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September 2011

Milton Friedman vs. Robert Barro

At my Saturday debate with Robert Barro, Barro said that the U.S. government could do nothing on the demand side: (a) fiscal expansion would run up against small multipliers and would add to the debt burden, (b) raising inflation expectations somehow was too dangerous to contemplate, and (c ) expansionary open-market operations were simply swapping one low-yield government liability for another and would have next to no effects.

Let the record show that Milton Friedman disagreed:

Via David Beckworth:

Macro and Other Market Musings:

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero,  monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

And Cole and Ohanian Drive Paul Krugman into Shrillness This Morning

Bad Faith Economic History  NYTimes com


Bad Faith Economic History - "Via Mark Thoma, Uneasy Money catches Cole and Ohanian — whose blame-FDR interpretation of the Great Depression has become dogma among conservatives — arguing in spectacularly bad faith.

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. 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. Putting the facts in one graph:

You might think that this looks pretty straightforward: output shrank when prices were falling, grew when they were rising, which is what a demand-side story would predict. But Cole and Ohanian focus on the month-to-month wiggles in 1932-33 — conveniently omitting wiggles that went in an inconvenient direction — to claim that demand had nothing to do with it.

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.

Atrios Tells Us That Paul Krugman Addresses David Brooks's Zombie Lies

FRED Graph  St Louis Fed

And he does. Paul:

Stimulus Tales: "Dean Baker is upset with David Brooks — not for the first time. Let me just put in a word here.

The story of Keynesian economists and the Obama stimulus, as anyone who’s been reading me knows, runs as follows: When information about the planned stimulus began emerging, those of us who took our macro seriously warned, often and strenuously, that it was far short of what was needed — that given what we already knew about the likely depth of the slump, the plan would fill only a fraction of the hole. Worse yet, I in particular argued, the plan would probably be seen as a failure, making another round impossible.

But never mind. What we keep hearing instead is a narrative that runs like this: “Keynesians said that the stimulus would solve the problems, then when it didn’t, instead of admitting they were wrong, they came back and said it wasn’t big enough. Heh heh heh.” That’s their story, and they’re sticking to it, never mind the facts.

And what the facts say is that Keynesian policy didn’t fail, because it wasn’t tried. The only real tests we’ve had of Keynesian economics were the prediction that large budget deficits in a depressed economy wouldn’t drive up interest rates, and the prediction that austerity in depressed economies would deepen their depression. How do you think that turned out?

Indeed. Here in the U.S. we had a tax-and-transfer stimulus--we put more cash into the hands of households (and banks!). But we did not try an expansionary spending stimulus. Put together localities, states, and the federal government, and our government did not purchase a larger share of the economy's productive potential in 2009 than it had in 2008, and in 2010 and 2011 we cut government purchases as a share of potential GDP--in 2011 sharply.

Daniel Davies Trolls His Own Weblog in Defense of Bankers II

Alex Harrowell watches with a horrified fascination:

Yes, the banks are to blame : Daniel Davies’s effort to become the most popular man in Britain "has, apparently, not developed to his advantage", to quote the Emperor Hirohito.

It struck me that there are two opposed explanations for the unusual toxicity of the comments thread that ensued, and they tell us quite a lot about the Great Bubble and the Great Recession that followed.

The first would be Daniel’s explanation. Look at them! It took only six comments for someone to analogise him to a soldier whose commander pays him in whiskey and cigarettes to cut the ears off prisoners, and sixty-five for someone to compare him to one of the anonymous organisers of the Holocaust. We got to Josef Stalin by comment 115 and to Megan McArdle by 108. Surely, this is evidence that there is an unreasoning and unproductive rage around at anything that smacks of banks, bankers, or banking...

Liveblogging World War II: September 27, 1941

Matt's Today in History: The First Liberty Ships Launched, September 27, 1941:

Today in 1941, the cargo ship SS Henry Patrick was launched along with 13 sister ships during a Presidential launching ceremony in Baltimore, Maryland. These 14 vessels were the first Liberty ships, a class of cheap and quick-to-build cargo haulers that helped to carry the industrial output of wartime America to the battlefields of Europe and the Pacific.

The Liberty ships were 441.5' long and had a 57' beam. When fully loaded, they required almost 28 feet of water to stay afloat. Their top speed was 11.5 knots or almost 13 miles an hour. They could carry 9,100 tons of cargo, but many of the ships carried more than that on a regular basis.

The basic design for the Liberty ship dates to 1940, when the British government ordered 60 ships to help replace the merchant ships lost during the first year of World War Two. These were called Ocean-class ships and were built at American shipyards. They used coal instead of oil because while Great Britain had many coal mines, the country had no indigenous oil fields. The first of these vessels, Ocean Vanguard, was launched in August, 1941.

The United States Maritime Commission took the Ocean-class design and modified it so the ships could be built faster and for less money. The biggest design change was the decision to weld sections of the ship together instead of using rivets. Riveting accounted for as much as one-third of the labor cost of building a cargo ship, so the monetary savings for a fleet of Liberty ships was significant. The Liberty design also used oil for fuel instead of coal as the Ocean-class ships used.

A group of engineering and construction concerns known as the Six Companies were given a contract from the federal government to build the first Liberty Ships. Henry J. Kaiser, an industrialist and the head of the Six Companies, studied the automotive industry and came to the conclusion that large ships could be built in much the same way as automobiles. This assembly line method was used by all the shipyards which built Liberty ships and was so successful that, by the end of the war, a ship went from a stack of steel plates to a finished product in just 30 days. Over the course of the war, the average construction time was 42 days.

During 1941, the US government increased the number of ships that were to be delivered to Great Britain from the original 60 to 200, then 306. 117 of these would be LIberty ships. By the time the United States entered the Second World War in December, 1941, the Six Companies' shipyards had much experience with the cargo ships' design. In all, sixteen American shipyards on both coasts built the Liberty ships; 2,751 of them were built between 1941 and 1945. The ships were initially named after famous Americans, starting with the signers of the Declaration of Independence. However, any group which raised $2 million worth of war bonds could name a ship (within reason, of course). This is how the US government came to own ships named SS Stage Door Canteen and SS U.S.O…

Greece is a Broken Ankle, and Europe Is Suffering from Organ Failure

David Wessel:

Summers Casts Himself as Paul Revere of Global Economy: Larry Summers, the sharp-tongued former Treasury secretary and former White House economic policy coordinator, says the role of yesterday’s policymakers is to sound the alarm loudly enough so today’s policymakers act in time to avert catastrophe. So he did his best to sound the alarm loudly at Friday’s afternoon at a gathering of bankers, former policymakers and journalists in the ornate ballroom of Washington’s Willard Hotel.

Observing that this is the 20th year at which he has attending the annual Fall meetings of the International Monetary Fund and World Bank and related gatherings — some at times of prosperity, some at times of crisis — Summers said the he had never been “more concerned about the global economy.”

“Our problems are as much intellectual as they are political,” he said, arguing that “a generalized misunderstanding has done and continues to do as much” to threaten global economic prospects as the obvious political tensions in U.S. but primarily in Europe, which he accused of “too much collective [fiscal] belt-tightening.”

The barrier to faster global growth, he argued, isn’t lack of capacity or skilled workers or ideas, but an overwhelming lack of demand. Calls for a return to fiscal virtue, if heeded, he said, would continue the currency economic downturn. “We are closer to the edge of a deflationary spiral than anyone would have anticipated six months ago.”…

Referring to Greece, Summers said, “We are discussing a broken ankle in the presence of organ failure,” he said. “If a generous sovereign from Mars paid off Greek debt, the fundamentals of Europe in crisis would not be altered.” The creditworthiness of large European governments and of European banks is now being questioned, and that is crippling growth in Europe. The sign that Europe is grappling with its problems will be when the focus of European negotiations moves beyond the next chapter in the Greek rescue, he said…

Pass the American Jobs Act, Already!

The Chart That Proves the Stimulus Was Never Tried  Daily Intel

Jonathan Chait:

The Chart That Proves the Stimulus Was Never Tried: The federal government has been pumping economic stimulus, in the form of higher spending and lower taxes, into the economy since 2009. But state and local governments have been pumping stimulus back out of the economy. Why? Because state and local governments can't run deficits. They have to balance their budgets. When the economy slows down, those governments collect less taxes, and often they have to spend more (on, say, programs for the poor….

The Goldman Sachs chart here measures the effect of the federal government's stimulus against state and local governments' anti-stimulus. Guess what? Anti-stimulus has been winning since the middle of 2010….

This offers an appropriate context in which to understand Obama's jobs plan. As Goldman Sachs indicates, if Congress approves Obama's plan (prognosis: dead on arrival) it would mainly just create enough new stimulus from the federal government to slightly overcome the state and local anti-stimulus. The net effect of government fiscal policy on the economy would be neutral. It would be sort of like the Lend-Lease program to help Great Britain win the war, if we were already giving weapons to the Nazis. A big improvement, in other words, but not exactly an overwhelming response…

The Chart That Proves the Stimulus Was Never Tried  Daily Intel 1

Rui Pedro Esteves: International Finance in the Belle Epoque: French Portfolio Exports, 1880-1913



  • Openness and growth
  • Pull factors
  • Sudden stops--sovereign default and the private sector


  • Push factors
  • Risk and return
  • Regulation and financial center competition


  • Composition, valuation, and return of the French portfolio
  • Good performance
  • Concentrated market structure

The Idea That Recessions Arise When Workers Do Not Understand How Many Commodities Their Paychecks Would Be Was Not One of the Brightest Lights on Humanity's Tree of Good Ideas

But the idea that recessions arise when workers do not understand how many commodities their paychecks will buy was (one of) Robert Lucas's big ideas.

