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September 2011

From the delong Twitterstream: September 30, 2011

  • SRT @ebertchicago: Clarence Thomas "inadvertently" forgot $700,000 payment to his wife from a rightist think

  • RT @drgrist: Oh, look, Bjorn Lomborg is losing his funding. #bjornenfreude

  • Martin Wolf Says: Fly the Helicopters!

  • The Global Macro Situation: Paul Krugman Reads Martin Wolf, Who Is Afraid, Very Afraid

  • RT @TimHarford: "That's not the tragedy of the commons. That's the tragedy of you're a dick." Brilliant!

  • RT @TPEconomy: WaPo shocked that austerity weakens the economy (via @DeanBaker13) #journalism

  • The due-process-free assassination of U.S. citizens is now reality - Glenn Greenwald -…

  • R.I.P. Sylvia Robinson (1936-2011)…

  • The Economist on Ron Suskind Such mistakes may be mere annoyances, but others verge on smears.

  • Books: An Unexpected Present: Robert Allen's "Global Economic History"

  • RT @ezraklein: Good point by @mattyglesias on the misguided fiscal moralism lurking behind the misguided weight moralism w/ Christy

  • Tim Duy Tries to Understand Dallas Fed President Richard Fisher

The "Uncertainty" Argument

Thinking again about what Robert Barro said during our debate on Saturday September 24, his argument seemed to me at least to have the following structure:

  • The enormous widening of interest rate spreads tells us that a major factor holding business back from entrepreneurship and expansion right now is uncertainty.

  • The uncertainty that matters is uncertainty about future government policy.

  • Resolve the uncertainty about what taxes and regulatory systems are going to be in th future, and the economy will recover very quickly.

I pointed out that the big increases in uncertainty about taxes and regulation in the 2000s came in two waves:

  • One wave between 2001 and 2003 when the Bush administration, via its tax cuts and Medicare D, destabilized the financing of the American social insurance system.

  • A second wave in 2009, when the Republican Party went into opposition on health care reform and rejected its own ideas--the Heritage Foundation-originated Romneycare plan that became the ACA.

Both of these took large and important areas of government policy and shifted them from being settled consensus to being completely up for grabs.

Yet business was distressed not by the increase in uncertainty about taxes that came in 2001-3 or about regulation that came in late 2009 but instead by the uncertainty about financing and demand that took place in late 2008.

Barro came very, very close to saying that if only we would roll back taxes, spending, and regulation to the form they were in at the end of the Clinton administration then the economy would recover to full employment very quickly. That seems to me to be simply wrong.

And that discussion of ours reminded me of Mark Thoma's report on Gary Burtless's take on the "uncertainty" argument:

A couple of hours after talking to an ABC correspondent about the woeful job numbers and what might be done to improve them, I was in the Bloomberg TV studios debating a guy from Heritage. He went on for several minutes about the damage being done by high taxes, excess regulation, business "uncertainty" about future tax hikes and regulatory burdens.  I asked Bloomberg's host whether he was aware that corporate profits relative to national income had just hit a 60-year peak?  He had heard rumors to that effect.  Was he aware that taxes on corporate earnings were at a 60-year low?  The Heritage guy had heard that might be the case.

Then why was uncertainty about taxes and the future burden of the Affordable Care Act holding back business investment and hiring right now?  If managers thought taxes or regulatory costs might go up in the future, wouldn't it make sense to take advantage of today's low taxes and lower burdens to invest and hire today?  According to the "uncertainty" argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018.  Shouldn't they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?

The "tax uncertainty" and "regulatory uncertainty" arguments would make more sense if, say, taxes were already high and might be going higher or regulatory burdens were heavy and might be getting heavier. But when taxes are at a 60-year low and the regulations are pretty much the same as they were in the 1990s boom, the argument makes no sense at all.  As we used to say down on the farm, you should "make hay while the sun shines." In other words, if you think it's going to rain later in the week, it strengthens the case for cutting and baling right now.

The odd thing is, when businesses are asked why they're not expanding, "high taxes" and "heavy regulatory burdens" and "tax uncertainty" don't feature as prominent answers.  They mostly say they don't see good prospects for extra sales.  But right-wing economists have their talking points, even if they make little sense, and they're sticking with 'em.  Another of their favorites is "... executives tell me they can't find good candidates for the job openings they have."  Don't get me started on that one.

Quote of the Day: Buy and Hold Edition

Edwin LeFebvre: Reminiscences of a Stock Operator:

Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance…

Tim Duy Tries to Understand Dallas Fed President Richard Fisher

I don't think he succeeds. Richard Fisher:

Richard Fisher: Before every FOMC meeting, I survey a select group of 30 or so private business and banking operators, imparting no information about monetary policy but listening carefully to their perspectives on developments in the economy as seen at the ground level. For weeks leading up to the meeting, there was speculation in the financial markets and in the press that an Operation Twist was being contemplated. I received an earful of opinions on these rumors.

What I gleaned from those conversations was as follows:

Embarking on an Operation Twist would provide an even greater incentive for the average citizen with savings to further hoard those savings for fear that the FOMC would be signaling the economy is in worse shape than they thought…

But I don't understand Fisher either. I can't understand how this argument with which Fisher leads has weight.

Mind you, I do not think that this is the argument that persuades Fisher. The argument that seems to have the most weight with Fisher is:

Richard Fisher: One other factor gave me pause and that was, and remains, the moral hazard of being too accommodative. For years, I have been arguing that monetary policy cannot solve the problem of substandard economic performance unless it is complemented by fiscal policy and regulatory reform that encourages the private sector to put to work the affordable and abundant liquidity we are able to create as the nation’s monetary authority….

Paul Volcker, who has the scars on his back from his Herculean effort to rein in inflation in the 1980s, wrote of this in the New York Times on Sept. 18. He reminded us that once unleashed, inflation combines with stagnation to make stagflation, the most painful of all combinations for the poor, for workers, for job seekers, for bond and stock holders and for businesses trying to navigate the economy.

And as Tim Duy concludes:

Ultimately, for all his antics, this is what Fisher is about - hard money…. [H]e sees nothing but economic apocalypse in 3% inflation.  He cannot wrap his mind around one simple fact – the 1970s began with 2.5% unemployment.  We are currently facing unemployment above 9%.  Apples and oranges…. For him, policy begins and ends with a single idea:  Hard money is just morally good.  And he will base policy on any "opinions on these rumors" that sound like they support his ideological conviction…

Readings for September 30 Class of Economics 24-1: Understanding the Lesser Depression


Since we did not (in my mind, at least) spend enough time on Gorton and Cecchetti last class, I want to repeat those two readings:

  • Gary Gorton (2010), "Questions and Answers About the Financial Crisis"

  • Stephen G. Cecchetti (2009). "Crisis and Responses: The Federal Reserve in the Early Stages of the Financial Crisis." Journal of Economic Perspectives, 23(1): 51–75.

And add, as well:


  • Vincent Reinhart (2011). "A Year of Living Dangerously: The Management of the Financial Crisis in 2008." Journal of Economic Perspectives, 25(1): 71–90.

  • Gary Gorton and Andrew Metrick (2010), "Regulating the Shadow Banking System"

Hoisted from the Archives: Why I Am Still Not Surprised That U.S. Treasury Bond Yields Are Still Very Low

Hoisted from the Archives from June 13, 2009: Why I Am Not Surprised That U.S. Treasury Bond Yields Are Still Very Low Today: A Sokratic Dialogue: Liquidity Preference, Loanable Funds, and European Hedge Funds that Fear the Collapse of U.S. Treasury Bond Prices - Grasping Reality with Both Hands:

Meno: I haven't seen you since spring classes ended.

Adeimantos: I have been away: Paris. London. Frankfurt.

Meno: Oh. Pleasant? Interesting?

Adeimantos: Not really interesting--too jet-lagged, so I sit in my hotel room in my underwear, read the Economist and Financial Times,, and reflect on how if in my 20s I had been in a fancy hotel in central Paris with someone else paying I would have thought I was in heaven, but that now I am just tired. Thus not too pleasant either.

Meno: Middle age is a shipwreck?

Kephalos: It gets worse...

Adeimantos: However, it was somewhat lucrative: talking to European hedge funds.

Meno: And what do European hedge funds think?

Adeimantos: They look at things like this:

Then they demand that I tell them why U.S. Treasury bond prices have not already collapsed (and Treasury interest rates risen) in anticipation of this forthcoming tsunami of bond issues. Given that Treasury bonds have not yet collapsed they are very very bearish about U.S. Treasury bond prices and interest rates. Supply and demand. The supply of U.S. Treasury bonds is about to become huge, and when supply goes up price should go down.

Sokrates: But if that argument is correct, then rational profit-seeking traders should already have sold U.S. Treasury bonds and already have pushed their prices down in anticipation of the sudden increase in supply...

Meno: Are you Sokrates or Milton Friedman?

Kephalos: There are two supply-and-demand arguments that can be made here. The first is that the supply of U.S. Treasury bonds is about to jump enormously--and so by supply-and-demand the price will be low once the extra bond issues hit the market, and should be low now in anticipation of this low-price Treasury bond market equilibrium. The second is that the inverse of the price of U.S. Treasury bonds--the Treasury nominal interest rate--is the price of liquidity: the amount of interest income you forego by keeping your wealth in cash rather than in securities. According to this second argument, the supply-and-demand is the supply and demand for cash: when the supply of cash is high, the price of liquidity is low, and since the price of liquidity is the short-term Treasury interest rate the short-term Treasury interest rate should be very low.

Adeimantos: Which it is...

Kephalos: And the long-term Treasury interest rate is the average of expected short-term future Treasury interest rates. Since the Federal Reserve has flooded the economy with cash and will keep flooding it with cash for the foreseeable, Treasury interest rates should be low which means Treasury bond prices should be very high--which they are--and stay high.

Adeimantos: Loanable funds vs. liquidity preference.

Sokrates: So, Kephalos, with your impeccable logic and deep wisdom derived from a long career financing expeditions to the shores of the Black Sea, you have presented us with two different supply-and-demand arguments, one saying that Treasury bond prices should be low and hence are about to collapse, and the other saying that Treasury bond prices should be high and are likely to stay more-or-less where they are for some time to come.

