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January 2012

DeLong Smackdown Watch: Structural Unemployment Edition

Anon writes:

Brad DeLong: Hysteresis and the American Unemployment Problem: For three f%@&ing years I have been telling you there was a structural unemployment problem which you have been vigorously denying. Now you are posting this without even acknowledging how clueless you were?

I would plead that two years ago we had no structural unemployment problem, that one year ago we had a tinge of a structural unemployment problem, and now we have a small structural unemployment problem--1.0% of the adult population more than frictional unemployment was back in 2006-7.

And it is growing: each month, each cyclically-unemployed person has an 0.3% chance of turning into a structurally-unemployed person.

On the Fed's Policy of Quantitative Easing Coupled with Promises Not to Let Prices Recover Any of the Ground Relative to Trend They Lost in the Recession...

The conventional Fisher-Friedman approach to the determination of nominal spending and income focuses on the equilibrium demand and supply of money through the quantity theory:

(1) PY = MV(i)

If the economy’s money-supply process has produced “too little” money for the current level of spending, businesses and households attempt to shift their portfolios and accumulate more money by (i) trying to sell some of their other financial assets for cash, and (ii) cutting back on their spending. Thus the flow of spending—and income, and production—falls until PY has fallen by enough to make households and businesses no longer seek to increase their money holdings. Combine this focus on money supply and money demand equilibrium with some model of price theory and price adjustment, and the result is a theory of the monetary business cycle.

At the zero-interest rate lower nominal bound, this Fisher-Friedman framework breaks down. With no opportunity cost to holding wealth in money rather than in other short-duration safe nominal assets, there is no reason for changes in the money stock to induce any changes in the flow of spending at all. Anybody seeking to model nominal and real income determination must then find another, alternative equilibrium condition to focus on.

The conventional theoretical macroeconomic step to take is to focus on the intertemporal Euler equation of a representative household with rational expectations: is it on an optimal consumption-savings path? But focusing on the Euler equation requires that there be (a) no disagreements between investors, and (b) a meaningful representative household, with (c ) correct rational expectations. If we are unwilling to make those assumptions, we are then driven back to the equilibrium condition from which, given the existence of no disagreements, a representative household, and rational expectations, the Euler equation was derived.

This equilibrium condition--appropriate for a more general theory—-is the Wicksell-Hicks flow-of-funds through financial markets condition: the supply of savings vehicles must be equal to the demand for savings vehicles. If the demand for savings vehicles is greater than the supply, people will cut back on spending their savings on currently-produced goods and services as they try to boost their holdings of savings vehicles. Spending, production, and incomes will fall until people feel so poor that they no longer wish to boost their holdings of savings vehicles. When the supply of savings vehicles is greater than demand, people will increase their spending as they try to turn their excess asset holdings into current consumption. Spending, production, and incomes will rise until the richer society is happy holding the existing supply of savings vehicles.

Thus theories about the effectiveness or ineffectiveness of any kind of policy—monetary, fiscal, banking, whatever—at the zero nominal interest rate lower bound are ways of deploying Wicksell-Hicks flow-of-funds equilibrium condition. They are theories about:

(2) B + S = B + I + (G - T)

about the demand for savings vehicles—the sum of the current stock of financial assets in the economy B and desired additions to that stock through savings S—and the supply of savings vehicles—the sum of the current supply of financial assets B plus business investment I plus government debt issuance G - T.

Note that if you wish to assume a (a) representative agent with (b) rational expectations you are still committed to an analysis via (2). It is a consequence of your intertemporal Euler equation. If and only if (2) holds, then your representative agent with rational expectations is on its optimal consumption-savings path.

Equation (2) gives us insight into the potential effectiveness of monetary policy at the zero lower bound. Such non-fiscal policies do not, by definition, change the supply of savings vehicles: they simply swap one savings vehicle in private portfolios for another—cash for Treasuries, short Treasuries for GSEs, private obligations subject to bankruptcy risk for private obligations backstopped by a government guarantee. For them to boost the economy therefore, they too must work via their effects on reducing private savings S or boosting private investment I.

How can they do this?

Mostly, they do this by convincing financiers that the path of real interest rates will be lower in the future than they had expected. Even though at the zero nominal lower bound the current size of the money stock is irrelevant because the opportunity cost of holding money is zero, this will not always be the case. Someday the size of the money stock will matter again. And if the central bank now takes steps that credibly promise such a larger money stock in the future when it matters, then expectations of lower nominal interest rates and higher price levels in the future which should boost investment and other real interest-sensitive components of spending now.

What are these policies?

Jawboning to reduce anticipated real interest rates: The central bank can claim that it will maintain interest rates in the future at a lower level and the money stock at a higher level than that of its normal policy reaction function. Thus, the central bank would claim, inflation will be higher in the future than forecasts based on normal reaction functions would allow. That means that real interest rates will be lower—and that would push down savings and push up investment.

The potential difficulty is that open-market operations can be unwound. That the Federal Reserve has raised the money stock this year does not necessarily mean that it will keep the money stock five years hence above the level called for by its standard reaction function. Pure jawboning is the ultimate in cheap talk. Jawboning backed by quantitative easing at the short end of the term structure is not quite pure cheap talk: the central bank is taking action. The problem is that the action is easily reversible.

Quantitative easing at the short end to reduce anticipated real interest rates: The central bank can claim that it will maintain interest rates in the future at a lower level and the money stock at a higher level than that of its normal policy reaction function—and back up those claims by expanding the money stock now by continuing to buy short-term government bonds for cash even though this is simply a swap of one zero-yielding short term safe nominal asset for another. The idea is that the Federal Reserve is not just claiming it will expand the money stock in the future—it has already expanded the money stock.

The potential difficulty is that open-market operations can be unwound. That the Federal Reserve has raised the money stock this year does not necessarily mean that it will keep the money stock five years hence above the level called for by its standard reaction function. Pure jawboning is the ultimate in cheap talk. Jawboning backed by quantitative easing at the short end of the term structure is not quite pure cheap talk: the central bank is taking action. The problem is that the action is easily reversible.

Quantitative easing at the long end to reduce anticipated real interest rates: The central bank can claim that it will maintain interest rates in the future at a lower level and the money stock at a higher level than that of its normal policy reaction function—and back up those claims by expanding the money stock now by to buying long-term government, agency, and private bonds for cash and committing to holding them to maturity. The idea is that the Federal Reserve is not just claiming it will expand the money stock in the future—it has already expanded the money stock. And such transactions are not or at least are not as easily unwound. Price pressure effects mean that the Federal Reserve will, embarrassingly, probably lose money on the round trip if it breaks its commitment to hold its purchased securities to maturity.

Quantitative easing at the long end may have another significant effect as well. By taking duration and, in the case of private bonds, default risk onto its balance sheet the Federal Reserve transfers that risk from the marginal investor to the marginal taxpayer. If the marginal taxpayer is at a corner solution in their financial market holdings or has a higher rate of time discount than the marginal investor or simply does not see through the government’s balance sheet, one consequence of quantitative easing at the long end is that investors will then have unused risk-bearing capacity. Duration and default risk spreads should then fall, and this fall in spreads should turn more investment projects into positive NPV ones. Quantitative easing at the long end thus has not only its potential principle effect on private investment and other forms of interest-sensitive spending via expectations of inflation and thus of real safe interest rates but also a secondary effect on investment via the government’s assumption of a role as a risk-bearing partner in private enterprise.

Back-of-the-envelope calculations based on standard finance principles suggest that this portfolio-composition effect should be insignificantly small. But similar arguments based on standard finance principles have long suggested that standard open-market operations in normal times should not be able to shake the intertemporal price system out for thirty years either, and there is a lot of evidence that standard open market operations in normal times do in fact have substantial effects.

Quantitative easing accompanied by declarations that the central bank has not changed its long-run inflation and price level targets: I do not understand why a central ban would pursue such a policy.

But that is the policy that the Federal Reserve appears to have decided to pursue.

Ryan Avent:

Monetary policy The Fed s communications problem | The Economist

Monetary policy: The Fed's communications problem: As I've written before, the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound. The Fed's efforts to clarify and push out the date at which it is likely to raise rates strikes me as a means to try and commit itself to higher inflation in the future. But the Fed's communications efforts in this regard run up against a serious obstacle in the form of the Fed's long-term inflation forecast, which is 2%. The Fed can't force future central banks to keep to any policy path. If the Fed were to project a long-run inflation rate above 2% then, as Mr Bini Smaghi says, markets might suppose that monetary tightening lay ahead, whatever the fine print says.

This is not an unsolvable problem but is, I think, one of the tight spots in which the Fed finds itself as it transitions from a framework that wasn't very good at boosting the economy at the ZLB to one that might be. One way to get around the problem would be to change the target, to 3% inflation or to something else, like a price or nominal GDP level, that implies future inflation above currently acceptable levels. The Fed may get there eventually, but probably not soon enough to have a meaningful impact on this recovery. 

An alternative might be to bring the point at which future inflation is tolerated a bit closer to the present. That is, the Fed doesn't necessarily run into problems of inconsistency if it projects inflation above 2% 1 or 2 years from now—a timeframe over which markets readily understand this group of policymakers to have control—while maintaining the long-run 2% goal. Achieving that would require the Fed to give itself a framework within which it's acceptable to have inflation above 2% (and even to try to generate inflation above 2%), and as I wrote last week, I thought the Fed took a big step in that direction at its latest meeting. But one then has to choose to act within that framework. I suspect that what that will take is a near-term projection of inflation above 2% combined with action—asset purchases—designed to demonstrate that, yes, the Fed is actually trying to create a little catch-up inflation. At the last press conference, Ben Bernanke all but admitted that that would be a sensible thing to do. Now we just need to excise the "all but".

Hysteresis and the American Unemployment Problem

Continuing to work on my Brookings Paper with Larry Summers: "Fiscal Policy in a Depressed Economy".

Here is an early sketch of what we might say about labor-side hysteresis:


Since the seasonally-adjusted U.S. unemployment rate reached its peak in the second half of 2009, the measured unemployment rate has been on a decline: fro a peak of 10.0% to a value of 8.5%, seasonally-adjusted, in December 2011.

However, this decline in the measured unemployment rate does not mean that a larger proportion of the American adult population is at work today than at the unemployment rate’s peak. In fact, the employment-to-population ratio in December 2011 was at exactly the same value that it had been at during the late-2009 unemployment rate peak. The unemployment rate today is lower today because the labor force participation rate is lower, not because the employment-to-population ratio is higher.


It would be expected that the labor force participation rate would be lower when the unemployment rate is higher: to be in the labor force requires that you have a job or be searching for a job, and when jobs are scarce—as is the case when the unemployment rate is high—taking the steps and making the effort to be in the labor force will flunk the benefit-cost test for more people.

What is slightly more surprising is the pattern over the past two years. Jobs right now, at least as measured by the employment-to-population ratio, are no more difficult to get than they were two years ago. But two years ago the labor force participation rate stood at 65%. Now it stands at 64%. 2.4 million American adults who would have been in the labor force two years ago are not in the labor force today, even though jobs appear to be no more scarce today than they were two years ago.

Over the post-World War II period in the United States, on average a one percentage point decline in the employment-to-population ratio has been associated with an 0.27 percentage point decline in the labor-force participation rate—and that decline in the labor-force participation rate is then made up when the employment-to-population ratio recovers. And, indeed, starting in January 2008, the recession-period change in the labor-force participation rate tracked what one would have expected from the historical pattern and the behavior of the employment-to-population ratio closely. But since the employment-to-population ratio finished its decline and began its flatline in late 2009, the behavior of the labor-force participation rate has been anomalous. Rather than stabilizing, it has continued to decline. It appears likely that persistent high unemployment in the United States is generating labor-force participation dynamics that have not previously been seen, at least not in the post-World War II period.


The obvious hypothesis is that the considerations raised by Blanchard and Summers (1986) in their “Hysteresis and the European Unemployment Problem” for Europe in the 1980s are starting to apply to the United States today. Persistent high transitory cyclical unemployment is transforming itself into permanent structural unemployment as the labor market recovery continues to delay its appearance.

How large should we mark down our estimate of the long-run economic growth path of the United States from the employment reports of the past two years? Two years ago, after all, the recession was over. The employment-to-population ratio was where it is. The labor force participation rate was a full 100 basis points higher.

If the unemployment rate follows a stationary stochastic process without much memory, then it by itself encodes the state of the business cycle and thus the gap between current and potential GDP. Under this shaky but not implausible assumption, the one percentage-point decline in labor-force participation over the past two years indicates that the long-run average employment-to-population ratio in the U.S. in the future will be one percentage point lower than would have been forecast two years ago under the assumption of a rapid labor-market recovery. Then the forecast would have been for a long-run employment-to-population ratio forecast of 62.5%. Now the forecast is for a long-run employment-to-population ratio forecast of 61.5%—a reduction in expected future long-run labor input of 1/60.

It is possible to argue that, with a labor share of .6, such a reduction in long-term labor supply carries with it a 1% reduction in potential output. It seems to us more reasonable to argue that the decline in labor supply is primarily a decline in raw unskilled and semi-skilled labor supply and not a decline in human capital supply, and that the decline in labor-force participation over the past two years as the employment-to-population ratio has flatlined has reduced potential output by 0.5%.

If so, then the experience of the past two years provides enough information to produce a one-episode estimate of the labor-side hysteresis parameter η needed for the simple analytical framework. Two years during which real GDP has stayed flat at 7% below our pre-2007 estimates of potential output have managed to push potential output down by 0.5%: that suggests a value for η of 0.5/(7 x 2) = 0.035.