Paul Krugman picks up the story:

Lucas In Context: In the 1970s, Lucas and disciples take it up a notch, arguing that we should assume rational expectations: people make the best predictions possible given the available information. But in that case, how can we explain the observed stickiness of wages and prices? Lucas argued for a “signal processing” approach, in which individuals can’t immediately distinguish between changes in their wage or price relative to others — changes to which they should respond by altering supply — and overall changes in the price level.

In the 1980s, the Lucas project failed — pure and simple. It became obvious that recessions last too long, and there are too many sources of information, for rational confusion to explain business cycles. Nice try, with a lot of clever modeling, but it just didn’t work.

One response to the failure of the Lucas project was the rise of New Keynesian economics…. The difference from old Keynesian economics was the effort to use as much maximizing logic as possible to interpret spending decisions. I find NK economics useful, if only as a way to check my logic, although it’s not really clear if it’s any better than old-fashioned Keynesianism.

The other response, by those who had already invested vast effort and their careers in the Lucas project, was to drop the whole original purpose of the project, which was to explain why demand shocks matter. They turned instead to real business cycle models, which asserted that the ups and downs of the economy are caused by technological shocks magnified by rational labor supply responses…. [T]he math was impressive, and RBC became a self-contained, self-replicating intellectual world.

The Lesser Depression arrives. It’s clearly not a technological shock; clearly, also, nobody is confused about whether we’re in a slump, as the old Lucas model required.

In fact, it looks a lot like what Keynes described, and old-Keynesian models work very well, thank you, both at explaining it and in making predictions about such things as interest rates and the effects of fiscal austerity. But the descendants of the Lucas project know that Keynes was wrong — it’s what their teachers and their teachers’ teachers have been saying all these years. They cannot accept anything resembling a Keynesian explanation without devaluing everything they’ve done with their intellectual lives.

So it must be Obama’s fault!

Department of "Huh!?"--No, Department of "WTF!?!?!?!?": Robert Lucas Edition

Robert Lucas, March 2009:

Christina Romer--here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this--in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.... [I]t's a very naked rationalization for policies that were already, you know, decided on for other reasons…. If we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder--the guys who work on the bridge -- then it's just a wash... there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that...

Robert Lucas, September 2011:

Noahpinion: Miscellaneous Lucas: If you think Bernanke did a great job tossing out a trillion dollars, why is it a bad idea for the executive to toss out a trillion dollars? It's not an inappropriate thing in a recession to push money out there and trying to keep spending from falling too much, and we did that...



Review of Ron Suskind's "Confidence Men"

We are live at the Huffington Post:

When I first learned in 2009 that Ron Suskind's next book was going to be about the making of a economic policy in the Obama administration, I looked forward to it. Previous books about the making of economic policy had degenerated into unseemly hagiography (cough Robert Woodward's Maestro cough) or into pure gotcha books (cough Robert Woodward's The Agenda cough). It seemed to me that Ron Suskind had done considerably better than "gotcha" books -- or had written "gotcha" books that also had immense extra value added -- on the Bush-era national security apparatus.

I thought he would do equally well on economic policy.

I thought the Obama economic-policy team was first rate. All five of the principals, Benjamin Bernanke, Timothy Geithner, Lawrence Summers, Christina Romer, and Peter Orszag, seemed to me among the very best candidates in the world for senior economic policymaking jobs in an American administration.

And they were all my friends, or at least we were friendly. I did think that some of them were in the wrong jobs. Lawrence Summers made much more sense to me as Treasury Secretary than as NEC chair. Timothy Geithner seemed to me much better suited to be NEC Chair than to manage a large department with line authority.

Nevertheless, even though the economic situation was horrible, the economic policy team looked good to me. I looked forward to a Suskind book that would tell of success: smart and serious people who knew what they were doing fighting about substance, presenting the president with good options, him choosing the best one, and the course of the economy during the Obama administration being if not great at least better than we all feared after the bankruptcy of Lehman Brothers.

And there is an important perspective from which Obama administration economic policy has been a considerable success. The banking system collapse was averted. The spike of the unemployment rate to 15% or higher was averted. Obama passed a pretty good financial regulatory reform. Obama passed a pretty good health-care financing reform. Obama passed the largest quick fiscal expansion he could get through congress (using the Reconciliation process would have taken months and months longer). We are left with a jobless recovery, and with crippled mortgage finance and construction, and a ticking bomb in Europe. But one could say that things could have been much worse--and would have been much worse had Republicans controlled any substantial share of economic policy or been more effective at blocking Obama initiatives. This may in the end be the judgment of history: that the most important thing to note about the Obama Administration's macroeconomic policy was that they, broadly, worked.

And of the successes of Obama administration economic policy perhaps the greatest success was the successful implementation of the "stress tests" of the banking system by Tim Geithner and his Treasury Department in the spring of 2009. The panic and the downturn could not be halted until finance became convinced once again that the key highly-leveraged money-center banks were well-capitalized. The government's TARP authority was not large enough to do the job. Somehow, private investors had to be convinced that investing in the banks was a good idea. The stress tests did that, and played a role in restoring confidence in 2009 somewhat akin (albeit on a smaller scale) to Roosevelt's abandoning the gold standard in 1933. It was a major achievement, well-executed--especially given that Tim Geithner was then "home alone" at the Treasury without confirmed deputies.

But this is not the only perspective from which to view Obama administration economic policy.

Since the spring of 2009 I have became more and more alarmed by the economic policy choices made by the Obama administration. A new administration needs to (1) forecast what is most likely to happen, and (2) design and implement policies that will deal with what is likely to happen, The Obama administration did that. I think that some of its initial policies were wrong, but given the press of events I would give the administration moderately high marks for the policies it designed and implemented up through, say, April 2009.

Thereafter, however, things to me seemed to gradually fall apart. An administration has a third task it needs to carry out: (3) think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well.

It needs to ask itself:

  • What if we are wrong in our estimation of the situation--what might the world then look like three years from now? 

  • What if more things go wrong in the next year or two--what might the world then look like three years from now?

  • In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?

The major risks that confronted the Obama administration-to-be in the fall of 2008 and the winter-spring of 2009 that are relevant here were:

  1. That the moderate Republicans in the Congress would, rather than engaging in normal American governance, join their colleagues out of party loyalty and help them wage a scorched-earth war against all administration policies--even their own Republican policies--following the Gingrich playbook that the road to victory in the next election is to make the Democratic President be and appear to be a failure.

  2. That the Federal Reserve would ignore half of its dual mandate, and be satisfied with policies that avoided deflation now matter what unemployment rate or capacity utilization rate those policies brought. 

  3. That the recovery that would follow once the recession was over would be a slow, hesitant, "jobless" recovery. 

  4. That the initial shock to the financial system and downturn would be much larger than anticipated as of early December 2008. 

  5. That mortgage finance might not resolve itself, and that construction might remain deeply depressed for a very long time.

  6. That government attempts to support weak banking systems would set off a wave of sovereign debt crises that would then deepen the global downturn.

  7. That repeated waves of expansionary policies might set off a dollar, sovereign debt, and inflation crisis inside the United States.

To deal with all of these, Obama needed to staff his administration up--to choose and nominate officials and, if the Senate did not confirm them in a timely fashion, recess-appoint them.

To deal with the first of these seven, the Obama administration needed to set up the Budget Act Reconciliation process and to husband executive branch authority so that it could conduct large-scale expansionary economic policy via Reconciliation and loan guarantees and quantitative easing if Republicans filibustered and the economy was still in the dumps in 2010 and 2011. To deal with the second, the Obama administration needed to rapidly nominate and get confirmed Federal Reserve governors and a Federal Reserve Chair who would take the Federal Reserve's dual mandate very seriously indeed if unemployment was above 9% and stable or rising in 2010 and 2011.

To deal with (3) and (4) the administration needed to prepare the ground by doing more of what it had done to buy insurance against (1) and (2)--by warning at every opportunity that the first round of expansionary policies 
might not be enough, by preparing the ground via Reconciliation and by husbanding executive branch authority, and by making sure not to abandon the fight against unemployment for the fight for long-run fiscal stability until the recovery was well-established--lest the administration wind up in 2010 and 2011 with a jobless recovery and few remaining tools to expand demand.

To deal with (5), the administration needed to prepare the ground for using Fannie Mae and Freddie Mac to essentially nationalize, refinance, and work out mortgages nationwide, should it turn out in 2010 or 2011 that the recovery was not strong or sustained.

To deal with (6), it would have been wise on day 1 to promote the IMF to the role of global technocratic crisis manager, and to get commitments from major credit-worthy economies that they would back the IMF with sufficient resources for it to actually handle the situation. should the mortgage-induced banking crisis of 2008-9 set off sovereign debt crisis in 2010-11.

I wasn't a genius to see these as the risks. They were, at least in the circles in which I moved, obvious.

Yet the only risk that the Obama administration has appeared to even think about guarding against is (7)--which is the one risk that has not come home to roost big time.

For me the big question since the summer of 2009 has been: Why? Why didn't the Obama administration make any significant effort to purchase insurance against risks (1) through (6)? Those were the questions that I hoped Ron Suskind's book would answer for me.

And, alas, it does not do much to do so. Instead, it falls into the Woodward The Agenda trap: it is a story of strong and colorful personalities knifing each other in internal bureaucratic bar fights, with little sense of what the substantive policy arguments were, of the arguments' merits and demerits, and of the stakes.

