the dubious Reagan-era doctrine that tax cuts would generate enough economic growth and revenue to reduce the deficit....

Among Keynes’s leading opponents were economists of the “Austrian school” such as future Nobel laureate Friedrich Hayek and Ludwig von Mises. Austrians considered recessions a natural feature of capitalist economies, and efforts to suppress them via monetary or fiscal policy were apt to distort investment, worsen booms and busts, or lead to inflation.... The Austrian view... is now experiencing a renaissance....

Keynesian policy fell into disrepute in the 1970s, when its advocates tried to drive unemployment ever lower using fiscal and monetary policy. Instead, they brought on ever-rising inflation and a series of deep recessions. This did not, however, invalidate macroeconomic stabilization: The job simply became the preserve of the Fed. It handled it with aplomb, skillfully managing inflation and unemployment so that the 1980s, 1990s and early 2000s were a period of exceptional macroeconomic stability. No wonder McCain advocated the “Weekend at Bernie’s” strategy for keeping Greenspan around.

In retrospect, the stability of that era bred complacency, encouraging households to accumulate too much debt and financiers to take too many risks.... The subsequent crisis and recession were so deep that they exhausted the Fed’s conventional remedy of lowering short-term interest rates. Obama’s 2009 stimulus package and the Fed’s foray into “quantitative easing” — that is, buying government bonds to lower their yields and thus increase spending — were unprecedented but nonetheless orthodox responses to economic weakness when short-term interest rates are zero.

Many Republicans consider the tepid economic recovery an indictment of Keynesianism.... They almost surely have it wrong. Uncertainty about fiscal and monetary policy was also rampant in the early 1980s: Taxes were cut and raised repeatedly and the Fed tried, then abandoned, efforts to target growth in the money supply instead of interest rates. Yet after a sharp recession in 1981-82, the economy took off, primarily because the recession had been induced by high interest rates and, once rates fell, demand sprang back....

What would the Republican Party’s new economic ideology mean if the GOP nominee assumes the presidency in 2013?... If we take their views at face value, we would not expect the new president, even if dealing with a renewed economic slump, to bless more fiscal or monetary stimulus. Indeed, more spending cuts and higher interest rates could be in store.... Of course, it’s one thing for a Republican candidate to inveigh against macroeconomic fine-tuning while stumping for tea party votes during the primaries. Once in office, presidents must think more carefully about the consequences of their decisions, both for the economy and reelection. At present, the public is far more worried about jobs than the deficit...

Duncan Black on Messaging

Good messaging may well not produce good policy, but bad messaging is bad politics--and leads to lost elections:

Eschaton: The Impotence Of Jibber Jabber: Floating around out there is the basic idea that the presidential bully pulpit isn't very powerful. I can accept that no amount of presidential jibber jabber can force through policy (might be true, might not, but a reasonable argument). So, then, the entire point of presidential jibber jabber is simply the politics. It isn't the package, it's the advertising. Fair enough. Has the focus on cutting the deficit for the past 20 months or so really been good politics?

Great Depression II in Europe Creeps Closer

Gerrit Wiesman for the FT:

Merkel rules out eurobonds: “Politics cannot and will not simply follow the markets,” Angela Merkel said on Sunday, as she shrugged off last week’s brutal financial markets and pledged to stick to the “extremely difficult task” of cutting member states’ debt and making the eurozone more competitive. “The markets want to force us into doing certain things – and that we won’t do,” the German chancellor told German public television in her first interview since returning from holiday last week…

Talk of "Will There Be a Double Dip?" Is Unhelpful

Mark Thoma:

Economist's View: Double Dip or Not, the Unemployed Need Help: "One reason that I don't like the framing of the "are we headed for a second dip" question is that it leads to a sigh of relief when we are told that we might get lucky and merely have an extended period of stagnation instead. It makes it appear that the answer to the "should we do more to help the unemployed" question depends upon whether a double dip is ahead. But an extended period of stagnation or even a slow, slow recovery (which almost seems like a good outcome at this point) are also problematic and cry out for more help for the unemployed. With so many eyes on the double-dip question, and with policy seeming to depend upon the answer, I'm worried we've forgotten how unacceptable alternative but not quite as bad outcomes would be. Unless there is a miracle recovery ahead, and that's pretty unlikely at this point, policymakers need to do what they can to increase the pace of the recovery in any case, not just if there's a double dip. In fact, policymakers should have provided more help already -- at the very least plans should be ready.

The president has promised a job creation program will be unleashed next month, but I'll believe it when I see it and it's hard not to wonder what took them so long. They can't possibly just be figuring out that they need a plan to deal with this, can they? I realize there's a legislative cycle to worry about, that they are waiting until Congress reconvene before moving forward, and it's not like this is an emergency or anything that demands immediate action. After all, the people writing the legislation have jobs, so what's the rush?

