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December 2011

On Daeho Kim's Claim That All of Our Medicare Spending Problems Are the Reagan Administration's Fault…

Austin Frakt: Pricing CABG | The Incidental Economist:

I’ve now had a chance to read Daeho Kim’s working paper “Medicare Payment Reform and Hospital Costs” (ungated pdf). It has already received some attention from Tyler Cowen, Reihan Salam, and Noah Miller, and I’ve already received some comments about it from readers. The key question among the bloggers is whether the phenomenon Kim investigates explains why US health expenditures pulled away from that of other nations beginning in the early 1980s, an upward bending of the cost curve…. [I]t’s fairly easy to put that question to rest without reading very far into Kim’s paper. It suffices to know that [the paper is] about how Medicare’s payment system for inpatient hospital services increased use of certain costly inpatient services and inpatient spending…. [T]he 1980s [cost explosion] phenomenon is largely an outpatient one…. [Kim's paper] does not address the main driver of the 1980s curve bending…


Nouriel Roubini: Stimulative Action Now!

Nouriel Roubini:

A plea to policymakers: we can’t risk another year of delay: For the last three years the world’s biggest economies - the US, eurozone and China - have been living up to the infuriating euphemism so beloved of policymakers: ”kicking the can down the road”…. [P]olitical constraints - the approaching elections in the US and leadership transition in China at the end of 2012, and the inability of the eurozone’s 17 governments and coalitions to coordinate policies coherently while staggered elections and changes of government take place – have led leaders to avoid the short-term pain and political costs of tough decisions that will yield benefits only over the medium term. 

It will become clear in 2012 that this game of “kicking the can down the road” is a zero-sum game…. If the world’s biggest economies continue to play the same game and try to kick the cans further down the road for another year, the cans will become bigger and heavier and eventually hit a brick wall. By 2013 at the latest, but possibly already in 2012, a perfect storm of a double-dip recession in the US, a disorderly scenario in the eurozone and a hard landing in China could materialise.


The Fiscal Multiplier Depends on the Monetary Reaction Function

FRED Graph  St Louis Fed 163

Scott Sumner is frustrated:

TheMoneyIllusion: For the 247th time, the fiscal multiplier is roughly zero: Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy.  There’s a mental block on their part (or on my part from their perspective) that prevents us from seeing eye to eye on the issue, even if we agree on the need for monetary stimulus. 

Everyone seems to agree that the fiscal multiplier is zero when we aren’t at the zero bound.  The issue being debated is whether this is also true when rates are near zero.  I say yes, most Keynesians say no.  See if you think the Fed continues to steer the nominal economy at the zero bound:

Bernanke and his colleagues may be considering more measures to aid growth and improve public understanding of Fed policy, which could be unveiled as soon as their next meeting taking place Jan. 25-26, said Julia Coronado, chief North America economist at BNP Paribas. The Fed reiterated that it expects joblessness to drop “only gradually.”

“They still see downside risks, so I still think they’re tilted toward easing,” said Coronado, a former Fed researcher who is based in New York. She said she expects a new round of asset purchases in the second quarter, or as soon as the January or March meetings should the economy deteriorate faster.

The “recent strength in data” allows Fed officials to “be a little more patient than they otherwise might be,” Coronado said.

Case closed?  Unfortunately the answer is no.  Both sides are dug in pretty deeply, so it will take more than a snippet from Bloomberg.com to change minds. 

Stay tuned for snippet number 248 in the near future.

The Money Illusion: http://www.themoneyillusion.com/?p=12297

From my point of view, it depends on what the monetary policy reaction function is. It depends on what the Federal Reserve does in response to any shock:

  1. If it take aggressive policy steps to restore nominal GDP to its pre-shock growth path come hell or high water, up to and including hitting the economy on the head with a brick to keep expansionary fiscal policies from affecting the path of nominal GDP, then, yes, Scott is right.

  2. If it sits on its hands and continues the policies it would have followed in the absence of the stimulative fiscal policy, then Scott is wrong unless (i) money demand (a) depends not on consumption spending but on GDP and (b) is interest inelastic or (ii) (a) the expansionary fiscal policy takes the form of buying exactly what the private sector would buy and (b) Ricardian equivalence holds.

I think we would be in a better place if the Fed's policy were well-described by (1)--and I work to try to convince the Fed to follow (1), but it seems pretty clear to me that the Fed's policy is well-described by (2): that no matter what fiscal policy is over the next two years, the Federal Reserve will keep short-term safe nominal interest rates at zero and the Fed's balance sheet at $3T.


Quote of the Day: December 20, 2011

"A pronounced stir was taking place in the ante-room; a loud, whooping laugh was heard, and the next moment a well-made gentleman in a plain evening dress embellished with a number of Orders walked into the ballroom, escorted by the Mayor of Brussels, and a suite composed of senior officers in various glittering dress uniforms. The ribbon of the Garter relieved the severity of the gentleman’s dress, but except for his carriage there was little to proclaim the military man. Beside the gilded splendour of a German Hussar, and the scarlet brilliance of an English Guardsman, he looked almost out of place. He had rather sparse mouse-coloured hair, a little grizzled at the temples; a mouth pursed slightly in repose, but just now open in laughter; and a pair of chilly blue eyes set under strongly marked brows. The eyes must have immediately attracted attention had this not been inevitably claimed by his incredible nose. That high-bridged bony feature dominated his face and made it at once remarkable…"

-Georgette Heyer, An Infamous Army


Things Could Be Worse!: Evaluating Macro Policy Edition

Adam Kotsko:

A sad suggestion: For discussion « An und für sich: Among the leaders of the major Western countries, it seems to me that the one whose response to the financial crisis was most effective was former UK prime minister Gordon Brown. It also seems to me that the only plausible competitor is Ben Bernanke.

This conclusion induces a profound despair in me. What do you think, dear readers?

An und für sich: http://itself.wordpress.com/2011/12/13/a-sad-suggestion-for-discussion/

8.6% unemployment when we had a level less than 6% by now at hand is a bad thing--6 million Americans' lives blighted for years, 20 million people worldwide, etc.

But at least the numbers are 6 and 20 and not--as they would have been had Cameron and Perry or Clegg and Gingrich been in the hot seats--20 and 50.

We could easily be much deeper in the Pit than we are...


It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment

Chad Stone:

Off the Charts Blog | Center on Budget and Policy Priorities | Blog Archive | It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment: Two competing narratives frame the debate about why unemployment remains so high even though the economy has been growing for more than two years. The mainstream “Great Recession” narrative holds that the economy fell into a deep hole in 2008 and has been climbing out of it so slowly because demand has grown so slowly.  Jobs continue to be very hard to find, no matter how hard unemployed workers look for them; employers are reluctant to hire until they see stronger signs that their sales will pick up soon.

The “Great Vacation” narrative holds that unemployment insurance (UI) benefits — in particular, the added weeks of benefits for the long-term unemployed that Congress has funded in the past few years — have dissuaded millions of unemployed workers from taking a job.  If, then, jobless workers would get off their duff (or if we would give them a good swift kick there), unemployment would plummet.

That narrative seems to be motivating the latest House UI proposal, which curtails the number of weeks of UI benefits available, would allow states to alter the fundamental social insurance nature of the program, and includes a number of “reforms” that would make it more difficult for workers who lose their jobs through no fault of their own to have access to the program (see our critique)….

A more recent analysis from Berkeley economist Jesse Rothstein finds even smaller effects [of extended UI on the unemployment rate]:

The estimates imply that UI benefit extensions raised the unemployment rate in early 2011 by only about 0.1-0.5 percentage points, much less than is implied by previous analyses.

Rothstein also found that more than half of this small increase in the unemployment rate occurred as workers receiving those added weeks of UI benefits stayed in the labor force looking for work, rather than drop out in discouragement.

When the unemployed stop looking for work, that reduces the unemployment rate (which only counts people actively looking for work), but it doesn’t help them or the economy or result in more workers having jobs….

[It] would be a serious mistake to conclude that the truth lies somewhere in the middle between the Great Vacation and Great Recession explanations — like saying that Philadelphia lies somewhere in the middle between New York City and Los Angeles.  If you rely on the Great Vacation explanation, you’ve barely started your journey to understanding why unemployment is so high.


Douthat's Inferno...

Ross Douthat, April:

A Case for Hell: Doing away with hell… threatens to make human life less fully human…. If there’s no possibility of saying no to paradise then none of our no’s have any real meaning either. They’re like home runs or strikeouts in a children’s game where nobody’s keeping score…. The doctrine of hell, by contrast, assumes that our choices are real, and, indeed, that we are the choices that we make. The miser can become his greed, the murderer can lose himself inside his violence, and their freedom to turn and be forgiven is inseparable from their freedom not to do so…. [T]he idea of hell is crucial to Western humanism. It’s a way of asserting that “things have meaning” — that earthly life is more than just a series of unimportant events, and that “the use of one man’s free will, at one moment, can mean life or death… salvation or damnation”…

Ross Douthat, December:

The Believer’s Atheist: [Christopher] Hitchens’s antireligious writings… he was not so much a disbeliever as a rebel…. His last word on the possibility of conversion…: “Suppose I ditch the principles I have held for a lifetime, in the hope of gaining favor at the last minute? I hope and trust that no serious person would be at all impressed by such a hucksterish choice.”…

[R]igorous atheism… leads ineluctably to the terrible conclusion of Philip Larkin’s poem “Aubade” — that “death is no different whined at than withstood.” Officially, Hitchens’s creed was one with Larkin’s. But everything else about his life suggests that he intuited that his fellow Englishman was completely wrong to give in to despair.

My hope — for Hitchens, and for all of us, the living and the dead — is that now he finally knows why.

I must say that most unfavorable obituaries of Christopher Hitchens confined themselves to saying that he (a) wasted his great talents and, (b) tried to lead the North Atlantic public sphere into supporting policies that were objectively destructive.