Meno: Which argument is right? Is the price of bonds the price that balances the supply and demand for bonds in the bond market? Or is the price of bonds the inverse of the interest rate which balances the supply and demand for cash in the money market? Both cannot be true, can they?

Adeimantos: Ah. But both arguments are true...

Meno: Why do I get the feeling that I am being cast as the dumb straight man in this dialogue?

Sokrates: Because you are a sophist and we are philosophers. We write the dialogues, and we write them to make ourselves look good so that everyone thinks that philosophers are the roxxor and sophists are lame...

Meno: What have I ever done to you?

Glaukon: Tried to take our students and their fees, perhaps?

Sokrates: And we have won. There are now departments of philosophy everywhere. But when was the last time you saw a department of sophistry?

Meno: OK. I will take up my role: Kephalos: Can you explain to me how two perfectly-coherent supply-and-demand arguments lead to opposite conclusions? And if both arguments are coherent, why do European hedge funds all believe the first?

Kephalos: I can answer the second question but not the first: European hedge funds live in the bond market and they see the supply and demand of bonds all day, so that is the market they believe is most important...

Adeimantos: That is true about European hedge funds. But, Meno, the way you have posed the issue is somewhat misleading. It is not which supply-and-demand argument is correct--for both are: the price/interest rate on Treasury bonds clears both the bond and the money market, both loanable funds and liquidity preference. It is how does the economy adjust in order to make the Treasury bond price/interest rate clear both these markets.

Meno: And I have the feeling that you are about to tell me...

Adeimantos: Let's start with an economy in equilibrium--where Treasury bond prices are such as to satisfy both loanable funds and liquidity preference, so that everyone is happy to hold the bonds given their current price and everyone is happy to hold the economy's cash supply given the current interest rate. Now suppose the Treasury issues a huge honking tranche of bonds (and Obama spends the money hiring the unemployed to give people cholesterol screenings on the street and hand out statins). Now the supply of bonds is greater than demand at current bond prices. So what happens?

Kephalos: The prices of Treasury bonds fall--interest rates rise...

Adeimantos: And what happens in the money market as interest rates rise?

Kephalos: People are no longer happy holding the economy's cash--it's too expensive; it's burning a hole in their pocket. So they start spending it faster...

Adeimantos: And as they start spending it faster?

Kephalos: This puts upward pressure on prices and employment, as businesses find that they can charge more and make hire profits and so hire more people...

Adeimantos: Incomes rise, and as incomes rise savings rise because people don't spend all of their increased incomes, do they?

Sokrates: Very true, Adeimantos.

Adeimantos: And what happens as savings rise?

Kephalos: People want to park those savings somewhere. They want to park those savings in Treasury bonds. And so demand for Treasury bonds rises...

Adeimantos: And the economy settles back at its new equilibrium, with (a) somewhat higher interest rates and (b) higher spending and income so that (c) people are happy holding the economy's cash at the current interest rates and rate of spending, and (d) people are happy holding the bonds at the current bond prices and level of income.

Kephalos: So both supply-and-demand arguments are true...

Meno: And the way that they can both be true is that there isn't just one quantity--the bond price--that adjusts to match supply and demand in the bond and the money markets...

Sokrates: But there are two quantities that adjust: the bond price and the level of spending...

Adeimantos: Yes. You have just derived things that were well-known 72 years ago. See John Hicks (1937), "Mr. Keynes and the 'Classics': A Suggested Interpretation."

Sokrates: But which adjusts more?

Adeimantos: Once again back to Hicks (1937). When the unemployment rate is high and the nominal interest rate on Treasury bonds is very very slow, adjustment comes in the form mostly of changes in spending and only slightly in changes in interest rates--the world is then "Keynesian." But when the unemployment rate is normal or low and the nominal interest rate on Treasury bonds is near its normal levels, adjustment comes in the form mostly of changes in interest rates and only slightly in changes in spending--the world is than "Classical." That's why the title of the article is "Mr. Keynes and the 'Classics'."

Meno: So when European hedge funds predict the collapse of U.S. Treasury bond prices as the new issues hit the market and ask where is the extra demand to hold all these new bonds come from, the answer is...?

Adeimantos: That even as the government issues the bonds it is also spending the money, and as the money it spends is parked in the bank accounts of the businesses the government is buying things from, the banks in which the money is parked take it and use it to buy Treasury bonds.

Meno: That sounds like sophistry...

Sokrates: You should talk...

Glaukon: Actually, it's just general equilibrium...

Meno: But is this doctrine--that the government's issuance of a fortune in bonds and spending of a fortune in money will show up primarily not as a collapse in bond prices and a spike in interest rates but as an expansion of spending--true?

Sokrates: We will see. Keynesian--or maybe I should say Hicksian--economists would say that bond prices/interest rates and spending/income levels are the two quantities that together adjust to jointly clear the bond and the money markets, to satisfy both loanable funds and liquidity preference equilibrium; that sometimes the principal movement is in interest rates; that sometimes the principal movement is in spending levels; and that right now it is likely that spending will adjust by much more than interest rates.

Adeimantos: And there is a little bit of empirical evidence that the Hicksian economists are right. Tim Fernholz sends us to Nelson Schwartz, who writes:

Europe Lags as U.S. Economy Shows Signs of Recovery - There was more evidence Thursday that the United States economy might be stabilizing, if not rebounding, even as economic reports in Europe remained gloomy. The American news — showing slight growth in retail sales and a dip in first-time jobless claims, as well as rising stocks — was not enough to end the disagreement between bulls and bears over how soon the economy would improve. But the apparent divergence of fortunes between America and Europe highlighted the different approaches to solving the financial crisis, and why some economists say the more aggressive American strategy may be working better, at least for now. It is a debate that is likely to be one of the issues dominating discussions when finance ministers from the eight largest economies meet in Italy this weekend.

Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States. “The shock originated in the U.S., but Europe is paying a higher price,” said Jean Pisani-Ferry, a former top financial adviser to the French government who is now director of Bruegel, a research center in Brussels. Almost from the beginning of the crisis, the United States and Europe chose largely different paths to aiding their economies. The most stark was Washington’s willingness to commit hundreds of billions of dollars to stimulus spending — in addition to moving aggressively to shore up banks and keep credit flowing — versus Europe’s worry that similar spending would increase inflation in the future. Just as the policies pursued during the Great Depression have been dissected ever since by economists, the fate of the United States and Europe as the two regions emerge from the global crisis will be analyzed for decades to come.....

One crucial concern about America’s increased deficit spending — that it would lead investors to demand higher interest rates on United States debt, making it far more expensive to borrow and slowing the economy — has been allayed, for now. An auction on Thursday of $11 billion in 30-year Treasury bonds found enthusiastic buyers, helping to push the Standard & Poor’s 500-stock index to a seven-month high...

Meno: And the Chicago School economists who say that government borrow-and-spend logically cannot increase overall spending? The Robert Lucases who say:

[W]ould a fiscal stimulus somehow get us out of this bind...? I just don't see this at all. If the government builds a bridge... by taking tax money away from somebody else, and using that to pay the bridge builder... then it's just a wash.... [T]here's nothing to apply a multiplier to. (Laughs.)... [And] taxing them later isn't going to help, we know that..."

What about them?

And the John Cochranes who said:

[W]hile Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. 'It’s not part of what anybody has taught graduate students since the 1960s. They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.'" To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit...

What about them?

Sokrates: I, at least, find myself unable to understand them. They say they believe in the quantity theory of money--that spending is equal to the economy's cash times its velocity. And they say that they believe that velocity is interest elastic--that people respond to incentives and spend the cash in their pockets more rapidly when nominal interest rates are high. They say that they believe that bond prices/interest rates are such as to balance saving and investment and make people willing to hold the stock of bonds.

That's all you need to be a Hicksian.

Yet they also claim that Hicks is wrong, somehow--without giving arguments. I can trip up and make foolish anybody who makes an argument, but if they don't make an argument I cannot make them look any more foolish...

The Global Macro Situation: Paul Krugman Reads Martin Wolf, Who Is Afraid, Very Afraid


Defeatism: Martin Wolf is getting frantic, as well he should. The austerians have brought us to the brink of a vast disaster. A recession in Europe looks more likely than not; and the question for the United States is not whether a lost decade is possible, but whether there is any plausible way to avoid one. Wolf directs us to a recent speech by Adam Posen (pdf), which opens with a passage that very much mirrors my own thoughts:

Both the UK and the global economy are facing a familiar foe at present: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the US and elsewhere in the 1930s, or in Japan in the 1990s, every major financial crisis-driven downturn has been followed by premature abandonment—if not reversal—of the macroeconomic stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further policy stimulus. Every time those voices were wrong on each and every count. Those voices are being heard again today, much too loudly. It is the duty of economic policymakers including central bankers to rebut these false claims head on. It is even more important that we do the right thing for the economy rather than be slowed, confused, or intimidated by such false claims. Indeed. Posen’s “unduly influential voices” are my Very Serious People. And it has been an awesome spectacle watching the VSPs search, obsessively, for reasons not to fight mass unemployment. Fiscal policy must tighten to appease the invisible bond vigilantes and please the confidence fairy. Interest rates must rise because, well, um, inflation, well, no, low rates cause moral hazard — yes, that must be it.

And we’re not (just) talking about ignorant politicians. This stuff has been coming from the European Central Bank, the Organization for Economic Cooperation and Development, the Bank for International Settlements. I don’t fully understand it. But a large part of it, it seems obvious, is the intense desire to see economics as a morality play of sin and punishment, where the sinners are, of course, workers and governments, not the bankers. Pain is not an unfortunate consequence of policies, it’s what is supposed to happen. How obsessive are these people? So obsessive that when the financial doom they predict fails to materialize, they consider this a bad thing: punishment must be administered, so what are the markets waiting for? Here’s Alan Greenspan a while back:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

Gosh, it’s regrettable that the markets aren’t confirming my warnings! And today Ronald McKinnon laments, yes, laments the failure of the invisible bond vigilantes to show themselves — they’re supposed to be “disciplining the government”, so why aren’t they here? Just to reiterate a point I’ve made before, none of this reflects actual economic theory. Throughout this crisis, people like Adam Posen and yours truly have been basing our arguments on standard textbook macroeconomics, whereas the Very Serious People have been making up stories on the fly to justify their calls for pain. As Wolf, who really seems to have eaten his Wheetabix, puts it,

The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.