Moreover, the book falls victim to the Teddy White disease: a reporter taking the time-colored recollections of 
individuals and turning them into a third-person omniscient capital "T" Truth, giving the narrative an authority it does not deserve.

This is further compounded by Suskind's having the implicit viewpoint of the third-person omniscient narrator jump away from one source to another, sometimes seemingly at random, sometimes when the first source tells a version of the story that Suskind does not want to highlight. This causes errors. References to seventeenth-century muzzle-loading musketry technology become in Suskind's retelling references to twenty-first century pornography. People who steamrolled the entire Democratic coalition to get policy ideas that had their origins in the hard-right Heritage Foundation enacted into law are, in Suskind's view, too weak to stand up to the big boys of the administration. Suskind wrongly thinks people who skip meetings to deal with crises are demonstrating their disloyalty to the president, when Obama would have been the very first to say: "What are you doing here? You need to be firefighting!"

And Tim Geithner dresses badly and will never make the cover of the Financial Times "How to Spend It" supplement.

And so what I at least regard as the big stories and mysteries of economic policymaking under Obama are largely passed by.

In my view, Suskind's greatest achievements in the 2000s came in stories where his third-person omniscient camera followed a single smart, talkative, quirky, and angry individual--John DiIulio, or Paul O'Neill--through the Bush administration. His narratives then acquire a kind of authority as one player's view. And the damage done by the assumption of the third-person omniscient viewpoint is thus limited. But that is not the kind of narrative we have here.

I had hoped to learn from Confidence Men why Federal Reserve Chair Ben Bernanke shifted from being the activist crisis manager and the advocate of aggressive quantitative easing that he was before mid-2009 to a man who does not take the Federal Reserve's dual mandate to focus both on price stability and full employment seriously. And I had hoped to learn why Obama chose to renominate Bernanke Federal Reserve Chair over a candidate--Larry Summers--who had reason to think he was the default choice for the job and who does take that dual mandate seriously. I had hoped to learn why Barack Obama had been appallingly slow at nominating candidates to fill empty slots among the Governors of the Federal Reserve. I learn nothing substantial about any of these.

I had hoped to learn why Tim Geithner had been strangely loathe to engage in large-scale quantitative easing using Treasury resources. Why wasn't the PPIP developed and expanded further? I had hoped to learn why Geithner was loathe to even to set up the game table for the possibility that it might become advisable to use Fannie Mae and Freddie Mac to intervene in the mortgage market on a large scale. People, after all, had been discussing using them as a "in case of emergency break glass" option since at least the Bear Stearns bankruptcy of early 2008. I learn nothing substantial about these.

I had hoped to learn why the Obama administration had not done the natural thing--the thing that I had been told on my first day in the Clinton administration was the right way to do economic policy--and load as much as possible of your core agenda into the streamlined budget Reconciliation process, as a way of evading congressional procedural roadblocks. I learn nothing about this.

I had hoped to learn why the Obama administration kept trying to make deal after deal with a unified Republican caucus that was following the Gingrich playbook that the road to victory in the next election is to make the Democratic President be and appear to be a failure by denying him everything that the press might call a success for the president. I learn nothing about this.

So what do I learn?

I learn that Barack Obama was very worried about the budget deficit and the rising national debt very early--so much so that he short-circuited his own bureaucratic processes and ordered reports from deficit hawk and OMB director Peter Orszag routed to him around the NEC process. And I learn that, perhaps as a consequence, Obama appears never to have registered how far off any possible Treasury bond crisis was. The message Obama needed to hear was, I think, something like:

Analogies between today and the early 1990s, when immediate deficit reduction set off a strong recovery, are likely to be wrong. At the start of the 1990s the 10-year Treasury bond commanded an interest rate of 9%. Today it commands an interest rate of 3%.

As of early 2009, or indeed as of today, a Treasury bond crisis is not one of the ten biggest dangers facing the United States economy.

I do learn that the "do less" or "do no harm" Geithner-Emanuel alliance regularly kneecapped a Romer-Summers "do something" alliance--perhaps because Summers' and Romer's small CEA and NEC staffs could only come up with outlines and proposals rather than plans--which only the Treasury with its ample staff could produce--and, as Geithner liked to say, "plan beats no plan".

Suskind writes that Geithner thought Romer was of "no value on policy issues [of] financial rescue", and that:

Larry and Rahm were the only one's that mattered. Larry's problem was that he had no alternative, ever... never came up with an alternative strategy...

Suskind then quotes Treasury Assistant Secretary Alan Krueger's thoughts on the issue:

Alan Krueger said one reason Treasury dragged its feet on constructing a plan for Citigroup's resolution was Sheila Bair. They would have had to consult the FDIC chairwoman... her agency is in the business of closing banks. "The fear was that Sheila would leak it... there'd be a run on Citi." He added that this was one of many reasons:

The bottom line is that Tim and others felt the president didn't fully understand the complexities of the issue, or simply that they were right and he was wrong, and that trying to resolve Citi and then other banks would have been disastrous.

Krueger, for one, disagreed...

I think that Alan Krueger is wrong here. First, in the early stages of any Democratic administration, the Treasury is overwhelmed with work. Assignments coming in are regularly dropped on the floor. Only the most immediate priorities of the Treasury Secretary get pushed through the bureaucracy. This was the case in 1993 when Treasury Secretary Lloyd Bentsen had a full mesnie of confirmed assistant and undersecretaries to deploy. This was more the case in 2009 when Tim Geithner had no confirmed deputies at all. 
Second, Tim Geithner had, when he was President of the Federal Reserve Bank of New York, tried to get tough on the banks. That was what the Lehman Brothers bankruptcy was. It backfired, catastrophically. After that experience, Geithner was bound to seek policies that would restore confidence, recapitalize the banking system, and halt the panic without frightening or angering bankers. From his perspective the risks involved in trying to get tough on banks were so great that such policies were, if not unthinkable, simply not a high priority. Had Obama wished a Treasury Secretary enthusiastic enough about being tough on banks and bankers to push plans for doing so through the bureaucracy, he needed to have chosen another and very different Treasury Secretary.

I learn that Barack Obama was attracted to the idea that on top of our business-cycle demand-driven downturn was a longer-run trend rise in technological unemployment that virtually guaranteed that the recovery would be "jobless":

[Summers and Romer] were concerned by something the president had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy. Summers and Romer were startled. "What was driving unemployment was clearly deficient aggregate demand," Romer said. "We wondered where this could have been coming from. We both tried to convince him otherwise. He wouldn't budge." Summers had been focused intently on how to spur demand, and on what might drive a meaningful recovery.... [W]ithout a rise in demand, in Summers's view, nothing else would work.... But productivity?... If Obama felt that 10 percent unemployment was the product of sound, productivity-driven decisions by American business, then short-term government measures to spur hiring were not only futile but unwise. The two economists strained their memory... had they said something he'd misconstrued?... After a month, frustration turned to resignation. "The president seems to have developed his own view," Romer said.

And I learn that the team of Orszag-Obama starting from this position effectively kneecapped proposals for follow-on expansionary policies to boost employment in late 2009 and early 2010, letting the best be the enemy of the good.

Orszag countered [in November 2009] that unless they did something large... $700 billion, "it wouldn't jump-start or significantly move the economy"; but $700 billion was politically untenable.... Romer said this was the wrong approach.... $100 billion would mean one million new jobs. "A million people is a lot of people." Obama was unenthusiastic. Romer, in meeting after meeting, came back with new plans, new ways either to locate $100 billion or to pitch it to Congress. Her appeals were passionate. She said they were falling into a "the perfect is the enemy of the good" trap.... In November.... [Obama] took Orszag's position at a briefing.... "That is oh so wrong," Romer blurted out.... "It's not just wrong, it's oh so wrong?" Obama queried.... "Enough!" he shouted. "I said it before, I'll say it again. It's not going to happen. We can't go back to Congress again. We just can't!"... Romer, visibly shaken... was summoned to talk privately in Jarrett's office....

A few weeks later... Summers stepped up, offering, almost word for word, the position Romer had voiced previously. This time Obama listened respectfully: "I know you've got to make this argument, Larry, but I just don't think we can do it." As they left the meeting, Romer... said, "Larry, I don't think I've ever liked you so much." "Don't worry, [Summers] quipped. "I'm sure the feeling will pass..."

Now I know that one major reason why Orszag at least was insufficiently panicked about the unemployment situation in late 2009 was that he was still confident that the U.S. economy was about to undergo a rapid recovery--that we would see a "V" rather than the "L" that we are currently suffering through. If you have high confidence that a "V" is on the way, then it indeed makes little sense to devote limited presidential time and limited administration bandwidth to lobbying for a $100 billion fiscal expansion. If a bill producing such shows up on the president's desk, of course the president should sign it--but from Orszag's perspective it was not worth spending energy. I thought at the time that Orszag and Obama were wrong. But Suskind does not help me understand why Orszag and Obama were so confident that the "V" was coming--he doesn't even hint that they had an argument.

And, as Ezra Klein points out, the stories Suskind does tell repeatedly undermine his global narrative claim that the administration's big problem was that Lawrence Summers was (a) too sure of himself, and (b) so good a debater that he won internal arguments he ought to have lost. If Larry Summers had been winning all the internal policy arguments, Ezra points out, then administration policy would have gone in "the direction Suskind clearly wishes the White House had gone."