This one by Douthat is the only one I have seen that--when read against the background of Douthat's theology of last April--actually hopes for Hitchens's eternal damnation. Most Americans, at least, pray that the dead are in Heaven rather than that the choices the dead made in this life have Eternal Consequences…


Twitterstorm delong: December 19, 2011

  • emptywheel emptywheel @ @ThePlumLineGS Gotta have something to do. We probably won't be at the "examine Paul's racism" phase until he actually wins IA. 9 minutes ago Retweeted by delong

  • jayrosen_nyu Jay Rosen Regarding Christopher: @kathapollit on Hitchens is a superb use of your time. http://jr.ly/wekg 3 hours ago Retweeted by delong

  • jbarro Josh Barro NPR, 1945: "To some, he was a genocidal maniac bent on world domination. But others note Hitler unified a fractious continent under 1 flag." 4 hours ago Retweeted by delong

  • jbarro Josh Barro Via @jdhenchman, here's NPR's ridiculously friendly obit for Kim Jong-Il http://n.pr/umj29B 4 hours ago Retweeted by delong

  • ddiamond Dan Diamond HHS just announced its 32 Pioneer #ACOs - list and link to @TheAdvisoryBd FAQ on Pioneers here: http://advbd.co/vbNLoE 4 hours ago Retweeted by delong

  • jbarro Josh Barro Am kind of surprised that Christopher Hitchens didn't write a brutal takedown of himself to be published posthumously. 4 hours ago Retweeted by delong

  • delong J. Bradford DeLong James Hamilton on Shadowstats' and Niall Ferguson's Claim That "True" Inflation is More than 10% per Year http://bit.ly/vlmrut 5 hours ago

  • brianbeutler Brian Beutler @ @ezraklein like all conservative jokes, humor isn't in the punch line. It's in imagining a cartoon liberal get angry about the joke itself. 6 hours ago Retweeted by delong

  • ModeledBehavior Modeled Behavior Wow, so here is Niall Ferguson falling for the "if we used old-timey inflation it'd be 10%!" b.s. http://thedailybeast.com/newsweek/2011/… 8 hours ago Retweeted by delong

  • MarlowNYC Marlow Stern Craziest claims made about Kim Jong-il. Ex: "State textbooks claim Jong-il does not produce urine or feces" thebea.st/tNzq3e #KimJong 12 hours ago Retweeted by delong

  • mattyglesias mattyglesias True fact. Until I visited Finland, I thought reindeer were fake just like santa and elves. (h/t @kari_mokko). 9 hours ago Retweeted by delong

  • delong J. Bradford DeLong Václav Havel on Kim Jong-il http://zite.to/vKhTca via @zite 16 hours ago

  • TPCarney Timothy P Carney Kim Jong-Il said he got 11 holes in one the first time he played golf. 19 hours ago Retweeted by delong

  • delong J. Bradford DeLong Remembering Vaclav Havel http://zite.to/tzA4hT via @zitel # 20 hours ago

  • joshtpm Josh Marshall Also ironic Newt crushed by onslaught of unrebutted attack ads, 'victim' of style of politics he did so much to create 20 hours ago Retweeted by delong

  • matociquala Elizabeth Bear The Jabba's palace sequence really is interminable. and I cannot approve the wholesale slaughter of muppets. 21 hours ago Retweeted by delong

  • delong J. Bradford DeLong Rep. Barney Frank Makes A Compelling Case For The Liberal Vision Of Big Government http://zite.to/vNxIAz via @zite 22 hours ago

  • TheStalwart Joseph Weisenthal Ha RT @_TPR: Fin. bloggers continue to forget where they come from once they get the CNBC facetime. @TheStalwart is only who remains true 23 hours ago Retweeted by delong

  • went1955 Robert Went Ireland demands debt reduction in exchange for participation in treaty changes – Irish Times – http://bit.ly/ubZBSF (via @boomerangomics) 18 Dec Retweeted by delong

  • EconOfContempt EconOfContempt Draghi: "this crisis...started from budgets that had got completely out of control" http://on.ft.com/uCjZQK Ugh. Dooming himself to failure. 18 Dec Retweeted by delong

  • katelinnea Kate Linnea Welsh The most confusing part of #TinkerTailorSoldierSpy is understanding why on earth anyone would cheat on George Smiley. 18 Dec Retweeted by delong

  • jayrosen_nyu Jay Rosen David Gregory interviewing Michelle Bachmann is like a tin of freeze dried coffee trying to program your VCR. 18 Dec Retweeted by delong

  • altmandaniel Daniel Altman Half the Twittersphere is using the death of #Havel as a conveyance for its own self-important and grandiose pontificating. (Whoops.) 18 Dec Retweeted by delong

  • ggreenwald Glenn Greenwald Read Al Franken on voting NO on NDAA: "inconsistent with the liberties and freedoms that are at the core of the system" http://is.gd/WIRaBC 18 Dec Retweeted by delong

  • dsquareddigest Dan Davies The phrase running through my mind at present is "Why Christopher Hitchens' Death Means We Must Support My Politics" 18 Dec Retweeted by delong

  • TheStalwart Joseph Weisenthal Housing, unemployment, consumer credit, foreclosures, etc. all worse today than they were two years ago. 18 Dec Retweeted by delong

  • delong J. Bradford DeLong @ @radleybalko @jstrevino How about "Radley Balko is a national treasure"? #truth #soulwisethesearetryingtimesdepartmen 18 Dec

  • delong J. Bradford DeLong Peter Temin: Financial Intermediation in the Early Roman Empire http://histecon.magd.cam.ac.uk/docs/temin.pdf 18 Dec

  • drgrist David Roberts I swear, about 95% of today's GOP politics is explained by @JoshTPM's 2004 "bitch-slap theory." http://is.gd/IKsMZN 17 Dec Retweeted by delong

  • jbarro Josh Barro Looking forward to attack ad w/ Newt's “I only chose to work with those whose values I shared" quote followed by Pelosi love-seat photo. 17 Dec Retweeted by delong

  • drgrist David Roberts Des Moines Register endorses Romney: http://is.gd/RE8eAJ They like his MA healthcare plan, which is "strikingly similar to 'Obamacare'." 17 Dec Retweeted by delong

  • wilshipley Wil Shipley The best part about that video is the banana IS the product of intelligent design: ours. We domesticated it up to 8,000 years ago. 17 Dec

  • petertkane Peter Kane Recommended from @delong - The 70% Solution: Taxing the Rich Department http://bit.ly/vyU47o 2 minutes ago Favorite Retweet Reply

  • Prof_BearB Bear Braumoeller Certified 100% awesome RT @delong: Supervillain or Newt | Celebrating our next president's best ideas supervillainornewt.com 3 hours ago

  • jneeley78 Josiah Neeley @ @delong @ModeledBehavior Worth noting that Shadowstats doesn't even attempt to recalculate old-timey inflation. Just adds 7-8% to the CPI. 5 hours ago

  • Omorka Jennifer Ramon Apples to pomegranates, but still interesting // RT @delong Income inequality in the Roman Empire http://zite.to/uezjPI via @zite 15 hours ago

  • @delong: Rep. Barney Frank Makes A Compelling Case For The Liberal Vision Of Big Government http://zite.to/vNxIAz via @zite” /cc: @jmoore 19 hours ago

  • robertwaldmann @ @delong Wikipedia unclear. Island dwarf elephants +giant tortoises. best rule = breadbox rule (if it's bigger than a breadbox it shrinks). 20 hours ago

  • EdBoilermaker13 Ed H @ @EconOfContempt @delong It's like Draghi has no economics training at all. Maybe he's a US Republican. 22 hours ago

  • jstrevino Joshua Treviño The Huffington Post, where the national treasures write. RT @delong: @radleybalko How about "Radley Balko is a national treasure"? 18 Dec

  • dolanecon Ed Dolan @ @delong PK is right Even more amazing is that inflation fears live when latest BLS data show deflation bigger threat tiny.cc/0bf8w 18 Dec


Why Oh Why Can't We Have a Better Press Corps? Robert Samuelson/Washington Post Edition

The remarkable spectacle of somebody whom the Washington Post hires to write about things about which he knows literally less than nothing…

Outsourced to Paul Krugman:

Don't Know Much About History, Debt Edition: Robert Samuelson today:

When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps.

British debt history:

Don t Know Much About History Debt Edition  NYTimes com

Funny about that.

Don’t Know Much About History, Debt Edition: http://krugman.blogs.nytimes.com/2011/12/19/dont-know-much-about-history-debt-edition/?pagewanted=all

James Hamilton on Shadowstats' and Niall Ferguson's Claim That "True" Inflation is More than 10% per Year

James Hamilton:

Econbrowser: Shadowstats debunked: I've yet to find someone who has been able to reproduce the claims made by Shadow Government Statistics about the extent to which government agencies are grossly misreporting the U.S. inflation rate. Apparently, neither has the Bureau of Labor Statistics, as detailed in an article by BLS economists John Greenlees and Robert McClelland in the latest issue of Monthly Labor Review.

First, some of the bolder claims by Shadowstats:

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that....

The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.

And here's the response by Greenlees and McClelland:

To begin, it must be stated unequivocally that the BLS does not assume that consumers substitute hamburger for steak. Neither the CPI-U, nor the CPI-W used for wage and benefit indexation, allows for substitution between steak and hamburger, which are in different CPI item categories. Instead, the BLS uses a formula that implicitly assumes a degree of substitution among the close substitutes within an item-area component of the index. As an example, consumers are assumed to respond to price variations among the different items found within the category "apples in Chicago." Other examples are "ground beef in Chicago," "beefsteaks in Chicago," and "eggs in Boston"....

The quantitative impact of the CPI's use of the geometric mean formula also has been grossly overstated by some, with one estimate exceeding 3 percent per year. It is difficult to identify real-world circumstances under which geometric mean and Laspeyres indexes could differ by such a large amount. The two index formulas will give the same answer whenever the prices used in an index all change by the same percentage. The bigger the differences in price changes, the more the Laspeyres index will tend to exceed the geometric mean. For the growth rate of the Laspeyres index to exceed the growth rate of a geometric mean index by 3 percentage points, however, the differences in individual price changes have to be quite large.