In the context of equation (11):[1]


and with a value of 2.7%/year for the long-term growth rate g of the American economy, such a value for η looms very large in the social-welfare cost benefit analysis indeed. With a real social rate of time discount rd of 5%/year, η of 0.035 produces a present value of gross benefits from expansionary fiscal policy at the margin 2.5 times as large as simple multiplier calculations focused on current output. With a rate of time discount of 4%/year, it is not 2.5 but 3.7 times as large. And with a social rate of time discount of 3%/year, it is not 2.5 or 3.7 but rather 12.7 times as large.

The social discount rate of 4%/year also allows us to do a calculation of the cost of each extra month’s delay in the coming of a recovery proper to the U.S. labor market. Inserting an extra month with the output and employment gap at its current level costs the American economy roughly $100 billion in foregone immediate output. And, at a social real discount rate of 4%, if the reduction in labor-force attachment is indeed permanent, it also costs the American economy $270 billion in the present value of reduced future potential output.

What appears to be the slow transformation of cyclical into structural unemployment in America today is an order of magnitude more damaging to our prosperity than is the simple fact that we are mired in the Lesser Depression.

[1] Where:

  • ΔW is the (marginal) change in social welfare induced by a (marginal) change ΔG in this-period government purchases

  • rd is the real social rate of time discount

  • g is the real growth rate of the economy

  • η is the labor-side hysteresis parameter--the share of today's boost to employment/output that is permanent because deep recessions cast shadows and reduce aggregate supply by increasing failures in the labor market

  • δ is the deadweight loss from raising a dollar of tax money in the future

  • m is the multiplier, net of any central bank neutralization of fiscal stimulus

  • τ is the current tax rate

  • ρ is the (if positive) default premium interest rate that the government must pay over and above the social rate of time discount, or (if negative) the value to investors of having safe government paper backstopped by the taxing power to invest in).

Felix Salmon on Sebastian Thrun and Udacity

Felix Salmon:

Udacity’s model: [T]hree very good questions about Sebastian Thrun’s new online university, Udacity, which I wrote about last week. I spoke to Thrun yesterday, so I took the opportunity to clear them up.

Reich begins:

  1. Why did Thrun need to quit Stanford? Why not pursue the project under the umbrella of Stanford, with its enormous and global reputation? Indeed, hadn’t he already carried out a demonstration proof of the concept with his Artificial Intelligence class at Stanford? Why not just continue with that in expanded form at Stanford?

As Thrun says on his homepage, he quit Stanford on April 1, 2011 — before offering the free class in artificial intelligence — “primarily to continue my employment with Google”…. This helps to answer another of Reich’s questions. “If Thrun developed [the AI] class as a faculty member at Stanford,” he asks, “then doesn’t Stanford have some claim on at least the course content?” The answer, it seems, is that Thrun developed the class after he gave up his position at Stanford. And as a result, the course content belongs not to Stanford but rather to KnowLabs, Thrun’s company…. Leaving Stanford, Thrun told me, “was the only way I could pull this off. The statement that we could let the students take exams and compare themselves to Stanford students, is something I don’t think the university would have approved.”

When NPR interviewed Thrun for a story about Udacity, they also got a none-too-enthusiastic statement from Stanford:

Thrun’s colleague Andrew Ng taught a free, online machine learning class that ultimately attracted more than 100,000 students. When I ask Ng how Stanford’s administration reacted to their proposition, he’s silent for a second. “Oh boy,” he says, “I think there was a strong sense that we were all suddenly in a brave new world.” Ng says there were long conversations about whether or not to give online students a certificate bearing the university’s name. But Stanford balked and ultimately the school settled on giving students a letter of accomplishment from the professors that did not mention the university’s name. “We are still having conversations about that,” says James Plummer, dean of Stanford’s School of Engineering. “I think it will actually be a long time — maybe never — when actual Stanford degrees would be given for fully online work by anyone who wishes to register for the courses.”

Stanford, then, has managed to come out of this story smelling reasonably good: it helped give Thrun the launching pad for Udacity, and didn’t visibly complain…. [T]he sign-up rate for Udacity’s new courses seems to be exactly the same as the sign-up rate for the AI class which was co-branded with Stanford: the lack of a Stanford branding doesn’t seem to have hindered Udacity much. And similarly, the incredible success of Khan Academy has taken place without any co-branding with a venerable legacy institution….

Udacity is very much a teaching institution rather than a research institution. “At Stanford, priority is your research career,” says Thrun. “That is counter to teaching 100,000 students, who generate 100,000 emails.” Looked at from a 30,000-foot view, Stanford is the institution being disrupted here, it’s not the institution doing the disrupting. And that also helps explain why Thrun isn’t doing Udacity under the auspices of Google. He says that Udacity does fit quite easily into Google’s mission of making the world’s information available for free, but that at the same time Google doesn’t need a dog in this particular fight. “Having a clean slate is a better way to start,” says Thrun. “The last thing I want is people asking whether Google is disrupting education. Better to ask if Sebastian is trying to disrupt education.” (That said, Thrun’s friend and boss Sergei Brin does feature prominently in the launch video for Udacity’s first course; it’s clear that Udacity has Brin’s strong support. And of course Google is also a big supporter of Khan Academy, having gifted it some $2 million.)…

Reich's second question:

  1. Why is Udacity a for-profit company? Thrun said that Udacity courses would be free to students, and Thrun cited Salman Khan and Khan academy as inspiration and model for what he’s doing. But Khan Academy is non-profit. Stanford University is a non-profit. Thrun says he wants to democratize higher education, offering knowledge to the world for free. How does this mission fit with his for-profit online university?

I asked Thrun about this, too, and he replied by saying that “for profit is not forced to make profit. I needed to get people together really fast, and it’s much easier to do that under the ways of a Silicon Valley company.” Certainly the speed with which Udacity launched, complete with a high-quality staff, is testament to the natural velocity with which things get done in Silicon Valley. Driving the launch was seed funding from Charles River Ventures, while the site’s jobs page proudly offers “Competitive salary, benefits, and Series A stock options” to anybody thinking about working at Udacity…. [O]nline education is young enough that it’s worth trying many different models to see which ones work. Udacity seems to be built on the standard VC model of get scale first, worry about monetizing it later…. “We should try many different things,” says Thrun. “I believe in the educational revolution that Salman started. I believe that education can change the world. So why not try a hundred of those things.”…

A large part of the success of both Khan’s courses and Thrun’s is the way that they’re presented and executed…. Khan, in particular, is a hugely gifted natural educator. And what both of them aspire to doing is to build what Thrun calls “magic” into the way that they teach. Thrun wants to add another element, too — community. His courses have a start date and an end date and deadlines… that makes them inherently social in a way that Khan’s YouTube videos aren’t.

Finally, asks Reich,

  1. What to make of Thrun’s apparent pleasure at the fact that 170 of the 200 Stanford students who had enrolled in the real, not online, version of the Stanford AI class stopped coming to class, preferring the online Thrun to the flesh-and-blood Thrun?

That pleasure, I’m quite sure, is genuine. I think that Khan and Thrun are at the forefront of a new, more personal way of teaching — think of them as having screen-actor skills in a world which has historically rewarded stage-actor skills. When you teach online, you’re teaching in a conversational manner, in a one-on-one space. And it turns out that many students — quite possibly most students — prefer being taught that way…. [T]he incentives for the teacher are so much greater online, if like most teachers you’re driven by the opportunity to impart knowledge to students. “This is the best thing I can do in my life,” says Thrun. “I empowered more students in 2 months than in my entire life before. On that scale, I was off the charts in the last quarter.” And of course Thrun is barely on the charts if you compare him to the number of students that Khan has reached.

What Khan and Thrun and others are creating is a new educational paradigm, which promises not only much greater scalability than anything we’ve had until now, but also higher-quality education. That’s the real lesson of Thrun’s Stanford students taking his class online…. The trick is intimacy, in a way which takes full advantage of the lean-forward nature of computer screens…. [I]t’s a much more immersive and intimate experience. Blow that YouTube video up to full screen, and jump down the rabbit hole. You might just learn something.

Cahn and Carbone: Red Families v. Blue Families

A much better book than Murray's Coming Apart: The State of White America 1960-2011. Published two years ago. Avoids Murray's original errors:

Naomi Cahn and June Carbone: Red Families v. Blue Families: Legal Polarization and the Creation of Culture:

Red Families v. Blue Families identifies a new family model geared for the post-industrial economy. Rooted in the urban middle class, the coasts and the "blue states" in the last three presidential elections, the Blue Family Paradigm emphasizes the importance of women's as well as men's workforce participation, egalitarian gender roles, and the delay of family formation until both parents are emotionally and financially ready. By contrast, the Red Family Paradigm--associated with the Bible Belt, the mountain west, and rural America--rejects these new family norms, viewing the change in moral and sexual values as a crisis. In this world, the prospect of teen childbirth is the necessary deterrent to premarital sex, marriage is a sacred undertaking between a man and a woman, and divorce is society's greatest moral challenge. Yet, the changing economy is rapidly eliminating the stable, blue collar jobs that have historically supported young families, and early marriage and childbearing derail the education needed to prosper. The result is that the areas of the country most committed to traditional values have the highest divorce and teen pregnancy rates, fueling greater calls to reinstill traditional values.

Featuring the groundbreaking research first hailed in The New Yorker, this penetrating book will transform our understanding of contemporary American culture and law. The authors show how the Red-Blue divide goes much deeper than this value system conflict--the Red States have increasingly said "no" to Blue State legal norms, and, as a result, family law has been rent in two. The authors close with a consideration of where these different family systems still overlap, and suggest solutions that permit rebuilding support for both types of families in changing economic circumstances….

Did David Brooks Read Charles Murray's New Book? Did David Brooks Read the Subtitle?

Charles Murray's new book is called: Coming Apart: The State of White America, 1960-2010.

Now David Brooks:

The Great Divorce: I’ll be shocked if there’s another book this year as important as Charles Murray’s “Coming Apart.” I’ll be shocked if there’s another book that so compellingly describes the most important trends in American society…

How can a book that explicitly leaves out Asian-Americans, Hispanic-Americans, Amerindians, African-Americans, people of mixed race, and Arab-Americans possibly describe "the most important trends in American society"?

How can the New York Times editors publish a piece without asking David Brooks why he does not dare mention the subtitle of the book he is puffing?

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

Chris Blattman: Where Are the Citations? Where Are the Hyperlinks?

Chris Blattman:

More on yesterday’s cheap shot at @freakonomics and @WSJIdeasMarket: What irked me… [is] the impression that large and profit-oriented blogs, especially ones that are affiliated (past or present) with media giants are less generous with attribution than the rest of the world.

On some blogs, intermediate sources are not hat-tipped, a practice which is bad manners at best, and worse things at worst. On others, like Freakonomics, hat tips exist but are merely unhyperlinked. The latter discussion is perhaps not worth the bits and bytes it involves. Unhyperlinked is not even a word. I’ll let readers be the judge. But the former offense deserves more attention.

Why spend more blog space on such frivolous things? No good reason. On this occasion, I started it and I should fess up when I overstate myself, or falsely accuse.

Also, I have an overdeveloped sense of justice, which often pushes me in the right direction, but sometimes leads me along silly and fruitless paths, such as accosting strangers on New York City sidewalks for littering, or (more successfully) trying to bring order to Dubai airport lines when hundreds of people are jumping queues during a 4am rush.

I will admit: I still get a great sense of satisfaction from the memory of hundreds of people from as many nations meekly looking ashamed and falling back into line. How should I feel looking back on this episode? Reader opinions welcome.

This is a great division between academics and--let's call them journamalists. Academics think that their arguments are stronger and thus that they are stronger and more persuasive when they cite and link. Journamalists think that if they give their readers a whisper that there are other, perhaps better sources of information, then--OH NOES!! THE REEDRS GO READ SOMETHING ELSE!! TEHRE GOEZ R ADVERTIZING REVENUE!!

This makes academics think that journamalists are immoral, mannerless cads--the type of people who you invite to dinner who then urinate on your bedspread. Journamalists, by contrast, are puzzled: "What's the big deal?" they ask. "Everybody does it."

Quote of the Day: January 31, 2012

"The [gold standard] system presupposed an intellectual climate in which governments attached priority to currency and exchange rate stability. It presupposed a political setting in which they were shielded from pressure to direct policy to other ends…"

--Barry Eichengreen, Globalizing Capital: A History of the International Monetary System

Liveblogging World War II: January 31, 1942

The U.S. Wr Production Board halts civilian automobile production:

War Production Board Facts, information, pictures: War Production Board, US civilian agency, headed by Donald M. Nelson (1888–1959), which was formed in January 1942 to organize economic mobilization for the war, encourage industrial expansion, and develop policies controlling every aspect of production. One of its main tasks was to divide scarce materials between the military and civilian production sectors which it was authorized to do under the Second War Powers Act passed in March 1942. It also had the power to stop or ration the production of civilian goods and in agreement with the military, which retained responsibility for procurement contracts, to set production quotas and schedules to eliminate bottlenecks and cut down on waste. To speed the conversion of industry to war production, its first decision was to outlaw the production of all cars and light trucks after 31 January 1942; and by June, when the Smaller War Plants Corporation was formed as part of it, the production of consumer durable goods had been cut by 29%. It was, Nelson later commented, not so much industrial conversion as industrial revolution...

Britain in the 1930s and Britain Today

We are live at Project Syndicate:

Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s pursuit of stimulus to restore the price level to its pre-depression trajectory.

Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.

Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain…ever.

That is quite an accomplishment. As Phillip Inman of The Guardian recently put it:

[T]he UK’s plan for recovery from the financial crisis was based on a full-throttle recovery in 2012....[C]onsumer confidence, business investment, and general spending would converge to send the economy on a trajectory of above-average growth.

It did not work: government ministers:

have done what the right-wing economists told them to do and moved out of the way – the theory being that public-sector spending and investment was ‘crowding out’ the private sector.

Instead, as Inman says, “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”

The failure of expansionary austerity in Britain should give all of its advocates around the world reason to reflect on and rethink their policy calculations. Britain is a highly open economy with a flexible exchange rate and some room for further monetary easing. There is no risk or default premium baked into British interest rates to indicate that fear of political-economic chaos down the road is discouraging investment.

There is an argument – not necessarily true, but an argument nonetheless – that, while in office from 1997 to May 2010, the Labour governments of Tony Blair and Gordon Brown overshot long-term sustainable government spending as a share of GDP. Their actions stand in contrast to countries that reduced their debt-to-GDP levels in the 2000’s, and to the United States, where the problem was not excessive spending but insufficient taxation under the Bush administration.

Yet, if one takes this view seriously, Britain, with a ten-year nominal interest rate of less than 2.1% per year, should already be in a boom. If there was ever a place where expansionary austerity should work well – where private investment and exports should stand up as government purchases stood down, confirming its advocates’ view of the world – it is Britain today.

But Britain today is not that place. And if expansionary austerity is not working in Britain, how well can it possibly work in countries that are less open, that can’t use the exchange-rate channel to boost exports, and that lack the long-term confidence that investors and businesses have in Britain?

Nick Clegg, Britain’s deputy prime minister and the leader of Cameron’s coalition partner, the Liberal Democrats, should end this farce today. He ought to tell Queen Elizabeth II that his party has no confidence in Her Majesty’s government, and humbly suggest that she ask Labour Party leader Ed Miliband to form a new one.

To be sure, if Clegg did this, his political career would probably be finished, and his party’s electoral prospects would be damaged for a long time to come. But Clegg’s political career and his party’s fortunes will be shaky for a long time to come in any case, given the economic hardship that Britain is enduring (and will continue to endure). At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.

Policymakers elsewhere in the world take note: starving yourself is not the road to health, and pushing unemployment higher is not a formula for market confidence.

Thinking Aloud About Fiscal Policy in a Depressed Economy...

I have been staring for weeks now at what I have come to call equation (11):

Untitled 1 1


  • ΔW is the (marginal) change in social welfare induced by a (marginal) change ΔG in this-period government purchases

  • rd is the real social rate of time discount

  • g is the real growth rate of the economy

  • η is the labor-side hysteresis parameter--the share of today's boost to employment/output that is permanent because deep recessions cast shadows and reduce aggregate supply by increasing failures in the labor market

  • δ is the deadweight loss from raising a dollar of tax money in the future

  • m is the multiplier, net of any central bank neutralization of fiscal stimulus

  • τ is the current tax rate

  • ρ is the (if positive) default premium interest rate that the government must pay over and above the social rate of time discount, or (if negative) the value to investors of having safe government paper backstopped by the taxing power to invest in).

I think that there are a number of lessons to be drawn from this equation:

  1. First, expansionary fiscal policy at the margin has net benefits as long as the this-period net-of-monetary offset multiplier parameter m is greater than the deadweight loss from additional tax revenue parameter δ. In a normal situation expansionary fiscal policy is not worth undertaking: the deadweight tax loss parameter δ is greater than the within-period multiplier parameter m, whether because labor or capacity constraints keep increases in nominal spending from raising production and employment by any significant amount or because the monetary authority takes steps that raise interest rates and so neutralize fiscal policy out of its desire to maintain price stability. But the situation right now is not normal.

  2. If there is value to investors in holding safe government debt--if ρ is negative and large enough in magnitude that rd - g + ρ is less than zero--then expansionary fiscal policy at the margin has net benefits for any positive multiplier parameter m, no matter how low. This is the “free money” point: if rd - g + ρ < 0, the attractiveness of government debt to wealthholders as a safe savings vehicle is sufficiently great that at the margin there is no financing burden of government debt on taxpayers. A national debt is then, in the words of first U.S. Treasury Secretary Alexander Hamilton, “a national blessing”—and more debt is a bigger blessing. In such a situation to sell new government debt and use the money to buy something useful in any way--or indeed to buy something useless--is social welfare-improving.

  3. It certainly looks right now as though rd - g + ρ < 0: if we had a real Treasury consol right now, its duration would be about 70 years and its interest rate would be in the range from 1.2%/year to 1.7%/year, comfortably less than the projected real growth rate of the economy. Where this comes from is an interesteing research question. Is it the equity premium puzzle by another name? Is it because investors are irrationally attached to what they regard as safety? Is it because financial markets are really lousy at mobilizing the risk-bearing capacity of the economy, while governments via taxation can do so easily? It looks as though the 1980s and the 1990s are the only times since the Gilded Age in which rd - g + ρ has not been less than zero. If so, that would have implications for optimal fiscal policy that would run far beyond the desirability of Keynesian expansion at the margins in deep depressions.

  4. Under the ancillary assumption that the appropriate social rate of time discount is surely not that much larger than the expected real growth rate of the American economy, positive hysteresis effects from labor-market attachment are highly likely to make expansionary fiscal policy at the margin worthwhile even if the multiplier is so low and the deadweight loss from taxation so high that even right now m < δ. Whatever costs are incurred as a result of deadweight losses of financing for debt and whatever current year benefits are obtained from a stronger economy are swamped did fiscal stimulus now manages to boost the permanent capital stock or reduce structural employment in the economy at all.

  5. If there is a substantial multiplier or significant hysteresis effects right now, the only consideration that could militate against the desirability of expansionary fiscal policy at the margin would be the emergence of a large positive risk-and-default premium ρ on government debt. Unless and until we turn into Greece in some bizarre way, there is nothing else in (11) that could mke expansionary fiscal policy at the margin a bad idea.

  6. The cost of financing the extra deficits generated by expansionary fiscal policy are lower than one would think becasue the multipier works in the short run to diminish the increment to the debt that must then be financed.

Anything that I have missed?

Carl Richards and Henry Blodget Offer Investment Advice That Is Good

Carl Richards:

Carl Richards On The Psychology Of Buying High And Selling Low: Successful investing is hard. Not complicated, just hard. It’s hard because for the most part, we are wired to make the same mistake over and over again. We buy high and sell low because that’s what everyone else is doing. But like any problem that needs to be fixed, the first step is recognizing the problem and then coming up with a plan to prevent it.

Buying High and Selling Low: We don’t have to look too far to find ample evidence of poor investor behavior on a wide scale. In 1999 when the dot-com bubble got bigger and bigger, the NASDAQ was up over 85 percent… FOR THE YEAR. That was crazy enough, but what happened in the first quarter of 2000 was insane. We went on a buying binge, all of us. Up until January 2000, the record for net inflows (money going in, minus money going out) into stock mutual funds was $29 billion. Now here we are in January 2000, right after an 86 percent run up. Look at these numbers.

  • In January we poured $44.5 billion into stock mutual funds.

  • In February, the shortest month of the year, inflows hit $55.6 billion. That’s almost $2 billion a day!

  • And March was nothing to sneeze at either with an investment of another $39.9 billion.

Think about it. Over three months, $140 billion dollars entered the market—AFTER it already had gained over 80 percent. At a time when we should have shown some caution, we allowed ourselves to get swept along with the crowd, and we paid for it. March 24, 2000, was the peak of the dot-com bubble, and by October 2002 the market had lost 50 percent of its value. So we poured money in, just in time to get our heads taken off!

If the behavior at the top was wild, clearly we still hadn’t learned the lesson on the way down. With the S&P 500 down over 50 percent from its highs, we couldn’t sell fast enough. October marked the fifth month in a row that investors pulled more money out of stock mutual funds than they invested. That had never happened. I repeat, never. October turned out to the market low. So at the market low, instead of buying equities at the best “sale” prices in five years, investors moved their money into bond funds, making the classic mistake of having bought high and sold low. Bond funds experienced a record inflow of $140 billion in 2002, at a time when bonds where at 46 year highs.

How many of us became a real estate investor in 2006? Are we buying gold now? See the pattern.

Breaking the Cycle: Once we recognize the problem we can fix it. The first step is to have a thought-out investment process that we can stick to when things get tough. Investing involves risk so no matter our investment process so there will be times that we are tested. There will be times we are tempted to go to cash, “just until things clear up” like some did in 2002. But the only real hope of sticking with an investment strategy is to understand it at least enough to have the confidence to stay disciplined when times get tough.

Step One: Buy a S&P 500 Index Fund…. Step 2: Building a Diversified Equity Portfolio…. Step 3: Reduce Risk By Adding Bonds…. Step 4: Automate Rebalancing….

Henry Blodget:

What Carl didn’t mention is that he has a new book, The Behavior Gap, coming out on January 3rd. I’ve read it and it’s an excellent deep-dive into the psychology of investing. One thing I love is his explanation of why we “know” the things we should do…yet we don’t do them. This is totally different than most “information” books, which try to convince us about things we already know. Wouldn’t you rather understand why you behave the way you do?

Henry Blodget:

FINALLY, SOME EXCELLENT INVESTMENT ADVICE: Don't Play The Losers' Game: If you're an individual with some money to invest, the first thing you need to know if you want to invest intelligently is that you shouldn't play the Losers' Game. What's the Losers' Game? The game that 99.9% of the people who talk about investing appear to be playing: Namely, following global economics and markets and investment advice and trying to make smart decisions along the way. If you play that investment game, you're almost certain to lose. And the sooner you understand that, the sooner you'll be on your way to investing intelligently…. That doesn't mean that the people in and on the financial media are stupid--they aren't. It just means that almost everything they talk about is irrelevant (or worse) if your goal is to invest intelligently…. So that's the first thing you should do if you want to invest intelligently: Recognize the financial media for what it is--financial media…. The second thing you need to understand if you want to invest intelligently is that if you choose to play this global sport, you will not be playing in a special Little League or low-stakes table with the folks like you who just aren't that good at it. You will play in the same league as the best professional players in the world. And you should expect to do as well against them as you would do against the PGA Tour players at the Masters or the Green Bay Packers in the Super Bowl or the Yankees in the World Series or grand masters in chess. Because the third thing you need to understand that only way for you to make money trading versus investing intelligently (owning low-cost index funds) is to out-play these top professionals….

To make it smart to play the trading game, therefore, you have to have a good reason for thinking that you are going to be one of the alpha "winners" instead of one of the losers….

So, then, how do you invest intelligently?… Invest in a diversified portfolio of low-cost index funds. Rebalance automatically when the allocations get out of whack. That's it. That's how you invest intelligently….

The reason you don't hear more about it in the financial media is that it's boring. The financial media need to make a living, too, and covering the 24/7 market game is exciting. And there are lots of people who like following the markets minute-to-minute 24 hours a day, and the financial media competes for their eyeballs and ears.

But that has nothing to do with intelligent investing.

And just because the "magic formula" of intelligent investing is simple doesn't mean it's easy to do. In fact, it's very hard.

The reason it's hard is that it's hard to understand and believe that this strategy will guarantee that you will outperform about 75% of all investors, including the professionals, over the long haul….

So if you are smart and disciplined enough to do it, hats off to you.  Enjoy the time and money you would have lost if you had spent your life playing the Losers' Game.

Quote of the Day: January 30, 2012

"In considering the Origin of Species, it is quite conceivable that a naturalist, reflecting on the mutual affinities of organic beings, on their embryological relations, their geographical distribution, geological succession, and other such facts, might come to the conclusion that each species had not been independently created, but had descended, like varieties, from other species…"

--Charles Darwin, On the Origin of Species By Means of Natural Selection

Econ 1: Spring 2012: UC Berkeley: Announcements for January 30, 2012

Number of open seats > # people on the waitlist. People can get in, as long as they switch into a section that has open seats (using Telebears): 22 people on the waitlist and 26 available seats

Any more manual processing of the waitlist should be done by the middle of this week

Any questions about enrollment can be directed to Lanwei Yang... She has year last set of office hours Monday 1-5 PM, 534 Evans

Paul Krugman: The Austerity Debacle


The Austerity Debacle: Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground…. [T]here are some caveats and complications. But this nonetheless represents a stunning failure of policy. And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years….

Britain… was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.” How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible…. David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron…. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe….

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

Liveblogging World War II: January 30, 1942

Adolf Hitler:

January 30, 1942: My German Fellow Countrymen and Women, My Comrades!…

At that time [1914] England was the principal initiator of this struggle, England, which over a period of 300 years, through a continuous succession of bloody wars, subjugated roughly a quarter of the globe. Because at that time it wasn't as if one day a few Indian princes or Indian localities or Indian representatives proceeded to London with the request "Britishers, come to India, reign over us or lead us," but it was the English who went to India and the Indian people did not want the British and tried to get rid of them by force. They forced their way in and could not be gotten rid of through more force. Through the use of force they subjugated this continent of over 380 million people, and kept them subjugated.

Only through force did they make one state after another pay them tribute and taxes. Behind this force, of course, stood the other one, which scents business everywhere where a state of disturbance exists: our international Jewish acquaintances. In this manner England, over a period of a few hundred years, has subjugated the world; and, to make secure this conquest of the world, this subjugation of the people, England endeavors to maintain the so-called balance of power in Europe….