Ed Andrews on the Transformation of Barack Obama into Herbert Hoovr

Ed Andrews:

Pollyanna-in-Chief? The Economy Drowns Out Obama's Cheery Speeches: In repeatedly insisting that there is "nothing wrong" with the economy, Obama puts himself at odds with both the public's perception and the market's fundamentals: "There is nothing wrong with our country" except for the "broken" political system, President Obama declared at many stops on his Midwest bus tour this week. "We've still got the best workers in the world. We've got the best entrepreneurs in the world. We've got the best scientists, the best universities." Well, fine. Presidents have to profess confidence about the country and its long-term prospects, even when the news is bleak. But in repeatedly insisting that there is "nothing wrong," Obama put himself at odds with current reality and with what most people think is true....

It's not just that unemployment and underemployment are sky-high. It's also that the economic recovery is sputtering and in serious danger of slipping into a second recession....

Obama didn't just say it once. It was a central line he repeated at his bus stops in Minnesota, Iowa and Illinois. Does that inspire confidence?... Polls indicate that American voters blame Republicans more than Democrats for the debt-ceiling debacle, and approval ratings for Congress are down as low as 13 percent. But a new Gallup Poll released on Wednesday showed that public approval for Obama's handling of the economy is also down to a new low of 26 percent. What is the line between projecting confident leadership and out-of-touch cheerleading?...

[H]appy talk, particularly at a moment when new fears are spiking, can hurt confidence and sour the public too...

Great Depression II Approaches in Europe

Barry Eichengreen:

Eurointelligence: [A]t this point the crisis boils down to just one word: Italy.   Italy’s debt is too big to restructure and too big for the European Financial Stability to finance.  While crises are complicated beasts, there’s no reason to complicate this one.  Sure, Greece may have to restructure again.  France may have to take budgetary measures.  But those are sideshows.  The euro area will not live or die on their basis.  The euro area’s crisis is all about one thing:  that Italy’s debt might be unsustainable....

Italy needs at least 1 per cent growth and 2 per cent inflation to ensure that the growth of nominal GDP exceeds the 3 per cent interest rate that is the best it can hope for. Bad economic news from other parts of the world has rendered 1 per cent growth unattainable.   This, in a nutshell, is what caused the Italian debt market, and European financial markets more generally, to blow up. The budgetary measures that the Italian government has now proposed, moreover, will only diminish the country’s growth prospects.  Raising taxes on financial investments and corporations will not encourage investment.  The €13 billion of spending cuts and pension savings slated for the next 18 months will only depress demand further.

What would help would be radical liberalization of the system of national labor contracts.  While the government is officially backing the idea, the only specifics we have is that any such initiative will be opposed by the country’s powerful trade unions. 

Maybe Italy will shake off the deep structural problems with labor contracts, tax compliance, and company and administrative law as a result of which its economy has been unable to grow.  Maybe 2012 will see the “miracle on the Mediterranean.” 

If not, as seems more likely, and Italian growth slows, European policy makers will have two choices.  One is a higher inflation target for the ECB.... The only other option is Eurobonds.  Serious Eurobonds.  Halfway houses, for example dividing sovereign debts into a first tier up to 60 per cent of each country’s GDP that will be guaranteed by euro area members as a group, and a second tier that will remain each nation’s responsibility, will no longer cut it.... [F]ull pooling of existing debts and having member states contribute to payments on it according to their respective GDPs....

Which distasteful option – inflation or Eurobonds – will be less revolting to German taxpayers?  Your guess is as good as mine.  (For what it’s worth, my guess is Eurobonds.)  But the German taxpayer will have to choose.  He is in a union with Italy.  And there is no way he can get out.

And if the German taxpayer does not choose, then Great Depression II in Europe draws near...

This Might Greatly, Greatly Improve My Quality of Life...


Go online and place order. Follow instructions and proceed to payment. Pack and send to (Include email confirmation receipt). We will check (confirm quantity and receipt). For books, we will cut the spine. We will carefully scan, digitize and OCR. We will check the quality of the scan. You will receive your PDF via download or DVD. We will recycle your papers after 2 weeks unless you request for returns. Access your contents anywhere. Books:100 pages, $1.

.pdf, however, is a nasty format.

Britain Shows Signs That It May Stop Hitting Itself on Its Head with a Hammer Quite so Hard

And it is all due to Adam Posen. Good work, Adam.

Paul Krugman assesses the situation:

Bearded American Economists to the Rescue: Bloomberg:

Bank of England policy maker Adam Posen’s 11-month push for more stimulus is now shaping the debate among officials as they consider whether the U.K. needs more quantitative easing to fight the danger of Europe’s crisis. With no policy maker seeking an interest-rate increase after Spencer Dale and Martin Weale switched votes, the discussion on the Monetary Policy Committee has shifted toward Posen’s agenda

Go Adam! Adam Posen studied Japan during the 1990s, and was a member of the club (also including yours truly) that worried that Japan was an omen for other advanced countries. And I have to say that the Bank of England is showing a lot of intestinal fortitude right now, holding to expansionary policies despite an inflation bulge it knows is temporary, but which nonetheless puts it under pressure. Then again, BoE monetary policy committee members don’t fear being charged with treason, or lynched in Texas.