I learn that, somehow, Tim Geithner managed to kneecap Barack Obama's initial enthusiasm for Elizabeth Warren's consumer financial protection agenda as a major administration initiative. Obama started out impressed with Warren. Suskind writes that Obama:

... was particularly taken with Elizabeth Warren.... "Wow, she's really something," he said.... "Really good, we should get her out there more often." Larry Summers and Anita Dunn... discussed for a moment how to get Warren more TV.... Alan Krueger smiled to himself. It was good Geithner wasn't present. He despised the crusading Warren...

And lots of people respected and approved of Warren--including, eventually, Christina Romer:

Warren was caught off guard by Romer's intensity, and her thoughtfulness.... Question after question, the two engaged in an intellectual thrust-and-parry, until finally... Romer broke her stride. "Why is it always the women?" Romer said. "Why are we the only ones with balls around here?" That night Warren got a call from Valerie Jarrett. "Wow, you really turned Christy Romer around."

But Obama would not appoint her to the agency whose creation she had worked so hard for:

August 13 [2010], Warren finally got her meeting with the president.... The president offered a long explanation of the complex logistics whereby Warren would stand up the agency and become a special advisor... that way she wouldn't spend months... on ice...

I think I understand why Geithner viewed Warren's potential appointment as too dangerous--the shadow of Lehman Brothers again, and Geithner's judgment that the catastrophic reaction to not bailing out the creditors of Lehman Brothers was a powerful wakeup call on the costs of "tough on bankers" policies. But a reader of Suskind would not learn anything about Geithner's reasons, other than Suskind's claim that Geithner--who has so far never worked for a Wall Street firm for a day in his life, and who was one of the three who pulled the plug on Lehman--is a tool of Wall Street.

Ex ante, I would have given long odds that Ben Bernanke would not forget about the Federal Reserve's dual mandate. Ex ante, I would have bet long odds that Tim Geithner would not have turned into "Dr. No" in a situation as desperate as the one the Obama administration has faced. Ex ante, I would have given long odds that even if Geithner had started 2009 much too optimistic that he would have quickly marked his beliefs to market. Ex ante, I would have given long odds that Summers would have wiped the floor with Orszag and Geithner were the collegiality of the NEC process to break down and turn into out-and-out bureaucratic war.

Why Obama chose the policies he did, why Geithner and Orszag and company were so optimistic in 2009, why the Reconciliation process was not teed up for emergency expansionary fiscal policy action if it turned out to be necessary, why Fannie and Freddie were not teed up for emergency mortgage action if it turned out to be necessary, why the administration turned so decisively away from unemployment and toward long-term deficit reduction in early 2010, why Summers and Romer did not wipe the floor with Geithner and Orszag in the long twilight bureaucratic struggle when NEC collegiality broke down, and why Bernanke forgot about the employment and output part of the Federal Reserve's dual mandate - these are all questions that I would dearly love to know the answers to.

Two and a half years ago I would have given long odds that Ron Suskind's book would provide me with a lot of the answers to these questions.

It does not.

Barclays Conference

  • Larry Summers was amazingly eloquent on Obama's accomplishments.
  • In fact, more eloquent than I have ever seen him before.
  • But the one person I have talked to says that I did even better.
  • However, that person was my mom...

Barclays Debate with Robert Barro, Moderated by David Wessel

Draft Opening:

WESSEL: If President Obama invited you into the Oval Office, told you that he recognized that the economic policies he has pursued to date haven't had the desired outcome, and gave you five minutes to tell him what in your opinion he should do now (setting aside whether Congress would go along)?

DELONG: I would say: Mr. President: When you took office, you quickly became convinced for some reason that we were going to see a rapid, "V"-shaped recovery. Hence you took your task to be (a) stopping the panic, (b) recapitalizing the banking system, and (c) filling in a good chunk of the demand gap with the Recovery Act. Then, you thought, the task of macroeconomic stabilization would be finished. And so you turned your attention to (i) health care reform, (ii) financial regulation, (iii) long-run budget balance, and other issues.

This was wrong. We do not have a "V" but rather an "L". Our expectations that the market was strong enough to return the economy to its long-run full-employment configuration within a couple of years--perhaps with assistance from the Federal Reserve--was wrong. The short run of slack aggregate demand, high unemployment, and low capacity utilization looks as though it will last not two to three years after the downturn begin but five to ten years--or more.

What to do? If Milton Friedman were here to advise you, he would give the same advice he gave Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have it keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. Announce that it is going to keep buying bonds for cash until total nominal spending is on a satisfactory trajectory.

Milton Friedman's teacher, the ur-monetarist Jacob Viner, had a somewhat different take. Viner worried that when--as now--interest rates are very low, people have no incentive to spend their cash. And when you take bonds out of circulation you reduce the supply and further lower interest rates further. Viner sought a way to boost the money stock without pushing interest rates down further. He recommended coordinated monetary and fiscal expansion: the Federal Reserve buys bonds for cash, and the Treasury than issues bonds and spends, in order to (a) expond the money supply, (b) directly put people to work and © keep falling interest rates from further depressing monetary velocity and so crowding out the beneficial effects of monetary expansion.

Both Friedman and Viner would, right now, say that the problem is that their policy recommendations have not been tried on a large enough scale commensurate with the seriousness of the problem.

I concur.

And when will it be time to think about long-term budget balance? As I believe my colleague Christina Romer used to tell you every single week: the bond market and the inflation rate will tell you when it is time to turn to dealing with long-term budget balance. They are certainly not telling you to do so now.


Liveblogging World War II: September 24, 1941

Babi Yar:

HowStuffWorks "World War II Timeline: On September 24, 1941, shortly after the Nazi Germans' successful 45-day battle for Kiev, Red Army engineers exploded a number of land mines that had been pre-positioned in key buildings in the city center. One of these was the Hotel Continental, in which the Germans had just established their headquarters. The devastation was enormous, with hundreds of German troops killed or severely injured and 25,000 Kiev residents left homeless.

Even though the attack had been carried out by Russian soldiers, the Nazi German high command blamed the city's Jewish community and ordered it to assemble for "resettlement" on September 29…

The Romance of Technology

Jo Walton:

Rothfuss Reread: The Wise Man’s Fear, Part 4: Well Over The Hill: Stargazer considers the poetry of real life power generation:

Somewhere, right now, a turbine is spinning in superheated steam above a great flame, gnawing ceaselessly day and night as a vast swarm of servants scurry about the globe to feed its insatiable appetite so that you may read these words from afar or speak to distant loved ones. Nations pour out gold and blood onto desert sands and throw away lives down deepest caves, burn down whole forests and flood river valleys that once were home to millions, all in the name of feeding those flames. Adepts labor cleverly to reduce inefficiencies as much as possible through ever more intricate patterns scrawled in copper and silicon, inventions from the University doubling your gas mileage and letting your cell phone hold its charge a little bit longer. And the most foresighted of those adepts dream of harnessing the greatest fire of all, ever circling overhead, by stealing right from the sky its power, or harnessing it through its stepchild, the ever-restless softly blowing Wind.

Paul Krugman on Ireland


Irish Confusion: [S]tandard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.

That was Keynes’s whole point in The Economic Consequences of Mr. Churchill — not that the return to gold at too high a parity would mean depression forever, but that it would subject Britain to years of unnecessary suffering.

Seeing some growth in Ireland, then, is not at all a refutation of Keynesian economics — it’s exactly what you’d expect, given that Ireland is in fact gradually achieving an “internal devaluation” via relative deflation. What would have posed an intellectual puzzle would have been a rapid bounceback to full employment. And that isn’t happening.

A Note on the Federal Reserve Dissenters’ Extremely Strange Supply-Side Logic

Mike Konczal:

A Note on the Federal Reserve Dissenters’ Supply-Side Logic: [T]he dissenting arguments aren’t in the demand side but instead in the supply side. Instead of thinking we have a demand problem but that monetary policy is ineffectual in this environment – an opinion held by many people – the arguments they use to tell the public about why they are against future monetary policy uses the language of the supply-side....


Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth....

Those with the capacity to hire American workers―small businesses as well as large, publicly traded or private―are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy...


There are good reasons to believe that expected after-tax productivity p fell.... [F]irms know that hiring a worker is a multiyear commitment, and so what matters for that decision is productivity, net of taxes, over the medium term of the next several years. If firms expect to face higher taxes in this time frame, then their measure of p has fallen. What about the utility that a person derives from not working? In response to the recession, the federal government extended the duration of unemployment insurance benefits.... [I]f (p−z) has fallen by 0.15, then the implied u* is 8.7 percent. This is indeed a wide range of possibilities....


Mr. Plosser’s answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. “You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems...

Scott Sumner has devastated the argument that this is about unemployed carpenters with a passing glance at the data, and as far as I can see Plosser has offered little additional data.... [W]hen we look at the three dissenters they don’t have a demand story where monetary policy can’t work. They have a story where things would be fine if the government just got out of the way and stopped trying to regulate the financial sector, focused on balancing the budget immediately and also stopped preventing people from moving to new careers by giving them unemployment insurance and hope that unemployment will come down anytime soon.

How did these people ever end up being some of the most important people in the country went it comes to whether or not our country will leave the Great Recession and get back to Full Employment?

Indeed. The shareholders and directors of the Federal Reserve Banks of Minneapolis, Dallas, and Philadelphia need to look themselves in the mirror, and make some changes...