To reach this goal, England conducted one war after another in Europe. She has seen first its powerful position menaced by Spain. When they had finally conquered Spain, they turned their attentions to the Netherlanders. When Holland seemed to represent no further danger, British hate concentrated itself against France. And when finally France was crushed with the help of all Europe, to be sure, they then imagined that Germany must be, of necessity, the one factor which might possibly be able to unify Europe.

Then it was that the struggle against Germany began, not out of love for the nations or their people, but only in their own most selfish, rational interests, behind which, as previously said, stands the eternal Jewry, which, in every struggle between nations, is capable of making profits and winning wherever there is confusion and wrangling. It is well-known that they have always been the instigators of unrest among the nations, because they were able to profit only in time of unrest, and because a period of peace might lead to reflection and hence, also, to an insight into the ways of these evil-doers of all nations….

The methods which they used in the first World War were like those with which they are fighting today. At first the war from outside, and war in the form of creating coalitions. Here fits a piece of Churchill's shamelessness, who says today: "England was never in a position to carry on war by herself alone against Italy or Germany." But this same man has through his lieutenant year after year given out promises of guarantee to the whole world. Then he himself admits that they were never in a position to fight alone.

But they guaranteed the Baltic states; they guaranteed the Balkans. They went on around: Every state in the world, they declared, needs a guarantee. Great Britain will put her whole strength behind them and will protect them. Today this same arch-liar says: "But we were really never in a position to carry on the war alone." But that is right; even in the World War they were not in a position to carry on the war alone. Therefore they cooked up a coalition against us of world-wide extent.

The methods have likewise remained the same. Promises to all those of little faith, the credulous, or stupid, who wanted to trust these promises, moreover, the attempt to allow their own interests to be represented with as much other blood as possible….

We know this today from the verdict of the English themselves, that they  in 1918 were exhausted, just before their own collapse, when perhaps a quarter hour before 12 o'clock the revolt in Germany was realized. Only the cowardice of our former rulers, their indecision, their halfway measures, their own uncertainty brought it on. And so the First World War was lost not by the merit of our opponents, but exclusively by our own fault.

The consequences of this collapse in November were not that world democracies stretched out open arms to Germany, they were not concerned about freeing the German people from its burdens and lifting the German people to a higher standard of culture (an impossibility since they themselves had a much lower one); the consequence was the most frightful collapse, politically and economically, that a people has ever experienced.

At that time there came to us a man who has done the German people immeasurable harm, Woodrow Wilson, the man who lied with a straight face. If Germany would lay down her arms, then she would get a compassionate, an understanding peace! Then she would not lose her colonies! But the colonial problems were fixed up, all right! The man lyingly promised us that there would be a general disarmament, that we would then be accepted on equal terms among nations, peoples, etc. with equal rights!

He lyingly promised us that then secret diplomacy would be done away with, and that we too would then enter into a new age of peace, of equality, of reason, etc.! This arch-liar's stooge was the President Roosevelt of today! He was his right hand man. Our German folk believed this man. They had no idea that they were dealing here with an American President, that is, with a man who has no regard for truths; who, for example, can calmly say before an election: "I shall vote against war," and after the election can say: "I vote for war." And who, when he is then called to answer for it, can explain as calmly as ever: "I said that then because I thought that there would be stupid people who would take it for the truth."

But we had no idea of a thing like this, that we were in fact dealing with a paralysis victim, with a madman, who was then head of this people, with which the German people had never in their history had a conflict! So there came the hour of the German people's worst disappointment:  got its disappointment at the moment when the German subordinate emissaries entered the car in the Compiegne forest, now known to us for the second time. And there right away came the rude question: "What are you gentlemen doing here?" There was an armistice which in reality meant total defenselessness. And the sequel to this armistice was then the peace treaty, the complete removal of our people's arms and therewith the removal of its rights, and with that the plundering and ravaging by an international financial combine which threw our people into the depths of misery.

They told us beforehand: "He who says that we intend to take away Germany's colonies lies!" They took them away from us! They said: "He who says that the intention is to take from Germany her merchant marine is not telling the truth!" They took it away from us! They said beforehand: "He who says that we want to take away part of the German people is inciting the people!" Later they took away one part after another! They had broken all their promises! In a few months the German people sank into a state of unimaginably deep despair and despondency-starving people without any hope. A people that did not get its prisoners of war back, even after the armistice and peace-treaty had been signed! A people that was not given food, even after it was defenseless! A people that was now repeatedly coerced,-if one carefully studies those times-from whom re-subjection was again and again demanded, extorted by some new repression. Even today, when one reflects upon this, one falls into a state of burning hatred and rancor against a world in which anything like this is possible.

Now it was at that time, my comrades, when everything was shattered, when the highest leadership of the Reich had fled abroad, when others were surrendering, when the armed forces had to give up their weapons, when the people themselves voluntarily disarmed; at that time when agitation could rage against Germany from within our borders, that one could read in the newspapers: "It is a good thing that we lost the war," that men without character could declare: "We were not able to win the war," it was at that moment, when anyone who even thought of Germany, or spoke about it, trembled to stand up, at that time, when the renunciation of life was being preached as an ideal, so to speak, and when one was ashamed to face the world as a German altogether, it was at that very time, my comrades, that I entered my political career with the determination to resurrect Germany!…


When, on the other hand, I look at my opponents, what have they really done, now? They could rush easily enough into war. War did not rob them of a peaceful state, for they have accomplished nothing. This prattler, this drink-bold Churchill, what has he in reality accomplished in his life? This perfidious fellow is a lazybones of the first order.

If this war had not come, the centuries would have spoken of our generation and also of all of us and also of myself as the creator of great works of peace. But if this war had not come, who would speak of Churchill? Now he will one day be spoken of, to be sure, but as the destroyer of an empire, which he and now we destroyed. One of the most pitiful phrase-mongering natures of world history, incapable of creating anything, of accomplishing anything, or of performing creative acts, capable only of destroying.

Of his accomplice in the White House I would rather not speak at all, moreover-a wretched madman….

Now the three great Have-Nots are united, and now we shall see who gains in this struggle, those who have nothing to lose, but everything to gain, or those who have everything to lose and nothing to gain. For, what does England want to gain? What does America want to gain? What do they want to gain? They have so much that they do not know what to do with what they have. A few persons per square kilometer need much more for all the cares which we are not the ones to have. A single poor harvest means for our national decades plundered, exploited, crushed, and in spite of that they could not eliminate their own economic need. They have raw materials, as much as they are willing to use, and they do not complete it, with their problems actually to found something reasonable in society, to the one who has everything and the one who wants to take from the other fellow who has hardly anything practically the last thing he owns, or to the one who defends that which he honors as his last possession….

I am glad that so many allies have joined our soldiers: in Sweden, Italy, then in the north, Finland and the many other nations which are sending their sons here to the east, too, Rumanians and Hungarians, Slovaks, Spaniards, we have many Frenchmen, and besides, the volunteers of our German States out of the North and West. Already today, a European war, and finally in the East, our a new ally: Japan. On this history will speak. 1939-the conquest of Poland; 1940-Norway and France and England, the Netherlands and Belgium; 1941-the Balkans and then finally, the nation which Mr. Cripps assured us a few days ago, in his loquacious manner, has been preparing itself for a fight with Germany. I knew that. As soon as I had become certain that there was false play going on here, in the instant that I became aware that Mr. Churchill in his secret meetings was already considering this ally, within the hour in which Molotov left Berlin, and took his leave because he had been able to come to a shrewd agreement, at that moment, it became clear to me, that this conflict was inevitable.

For this, too, I thank fate, that it placed me at the head of the Reich, so that I was in a position to strike the first blow. If one must fight, then I take the stand that the first blow is the decisive one. And we didn't stop to think it over very much.

We can only wish Japan good luck, because instead of playing around for a long time with this lying nation, it started to fight immediately.

Now, our soldiers have been fighting in the East since June 22, a battle which will some day go into the chronicles of history as a hero-song of our people…. It was not Russia that forced us to defense, but only 38 and 40 and 42 and sometimes 45 degrees below zero that did it. And in this cold, there, troops which are not accustomed to it cannot fight as in the red heat of the desert during certain months. But at this time, when the difficult transition was necessary, I again looked upon it as my task to take upon my shoulders the responsibility for that, too. I wanted thereby to save my soldiers from something worse…. In four months we had fought almost to Moscow and Leningrad. Four months of Northern winter are now past. They have advanced a few kilometers at individual points and have made great sacrifices in blood and human lives there. They may be indifferent to that; but in a few weeks in the South the winter is going to break, and then the spring will move farther north, the ice will melt, and then the hour will come when the ground is again hard and firm, and when the new weapons will again flow there from our homeland, and when we shall beat them, and revenge those who now have fallen such lonely victims of the cold.

For I can tell you that the soldiers at the front have the feeling of superiority over the Russians. To compare him with them would be an insult. The decisive thing now is that this transition from attack to defense be successful, and I may say that it has been…. On this January 30th, I can tell you that I am sure of only one thing. How this year is going to end I don't know. Whether or not the war will end this year I do not know; but I do know one thing. Wherever the foe may appear, he will this year be fought as before. It will again be a year of great victories; and even as I held the flag high before this, at all times, so I will hold it high even now because I find myself in such a different position….

We have an opponent in front of us, who may have an immense numerical superiority, but we will rival him at least in the birthrate by spring and also in regard to weapons. And so it will be in all things, and above all we have Allies today. It is also no more the time of the World War. What Japan is accomplishing in the East alone, is, for us, beyond evaluation….

Thus the home-front need not be warned, and the prayer of this priest of the devil, the wish that Europe may be punished with Bolshevism, will not be fulfilled, but rather that the prayer may be fulfilled: "Lord God, give us the strength that we may retain our liberty for our children and our children's children, not only for ourselves, but also for the other peoples of Europe, for this is a war which we wage,  not for our German people alone, but for all of Europe and for all of humanity."

If You Think That the Equilibrium Real Ten-Year Treasury Rate Is 2.5%/Year...

… as you might conclude from the historical track of the past fifty years:

FRED Graph  St Louis Fed

then the current 10-year Treasury rate of 1.87%/year is consistent with market expectations of deflation at an average rate of 0.63%/year over the next decade.

If you think that the market's forecast of the equilibrium Treasury real rate over the next decade will be much less than 2.5%/year--as the real TIPS rate of -0.185/year suggests--then it seems likely that it is because the market expects a high unemployment rate for the next decade.

Neither possibility seems consistent with market expectations of a Federal Reserve that understands its mission.

And I mus tsay that I do find it difficult to believe that the breakeven 10-year inflation number of 2.46%/year is an expected-value market forecast rather than a reflection of the fact that the marginal players in the TIPS market on the buy side are willing to pay heavily to lay nominal risk off while the marginal players on the sell side require a substantial premium to take nominal risk on.

The Eurocrisis: Duncan Black is HSRILL!!


Eschaton: Thanks, Idiots For all you have done.

BRUSSELS — Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.

How about maybe resigning in shame?

Stephen Castle:

E.U. Leaders Set to Admit Austerity Is Not Enough: BRUSSELS —   Bowing to mounting evidence that  austerity alone cannot solve the debt crisis, European leaders are expected to conclude  this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.

A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders  have come to realize that austerity measures, like those being put in countries like Greece and Italy,  risk stoking a recession and plunging fragile economies into a  downward spiral…. [L]eaders will discuss long-term structural reforms and better use of E.U. subsidies, while avoiding mention of the one thing that could change the climate: a fiscal stimulus from Germany, the euro currency zone’s undisputed powerhouse….

With its emphasis on punishing euro nations that exceed deficit and debt level, the agreement, or “fiscal compact,” has been described privately by one official as a plan to criminalize Keynesianism. Nevertheless, the hope is that if it gets the treaty it wants on fiscal discipline, Germany will agree to far-reaching efforts to end the debt crisis. And while some see the new, pro-growth rhetoric as empty — or even cynical — others believe that it marks a psychological turning point.

“I think it is an important shift, particularly from Germany but also from others, from the phase where it was all about fiscal balance and consolidation to a more comprehensive approach where you have an all-encompassing look at economic sustainability,” said Nicolas Véron, senior fellow at Bruegel, an economic research institute in Brussels. “It is quite promising, but at this point I don’t see it translating into immediate measures.” Those are badly needed in a Europe with more than 23 million people unemployed….

Other analysts concur…. “Even countries with relatively strong public finances such as Germany — the country’s budget deficit fell to just 1 percent of GDP in 2011 — are tightening fiscal policy,” Simon Tilford, the chief economist for the Center for European Reform in London, wrote recently. “In so doing, European governments are standing conventional macroeconomic thinking on its head. Governments are withdrawing demand from their economies at a time of pronounced private sector weakness.” Output in both the euro zone and the European Union is still around 2 percent lower than before the crisis. The Spanish and British economies are still almost 4 percent short of their pre-crisis peaks, the Italian one nearly 5 percent, and the Greek and Irish economies 10 percent to 15 percent, Mr. Tilford added….

Germans increasingly accept that this is a dangerous outlook, said Joachim Fritz-Vannahme, director of the Europe program at the research institute Bertelsmann Stiftung. “Many people now say that it will never work to push all the Southern European countries into austerity, hoping that, one day, they will pay back what they owe,”’ he said. In Germany, the opposition Social Democrats have been calling for a new Marshall Plan for Europe….

“The recognition is coming that austerity won’t work,”’ said Mr. Fritz-Vannahme, “but how to get beyond austerity politics is completely unclear. There is no master plan under discussion in this country.”