To see this point, consider another very simplified example. Suppose that the CPI sample for ice cream and related products in Boston consisted only of an equal number of prices for ice cream and frozen yogurt and that, between one year and the next, all the prices of ice cream in Boston rose by 8.6 percent while all the frozen yogurt prices fell by 4.2 percent. In that case, the geometric mean estimate of overall annual price change would be 2.0 percent, only slightly less than the Laspeyres estimate of about 2.2%. In order to come up with a difference of 3 index points, one has to assume a much more dramatic divergence between ice cream and frozen yogurt prices than the one hypothesized. For example, if ice cream prices rose 30 percent in one year, while frozen yogurt prices fell by 20 percent, the overall geometric mean index would still rise by 2 percent, but the Laspeyres index would rise 5 percent, for a difference of 3 index points. However, such a large annual divergence would be quite uncommon within CPI basic indexes-- between ice cream and yogurt, between types of candy and gum, between types of noncarbonated juices, or between varieties of ground beef. Moreover, for a 3-percentage-point divergence to continue year after year, the divergence between the individual component prices would have to continue to widen. For example, if, by contrast, during the next year ice cream prices increased by the same amount as frozen yogurt prices, then the two index formulas would give the same inflation estimate for that year. Although such a divergence might plausibly occur in one component for 1 year, it is beyond belief that such sharply divergent price behavior would continue year after year across the whole range of CPI item-area components.

Finally, and most importantly, there is rigorous empirical evidence on the actual quantitative impact of the geometric mean formula, because the BLS has continued to calculate Laspeyres indexes for all CPI basic indexes on an experimental basis for comparison with the official index. These experimental indexes show that the geometric mean led to an overall decrease in CPI growth of about 0.28 percentage point per year over the period from December 1999 to December 2004, close to the original BLS prediction that the impact would be approximately 0.20 percentage point per year.

There's much more in the BLS article on this and related questions such as hedonic price adjustment and owner's equivalent rent.

Why do people continue to give credibility to an operation like Shadowstats? Now that's something that I'd like to hear explained.

: http://www.econbrowser.com/archives/2008/09/shadowstats_deb.html

Oh Boy: Niall Ferguson Practicing Economics without a License Department,,,

FRED Graph  St Louis Fed

Modeled Behavior sends us to:

Niall Ferguson: May 1, 2011: The Great Inflation of the 2010s: The Fed may deny it, but Americans know that prices are rising. Inflation is back.

“I can’t eat an iPad.” This could go down in history as the line that launched the great inflation of the 2010s. Back in March, the president of the New York Federal Reserve, William Dudley, was trying to explain to the citizens of Queens, N.Y., why they had no cause to worry about inflation. Dudley, a former chief economist at Goldman Sachs, put it this way: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.” Quick as a flash came a voice from the audience: “I can’t eat an iPad.”…

[I]f we’ve avoided rerunning the 1930s only to end up with a repeat of the 1970s, the public will judge him to have failed. To this, the Fed has a stock response. It points to the all-urban consumer price index (CPI-U) and notes that it was up only 2.7 percent in March relative to the same month a year earlier. Strip out the costs of food and energy, and “core CPI”—the Fed’s preferred measure—is just 1.2 percent. When Google unveils its new index of online prices, it’s likely to tell a similar story. To ordinary Americans, however, it’s not the online price of an iPad that matters; it’s prices of food on the shelf and gasoline at the pump. These, after all, are the costs they encounter most frequently. And with average gas prices hitting $3.88 a gallon last week, filling up is now twice as painful as when President Obama took office….

And the reason the CPI is losing credibility is that, as economist John Williams tirelessly points out, it’s a bogus index. The way inflation is calculated by the Bureau of Labor Statistics has been “improved” 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent. Yes, folks, double-digit inflation is back. Pretty soon you’ll be able to figure out the real inflation rate just by moving the decimal point in the core CPI one place to the right….

Maybe. Or maybe inflation expectations started shifting when the guy from Goldman—a Marie Antoinette for our times—seemed to say: let them eat iPads!

No. If the "old methods" were still being used, CPI inflation would not be 10%/year. God alone knows where Niall Ferguson got this. God alone knows why he believes it.

Pretty much all components of our price indexes are right now doing pretty much what they did in the decade of the 2000s--when there were no cries from Niall Ferugson at all about how "double-digit inflation is back."

Inflation Conspiracy Theories  NYTimes com

Paul Krugman on inflation conspiracy theories:

Inflation Conspiracy Theories: One response of inflation-fearers to the absence of the inflationary outburst they’ve been waiting for is to reject the numbers, and claim that the BLS is hiding a much higher rate of inflation than the official numbers say. You see that a fair bit in comments, and some credulous mainstream figures (i.e. Niall Ferguson) have also bought into this story. How do we know that it’s wrong?

One answer is that people I know work with the BLS, and they really are doing the best they can. But that won’t convince the skeptics, since I am presumably also part of the conspiracy. Bwahahahaha.

Another answer is that if inflation is much higher than reported, real GDP and real wages must have been plunging in recent years. That’s inconsistent with everything else we see, which corresponds to an economy with slow but positive growth.

But there’s a third answer: we now have price measures calculated independently by people not in the government — in particular, the MIT Billion Prices Project. The BPP collects prices from the internet; this means that it’s not a perfect match for the consumer price index, which includes things such as services that are generally not sold online. But if inflation were much higher (or much lower) than reported, you’d expect to see a big divergence between the independent index and the official stats…. Forty months into the project, the BPP shows a price rise about a third of a percentage point higher than the CPI. That’s around 0.1 percent higher inflation on an annual basis — i.e., essentially nothing.

Sorry, folks, but there’s no grand conspiracy to hide inflation.

: http://krugman.blogs.nytimes.com/2011/12/18/inflation-conspiracy-theories/?pagewanted=all

And Now, a Word from Calvin of Calvin & Hobbes

Calvin:

Since September it’s just gotten colder and colder. There’s less daylight now, I’ve noticed too. This can only mean one thing - the sun is going out. In a few more months the Earth will be a dark and lifeless ball of ice.

Dad says the sun isn’t going out. He says its colder because the earth’s orbit is taking us farther from the sun. He says winter will be here soon.

Isn’t it sad how some people’s grip on their lives is so precarious that they’ll embrace any preposterous delusion rather than face an occasional bleak truth.


Liveblogging World War II: December 19, 1941

Adolf Hitler personally takes supreme command of the German Army:

Hitler takes command of the German army — History.com This Day in History — 12/19/1941: "On this day, in a major shake-up of the military high command, Adolf Hitler assumes the position of commander in chief of the German army.

The German offensive against Moscow was proving to be a disaster. A perimeter had been established by the Soviets 200 miles from the city—and the Germans couldn't break through. The harsh winter weather—with temperatures often dropping to 31 degrees below zero—had virtually frozen German tanks in their tracks. Soviet General Georgi Zhukov had unleashed a ferocious counteroffensive of infantry, tanks, and planes that had forced the flailing Germans into retreat. In short, the Germans were being beaten for the first time in the war, and the toll to their collective psyche was great. "The myth of the invincibility of the German army was broken," German General Franz Halder would write later.

But Hitler refused to accept this notion. He began removing officers from their command. General Fedor von Bock, who had been suffering severe stomach pains and who on December 1 had complained to Halder that he was no longer able to "operate" with his debilitated troops, was replaced by General Hans von Kluge, whose own 4th Army had been pushed into permanent retreat from Moscow. General Karl von Runstedt was relieved of the southern armies because he had retreated from Rostov. Hitler clearly did not believe in giving back captured territory, so in the biggest shake-up of all, he declared himself commander in chief of the army. He would train it "in a National Socialist way"—that is, by personal fiat. He would compose the strategies and the officers would dance to his tune.


Quote of the Day: December 19, 2011

"The most momentous changes of all, though, were in textiles and coal, exactly the spheres of activity that would drive the British industrial revolution in the eighteenth century. Eleventh-century textile workers invented a pedal-powered silk-reeling machine, and in 1313 the scholar Wang Zhen’s Treatise on Agriculture described a large hemp-spinning version, adapted to use either animal or waterpower. It was, Wang noted, “several times cheaper than the women it replaces,” and was “used in all parts of north China which manufacture hemp.” So moved was Wang by this wizardry that he interrupted his technical account with bursts of poetry: It takes a spinner many days to spin a hundred catties, But with waterpower it may be done with supernatural speed!…"

--Ian Morris, Why the West Rules--for Now


DeLong Smackdown Warch: Daniel Kuehn on the Hierarchy of Bads

I had written:

Maynard & Fred & Gus & Ralph on the History of Macroeconomics: On Hayek… in my view, there are four Hayeks, one good, and three of varying degrees of badness:

  1. The good Hayek of the price system as a discovery and information transmission mechanism, of the importance of entrepreneurship, and of private property and the rechstaat as guarantees of individual liberty.

  2. The bad Hayek who prefers Augusto Pinochet to Helmut Schmidt.

  3. The worse Hayek who had his head completely up his posterior on economic policy during the Great Depression.

  4. The worst-of-all Hayek. The one who when Keynes praises the Road to Serfdom and pronounces himself in "not just agreement, but deeply moved agreement with it" responds "no you are not!"

Daniel Kuehn said...

I would say that preferring Pinochet to Schmidt is worse than slighting Keynes, but otherwise good post!

Touché…

I cannot defend what I wrote. But clearly I--or at least one of the mes that sits inside my skull and occasionally creeps out, evading the rationality censor--thinks that Sins of the Intellect are the worst--worse than torturing people, throwing them out of airplanes into the South Atlantic, and massacring the in soccer stadiums.