And this cruelty rules our world.

Ummm… Is Rich Lowry Really This Stupid?

Harold Pollack reports that talking to Tim Noah, Rich Lowry says:

[Warren Buffett] should give all his wealth away…. come move to Westchester County. Move to McLean, Virginia. Move to the suburbs of San Francisco with his wife. Adopt a couple of young kids, so he has a young family again. Make arrangements so that he only makes $250,000 every year. And then let's see how he likes being lumped in with millionaires and billionaires, as the President does.... And see how he feels about seeing his taxes increased, when he actually has to worry about expenses!


If you increase the marginal tax rate on incomes above $250,000 by five percentage point, then you would increase Warren Buffett's taxes in this scenario by… wait for it… wait for it… zero.

People I have surveyed so far have voted 12 for the proposition that Rich Lowry does not know how tax brackets work and 2 for the proposition that he does know but is trying to mislead and confuse his audience.

National Review: embarrassing thoughtful conservatives for 56 years…

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

The New Deal Fixed 40% of the Great Depression in Four Years

Another Depression Chart | ThinkProgress

Matthew Yglesias:

Another Depression Chart: Eric Rauchway sent me another chart that helps illustrate the issue of the puzzling Cole/Ohanian theory that there was no demand-driven recovery from the Great Depression, According to Cole and Ohanian, demand-driven changes in output can be distinguished from productivity-driven ones, because they’re manifested by changes in hours worked. On this chart, it becomes very difficult to miss the Depression-era collapse in the demand for workers, and recovery of demand during the mid-30s and during World War II. You also see that there was a long-term structural transition to more leisure, but that the line tends to squiggle around with the business cycle. But the Depression is no squiggle. It’s there plain as day, as is the recovery.

From the delong Twitterstream: September 29, 2011

  • Teaching Keynesian Economics to Your Bulldog about 6 hours ago from TypePad

  • Quote of the Day: Winston Churchill's Eulogy for Neville Chamberlain

  • @mattyglesias: SFO lunch options are hilariously upscale. Can't believe this city has a football team!

  • @BostonReview: RT @JoshuaHol Road to serfdom! RT @MikeElk: Docs show Charles Koch lured Hayek to US by saying he could get Soc Sec ht ... about 2 hours ago from web

  • @bradplumer: New Nordhaus paper: "coal-fired power plants have air pollution damages larger than their value added."

  • @aaronsw: Arnold @Schwarzenegger tells Michael Lewis he ran for governor as a joke:…

  • @moetkacik: Charles Koch to broke @FriedrichHayek in 73: "Never fear, there are these wonderful things, Social Security & Medicare… h ...

  • @pdacosta: RT @rayne_ea "Mr Market" has IQ of 100, mental age of 10, is unruly, myopic & forgetful - so don't take too much notice of ...

  • @normative: It's easy to mock the toy-plane bomb plotter, but just think what could happen if the FBI gives the next guy a dirty nuke!

  • Mirabile visu: I am to the right of Martin Wolf: "Time to think the unthinkable and start printing again"

  • Ron Suskind: Counterparties? Equity Holders?

  • Financial Times kills iOS app to avoid Apple tax, switches to HTML5, succeeds – Boing Boing

Ron Suskind: Counterparties? Equity Holders?

On the Twitter Machine:

felixsalmon felix salmon: Yes, Suskind really does talk about "secured creditors, such as equity holders".

moetkacik moe tkacik: @felixsalmon don't join this stupid mob. did you read it? Suskind's fundamentals generally a lot sounder than Geithner's

dsquareddigest Dan Davies: @moetkacik @felixsalmon yes that comment looks like mistranscription of a note referring to derivs counterparties rather than anything else

felixsalmon felix salmon: @dsquareddigest is it reasonable to say that derivatives counterparties lent money to Citi? 14 minutes ago

dsquareddigest Dan Davies: @felixsalmon in context (ie, who might be about to lose a bunch in various breakup scenarios) absolutely yes.

delong delong: @dsquareddigest @felixsalmon I don't see that at all. I think it's just a mistake

dsquareddigest Dan Davies: @delong @felixsalmon yes, but the mistake is putting "equity holders" instead of "counterparties". Then it makes sense.

felixsalmon felix salmon: @dsquareddigest it only really makes sense if you also replace "lending money to" with "doing business with".

dsquareddigest Dan Davies: @felixsalmon no, I would definitely talk that way in a meeting. Someone with a derivatives position in profit vs you is lending you money.

Confidence Men Wall Street   Ron Suskind  Google Books

I agree with @dsquareddigest that it looks like a mistranscription of a note. I suspect that the note originally read "secured creditors, unlike equity holders" rather than "secured creditors, such as derives ctrpties", but until Ron Suskind releases his notes we won't really know.

The Road to Serfdom!!

Yasha Levine and Mark Ames:

Charles Koch to Friedrich Hayek: Use Social Security!: [I]n early June 1973, weeks after [Charles] Koch was appointed president of the Institute for Humane Studies. Along with his brothers, Koch inherited his father’s privately held oil company in 1967…. Koch invited Hayek to serve as the institute’s “distinguished senior scholar” in preparation for its first conference on Austrian economics, to be held in June 1974.

Hayek initially declined Koch’s offer. In a letter to IHS secretary Kenneth Templeton Jr., dated June 16, 1973, Hayek explains that he underwent gall bladder surgery in Austria earlier that year, which only heightened his fear of “the problems (and costs) of falling ill away from home.” (Thanks to waves of progressive reforms, postwar Austria had near universal healthcare and robust social insurance plans that Hayek would have been eligible for.)

IHS vice president George Pearson (who later became a top Koch Industries executive) responded three weeks later, conceding that it was all but impossible to arrange affordable private medical insurance for Hayek in the United States. However, thanks to research by Yale Brozen, a libertarian economist at the University of Chicago, Pearson happily reported that “social security was passed at the University of Chicago while you [Hayek] were there in 1951. You had an option of being in the program. If you so elected at that time, you may be entitled to coverage now.”

A few weeks later, the institute reported the good news: Professor Hayek had indeed opted into Social Security while he was teaching at Chicago…. He was eligible…. On August 10, 1973, Koch wrote a letter appealing to Hayek to accept a shorter stay at the IHS, hard-selling Hayek on Social Security’s retirement benefits, which Koch encouraged Hayek to draw on even outside America. He also assured Hayek that Medicare, which had been created in 1965 by the Social Security amendments as part of Lyndon Johnson’s Great Society programs, would cover his medical needs…. [T]aking on the unlikely role of Social Security Administration customer service rep, Koch adds, “In order to be eligible for medical coverage you must apply during the registration period which is anytime from January 1 to March 31. For your further information, I am enclosing a pamphlet on Social Security.”

And The Nation's website just crashed…

Coal-Fueled Power as a Value Subtracting Industry:

Muller, Mendelsohn, William Nordhaus

"Environmental Accounting for Pollution in the United States Economy": American Economic Review Vol. 101, No. 5, August 2011:

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added. (JEL E01, L94, Q53, Q56)

Quote of the Day: Winston Churchill's Eulogy for Neville Chamberlain

"At the lychgate we may all pass our own conduct and our own judgments under a searching review. It is not given to human beings, happily for them, for otherwise life would be intolerable, to foresee or to predict to any large extent the unfolding course of events. In one phase men seem to have been right, in another they seem to have been wrong. Then again, a few years later, when the perspective of time has lengthened, all stands in a different setting. There is a new proportion. There is another scale of values. History with its flickering lamp stumbles along the trail of the past, trying to reconstruct its scenes, to revive its echoes, and kindle with pale gleams the passion of former days.

"What is the worth of all this? The only guide to a man is his conscience; the only shield to his memory is the rectitude and sincerity of his actions. It is very imprudent to walk through life without this shield, because we are so often mocked by the failure of our hopes and the upsetting of our calculations; but with this shield, however the Fates may play, we march always in the ranks of honour.

"Whatever else history may or may not say about these terrible, tremendous years, we can be sure that Neville Chamberlain acted with perfect sincerity according to his lights and strove to the utmost of his capacity and authority, which were powerful, to save the world from the awful, devastating struggle in which we are now engaged….

"Herr Hitler protests with frantic words and gestures that he has only desired peace. What do these ravings and outpourings count before the silence of Neville Chamberlain’s tomb? Long, hard, and hazardous years lie before us, but at least we enter upon them united and with clean hearts….

"He was, like his father and his brother Austen before him, a famous Member of the House of Commons, and we here assembled this morning, members of all parties, without a single exception, feel that we do ourselves and our country honour in saluting the memory of one whom Disraeli would have called 'an English worthy'."

Teaching Keynesian Economics to Your Bulldog


James Hanley at Adrian College is perplexed, and seeks a guide:

Lecturing on Keynes Today: Today in my political economy class I’m doing my Keynes lecture. This is one of my least favorites, and reading as much as I have over the last year about Keynes has just made it all the more confusing. My questions have grown while the answers have not, which makes it very hard to talk about to those who aren’t yet familiar with it. I think I need to spend the next year getting answers. Perhaps it’s time to try to strike up some direct communication with Brad DeLong–with any luck he’ll be pleased to try to teach a monetarist-leaning public-choice guy the logic of fiscal stimulus.

Well, here's one (perfectly valid and correct) way to look at it:

  1. Start with the quantity theory of money: PY = MV

  2. Note that V = V(i), that the lower are short-term nominal interest rates, the lower is velocity

  3. Observe that standard open-market operations swap bonds for cash--increase M by decreasing the supply of bonds to be held by the private sector

  4. Note that demand curves slope down--that if the supply of bonds drops, the price of bonds rises

  5. Note that a higher price of bonds is a lower nominal interest rate i

  6. Worry that under some circumstances--like right now--the velocity of money is especially sensitive to the interest rates--so that standard open-market operations that shrink the supply of bonds will have little or no effect on total spending PY because the bigger-M channel is offset by the smaller-B leads to lower-i leads to lower-V channel

  7. Observe that if the government increases the money supply M but holds the interest rate i constant by not reducing the supply of bonds B then this crowding-out problem does not arise, and monetary expansion is effective

  8. Figure out that if the government is going to expand M without shrinking B, then it has to buy stuff with the M--and ideally it has to buy stuff with the M that is as far from being a substitute for B as possible. Bridges seem good. So does cholesterol-reducing medicine. And smaller school class sizes

  9. Voila! The case for fiscal stimulus.

That is the argument for fiscal policy from the LM-side of the IS-LM scissors--and it is an argument that I think captures the spirit of Keynes's Treatise on Money. There is another argument for fiscal policy that starts from the IS-side of the IS-LM scissors--and that is the argument of the General Theory

But, as Hicks (1937) pointed out, it's a scissors: to ask which blade does the cutting--PY = MV(i) or I(i) = S--is to ask the wrong question.

