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March 2012

Liveblogging World War II: March 26, 1942

General Basilio Valdes:

March 26, 1942 – Thursday « The Philippine Diary Project: Attended and served Mass. Returned to Del Monte. 12:30 p.m. went with Vice-President Osmeña to Mr Crawford’s evacuation house for lunch. Returned to Del Monte. Packed my valise for the airplane trip.

The planes arrived at 8:45 p.m. We could hear the roar of the engines from our house at Del Monte. At 10 p.m. we were told to get into automobiles already assigned to each person and member of the President’s party. Those that were to ride in Plane N-1 rode in cars N-1 and N-2. We were the President and his family, Dr. Trepp, Colonel Nieto, Chaplain Ortiz and myself. We arrived at the airfield at 10:40 p.m.; we were assigned to various places thus; Colonel Nieto & Chaplain Ortiz in the gunners cockpit in front. Dr. Trepp in the rear and the President, his family and myself in the radio operators compartment in the center of the plane.

There was absolutely no comfort amenities, but we were willing to sacrifice every thing for safety. We took off exactly at 11 p.m. The moon was bright. I heard the roar of the four engines, then I felt a few bumps and a few seconds later I realized we were in the air. The first part of the journey was pleasant although I felt cold. I was sitting on a box in the bomb compartment and there was a cold draft coming from a small opening in the floor of the compartment.

A few minutes later the pilot Lieutenant Falkner came and asked me not to smoke as I was situated next to the two big tanks of gasoline. I assured him that there was no danger and I was not a smoker. I could notice we were climbing as it became colder and colder. My feet were almost frozen. Suddenly I felt a hand in the dark grabbing my left leg. I got up; it was the President. “Give me oxygen”, he said “I cannot breathe well”. I applied the oxygen apparatus to his nose. After a few minutes he said: “this does not function; I can not smell the oxygen.” I informed him that oxygen had no odor and consequently could not be smelled. The he said: “Tell the pilot not to climb too high as I cannot stand it.” I took his pulse; it was a little fast due to his fear but otherwise was alright. I spoke to the pilot who assured me that he would not go higher than 9,000 feet and as soon as the enemy bases had been passed he would come down to 6,000 ft.

I watched the moon playing hide and seek behind the clouds. I took my rosary and prayed fervently. I thought of my family, of my little Nucay (Charito) of those dear to me. What would become of them if the trip should end in a disaster? As the moon disappeared behind the horizon, I looked at my watch; it was 2 a.m. Then I looked at the stars, but these also disappeared as we entered clouds. The clouds become darker and thicker. Then I could hear the rain pounding on the plane. The President asked for oxygen again. Then as we entered a heavy rain squall the plane was lifted and dropped a few times by the strong winds.

I did not like it. The President was quite worried. He asked me if there was any danger. I assured him that there was none. Suddenly I noticed that the pilot banked the plane and the flying became smoother, later he told us that he had gone around the squall. At 6 a.m. the pilot came to inform us that we had passed already the Japanese bases and were practically safe. I saw the sky become clearer and then the sun came out. Then I saw land and a little later Port Darwin. We landed at Batchelor’s Field at 7:45 a.m.

Alan Beattie, Archon of the Shrill: Selections from His "Who’s in Charge Here?"

Alan Beattie:

Book extract: Who’s in Charge Here?: The problem is not the international monetary or economic system as such. It is that economic policy was run badly within that system…. Financial regulators and central banks were far too nonchalant about the huge amount of borrowing that was going on, and the ever more exotic financial assets that were being created to facilitate it. Governments in economies such as the UK and USA watched huge housing booms take off, financed by those incomprehensible financial instruments, and cheered them on their way…. But there was nothing inevitable about making these mistakes. Nothing in the global economic system forced the USA to run a hopelessly dispersed regulatory system that allowed financial institutions to escape proper scrutiny…. No one compelled a gang of countries in Continental Europe to yoke their disparate economies together in a badly designed currency union that encouraged asset bubbles in the periphery fueled by reckless lending by banks in the centre.

Some argue that the crisis was inevitable because the big emerging markets, particularly China, by persisting in intervening in the foreign exchange markets to hold down their own currencies, were in effect shovelling huge amounts of money at the rich world…. But the mistakes of countries on the receiving end were avoidable without changing the system – indeed, some countries have largely avoided them. Countries where governments exercised proper control over their banks, such as Canada and Australia, have been much more stable. Not a single major Canadian financial institution failed during the crisis….

The current predicament of the world economy is all the more poignant because it is unnecessary. This is a political and ideological crisis, not a technocratic one. Authorities could have done, and could still do, a lot to prevent their economies sliding back into recession and financial chaos. That they are not doing so is not just because of a lack of political will. It is also because significant numbers of voters and politicians have learnt precisely the wrong lessons from previous episodes and are determined to make similar mistakes all over again.