John McCain Says: We Republicans Don't Dare Let Americans See Our Candidates in Unscripted Settings Anymore


McCain: ‘Stop the debates, enough with the debates’ | The Raw Story: Former presidential candidate and Mitt Romney supporter John McCain (R-AZ) expressed Sunday morning his fatigue over the number of debates in this Republican nomination cycle.

“We’ve got to stop the debates,” McCain told Meet The Press‘ David Gregory. “Enough with the debates, because they are driving up our candidates’, all of them, unfavorability. We have enough of that. They’ve turned into mud wrestling instead of an exposition of all our candidates views. And it’s time to recognize who the real adversary is, and it’s not each other.”

There have been a total of 19 GOP presidential debates this campaign season so far.

Twitterstorm delong: January 29, 2012

  • AKaczynski1 Andrew Kaczynski Newt Gingrich in 2009 praised Obama for how much more open and transparent HCR was than 1993. Also called 4 a mandate. Retweeted by delong

  • LATSeema Seema Mehta Gingrich today drove 300 miles to hold 1 event where he spoke (and 1 avail). This does not seem like wisest use of time 2 days b4 FL primary 10 minutes ago Retweeted by delong

  • BorowitzReport Andy Borowitz Threatening to unfollow someone on Twitter is a threat akin to turning down a free pizza flyer on the street. 6 minutes ago Retweeted by delong

  • delong J. Bradford DeLong Noahpinion: In which John Quiggin intellectually pulpifies Stephen Williamson… 10 minutes ago

  • BorowitzReport Andy Borowitz Gingrich on leaving the race: "Not unless it gets cancer." #FLPrimary 30 minutes ago Retweeted by delong

  • drgrist David Roberts Hansen's conclusion: "the slowdown of warming is likely to prove illusory, with more rapid warming appearing over the next few years." 23 minutes ago Retweeted by delong

  • keepitcleva Epiphany Sweet I am sorry anyone who stands in front of a confederate flag can't tell me shit, and does not have my best interest as a black woman. 2 hours ago Retweeted by delong

  • cshirky Clay Shirky Arthur Brisbane of NYT re-iterates 'fact-checking is so hard' line. 100% reader opposition 1 hour ago Retweeted by delong

  • delong J. Bradford DeLong Hoisted from the Archives: Stephen Williamson Makes His Play for the Second Stupidest Man Alive Crown 2 hours ago

  • delong J. Bradford DeLong @ @techstepper In other news, the sun rose in the east today... 2 hours ago

  • delong J. Bradford DeLong @ @tylercowen Shouldn't you tweet "the sun rose in the east today" too? 2 hours ago

  • daveweigel daveweigel Gingrich, laying it on thick, says Obama nixed Keystone to please "left-wing environmental extremists in San Francisco." 2 hours ago Retweeted by delong

  • MarkThoma Mark Thoma Damn -- just lost the 84 tabs I had open in Firefox. That's going to put a crimp on things...time to reconstruct... 3 hours ago Retweeted by delong

  • Atrios Atrios i just converted Mitt's late father to pastafarianism #notreally 3 hours ago Retweeted by delong

  • delong J. Bradford DeLong @ @adamkotsko Justice for Seamus! 3 hours ago

  • markos Markos Moulitsas Oh, those funny economists who said austerity would lead to recession! Of course, they were right. 5 hours ago Retweeted by delong

  • RyanLizza Ryan Lizza RT @EricFehrn: Newt's problems with the truth 4 hours ago Retweeted by delong

  • delong J. Bradford DeLong @ @DanRiehl Is Jacobson the crazy person who shills for Haley Barbour? 5 hours ago

  • jamespoulos James Poulos Biden FTW MT @SeanTrende: @reihansalam @BuckSexton Imagine how Dems wouldve felt in 08 if their field had been Dodd, Biden, Gravel, Kucinich 28 Jan Retweeted by delong

  • aterkel aterkel Great catch by @ktumulty - Gingrich says college kids too coddled. Shld work more. But in college, he refused to work. 6 hours ago Retweeted by delong

  • delong J. Bradford DeLong @ @alanbeattie @dsquareddigest There are useful Welsh tips? I thought the whole point of Welsh was that outsiders couldn't pronounce it... 6 hours ago

  • EuropeanViolet Mr. Violet @ @delong it seems mental health isn't associated to any intellectual field of study... 7 hours ago Retweeted by delong

  • alanbeattie Alan Beattie @ @dsquareddigest I'd be more comfortable abt that if I thought Germany grasped the point about symmetric adjustment 7 hours ago Retweeted by delong

  • pandagon Jesse Taylor Is it weird that the GOP race has turned into a long argument over how awesome Obama's campaign is gonna be? 8 hours ago Retweeted by delong

  • delong J. Bradford DeLong PLoS ONE: Familial Linkage between Neuropsychiatric Disorders and Intellectual Interests… 7 hours ago

  • delong J. Bradford DeLong Why the Republican Party as We Know It Needs to End Now: Ron Paul Story That I Knew Five Years Ago Edition 10 hours ago

  • BorowitzReport Andy Borowitz BREAKING: Herman Cain Endorses Gingrich's Lifestyle 20 hours ago Retweeted by delong

  • firedoglake Firedoglake Why Is NBC Complaining When Romney Runs a Truthful Ad? 22 hours ago Retweeted by delong

  • DonGonyea Don Gonyea "We knew media would be tough. We knew Obama would be tough. We didn't think our primary opponent would be so tough." Gingrich in Orlando. 23 hours ago Retweeted by delong

  • alykatzz Alyssa Katz For you Fannie/Freddie birthers out there -hello, @MikeBloomberg - Mark Zandi eviscerates the myth. h/t @KatrinaNation 23 hours ago Retweeted by delong

  • BorowitzReport Andy Borowitz BREAKING: Romney Says He Has Created Thousands of Jobs for Swiss Bankers #FLPrimary 28 Jan Retweeted by delong

  • cblatts Chris Blattman More on yesterday’s cheap shot at @freakonomics and @WSJIdeasMarket (Blog Post) 28 Jan Retweeted by delong

  • delong J. Bradford DeLong Democratic Individuality: Carl Schmitt and Guantanamo at 10: Todd Pierce, a Judge Advocate General officer, speaks out… 28 Jan

  • JohnQuiggin JohnQuiggin James Q Wilson hasn't been keeping up - reads like it was written in 2007. The rich aren’t the problem

  • DanRiehl DanRiehl If we have a nominee who is defending state run healthcare - and Romney is doing precisely that - this election is over. 28 Jan Retweeted by delong

  • AndyHarless Andy Harless The notion of a "Great Depression" that began in 1929 is based on the US frame of reference. The timing elsewhere was a little different. 28 Jan Retweeted by delong

  • GeneHealy Gene Healy In today's edition of "point and laugh at Newt Gingrich": 28 Jan Retweeted by delong

  • delong J. Bradford DeLong Hoisted from Comments: Robert Waldmann on Principal Reduction, FHFA, and Ed DeMarco 28 Jan

  • mattyglesias Matt Yglesias Sadly for Greece, Fage is actually made in New York, otherwise they'd be enjoying an export boom. Should have patented straining stuff. 28 Jan Retweeted by delong

  • mattyglesias Matt Yglesias @ @ModeledBehavior I feel like I'm reaping much more consumer surplus from Greek yogurt than I ever did from conventional yogurt. 28 Jan Retweeted by delong

  • delong J. Bradford DeLong That the Washington Post Published and Kept on Publishing David Broder Is Reason Enough for It to Shut Down Today an... 28 Jan

  • BorowitzReport Andy Borowitz It only take a few minutes of a debate to feel the same way about Newt Gingrich that his ex-wives do. 27 Jan Retweeted by delong

  • delong J. Bradford DeLong Econ 1: Spring 2012: U.C. Berkeley: Revised Syllabus: Course Topics 27 Jan

  • paullewismoney Paul Lewis Always thought it strange that you motivate rich by throwing money at them, but you motivate poor by taking money away. #hester 27 Jan Retweeted by delong

  • delong J. Bradford DeLong Who Is Teaching in Wheeler This Semester?

  • FrankPasquale Frank Pasquale @ @delong That Mencken quote is also in the intro of @DougHenwood's Wall Street, p. 6 It's truest of ketchup economists 2 hours ago

  • tinyrevolution Jonathan Schwarz Serious question for @delong re… How many fancy economists you know have ever read this? @ZZEmerson 2 hours ago

  • shermandorn Sherman Dorn @ @delong @markthoma 84 tabs is an abomination of nature. Leviticus: 18:10*e-10*pi. 2 hours ago

  • dominiquerdr Dominique Rodier RT @delong: Social democracy and equal opportunity — Crooked Timber #OWS #neoliberalism 7 hours ago

  • EuropeanViolet Mr. Violet @ @delong it seems mental health isn't associated to any intellectual field of study... 7 hours ago

  • evansorem EvanSorem @
    @brianbeutler @delong yes! You can spell R money with Romney. Coincidence - hardly from his perspective!! 27 Jan

Hoisted from the Archives: Stephen Williamson Makes His Play for the Second Stupidest Man Alive Crown

Yes, if you were asking, Stephen Williamson is a bullshit artist:

Brad DeLong: August 29, 2010: Stephen Williamson Makes His Play for the Second Stupidest Man Alive Crown: Narayana Kocherlakota… wrote that the Federal Reserve must raise interest rates before too long a time has passed or else its low interest rate policy will generate deflation:

Narayana Kocherlakota Speech: But over the long run, money is, as we economists like to say, neutral.... [I]f the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent... a low fed funds rate must lead to consistent—but low—levels of deflation...

People--most notably Nick Rowe--correctly took exception. As Andrew Harless put it: Kocherlakota said that if you want it to be dry then people should not carry umbrellas because umbrellas cause rain. The correct statement is that if people expect it to be dry then people will not carry umbrellas.

Now comes Stephen Williamson, claiming that all Kocherlakota said was that a period of deflation would be a period of low interest rates:

Stephen Williamson: New Monetarist Economics: More-Than-Ever Worked Up About Nothing: I missed some of this stuff, as I try not to read DeLong's blog, for fear of depreciating my human capital…. Having a rational discussion with these guys is something like having afternoon tea with a couple of psychotic ferrets…. Ultimately, the lower monetary growth as the result of tightening leads to lower inflation and lower nominal interest rates over a longer horizon…. In the long run, what dominates is the "Fisher effect" whereby an inflation premium gets built into the nominal interest rate. That's pretty much what Krugman and DeLong seem to be trying to say. What's all the heat about?

Perhaps Williamson is genuinely too stupid to notice that Kocherlakota said "a low fed funds rate must lead to... deflation" when he should have said "a low fed funds rate reflects the existence of expectations of deflation..."

Perhaps Williamson knows very well that umbrellas do not cause rain, and that Kocherlakota said that umbrellas cause rain as an argument for higher interest rates soon, but that Williamson is just pretending not to understand what is going on.

In neither case is the spectacle edifying.

Things to Note This Sunday Morning...

  • Substantial numbers of Econ 1 students who seem to be having genuine problems with figuring out expected values. This is disturbing…

  • Substantial numbers of Paultards trying to leave comments about how Obama and me are the real race-baiters here--not Ron Paul and his newsletters. Makes me really wish that would-be commenters had to pony up $5 for each comment into a fund I could then distribute to the value-added commenters--hell, I'd be happy to sweeten the pot with $1000/year of my own moneup y…

  • Someday--maybe 5, maybe 10, maybe 20, maybe 50 years from now--some Pope is going to say: "The fact that God gave us concealed ovulation means that birth control is completely fine. If God had not wanted humans to make love whether or not such lovemaking is 'open to conception', She would have set things up so that human females went into estrus and human males were only aroused by females in estrus, the way it works with so many of our other mammal cousins. Paul VI and his successors John Paul I and II and Benedict XVI were narrow-minded misogynists who made serious theological errors." That day is coming sure as the sun rises in the east every morning. When that day comes, what is Ross Douthat going to do? Say "my bad--I've been talking bullshit for the past 15, or 20, or 30, or 60 years" or say "Benedict the Narrow-Minded was the last true pope"?

Monetary Policy: The Federal Reserve Is Doing It Wrong...

That has to be the conclusion of anybody coming at the problem of monetary policy from any applied-math optimal-control perspective.

James Hamilton sends us to the Fed's forecasts of inflation:

Econbrowser Inflation expectations and the Fed

If the Fed's view is that the PCE-deflator unemployment rate should be 2.0%/year on average (and why the PCE deflator? Why not the GDP deflator? Investment-goods prices are prices too), then if the Fed had a single mandate its policies should be such as to get us to 2.0%/year inflation if not next year than the year after. But it is not until the "longer run" three and more years into the future that the Fed's expectation of inflation converges to 2.0%/year.

But the Fed does not have a single mandate: it has a dual mandate. And that dual mandate commands it to tolerate short-run inflation higher than it thinks is ideal when by doing so it can reduce excessively high unemployment.

James Hamilton:

Econbrowser: Inflation expectations and the Fed: Noteworthy among the information released by the U.S. Federal Reserve last week was a statement of the FOMC's longer run goals and policy strategy. A key section reads:

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.