A First Dark Age of Macroeconomics…

In 1829 John Stuart Mill, Thomas Robert Malthus, and even Jean-Baptiste Say understood that excess demand for liquid cash money was excess supply for currently-produced goods and services, was a "general glut".

And once you recognize that your key financial asset, your medium of exchange--money--is also a savings vehicle (a store of value) and a safe asset (a unit of account), you immediately see that not just monetary but fiscal and banking policy can have macroeconomic effects. And if you say that Say's Law works except in exceptional circumstances to ensure that aggregate demand cannot be less than supply, it would seem immediate and obvious that aggregate demand cannot be more than current production as well--that just as something unusual and exceptional has to cause the downturn from normal, so something unusual and exceptional has to cause the revival to normal. It is very puzzling. If an excess demand for financial assets is seen to cause a collapse in production and employment, then it would seem immediate and obvious that generating an excess supply of financial assets would cause a revival.

Thus it would seem that back in 1829, when John Stuart Mill wrote his Essays on Some Unsettled Questions of Political Economy under the spur of the British depression of 1825-26 that followed the collapse of the canal boom, that a useful macroeconomics was on the verge of being born.

So what happened over the next century?

Why in 1936 is John Maynard Keynes writing about the complete victory of Say's Law, of how Ricardo had conquered England as thoroughly and completely as the Holy Inquisition had conquered Spain?

And when Alfred and Mary Marshall write about The Economics of Industry in 1885, why are they so eager to invoke the confidence fairy and so unseeing of the supply of financial assets--why do they see only one of the two blades of the scissors? It is as if a nervous breakdown of entrepreneurs is the sole cause of economic downturns, and that admits of none but a psychological cure. Why do Fisher and even Wicksell seem to me, in some ways, to know less than the young John Stuart Mill had known in 1829?

John Maynard Keynes (1936):

The General Theory of Employment, Interest and Money: The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commanded it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;— a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a Society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away.

Krugman and the Firebaggers: Hippie Punching Department

Paul Krugman notes:

Hippie Punching: Via Greg Sargent, I learn that some people in the Obama campaign really, really dislike people like me, who complain when the president gives in to GOP blackmail. Well, at least they’re paying attention. I would say this: on one side you have the GOP, which responds to completely crazed Tea Party demands by doing all it can to assure the hard right that it’s on its side. On the other, you have the Democratic establishment or at least part thereof, which responds to complaints from its own base that it’s going too easy on the crazies by lashing out at the base, with a bit of bearded-professor bashing on the side. Way to strengthen your bargaining position, guys.

What is important, I think, is not New Mexico Obama for America State Director Ray Sandoval but rather the more general evolution of thought and message coming from inside the Obama bunker.

Back at the end of 2008, our questions (at least my questions) were: "What if the downturn is bigger than we currently think it will be? What if worries about a jobless recovery and the absence of labor-market mean-reversion turn out to be true? What if--as has happened in the past--this financial crisis turns into sovereign crises and the world economy gets hit by additional shocks? Then your polices will not be bold enough. What is Plan B?" And the answers were all along the lines of:

  1. You are a pessimist. We are already doing unprecedented things to stabilize the economy--and odds are that in a year we will be worrying about inflation and unwinding the stimulus rather than about unemployment.
  2. Obama is genuinely post-partisan, and won't have anything like the trouble Clinton had negotiating with Republicans: our policies will evolve as the situation evolves.

Back in the late summer of 2009, our questions (or at least my questions) were: "You aren't getting any cooperation from Republicans--they appear to have doubled down on the Gingrich-Dole strategy that you win the next election by making the Democratic President a failure. The economy really needs more stimulus. What are you going to do? Isn't it time to use the President's powers more aggressively--to use Fed appointment powers and the Treasury's TARP authority and Reconciliation to do major stimulus?" And the answers were:

  1. We are doing all that we can.
  2. This is really hard.
  3. Things will probably still work out all right.
  4. If worst comes to worst, we will trade long-run budget balance via a spending cut-heavy package of long-run spending cuts and tax increases for short-term stimulus to get us out of the short-term unemployment mess.
  5. Hippie punching.

By the late summer of 2010, our questions (or at least my questions) were: "You are in a total war with the Republican Party. They aren't giving you anything. It is time to seriously push the envelope of executive authority to put policies in place that will reduce unemployment." And the answers were:

  1. The best policy is to achieve long-run fiscal discipline so that the confidence fairy will show up.
  2. Hippie punching.