Department of "Huh?!": Austerity Bad and Stimulus Bad too Department

Outsourced to Noah Smith:

Noahpinion: Cochrane blasts austerity AND stimulus...???: These two points of view just don't seem consistent to me. Here's a few reasons why:

  1. How can austerity and stimulus both be harmful?… He claimed that either slashing or boosting government spending would cause a significant deterioration from where we are right now. It doesn't take a genius to see the logical implication of this position: Cochrane must believe that the level of government spending is exactly optimal right now. So policymakers in every rich country (including Barack Obama) have gotten the level of government spending exactly right!…

  2. If austerity increases deficits, why wouldn't stimulus reduce deficits? Cochrane laughs at the notion, currently being advanced by Brad DeLong and Larry Summers, that increased government spending could pay for itself. But just a few sentences earlier, he claims that austerity is failing to close budget gaps!… [I]n other words, our current level of spending must be exactly the level that minimizes fiscal deficits. Again, a huge win for government policy!…

Over the past couple of years, stimulus opponents have been relentlessly pounded by the evidence…. So how do the opponents of fiscal stimulus respond? All through the recession, they've been saying that boosting spending doesn't boost GDP. But if cutting spending hurts GDP, how is the anti-stimulus position tenable? Well, stimulus opponents could argue that government spending is simply irrelevant… that's proving a difficult case to make. The only other out for stimulus opponents is to claim that we are at the perfect level of government spending right now…. But I have to say, this case doesn't seem credible either. How is it that every rich country just happens to be at exactly the right level of spending?…

Didn't Archimedes Have a Solution for This?

Felix Salmon:

Felix Salmon: The problem of fake gold bars: You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

Of course, there are means of testing gold bars beyond just weight and XRF. If you can weigh the bar accurately, then you can test for purity by essentially dropping it in a bucket of water and seeing how much the water level rises: a gold-covered tungsten bar will displace more water than a pure gold bar. Alternatively, for $3,000 or so you can buy a micro ohm meter, which is easily sensitive enough to tell the difference in conductivity between a pure gold bar and one which is largely tungsten.

But as far as I know, these tests are not particularly commonplace among gold dealers, and in any case only a minuscule fraction of the gold bars in the world are physically traded… the obvious point at which tests like these would be conducted…. [E]ven if you’re just a Ron Paul or Glenn Beck type with your own personal stash — then there’s no realistic chance at all that you’re going to go bar by bar through your own holdings, testing each one. In the case of gold, then, what JK Galbraith famously called “the bezzle” — the amount of wealth that people think they have, which in fact they don’t have — could be truly enormous….

On the other hand, it’s also possible that the number of salted 400 oz bars is zero, that the 1 kg bar recently discovered was an amateurish aberration, and that there’s nothing to worry about at all. But the economic incentives here are so enormous, for people looking to make a fortune in the fake-gold-bar industry, that I very much doubt no one has tried. And statistically speaking, if a bunch of people have tried, then some subset of those people will have succeeded.

So what to make of the fact that no salted 400 oz bars have yet been found? On the one hand, it can be viewed as very worrying — as being an indication that the gold markets are very bad at uncovering such things. On the other hand, you’d think they’d be good enough at it that they would have uncovered at least a small percentage of the salted bars outstanding — and if they’ve uncovered no such bars at all, then that can be taken as an indication there aren’t any salted bars outstanding.

In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult…

Of course, Archimedes faces the problem that gold has a specific gravity of 19.32, tungsten has one of 19.25, and both osmium and iridium have ones of about 20.5. All you need to do is dope your tungsten with about 6% osmium/iridium and Archimedes is hapless and helpless.

How expensive are osmium and iridium anyway?

Larry Summers: Prudent Macro Policy


How to ensure stimulus today, austerity tomorrow: Economic forecasters… are those who cannot know the future but think they can – and… those who recognise their inability to know the future. Major shifts in the economy are rarely forecast, and often not fully recognised until they have been under way for some time….

What can be said is that for the first time in five years a resumption of growth significantly above the economy’s potential now appears a substantial possibility…. Employment growth has been running well ahead of population growth for some time now. The stock market level is higher and its expected volatility lower than at any time since 2007…. Consumers who deferred purchases of cars and other durable goods have created pent-up demand that now seems to be emerging. At last the housing market seems to be stabilising…. [M]ore and more young people have moved in with their parents. At some point they will set out on their own, creating a virtuous circle….

True, the risks of high oil prices, further problems in Europe and financial fallout from anxiety about future deficits remain salient. However, unlike the situation in 2010 and 2011, these risks are probably already priced into markets and factored into outlooks….

What are the implications for macroeconomic policy? Such recovery as we are enjoying is less a reflection of the American economy’s natural resilience than of the extraordinary steps that both fiscal and monetary policy makers have taken to offset private sector deleveraging…. [T]he most serious risk to recovery over the next few years is no longer financial strain or external shocks, but that policy will shift too quickly away from its emphasis on maintaining adequate demand…. On even a pessimistic reading of the economy’s potential, unemployment remains 2 percentage points below normal levels, employment remains 5m jobs below potential levels and gross domestic product remains close to $1tn[/year] short of its potential…. [A] lurch back this year towards the kind of policies that are appropriate in normal times would be quite premature. Indeed… by slowing investment and increasing long-term employment, such policies could seriously damage the economy’s long-term performance. Brad Delong and I argued in a recent paper that premature and excessive fiscal contraction could even, by shrinking the economy, exacerbate budget problems in the long run.