Hoisted from Comments: Robert Waldmann on the Durability of Capital

Robert Waldmann:

A Free Lunch for America: You are assuming that infrastructure depreciates away in 30 years. This isn't true. Also, I think [infrastructure] is a one horse shay -- no depreciation for 30 years then poof. I'd say that, with normal maintainance whose cost is included in the correct calculation of returns, infrastructure lasts a long long time. The Brooklyn bridge is still there (oh and I regularly drive on the Appian way).

Also, as always, another free lunch would be to sell bonds and invest the proceeds in the S&P 500. Or is that a free supper?

"Regularly drive on the Appian Way" wins the infrastructure debate.

Two comments:

First, at a meeting I was at a couple of weeks ago, Robert Solow lamented that he knew his age when he said "one-horse-shay depreciation" and was rewarded with blank looks from an entire room of economists. He would be happy to hear you say it.

Second, selling government bonds and investing the proceeds in equity index funds is not a free lunch, exactly. It is the largest hedge-fund operation ever contemplated--and in my view a good thing to do…

Scholastic Theology of Inflation Watch

Scholastic econotheologians say inflation can arise from no previous direct cause. But c`an inflation arise ex nihilo? Modeled Behavior say no:

Immaculate Inflation «  Modeled Behavior: "We can take a step back and interpret these events as saying liquidity demand is being satiated. Or, we can take a micro perspective and say that the demand for goods and services in these markets is increasing. Either way we look at it, however, demand driven inflation should be drive a rise in production. In an economy with little unemployment we would expect this to bid up wages as employers competed for scarce labor. The result would simply be higher prices and wages and a distortion of long term contracts like mortgages.

However, in an economy with high unemployment we should expect some of this to result in an increase in hiring. Thus I see when I see rents rising, I think that means that construction employment will rise. When I see new car prices rising I think that means manufacturing employment will rise.... [B]y looking at a the economy on a market by market basis we should be able to tell which is which. This is one reason why inflation driven by gasoline prices is “bad.” It almost certainly represents an increase in the price of a commodity – oil and a reduction in the supply of gasoline. This means that we expect contraction in the gasoline market. In addition through income effects we should expect a contract in the demand in other individual markets.

When inflation is coming through the commodity markets it means that either the commodity is in short supply generally or that it is being pulled away from the US market by demand elsewhere. In either case the result is less real resources available for US households and firms.

However, when inflation is coming through the final goods market it means that real resources are being pulled towards US households and firms. That implies both that US households and firms are trading out of cash and into real goods and that the net effect in each individual market will be an increase in output.

David Wessel Says: It Is 1931 Again

David Wessel:

The Perils of Ignoring History: There is an optimistic scenario for the U.S. economy: Europe gets its act together. The pace of world growth quickens, igniting demand for U.S. exports. American politicians agree to a credible compromise that gives the economy a fiscal boost now and restrains deficits later. The housing market turns up. Relieved businesses hire. Relieved consumers spend. But there are at least two unpleasant scenarios: One is that Europe becomes the epicenter of a financial earthquake on the scale of the crash of 1929 or Lehman Brothers 2008. The other is that Europe muddles through, but the U.S. stagnates for another five years, mired in slow growth, high unemployment and ugly politics…. No one would intentionally choose the second or third, yet policy makers look more likely to stumble into one of those holes than find a path to the happier ending.

Why? Liaquat Ahamed has been pondering that question…. "Is it because people don't know what to do (or there's disagreement about what to do)," he wonders, "or is it the politics, particularly the reluctance to ask some people to pay for the mistakes of others?" "In the '20s," he says, "there was much more ignorance"—the disastrous fealty to the gold standard, the Federal Reserve's failure to understand its role as lender of last resort. Today? Mr. Ahamed can't decide if it's ignorance or insurmountable political barriers that keep governments from doing what needs to be done.

In the 1920s, two crises fed on each other: a banking crisis in the U.S. and a sovereign-debt crisis in Europe. (Sound familiar?) In our time, the U.S. handled its banking crisis better than it did back then. (Yes, much better, despite missteps and criticism.) But Europe? The problems go well beyond the inevitable Greek default on its debts. "We are discussing a broken ankle in the presence of organ failure," Lawrence Summers, the former U.S. Treasury secretary, quipped last week about the fixation on Greece….

Mr. Ahamed sees another, largely unappreciated lesson from the '20s. The few moves in the right direction then were too small for the scale of the economic disaster. After 1929, the Fed did open the credit spigot—a bit. And Herbert Hoover did push through an increase in public-works spending and an income-tax cut, but they were small. In our time, says Mr. Ahamed, "I don't think Keynesians or even monetarists ever realized that the numbers to make their policies work are so gigantic. Everyone had sticker shock." The Obama stimulus seemed huge and the Fed's quantitative easing—printing money to buy bonds—looked massive, but in retrospect perhaps they weren't sufficiently large. To be sure, some advocates of the earlier fiscal and monetary stimulus, such as Harvard University's Robert Barro, doubt that another big dose now would do much good.

Today, political stalemates in Europe and the U.S. block both the short-term policies these economies need to avoid a return to recession and—importantly—also block the long-term course corrections required to get the economies growing faster in the future. Europe needs to avoid financial calamity now and to decide whether and how it will move toward economic and fiscal integration or less integration. It cannot stay where it is.

In the U.S., it's hard to see what will power the economy over the next couple of years. It won't be consumers, still laden with debt. It won't be housing. Exports are up, but overseas economies are slowing. Local, state and federal governments are retrenching. Small businesses can't get credit, and big businesses look at all of the above and won't hire….

A senior U.S. policy maker, a fan of Mr. Ahamed's book, called me the other day. "Promise me," he said, "that if you write a sequel about the Great Depression of 2012 that you'll note that I was one of the guys really trying to head it off." It was, in a way, one of the few encouraging things I've heard lately. It conveyed a welcome appreciation of how large the stakes are. We'd be better off if more policy makers realized that.

As best as I can see, Liaquat Ahamed's claim that "Keynesians or even monetarists ever realized that the numbers to make their policies work are so gigantic. Everyone had sticker shock…" is simply wrong. I know that I was talking in April 2008 about how we wanted to be ready to nationalize Fannie and Freddie and use them to refinance every single mortgage in the country if it should become necessary. Christina Romer and Jared Bernstein could do the math on the demand gap in late 2008 and early 2009, and did so.

The monetarists are harder. Some--Lars Svensson, Michael Woodford, and Scott Sumner comes immediately to mind--seem to have known well how much less effective open-market operations are once you hit the zero nominal bound, how large the scale of operations have to become, and how it is (we think) much better not to announce volumes of bond purchases but instead to try to engage stabilizing speculation on your side by announcing that you are targeting the forecast. Others did not seem to get it, and still do not seem to get it.

And I gotta protest David Wessel's claim that Robert Barro was an "advocate of the earlier fiscal and monetary stimulus". I remember Robert Barro in January 2009:

Robert J. Barro: Government Spending Is No Free Lunch: A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP -- consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one…. [T]his perspective, not the supposed macroeconomic benefits from fiscal stimulus, is the right one to apply to the many new and expanded government programs that we are likely to see this year and next.

What do the data show about multipliers?… I have estimated that [in] World War II… the multiplier was 0.8…. There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases….

I can understand various attempts to prop up the financial system. These efforts, akin to avoiding bank runs in prior periods, recognize that the social consequences of credit-market decisions extend well beyond the individuals and businesses making the decisions. But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936. Much more focus should be on incentives for people and businesses to invest, produce and work…. Eliminating the federal corporate income tax would be brilliant.

On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis…

Why Has the Federal Reserve Been Unwilling to Extend Itself to Stabilize the Path of Nominal GDP?

Mark Thoma speculates:

Ben Bernanke and the Washington Consensus: Bernanke does qualify his remarks about the Washington Consensus to include many of these objections. For example, he acknowledges that “best-performing” China and Korea used industrial policy to spur growth — and industrial policy is a large departure from the Washington Consensus — but he is nevertheless mostly dismissive of the industrial policy approach.

I am not saying that we should abandon free market principles entirely, or even mostly, or that the types of growth policies applicable to developing countries necessarily carry over to developed economies. The point is that the framework Bernanke adopted in his remarks is far more free-market oriented than the state of the literature, and this may tell us something about attitudes toward free market and self-regulation of financial markets within the Fed.

One final comment. There is a clue about the Fed’s hawkishness toward inflation in Bernanke’s remarks:

…many emerging market economies in the 1990s emulated the success of the advanced economies in the 1980s in controlling inflation…. Improvements in macroeconomic management have been particularly striking in Latin America, where large budget deficits and high inflation rates had produced costly swings in economic activity in previous decades.…

So Bernanke sees low and stable inflation as one of the keys to long-run economic growth, it avoids “costly swings in economic activity,” and from the Fed’s actions recently it appears that the Fed is reluctant to risk an outbreak of inflation. I don’t think this should be a worry, the Fed could be more aggressive now to try to help the unemployed, i.e. let inflation rise above target, without risking its long-run commitment to price stability. But apparently the Fed does not trust itself to bring down the inflation rate in the long-run if it allows it to rise in the short-run. I guess I have more faith in Bernanke and others at the Fed than they have in themselves.

Paul Krugman on the "Uncovery"

Paul Krugman:

Unrecoveries and the New Normal: Larry Mishel has a very good piece systematically debunking the zombie claim that fears of regulation are holding back job creation. There is, literally, not a shred of evidence for this claim — not in the numbers, not in what businesses say. Yet it has been eagerly adopted not just by Republican politicians but by Chicago economists, Federal Reserve presidents, and more. I think the willingness of so many people to completely abandon any intellectual principles here, so that they can play for Team Republican — or maybe we should call that Team Oligarch — is part of what has me down these days….