And now it is the late summer of 2011. Our big question still is: how is Obama going to use executive branch authority to reduce unemployment? There are lots of options: adjourn congress and do some recess appointments to get the Federal Reserve more engaged in actually pursuing its dual mandate, quantitative easing via the Treasury Department, shifting Fannie Mae and Freddie Mac from their do-nothing position by giving them a microeconomic stabilization mission, talking about how a weak dollar is in America's interest.

And this time what I am hearing back is only:

  1. Hippie punching.

It is difficult to read this in any way but as a group of people inside a bunker who (1) have been wrong about the situation, (2) are scared to use the powers they have to try to make things better, and (3) really do not like being reminded that they were wrong about the situation.

That seems to me to mean that the Obama administration right now has one and only one macroeconomic policy idea: hope that the country gets lucky.

Other comments: Steve M.:

No More Mister Nice Blog: Being the Kicked Dog: There's a lot of chatter right now about Ray Sandoval, the New Mexico state director for Obama for America, who, in an e-mail to supporters, recommmended a blog post that bashes Paul Krugman and the "Firebagger lefty blogosphere," in the course of defending Obama. What amuses me is this reaction from Ezra Klein:

Paul Krugman is one op-ed columnist. FireDogLake is one Web site. They have readers. But they are not the state of Ohio. Time and again, however, we see evidence that they have gotten deep inside the White House's head. In letters, in offhand comments, in outbursts at press conferences, in my personal reporting, members of the Obama administration and members of the Obama reelection campaign will let slip that they are dwelling and worrying over these arguments. They may not agree with them. They may not think they're fair, or sophisticated, or useful. But they're thinking about them. And if you're the "professional left," that's exactly what you want….

Oh, please. I'm looking for evidence that the administration is taking the arguments of its left-wing critics seriously. I'm not seeing it. What I'm seeing is the administration getting hammered from all sides, but mostly from the right, and not really being willing to take on the right. And you know -- what do you do when your boss chews you out every day at work? You go home and, as soon as the dog does something to annoy you, you kick the dog. Well, the right is Obama's boss. And Krugman and FDL and "the professional left" are the dog. Lefty critics are the annoyers the White House isn't afraid of. I'd love to think the lashing out at the left is a sign that lefty critics have gotten to the administration, but I think it's just a case of punching down

And Tbogg:

Tag’em and Bag’em: [I]t is a sad fact of life that there are some many within the Obama White House who see the liberal base as someone you call up every four years for a quickie ---- and then don’t return their calls or respond to their texts for another four years. Some of these people are (or were) major players like Rahm or William Daley and others are like  OFA’s New Mexico State Director Ray Sandoval who plays the role of Guy Fleegman in our current drama.

I’ve said before that I believe  Obama’s advisers are to blame for this sad state of affairs. Obama strikes me as the kind of guy who doesn’t like to lose, who goes for the sure thing. He seems to be sitting on his slim lead figuring that he can beat the least damaged clown to tumble out of the Republican clown car, and his people are no doubt encouraging this belief and, for all I know, they may be right. But I don’t know if the country can survive another year plus of half measures and less-than-they-seem proposals….

ersonally I haven’t  given up hope for Barack Obama even though he has shown little inclination for bold gestures. I’ll still vote for him for no better reason than the fact that the alternatives range from abominable to “are you ----ing kidding?”.

So all I can do is hope that he can change.

The fact that this makes me feel like a battered wife has not escaped my notice…

A Colossal Failure of the American Political System

That Republicans in Washington are trying to make the country weaker and poorer is a bad thing, but not a surprising thing: anybody who has been paying attention to the evolution of the Republican Party since at least 1991 will not be surprised.

That the Obama wing of the Democratic Party has joined them is both a bad thing and, to me, a great surprise.

Duncan Black:

Eschaton: Fringe Views: It really doesn't matter all that much whether the economy, according to somewhat arbitrary criteria, has another "recession." I think the true fringe view, where fringe means outside the Village, is that unending 9.0%+ unemployment is horrible and requires an appropriate policy response. The point is we never got out of the last recession, and whether GDP growth is barely positive or barely negative doesn't matter all that much.

I still do not understand how it happened.

Ezra Klein marvels as well:

A ‘policy-induced slowdown’: The markets are tanking. Again. And it’s in part because they expect us to screw up. Again…. J.P. Morgan… announced that it was cutting its global growth forecasts by a full percentage point for 2011 and 2012. Why? I'll let them explain:

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors – especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling – have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe.

In other words: Growth is weak and policymakers are hurting rather than helping. The debt-ceiling debate hurt. The dithering response to the euro zone’s debt crisis hurt. And the expected austerity in both the United States and Europe is going to hurt even more…. What we are entering, J.P. Morgan says, is a “policy-induced slowdown.” Another way of saying that is we’re entering an unnecessary slowdown. This implies that if we reversed course, we could see a policy-induced recovery, or at least acceleration. So how about it, Congress?