How then to respond to valid concerns…? The right approach is to use contingent commitments – policies that commit to action to normalise conditions, but only when certain thresholds are crossed…maintain the current Fed Funds rate until some threshold with respect to unemployment or expected inflation is crossed…. [F]und infrastructure… [with] a financing mechanism such as a gasoline tax… triggered when some level of employment or output growth has been achieved…. Contingent commitments have the virtue of giving households and businesses clarity… eliminate political uncertainty… allow policy makers to make a simultaneous commitment to near-term expansion and medium-term prudence – exactly what we require…

The Basic Arithmetic of Self-Financing Fiscal Policy

Real Treasury 10-Year Borrowing Rates

System 3

From my perspective, it was noteworthy that the one thing that Larry Summers's and my "Fiscal Policy in a Depressed Economy" was not challenged upon at the Brookings Institution last Friday was on our arithmetic.

We were challenged on the proper estimate of the multiplier μ and challenged (quite rightly) on our guesses of the hysteresis parameter η, the share of a current downturn that is the shadow cast on future potential output. We were challenged by those saying that America's debt capacity should not be used now but should be kept ready and dry to be used in some future crisis in which using it could do much more good than it would now. We were challenged by those who think that the U.S. is on the edge of losing not just its exorbitant privilege that allows it to borrow enormous amounts at negative real interest rates but is on the point of seeing a complete revolution in interest rates that will push the rates at which the Treasury can borrow up into high single or double digits.

But on our basic arithmetic we were not challenged: it is that fiscal policy in a depressed economy is self-financing as long as:

Microsoft Word

where r is the real Treasury borrowing rate--take the nominal Treasury borrowing rates and subtract 2%--g is the growth rate, which is 2.5%; τ is the fraction of GDP that shows up as increased tax revenues and reduced social-insurance transfers, which is 1/3; μ is the (debatable) standard Keynesian multiplier when monetary policy is at the zero lower bound; and η is the (largely unknown) hysteresis shadow a long, deep depression casts on future potential output.

As we, at least, see it, it is possible to be highly confident that the depressed-economy standard Keynesian multiplier when monetary policy is at the zero lower bound μ is greater than 1.0, and substantially confident that the hysteresis shadow η cast by a long, deep depression is greater than 0.05.

The arithmetic means that over the past four years fiscal policy has been self-financing, and would be self-financing unless the real Treasury borrowing rate is rapidly going to become greater than 5%--unless the nominal Treasury rate is rapidly going to burst through 7% heading upwards. It has simply never been at such levels, save for a short span of years during and immediately after the Volcker disinflation.

Thus, even if you think that the United States is on the edge of some kind of fiscal crisis and may be about to transit from a low interest rate "confidence in government" to a high interest rate "panic" equilibrium, increases in debt-service loads relative to GDP from fiscal austerity are more likely to shock the system into the bad equilibrium than are policies of fiscal expansion. Fiscal expansion over the past four years would--exceptionally and extraordinarily--have, for once, by the arithmetic, paid for themselves.

Critical Real Treasury Borrowing Rates as a Function of the Hysteresis Parameter η: Multiplier μ = 1.0 Case

Microsoft Excel

Critical Real Treasury Borrowing Rates as a Function of the Hysteresis Parameter η: Multiplier μ = 1.5 Case

Microsoft Excel 1

Critical Multiplier μ and Hysteresis η Parameter Values: Treasury Real Borrowing Rate r = 5.0% Case

Microsoft Excel 2

Why You Learn Less than Nothing from the Typical New York Times Columnist: Swooning for Paul Ryan Edition

James Kwak:

Why Do New York Times Columnists Keep Swooning for Paul Ryan?: James Stewart,,, attempts to defend Ryan’s tax proposals against charges that they favor the rich:

To me it sounds like a proposal to raise [the wealthy's] taxes by depriving them of cherished ‘loopholes,’ to use the proposal’s word…. There’s no getting around the fact that a 25 percent rate on the top earners would nearly double Mr. Romney’s effective rate and more than double it for the 101 of the top 400 taxpayers who pay less than 10 percent, assuming the loopholes are indeed closed…. Despite Mr. Ryan’s reluctance to specify which tax preferences might have to be curtailed or eliminated, there’s no mystery as to what they would have to be. Looking only at the returns of the top 400 taxpayers, the biggest loophole they exploit by far is the preferential tax rate on capital gains, carried interest and dividend income….

Stewart… is… assuming that Ryan must be proposing to eliminate those preferences: “there’s no mystery as to what they would have to be.” Only they aren’t. Stewart quotes directly from the FY 2012 budget resolution authored by Ryan’s Budget Committee. But apparently he didn’t notice this passage:

Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy. Mainstream economics, not to mention common sense, teaches that raising taxes on any activity generally results in less of it. Economics and common sense also teach that the size of a nation’s capital stock – the pool of saved money available for investment and job creation – has an effect on employment, productivity, and wages. Tax reform should promote savings and investment because more savings and more investment mean a larger stock of capital available for job creation.

In other words, taxes on capital gains should not be increased, but if anything should be lowered.

Stewart assumes that Ryan wants to raise capital gains taxes because that’s the only way to justify a 25 percent top rate as anything other than a massive giveaway to the rich. But Ryan himself has said he doesn’t want to raise capital gains taxes.* It really is a massive giveaway to the rich. The reason Ryan won’t specify the “loopholes” he wants to close is that he can’t…. Stewart has fallen into the trap of believing that Paul Ryan is something other than a charlatan and a political hack…. How Stewart missed this is baffling, since the passage I quote is from page 51, and Stewart quotes directly from page 50.