A lot of the argumentation for the regulatory thing comes from the belief that the failure to recover strongly from the 2007-2009 recession is unprecedented. You often hear assertions to the effect that in the past the economy has always rebounded strongly after a recession, so there must be something special at work here — and that something special must be the socialist in the White House.

Yet the reality is that weak recoveries have actually been the norm for the last two decades: both the 1990-1991 recession and the 2001 recession were followed by prolonged “jobless recoveries”.

This isn’t a new observation. I personally was warning that this recession would be followed by a recovery that didn’t feel like a recovery as early as January 2008, and was speculating about the reasons for the change in the business cycle back then too. And of course by late 2008 we also had the Reinhart-Rogoff comparisons of severe financial crises to draw on as backup.

This does make me wonder, by the way, how the jobless recovery post-2009 can have come as such an apparent surprise to the White House. It was by far the most likely outcome, even given what we knew then.

In the current context, however, what this means is that there is nothing special to explain…

A Free Lunch for America

We are live at Project Syndicate:

BERKELEY – Former US Treasury Secretary Lawrence Summers had a good line at the International Monetary Fund meetings this year: governments, he said, are trying to treat a broken ankle when the patient is facing organ failure. Summers was criticizing Europe’s focus on the second-order issue of Greece while far graver imbalances – between the EU’s north and south, and between reckless banks’ creditors and governments that failed to regulate properly – worsen with each passing day.

But, on the other side of the Atlantic, Americans have no reason to feel smug. Summers could have used the same metaphor to criticize the United States, where the continued focus on the long-run funding dilemmas of social insurance is sucking all of the oxygen out of efforts to deal with America’s macroeconomic and unemployment crisis.

The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year. Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure – even unproductively, on projects for which the social rate of return is a measly 25% per year. Suppose that – as seems to be the case – the simple Keynesian government-expenditure multiplier on this spending is only two.

In that case, the $500 billion of extra federal infrastructure spending over the next two years would produce $1 trillion of extra output of goods and services, generate approximately seven million person-years of extra employment, and push down the unemployment rate by two percentage points in each of those years. And, with tighter labor-force attachment on the part of those who have jobs, the unemployment rate thereafter would likely be about 0.1 percentage points lower in the indefinite future.

The impressive gains don’t stop there. Better infrastructure would mean an extra $20 billion a year of income and social welfare. A lower unemployment rate into the future would mean another $20 billion a year in higher production. And half of the extra $1 trillion of goods and services would show up as consumption goods and services for American households.

In sum, on the benefits side of the equation: more jobs now, $500 billion of additional consumption of goods and services over the next two years, and then a $40 billion a year flow of higher incomes and production each year thereafter. So, what are the likely costs of an extra $500 billion in infrastructure spending over the next two years?

For starters, the $500 billion of extra government spending would likely be offset by $300 billion of increased tax collections from higher economic activity. So the net result would be a $200 billion increase in the national debt. American taxpayers would then have to pay $2 billion a year in real interest on that extra national debt over the next 30 years, and then pay off or roll over the entire $200 billion.

The $40 billion a year of higher economic activity would, however, generate roughly $10 billion a year in additional tax revenue. Using some of it to pay the real interest on the debt and saving the rest would mean that when the bill comes due, the tax-financed reserves generated by the healthier economy would be more than enough to pay off the additional national debt.

In other words, taxpayers win, because the benefits from the healthier economy would more than compensate for the costs of servicing the higher national debt, enabling the government to provide more services without raising tax rates. Households win, too, because they get to buy more and nicer things with their incomes. Companies win, because goods and workers get to use the improved infrastructure. The unemployed win, because some of them get jobs. And even bond investors win, because they get their money back, with the interest for which they contracted.

So what is not to like? Nothing.

How, you might ask, can I say this? I am an economist – a professor of the Dismal Science, in which there are no free lunches, in which benefits are always balanced by costs, and in which stories that sound too good to be true almost inevitably are.

But there are two things different about today. First, the US labor market is failing so badly that expanded government spending carries no resource cost to society as a whole. Second, bond investors are being really stupid. In a world in which the S&P 500 has a 7% annual earnings yield, nobody should be happy holding a US government 30-year inflation-adjusted bond that yields 1% per year. That six-percentage-point difference in anticipated real yield is a measure of bond investors’ extraordinary and irrational panic. They are willing to pay 6% per year for “safety.”

Right now, however, the US government can manufacture “safety” out of thin air merely by printing bonds. The government, too, would then win by pocketing that 6% per year of value – though 30 years from now, bondholders who feel like winners now would most likely look at their portfolios’ extraordinarily poor performance of over 2011-2041 and rue their strategy.

Karl Smith Tells "Austrians" and "Structuralists" About Wesley Clair Mitchell (1913) Business Cycles

One reason that I have long been inoculated against "Austrian" and "Structuralist" error was that back in 1983 I read Wesley Clair Mitchell's (1913) Business Cycles, and later Burns and Mitchell: Business Cycles: The Problem and Its Setting. They piled up mounds and mounds of data that showed quite convincingly that the business cycle was not a shift from declining to rising sectors or a shortening of the period of production, but rather an economy-wide pulse to the intensity of economic activity.

Karl Smith attempts the same task as Mitchell in a single blog post:

[T]here is a tendency among structuralists and Austrians to complain that Keynesians only look at aggregate data and draw sweeping conclusions, but then the structuralists and Austrians fail to examine the disaggregated data…. If the sector level is of interest to you then we have lots of sector data at our finger tips. If that’s not enough the Economic Census lets us dig down to a level of aggregation that is only roughly 3 firms deep…. Right now there are questions about the jobs. Is there such a thing as “the labor market” or are there simply lots of markets in which labor is bought and sold.

The Macroeconomy Exists Ctd

I think there is a labor market… here are two very different sectors and their job opening rates. Openings as a percentage of employment overtime. Even though the difference between sectors is at least as big as the difference in sectors, the key is that they move together…

Now we do have structural shifts. As I have said before, between 2005 and 2007 the U.S. economy shifted out of construction and into exports:

FRED Graph  St Louis Fed 97 1

But the downturn begins not when the market economy tries to shift resources from construction to exports, but rather when the financial crisis disrupts everything.

Quote of the Day: Nicholas Meyer on India's License Raj

Wrath of Khan director and Seven-Percent Solution author Nicholas Meyer on India's "License Raj" before Rajiv Gandhi's turn to neoliberalism:

Nicholas Meyer: It was the most, the best, the worst; it was inspiring, dispiriting, colorful, irresistible—you name it. It was also a labyrinthine bureaucracy, whose economic models were India’s long-time ally, the USSR, for whom economics (to paraphrase John McCain) was not a strong suit. This meant, among other things, that everything you brought into the country, you had to take out again when you left. A vacuum cleaner, for example, might deprive a sweeper of his job, so it had to go back with us. There was no Coca-Cola, only their poisonous approximation, and no cars except the ones they manufactured, called Ambassadors. (Driving in India makes you believe in karma.) The crew was great at improvising solutions to the endless problems that presented themselves. One day when we needed our tulip crane for a big shot, I was flummoxed to learn that four of its bolts had been stolen, incapacitating a vital piece of equipment. I don’t deal well with last-minute alterations to The Plan, but my Indian crew managed to mill four new bolts by the time we were ready to roll. India.

Liveblogging World War II: September 28, 1941

Orders from the German occupation authorities:

Ukrainian History: "All Jews living in the city of Kiev and its vicinity are to report by 8 o’clock on the morning of Monday, September 29th, 1941, at the corner of Melnikovsky and Dokhturov Streets. They are to take with them documents, money, valuables, as well as warm clothes, underwear, etc. Any not carrying out this instruction and who is found elsewhere will be shot. Any civilian entering flats evacuated by [Jews] and stealing property will be shot.

The Euro Crisis Is, at Its Heart, Not a Sovereign Debt Crisis

Origins of the Euro Crisis  NYTimes com

Paul Krugman:

Origins of the Euro Crisis: Kash Mansori has an excellent post… documents the fact — which the Germans cannot bring themselves to acknowledge — that fiscal irresponsibility had very little to do with it. And he shows that what really predicts who found themselves in crisis was capital inflows…. I’d add that it is very difficult in real time to convince people that capital inflows pose a threat, no matter how obvious the numbers seem. Somewhere in the years just before the crisis I was at a meeting in Barcelona where Olivier Blanchard tried to tell the Spaniards how dangerous the situation was getting; he got trashed and ridiculed for his pains, just like those who warned about the US housing bubble.

Kash Mansouri:

The Street Light: What Really Caused the Eurozone Crisis?: [W]hile they didn’t necessarily make the right decision every time, the peripheral EZ countries were up against powerful exogenous forces - capital flow bonanzas and sudden stops - that tended to push them toward financial crisis. They were playing against a stacked deck.

It’s useful to reevaluate the macroeconomic history of peripheral Europe in light of this interpretation. Rather than large current account deficits being the result of fiscal mismanagement or excessive consumption, the current account deficits were the necessary and unavoidable counterpart to the surge in capital flows from the EZ core. Rather than above-average inflation rates and deteriorating competitiveness being signs of labor market inefficiencies or lax fiscal policies in the peripheral countries, appreciating real exchange rates were inevitable as the mechanism by which those current account deficits were effected.

The eurozone debt crisis is big enough that there's plenty of blame to go around, and some of it certainly should go to the crisis countries themselves. But it must also be recognized that as soon as those countries adopted the euro, powerful forces were set in motion that made a financial crisis likely, and very possibly unavoidable, no matter what the governments of the peripheral euro countries did. Irresponsible behavior by the periphery countries did not set the stage for the eurozone crisis; the common currency itself did.

Michael Gerson Calls Republican Presidential Candidates Cruel and Immoral

Long overdue, but nice to see.