This represents an important step in the direction of an explicit inflation target, which some academic research suggests might help lead to greater financial stability. It's very useful to connect this statement of longer run goals with other details released last week on what the Fed is expecting over the next several years…. [T]he FOMC is saying that it would like inflation to be about 2% annually, but is expecting it only to be 1.4 to 2.0% over the next 3 years. Putting 2 and (less than) 2 together, the FOMC is telling us that, based on its price stability objective alone, the Fed is expecting inflation to be lower than it would like. In other words, even if the economy were at full employment, a little more stimulus would be called for. And of course, nobody thinks the U.S. is anywhere close to full employment. The Fed's forecast is for an unemployment rate between 7.4 and 8.1% for 2013….

But what's the Fed waiting for?… The Fed is not alone in thinking that inflation will be lower over the next few years than it was in 2011. For example, the median respondent to the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters is anticipating 1.6 to 1.8% annual headline PCE inflation for 2012…. [E]expected inflation as inferred from the gap between nominal and inflation-protected 5-year Treasury securities has been coming in below 2% since last summer….

[A] key element of the success of anything the Fed tries to do is that the market has to believe the Fed can and will carry out what it says…. Without credibility, the Fed is only a paper tiger. The more political opposition the Fed faces, the less it can actually accomplish.

Why the Republican Party as We Know It Needs to End Now: Ron Paul Story That I Knew Five Years Ago Edition

Jerry Markon and Alice Crites say the obvious:

Ron Paul signed off on racist 1990s newsletters, associates say: Ron Paul, well known as a physician, congressman and libertarian, has also been a businessman who pursued a marketing strategy that included publishing provocative, racially charged newsletters to make money and spread his ideas, according to three people with direct knowledge of Paul’s businesses.

The Republican presidential candidate has denied writing inflammatory passages in the pamphlets from the 1990s and said recently that he did not read them at the time or for years afterward. Numerous colleagues said he does not hold racist views.

But people close to Paul’s operations said he was deeply involved in the company that produced the newsletters, Ron Paul & Associates, and closely monitored its operations, signing off on articles and speaking to staff members virtually every day.

“It was his newsletter, and it was under his name, so he always got to see the final product…. He would proof it,’’ said Renae Hathway, a former secretary in Paul’s company and a supporter of the Texas congressman….

The candidate, who has presented himself as a kindly doctor and political truth-teller, declined in a recent debate to release his tax returns, joking that he would be “embarrassed” about his income compared with that of his richer GOP rivals. Yet a review of his enterprises reveals a sharp-eyed businessman who for nearly two decades oversaw the company and a nonprofit foundation, intertwining them with his political career. The newsletters, which were launched in the mid-1980s and bore such names as the Ron Paul Survival Report, were produced by a company Paul dissolved in 2001. The company shared offices with his campaigns and foundation…. Paul’s wife and daughter were officers of the newsletter company and foundation; his daughter also served as his campaign treasurer….

In the past, Paul has taken responsibility for the passages because they were published under his name. But last month, he told CNN that he was unaware at the time of the controversial passages. "I’ve never read that stuff. I’ve never read — I came — was probably aware of it 10 years after it was written." Paul said.

A person involved in Paul’s businesses… said Paul and his associates decided in the late 1980s to try to increase sales by making the newsletters more provocative. They discussed adding controversial material, including racial statements, to help the business, the person said. "It was playing on a growing racial tension, economic tension, fear of government," said the person, who supports Paul’s economic policies but is not backing him for president. “I’m not saying Ron believed this stuff. It was good copy. Ron Paul is a shrewd businessman."

The articles included racial, anti-Semitic and anti-gay content. They claimed, for example, that the Rev. Martin Luther King Jr. "seduced underage girls and boys"; they ridiculed black activists by suggesting that New York be named “Zooville” or “Lazyopolis”; and they said the 1992 Los Angeles riots ended “when it came time for the blacks to pick up their welfare checks." The June 1990 edition of the Ron Paul Political Report included the statement: “Homosexuals, not to speak of the rest of society, were far better off when social pressure forced them to hide their activities.”

It is unclear precisely how much money Paul made from his newsletters, but during the years he was publishing them…. In 1984, he reported debt of up to $765,000, most of which was gone by 1995, when he reported a net worth of up to $3.3 million. Last year, he reported a net worth up to $5.2 million.

The newsletters bore his name in large print and featured articles on topics ranging from investment advice to political commentary. Frequently written in first person, they contained personalized notes, such as holiday greetings from Paul and his wife, Carol….

In 1984, just before losing a Senate bid and leaving Congress, Paul formed Ron Paul & Associates. He soon began publishing the Ron Paul Investment Letter, initially offering mostly economic and monetary information. Texas tax records listed Paul as president of the business, his wife as secretary, his daughter, Lori Paul Pyeatt, as treasurer, and a longtime Paul associate, Lew Rockwell, as vice president. Ed Crane… said Paul reported getting his best response when he used a mailing list from the now-defunct newspaper Spotlight, which was widely considered anti-Semitic and racist…. Paul’s investment letter was languishing. According to the person involved with his businesses, Paul and others hit upon a solution: to “morph” the content to capi­tal­ize on a growing fear among some on the political right about the nation’s changing demographics and threats to economic liberty.

The investment letter became the Ron Paul Survival Report — a name designed to intrigue readers, the company secretary said. It cost subscribers about $100 a year. The tone of that and other Paul publications changed, becoming increasingly controversial. In 1992, for example, the Ron Paul Political Report defended chess champion Bobby Fischer, who became known as an anti-Semitic Holocaust denier, for his stance on "Jewish questions."…

Rockwell was the main writer of the racial passages, according to two people with direct knowledge of the business and a third close to Paul’s presidential campaign…. Paul "had to walk a very fine line," said Eric Dondero Rittberg, a former longtime Paul aide who says Paul allowed the controversial material in his newsletter as a way to make money. Dondero Rittberg said he witnessed Paul proofing, editing and signing off on his newsletters in the mid-1990s. "The real big money came from some of that racially tinged stuff, but he also had to keep his libertarian supporters, and they weren’t at all comfortable with that," he said….

Hathway described Paul as a “hands-on boss” who would come in to the company’s Houston office, about 50 miles from his home, about once a week. And he would call frequently. “He’d ask, ‘How are you doing? Do you need any more money in the account?’” she said….

In 1996, as Paul ran for Congress again, his business success turned into a potential political liability when his newsletters surfaced in the Texas media. Paul was quoted in the Dallas Morning News that year as defending a newsletter line from 1992 that said 95 percent of black men in the District are “semi-criminal or entirely criminal” and that black teenagers can be “unbelievably fleet of foot.”

“If you try to catch someone that has stolen a purse from you, there is no chance to catch them,” the newspaper quoted Paul as saying.

Paul won reelection, then dissolved Ron Paul & Associates in 2001…

Quote of the Day: January 29, 2012

"The dirty little secret of what used to be known as Wall Street securities firms—Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns—was that every one of them funded their business in this way to varying degress, and every one of them was always just twenty-four hours away from a funding crisis. The key to day-to-day survival was the skill with which Wall Street executives managed their firms' ongoing reputation in the marketplace…"

--William D. Cohan, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street

Econ 191: U.C. Berkeley: Spring 2012: April 3, 2012: David Romer: Monetary Policy at the Zero Nominal Interest Rate Lower Bound

April 3. Professor David Romer: Monetary Policy at the Zero Lower Bound:

Karl Smith Watches Mark Zandi Join the HSRILL!!

Karl Smith:

Fannie, Freddie and Chewbacca « Modeled Behavior: Center-left intellectuals in America apparently have a serious problem comprehending the concept of Bullshit. The entire econ world has borne witness to Paul Krugman tearing out his hair over Zombie Lies. Now, Mark Zandi devotes some several thousands words to overturning the nonsense notion that 70 year old US Government Sponsored Enterprises sparked a 21st century global boom in raw material and land prices during a time in which their influence on the international credit markets was approaching a multi-decade low. He writes

Getting history right for this dark economic period is critical if we are to design a better mortgage finance system for the future. If Fannie Mae and Freddie Mac are responsible for the debacle, then perhaps government’s role in a future mortgage finance system should be minimal. But if private lenders deserve most of the blame, the case grows for giving government an important role in backstopping and overseeing the system.

Mark, Mark. Clonazepam. It’s a beautiful thing. Let go. I am betting that maybe five people in the US actually believe Fannie and Freddie caused the housing bubble. Maybe half a dozen more are actively lying about it. The rest are just Bullshitting. That is, they don’t really care what the truth is one way or the other. This is just a way to gesture in the general direction of the federal government and say Urrhh!!!

Mark Zandi:

Fannie and Freddie don’t deserve blame for bubble: There is plenty of blame to go around for the U.S. housing bubble, but not much of it belongs to Fannie Mae and Freddie Mac. The two giant housing-finance institutions made many mistakes over the decades, some of them real whoppers, but causing house prices to soar and then crater during the past decade weren’t among them. The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study….

America’s mortgage securitization machine was fundamentally broken. It created millions of mortgage loans that, even under reasonable economic assumptions, stood little chance of being repaid — and were not. As a result, hundreds of billions of dollars were lost as defaults and write-downs brought the financial system, and the wider economy, to the brink, requiring a massive government bailout.

Also to blame, of course, were regulators, who gave the private mortgage market little, if any, oversight….

“If it grows like a weed, it probably is a weed.” This age-old banking adage aptly applies to the private mortgage lending business during the housing bubble. Between 2004 and 2007, private lenders originated three quarters of all subprime and alt-A mortgage loans. These were loans to financially fragile homeowners with credit scores under 660, well below the U.S. average, which is closer to 700. But only a fourth of such loans were originated by government agencies, including Fannie, Freddie and the Federal Housing Administration. The dollar amount of subprime and alt-A loans made during this period by the private sector was jaw-dropping, reaching nearly $600 billion at the height of the lending frenzy in 2006….

At the start of 2002, before the housing boom got going, the two agencies’ market share accounted for almost 54 percent of all mortgage debt. By summer 2006, the bubble’s apex, their share had fallen to only 40 percent. It is difficult to see how the agencies could have been responsible for inflating the housing bubble at a time when they were losing a full 14 percentage points of market share. Indeed, the opposite was true, as their position in the housing market rapidly diminished….

Fannie and Freddie couldn’t compete with rapaciously expanding private lenders. Securitization was in full swing, enabling private lenders to offer low rates and increasingly aggressive terms to borrowers. In 2006, almost half the loans made by private lenders required no down payment and no documentation. Fannie and Freddie simply couldn’t play in that league…. Fannie and Freddie did play a significant part in the financial panic…. [P]olicymakers hoped the agencies could keep the housing market from unraveling…. Despite Fannie and Freddie’s role in the panic, it is wrong to blame them for creating it; that distinction belongs rightly to the private mortgage market. Understanding this is critical to creating a stable, efficient mortgage finance system for the future….

Mark Zandi is chief economist at Moody’s Analytics, a subsidiary of Moody’s Corp. He is the author of “Financial Shock,” an book about the financial crisis. His column will appear regularly.

Hoisted from Comments: Robert Waldmann on Principal Reduction, FHFA, and Ed DeMarco

Hoisted from Comments: Robert Waldmann:

More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path: Good move. DeMarco can block things so it is necessary to give him what he demands. But his view is odd. I think that Berstein is right that he demands "some way to mitigate the losses to the agencies (and the taxpayers) from the loan forgiveness" by transferring money from the taxpayers to the agencies (and the taxpayers).

As a citizen (almost all of whose income is excluded by the foreign earned income exclusion) I stare and laugh.

Indeed. In DeMarco's mind, it is of vital importance that the shareholders of Fannie and Freddie--who are the taxpayers--not bear any losses on the value of their Fannie and Freddie equity as a result of principal reduction, but rather that any losses from principal reduction be born, instead, by the taxpayers.

And never mind that should principal reduction manage to work to reduce market failures in housing finance and strengthen the recovery, the principal beneficiaries--whose gains will absolutely dwarf any accounting entries in Fannie and Freddie's books--will be the taxpayers, who are the ultimate shareholders of Fannie and Freddie.

Luke Lea Gets It Wrong, I Think: Assessing John Cochrane Can't I Let Sleeping Dogs Lie? Department

I see that over at Noahpinion, Luke Lea has commented. Let me delay this for a couple of day, to see if I calm down...

Three days later: nope...

Here is Luke Lea:

Noahpinion: Cochrane: Just don't call it "stimulus"!: If economics were truly a science there would be no more disagreement on these points than than there is among physicists on the law of gravitation. We have way too many economists with far to little valuable work for them to do. So they play around forever instead, never arriving at consensus.

Perhaps it is time to downsize the profession? Defund the universities? But that will never happen of course.

Maybe a new insurgent set of colleges and universities starting from scratch, ones that give students better educations at more reasonable prices? (Remember how Edinburgh overtook Oxford and Cambridge back in the day?) There are plenty of billionaires out there who could found them.

Economics will never reform itself from within. That would be against human nature.

I think that Luke gets this a bit wrong.

What I think he gets wrong is that there never was (much) disagreement over the models.

The models say and always said that a debt-financed expansion of government purchases has no effect on production, income, and employment if:

  1. bottlenecks in resource and labor markets are so severe that increases in nominal spending show up entirely as increases in prices and not at all as increases in production; or
  2. the central bank has a nominal GDP target and takes steps to hit it, and so offsets any impact of fiscal policy on nominal spending; or
  3. what the government buys is exactly the same as what the private sector would have bought; or
  4. the government's debt is sufficiently risky that more government debt does not reduce the average riskiness of the pool of outstanding savings vehicles; or
  5. perhaps there are a few other edge cases we could think of if we were sufficiently ingenious, but nobody has focused on them.