It is, I must say, remarkable that Plosser has managed to avoid learning that the housing bust since 2007 has been much larger than the mid-2000s housing boom, and that there is no overhang of overbuilt houses, rather the reverse:

FRED Graph  St Louis Fed 97 2

And it is remarkable that Narayana Kocherlakota has failed to learn that the real cost of financing today's (large) government debt is less than the cost of financing the debt back in 2007:

Daily Treasury Real Yield Curve Rates

And it is remarkable that Narayana Kocherlakota has been unable to look at a supply-demand graph and notice that the fall in hires has not been accompanied by a rise in wage pressure:

FRED Graph  St Louis Fed 8

FRED Graph  St Louis Fed 9

And it is perhaps most remarkable of all that Richard Fisher does not seem to be aware of the course of the unemployment rate in Texas:

FRED Graph  St Louis Fed 10

Over at Crooked Timber, Daniel Davies Turns into an Internet Troll...

…by defending his profession against the charge of wrecking the global economy.

Daniel Davies:

But who’s the real criminal? It’s me, isn’t it?: Joris Luyendijk.. has made at least one major discovery: People in the Guardian comments section really, really hate bankers….

I’ve got a Twitter account and some spare time, and as a result, have been collecting[1] prime specimens of banker abuse. So far, I’ve gathered that I, personally, have stolen from every single benefits claimant in England, and that Sir Fred Goodwin (crime: got a big pension, managed a bank poorly) is clearly a bigger criminal than Sir Anthony Blunt (crime: betrayed dozens of serving agents to Stalinist Russia). And, of course, during the recent London riots, dozens of variations on “who is the real criminal – the man who smashes a shop window and steals an iPod, or the man who gets paid a bonus?”

Because, at the end of the day, Dr Harold Shipman murdered 52 infirm old women in order to steal money from their wills, but bankers, get bonuses. Who is the real criminal, eh??

It is without any anticipation of popularity or agreement (or even any real hope of not being called an asshole on my own blog, although I must say that would be jolly nice if you were in the mood) that I tell you that I think this is all rather a pack of bollocks….

Macroeconomic events have macroeconomic causes, not microeconomic ones. Bad, stupid products[2] like Option ARMS or subprime buy-to-let teaser mortgages, were not invented by the industry out of sheer cackling evil; they were invented because they were the only way to get the people into the houses, given how expensive property had become. This was, as Dean Baker keeps reminding us, a housing bubble first and foremost and a financial bubble second; we are in a recession basically because of the disappearance of a huge amount of household sector wealth.

How expensive property had become … this is one that I’d like to linger on, because it rather points out that the number of people who a) benefited from and b) causally contributed to, the bubble and bust is rather bigger than you might think….

[M]aking a big deal about “the bankers caused this crisis/stole from us/etc” is a big mistake. And that’s basically for the simple reason that there is no hope for egalitarian politics if you are going to build it on such weak grounds…. The demands of egalitarian justice are not based in some convoluted proof that the rich have in some way stolen from the poor. The case for redistributive taxation does not rest on bankers’ bonuses being stolen goods, or even on them being undeserved. If you try to agitate for egalitarian policies based on this kind of argument, you are never going to make a strong case, because in the first place, “bankers” didn’t actually steal that money, for the most part, and secondly, if you are giving all the agency to “bankers” then you are accepting the first premis of the “wealth creators” rhetoric, and this is going to destroy you, politically, across the business cycle…. Money for the banking sector bailouts hasn’t come out of the mouths of babes and Sure Start centres; the austerity measures were a specific and separable decision, made by people who ought to be held accountable for it.

So my basic message here is that economics isn’t a morality play, even in the face of a depression. Even morality isn’t a morality play, most of the time. I wasn’t actually responsible for the housing crash and nor were most of my mates. We didn’t close down your local library or put your student fees up; that was the coalition government who did that. In general, if you want to build a better society, the message from the more thinking and socially responsible element of the financial sector is “send us the bill and spare us the lecture”.

Alas! I think that the bankers did do it.

FRED Graph  St Louis Fed 97

Lets start at the height of the U.S. housing boom in 2005:III, when residential construction reached its peak value as a share of potential GDP. At that moment it dawned on lenders that Option ARMS and subprime buy-to-let teaser mortgages were really not the best businesses to be in, and it dawned on potential borrowers that Option ARMS and subprime buy-to-let teaser mortgages were really not the best financial liabilities to assume--especially because they came bundled with an overpriced house. So after 2005:III the U.S. residential construction sector began to shrink. And it shrank, and shrank, and shrank. By the end of 2007--a little over two years later--it was down by 2.5% of potential GDP as housing prices fell and mortgage financing dried up.

But had the economy slid into recession? No. As residential construction stood down, exports stood up. Foreigners earning money from selling imports to the U.S. no longer invested their earnings in MBSs. Instead, they bought exports from the U.S. Residential construction down by 2.5% of potential GDP, exports up by 1.9% of potential GDP--the market economy was doing fine. It was rebalancing in response to a shock to fundamental expectations just as Jean-Baptiste Say would have said it ought to back in 1803. And Friedrich Hayek's claim--the claim of the entire Marx-Mellon-Hoover-Hayek axis, in fact--that a speculative bubble orgy like 2004-2006 was a sin that had to be paid for in blood and pain and fire and unemployment? Wrong, up until the end of 2007.

FRED Graph  St Louis Fed 97 1

But what happened in the two years after the last quarter of 2007? Housing construction continued its decline, even though at the start of 2008 it was plausible and by the end of 2008 it was undeniable that the housing bust had been sufficiently long and deep to erase any Hayekian overbuilding of residences. And throughout 2008 equipment investment and exports fell off the cliff, gradually at first and then at a stunning pace.

Why did they do this? It wasn't because, as Daniel claims, of "the disappearance of a huge amount of household sector wealth. It did disappear. But wealth had disappeared before--remember Black Monday on the stock market in 1987, or the collapse of the dot-com boom?--without it triggering a Lesser Depression. It was because people recognized that banks that were supposed to have originated-and-distributed mortgage-backed securities had held on to them instead, that as a result a large chunk of the $500 billion in subprime losses had eaten up the capital base of highly leveraged financial institutions, and that you were running grave risks if you lent to a bank. The run on the shadow banking system that followed was the source of the crash as financing for exports and for equipment investment vanished, and then the whole thing snowballed.

No banks losing track of the risks they were running and holding on to assets that were supposed to be originate-and-distribute, no financial crisis, no credit crunch, and no Lesser Depression. The housing bubble would have deflated, unemployment would now be near 5%, exports would have boomed, and our biggest worry right now would probably be a "weak dollar".

Instead, I somehow find myself in this strange alternate universe...


Emi Nakamura and Jon Steinsson: "Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions"

Nakamura and Steinsson:

We use rich historical data on military procurement spending across United States regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed-economy aggregate multiplier. The closed-economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind". In contrast, our estimate "differences out" these effects because different regions of the U.S. share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks have large effects on output.

An open economy relative multiplier of 1.5 for states, of 3.5 for high-unemployment states, and of 0.7 for low-unemployment states.

Given the magnitude of spillovers across state lines, an "open economy relative multiplier" of 1.5 is very large indeed--corresponding to a "closed-economy aggregate multiplier" substantially north of 5…

Elizabeth Warren Runs for Senate

Via Eschaton:

Elizabeth Warren!

I hear all this, you know, “Well, this is class warfare, this is whatever.”—No!

There is nobody in this country who got rich on his own. Nobody.

You built a factory out there—good for you! But I want to be clear.

You moved your goods to market on the roads the rest of us paid for.

You hired workers the rest of us paid to educate.

You were safe in your factory because of police forces and fire forces that the rest of us paid for.

You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.

But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Barack Obama as Slightly to the Right of Colin Powell...


Obama as True Believer: [T]he president seems to have been remarkably hostile to any discussion of trying to do another stimulus when it was obvious the first wasn't doing what was needed.... Suskind reports that when the administration was informed of the potential for unemployment at 9.8% in 2010, Obama was pensive, knowing that the midterms could be a bloodbath and he asked for some input.... [H]e was apparently unmoved by the various scenarios, passively saying he hoped the rosier scenarios came to pass and that was that.

It certainly does clear up any thought we might have had about whether or not the president is a real fiscal conservative or whether he was just flogging this deficit obsession for political effect. He's a true believer. And we know this because of his reliance on other deficit hawks and because when the political bloodbath the jobless recovery had predicted came true, his first move was to validate the Republicans' manufactured narrative about what had motivated their voters and launch his program of budget cuts and deficit reduction.

I have thought that his fetish for a Grand Bargain was mostly born of a delusional belief that he was someone who could bridge unbridgeable differences and be remembered as the man who brought cats and dogs together. But it looks as though he was just as motivated by the fact that he's a true blue, Concord Coalition, Pete Peterson deficit hawk.

Stephen Dawson Liveblogs World War II September 23, 1941

Stephen Dawson:

23rd September 1941: Base camp life in Cairo: "When I first felt ill I didn’t report sick for a day or two. It is discouraged to report sick at the Base. You are usually malingering to avoid a draft. Eventually I had to go, though. As my temperature was normal I got Medicine and Duty and felt a criminal. None of the required Medicine was available but they managed to arrange plenty of Duty for me. In the afternoon (it was a half holiday) I was selected for a burial party.

We buried a couple of blokes at the English Cemetery. They had shot it out with revolvers and both died. One was an MP and weighty; the other was a Scot and lighter. I edged towards the second coffin. “C’mon this ‘un,” said the Sergeant, “You look a big, healthy strong feller” (My God! What irony I thought.) The distance we had to carry the coffins was easily 250 yards. When we got there – “Whop ‘im in, lads!” cried the Sergeant, “An’ lets get weavin’ into the town!” And these men in the be-flagged coffins had died romantically of Bullet. “Some corner of a foreign field”, what!