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

Joe Weisenthal Quotes Sven Jari Stehn on Delong And Summers


Goldman On New Paper From Delong And Summers: Spending Cuts Now Will Be A Disaster: Goldman's Sven Jari Stehn is out with a new note spotlighting new research from economists Larry Summers and Bradford DeLong…. The gist: When interest rates are at zero, spending more to stimulate the economy has a long-run effect of helping the fiscal situation…. Here's Stehn:

In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.

They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.

Stehn then backs up their work, pointing out that Goldman's own research shows deleterious effects of fiscal consolidation in times like these…

Mortgage Principal Writedowns

Felix Salmon:

Principal writedowns of the day, mortgage edition: It’s principal-writedown day today! Jesse Eisinger has uncovered a huge story: that internal analyses at both Fannie Mae and Freddie Mac show that reducing principal on troubled mortgages has a “positive net present value”. That of course directly contradicts the testimony of Frannie’s regulator, Ed DeMarco — but it’s now going to be much harder for DeMarco to maintain his position that principal reductions would never help Frannie’s finances.

Meanwhile, Bank of America has launched a pilot scheme which is a variation on the theme of principal reduction…. [B]anks don’t want to foreclose: prices are still very depressed, making homes extremely hard to sell…. Banks have no particular interest in being landlords, but if they can do right-to-rent deals with a large number of homeowners, they can bundle those deals up into a big package, and sell it off to investors…. The WSJ explains how the BofA scheme works:

Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.

In exchange, former owners would be offered one-year leases with options to renew…. [I]n Phoenix recently, a consumer with a $250,000 mortgage and monthly payments of $1,600 could swap the house for a lease, renting the home for $900, depending on the condition of the property and the neighborhood….

This is a far cry from a right to rent a home that has been foreclosed, of course. All of these self-imposed rules seem silly to me…. The real reason for this pilot scheme, I suspect, is just that BofA is very worried about its legal ability to foreclose on houses. The difference between a foreclosure and a deed-in-lieu operation like this one is that a foreclosure is involuntary on the part of the homeowner, who retains lots of legal rights. A deed-in-lieu, by contrast, is something the homeowner must agree to…. [L]et’s hope that the pilot works, and is copied by other banks around the country. It’s about time.

What Does the Taylor Rule Say?

Re: "For the past three years, standard Taylor-rule formulations of monetary policy have called for short-term safe nominal interest rates lower than zero."

Well, it depends on what you mean by "Taylor rule".

The central point at issue is whether the “Taylor Rule” is, as John Taylor maintains, setting “the [nominal] federal funds rate… equal [to] 1.5 times the inflation rate plus .5 times the GDP gap plus 1”, or, as Glenn Rudebusch says, “a statistical regression of the funds rate on the inflation rate and on the gap between the unemployment rate and… the natural… rate of unemployment… [which] recommends lowering the [nominal] funds rate by 1.3 percentage points if core inflation falls by one percentage point, and by almost two percentage points if the unemployment rate rises by one percentage point”.

The first—the policy preferred by John Taylor—has not called for strongly negative nominal short-term safe interest rates over the past three years. The second—a linear extrapolation of the policies in fact followed by the U.S. monetary authority over the past two and a half decades—does.

See Glenn D. Rudebusch (2006), Glenn D. Rudebusch (2009), David W. Henderson and Warwick McKibbin (1993), John B. Taylor (1993), and John Taylor (2010).

Amanda Marcotte on Mitt Romney: "Justice for Seamus!" Edition

What does it mean? Does it mean anything?

Amanda Marcotte:

Does the dog story matter?: Does the Mitt Romney dog story matter?…

The white Chevy station wagon with the wood paneling was overstuffed with suitcases, supplies, and sons when Mitt Romney climbed behind the wheel to begin the annual 12-hour family trek from Boston to Ontario....

Before beginning the drive, Mitt Romney put Seamus, the family's hulking Irish setter, in a dog carrier and attached it to the station wagon's roof rack. He'd built a windshield for the carrier, to make the ride more comfortable for the dog.

The ride was largely what you'd expect with five brothers, ages 13 and under, packed into a wagon they called the ''white whale.''

I want to pause to note the various details that make it clear that this car was a large station wagon, and not a compact car that might make packing a large dog in it truly impossible.

As the oldest son, Tagg Romney commandeered the way-back of the wagon, keeping his eyes fixed out the rear window, where he glimpsed the first sign of trouble. ''Dad!'' he yelled. ''Gross!'' A brown liquid was dripping down the back window, payback from an Irish setter who'd been riding on the roof in the wind for hours.

As the rest of the boys joined in the howls of disgust, Romney coolly pulled off the highway and into a service station. There, he borrowed a hose, washed down Seamus and the car, then hopped back onto the highway. It was a tiny preview of a trait he would grow famous for in business: emotion-free crisis management.

It's always tough to know how to take these stories. On one hand, they feed the cult of personality built up around politics that has become rather toxic in the past few decades. On the other hand, behavior like this can also be a remarkable, easy-to-understand symbol for a candidate's larger worldview…. [A]s a symbol of the conservative worldview, strapping a dog to a car roof for 12 hours, and then simply hosing him down when he shits himself, but then pointing to a "windshield" as evidence that you're not a total monster? If it were a novel, you'd be indicating that the character was an irredeemable monster, with no self-awareness to boot….