Michael Gerson:

A dose of reality for the HPV debate: The human papillomavirus (HPV) is a nasty, sexually transmitted disease contracted by about three-quarters of Americans at some point. You can have it, and spread it, without knowing it. In some women, the virus causes abnormal cells in the lining of the cervix that can develop into cancerous lesions. Virtually all cervical cancer is caused by HPV. There is, however, a vaccine that is highly effective against the most dangerous HPV strains. The main side effect, as you’d expect in a procedure involving a needle, is fainting. The Cen­ters for Disease Control and Prevention recommends that all girls should get it anyway.

At least this approach would have added to the public stock of health information. Instead, Michele Bachmann talked of “innocent little 12-year-old girls” who were “forced to have a government injection” by Rick Perry’s 2007 mandate of HPV vaccinations in Texas. Bachmann later added, on the medical authority of a weeping mother’s anecdote, that the HPV vaccine, or maybe it was some other vaccine, might cause “mental retardation.” Bachmann herself seems prone to a serious condition: the compulsive desire to confirm every evangelical stereotype of censorious ignorance....

Try to imagine a parent-daughter conversation about sexual restraint and maturity that includes the words: “Honey, I’m going to deny you a vaccine that prevents a horrible, bleeding cancer, just as a little reminder of the religious values I’ve been trying to teach you.” This would be morally monstrous. Such ethical electroshock therapy has nothing to do with cultivation of character in children. It certainly has nothing to do with Christianity, which teaches that moral rules are created for the benefit of the individual, not to punish them with preventable death.

This approach to moral education may appeal to a certain kind of conservative politician. How could it possibly appeal to a parent, conservative or otherwise?

A second objection to routine HPV vaccination concerns parental rights. Bachmann confused this issue by introducing anti-vaccine paranoia — one of the most direct and practical ways that a public official can undermine the health of his or her fellow citizens. A more sophisticated version of this argument claims that a vaccine against measles or mumps is fundamentally different from a vaccine against a sexually transmitted disease such as HPV. Because of the ethical context, parents should have more of a say.

But the public health case for vaccination is similar for diseases spread by coughing and those spread by sexual contact. Vaccines decrease the incidence of a disease in a whole society, which has good health outcomes for everyone, not only the protected individual. Consider a woman who is resolutely abstinent until her marriage at 24. Her husband — who got HPV from a girlfriend who was not vaccinated — unknowingly gives it to his wife on their wedding night, increasing her risk for cervical cancer. She would suffer because others are not vaccinated. The decision to vaccinate — for HPV or any infectious disease — is not just a personal, family choice. It is also a matter of public health. And it is not unreasonable for public authorities to strongly encourage responsible parental choices.

Not Yet at "Buy Bottled Water and Ammunition": Brad Plumer Interviews Barry Eichengreen on the Euromess

It was the fall of… 1983? when Barry first taught me about the Austrian sovereign debt crisis of 1931 and the slide of Europe into the depths of the Great Depression.

80 years later:

Eichengreen: ‘This is first and foremost a banking crisis’ #Euromess:

The idea that this period of high uncertainty is over is naive. We’re in for a couple more months of volatility at least….

[S]omebody has to take major losses on Greek bonds, and the holders don’t want to do that…. Weak banks don’t like to acknowledge that they’re weak; they don’t like the prospect of diluting their existing shareholders by raising more capital. There is also a reluctance in German political circles about supersizing the EFSF, about leveraging it and enabling it to provide guarantees so that large-scale purchases of Italian and Spanish bonds can be undertaken to stabilize their bond markets and limit contagion. Germany fears that there may be losses on those purchases, which will end up on the doorstep of the German taxpayer. And there’s mixed feelings in Greece itself….

Everything has gotten worse over the summer, leading to an acknowledgment by almost everyone that Plan A, what was agreed to on July 21, will not fly. And that they have to move to a Plan B. That’s the positive answer. The negative answer is that there’s not yet a consensus about what Plan B is…

Would abandoning the euro be better or worse for Greece? And the answer is debatable. You could argue that in the medium term, Greece would be better off. It could devalue its new drachma and become more competitive (although that would depend on how wages and prices respond as they start printing drachmas). But you have to balance that against the short-term costs: a full-on bank run, the need to close down financial markets, to close down Greece’s border. So it’s not clear how short-term costs and long-run benefits balance out. But from the point of view of the rest of the euro zone, Greece leaving would be a disaster…

I think European leaders and politicians are being reminded that the costs of allowing or forcing a member state to exit the euro area would be very, very high. Now, the costs of keeping it in are also very, very high. But you’ve got to choose. And European leaders seem to have finally forced themselves to acknowledge that there’s not a third low-cost alternative on the table.

This is first and foremost a banking crisis. Somebody lent Greece all this money, and the name of that someone begins with a “b”: banks. And now, the constraint on solving the crisis is that those banks are in a weak financial position. So they need to fix the way supervision and regulation of banks is done. Europe has a single currency, a single financial market and yet 17 separate national bank regulators. That’s madness…

I think they do need to deal with sovereign over-borrowing where it’s a problem. But it’s important to be clear: up until the crisis spread to Europe, this was a problem in Greece and nowhere else…

They need to have an adequately funded emergency financial facility. When a country does get into trouble in the future, through no fault of its own, there needs to be a way of providing emergency liquidity. The Europeans don’t have an adequate facility at moment; that’s why there’s debate about supersizing the EFSF…

Notice I haven’t uttered the words “fiscal union” yet. I think fiscal union is a bridge too far. The important steps are centralized bank regulation, E.U. requirements about national fiscal rules and procedures, and a mechanism for providing emergency liquidity.

Crooked Timber and Boingboing's Commenters Play the Game at a Very High Level

Crooked Timber:

LizardBreath 09.28.11 at 5:31 pm: I’ve got nothing against hostility generally, but unfocused hostility based on misunderstandings I find displeasing. Directed, intentional hostility only!


scatterfingers Today 08:51 AM: I see a lawsuit from Apple coming. Because Apple owns the rights to all stuff that resembles other stuff.

Queen Emmy the Physics-Taught Dog on Superluminal Neutrinos

Queen Emmy:

Faster Than a Speeding Photon: "Measurement of the neutrino velocity with the OPERA detector in the CNGS beam" : Uncertain Principles: there's still room for a canine-level write-up going into a bit more depth about what they did and where it might be wrong.

So, what did those jokers at CERN pull this time? Isn't it bad enough that they want to feed us all into a black hole, now they're messing with the speed of light?… The neutrinos are created at CERN in one of their three varieties, and on the way to Gran Sasso, they can change character and end up being detected as a different type…. As part of the preliminary analysis for their main experiment, they looked at about three years worth of data, and noticed something odd: the neutrinos in their experiment seem to be moving slightly faster than the speed of light…. [T]he difference they see is many times larger than their uncertainty, and they can't figure out why…. [T]hey do is to compare the distribution of times when they detect neutrinos to the distribution of times when neutrinos were created in the source…. [T]he time of flight… is about 60ns too short, suggesting the neutrinos were moving faster than they speed of light….

How about the distance? Could they have screwed that up? That's the other obvious source of error, but it's hard to see how. Again, they have GPS to use for this, and while the accuracy of the position obtained by GPS for a moving receiver, like in your phone, is only several meters, if you're trying to measure the distance between two fixed points, and monitor it over a long time, you can get really good accuracy. They claim to have the distance down to 20cm, which is a bit less than a nanosecond at the speed of light. Twenty centimeters? Really? Really. They even provide a graph showing their measurements over the three-year run, which pick up a slow change due to continental drift, and a dramatic jump due to an earthquake in 2009….

So, what else could be wrong? Well, that's the problem. They've checked all the obvious things, and they all seem to hang together. Which is why they're putting this result out there, knowing full well that it disagrees with just about everything else. They're hoping that some clever person will spot a mistake, or, failing that, that another experiment will do the same test (there's one in Japan and one in the US), and see if they get the same result….

It'd be deeply, deeply weird, though, not least because the existence of superluminal particles that interact with ordinary matter (as neutrinos do, albeit weakly) opens the door to violations of causality-- effects happening before the things that caused them, and that sort of thing. This wouldn't be a big loophole-- the speed difference is tiny, and neutrinos interact extremely weakly-- but it's the kind of philosophical problem that would really bother a lot of people.

So, if you had money to bet on it, bet that this result is wrong. But these guys aren't complete chumps, and if something is wrong with their experiment, it's something pretty subtle, because they've checked all the obvious problem areas carefully.

7.5 Million Households Are Missing

Phil Izzo:

More Americans Are Doubling-Up: More people are living with family amid high unemployment rates and a slow economy, but while the phenomenon is keeping the poverty rate lower, it has wider negative economic consequences.... [T]he Census Bureau noted a big jump in the number of individuals and families doubling up. Census says 69.2 million, or 30%, were doubled-up in 2011, up from 61.7 million adults, or 27.7%, in 2007.... Fewer households means fewer consumers for businesses desperate for demand. (You don’t need to buy a new TV if you can just use mom and dad’s.) At the same time, it continues to drag on a housing market that needs to burn off excess supply.... Necessity is likely the primary driver of the increase in doubling-up. Many of these families and children living at home may want to make the jump out on their own as soon as their economic standing improves. That could represent a strong shadow demand for housing, as well as a potential jump in household formation with a resultant boost in consumption.

Cole and Ohanian Say: "We Do Not Mention Our Main Point in the First Three Paragraphs of Our Op-Ed"

Cole and Ohanian say:

Cole and Ohanian Reply: Paul Krugman claims our economic history is in "incredibly bad faith" by showing that industrial output is positively correlated with the wholesale price index. The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input…

The first three paragraphs of Cole and Ohanian:

HStimulus and the Depression—The Untold Story: About one-half of President Obama's proposed $447 billion American Jobs Act consists of payroll tax holidays designed to boost spending and increase hiring. But these temporary policies will do little to jump-start the economy, much as earlier temporary economic Band-Aids, such as the 2009 stimulus, did little to improve the economy.

Proponents justify stimulus spending in part based on the widely held view that government-fueled increases in "aggregate demand" during FDR's New Deal ended the Great Depression and brought recovery. Christina Romer, former chairwoman of Obama's Council of Economic Advisers, has argued in op-eds that government should continue to spend for this reason. And in a 2002 speech as a Federal Reserve governor, current Fed Chairman Ben Bernanke claimed that monetary expansion and the turnaround from the deflation of 1932 to inflation in 1934 was a key reason that output expanded.