When I got outside, I noticed that everyone complained of the sickening smell from the coffins… Apparently the two revolver kings had been dead three days, which in this climate, is discouraged. I’d been too ill to notice any smell. All I’d observed was that there is something unmistakably peculiar about the movement of the feet of men carrying the body of another man.

Next day my temperature was 100 degrees and I was sent to bed in my tent. Next day it was normal and I remained in bed. Third day it was 102 degrees. “What is wrong with you?” asked the MO vaguely. “Suspected sandfly fever sir” “And you feel better today?” briskly selling me an affirmative. “No,” I said coldly, “I feel worse, actually” “Oh, you’d better go to hospital, out of the way!” he said impatiently.

So I came here and they soon found it was not sandfly at all but malaria. I feel much better now. Just old and tired. I read all the time, except when I feel too weary. Wonder if I’ll ever feel fit again. It’s months since I felt fit – or tolerably happy.

Ezra Klein on the Deep Incoherence of Ron Suskind's "Confidence Men"


Ron Suskind’s Larry Summers problem: I’ve also been reading ‘The Confidence Men,’ and like Weisberg, I’m not impressed, but for a very different reason. Let’s call it, as Suskind does, the Larry Summers problem…. No one in the book gets a worse rap than Summers. And I don’t mean as a decision maker. I mean as a person. Suskind really doesn’t like the guy. But stop for a moment and consider what Suskind actually thinks about Summers: He believes that his remarkable ability to argue and debate and convince allowed him to hijack President Obama’s process and agenda. The book, which is largely about the White House’s internal processes, argues that this issue, the White House’s Larry Summers problem, has been the core impediment for the administration over the past three years.

And yet, when Suskind begins explaining, or at least implying, what the White House actually did wrong, the Larry Summers problem provides almost no explanatory power. In fact, it points in the other direction, the direction Suskind clearly wishes the White House had gone.

Suskind… makes a very big deal of the fact that Obama was leaning toward nationalizing the banks… [until] Timothy Geithner arguably killed the initiative. In the conclusion, this is really the only policy issue Suskind identifies…. So where was Summers and his remarkable powers of persuasion during this debate? Well, he was on the side of nationalizing Citibank. Indeed, Suskind suggests that he was actually trying to end-run Geithner’s reluctance by writing the policy proposal that Geithner refused to produce. “Larry and Christina worked the phones in early March to try to gather the information they’d need to field, at the very least, a strong counterproposal,” reports Suskind, “if not the kind of fully rendered alternative plan that only Treasury could provide.”

The other major issue that could plausibly have had a material effect on the recovery was the question of a follow-up stimulus package. In another of Suskind’s more consequential passages, he relays an argument that Christina Romer made to the president, in which she characterized Peter Orszag’s view that a small stimulus would be ineffective as “oh so wrong.” In the book, Obama comes down very hard on her, and this anecdote is mentioned in many of the stories about the dissatisfaction the White House’s female staffers had with the way they were treated. In the next passage, however, Suskind notes that in a subsequent meeting, “Summers stepped up, offering, almost word for word, the position Romer had voiced previously.”

There’s little doubt that Summers ran a poor process. I wrote a piece on this back in August 2010, for instance. But the question is whether that process led to substantially worse policy outcomes. And that’s less clear. You can see the tension in Suskind’s book, as in most of the cases where Suskind identifies a major inflection point for administration policy, Summers is running a fairly open version of his process, and Summers ends up on both the side that Suskind appears to support and on the side that ultimately loses the debate...

Hear the Word of the LORD!

David Weigel tells us about Ron Paul:

More Notes from Ralph Reed's Jamboree: Ron Paul started with the story of Isaiah, reminding the crowd of what God told the prophet about the "remnant" that can be activated by faith. "The greatest example of this 'remnant' idea was what happened with the Soviet system," said Paul, going into the life and battles of Russian dissidents. Too subtle? Fine: "We ought to obey the Bible on the monetary issue!"


And, behold, one came and said unto Jesus, "Good Master, what good thing shall I do, that I may have eternal life?"

And Jesus said unto him, "Why callest thou me good? there is none good but one, that is, God: but if thou wilt enter into life, keep the commandments."

The young man saith unto him, "Which?"

Jesus said, "Thou shalt do no murder, Thou shalt not commit adultery, Thou shalt not steal, Thou shalt not bear false witness, Honour thy father and thy mother: and, Thou shalt love thy neighbour as thyself."

The young man saith unto him, "All these things have I kept from my youth up: what lack I yet?"

Jesus said unto him, "If thou wilt be perfect, go and sell that thou hast, and give to the poor, and thou shalt have treasure in heaven: and come and follow me."

But when the young man heard that saying, he went away sorrowful: for he had great possessions.

Then said Jesus unto his disciples, "Verily I say unto you, That a rich man shall hardly enter into the kingdom of heaven. And again I say unto you, It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God…"

Department of "Huh?!": Ireland "Cuir Siao ar Ghabhar Agus Is Ghabhar" Edition

Periodically Tyler Cowen claims that Ireland's experience falsifies "the Keynesian story"--tha austerity has not killed the Irish economy but made it stronger, or that austerity has struck the Irish economy down but it is now rising up more powerful than we cdan imagine, or something:

I can't see why he says this:

Microsoft Excel

Microsoft Excel 1

I, at least, believe that part of "the Keynesian story" is that there are full employment equilibrium-restoring forces in the economy-but that they are weak, and will not manifest themselves if you keep hitting the economy on the head with a hammer.

Paul Krugman Needs to Learn the Leadership Secrets of the Anglo-Saxons

From The Battle of Maldon, the words of Byrhtwold:

Hige sceal þe heardra,/heorte þe cenre,
mod sceal þe mare,/þe ure mægen lytlað

Paul Krugman:

What Profit Hath A Man Of All His Labor?: I’m in a weird mood as the markets tumble. It will pass, but right now I feel like the preacher in "Ecclesiastes", wondering about the point of it all.

Here’s the point: back around 1998 I was among those who looked at the crisis in Asia and realized what it implied — namely, that the problems that caused the Great Depression had not been solved, and that it could happen again. The speculative attacks on smaller nations, the liquidity trap in Japan, were omens for all of us. In 1999 I wrote a book, The Return of Depression Economics, saying all that.

When the 2008 crisis struck, it was immediately clear that this was what we had been afraid of. And it was desperately important that policy makers realize that we were in a world where the usual rules no longer applied.

But they didn’t. The banks were rescued — but as soon as that happened, the moralizers and deficit worriers, the people who see hyperinflation lurking under every bed, took over. Warnings that we were repeating not just the mistakes of Japan but the mistakes of Hoover and Bruening were waved away as the squeaking of people of no consequence, never mind the fact that some of us had pretty fancy credentials.

And now we are exactly where I feared we’d be, repeating all the old mistakes and experiencing all the old consequences.

As I said, I’ll get over it. But grant me a moment to look on the past three years, and despair.

Now I do feel guilty: four years ago I should have started screaming that the banks had lost control of their derivatives books and that we needed to nationalize housing finance immediately, and kept on screaming. I did not.

But, IMHO at least, Krugman has nothing to feel guilty for. I believe that he has been one of the world's great benefactors over the past four years.

Simone Wallmeyer is the Face of German Finance

Will somebody please leave this poor woman alone | FP Passport

Blake Hounshell:

Will somebody please leave this poor woman alone?: Granted, there are only so many ways photographers can show a stock market in decline. Still, couldn't the folks at Getty Images leave this poor German trader alone and find someone else to use as a stand-in for an entire continent's economic fears?

Here she is earlier today…. Here she was on Sept. 30…. Here she was looking cautiously optimistic on Sept. 19…. And here she was pursing her lips disapprovingly on a particularly grim Sept. 16, in a photo that made the front page of the Financial Times. I bet she wishes she can go back to the days of Sept. 15, when she could do her job in relative obscurity:

UPDATE: The woman's name is Simone Wallmeyer. The Independent interviewed her Friday. "I'm afraid I get photographed because of the board rather than me," she told the paper. (Thanks to a sharp-eyed Passport reader for the name.)

The World Is More "Vulgar Keynesian" than I Had Imagined

And those economists--Paul Krugman, Dean Baker, Nouriel Roubini--who were warning that it might be should get credit for what they said long ago in the days of the Great Moderation.

Duncan Black:

Eschaton: Maybe We Can Tell People Who Was Right?: Maybe editors can invite those who were screaming about bond vigilantes to write heartfelt apologies to all of those they helped to condemn to long term economic suffering? Just kidding, they'd just write how brave and bold it was to be a part of their very smart club, even though they're wrong about everything.

Paul Krugman:

One Point Seven Seven: That’s the current interest rate on 10-year US bonds.

Remember, back in 2009 there was a big debate between people like me, who said that we were in a liquidity trap and that interest rates would stay low as long as the economy was depressed, and people like the WSJ editorial page and Niall Ferguson, who said that government borrowing would bring on the bond vigilantes and send rates soaring.

How’s it going?

And just to be clear: this isn’t just about I-told-you-so. We’re talking about different models, different visions of how the economy works. Their vision led to calls for austerity now now now; mine said that the overwhelming danger was that we wouldn’t provide enough stimulus, and that we would pull back too soon. Sure enough, we didn’t and we did. And now catastrophe looms.

Risk, Return, and Macroeconomics: More Like Trying to Stop a Charging Rhinoceros with a Deer Rifle...


Paul Krugman writes:

Meh -- And I Mean That: OK, the Fed moved. It was a bit stronger than expected — and BB and company stood up to the GOP. But seriously, they’re trying to use a water pistol to stop a charging rhino…

It's not that bad. A water pistol is about 1/10000 the weapon you need to stop a charging rhino. This is more like 1/10 of what I think the Fed should be doing.