What really makes this story interesting is how Romney responded recently when confronted with this story:

"Uh...," Romney said, clearly caught off guard by the question. "Love my dog."

"That’s all I’ve got for ya."

Asked about the idea that his treatment of the animal had been cruel, Romney replied, "Oh please. I’ve had a lot of dogs and love them and care for them very deeply."

With that, an aide abruptly ended the interview.

This story resonates because it neatly captures the cruelty at the heart of the paternalistic conservative worldview. Now some conservatives are just openly hateful, thus the whooping and hollering from the crowd at the idea of just letting uninsured people die at a Republican debate. But then there's the "compassionate conservatism" mentality, where arguments about depriving people of legal protections, rights, and a social safety net are framed as somehow loving and compassionate. You see it everywhere, from arguments that taking away the social safety net toughness people up, or taking their Medicare somehow gives them "choice", or that taking abortion rights is somehow good for women…. In Romney's mind, what's good for him---to have a 12 hour drive without a slobbering dog in the car---is just good for the dog, and evidence that it's not is dismissed out of hand with a few noises about how he doesn't intend to hurt anyone. You see the same thing in play, in an even uglier way, with Ron Paul's defenders trying the "he's not racist in his heart; he just signed off and probably wrote a bunch of unbelievably racist rants" number. It's this imperious demand that we take them at their word when they say they care about and love others, and ignore their actions….

[Romney] will swear up and down that he loves this country and loves Americans, but if it's in his best interest---and the interest of his rich friends---he'll strap us to a car roof and when we shit ourselves in terror, he'll hose us off and leave us wet and shivering as he takes us back into the unforgiving winds.

Everybody Who Ever Praised Paul Ryan as a Serious Policymaker Owes the Rest of Us a Huge Apology

Joe Weisenthal

Paul Ryan Growth And Revenue Assumptions: There's Something You Should Know About Paul Ryan's Balanced Budget Claim… [H]e says that the "source" is the CBO, so does this mean that the Congressional Budget Office really concluded that his path would do this?

Not quite?

Menzie Chinn explains:

The CBO provides some numbers (it's not a "score"), with a caveat:

At the request of the Chairman of the House Budget Committee, Congressman Paul Ryan, the Congressional Budget Office (CBO) has calculated the long-term budgetary impact of paths for federal revenues and spending specified by the Chairman and his staff. The calculations presented here represent CBO’s assessment of how the specified paths would alter the trajectories of federal debt, revenues, spending, and economic output relative to the trajectories under two scenarios that CBO has analyzed previously. Those calculations do not represent a cost estimate for legislation or an analysis of the effects of any given policies. In particular, CBO has not considered whether the specified paths are consistent with the policy proposals or budget figures released today by Chairman Ryan as part of his proposed budget resolution.

In other words (as stressed by Ezra Klein), Representative Ryan specified revenues and expenditures, and told CBO to calculate how the debt trajectory would change as a consequence. Thus, CBO did not “score” the plan, exactly because so much was unspecified.

LOL. So basically Ryan told them that his scheme will generating amazing growth and tax revenue, and thus it was just a matter of the CBO then determining what debt-to-GDP would be in such a scenario.

Justin Fox: What Macroeconomists Don't Know


The (Many) Things Macroeconomists Don't Know: Jean-Claude Trichet… did regret something about the last few years. He regrets that economists didn't give him better advice. What Trichet said was that state-of-the-art macroeconomic theory was almost entirely useless in dealing with the crisis that began in 2007. Yeah, he tried to be polite about it: "This doesn't mean we have to abandon DSGE," he said, referring to the dynamic-stochastic general equilibrium models — in which an economy of rational, far-seeing actors struggles with the occasional friction or shock, but generally gets along okay — that dominated the work of economists at central banks. Buuut "atomistic rational agents [the figures that populate DSGE models] don't capture behavior during a crisis."… Trichet finally reached for the last refuge of the frustrated economic policymaker: John Maynard Keynes. He quoted (at length) a famous story from Keynes' General Theory. It describes a beauty contest in a newspaper where the goal is to pick the face that the most readers will vote for.

It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

"It captures what's happening when a systemic crisis is unfolding," Trichet said. At the height of the 2008 crisis, he went on, "it was clear that an immensely large number of [market] participants were thinking that if there was not a game change, the system would collapse." Now, none of this is exactly news. Lots of people have said similar things over the past couple of years. But it was very interesting hearing them from someone who until recently was one of the most powerful economic policymakers on the planet — and one who has been criticized mainly (at least among English-speakers; the Germans have their own unique view) for being too conservative, and too unwilling to jettison faulty models of how the world works. Not that he has any regrets or anything…

Binyamin Applebaum: Recession's Lasting Effects


Recession's Lasting Effects: [A] paper presented Friday at the Brookings Institution warns that recessions may do lasting harm, like an untended house that not only needs a good dusting, but has also started to rot…. The fact of reduced investment is clear, as shown in the graph below. The question is whether a rebound in investment eventually will fill the gap, as happened in the United States after the Great Depression, or whether losses will be permanent, as happened in Europe in the 1980s and Japan in the 1990s…. There also may be an effect on employment: Workers may become less employable the longer they remain outside the work force, creating a long-term reduction in the supply of available labor. Mr. Summers was the co-author of a famous paper in the 1980s arguing that just such an effect was dragging on Europe, but the mechanism he proposed – that unions lost interest in their former workers – does not apply in the United States, where unions play a smaller role….