And Josh Marshall:

Wall Street Knows It: Wall Street is telling us (now noting Morgan Stanley's explanation of its growth outlook downgrade) that two key factors in the increasingly gloomy outlook for the economy are Washington's high-wire antics (i.e., Republican hostage taking on the budget) and the prospect of fiscal tightening in the USA....

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors - especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling - have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe. Personally, I don't have any doubt who's to blame at a policy level. But at a certain point you just step back and grimace as you see the ship approaching the waterfall with calls of "full speed ahead!"

It really is a downturn made in Washington. Mind-numbing to behold. But then, who hires Washington?

And Paul Krugman:

Awesome Wrongness: [T]hings are looking really terrible, And crucially, they’re looking terrible in the wrong way, at least if you wanted to believe that political and policy debate over the past year and a half made any sense at all. We’ve been utterly preoccupied with deficits, deficits, deficits; there was supposedly a crisis looming, but a crisis that would take the form of an attack by the bond vigilantes. And here we are, with markets now deeply worried not by deficits but by stalling growth, fearing not fiscal profligacy but fiscal austerity, and with interest rates at historic lows. Instead of turning into Greece, we’ve turned into Japan, except much worse. And policy is replaying 1937.

In the past, you could make excuses on the grounds of ignorance. In the 1930s they didn’t have basic macroeconomics. Even in Japan in the 1990s you could argue that it took a long time to realize that the liquidity trap was a real possibility in the modern world.

But we came into this crisis with a pretty good understanding of what was at stake and pretty good analysis of the policy options — yet policy makers and, I’m sorry to say, many economists just chose to ignore all that and go with their prejudices instead.

And the worst of it is that the people who got this so wrong have not and probably won’t admit to their awesome wrongness; on the contrary, they’ll dig in. And the Lesser Depression will go on and on and on.

The Fiscal Policy of Herbert Hoover

Ed Harrison sends us to Hoover's deficit-reduction message of March 8, 1932:

Herbert Hoover: Statement on Efforts to Balance the Budget: The whole of the administrative officials are cooperating with the special Economy Committee appointed by the House of Representatives in the drive to bring about further drastic economies in Federal expenditure.

You will recollect that the budget sent to Congress represented reductions in expenditures for the next fiscal year of about $365 million below the present fiscal year. The House Appropriations Committee has reduced the amounts of bills so far reported out by about $112 million. Of this, however, between 60 and 70 million is a deferment until Congress meets next December when they will be compelled to meet positive obligations by deficiency bills. To this extent, therefore, the reductions do not help next year's expenditures.

In order to meet the requirements of the Ways and Means Committee that expenditures must be reduced by $125 million in order to balance the budget, it is necessary that further cuts be made. There is very little room left for reductions by administrative action and the House Appropriations Committee has passed upon the major supply bills except the Army and Navy. Further economies must be brought about by authorization of Congress, either by reorganization of the Federal machinery or change in the legal requirements as to expenditure by the various services.

The Director of Veterans' Affairs has proposed to the special House Committee on Economy some changes in the laws relating to pensions and other allowances which would produce economies of between 50 and 60 millions per annum. The Postmaster General is placing before the committee changes in the legal requirements of Post Office expenditures. The Secretary of Agriculture has suggested changes in the law requiring expenditures in the Department of Agriculture, and the other departments are engaged in preparation of similar drastic recommendations.

I believe the Committee on Economy, through administrative reorganization and such methods as I have mentioned, will be able to find a large area of economy.

Nothing is more important than balancing the budget with the least increase in taxes. The Federal Government should be in such position that it will need issue no securities which increase the public debt after the beginning of the next fiscal year, July 1. That is vital to the still further promotion of employment and agriculture. It gives positive assurance to business and industry that the Government will keep out of the money market and allow industry and agriculture to borrow the monies required for the conduct of business. I cannot overemphasize the importance of the able nonpartisan effort being made by the Ways and Means Committee and the Economy Committee of the House whose work are complementary to each other.

Sounds somewhat familiar, no?

But Hoover was using the RFC and the FHLB to try to boost the flow-of-funds through the capital markets and rebalance the housing market. Obama has no such parallel initiatives using residual TARP money or Fannie and Freddie.

Matthew Yglesias on How Richard Fisher Also Lives in a Fantasy World (But in This Case, Unlike Reihan Salam, There Is No Upside)

Safari 1

Matthew Yglesias concludes that Federal Reserve Bank of Dallas President Richard Fisher is living in a fantasy world:

Richard Fisher Doesn’t Know There’s A Recession In Texas: Dallas Federal Reserve President Richard Fisher recently voted against monetary stimulus and explained why in a speech delivered earlier this week. The method is to first start with a long discussion of the relative strength of job growth in Texas, then offer a brief discussion that reveals Fisher doesn’t seem to understand how monetary policy works, and then conclude with a staggering analysis of the Texas labor market which appears to entirely neglect the fact that the unemployment rate in Texas is over 8 percent….