There is also a sixth argument in the models--not that fiscal policy is ineffective, but rather that nonstandard monetary policy is superior:

(6) even when interest rates are at their zero nominal lower bound, it is more effective to back your promises that the future money stock will in fact be higher by having the government issue debt and buy risky private bonds and have corporations spend the proceeds than to have the government issue debt and spend the proceeds itself.

I don't see any cogent reasons why any of those arguments should have much if any traction as applied to the U.S. economy right now.

But they are arguments.

We can argue about them.

And I am willing to learn. My position has been moving over the past five years under pressure from events and evidence. I am a lot more "Old Keynesian" now than I was five years ago--but I am sure that I will move my position in the future under pressure from events and evidence and will surely think differently five years from now than I do today.

As Cochrane says most recently:

[Fiscal] stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now…. Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't…. The facts are far from decisive…. So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works…

I wouldn't say "a great deal of uncertainty", I would say "some uncertainty". And I would say that there is good reason to believe that the models that predict fiscal expansion would be ineffective do not apply to the U.S. right now.

But I am not omniscient.

I could have it wrong.

What I do not have wrong is that Cochrane's statements right now that fiscal policy is "an economically interesting proposition" are flatly and totally inconsistant with what Cochrane was claiming three years ago.

Three years ago he was claiming that the possibility that a debt-financed expansion of government purchases could boost employment and output when the economy was at the zero nominal lower interest rate bound was:

not part of what anybody has taught graduate students since the 1960s. They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false…

Perhaps Cochrane misled Michael McKee and Oliver Staley because he had simply not done his homework--had not thought the issues through at an Econ 1 level. Perhaps he was playing for Team Republican and knowingly telling them lies when they called him up and asked him about Jim Tobin.

I really don't care which.

What I do know is that his intervention made Christina Romer and Larry Summers and company's technocratic job more difficult at a crucial moment.

What I do know is that Cochrane owes them--and the country, and whatever journalists and Republican politicians he has talked to and misled over the years--a big, sincere, express, personal apology. And I think that he owes the economics profession a deep and sincere rethinking of how he operates.

The problem is not that economists disagree about the economics.

There is some disagreement about what models are the best first approximations to the world we live in--but actually there is not that much disagreement. The fact that I am happy to endorse (with footnotes, noting what I regard as his evasions) Cochrane's current statement that the effectiveness of expansionary fiscal policy is an "economically interesting proposition" should carry information about how much real disagreement there is about the economics. And if you note that when Cochrane makes his argument that the fiscal-theory-of-nominal-demand applies to the U.S. economy today, he is in fact maintaining a position that debt-financed expansions of government purchases right now have not weaker but considerably stronger effects on nominal demand than I think plausible. That's another piece of information.

The problem is that there are a lot of influential bullshit artists out there. Cochrane is at least willing to try to engage. Lucas, Fama, Prescott, Posner, etc., etc. are not even willing to do that.


RUCHIKA GUPTA (Jan 26, 2012 9:24 PM PST) When drawing the supply curve in our homework why do we make steps (a horizontal line and a vertical line) to connect the points as opposed to connecting them by straight lines like in a PPF?

J. Bradford DELONG (Jan 27, 2012 5:58 AM PST) It is because of the way we set up the problem: the supply curve is flat because each producer has a constant opportunity cost of teaching yoga lessons. If they got bored as they taught more lessons--and so needed more money to teach the fifth lesson than the first to make it worth their while--we would have a supply curve without steps.

J. Bradford DELONG (Jan 27, 2012 12:42 PM PST) Re: "how do you calculate opportunity cost if a worker can produce n of one good and 0 of the other. The opportunity cost of the other would be n/0 which is undefined" Would you be happier at saying that the limit of the opportunity cost is infinity as productivity at making the good approaches zero?

THERESA FRUZSINA ANDRASFAY (Jan 27, 2012 7:11 PM PST) I'm noticing this problem set is not only long but the problems each are pretty time intensive. I'm just wondering if the exams are going to be a similar difficulty level.

J. Bradford DELONG (Jan 27, 2012 7:13 PM PST) As I said, the first problem set was double length in an attempt to clear the waitlist. It seems to have worked: at the moment we have 26 available seats and a waitlist of 27...

JOSEPH JAE MIN AHN (Jan 27, 2012 11:31 PM PST) Can anyone tell me where I can find out how to find expected values?

TAI CAO TRAN (Jan 28, 2012 12:17 AM PST) Based on our section, (taken from a worksheet) Expected Value = [probability that the person will be making x item] x [amount of item the person can make]. For example: Greg can make 10 lattes and Dharma can make 2 lattes. The probability that either Greg or Dharma will be making latte is 50% (say they flip a coin to determine who will make latte). So Greg making lattes EV would be 5 (1/2 * 10) vs Dharma making lattes EV would be 2 (1/2 * 1). FYI, I'm still trying to incorporate that to #3 of the problem set.

J. Bradford DELONG (Jan 28, 2012 8:56 AM PST) Remember: expected values are easy because they add: E(a + b) = E(a) + E(b). Expected values are easy because they are just probabilities times outcomes: E(a) = P(a=A) x A, where P() means "probability" and E() means "expected value"

Jared Bernstein: More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path | Jared Bernstein | On the Economy


More On Principal Reduction: A New Initiative From the White House That Should Help Clear the Path: As I wrote the other day, reducing principal on homeowners with underwater mortgages is one important way to help them avoid foreclosure and help the economy get better faster.  It’s not for everyone—some homeowners simply bit off too much house.  But there are millions out there for whom this could work.

In this regard, I like the look of a new initiative by the White House just released this afternoon.  First, they’re sharply increasing the incentives—by a factor of three—in the part of their loan modification program (HAMP) that nudges the investors that own the loans to write down the principal.  Owners of loans used to get 6-21 cents on the dollar to write down principal; now they’ll get 18-63 cents.

Second, for the first time, they’re offering these incentives to loans held or insured by the GSEs (Fannie and Freddie).

A big boulder in the path to principal reduction has been the reluctance of the GSEs regulator, the FHFA, to play along—i.e., to reduce principal on the loans that Fan and Fred hold or insure.  And HAMP principal reductions were off limits to the GSEs. 

Well, according to the White House, they’re not off limits anymore:

To encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE’s regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.

Now, FHFA acting director Ed DeMarco has consistently resisted reducing principal for reasons I discuss in the link above.  But he’s also said he’d go there if there were incentives to do so—some way to mitigate the losses to the agencies (and the taxpayers) from the loan forgiveness.  

Well, here it is, Ed…

That the Washington Post Published and Kept on Publishing David Broder Is Reason Enough for It to Shut Down Today and Never Reopen

Paul Krugman:

Austerity Memories: A further thought on the observation that Britain’s slump has now gone on longer than the slump in the 1930s: it’s worth remembering the rapturous reception the Cameron austerity program received here, not just from the right, but from centrists. Here’s David Broder:

Cameron and his partners in the coalition have pushed ahead boldly, brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.

Heh heh, silly economists. Broder went on to urge Obama, after his salutary midterm defeat, to “do a Cameron” and agree to sharp cuts in the welfare state.

It’s kind of remarkable how none of the Very Serious People even considered the possibility that people like me might be, well, right.

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

Indeed, Broder's column--which I mercifully did not read at the time--is worse than I imagined it could be from Krugman's description, even knowing what I know about Broder:

David S. Broder - What America might learn from the British austerity model: The most important political news last week came from across the Atlantic, where the coalition government of British Prime Minister David Cameron ordered an austerity budget that radically reduces government spending on the welfare state. Both the policy and the political circumstances that brought it about have profound implications for the United States.

This country has wandered far -- not quite as far as Britain has -- toward the pending fiasco that threatens leftist regimes worldwide, and the reaction here in the Nov. 2 midterm elections is likely to be as painful for President Obama and the Democrats as the May 6 election was for Labor's Gordon Brown.

George Osborne, Cameron's chancellor of the exchequer, did not mince words. He told Parliament, "Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt." Britain's budget deficit, now 11.4 percent of the size of its overall economy, is not that much larger than the United States' -- 8.9 percent -- but the debate has been similar in both countries.

While the Obama administration and the Federal Reserve have chosen to stimulate economic growth by tax cuts and spending in hopes of reducing debt service, Britain has opted for the swifter, more painful gamble of increasing taxes and slashing public spending.

The budget ax was felt almost everywhere. Retirement benefits will be delayed, and hundreds of thousands of government jobs will be eliminated. Subsidies to the arts and the BBC will shrink. The value-added tax will rise from 17.5 percent to 20 percent.

As important as the policy shift from Keynesian economics is the political calculus that led the British government to these actions. The last general election produced a hung Parliament, with the Conservatives out front but short of a majority. Labor finished second and the Liberal Democrats, a reform-minded middle-class party, were third.

Britons resigned themselves to a weak minority government and early elections. But to everyone's surprise, it turned out that the right and center were ready for radical change. The leaders of the Conservatives and the Liberal Democrats discovered more agreement than they had expected -- including on the new austerity budget.

Cameron and his partners in the coalition have pushed ahead boldly, brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain's economic recovery and throw the nation back into recession.

My British friends tell me that it is only because of the two-party coalition that Cameron can take these risks. If he were dependent only on a minority Conservative Party, the risk of a public meltdown -- similar to what is happening in France -- would be too great.

The American political system virtually precludes the possibility of a coalition government. But the midterm elections provide the opportunity for a similar breakthrough.

If Republicans emerge next month with sufficient leverage in the House and Senate to approach Obama with a proposition, they could insist that he "do a Cameron" when it comes to federal spending: a radical rollback now in the welfare state in return for a two-year truce on such policy questions as repeal of the health-care law.

The vehicle could well be Obama's strong endorsement of the Dec. 1 report from his fiscal responsibility commission, which is expected to emphasize spending discipline over raising revenue. This would offer major gains to both parties, and set the stage for another experiment in the British model.

The fact that that guy kept his column ink should lead every employee of the Washington Post to rend their garments, fast, and make public apology in the streets of Washington...

The Romney Conundrum...

Jim Tankersley:

The Romney Conundrum: Jekyll and Hyde: Expect Mitt Romney’s economic and political advisers to struggle over his soul if he wins the presidency. As president, would Mitt Romney follow his all-star economic advisers—or the promises he has made to the Republican base?

Mitt Romney pitches himself as the sort of guy who surrounds himself with the smartest people he can find. He’s the consummate corporate executive: He listens to smart people and puts their best ideas into play. Sure enough, in his presidential campaign, Romney has assembled a team of conservative economists whose smarts and star power, academically and politically, outshine that of any of his Republican rivals. Last year, Romney’s economic advisers advocated policies that, if a candidate were to package them together, would amount to the most creative jobs plan in the GOP field….

Romney issued a 59-point economic plan with fanfare last September. The platform contradicts landmark findings on monetary and housing policies published in 2011 by his top two economic advisers: Glenn Hubbard, the dean of Columbia University’s business school; and N. Gregory Mankiw…. Mankiw and a coauthor called last spring for the Federal Reserve Board to goose consumer demand by easing monetary policy…. Hubbard and two collaborators argued for reducing the interest rates on 30 million home mortgages….

But in both cases, Romney has vowed to pursue the opposite course. He has said he would replace Federal Reserve Board Chairman Ben Bernanke with someone who would tighten monetary policy… let the housing market stabilize on its own….

This, then, is the Romney Conundrum—for conservatives, liberals, and everyone else. Even on the economy, Romney’s signature issue, it’s hard to know where his heart lies—and how he would govern in the White House. Would the former Massachusetts governor listen to his best and brightest? Or to his party base?…

Romney, if elected, would join a parade of recent presidents who struggled to reconcile campaign promises with political and economic reality. George H.W. Bush violated his “read-my-lips” vow not to raise taxes and lost reelection. Bill Clinton ran on a middle-class tax cut…. George W. Bush broke his pledge to concentrate his tax cuts on low- and middle-income Americans and to pay down the national debt. Barack Obama still hasn’t renegotiated the North American Free Trade Agreement, as he promised during his 2008 campaign….

What you get from piecing together the recent work of Romney’s advisers is a coherent, data-driven story of what is wrong with the U.S. economy and how it ought to be fixed…. [T]he story that the candidate’s economic advisers like to tell about the housing market and monetary policy is one that the candidate’s plan sidesteps…. Economists who have advised presidents and would-be presidents concede that it would be delusional to expect Romney, or any candidate, to parrot his advisers on every economic issue….

“Those guys make me feel better about Romney,” said Jared Bernstein, who served as Vice President Joe Biden’s chief economist and has returned to the liberal Center on Budget and Policy Priorities….

“As a general proposition, you trust what the candidate says, not what academic advisers believe,” said Robert Shapiro, a former campaign and White House adviser to President Clinton….

Mankiw, for one, has openly pondered a version of the Romney Conundrum. In a 2006 op-ed in The Wall Street Journal that called for raising the gas tax, he wrote, “Is it conceivable that the policy wonks will ever win the battle with the campaign consultants?” Well, consider this: Romney, too, went on to embrace a form of gas tax. In his book No Apology: The Case for American Greatness, he called for a gasoline or carbon-emissions tax that would be fully offset by reduced payroll taxes. “Higher energy prices would encourage energy efficiency across the full array of American business and citizens,” Romney wrote. “It would provide industries of all kinds with a predictable outlook for energy costs, allowing them to confidently invest in growth.” It’s a plan that Mankiw might well have written himself. And then in the heat of this presidential campaign, Romney abandoned it. 

Katy O’Donnell contributed.