I will report to the Reeducation Camp…


The End of the Iraq War

Spencer Ackerman:

Video: Drone Watches Last U.S. Convoy Leave Iraq | Danger Room | Wired.com: On March 19, 2003, U.S. ground forces crossed the concertina wire in Kuwait that marks Iraq’s southern border, beginning one of America’s most controversial wars. On December 17, 2011, at 11:30 p.m. Eastern Standard Time, the last military convoys rolled off Iraqi soil, back to Kuwait. This time, a U.S. Air Force Predator drone loitered overhead, bearing witness.

This is what a U.S. withdrawal looks like to a robotic plane in the sky. An orderly, blue-tinged column of trucks — 125 of them, according to the U.S. Air Force — moves along a stretch of road. The Predator doesn’t see any of the accomplishments or the sacrifice that U.S. troops achieved, endured and earned in Iraq for the past nine years. Nor does it see the suffering, the bitterness and the loss.

But it does record a minor success. The Predator video feed does not show chaos at the border. There is no insurgent assault seeking to chase the U.S. military out. Nor is there a panicked helicopter flight from an embassy rooftop. Instead, as the final trucks calmly cross into Kuwait, the Predator watches border guards shut a gate, providing a sense of finality.

It may not be so final. The U.S. leaves behind a massive embassy in Iraq guarded by up to 5,500 armed security contractors. Little is known about that hired army — when, for instance, it can open fire on Iraqis to protect U.S. diplomats — but it amounts to a privatized residual U.S. force. And in addition to Iraq’s lingering political problems, the country is still a battleground for competing U.S. and Iranian interests. Still, Pentagon Press Secretary George Little tweeted on Sunday morning that Defense Secretary Leon Panetta has “approved the order officially ending the Iraq war: EXORD 1003 Victor, Mod 9.”

And the Predators? They won’t exactly leave Iraq after the pullout. On Friday, Panetta secured Baghdad’s approval to allow the drones to fly — unarmed — over northern Iraq from Turkey’s Incirlik air base. They’ll be spying for Kurdish terrorists.

Beyond that, after December 31, when the pullout must legally be complete, drones — armed and otherwise — will be in reserve at the U.S.’ constellation of bases near Iraq in Persian Gulf states.

“Any operation of any aircraft of any type into the sovereign airspace over Iraq after that date would need to comply with Iraqi laws and policies,” Capt. Melissa Milner, chief spokeswoman for the U.S. Air Force in the Middle East, told Danger Room in October. “We are not aware of any special arrangements or exceptions for any aircraft, and are not aware of any ongoing discussions with [the Iraqi defense ministry] on the matter.”


Twitterstorm delong: December 17, 2011

  • Flipboard vs. Currents vs. Zite? http://bit.ly/tvGOYa 23 minutes ago

  • How the iPad 2 Became My Favorite Computer http://zite.to/tgXgfp via @zite 1 hour ago

  • paulmasonnews Paul Mason Offtopic - when i heard Italian Northern League try to ban kebab shops i think: what they got against Brit culture? 2 hours ago Retweeted by delong

  • Financial Crises’ Impact Varies Widely - Economic View - NYTimes.com http://bit.ly/tYG0f6 1 hour ago

  • mattyglesias mattyglesias But if we want America to continue as the dominant global power, we'll need many more immigrants than are currently allowed to come. 3 hours ago Retweeted by delong

  • mattyglesias mattyglesias Zite is my favorite new iPad ap. Much better than Flipboard. 7 hours ago Retweeted by delong

  • delong J. Bradford DeLong @ @felixsalmon @gsignoret But usually we learn negative amounts from op-eds--"first, inform your readers" is not a value to Peggy Noonan and c 7 hours ago

  • jbarro Josh Barro Tip to closeted electeds: don't shop at a gay fetish store and then SUBMIT THE RECEIPT FOR REIMBURSEMENT http://bit.ly/vovUBn 10 hours ago Retweeted by delong

  • Dennis Perrin's Christopher Hitchens Obituary http://bit.ly/s8tWn1 10 hours ago

  • Mobute Mobutu Sese Seko It's amazing to go back & read his old columns and revivify a loathing for Christopher Hitchens that became nearly a muted hobbyist disdain. 15 hours ago Retweeted by delong

  • tanehisi Ta-Nehisi Coates I think I'll start an anti-Semitic newsletter called "TNC Reports" and then claim to be ignorant of its contents. HTTP://bit.ly/sHpH8Z 22 hours ago Retweeted by delong

  • dsquareddigest Dan Davies It is not as if "The Left" is wholly unfamiliar with the concept of an intellectual giant who has a blind spot for horrific state violence 23 hours ago Retweeted by delong

  • AnandWrites Anand Giridharadas "If you’ve no debts and have $10 in your pocket you have more wealth than 25% of Americans": http://onforb.es/vFTX2Y 16 Dec Retweeted by delong

  • JustinWolfers Justin Wolfers How little do we know? A 70% confidence interval for GDP growth in 2012Q1 ranges from 0% to 3.8%. For 2012Q2, from -0.1% to 4.3%. 16 Dec Retweeted by delong

  • AnnieLowrey Annie Lowrey I have never encountered a more aggressively horrible consumer product than the BlackBerry Bold.

  • EuropeanViolet Mr. Violet @ @delong Income inequality in the Roman Empire http://zite.to/uezjPI < Rome collapsed. 47 minutes ago

  • rootless_e rootless Thatcher tells Hayek that wholesale murder and torture are not ok in the UK http://tinyurl.com/cz7y29n (from @delong) 3 hours ago

  • fillups44 fillups44 @ @delong Perrin's takedown of @sullydish pretty brutal, although Ask Andrew Anything spots back up Perrin's take. Insufferability of Andrew 9 hours ago

  • MurbsSox Murbs' Sox Don't believe the spin folks! RT @delong: For the Last Time, Fannie and Freddie Didn't Cause the Housing Crisis bit.ly/rMsea6 9 hours ago

  • destroy_time Benjamin Taylor @joshtpm @delong howling into the idiot wind, man. no one wants to admit that the banks were at fault; would hurt campaign contributions. 9 hours ago

  • CoreyRobin corey robin @delong Only a writer of Hitchens’s talents could do justice to the culture that now so shamefully mourns him. http://bit.ly/sLgWyy 20 hours ago

  • EuropeanViolet Mr. Violet oh wait, without democracy #StructuralReforms would roll quite faster! http://t.co/eReJcdjW | @delong 16 Dec

  • rootless_e rootless @delong https://t.co/iquPuWI9 Hitchens, Keynes, Trotsky. 16 Dec

  • rote_fahne Mark @ @delong Made in Texas: Apple's A5 iPhone chip - well, it's still the third world. 16 Dec


"The Fault, Dear Brutus, Lies Not in the Stars But in Ourselves…" Inadequate Fiscal, Monetary, and Banking Policy Response to the Lesser Depression

Mark Thoma sends us to Christy Romer:

A Financial Crisis Needn’t Be a Noose: RECESSIONS after financial crises are long and severe, and the subsequent recoveries are protracted…. But while there are strong patterns in the authors’ mountains of data, this simple summary misses an important fact: There’s dramatic variation in the aftermaths of crises, and much of it is caused by how policy makers respond….

Reinhart-Rogoff… emphasizes common patterns across crises…. [T]he averages are stunning. For 14 major crises since 1929, the associated decline in real per capita gross domestic product averaged 9.3 percent….

But… Norway had only a slight decline in per capita G.D.P. — around 1 percent — after its 1987 crisis…. The Depression… G.D.P. fell nearly 30 percent in the United States, and didn’t return to its pre-crisis level for a decade. But in Spain, it fell only 9 percent in the Depression as a whole, and actually rose in the year after its 1931 banking crisis….

What explains the variations?… [C]rises that happen along with currency crises tend to be followed by much more severe recessions…. [B]ig declines in house and stock prices… have damaging effects on their own…. BUT an even larger determining factor is the policy response. Why was the Great Depression so much worse here than in Spain?… Spain benefited from not being on the gold standard. Its central bank was able to lend freely and increase the money supply after the panic. By contrast, in 1931 the Federal Reserve in the United States raised interest rates to defend its gold reserves and stay on the gold standard…. [P]olicy response largely explains why output fell after the American banking panics in 1930 and 1931, but rose after the final wave in early 1933. After the first waves, the Fed did little, and President Herbert Hoover signed a big tax increase to replenish revenue. After the final wave, President Franklin D. Roosevelt abandoned the gold standard, increased the money supply and began a program of New Deal spending….

The Reinhart-Rogoff study points out that policy makers’ ability to take strong fiscal action depends on whether they start with high levels of debt. In the current episode, China and South Korea have recovered faster, partly because they have taken more aggressive fiscal stimulus measures. They could do that because they entered the crisis in good fiscal health…. After its banking panic in 1991, Sweden aggressively restored its banks to health. They were nationalized, recapitalized with public funds, and then returned to private control. After three rough years, Sweden grew rapidly, soon returning to its pre-crisis trend. Japan, by contrast, put off cleaning up its banks after its 1992 crisis….

[W]here does this… leave us?… [P]olicy makers need to make the financial system less prone to crises, and to fight panics aggressively when they arise…. A country as creditworthy as the United States can continue to use fiscal stimulus to help return the economy to full employment. And… there’s much more the Fed could be doing. Whether we continue to fester or finally embark on a robust recovery depends on whether we choose to use the tools available.

Finally, governments around the world, including our own, should remember that it helps to be in sound fiscal shape before a crisis hits…. Being careful in good times gives policy makers the ability to fight crises in bad ones.


Quote of the Day: December 17, 2011

"Why do we feel so unified? We have discovered something in the left brain, another module that takes all the input into the brain and builds the narrative. We call this the interpreter module…. When we set out to explain our actions, they are all post hoc explanations using post hoc observations with no access to nonconscious processing. Not only that, our left brain fudges things a bit to fit into a makes-sense story. It is only when the stories stray too far from the facts that the right brain pulls the reins in…. [T]he actions and the feelings happen before we are consciously aware of them—and most of them are the results of nonconscious processes, which will never make it into the explanations. The reality is, listening to people’s explanations of their actions is interesting—and in the case of politicians, entertaining—but often a waste of time.