Despite the fact that Texas has severely limited social services and an education system that faces great challenges, people and businesses have been picking up stakes and moving to Texas in significant numbers over a prolonged period…. Jobs have been created for American workers in Texas in several different sectors, not just in the oil and gas and mining sectors. People have taken those jobs of their own free will, even though the jobs may not measure up to the compensation levels everyone would like. And yet Texas, like all states, is subject to the same monetary policy as all the rest…. From this, I draw the conclusion that private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth.

Fisher seems to be badly confused here…. [H]e’s concluded that the whole country could get out of recession if it only had public policy as good as Texas’ public policy. But Texas is experiencing the same severe labor market recession as the rest of the country. I promise!… Fisher should consider that in good times Texas adds jobs faster than people whereas in bad times it adds people faster than jobs:

Texas population growth is a constant. It says good things about the state of Texas. But… as Fisher says, “Texas, like all states, is subject to the same monetary policy as all the rest.” Sometimes the labor market variables are pointing in a good direction, other times they’re pointing in a bad one. This is one of the bad times. But Fisher doesn’t seem to have noticed.

Me? I don't think migration to Texas says good things about superior public policy in the state of Texas.

I think it says good things about air conditioning and the conquest of malaria and yellow fever.

Before air conditioning (and the conquest of malaria and yellow fever) and after the discovery of fire it makes a lot of sense to live in Boston or Detroit or Cleveland or Chicago rather than Atlanta or New Orleans or Dallas or Houston. After air conditioning, not so much.

But Matt's big point is well-taken: it is astonishing that Fisher does not seem to realize--that nobody on his staff has gotten him to realize--that the unemployment rate in Texas even with the current energy boom is 8.3%.

That really should cause some marking of beliefs to market on Fisher's part. It hasn't.

James Fallows Praises Jackie Calmes: "If You Read One 'Serious' Newspaper Article This Weekend…"


If You Read One 'Serious' Newspaper Article This Weekend: please let it be this one, by Jackie Calmes in today's New York Times, about the economic and political consequences of the House GOP's anti-deficit push.

Read it all, but the short version is: Since winning control of the House, the Republican leadership has been brilliantly successful in convincing some of the public, enough of the news media, and at crucial points the Obama Administration that the main threat to America is future deficits. Thus the debt-ceiling collision; thus the agreed-on cutbacks; thus the frenzy through these past few months about deficit projections.

Meanwhile, what business people, ratings agencies, financiers, investors, central bankers, and even most Republican economists (with a predictable exception) consider the real emergencies for the country -- stagnant growth, very high unemployment, the prospect of worldwide recession yet again, which among other bad effects would drive deficits even higher -- will only get worse because of the new austerity drive. These officials are all trying to wave the GOP leaders off their commitment, but the politicians don't notice, don't care, or don't grasp the point. Thus the deathless words of Rep. Eric Cantor, from a memo to his troops as reported by the NYT:

"Over the next several months, there will be tremendous pressure on Congress to prove that S.& P.'s analysis of the inability of the political parties to bridge our differences is wrong. In short, there will be pressure to compromise on tax increases," Mr. Cantor wrote.

.But, he added, "We were not elected to raise taxes or take more money out of the pockets of hardworking families and business people."

Translated: S&P downgraded U.S. debt because they concluded U.S. government was dysfunctional. There will be pressure to prove them wrong. Let's prove them right! Even though that leads to higher deficits. Even though that leaves people out of jobs. You can't make this up. Anyhow, please read it sometime this weekend.

Why Don't Republicans Like Illegal Immigrants from Mexico?

Reihan Salam, I think, lives in a fantasy world.

Consider the self-image of he Republican right. They regard themselves as a chosen people, an elect: aggressive, entrepreneurial, risk-taking, wanting to climb the ladder, upwardly mobile, intolerant of niggling laws and regulations that take away their freedom and keep them doing what it is their right to do to better themselves.

So what group in America today best fits that self-image? What group in America today ought to be the darlings of the Republican right?

Yep. You guessed it. Illegal immigrants from Mexico. They really are aggressive, entrepreneurial, risk-taking, wanting to climb the ladder, upwardly mobile, intolerant of niggling laws and regulations that take away their freedom and keep them doing what it is their right to do to better themselves.

But the Republican right does not love them. It does not embrace them. It does not even dislike them. It hates them. It loathes them. Why? Because they are brown. Because they do not speak English well.

Reihan Salam lives in a fantasy world--not there is anything wrong with that. If he works hard enough and is persuasive enough, maybe he will someday create a Sam's Club Republican Party, a Republican Party in which illegal immigrants from Mexico are the darlings of the right-wing evangelical Republican churches that will offer them sanctuary, in which Republican opposition to the Civil Rights Act is genuinely based in a fear of government overreach rather than in a cold, cruel calculation that sacrificing the rights of African-Americans is worth doing if it leads to Republican electoral dominance.