Paul then goes into one of the things he does very best--making complicated issues of economic institutions and market responses crystal clear:

Conventional monetary policy operates by changing the supply of monetary base, which is a unique, uniquely liquid asset. Increase the supply of green pieces of paper with pictures of dead presidents, and you start a hot-potato process in which people try to get out of that asset into higher-yielding but less liquid assets, interest rates fall all along the curve, and big real things can happen. Right now, however, people are holding monetary base at the margin simply for its role as a store of value [because in a liquidity trap its zero interest rate is a rate of return competitive with that provided by other stores of value], so conventional monetary policy doesn’t do anything.

The Fed is therefore trying to operate on a different margin, swapping short-term for long-term securities. The trouble here is that it’s not at all clear that this has much traction. To a first approximation, long-term interest rates are determined by expected future short-term rates, and if that were the whole story, the Fed would be accomplishing nothing at all. Now, to a second approximation, risk plays a role; and what the Fed is trying to do is play on the margin created by the difference between the first and second approximations. OK. But we’re talking about very big markets here. Total nonfinancial debt in the US is around $36 trillion, and the Fed is talking about shifting $400 billion of that total from short-term to long-term assets. How much effect can that have?


Well, the present-value discount on the cumulative cash flows from holding long-term Treasury bonds has two components: an expectation that short-term interest rates will rise in the future, and a reward for bearing risk. At the moment ten-year Treasury bonds are selling at a present-value discount of 20 14%, and thirty-year Treasury bonds are selling at a present-value discount of 45%. Guess that half of these discounts are expectations of interest rate changes and half are rewards for risk bearing. Then if the Fed buys half 10-year and half 30-year bonds it takes risk currently valued at $60 billion off of the private sector's balance sheet. A ten-year corporate investment project of about $150 billion carries $60 billion worth of risk with it, so if this works and if the risk-bearing capacity freed-up by this version of quantitative easing is then deployed elsewhere, we will have an extra $150 billion of business investment over the year or so it takes to roll out this program and for it to have its effect.

$150 billion is, as Christina Romer likes to say "not chopped liver"--not even in a $15 trillion economy. But it is about 1/10 of our current problem--maybe less when you reflect that our current-problem is a multi-year problem.

Better, Paul says, for the Federal Reserve to act on inflation expectations rather than simply acting to free up some of the risk-bearing capacity of the private market:

The main way in which unconventional Fed policy can work is by changing expectations — especially expected future inflation. And that’s not happening. In fact, expectations of inflation over the next 5 years have been falling fast:

And let me 100% endorse Krugman's conclusion:

So kudos to the Fed for defying the right’s threats, and I guess this is better than nothing. But is it remotely enough? No.

Jo Walton Reviews Vernor Vinge’s "A Fire Upon the Deep"


Jo Walton:

“All right, one quest. But never another!”: It’s not that I think A Fire Upon the Deep is perfect, it’s just that it’s got so much in it.

There are lots of books that have fascinating universes, and there are lots of first contact novels, and there are lots of stories with alien civilizations and human civilizations and masses of history. The thing that makes A Fire Upon the Deep so great is that is has all these things and more, and it’s integrated into one thrilling story. It has the playful excitement and scope of pulp adventure together with the level of characterisation of a really good literary work, and lots of the best characters are aliens.

It really is the book that has everything.

Galaxy spanning civilizations! Thousands of kinds of aliens! Low bandwidth speculation across lightyears! Low tech development of a medieval planet! Female point of view characters! A universe where computation and FTL travel are physically different in different places! An ancient evil from before the dawn of time and a quest to defeat it! A librarian, a hero, two intelligent potted plants, a brother and sister lost among aliens, and a curious mind split between four bodies. And the stakes keep going up and up…

I would add that the hero is both a zombie and also thinks he is The Lost Prince of Canberra. And the potted plants' pots have six wheels. Hexapodia really is the key insight…

Four Years After the Wake-Up Call

About four years ago exactly, we learned that we were in trouble. We had a housing boom driven by unrealistic expectations of house prices and mortgage costs that had created a housing overhang of overbuilding. Moreover, bankers who ought to have known better and had promised management and shareholders that they were originating-and-distributing securities that rested on a fundamental base of subprime mortgages had held onto such securities instead. The daily gyrations of the usually-placid Federal Funds market starting in late 2007 told us all that banks were really worried that other banks had jumped the shark and turned themselves insolvent.

FRED Graph  St Louis Fed 7

The Fed Funds Market since Last June

Four years ago nearly all mainstream economists would have said that, even though the situation appeared serious, by now the economy would be back to normal. Some of us would have said that within a couple of years the housing capital overhang would have been worked off--and it has--and so there would no longer be any real cause of recession. Some of us would have said that within a couple of years people would have adjusted their price expectations to the lower level consistent with the nominal shock of the flight to quality, and there would be no price-expectations reason for recession. Some of us would have said nominal shocks can disturb the labor market matching process, but not for long: that conditional on the absence of a current negative shock the unemployment rate jumps 40% of the way back to it's natural rate value in a year.

Very few of us thought that it would be long and nasty: Paul Krugman, Nouriel Roubini, and Raghuram Rajan are the only three names regularly on my must-read radar screen that come to mind--and none of them specifically feared that a subprime mortgage crisis would have catastrophic consequences. UPDATE: Dean Baker was warning very early that the housing crash was (a) inevitable and (b) would be log and nasty.

And as it turned out to be long and nasty, recent economic theories of macroeconomics have fallen like tropical rain forests. The--already implausible--claims that downturns had real causes? Fallen. The claim that downturns lasted only as long as workers misperceived their real wage? Fallen. The claim that the labor market cleared in a small number of years? Fallen. Those of us who believed that the long run came soon, that the cause of downturns was transitory price-level misperceptions, or that downturns had real causes need now to be looking for new jobs, or at least new theories.

And we are left with the live macroeconomic theories being those of the 1960s, at the latest. This is embarrassing for those of us who want to belong to a profession that is a progressive science, rather than an analogue of medieval barbering.

So what would the economic theories of the 1960s and before tell us to do?

  • Milton Friedman: monetary expansion, and more monetary expansion--quantitative easing as deep and as broad as necessary to get nominal GDP back to its trend.

  • John Maynard Keynes (or at least one of the moods of Keynes): have the government borrow and buy stuff, and keep buying stuff until real economic activity is back to some normal trend value.

  • Jacob Viner: Why choose? Do both! Print lots of money and have the government use it to buy stuff and hire people.

The odd thing is that none of those three recommended policies--all of which are sponsored by economists with the purest of purebred pedigrees--have been followed. We simply have not expanded government purchases as a share of potential GDP in this downturn:

FRED Graph  St Louis Fed 4

And while the Federal Reserve has taken the monetary base to previously-unimaginable levels--up from $900 billion to $1.7 trillion in late 2008, up to $2 trillion in let 209, and up to $2.7 trillion in early 2011--it has never adopted Milton Friedman's recommended policy that it start buying bonds for cash and keep buying bonds for cash until nominal spending is on the path that the Federal Reserve wants it to be on:

FRED Graph  St Louis Fed 5

And so right now nominal GDP is $15 trillion/year when it ought to be $16.7 trillion/year:

FRED Graph  St Louis Fed 6

It is not as though anybody is happy with 9% plus unemployment, is it?

The Shape of the Downturn

FRED Graph  St Louis Fed 4

this is not a bad way to look at (much of) what is going on in the current Lesser Depression. The boom of the 1990s had been driven by rising exports and, overwhelmingly, business investment in equipment investment and software as Bill Clinton's stabilization of the U.S. government's long-term finances and his shrinkage of the government had unleashed a high-investment, high productivity growth recovery. The recession of 2001 was driven primarily by a fall in exports and secondarily by a fall in business equipment investment. The mid-2000s recovery was led by residential investment, with exports and business equipment investment adding support.

That takes us up to the end of 2005.

With the start of 2006, the housing bubble bursts and residential construction investment begins to decline as a percentage of potential GDP. But for the first two and a half years exports stand up as housing construction stands down and the economy remains near an even keel even with the growing financial turmoil.

Then in late 2008 the economy falls off a cliff: business investment in equipment and software collapses, housing investment collapses further to far below any equilibrium level, and exports collapse. Exports and business equipment and software investment start to recover in the third quarter of 2009. If only their good recovery performance had been matched by a recovery in residential investment and an increase in government purchases, we would due fine.

But there was no recovery in residential construction. There was no increase in government purchases. And starting in 2010 the shrinking government sector puts additional downward pressure on the economy.

Good to See, But About 1/10 of What I Guess We Should Be Doing


Federal Reserve: Fed Announces More Stimulus Despite Growing Criticism: The Federal Reserve on Wednesday dialed up its aid to the beleaguered U.S. economy, launching an effort to put more downward pressure on long-term interest rates over time and help the battered housing sector. The Fed said it would launch a new $400 billion program that will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to purchase longer-dated Treasuries. It will now also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, an acknowledgement of just how weak conditions in the sector have remained.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,'' Fed said in its statement. Faced with a lofty 9.1 percent jobless rate, consumer and business confidence sapped by a troubling U.S. credit downgrade, and an escalating sovereign debt crisis in Europe, Fed officials have signaled they would seek to prevent already sluggish U.S. growth from weakening further.

The problem is that such policies work, to the extent that they work, by taking duration and other forms of risk onto the government's balance sheet, leaving the private sector with extra risk-bearing capacity that it can then use to extend loans to risky private borrowers.