My view is that the balance of the probabilities is that the Romney we would get would be 90% the Romney currently running for President and 10% the Romney advised by Mankiw and Hubbard and company. In part, I think, this reflects a difference between Democratic and Republican administrations. There are, in the academic community, numbers of stories of academic economic advisors during Democratic administrations--Obama, Clinton, Carter--waging intellectual and bureaucratic wars within the corridors of power against interest groups, political advisors, bureaucratic process guys, and the president himself in an attempt to convince the president and his inner circle that their policies were destructive. They lost, usually, but their adversaries knew that they had been in a fight.

There is only one such significant story about academic economic advisors during Republican administrations: Martin Feldstein in 1982-1984.

I remember one senior sub-cabinet Democratic official muttering to me and to their other spear-carriers as we crossed the parking lot from the OEOB to the West Wing:

I could go back to my house. I wouldn't have to live in this [WASHINGTON NEIGHBORHOOD] dump. I could go back to my life!


Today would be a good day to get fired.

It's not Thašuka Witko: "Hóka-héy! Today is a good day to die!" (Although it is as close as we economists can get.) But it is an attitude you need in your advisors if you are going to have a chance of rational technocratic policies. And for reasons I don't understand, the Democratics today seem to have more of it…

Alex Massie Continues to Beg Republicans Not to Choose Newt Gingrich

Alex Massie:

The Cult of Reagan is a tedious thing, but I submit that while you can be many kinds of Republican and hope to become the party standard-bearer you cannot be the type of Republican who encourages folk to think Ronald Reagan was a kind of Californian Neville Chamberlain…. Nor, I think, can you be the kind of chap who argues that "it is precisely at the vision and strategy levels that the Soviet empire today is superior to the free world"…

Liveblogging World War II: January 28, 1942

MY DAY by Eleanor Roosevelt:

In spite of rather gray looking skies, I left Washington yesterday afternoon, hoping to land in New York about 6:45. But we came down at an unfamiliar airport, and I found we were in Philadelphia and the flight was cancelled. I drove to the station and caught a train almost immediately and reached my house at 9:15, so I might just as well have taken a 5:00 o'clock train out of Washington.

I talked to some Army boys on the way over, who had just had their orders. One youngster in a sailor's uniform sat just a few seats ahead of me. When he turned around, I felt sure he must have added a few years to his age, for he looked fourteen instead of eighteen. They tell me that the boys coming over here from England to get their training in flying, are very young, ranging from 16 to twenty. Some of our own pilots are 20 to twenty-two. It is a curious thing to me, that older people seem so often to accept with complacency these young armies. I rebel, and yet I know an army must be young.

I have a great desire to see our fighting forces organized in the most efficient possible way, by putting each individual in the place where he will serve best, because only in that way shall we shorten the horrible period through which we are living. I want to see everyone in civilian life at the present time, doing the job he is best able to do, and doing it as well as he possibly can.

If women are able and skillful enough to go into factories, I hope they will. I hope that all men, young or old, who work in factories in defense industries, will do the most efficient job that can be done. Whatever the jobs are that people are doing, I want them done by the right people and in the best possible way, because that is the way to win this war.

Every day that goes on, means more young men in every land are dying. I am confident that our cause is just, but I want to see youth free again to fight a different kind of war, a war to find a way by which we all live more decently and happily together.

All of us know that, at the end of this war, that other war has to be fought, and we shall need youth to fight it. I hope that, in every factory today, and in every service camp, young people are discussing the kind of a world they intend to build after the fighting is over.

It may not be the kind of a world in which my generation has lived, but if it achieves the ends for which we are fighting: real freedom for every individual regardless of race, creed or color, economic freedom for every individual who is willing to put his capacities to work of some kind, then these horrible days will have obtained good results. We have to live through them and I accept the necessity, but at the same time I hope we do our share in civilian life to prepare for a different and better future world.

Twitterstorm delong: January 27, 2012

  • delong J. Bradford DeLong Carried Interest Tax Break Exposes Mitt Romney Electability Myth… 7 minutes ago

  • paullewismoney Paul Lewis Always thought it strange that you motivate rich by throwing money at them, but you motivate poor by taking money away. #hester 19 hours ago Retweeted by delong

  • davidfrum davidfrum Associates confirm to WashPo what was already obvious: Ron Paul has lied & lied about his racist newsletters 11 hours ago Retweeted by delong

  • delong J. Bradford DeLong The Debate on Private Equity in 1989, Peter Róna addressing Jensen | Rortybomb… 13 hours ago

  • drgrist David Roberts Tonight in Florida, the GOP candidates weren't asked a single question about Social Security. Instead, the moon. And their wives. 23 hours ago Retweeted by delong

  • brianbeutler Brian Beutler RT @prwerdel: Romney doesnt want us becoming like Europe, where they have awesome, awesome bank accounts. 26 Jan Retweeted by delong

  • DavidCornDC David Corn Follow-up question to Newt: "Did you seek God's guidance when you okayed the impeachment crusade against Clinton while having an affair?" 26 Jan Retweeted by delong

  • DanRiehl DanRiehl Obama is going to slice and dice Romney on RomneyCare, no way around it. And I bet low-info primary voters won't get the importance 26 Jan Retweeted by delong

  • daveweigel daveweigel RT @mattyglesias: Florida seems like a good place to ask why unlimited entry to the USA is good for Cubans, but not for other people. 26 Jan Retweeted by delong

  • daveweigel daveweigel RT @kathleenparker: Callista is an accomplished person who deserves more than our cynicism and our snark. And I mean that. 26 Jan Retweeted by delong

  • daveweigel daveweigel Big big laughs in press room when Gingrich says "all three of the wives" #CNNdebate 26 Jan Retweeted by delong

  • aterkel aterkel MT @huffposthill These guys are smart. The electoral votes they'll garner frm Puerto Rico and the Moon will really help them in the general. 26 Jan Retweeted by delong

  • ktumulty Karen Tumulty. Please, Wolf, stop before you ask this first lady question. really. it is not too late. #cnndebate 26 Jan Retweeted by delong

  • daveweigel daveweigel Good lord, did Arnold Rothstein pay Newt to throw this? #CNNdebate 26 Jan Retweeted by delong

  • DemocratMachine Viva DemocratMachine the way Mitt Romney tells it, there wasn't a Republican primary for him to vote in back in 1992. Total lie. #CNNDebate 26 Jan Retweeted by delong

  • AmandaMarcotte Amanda Marcotte And that's been your 60 seconds of Ron Paul sounding lucid, so progressive dudes can gloat about how much the wuv him for another week. 26 Jan Retweeted by delong

  • DemocratMachine Viva DemocratMachine nobody tell Mitt Romney that Raul Castro runs Cuba now. #CNNDebate 26 Jan Retweeted by delong

  • LarrySabato Larry Sabato I don't believe Mitt told truth about 1992. He voted Tsongas in D POTUS primary when Bush 41 was facing Pat Buchanan, same day 3/10/92. 26 Jan Retweeted by delong

  • AdamSerwer AdamSerwer Shorter Romney: I love Israel so much there's no way I'd try to keep it from self-destructing. 26 Jan Retweeted by delong »

  • AriBerman Ari Berman Shorter Newt: Palestinians "invented people." Spanish "language of the ghetto." Obama "food stamp president."

  • jdportes Jonathan Portes @ @delong Actually, the chart on my blog is more up-to-date (and hence gloomier)… 26 Jan

  • katforrester Katrina Forrester Great post from @delong The British Economy Is Now Doing Worse than it Did in the Great Depression 8 hours ago

  • evansorem EvanSorem @
    @brianbeutler @delong yes! You can spell R money with Romney. Coincidence - hardly from his perspective!! 9 hours ago

  • Potterybarnmerc Olivia RT @delong: RT @daveweigel: Big big laughs in press room when Gingrich says "all three of the wives" #CNNdebate 26 Jan

  • Lulz4l1f3 Lulz4l1f3 @ @delong Confusing VC and PE? I hate when that happens. Some of the nicest people I know are VC folks. Forget Romney, poor VC ppl. 26 Jan

  • wonkinakilt Joe Colucci Supply chain: still one of the coolest (and most important) productivity improvements of recent years. via @delong 26 Jan

  • Beyerstein Lindsay Beyerstein @ .@curiouscliche @moetkacik @delong In Rand-World anti-cig=antilife; anti-dexedrine=antilifelibertyandpersuitofhappiness. 25 Jan

  • BizTrends FRANK FEATHER RT @delong: Udacity and the future of online universities | Felix Salmon via @twttimes 25 Jan

Econ 1: Spring 2012: U.C. Berkeley: Problem Set 2

Due at the start of section following the Monday, February 6 lecture:

Problem Set 2

Problem Set 2: Demand and Supply; Market Equilibrium

J. Bradford DeLong/Lanwei Yang/etc.

Econ 1: Spring 2012: U.C. Berkeley

Due at first section after Monday, February 6 lecture
  1. Suppose that there are four people in the economy who demand yoga lessons: Kautilya (a government economist) with an income of $1000/week, Thasuka Witko (a herder and politician) with an income of $500/week, Buffy Summers (a student at U.C. Sunnydale) with an income of $300/week, and Sappho (a poet) with an income of $600/week. Kautilya spends 1/5 of his income on yoga lessons, Thasunka Witko spends 1/10 of his income on yoga lessons, Sappho spends 1/4 of her income on yoga lessons, and Buffy Summers spends half of her income on yoga lessons. Draw the demand curve for yoga lessons in this economy. What is demand for yoga lessons if the price of yoga lessons is $10/hour? $20/hour? $30/hour? $40/hour? $50/hour?

  2. Consider the same situation as in question (1) but with one difference. Changes in Buffy Summers's life circumstances--the opening of the Mouth of Hell on the U.C. Sunnydale campus--lead her to have no demand for yoga lessons at all as she has to spend all of her income buying sharp wooden stakes. Learning about Buffy's predicament leads Kautilya to boost his yoga expenditures to 1/4 of his income, leads Thasuka Witko to drop yoga entirely and join Buffy in her family business, while Sappho continues to spend 1/4 of her income on yoga lessons. Draw the demand curve for yoga lessons in this economy. What is demand for yoga lessons if the price of yoga lessons is $10/hour? $20/hour? $30/hour? $40/hour? $50/hour?

  3. This new situation sees the rapid growth of a wooden stake-making industry to deal with the influx of vampires onto the U.C. Sunnydale campus. Buffy can make 20 stakes a shift and has an alternative occupation she enjoys as much as stake-making that pays her $60 a shift. Kautilya can make 10 stakes a shift and has an alternative occupation he enjoys as much as stake-making that pays him $200 a shift. Sappho has an alternative occupation she enjoys as much as stake-making that pays her $120 a shift and can make 30 stakes a shift. Thasuka Witko has an alternative occupation he enjoys as much as stake-making that pays him $100 a shift and can make 8 stakes a shift. Draw the supply curve for stakes on the U.C. Sunnydale campus. How many stakes are supplied if the price of each stake is $1? $2? $4? $8? $15? $30? $50?

  4. In this new situation, Buffy realizes that she can order wooden stakes over the internet in unlimited quantities for a price including next-day FedEx shipping of $10/stake. Draw the new supply curve for stakes.

  5. In the same situation as problem (4), suppose that there is a demand for 10 stakes a shift. Who makes stakes? What is the market price of stakes? How about if there is a demand for 50 stakes a shift? 100 stakes a shift? 200 stakes a shift?

  6. Suppose that, on and near the U.C. Sunnydale campus, the weekly supply curve for lattes is given by the equation Q = max(1000 P - 2000, 0) : nobody makes any lattes unless the price is above $2/latte, and for each $1 the price is above $2 an extra 1000 lattes are made. Suppose that customers have $10,000/week to spend on lattes. Draw the supply curve and the demand curve. What is the equilibrium price of lattes? What is the equilibrium quantity of lattes?

  7. Suppose, in the same situation as (6), that the arrival of new, charismatic yoga teachers reduces the amount of money customers have to spend on lattes to $6,000/week. Draw the supply curve. Draw the old and the new demand curves. What is the new equilibrium price of lattes? What is the new equilibrium quantity of lattes?

  8. Suppose that, in the same situation as (6), scary newspaper stories about the health dangers of yoga lead customers to cut back on their purchases of yoga lessons and increases the amount of money they have to spend on lattes to $14,000 a week. Draw the supply curve. Draw the old and the new demand curves. What is the new equilibrium price of lattes? What is the new equilibrium quantity of lattes?

  9. Suppose that, on and near the U.C. Sunnydale Campus, the supply curve for yoga lessons is Q = 100 P. Suppose that customers have $10,000/week to spend on yoga lessons. Draw the supply and demand curves. What is the equilibrium price of yoga lessons? What is the equilibrium quantity? Suppose that the amount of money customers have to spend on yoga lessons rises to $14,000/week? Suppose it falls to $6,000/week?

  10. In the same situation as (9), suppose that the professors at Crony Capitalism Corrupt Rail Baron University 50 miles to the south become lazier, decide they want to teach less, and offer full course credit toward their degree to students who are willing to offer yoga lessons at U.C. Sunnydale. Suppose that enough students to teach 500 places in yoga classes a week drive up to U.C. Sunnydale to add to those offering yoga classes. Draw the new supply curve. Draw the demand curve if people have $10,000/week to spend on yoga lessons. What is the equilibrium price of yoga lessons? What is the equilibrium quantity? Suppose that the amount of money customers have to spend on yoga lessons rises to $14,000/week? Suppose it falls to $6,000/week?