The United States rebounded completely from the Great Depression. Europe and Japan have not rebounded from their more recent traumas. And we are now living through what may be just the fourth comparable experience. The proper antidote to hysteresis, the authors write, is an increase in government spending…. [T]here is little prospect that Congressional Republicans will revisit their opposition to stimulus this year. Which means that our current experiment will run to completion: If hysteresis is real, we will know it by its consequences.

Department of "Huh?!": Oil Price Edition

The question:

Poll Results | IGM Forum: Gasoline Prices: Changes in U.S. gasoline prices over the past 10 years have predominantly been due to market factors rather than U.S. federal economic or energy policies, yes or no?

Poll Results | IGM Forum

Poll Results | IGM Forum 1

Poll Results | IGM Forum 2

FRED Graph  St Louis Fed

Which of these changes in U.S gasoline prices since early 2002 do Hoxby, Stokey, and Zingales think might have been due to changes in U.S. federal economic or energy prices rather than to changes in supply and demand?

I could see somebody arguing that the Bush-era step-back from financial market regulation led to the economic crash that led to the late-2008 collapse in gasoline prices, and that the subsequent revival was in large part due to the TARP, the stress tests, the ARRA, and QE. But somehow I doubt that that is what these three have in mind...

Adolf Hitler Liveblogs World War II: March 23, 1942

Adolf Hitler:

Führer-Directive 40: Subj: Command Organization of the Coasts

General Situation: In the days to come the coasts of Europe will be seriously exposed to the danger of enemy landings. The enemy's choice of time and place for landing operations will not be based solely on strategic considerations. Reverses in other theaters of operations, obligations toward his allies, and political motives may prompt the enemy to arrive at decisions that would be unlikely to result from purely military deliberations. Even enemy landing operations with limited objectives will--insofar as the enemy does establish himself on the coast at all--seriously affect our own plans in any case. They will disrupt our coastwise shipping and tie down strong Army and Luftwaffe forces which thereby would become unavailable for commitment at critical points. Particularly grave dangers will arise if the enemy succeeds in taking our airfields, or in establishing airbases in the territory that he has captured. Moreover, our military installations and war industries that are in many instances located along or close to the coast, and which in part have valuable equipment, invite local raids by the enemy.

Special attention must be paid to British preparations for landings on the open coast, for which numerous armored landing craft suitable for the transportation of combat vehicles and heavy weapons are available. Large-scale parachute and glider operations are likewise to be expected.

.General Tactical Instructions for Coastal Defense: Coastal defense is a task for the Armed Forces, and requires particularly close and complete co-operation of all the services. Timely recognition of the preparations, assembly, and approach of the enemy for a landing operation must be the goal of the intelligence service as well as that of continual reconnaissance by Navy and Luftwaffe. Embarkation operations or transport fleets at sea must subsequently be the target for the concentration of all suitable air and naval forces, with the object of destroying the enemy as far off our coast as possible. However, because the enemy may employ skillful deception and take advantage of poor visibility, thereby catching us completely by surprise, all troops that might be exposed to such surprise operations must always be fully prepared for defensive action. Counteracting the well-known tendency of the troops to relax their alertness as time goes on will be one of the most important command functions...

Matthew Yglesias: Self-Defeating Austerity

Matthew Yglesias:

When Austerity Is Self-Defeating: [N]rmally stimulating the economy with discretionary fiscal policy won't work because the central bank, in order to avoid inflation, will respond to any stimulative impact with higher interest rates. Thus government purchases will "crowd out" private sector activities.... But in a period when rates are up against the zero bound and still the economy is depressed, the calculus is different. By simply committing to keep interest rates low despite the expansion in government debt, the central bank can allow an expansion in government purchases to increase the amount of economic activity and not just crowd out private sector investment.

But what about the need to repay the loan later with taxes? Doesn't that produce growth-slowing distortions? Yes, it does. But they argue that the decision to allow for a very prolonged period of depression also creates economic distortions. For starters, a prolonged recession means a prolonged period of time of below-average investment—a time during which population growth and depreciation mean that a society's stock of capital goods is declining. Secondarily, when people are employed they're constantly learning job-relevant skills whereas when they're unemployed they're slowly un-learning those skills....

Their net point is that rather than a tradeoff between short-term pain and long-term gain, we face a tradeoff between the long-term pain of needing to repay a larger stock of debt and the long-term pain of needing to deal with an economy that's permanently crippled by under-capitalization and deteriation of worker capabilities. They argue that this means fiscal stimulus passes cost-benefit analysis even under very restrained estimates of the fiscal multiplier.