But buying a 10 or even a 30-year Treasury bond and selling Treasury bills does not remove all that much risk from the government's balance sheet. Much better--if you have $400 billion to spend--to buy something much riskier...

Hoisted from Comments: Norman Carlton Is the Institutional Memory of the U.S Treasury

Norm Carlton:

Reading Ron Suskind's "Confidence Men"...: When there was an Under Secretary for Monetary Affairs at Treasury, both the Assistant Secretary for International Affairs and the Assistant Secretary for Domestic Finance reported to this Under Secretary. I believe the Fiscal Assistant Secretary, a position not requiring Senate confirmation, also reported to the Under Secretary, but as a practical matter, the Fiscal Assistant Secretary, who oversees two bureaus, Public Debt and Financial Management Services, has been more an operational position than a policy one.

The Under Secretary for Monetary Affairs position made sense, since it meant that many disagreements, though not all, between Domestic Finance and International Affairs could be resolved without having to appeal to the Secretary.

In the George H.W. Bush Administration, the Under Secretary for Monetary Affairs position was split in two, one Under Secretary for Domestic Finance and one for International Affairs. In the Clinton Administration, the Assistant Secretary for Domestic Finance position was split in two, one for Financial Markets and one for Financial Institutions. Then, I am not sure whether it was in the George W. Bush or the Obama Administration, the Assistant Secretary for International Affairs position was slit in two -- International Finance and International Markets and Development.

The current structure creates more political positions and has devalued the importance of Assistant Secretaries. It can also contribute to more turf fights because of overlapping responsibilities. More important, though, to the functioning of the Treasury Department are the particular people appointed to the various political positions, how well they work together, and the leadership of the Secretary.

Nick Rowe Continues His War on New Keynesian Macroeconomics

Nick Rowe:

Worthwhile Canadian Initiative: What's wrong with New Keynesian macroeconomics: New Keynesian models lead good economists, who correctly diagnose the monetary nature of the recession, at the same time to believe that monetary policy is powerless at the zero lower bound. And recommend fiscal policy instead. This is like correctly diagnosing magneto trouble, then recommending we all get out and push the car, rather than fixing the magneto. I just refuse to accept that that's the best we can do. We need to understand that monetary magneto better, and learn how to fix it. And it is my frustration with this lack of correspondence between diagnosis and policy prescription that has lead me on my three year search for something better….

All equilibrium theories have a disequilibrium story on the side. If the demand curve for apples shifts right, that creates excess demand for apples at the old equilibrium price, so individual sellers can raise their prices above other sellers' prices and still sell their apples, and this process is what gets the price to the new equilibrium. In monetary economics we call this disequilibrium story the monetary policy transmission mechanism. The interest rate transmission mechanism is the New Keynesian disequilibrium story. It's not the only possible story. It's not even a very good story, as I argue above.

My MX6 developed "magneto" trouble last Summer, 100kms away from home. Replacing the alternator is a 2 hour job, and I didn't want to do it at the side of the road. So I bought a new battery at Canadian Tire, replaced the old battery when it finally died, and that got me home. I replaced the alternator the next morning. There are circumstances when a bodge job is the best you can do. But it's not really satisfactory.

Suskind Audiotape Backs Up Anita Dunn in Her Claim To Be Quoted Out of Context

In normal, conversational English, "If not for X, then Y" means: "Not Y, and X made the difference".

Anita Dunn to Valerie Jarrett:

If it weren't for the president, this place would be in court for a hostile workplace, because it actually fit all of the classic legal requirements for a genuinely hostile workplace to women...

Ron Suskind:

"This place would be in court for a hostile workplace," Dunn is quoted as saying in Suskind's book. "Because it actually fit all of the classic legal requirements for a genuinely hostile workplace to women."

Naughty, naughty, Ron. That's not how you quote.

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

Notes Toward an Understanding of Obama's Economic Policymaking

First, Eight Passages from Ron Suskind's Confidence Men that seemed to me worth noting:

The internal victory of the "do less" camp:

Two passages on the curious passivity of Obama as it became clear not just to the Left Opposition but to everybody that the administration needed to do more:

Ron Suskind's view of relative standing inside the Imperial Court:

A passage I noted that seems to me to reflect very badly on Obama:

Two passages I noted that seem to me to reflect badly on Suskind:

Coverage of Ron Suskind's Confidence Men has so far focused almost exclusively on the gotchas. And the gotchas in this book are three:

  1. Tim Geither, home alone in the Treasury without confirmed deputies in the winter of 2009, was overwhelmed with things to do and dropped assignments on the floor--including the assignment to construct a resolution plan for Citigroup.
  2. Larry Summers does not have a future career as leader of a self-esteem therapy group.
  3. Senior female officials in the administration felt that it was too much of a middle-aged boys' club, and that this was a problem. (Curiously, you will not learn that those same senior administration officials thought that the president was their friend and ally in fighting this middle-aged boys' club atmosphere.)

It is not clear to what extent these gotchas are fire or merely smoke. That Larry Summers roams the world leaving enemies in his wake is no secret. That Tim Geithner was unwilling to make a banker cry after his participation in the fiasco that was the Lehmann Brothers application of "tough love" to the banking system was not news to me at least. And former White House Communications Director Anita Dunn claims that Ron Suskind gets her quotes wrong. She has a reputation as somebody who stands up, says what she thinks, and confirms that she said what she did indeed say. Other senior Obama policymakers say that Ron Suskind promised them quote approval and did not deliver. It is barely possible that they are deciding that now is the time to spend their reputations in defense of the president. It is not likely.

So let's dig deeper than the gotchas.

When I first learned in the summer of 2009 that Ron Suskind's next book was going to be about the making of a economic policy in the Obama administration, I looked forward to it. As of early 2009 I thought that the Obama economic policy team was first rate. All five of the principals, Bernanke, Geithner, Summers, Romer, and Orszag, seemed to me among the very best candidates in the world for senior economic policymaking jobs in an American administration. Plus they were all my friends, or at least friendly to me. I did think that some of them were in the wrong jobs: Summers made much more sense to me as Treasury Secretary than as NEC chair. Geithner and Orszag seemed to me much better suited to be NEC Chair than to manage large departments with line authority. But although the economic situation was horrible the economic policy team looked very good. So I thought the story that Suskind's book would tell would be that of success: smart and serious people who knew what they were doing fighting about substance, presenting the president with good options, him choosing the best one, and the course of the economy during the Obama administration being if not great at least better than we all feared after the bankruptcy of Lehman Brothers.

And, indeed, there is a perspective from which Obama administration economic policy has been a considerable success. The banking system collapse was averted. The spike of the unemployment rate to 15% or higher was averted. Obama passed a pretty good financial regulatory reform. Obama passed a pretty good health-care financing reform. Obama passed the largest quick fiscal expansion he could get through congress (using the Reconciliation process would have taken a lot longer). We are left with a jobless recovery, and with crippled mortgage finance and construction, and a ticking bomb in Europe. But, one could say (and I am sure Tim Geithner does say every hour) things could have been much worse--and would have been much worse had Republicans controlled any substantial share of economic policy or been more effective at blocking Obama initiatives.

But this is not the only perspective. As the past 30 months passed, I have became more and more alarmed. The policy choices being made by Obama appeared to be not only not the best but not even terribly good ones. When a new administration takes office, it needs to (1) forecast what is most likely to happen, and (2) design and implement policies that will deal with what is likely to happen and put the economy on a trajectory toward a good outcome. The Obama administration did that--I think that some of its initial policies were wrong, I think that Tim Geithner was so scared that his attempt to get tough on banks during the Lehmann Brothers bankruptcy had backfired so catastrophically that his judgment was impaired, but given the press of events I would give the administration moderately high marks for the policies it designed and implemented up through, say, April 2009.

Thereafter things seemed to me to fall apart. An administration has a third task it needs to carry out: (3) think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well. It needs to ask itself:

  • What if we are wrong in our estimation of the situation--what might the world then look like three years from now?
  • What if more things go wrong in the next year or two--what might the world then look like three years from now?
  • In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?

And there the Obama administration seemed to fail. I wanted to figure out why.

Obama Confronts the Likelihood of a Jobless Recovery

From Ron Suskind's Confidence Men: the summer 2009 "jobless recovery" briefing:

Cloud Reader 49

Cloud Reader 50

Cloud Reader 51

Cloud Reader 10

Two comments:

  • This briefing seems to come remarkably late: I know I was worrying about the possibility of a jobless recovery from March 2008 on.

  • There is no sign in Suskind's book of any reaction--of any contingency planning for what if Zandi was wrong: "I hope that Zandi is right" is not a plan.

Ron Suskind's View of Who Is Advising Obama on Economic Policy

A correspondent sends me a list of the number of page mentions in Confidence Men:

133 Lawrence Summers
131 Tim Geithner
59 Peter Orszag
49 Paul Volcker
45 Christina Romer
42 Ben Bernanke
40 Alan Krueger
34 Robert Wolf
29 Gary Gensler
24 Elizabeth Warren
22 Austan Goolsbee
22 Valerie Jarrett
21 Robert Rubin
16 Nancy-Ann DeParle
15 Sheila Bair
11 Paul Krugman
6 Robert Reich
5 Joe Stiglitz
5 Steve Rattner
5 Andrew Metrick
5 Gene Sperling
5 Neil Wolin
4 Jason Furman
4 Laura Tyson
4 Jared Bernstein
3 Jeff Sachs
3 Mike Froman
2 David Romer
1 Peter Diamond
1 Alan Blinder