"We showed a split-brain patient two pictures: A chicken claw was shown to his right visual field, so the left hemisphere only saw the claw picture, and a snow scene was shown to the left visual field, so the right hemisphere only saw that. He was then asked to choose a picture from an array of pictures placed in full view in front of him, which both hemispheres could see. The left hand pointed to a shovel (which was the most appropriate answer for the snow scene) and the right hand pointed to a chicken (the most appropriate answer for the chicken claw). Then we asked why he chose those items. His left-hemisphere speech center replied, “Oh, that’s simple. The chicken claw goes with the chicken,” easily explaining what it knew. It had seen the chicken claw. Then, looking down at his left hand pointing to the shovel, without missing a beat, he said, “And you need a shovel to clean out the chicken shed.” Immediately, the left brain, observing the left hand’s response without the knowledge of why it had picked that item, put it into a context that would explain it. It interpreted the response in a context consistent with what it knew, and all it knew was: chicken claw. It knew nothing about the snow scene, but it had to explain the shovel.

"Once we understand that the left-brain interpreter process is driven to seek explanations or causes for events, we can see it at work in all sorts of situations…. The left-brain interpreter creates order out of the chaos presented to it by all the other processes spewing out information…. This post hoc interpreting process has implications for and an impact on the big questions of free will and determinism, personal responsibility and our moral compass, which we will look at in the next chapter. When thinking about these big questions, one must always remember, remember, REMEMBER that all these modules are mental systems selected for over the course of evolution. The individuals who possessed them made choices that resulted in survival and reproduction. They became our ancestors…"

--Michael S. Gazzaniga, Who's in Charge?: Free Will and the Science of the Brain


Daniel Kuehn and David Glasner Appear Tired of Trying to Reason with Austerity-Loving Austrians...

The very sharp Daniel Kuehn writes:

Facts & other stubborn things: Tyler Cowen makes a good point on ABCT (let's abstract from Hayek for a second): Reviewing Wapshott's book, he writes:

For all his brilliance, Hayek didn’t—at the critical time—have a good enough understanding of the dangers of deflation. He didn’t fully realize the extent of sticky wages and prices and, more deeply, he didn’t see that ongoing deflation would render the “calculation problem” of a market economy more difficult.

Let me note that Hayek (and others) had no excuse for not seeing that the economy cannot "recalculate" effectively in a bust. None at all:

John Maynard Keynes: The General Theory of Employment, Interest, and Money: If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the 'Manchester System', but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production…. Within this field the traditional advantages of individualism will still hold good. Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency--the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty… the best safeguard of the variety of life… the loss of which is the greatest of all the losses of the homogeneous or totalitarian state…. Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensitv to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…

Daniel resumes:

The "at the critical time" aside should do away with any need to argue about Hayek on NGDP targeting - a discussion that has never interested me all that much…. A lot of Austrians seem to look at recessions like pressing the reset button…. [T]his is exactly the opposite of how we ought to think about things…[:]

Keynesians argue that the price distortion occurs in the bust, not the boom. Interest rates are too high, and the Austrians are embracing this distortion of the price mechanism as normal. When you hear Keynesians talk about stimulus, they don't usually talk about how it gives people jobs directly (although if you can do that on worthwhile projects like building roads and schools of course that's nice). When Brad DeLong talks about stimulus, for example, he always refers to its benefit as being the provision of high quality assets for which there is an excess demand. The point is to eliminate the price distortion in the interest rate, so that investors can once again engage in specialization and exchange….

F]rom my perspective, the interest rate is "too high" during recessions… our biggest distortionary problem is in the bust. Austrians don't even seem to accept this possibility or address it. It's taken as an article of faith when things are "natural" and when they aren't. If Austrians keep pretending people in the mainstream don't get specialization and exchange, or that they don't get profit and loss or that they don't get why we need to disaggregate (i.e. - if they take the Roberts/Papola approach), ABCT isn't going to get anywhere with the mainstream. The mainstream already gets all this, guys, and self-righteously re-explaining it to them is not going to get you anywhere…

Heh. Indeed.

This is, I think, why most of us from the Say-Mill-Bagehot-Wicksell-Fisher-Cassell-Hawtrey-Keynes-Viner-Friedman-Tobin-Kindleberger tradition who have tried in good faith to engage the Austrians conclude thet we have made a mistake, and warn others not to.

Even the extremely sharp and patientDavid Glasner is at the end of his rope:

Keynes v. Hayek: Enough Already: First, it was the Keynes v. Hayek rap video, and then came the even more vulgar and tasteless Keynes v. Hayek sequel… a new book by Nicholas Wapshott…. [W]e can still learn a lot by going back to Keynes’s and Hayek’s own writings, but all this Keynes versus Hayek hype creates the terribly misleading impression… an increasingly polarized discussion in which people choose sides based on pre-existing ideological commitments rather than on a reasoned assessment of the arguments and the evidence. In part, this framing of arguments in ideological terms simply reflects existing trends that have been encouraging an increasingly ideological approach to politics, law, and public policy…. Those who want to address the problem in a pragmatic, non-ideological, way are losing control of the conversation…


Jonathan Bernstein: How Obama Should Get Tough With Congress on Recess Appointments

JB:

How Obama Should Get Tough With Congress on Recess Appointments: Throughout 1903, the Senate minority was blocking several nominations put forth by the White House. President Roosevelt should have been able to wait for that Congressional session to adjourn and make his recess appointments before the next session was scheduled to begin, by Constitutional mandate, on December 7 of that year. However, House Speaker Joe Cannon refused to go along, keeping the House in session throughout the break.

In response, the Senate leadership concocted a plan. On the big day of December 7, the Senate convened, adjourned, and immediately began an entirely new session. As The New York Times report had it the next day:

The conclusion has been reached that between the time of the falling of President pro tempore Frye’s gavel signifying the conclusion of the extraordinary session and the calling to order of the Senate in the regular session of Congress, an appreciable lapse of time occurred. In this time the appointments technically were made.… There was but one fall of the gavel, but one stroke, and but one sound.

And in that instant, Roosevelt made 168 military promotions that normally would have to have been approved by the Senate, as well as “about 25 civilian appointees.” 

Was it legal? No one knows with certainty, as it wasn’t adjudicated in the courts. Two years later, a Senate report concluded that it wasn’t allowable, but that was just the institution defending its own prerogative. It’s pretty unlikely, meanwhile, that the Supreme Court would want to get involved in a squabble between the other two branches, and even if it did the Court hasn’t exactly been reluctant recently to side with the presidency. Not to mention that recess appointments have limited duration to begin with; it’s unlikely that the Court would rule before the terms expired, anyway.

But even if Obama doesn’t prefer the example set by Roosevelt, he has other options. There’s an unused Constitutional provision giving the president the power to step in when the chambers cannot agree on adjournment: He could thus block House Republicans’ efforts to prevent a recess by siding with Senators’ preference for a normal adjournment. Or, he could simply declare that in the present circumstances a long Senate recess punctuated by brief pro forma sessions every three days is still a “Recess of the Senate” in his opinion, and therefore sufficient for his Constitutional recess appointment power to kick in. While there is no Supreme Court ruling on the issue, a lower court ruling appears to support him should he choose to go that route.

The broader point, however, is that presidents do not have to sit back helplessly in the face of innovative and unprecedented congressional obstruction…. [P]residents are perfectly entitled to make use of whatever legal and Constitutional options are available….

Barack Obama sought to call on the spirit of Teddy Roosevelt in his Osawatomie speech. If he really wants to emulate TR, however, it’s time for some recess appointments.


DeLong Smackdown Watch: Structural Change and Macroeconomic Vulnerability in the 1920s and Today Edition

Scott Sumner protests that I am giving an overly generous reading to Stiglitz in Vanity Fair:

On empirical grounds almost every single step in this argument is wildly implausible. And that’s not hyperbole; I don’t mean one step, I mean every single step…

I think that if you strip Greenwald-Stiglitz (or perhaps the argument that Greenwald-Stiglitz ought to be making) down to its core, it goes like this:

  1. There are times in which important sectors (agriculture, manufacturing) see secular absolute--not just relative--declines in employment.

  2. In these times there are a bunch of reasons--added uncertainty because profitable investment can no longer proceed along established channels, rises in savings rates because income is redistributed to rich winning sectors, rises in savings rates because of balance sheet and bankruptcy effects--that tend to push average savings rates over the business cycle up and average investment rates down.

  3. Hence the natural rate of interest that produces full employment will be on average low in such times.

  4. This means that even a small adverse monetary or other shock that pushes the natural rate of interest down further can easily land you on the lee shore of the zero safe nominal interest rate lower bound.

  5. And then you are fracked: totally fracked.

As I said, I don't think that this Greenwald-Stiglitz channel--which I tend to think of as a Michael Bernstein or perhaps a J.A. Hobson channel--is a first-order underlying cause of either the Great Depression or today's difficulties. It seems to me to be a second-order complicating factor at most, but I could be wrong.

I would also notice that from one viewpoint Stiglitz has rocketed himself around the closed Friedmann universe and is now approaching Austrianism from the unexpected direction of the Galactic South: that the recalculation requirements of rapid structural change put the economy in a configuration in which it is more vulnerable than usual to monetary shocks, and in which monetary policy is less powerful than usual in repairing the damage.


Paul Krugman: They Have Made a Desert, and Called it Successful Austerity

They Have Made A Desert Ireland Edition  NYTimes com

Ireland Edition. Paul Krugman:

They Have Made A Desert, Ireland Edition: And called it a successful example of austerity…. Like that other implausible candidate for role model, Latvia, Ireland has been hailed as a success story — and a challenge to Keynesians like me — when there was never anything that looked like real success and nothing that posed any sort of puzzle. (Even in a Keynesian world, internal devaluation will work in the long run if you can stick to it — but in the long run, well, you know the rest.)