I am not holding my breath. But the task is worth attempting. And it can only be attempted by somebody living in a fantasy world.

Reihan Salam:

Op-Ed: Don’t call it racism: [T]he notion that Perry is a racist won’t go away anytime soon…. Conservatives, myself included, resist and resent this conclusion. One reason is that conservative criticisms of many programs aimed at bettering the lives of members of minority groups are rooted in the belief that these programs are actually counterproductive… that efforts to find a shortcut around the organic process through which individuals and communities abandon old habits and practices and adopt new ones usually backfire.

This bias against efforts to speed up social change has led to a number of horrible misjudgments, including the opposition of conservatives like Arizona Senator Barry Goldwater to the Civil Rights Act of 1964 and, more recently, the almost universal opposition among national conservative politicians to letting the states decide whether or not to grant same-sex couples the right to marry….

One thing that is undeniably true is that American conservatives are overwhelmingly white in a country that is increasingly less so. As the number of Latinos and Asian-Americans has increased in coastal states like California, New York and New Jersey, many white Americans from these regions have moved inland or to the South. For at least some whites, particularly those over the age of 50, there is a sense that the country they grew up in is fading away, and that Americans with ancestors from Mexico or, as in my case, Bangladesh don’t share their religious, cultural and economic values. These white voters are looking for champions, for people who are unafraid to fight for the America they remember and love. It’s unfair to call this sentiment racist…

$1.049 Million...

… and the ultimate walk-to-work house.

At a 4.25% nominal interest rate, figuring 2% average inflation and a 40% combined federal-and-state marginal tax rate, the real interest cost of a $1 million house is $5,500/year…

… plus $15,000/year in property taxes…

… plus $7,000/year in insurance…

… that is a total economic cost of $27,500/year, or $2,300/month--we could not rent anything close for anything approaching that, even factoring in the maintenance that the landlord would do. It's really very cheap…

… plus it is a $55,000/year forced-savings program as you pay down the real and nominal principal--but that isn't a problem but an advantage: we like forced-savings programs…

… plus it is an enormous bet on the Berkeley housing market: a bet of unknown expected value and large variance--say a standard deviation of $200 thousand…

… but I firmly believe that risk aversion comes from declining marginal utility of wealth: that as the trustee of all my possible future selves I am willing to make utility tradeoffs among them, knowing that wealth at the margin produces more utility for those possible future selves that are poor than for those who are rich…

… and I know that in a life-cycle perspective even losing $400 thousand in the Berkeley housing market would not materially move the needle on my lifetime marginal utility of wealth, so I really should be risk-neutral with respect to such bets…

Question: do I have a moral (or a professional) obligation to act as if I were a rational utility-maximizing von Neumann-Morgenstern agent even if doing so makes me anxious?

Alfred and Mary Marshall and the Confidence Fairy: Annals of the History of Economic Thought

Alfred Marshall and Mary Marshall (1885), Economics of Industry, Book III: Market Value: Chapter 1: Changes in the Purchasing Power of Money

(4) After every crisis, in every period of commercial depression, it is said that supply is in excess of demand. Of course there may easily be an excessive supply of some particular commodities; so much cloth and furniture and cutlery may have been made that they cannot be sold at a remunerative price. But something more than this is meant. For after a crisis the warehouses are overstocked with goods in almost every important trade; scarcely any trade can continue undiminished production so as to afford a good rate of profits to capital and a good rate of wages to labour. And it is thought that this state of things is one of general over-production. We shall however find that it really is nothing but a state of commercial disorganization; and that the remedy for it is a revival of confidence.

To begin with, it is clear that, as [John Stuart] Mill says:

What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange.

But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones. Projects for new railways meet with no favour, ships lie idle, and there are no orders for new ships. There is scarcely any demand for the work of navvies, and not much for the work of the building and the engine-making trades. In short there is but little occupation in any of the trades which make fixed capital. Those whose skill and capital is specialized in these trades are earning little, and therefore buying little of the produce of other trades. Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less; the diminution of the demand for their wares makes them demand less of other trades. Thus commercial disorganization spreads, the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization.

The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others…

In addition to the first explicit invocation of the Confidence Fairy "touch[ing] all industries with her magic wand" I have found, I find it interesting that Alfred and Mary Marshall quote Mill on the truth of Say's Law without quoting Mill on when Say's Law breaks down--on how excess demand in (and after) a financial crisis for financial assets like money is deficient demand for and excess supply of currently-produced goods and services and labor: a general glut.

This failure to note Mill's insights from his Essays on Some Unsettled Questions--this failure to recognize that not just Malthus but Mill and indeed Say himself had big problems with the empirical applicability of Say's Law--is, I think, what lies behind Keynes's peroration in Chapter 3 of his General Theory:

Malthus, indeed, had vehemently opposed Ricardo's [and Say’s] doctrine... but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas...