DeLong Smackdown Watch: Mark Thoma Edition

Mark Thoma:

Economist's View: The Case for More Fiscal Stimulus: As a big critic of those who claim that tax cuts pay for themselves, I have been hesitant to embrace the "government spending pays for itself" defense of using government expenditures to stimulate the economy. With tax cuts, there does appear to  be some offset, but it is not large, i.e. on net, tax cuts increase the deficit by quite a bit (revenues of 10-15 cents on the dollar is, I think, a generous estimate of the dynamic effects). It's a theoretical possibility that a cut in taxes will pay for itself, but the empirical evidence just isn't there.

The people making the claim about government spending are careful to note that it only applies to very depressed economies, and government spending paying for itself in the long-run is a certainly a theoretical possibility in that case. And events in Europe are suggestive that a careful empirical investigation will support the claim…. Some things do pay for themselves, and then some. A business investment had better do that…. So I don't mean to imply the claim is outlandish per se, not at all. It may well be true. I just don't have the evidence I need to make a strong statement.

One more note. I also don't really like the framing. It's not what's intended by those making the argument, and they are careful on this point. But careful or not it makes it seem as though the spending is only worthwhile if it does, in fact, lower the long-run deficit. But there are benefits to, say, putting people back to work that are not captured by this sort of expenditure/tax-return analysis…

Mark Thoma: Odyssean and Delphic Interest Rate Guidance...

Mark Thoma:

Economist's View: "The Macroeconomic Effects of FOMC Forward Guidance": I've been trying to figure out whether the Fed's declaration that it would maintain exceptionally low rates through late 2014 represents a conditional or unconditional statement. That is, if the economy improves faster than expected, will the Fed raise rates prior to that time? Or will it honor this as a firm commitment that is independent of the actual evolution of the economy?

The statement clearly leaves wiggle room -- if the Fed wants out of the commitment the language is there. But I have the impression that the public views it as a firm, unconditional commitment and if the Fed backs away it will be seem as breaking a promise (i.e. lose credibility).

Apparently, I'm not the only one who is unsure about this. This is from Jeffrey R. Campbell, Charles L. Evans, Jonas D.M. Fisher, and Alejandro Justiniano (Charles Evans is the president of the Chicago Fed). They look at the effectiveness and viability of the two types of forward guidance, and conclude that a firm commitment with an escape clause specified as a specific rule (e.g. won't raise rates until until unemployment falls below 7% or inflation expectation rise above 3%) can work well...

Paul Krugman: He Told Us So

Paul Krugman:

Blunder of Blunders: DeLong and Summers on fiscal policy in a depressed economy is out. The headline point is the argument that austerity when you’re in the liquidity trap may well worsen, not improve, your long-run fiscal position; I’ve been making the same point for a couple of years, but Brad/Larry present some evidence from the birth of Eurosclerosis and the downgrading of US potential output estimates since the crisis began.

They also emphasize the crucial point that even if austerity doesn’t literally worsen the long-run position, it does at best very little to improve that position — yet imposes large current costs. So the cost-benefit analysis is overwhelmingly in favor of stimulus as long as you’re in the liquidity trap.

And what that says, in turn, is that the embrace of austerity by policy and political elites in late 2009 and early 2010 was an almost inconceivably terrible blunder. The result of that embrace was the imposition of huge economic and human costs, with little if any benefit…

The Economist: Is Fiscal Expansion Self-Sustaining?

Our answer is: right now, yes it is, but not usually.

The London Economist:

A theory of fiscal policy: Self-sustaining stimulus: Larry Summers says fiscal stimulus can pay for itself: WHEN he was at the Treasury nearly 20 years ago Larry Summers would counsel President Bill Clinton on the merits of “stimulative austerity”: cut deficits, and interest rates will fall by enough to produce stronger economic growth. Now Mr Summers is making the opposite case: stimulate growth through a bigger deficit, and the long-term debt may shrink.

In a new paper written with Brad DeLong of the University of California, Berkeley, Mr Summers, now at Harvard after a stint as Barack Obama’s chief economic adviser, says that in the odd circumstances America faces today temporary stimulus “may actually be self-financing”…. Mr DeLong and Mr Summers are careful to say stimulus almost never pays for itself. When the economy is near full employment, deficits crowd out private spending and investment. In a recession the central bank will respond to fiscal stimulus by keeping interest rates higher than they would otherwise be. Both effects mean that in normal times the fiscal “multiplier”—the amount by which output rises for each dollar of government spending or tax cuts—is probably close to zero.

Such constraints are not present now…. Many economists have made this point. Mr DeLong and Mr Summers go further by introducing the role of “hysteresis”—the tendency of a temporary change in unemployment to become permanent. Mr Summers has looked into this topic before. In an early paper he found that the surge in demand for women workers during the second world war permanently raised the presence of women in the workforce, a case of positive hysteresis.

The worry now is very different. Between 3% and 4% of the labour force has been unemployed for at least six months (see chart), the highest proportion in over 60 years. The longer the economy stays depressed, the more likely those workers are to quit the labour force altogether. By putting these people back to work today, stimulus generates higher taxes not just this year but for years to come, lowering the long-term debt burden….

Their conclusions apply “only in circumstances of a kind we haven’t seen in the US in 70-some years, and once this episode ends, won’t see again in more than 70 years,” says Mr Summers. Even now, “it depends on the ability to do something that may be politically hard: keeping the stimulus timely and targeted.”