The sad thing here is that textbook Keynesian macro has been a very good guide all through this crisis — but nobody will believe it.


Commemorating the Death of Christopher Hitchens in a Manner That Hitch Would Have Approved of Department

Mobutu Sese Seko on Twitter:

@kofiabiney I think even 5-year-old analyses nail it: this was an existential global crusade for a narcissist who needed a defining moment. 5 hours ago

@kofiabiney Isn't that enough? But the casual misogyny, the relentless narcissistic Galahad routine about Clinton, his bullshit about Said. 5 hours ago

Perversely, even as Hitchens went through chemotherapy, I (and others) forgot to constantly throw up—not in solidarity but in opposition. 5 hours ago

You read awful things and remember them and pack those sick feelings away for later and are stunned to find that time wrongly tempered them. 5 hours ago

It's amazing to go back & read his old columns and revivify a loathing for Christopher Hitchens that became nearly a muted hobbyist disdain. 5 hours ago

RIP Christopher Hitchens, Defense Against the Dark Arts Teacher, Hogwart's School of Witchcraft and Interventionism


Twitterstorm delong: December 16, 2011

  • JustinWolfers Justin Wolfers As I'm reading a Goldman evaluation of forecast accuracy, I'm struck once again by how little we know about the macroeconomy. 10 minutes ago Retweeted by delong

  • JustinWolfers Justin Wolfers How little do we know? A 70% confidence interval for GDP growth in 2012Q1 ranges from 0% to 3.8%. For 2012Q2, from -0.1% to 4.3%. 8 minutes ago Retweeted by delong

  • Mike Konczal: An Interview on Balance Sheet Recessions with Amir Sufi http://t.co/E0IWvonz 3 hours ago

HTTP status cats by GirlieMac: classic server error codes, now with cats - Boing Boing http://t.co/9XO1k8iV 4 hours ago

  • AnnieLowrey Annie Lowrey I have never encountered a more aggressively horrible consumer product than the BlackBerry Bold. 4 hours ago Retweeted by delong

  • delong J. Bradford DeLong Receding Inflation In Britain http://bit.ly/vL5paR 9 hours ago

  • kdrum Kevin Drum I'm sort of fascinated that GOP establishment seems to hate Gingrich even more than Democrats. And not just on tactical grounds, either. 19 hours ago Retweeted by delong

  • DemocratMachine VivaMachine! @ @RyanLizza How can we expect Ron Paul to read his own newsletter and tell the ghostwriter Pon Raul to knock off the racism? 18 hours ago Retweeted by delong

  • Dear Republican debate: Are you even aware that we are suffering 8.6% unemployment? What would you do about it? 19 hours ago Retweeted by delong

  • DavidCornDC David Corn Mitt: Some of my best Cabinet members were gay. He just lost 10 points. #foxate #iowadebate 19 hours ago Retweeted by delong

  • DemocratMachine VivaMachine! but what if the Illegal Immigrants have big brains, will they move forward in the line, Mitt? #FoxDebate 20 hours ago Retweeted by delong

  • lizzwinstead Lizz Winstead The only court Newt wou;d preserve is divorce court. #Teabate #TweetThePress 20 hours ago Retweeted by delong

  • pkedrosky Paul Kedrosky Reality gets better and better: Pair of Robbers Want Only iPhones, No BlackBerries - http://goo.gl/OELBw 22 hours ago Retweeted by delong

  • EuropeanViolet Mr. Violet oh wait, without democracy #StructuralReforms would roll quite faster! http://t.co/eReJcdjW | @delong 3 minutes ago

  • rote_fahne Mark @ @delong Made in Texas: Apple's A5 iPhone chip - well, it's still the third world. 3 hours ago

  • cstross Charles Stross @ @adamkotsko @delong Mother Teresa was evil. (Denying pain meds to terminal cancer patients "for the good of their souls"? To hell with her.) 10 hours ago

  • TamboDUC Cristián Ducoing "The early 1950s saw Argentina's relative prices of producer durables rise to more the twice world levels" @delong (1991) 11 hours ago

  • jbplainblog Jonathan Bernstein Dude. Fox should totally use the WS air guitar thing for their time gong. RT @delong: @jbplainblog @normative Wyld Styllyns Rule! 20 hours ago

  • nbeaudrot Nicholas Beaudrot @jbplainblog @normative @delong Be Excellent To Each Other. airguitar 20 hours ago

  • mike_cal Michael Hoexter A critical read RT @drgrist: Read. It. RT @delong: Mark Schmitt for Democracy Journal: The Myth of the Middle http://bit.ly/tnORLD 22 hours ago

  • Noahpinion Noah Smith @delong Is it a Godwin's Law violation to call this Nazi-esque? http://t.co/1s2NagRY 15 Dec


Letter from Margaret Thatcher to Friedrich Hayek

I would dearly love to see what this is a reply to:

Letter from Margaret Thatcher to Friedrich Hayek | Naomi Klein:

February 17, 1982

Thank you for your letter of 5 February. I was very glad that you able to attend the dinner so thoughtfully organized by Walter Salomon. It was not only a great pleasure for me, it was, as always, instructive and rewarding to hear your views on the great issues of our times.

I was aware of the remarkable success of the Chilean economy in reducing the share of Government expenditure substantially over the decade of the 70s. The progression from Allende's Socialism to the free enterprise capitalist economy of the 1980s is a striking example of economic reform from which we can learn many lessons.

However, I am sure you will agree that, in Britain with our democratic institutions and the need for a high degree of consent, some of the measures adopted in Chile are quite unacceptable. Our reform must be in line with our traditions and our Constitution. At times the process may seem painfully slow. But I am certain we shall achieve our reforms in our own way and in our own time. Then they will endure.


The Speed with which International Economic Imbalances Can Mount...

Karl Smith sends us to Kate Mackenzie quoting a chart from Bank of Canada Mark Carney:

Structure of a Recession Europe Edition  Modeled Behavior

Kate Mackenzie:

Structure of a Recession: Europe Edition: Carney points out that it doesn’t matter whether the debt is initially public or private, because private debts inevitably become public.

And of course, Europe is a microcosm (or, whatever a big microcosm is called) for the whole world. As Carney says, “Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation.

And Karl Smith:

This in itself, however, is not enough.

Lets imagine that Portugal received massive inflows of foreign capital from 2002 to 2010. Then it used that capital to stockpile massive quantities of gold. Where would they be today? Chances are living the high life…. The point is… that there is something magical about the ability to send back whatever you borrowed. One of the things about Europe’s situation and that in America as well is that what was borrowed was structures…. Portugal can’t just ship Villas back to Germany or China to make good on its debts. What it could do is ship Germans or Chinese to Portugal to stay in the Villas. That would require, however, increased expenditures on vacations in Germany or a falling Euro to make it more affordable for the rising Chinese middle class to visit Portugal.


I Don't Fully Buy Stiglitz's Argument That Our Macro Problems Have Deep Structural Roots. But I Do See Its Coherence

Truth is, I don't understand all the hating on the Vanity Fair Stiglitz piece, "A Banking System is Supposed to Serve Society, Not the Other Way Around".

Perhaps I am giving Joe too charitable a reading. But I really do not see a serious analytical problem. Not that I buy the argument--I don't think that our macro problems today have deep important structural roots in the decline of manufacturing due to its rapid productivity growth, and I don't think that a massive governmental borrow-and-spend program is the only way out (but Stiglitz may be right in his claim that it would be the best way out).

However, even though I do not fully buy it I do think I understand the argument. And I do not think it is incoherent.

As I understand the Greenwald-Stiglitz hypothesis--about the Great Depression as applied to agriculture and about today as applied to manufacturing--it goes like this:

  1. Rapid technological progress in a very large economic sector (agriculture then, manufacturing now) leads to oversupply and steep declines in the sector's prices. Poorer producers have less income. They come under pressure to cut back their spending. Others--consumers--are now richer because they are paying less for their food (or their manufactures), but their propensity to spend is lower than that of the stressed farmers or ex-manufacturing workers.

  2. Moreover, the oversupply of agricultural commodities (or manufactured goods) means that only an idiot would invest at their normal pace in those sectors. To the shortfall in consumption spending is added a shortfall in investment spending as well.

  3. Thus we have systematic pressures pushing spending down below economy-wide income. These aren't going to go away until the declining sector (agriculture then, manufacturing now) is no longer large enough to be macroeconomically significant.

  4. Macroeconomic balance requires that the economy generate offsetting pressures pushing spending up. What might they be?

  5. For a while, those receiving the income that farmers (or ex-manufacturing workers) have lost and those who use to invest in the declining sectors can lend it to the farmers (or ex-manufacturing workers) so that they can keep up with the Joneses. But lending more and more to poorer and poorer debtors is, like lawn darts, only all fun-and-games until somebody loses an eye.

  6. An alternative possibility is to switch investment away from the farm value-chain complex (or the manufacturing value-chain complex) to something else. But what? Nobody really knows. The future is uncertain. Other investments are clearly riskier then funneling money into the old channels of boosting the capital of the farm value-chain complex (or the manufacturing value-chain complex) had been. Given the extra risks, this pressure can only manifest itself if the cost of capital falls. But here we hit the zero lower bound on interest rates. And we are off to the secular liquidity-trap races. This won't work either.

Now at this point I disagree with Greenwald-Stiglitz. I see three plausible ways to fix the unemployment-generating aggregate demand shortfall:

  • (a) This could be fixed by expectations of inflation that push you sustainable real cost of capital down below zero far enough that savings no longer exceeds planned investment at full employment. (But normal monetary ease it does not produce expectations of secular inflation won't do anything useful.)

  • (b) This could be fixed by government loan- or bank-guarantee programs that transfer the risk of new and untried investments away from entrepreneurs and investors onto taxpayers, so that even without expected inflation planned investment at full employment no longer falls short of saving when the cost of capital is at the zero nominal lower bound. so that you don't need a cost of capital less then be expected rate of deflation. It can be fixed by the government running up debt and buying stuff.