Meanwhile, back at the Economics of Industry, Alfred and Mary Marshall continue:

If all trades which make goods for direct consumption agreed to work on and to buy each other's goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. The trades which make fixed capital might have to wait a little longer, but they too would get employment when confidence had revived so far that those who had capital to invest had made up their minds how to invest it.

Confidence by growing would cause itself to grow; credit would give increased means of purchase, and thus prices would recover. Those in trade already would make good profits, new companies would be started, old businesses would be extended; and soon there would be a good demand even for the work of those who make fixed capital. There is of course no formal agreement between the different trades to begin again to work full times and so make a market for each other's wares. But the revival of industry comes about through the gradual and often simultaneous growth of confidence among many various trades; it begins as soon as traders think that prices will not continue to fall: and with a revival of industry prices rise.

[Note: The most plausible of all the plans that have been suggested by Socialists for the artificial organization or industry is on which aims at the "abolition of commercial risk". They propose that in times of depression government should step forward and, by guaranteeing each separate industry against risk, cause all industries to work, and therefore to earn and therefore to buy each other's products. Government, by running every risk at once, would, they thin, run no risk. But they have not yet shown how government could tell whether a man's distress was really due to causes beyond his own control, nor how its guarantee could be worked without hindering that freedom on which energy and the progress of invention depend.]

(5) The connexion between a fall of prices and a suspension of industry requires to be further worked out.

There is no reason why a depression of trade and a fall of prices should stop the work of those who can produce without having to pay money on account of any expenses of production. For instance a man who pays no wages, who works with his own hands, and produces what raw material he requires, cannot lose anything by continuing to work. It does not matter to him how low prices have fallen, provided that the prices of his goods have not fallen more in proportion than those of others. When prices are low, he will get few coins for his goods; but if he can buy as many things with them as he could with the greater number of coins he got when prices were high, he will not be injured by the fall of prices. He would be a little discouraged if be thought that the price of his goods would fall more than the prices of others; but even then be would not be very likely to stop work.

And in the same way a manufacturer, though he has to pay for raw material and wages would not check his production on account of a fall in prices, if the fall affected all things equally, and were not likely to go further. If the price which he got for his goods had fallen by a quarter, and the prices which he had to pay for labour and raw material had also fallen by a quarter, the trade would be as profitable to him as before the fall. Three sovereigns would now do the work of four, he would use fewer counters in measuring off his receipts against his outgoings; but his receipts would stand in the same relation to his outgoings as before. His net profits would be the same percentage of his total business. The counters by which they are reckoned would be less by one quarter, but they would purchase as much of the necessaries, comforts, and luxuries of life as they did before.

It however very seldom happens in fact that the expenses which a manufacturer has to pay out fall as much in proportion as the price which he gets for his goods. For when prices are rising, the rise in the price of the finished commodity is generally more rapid than that in the price of the raw material, always more rapid than that in the price of labour ; and when prices are falling, the fall in the price of the finished commodity is generally more rapid than that in the price of the raw material, always more rapid than that in the price of labour. And therefore when prices are falling the manufacturer's receipts are sometimes scarcely sufficient even to repay him for his outlay on raw material, wages, and other forms of circulating capital; they seldom give him in addition enough to pay interest on his fixed capital and earnings of management for himself.

Even if the prices of labour and raw materials fall as rapidly as those of finished goods, the manufacturer may lose by continuing production if the fall has not come to an end. He may pay for raw material and labor at a time when prices generally have fallen by one-sixth; but if, by the time he comes to sell, prices have fallen by another sixth, his receipts may be less than is sufficient to cover his outlay.

We conclude then that manufacturing cannot be carried on except at a low rate of profit, or at a loss, when the prices of finished goods are low relative to those of labour and raw material; or when prices are falling, even if the prices of all things are falling equally.

(6) Thus a fall in prices lowers profits and impoverishes the manufacturer: while it increases the purchasing power of those who have fixed incomes. So again it enriches creditors at the expense of debtors. For if the money that is owing to them is repaid, this money gives them a great purchasing power; and if they have lent it at a fixed rate of interest, each payment is worth more to them than it would be if prices were high. But for the same reasons that it enriches creditors and those who receive fixed incomes, it impoverishes those men of business who have borrowed capital; and it impoverishes those who have to make, as most business men have, considerable fixed money payments for rents, salaries, and other matters. When prices are ascending, the improvement is thought to be greater than it really is ; because general opinion with regard to the prosperity of the country is much influenced by the authority of manufacturers and merchants. These judge by their own experience, and in time of ascending prices their fortunes are rapidly increased; in a time of descending prices their fortunes are stationary or dwindle. But statistics prove that the real income of the country is not very much less in the present time of low prices, than it was in the period of high prices that went before it. The average amount of the necessaries, comforts and luxuries which are enjoyed by Englishmen is probably greater now, in 1886, than it was in 1872.