But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board's Index of Industrial production rose nearly 50% between the Depression's trough of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year...

I defy anybody to read the first three paragraphs of Cole and Ohanian and not believe that Cole and Ohanian's "main point" is that the level of production is unrelated to aggregate demand--that Romer and Bernanke are wrong in claiming a link. We are told that production "rose nearly 50%… [in] a period of significant deflation". We are told that "despite higher aggregate demand, industrial production was roughly flat…"

If Cole and Ohanian want to delete the first three paragraphs from their op-ed, that would be good.

If they want to keep those three paragraphs, it seems to me that Glasner is correct:

Misrepresenting the Recovery from the Great Depression: Though not wrong in every detail, the version of events offered by Cole and Ohanian is still a shocking distortion of what happened before FDR took office in March 1933…. The misrepresentation perpetrated by Cole and Ohanian only gets worse when they describe what happened during the period of true recovery, April through July 1933…

Jacob Weisberg on Ron Suskind: We Source Nothing! Nothing!!

Jacob Weisberg annoys Robert Waldmann. Jacob Weisberg must have really annoyed Robert because Robert goes on the attack--even though Jacob is attacking Ron Suskind, who was unfairly mean and misleading in his book Confidence Men about our friend, teacher, and co-author Lawrence Summers (and others as well).

But does Robert ignore Jacob and let Ron Suskind twist slowly, slowly in the wind? No:

Robert's Stochastic Thoughts: Compare:

"W.H. details errors in Suskind book": Ben White in Politico 9/19/11: An administration official sent along a partial list under the headline "The Suskind Book Game: 'Too Big to Fact Check?'" From the list of alleged errors: "1.) Suskind wrote that Larry Summers needed Senate confirmation to lead the National Economic Council. 2.) Suskind wrote that Secretary Geithner served as 'Chairman' of the New York Fed. 3.) Suskind wrote that Gene Sperling served as 'an assistant Treasury Secretary.' 4.) Suskind wrote that Geithner had 'never been an undersecretary' at Treasury. 5.) Suskind wrote that the acronym for the Bank for International Settlements is 'BASEL.' 6.) Suskind wrote that Gene Sperling played tennis at the University of Michigan.


"Don't Believe Ron Suskind": Jacob Weisberg Slate 9/22/11: Suskind has now turned his egregious writing and dubious technique on the Obama administration in his new book, Confidence Men. Once again, his work is strewn with small but telling errors. Here are a few: The Federal Reserve is a board, not a bureau (Page 7); Treasury Secretary Timothy Geithner was previously president, not "chairman," of the New York Fed (Page 56); he was, however, an undersecretary of the treasury, which Suskind makes a point out of saying he wasn't (Page 172); Horatio Alger was an author, not a character (Page 54); Gene Sperling didn't play tennis for the University of Michigan, because he went to the University of Minnesota (Page 215); the gothic spires of Yale Law School, built in 1931, are not "centuries old" (Page 250); Franklin D. Roosevelt did not say of his opponents, "I welcome their hate" (Page 235). What FDR said at Madison Square Garden in 1936, was "I welcome their hatred." That nuance wouldn't matter if it weren't such a famous line, but getting it wrong is the political equivalent of an English professor misquoting Hamlet's soliloquy.

That is an entire paragraph. There is no citation of anything--no hint that Weisberg had any help from anyone in finding those errors, some of which were described in public 3 days before his article was published. And with attribution, by the White House. It's easy to look good if you present someone else's work as your own.

To an academic, Weisberg's failure to drop a citation--failed to write "Here are a few errors compiled by the White House and sent to Ben White of Politico", and wrote instead "Here are a few"--is a big red warning flag that there is something very wrong with Weisberg. In academia, if you pick up somebody else's point and run with it, you drop a citation. Indeed, even with things I have thought of all by myself I have then gone and searched through the literature looking to see if there is a precursor I can cite--both because I don't want to be thought of as either the kind of person who steals others' ideas without attribution or the kind of person too lazy to read the literature, and because pointing out that somebody else agrees with me adds heft to the argument. Webloggers are much the same.

For journalists--or some journalists, or some powerful journalists--it seems to be different. Passing off the work of others as if it were your own in the omniscient third person seems to be a fairly common rhetorical mode.

That doesn't make it right. And that doesn't make those low down in the journalistic pecking order whose work is appropriated without a credit happy…

UPDATED: My guess is that Ron Suskind's book is riddled--no, contains an unusually large number of--errors because Ron (1) is not a subject-matter expert here, and (2) did not send his galleys to his sources (or, indeed, to anybody else knowledgeable who wanted to make him look good) for correction. Why not? My guess is that Suskind did not do so--in spite of promises--because he knew that he was in the process of burning his sources: taking the stories that they had told him and attaching different endings to the stories than his sources had related.

Pass the American Jobs Act Already!

Mike Konczal reads Christina Romer, and comments:

Christina Romer on Fiscal versus Housing Policy: Romer argues for the job plan, which is centered around fiscal solutions in the fiscal circle (infrastructure, tax cuts) and doesn’t primarily include solutions in the housing circle (except for housing refinancing which is unlikely to go anywhere).  Romer addresses this head-on:

WE NEED A HOUSING PLAN, NOT MORE FISCAL STIMULUS: The bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homes — we’ll never get the economy going. The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth. Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt. We should, however, be thinking hard about whether the president’s stimulus plan is the best one for a debt-heavy economy. It may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.

I tend to think there’s enough space for advancement on all three fronts…. But in general, those who think that we have a housing debt hangover problem think that running a larger fiscal deficit is a good thing…. [A]s Richard Koo puts it:

Indeed the key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process…. [P]remature fiscal reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937…

Romer adds an interesting argument to this overlap – that the best way to deal with the housing hangover is to boost wages and employment, which can be done through fiscal policy.  Unemployment is well-correlated with deleveraging, foreclosures and underwater mortgages, so relief through this channel will go towards the areas most in need….

[W]hat are the arguments against this job bill again?

Buce Watches Henry Kissinger Look at HImself in the Chinese Mirror

Very nice catch. I think, however, that Li Hongzhang had a much better grasp of the real state of world affairs and the interest of his country and the world than Henry Kissinger ever did.


Underbelly: Kissinger Gazes into the Chinese Mirror: The point struck me early on when I read Kissinger's sketch of Li Hongzhang, who dominated what passed for foreign policy under the decrepit Ming Dynasty late in the 19th Century.  Here's Henry on Li:

Ambitious, impassive in the face of humiliation, supremely well versed in China’s classical tradition but uncommonly attuned to its peril, Li served for nearly four decades as China’s face to the outside world. He cast himself as the intermediary between the foreign powers’ insistent demands for territorial and economic concessions and the Chinese court’s expansive claims of political superiority. By definition his policies could never meet with either side’s complete approbation. Within China in particular Li left a controversial legacy, especially among those urging a more confrontational course. Yet his efforts—rendered infinitely more complex by the belligerence of the traditionalist faction of the Chinese court ... 

Okay, I should  not get carried away here--the late 20th Century United States did not face "foreign powers' insistent demands for territorial and economic concessions."    But when Henry says "[a]mbitious, impassive in the face of humiliation, supremely well versed," surely he is thinking of himself?  So also "his policies could never meet with either side's complete approbation"--?  And perhaps most: "controversial...especially among those urging a more confrontational course." The soundbyte on Kissinger today (fair or not) probably includes the phrase "war crimes."  It's perhaps difficult to recall the shock and impotent rage Kissnger and his boss the Emperor President withstood from their old allies on the right when they so shattered Cold War orthodoxies by establishing as relationship with our great enemy. The only other betrayal of equal magnitude would be when Ronald Reagan yanked the pins out from under the Neocons by sitting down to chat with Mikhail Gorbachev.

Kissinger never had to play from weakness the way Li dd. He did have (or felt he had) to make deals, and to bear the acrimony.   "But appeasement is also politically risky," Kissinger writes, "and [threatens?] social cohesion.  For it requires the public to retain confidence in its leaders even as they appear to yield to the victors' demands."

Oh, perhaps I overdo here.  Perhaps Kissinger did not understand  he reflection when he wrote about Li; perhaps he merely saw it.  Either way, I suspect we are getting some of Kissinger's self-appraisal here, the taste of a summing-up.  And I'm actually only in the early chapters of the book; I look forward to much more of the same.

I do suspect that Buce is going to learn much more about Kissinger than he will learn about China…

Is This a Compliment?

Bianca Steele writes:

Reader, I Married Him: I’m going to go out on a limb and suggest that the old Internet culture survives among Sady Doyle’s readers (and among Sady Doyle’s trolls) in a way that it probably does not among Crooked Timber’s, Think Progress’s, or the Ordinary Gentlemen’s, much less Glenn Greenwald’s or Brad De Long’s comments sections…

Thank you, I think...

Kevin O'Rourke: An Economist without Economic History Is Like a Fish Without... conomic history

… water.


The Irish Economy: Paul Krugman is upset about some pretty fanciful accounts of what supposedly happened during the Great Depression, and I don’t blame him. He also wonders whether economics is a progressive science (I am using the word ’science’ in its German sense). Well, one of the things that philosophers of science have argued about in the past is whether, when you have a paradigm shift, you end up losing knowledge, and it’s pretty clear what has happened in this instance.

I recently came across this quotation from Mark Blaug….

At this point, it is helpful to note what methodological individualism strictly interpreted…would imply for economics. In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and since few have yet been so reduced, this amounts to saying goodbye to almost the whole of received macroeconomics. There must be something wrong with a methodological principle that has such devastating implications….

[A] lot of people have been more than happy to say goodbye to the whole of received macroeconomics — for example, I have been reliably informed that a well-known department stopped teaching its undergraduates IS-LM just before the crisis hit in 2008. And the result is that you had people seriously peddling the line that austerity would be expansionary in the wake of the biggest downturn since the 1930s — and these claims were influential in Europe, it seems clear, in the fateful spring and summer of 2010.

One lesson is that it is one thing to play counter-intuitive intellectual parlour games in order to get tenure… another thing entirely to say something about the real world. For that you need a little common sense.