  • (c) This could be fixed by having the government borrow and spend on a large scale.

Stiglitz, however, doesn't see either the "expected inflation" or the "loan- and bank-guarantee" roads as possible. Stiglitz's conclusions:

Two conclusions…. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America’s conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.

Monetary policy is not going to help us out of this mess…. [A]nyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.

I think that if I asked him Stiglitz would say that (a)--zero interest rates and expected inflation--would help if you could get there, but that you cannot get there through monetary policy. Only if people expect full employment will there be enough inflation to sustain a full employment equilibrium. And since they don't expect full employment there isn't enough expected inflation no matter how easy monetary policy is. I think he would say that (b) might work in the sense of restoring full employment in the short run, but it would be an unfair upward redistribution of wealth from taxpayers to financiers, and moreover would not help resolve the underlying structural problems that created the shortfall between savings and planned investment at full employment in the first place.

Stiglitz does say that (c) is best:

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one… out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality…. Education…. [B]asic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth…. Meanwhile, the states could certainly use federal help in closing budget shortfalls…. [C]leaner and more efficient energy production…. [O]ur decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.

And once we have both restored full employment and accelerated the structural transformation needed then we can return to normality. But in order to get there:

we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery…. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks…. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around…

I'm not sure that I buy Stiglitz's argument that massive government borrow-and-spend is the only, or even the best, way out of our current mess. And I agree that Stiglitz's piece could have used a couple more paragraphs about life at the zero nominal interest rate lower bound explaining why Stiglitz thinks the belief "that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one".

Perhaps I have seen so much really bad macroeconomics over the past four years that I now suffer from the soft bigotry of low expectations. But this does not seem to me to be, as Nick Rowe calls it:

really bad macroeconomics. God it's depressing. If you want to talk about a deficiency of aggregate demand, and why Say's Law sometimes fails, you really do need to talk about monetary exchange economies and an excess demand for money at the aggregate level. You can't just do partial equilibrium analysis and cobble it all together.

So then why does Nick have such an adverse reaction to Stiglitz?

I think it is because Stiglitz is at bottom a Wicksellian and Rowe is a Fisherian. A Wicksellian is a believer that the key equation in macro is the flow-of-funds equation S = I + (G-T), savings S equals planned investment I plus government borrowing (G-T), and that the money market exists to feed the flow-of-funds an interest rate that has a (limited) influence on planned investment I. A Fisherian is a believer that the key equation in macro is the money market's quantity theory equation PY = MV(i), and that the flow-of-funds exists to feed the quantity theory an interest rate that has a (limited) influence on velocity V.

Thus they have a hard time communicating. From the Fisherian viewpoint, the Wicksellians are talking nonsense because they spend their time on things that have a minor impact on velocity while ignoring the obvious shortage of money. From the Wicksellian viewpoint, the Fisherians are talking nonsense by ignoring the obvious fact that movements in money induce offsetting effects in velocity unless they somehow alter the savings-investment balance.

And it is we Hicksians, of course, synthesize both positions into a single unified and coherent whole…


Hoisted from Comments: Rea on Who Would You Rather See at Your Door?

George Macdonald Fraser wrote:

The Candlemass Road: "Here is any one of you, in a lonely place, as a little cabin in the wilderness, with no neighbours or friends by, and ye are sick and feeble, and with you your wife and two fair daughters…. As ye lie there helpless, there approach three great thieves and murderers that ye know to be crueller than any devils…. [A]s ye lie in terror for what is to come, a knock falls on the nether door of your poor cabin, as it may be some wayfarer seeking lodging or refreshment. Aye, and it may be he will lend you aid against your enemies approaching! You bid your wife open in haste. Now tell me, scholars, what men do you hope to see there when she opens? The learned, gentle Aristotle and St. Francis the meek, or Attila the great Hun armed cap-a-pie with Chingis at his elbow? From which pair, in your sore need, shall you hope to have the greater good, the saintly philosophers or the lusty men of war?"

Rea writes:

All in all, I'd rather have Socrates, in full hoplite armor, thereby obtaining the best of both possibilities.


Memo to iPhone

I like it that you know how to spell both "Greenwald" and "stiglitz". But what planet are you programmed on where "stiglitz" is ever not capitalized?


Why Were We Ever in Iraq?

Yes, getting rid of Saddam Hussein would have been a mitzvah--if we had not replaced him with a chaotic mess that was, for half a decade at least, significantly worse than being ruled by Saddam Hussein.

Duncan Black wonders aloud:

Eschaton: At Least The War Is Over: Sort of, anyway.

After all these years I still have no idea what it was all about.

Even at the time conservatives would occasionally admit that the WMD rationale was horseshit. It was as if each had their own individual Great Game reason for it. There were as many reasons for the Iraq war as there were supporters of it.

I suppose, ultimately, it came down to blowing up brown people and pissing off liberals. So it was quite a success, really.

Certainly the national security of the United States has been harmed by the adventure. Iran is no longer contained by Iraq. And there are an awful lot more people in the world who have very good reason to hate America.


Receding Inflation In Britain

Outsourced to Paul Krugman:

Receding Inflation In Britain: Back in June, keying off a speech by Adam Posen, I said that British inflation was offering a teachable moment. The headline inflation number was running quite high, but even a bit of analysis showed that this largely reflected temporary shocks, mainly hikes in VAT and commodity prices plus some effects from the depreciation of the pound. Yet there was much hysteria, with many claiming that Britain was on the verge of a 1970s-type inflationary spiral. I concluded,

What we can hope for is that the BoE stays the course; and when inflation in the UK drops sharply, as it almost surely will, that will be an object lesson in the folly of always making policy as if it were 1979.

Sure enough, British inflation is rapidly receding. The market is now pricing in just 2 percent inflation over the next 5 years.

The hard money and austerity types have been wrong, yet again.


Quote of the Day: December 16, 2011

"Seeing no help, I said if one must sit by me at any feast of theirs, it should be Attila the Hun, so should I be spared their rudeness and intrusion. Some accounted it a good answer, and laughed, but he that had sneered at me scowled and said they had none at their feasts but those they might have good of, and I must name another, since Attila was a monstrous beast that none could have any good of, being curst and altogether abominable.

"At this, I, being part drunk myself, said he lied, for good might be had of the worst that ever were, in certain cases. At this he swore that if I could not prove it by logic, I should pay double forfeit and swim in the Cam for my impudence, so let me say how one could have good of Attila or any like him. His fellows grinned and gleeked about me, and some cried, 'At him, old Papist!' but others 'Confound the Jesuit, he mocks us, to the river with him!' and bade me make good mine argument.

"First, I told them, they should name any two from whom they might hope to have the greatest good (other than Our Lord, for it was not fit to name Him in such a question). They that had named Aristotle and St Francis as their chosen guests again cried out their names, and with those I was content, saying that against them I would justify Attila and another like him, as Chingis Khan or Hulagu (of whom I doubt these scholars had heard, though they cried aye to him).

"I would do it, I said, on an hypothesis, as thus: 'Here is any one of you, in a lonely place, as a little cabin in the wilderness, with no neighbours or friends by, and ye are sick and feeble, and with you your wife and two fair daughters.' Hereon they cried that being young they had no daughters, and would other men’s daughters do, to give them solace in that lonely place, whereof they doubted not they would soon be enfeebled if not sick! I let them bray it out, and when they were quiet, continued: 'As ye lie there helpless, there approach three great thieves and murderers that ye know to be crueller than any devils, who will surely torment and slay you and ravish your wife and fair daughters, and take and burn all besides. There is no help for you at all, being at their mercy if they come in, but as ye lie in terror for what is to come, a knock falls on the nether door of your poor cabin, as it may be some wayfarer seeking lodging or refreshment. Aye, and it may be he will lend you aid against your enemies approaching! You bid your wife open in haste. Now tell me, scholars, what men do you hope to see there when she opens? The learned, gentle Aristotle and St Francis the meek, or Attila the great Hun armed cap-a-pie with Chingis at his elbow? From which pair, in your sore need, shall you hope to have the greater good, the saintly philosophers or the lusty men of war?'

"They cried out with scorn that between the enemies before and Attila at their back, it was all one, they should have nothing but evil at the hands of either. 'Not so,' says I, and bade them look in the chronicles, 'for there you shall read that the Scythian and the Mungul both, though in their conquests they were monsters of cruelty that put whole nations to the sword, yet in their private and domestic ways were zealous for good order and discipline of law, being such as would not suffer weak or poor folk to be despoiled or hurt by thieves and ravishers. Aye, of that Chingis was it said that while he carpeted all Asia with bones, yet might a virgin with a bag of gold walk the length of his dominions without harm, so perfect was his governance. So, again I say, who shall better serve you in time of peril, the philosophers who wish you well but cannot front the murderers save with words, or the bloody ravagers of empires who are yet ready to turn their weapons against common spoilers?'

"At this they fell to babbling and dispute, and one fell down drunk crying 'Paradox! Paradox!' while another said that for all he knew Aristotle might be a right swashing boy when it came to a fray. I asked would he wager on him with sword and buckler against my two savages, let roaring Francis give what aid he might, and he said, no, not at any odds. And while a few of them held that such as Attila and Chingis would do no good service to any, the more held that I had made my case, and should not be fined or insulted, but pressed more drink upon me that I durst not refuse for fear of their rough merriment, and called me a jolly old Pope, and how I came home I know not, for they found me sodden among the cabbages in the almshouse garden, and I was two weeks abed thereafter with the sciatica.

"And lying there, and not able to read more than a little for the infirmity of mine eyes that are worn with looking on the world’s wickedness four score years, I fell to meditating on the good that evil men may do, by design or more commonly by chance…. I remembered sundry instances that I had seen, and in especial the man Waitabout, that I knew only for a little season, yet it changed my life’s course, and indeed had been like to lose my poor life for me, yet was I spared, 'by God’s grace', a phrase I speak now but by habit and long use, for if He hath any grace (or indeed any being at all save in men’s minds only) I have long been removed from it. Which is a blasphemy, as they say, yet I have known worse.

"No, I am no priest, nor ever was except to the outer eye, for what priest ever doubted, and with long doubting, gave over his belief at last? As to the Waitabout, he was no Attila yet had done ill enough in his time, and if he did good it was upon compulsion and for a brief hour only, and still I know not whether it was good or no. But certain it is he was no common man, though common seeming, a robber and slayer and broken wanderer that had in him, I think, the making of a sage if not a saint. He read me a lesson, aye, and so too did my Lady Dacre, though what it was I can hardly tell even now.

"Yet I would tell of them both that have been out of my mind these many years, saving that visit my lady paid me five years agone, fair and smiling still and brought me a gift of candles of fine Italian wax, though not scented, 'for we shall burn no incense between us, nor make graven images neither,' as she said, which was an old jest between us. 'A remembrance of Candlemass,' says she, 'aye, of the Candlemass road,' and told me they had made a ballad of it, and of what befell betwixt the fires at Triermain, which I marvelled to hear her speak of so lightly. But of Waitabout she spake not at all…"

--George MacDonald Fraser, The Candlemass Road


Delong Smackdown Watch: Nick Rowe on Joe Stiglitz and Bryan Caplan

Nick Rowe writes:

Worthwhile Canadian Initiative: Bryan Caplan and Joseph Stiglitz: "OK, I've said that Joseph Stiglitz gets Aggregate Demand wrong. It's only fair that I say that Bryan Caplan gets AD wrong too, for much the same reason.

Where are you Mark, Paul, and Brad? Seriously, you're not allowed to do any posts criticising Bryan Caplan for this, until after you have said that Joe Stiglitz is wrong too! It's only fair!

But, curses, I have exams to mark. And I really shouldn't be spending the time to explain fully why Bryan is wrong, until after I've marked my exams.

So here's a quickie:

Bryan Caplan and Joseph Stiglitz are making the same mistake…. The only way to increase output in a demand-constrained economy is to do something that changes that relationship between output demanded and output, so that more output is demanded for any given level of output. That's what monetary and/or fiscal policy are supposed to do. All that micro stuff, messing around with relative prices like the price of food (Stiglitz) or labour (Caplan) won't do anything unless, as a by-product, it happens to change the relationship between output demanded and output.

Macro is not the same as micro. The micro labour demand curve slopes down because it assumes that the extra output produced by the extra workers can in fact be sold. But that's precisely what's at issue here. Otherwise, wage cuts simply cause an equal cut in prices, or else cause a change in the distribution of income only. Unless price cuts cause AD to increase (which depends on how monetary and/or fiscal policy responds), or unless a change in the distribution of income causes AD to increase (which depends on relative marginal propensities to hoard), they won't increase AD…

I haven't read Stiglitz in Vanity Fair yet, or Caplan. I do have a day job...


Twitterstorm delong: December 15, 2011

  • DavidCornDC David Corn Newt opens by playing the Xmas card. Nothing about Hanukah. There goes the all-important Jewish vote in the IA caucus. #foxate #iowadebate 19 minutes ago Retweeted by delong

  • anamariecox Ana Marie Cox RT @daveweigel: Gingrich on electability: I'm Kemp, Reagan, FDR, and possibly Voltron. #iowadebate 17 minutes ago Retweeted by delong

  • pandagon Jesse Taylor How did Newt, who dodged the draft, get a job teaching generals the art of war? Or is this a Call of Duty thing? #iowadebate 17 minutes ago Retweeted by delong

  • DavidCornDC David Corn Newt: "I balanced the budget." Politifacts says this is a lie. That took about 8 seconds. 16 minutes ago Retweeted by delong

  • pkedrosky Paul Kedrosky Reality gets better and better: Pair of Robbers Want Only iPhones, No BlackBerries - goo.gl/OELBw 1 hour ago Retweeted by delong

  • pkedrosky Paul Kedrosky Remarkable reading: A Minute By Minute Breakdown of MF Global's Last Week On Earth - http://goo.gl/vn3Q4 1 hour ago Retweeted by delong

  • B_Eichengreen Barry Eichengreen In this piece at Foreign Policy Magazine's "Deep Dive," I argue that Europe is building a bridge to nowhere: http://foreignpolicy.com/articles/2011/… 40 minutes ago Retweeted by delong

  • LOLGOP LOLGOP 16. If a woman repeatedly cheats on her husband they call her a "whore". But if a man does it, the GOP calls him a "frontrunner". 37 minutes ago Retweeted by delong

  • mlcalderone Michael Calderone Amazing editor's note: "posting contains multiple, serious factual errors that undermine its premise" http://wapo.st/sLgwuE 26 minutes ago Retweeted by delong

  • felixsalmon felix salmon Woman appealing a decision saying she violated the Civil Rights Act, says she's "sticking up for my white rights": http://yhoo.it/t54DpI 1 hour ago Retweeted by delong

  • shiftctrlesc shift ctrl esc Armed drones flying over american cities ... A decade ago, the people that warned this was coming were dismissed as tin foil crackpots. 14 Dec Retweeted by delong

  • TimFernholz Tim Fernholz The Ryden Plan is the product of a very weird policymaking dynamic indeed. 2 hours ago Retweeted by delong

  • drgrist David Roberts Who would have thought building a vast military/security apparatus for an indefinite war on a vague enemy would have domestic repercussions? 1 hour ago Retweeted by delong

  • PatrickRuffini Patrick Ruffini With that said, does anyone know a good foreign, uncensored DNS server? I may demo how easy it is to change. #SOPA 2 hours ago Retweeted by delong

  • delong J. Bradford DeLong Daniel Kuehn Reads Keynes's The Economic Consequences of the Peace http://bit.ly/ru7hN2 1 hour ago

  • Noahpinion Noah Smith @delong Is it a Godwin's Law violation to call this Nazi-esque? http://nationalreview.com/articles/28576… 10 hours ago Retweeted by delong

  • matociquala Elizabeth Bear First you must accept the fact of your own mediocrity. http://bit.ly/uM3cy4 @tanehisi says hard true things. 2 hours ago Retweeted by delong

  • crampell Catherine Rampell like the Ivies, Berkeley expanding fin aid: families earning ≤$140,000 to contribute no more than 15% of annual income nyti.ms/vUh6oj 10 hours ago Retweeted by delong

  • ryanchittum Ryan Chittum if the NYT can give Friedman an unlimited travel budget, they can surely hire an intern to put links in his copy http://nyti.ms/uBTIDq 10 hours ago Retweeted by delong

  • ayeletw Ayelet Waldman You know what makes women's lives better? The ability to control when and if they have children. Help a sister out. http://bit.ly/rrHzc5 10 hours ago Retweeted by delong

  • delong J. Bradford DeLong @ @nickconfessore @ezraklein No. Not similar. GOP plans for Medicare enormous compromises in quality. The ACA at least has a quality strategy 11 hours ago

  • AmandaMarcotte Amanda Marcotte God, I've been waiting forever to have an excuse to make fun of rich suburban bikers, and IT'S FINALLY HAPPENING. 11 hours ago Retweeted by delong

  • timothypmurphy Tim Murphy (For you non-history buffs, Christmas was a holiday that used to be celebrated before gays were allowed to serve openly in the military.) 11 hours ago Retweeted by delong

  • delong J. Bradford DeLong James Saft, Fifteen Months Ago, on Ireland http://bit.ly/s7QxzV 12 hours ago

  • delong J. Bradford DeLong The Council on Foreign Relations Finally Hosts a Good Discussion of the Current Economic Situation http://bit.ly/vFzMPI 21 hours ago

  • thegarance Garance Franke-Ruta "An article on Newt Gingrich's official website is headlined 'A Tale of Three Wives: Life on the Campaign Trail.'" http://bit.ly/u2SNtB 14 Dec Retweeted by delong

  • orezavi orezavi RT @delong: Mohamed El-Erian: Downward Spiral bit.ly/sfD4dQ 42 minutes ago

  • MattCowgill Matt Cowgill "When you read Keynes, you realize you are reading a man of profound humanity and spirit" http://goo.gl/sLmyw (via @delong) 1 hour ago

  • drgrist David Roberts Read. It. RT @delong: Mark Schmitt for Democracy Journal: The Myth of the Middle http://bit.ly/tnORLD 1 hour ago

  • nielsandeweg Niels Andeweg @ @delong Mrs. Merkel fails to realize that (her) shareholders are ultimately (point reached) stakeholders too #statesmanship #eurocrisis 7 hours ago

  • Noahpinion Noah Smith @delong Is it a Godwin's Law violation to call this Nazi-esque? http://t.co/maPgPQTe 10 hours ago

  • nickconfessore Nick Confessore RT @delong: No. Not similar. GOP plans for Medicare enormous compromises in quality. The ACA at least has a quality strategy 10 hours ago

  • nazarioz nazarioz Oh that's right, this was a good interview on inequality - RT @delong: Daron Acemoglu on Inequality http://thebrowser.com/interviews/dar… 14 Dec

  • MarkHedgesUSA Mark Hedges @ @delong Can you fraking believe Fox is suggesting WAR to rescue a ROBOT? 14 Dec

  • davenicolette Dave Nicolette @ @delong Didn't you know? Billions of Americans quit their jobs every day so they can get rich on unemployment benefits. 14 Dec

  • LisaIronTongue Lisa Hirsch @delong hilariously, I have a LinkedIn invite from Ben Stein. Must be from email telling him how wrong he was about something. 14 Dec

  • MilesCorak Miles Corak @NYTimeskrugman @delong @MarkThoma @TimHarford This speech by #BankofCanada gov #Carney looks at our #Minsky moment http://bit.ly/uSRebi 14 Dec »

  • ceisenhood Charlie Eisenhood "We have a common, collective interest in full employment and shared prosperity. We are the 100%." - @delong 14 Dec