Another lesson is that economists need at least some training in economic history. No-one with the slightest feeling for historical reality could believe that the Great Depression was due to supply side forces, for example. I observe that Krugman, along with such luminaries as Maurice Obstfeld and Ken Rogoff, did his graduate work in MIT, and I surmise (without having any inside knowledge on the matter) that all three were exposed to Charlie Kindleberger and Peter Temin. They are all distinguished theorists, but also have a historical sensitivity, and this makes them better economists — if your definition of a good economist includes the ability to say sensible things about our very messy real world.

One of the most important things that a bit of history gives you is a sense of the importance of context…. Malthus devised a model that did a pretty decent job of describing the world up to the point that he started writing, but which soon became essentially irrelevant in the century that followed, at least in the richer countries of the world. (He had an economist’s sense of timing.) Sometimes the world is well-described by Keynesian models, and sometimes it is not. And so on.

If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.

The First Rule Is: Never Let the New Republic Choose the Title for Your Article

Never get involved in a land war in Asia. Never fight a battle of wits when iocane powder is involved. And never, never, never, never, never, never, never let the New Republic's editors choose the headline for your article.

Peter Orszag writes a thoughtful, intelligent piece about America's poetical problems, and the New Republic editors betray him with their headline.

Matthew Yglesias observes:

Better Institutions Aren’t ‘Less Democracy’: Peter Orszag has what I think is a very good column about the desirability of increasing automaticity in certain aspects of American policymaking that’s been given provocative framing [by the New Republic's editors] around the idea that America needs “less democracy.”

Provocative framing has a lot of marketing value, but it also provokes lots of people to disagree with you.

I saw Orzag’s thesis being subjected to a lot of unwarranted scorn earlier today. I would suggest that people ignore the framing [headline by the New Republic and focus on what he’s actually saying.

He seems to have two really concrete suggestions. One is that we should try to enhance the scope of “automatic stabilizers” in American fiscal policy… not something any progressive should have a problem with. The other is that we should strengthen the hand of non-elected boards to make adjustments to Medicare payment rates. Some progressives may have a problem with this on the grounds that cutting spending is a bad idea. But most progressives I know also claim to be admirers of single-payer health care systems that do a better job than America’s of controlling health care costs. The way that they do this is precisely through the sort of technocratic price controls that Orszag is praising.

What I would say on both sides is that [the New Republic editors'] framing everything as a conversation around more or less “democracy” is a foolish way to think about institutional design…. Adopting default rules that strengthen automatic stabilizers wouldn’t be “less democratic,” it would be a good idea.

Yet another reason to think that the sooner the New Republic dies and the moneys that support it flow into other channels, the better for all of us.

Argentina and the Contras: Could This Be True?

David Drake makes a claim about the secret history of the Cold War:

David Drake: in the [late] 1970s the US hired a battalion of troops from Argentina, called them “the Contras” and employed them to fight the socialist government of Nicaragua. The military dictatorship running Argentina at the time was more than happy to support the US effort. Unfortunately for everybody (except ultimately the Argentine people), General Galtieri and his cronies (some of whom, amazingly, were even stupider and more brutal than he was) decided that their secret help to the US meant that the US would protect them from Britain when they invaded the Falklands and subjected the islands’ English-speaking residents to what passed for government in Argentina. Galtieri was wrong–the tail didn’t wag the dog during the Falklands War–and Argentina ousted the military junta as a result of its humiliation by Britain; but there might not have been a Falklands War if the US had not used Argentina as a military proxy in Nicaragua…

Jonathan Bernstein: Obamacare vs. the ACA

Why Republicans may vote for the father of the Affordable Care Act after all. Jonathan Bernstein:

A plain blog about politics: The Obamacare/ACA split: Republican voters strongly oppose Obamacare, but they don't care very much about the ACA. They strongly oppose the health care plan that Barack Obama and Nancy Peloci and  Harry Reid crammed through Congress against the will of the American people, and they think it's an unconstitutional power grab that amounts to a government takeover that's going to bankrupt the nation by cutting Medicare and death panels and all. But they don't know or care anything about the exchanges, or the cost-cutting efforts, or most of the rest of it….

[A]s an attack from other candidates without the support of other leading conservatives, I've never thought that it's a very strong charge, because Romney can always respond with just as much disdain as the other candidates that he strongly opposes Obamacare and would repeal it as soon as possible.

Because, after all, Mitt Romney does hate Obamacare. He just doesn't really hate the ACA, but Republicans don't much care about that.

Yes, Recovery in the Great Depression Started with Roosevelt: Stephen Williamson Takes to His Fainting Couch Department

FRED Graph  St Louis Fed 1

Stephen Williamson: New Monetarist Economics: Hal and Lee have joined the Paul Krugman bad guy club. Writing about Cole and Ohanian's WSJ piece, Krugman says:

This goes beyond holding views I disagree with (as does much of what happens in this debate). This is a deliberate attempt to fool readers, demonstrating that there is no good faith here.

Hal and Lee are two thoughtful and careful economists. I don't agree with everything they have ever said, but to call them liars is appalling.

Williamson should be much more unhappy at Cole and Ohanian's claim that July 1932-June 1933 was "a period of significant deflation". The PPI in July 1932 is 11.1. The PPI in June 1933 is 11.2. Cole and Ohanian may be the only people who have ever managed to call a period during which the price level rose as "one of significant deflation".

Cole and Ohanian:

Harold Cole and Lee Ohanian: Stimulus and the Depression—The Untold Story: Fed Chairman Ben Bernanke claimed that monetary expansion and the turnaround from the deflation of 1932 to inflation in 1934 was a key reason that output expanded.

But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board's Index of Industrial production rose nearly 50% between the Depression's trough of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year…

I think David Glasner says what ought to be said:

Misrepresenting the Recovery from the Great Depression: [T]he version of events offered by Cole and Ohanian is still a shocking distortion of what happened before FDR took office in March 1933.  In particular, although Cole and Ohanian are correct that the trough of the Great Depression was reached in July 1932, when the Industrial Production Index stood at 3.67, rising to 4.15 in October, an increase of about 13%, they conveniently leave out the fact that there was a double dip; industrial production was flat in November and started falling in December, the Industrial Production Index dropping to 3.78 in March 1933, barely above its level the previous July.  And their assertion that deflation continued during the recovery is even farther from the truth than their description of what happened to industrial production.  When industrial production started to rise, the Producer Price Index (PPI) increased almost 1% three months in a row, July to September, the only monthly increases since July 1929.  The PPI resumed its downward trend in October, falling about 9% from September 1932 t0 February 1933, at the same time that industrial production peaked and started falling again.

That is why most observers date the trough of the Great Depression in the US not in July 1932, but in March 1933 when FDR took office in the midst of a banking crisis that threatened to drive the US economy even deeper into deflation and depression than it had been in July 1932. So when Cole and Ohanian assert that recovery from the Great Depression started in July 1932, and go on to say that the recovery took place during a period of significant deflation, it is hard to avoid the conclusion that they are twisting the facts to suit their own ideological predilection.

The misrepresentation perpetrated by Cole and Ohanian only gets worse when they describe what happened during the period of true recovery, April through July 1933.  Contrary to their assertion, deflation stopped in February 1933, the PPI hitting its low point of 10.3.  Prices began to rise as soon as FDR suspended the gold standard shortly after taking office in March (not June as Cole and Ohanian mistakenly assert) 1933, the PPI rising to 11.9 in July (an increase of about 14% over February) when industrial production hit a peak of 5.95, 57% above the March low point…. To assert that the rapid price increases from March to July, a proxy for increased aggregate demand, played no role in what was then (and remains) the fastest increase in industrial production in any four-month period in American history is a gross misrepresentation of the facts.  What is perhaps even more shocking is that Cole and Ohanian would misrepresent facts so easily ascertainable….

Another point overlooked by Cole and Ohanian, presumably because it doesn’t exactly fit the ideological message that they want to propagate, is that the timing of the recovery — immediately after the monetary stimulus resulting from suspension of the gold standard – shows that monetary policy can be effective with little or no fiscal stimulus [even in a liquidity trap].  It is hard to see how any fiscal stimulus could have taken effect by April 1933 when the recovery had already begun.  Moreover, Roosevelt campaigned as a fiscal conservative, so it would not be easy to argue that anticipated fiscal stimulus was being felt in advance of its actual implementation.

The real lesson the Great Depression is that monetary policy works — for good or ill.

Ezra Klein Gives the Smackdown to Matt Miller


Which problem does your third party solve? - The Washington Post: "Whenever friends of mine begin idly fantasizing about a third party, I always have the same question: which problem of American governance, specifically, is your third party meant to solve? Gridlock in the Congress? Corporate money in politics? Ideas that go unmentioned by the two major political parties?…

As Greg Sargent pointed out, [Matt Miller's] speech sounds substantially like speeches President Obama has given, either recently or during the 2008 campaign. The policy ideas, too…. [S]hort-term stimulus and long-term deficit reduction… corporate tax reform and the imposition of an energy tax… higher salaries to teachers and easier ways to fire the ones who perform poorly… universal pre-k and tweaks to the Affordable Care Act… higher capital ratios to rein in the banks and campaign-finance reform to clean out our elections… higher taxes and a lift in the eligibility age for both Medicare and Social Security… truce on issues like abortion and gun control until we get the economy back on its feet… what the Obama administration would do if it didn’t have to clear its policies with Congress or the American people.

Miller’s speech implies that what’s holding American politics back is that there are no candidates willing to give this speech, or hold these positions. That’s not accurate. What’s holding American politics back is a polarized Congress that has collapsed into gridlock. What’s holding American politics back is that the minority party understands that the quickest path back to power is undermining the majority party’s ability to govern. What’s holding American politics back is that voters want a government spending at about 23 or 24 percent of GDP but they want taxes around 18 percent of GDP, or maybe even a bit lower.

These types of third-party proposals tend to talk a lot about hard truths, tough choices and unpleasant realities. But in almost all cases, they skirt the hardest political truth of all, which is that politics is hard, often boring, work…

I don't know whether Ezra is correct in his claim that Matt simply wants to avoid the hard work of politics--wants to avoid facing the fact that if he actually wants to get all these good things done, he needs to roll up his sleeves and start working alongside those of us trying to advance Obama's agenda--or whether he is too embarrassed and "nonpartisan" to admit that Obama's positions are his positions and that Obama ought to be his ideal president.