Kristina Peterson: Summers, DeLong Push for More Government Spending

A temporary boost of government spending can help spur an economic recovery when interest rates are near zero, a former top economic adviser to President Barack Obama argued in a paper released Thursday at a Brookings Institution conference. The view advocated by Lawrence Summers, Obama’s first National Economic Council director and now a Harvard University professor, and University of California at Berkeley economics professor J. Bradford DeLong in Thursday’s paper isn’t likely to be welcomed by those pushing to immediately slash the federal budget deficit. Earlier this week House Budget Committee Chairman Paul Ryan (R., Wis.) introduced a budget plan he said would spend $5.3 trillion less over 10 years than the president has proposed, narrowing the budget deficit by $3.3 trillion over the decade. That’s exactly the kind of economic prescription that Summers and DeLong caution against. Imposing an austere budget on an economy still struggling to recover from a financial crisis could be “self-defeating” in both the short term and the long run, the pair said.

Instead, they advocate a temporary spurt of government spending when interest rates are near zero, since it is so cheap for the government to borrow money and the central bank has little left in its arsenal to spur growth. The Federal Reserve’s most recent actions may argue against that, since the central bank has taken many other steps since it lowered its key short-term rate to near zero, including buying bonds and providing longer-term guidance on interest rates.

Summers and DeLong emphasize that the fiscal stimulus is only effective when interest rates are super low and in a weak economy, when the spending is needed to soften lingering effects from a recent financial crisis. “While the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times,” in situations resembling the current U.S. economy, additional government spending “will ease rather than exacerbate the government’s long-run budget constraint,” Summers and DeLong wrote. In weak economies struggling to recover from a financial crisis, the government can generate more growth from each dollar of spending when interest rates are very low, because the Fed is unlikely to raise rates to snuff out inflation, the paper argued. The fiscal stimulus may also be more effective than in normal times because it is helping to mitigate the effects of a recent recession, which could otherwise hamper the economy’s ability to return to its full potential.

It’s important that the stimulus actually boost spending — not just increase the deficit — for the economy to reap a benefit, Summers and DeLong stress, just before launching a brief defense of the often-criticized fiscal stimulus package passed by Congress in 2009 when Summers worked in the Obama White House. The paper cites a string of economists who suggest “that a very substantial fraction of the fiscal stimulus enacted in the 2009 Recovery Act translated rapidly into increased spending.” Summers and DeLong caution that their paper isn’t an argument against putting the country on a long-term sustainable fiscal path. But they argue that for the current U.S. economic condition, and other countries mulling severe budget cuts, a fresh boost of spending may be more effective right now.

Brookings Panel on Economic Activity: Spring 2012


"Fiscal Policy in a Depressed Economy", by J. Bradford DeLong, University of California, Berkeley and Lawrence Summers, Harvard University.

"Disentangling the Channels of the 2007-2009 Recession", by James Stock, Harvard University and Mark Watson, Princeton University:

Comments: Stock and Watson say policy uncertainty is liquidity squeeze is risk spreads: there is one single "financial shock". Stock and Watson say the old factors and old coefficient macro dynamics predict the macro dynamics of this recent recession. Thus the current business cycle is still the standard business cycle--only bigger, driven by bigger financial shocks. Alan Blinder queries: how can this recession be the same? It wan't caused by either inflation-fighting monetary policy or by an oil shock. So it ought to have been different, shouldn't it? In Ricardo Caballero's framework, a normal post-WWII recession was caused by a liquidity squeeze, but this was caused by a safety squeeze--there would have been a liquidity squeeze if not for extraordinary Fed action, and Milton Friedman would have said that fixing the liquidity squeeze would fix the problem. And it didn't...

If I understood Martin Baily, I think he was wondering whether an error-correction framework would show more of an anomaly in the recent episode. I want to second that.

"Macroeconomic Effects of FOMC Forward Guidance", by Jeffrey Campbell, Charles Evans, Jonas Fisher, Alejandro Justiniano, Federal Reserve Bank of Chicago

Comment: First, let me thank Michael Woodford for finally telling me how to pronounce Goy-tee. I have never before dared say anything other than "Eggertsson". Second, the point about nominal levels: when velocity undershot in the early 1980s Paul Volcker laid down the principle that base drift would not be reversd--admittedly, then it was base drift in the money stock. That precedent creates some difficulties for the Fed to adopt level targeting.

Third, with respect to commitments. The FOMC's voting membership turns over rather quickly. That makes commitment difficult. Commitment via appointing central bankers who are conservative in the Rogoff sense in having an unreasoning distaste for inflation solves some commitment problems, but not others. Odyssean commitment via QE is also difficult because QE transactions can easily and costlessly be reversed. So if you are a central bank that wants to commit to a higher future money stock, the natural way to do it is to increase the money supply by expanding your portfolio in ways that cannot be reversed. So, instead of buying GSE MBSs, buy bridges, human capital for twelve year olds, and biomedical knowledge--transactions the Fed cannot unwind. And Eggertsson and Woodford optimal ZLB monetary policy has just become monetary base-financed expansionary fiscal policy.

"Is the Debt Overhang Holding Back Consumption?", by Karen Dynan, Brookings Institution

Comment: Are the quarter of mortgage debtors who are underwater more of a drag on the economy than other homeowners who have lost wealth? Yes, clearly they are.

"The Euro’s Three Crises", by Jay Shambaugh, Georgetown University

Comment: Yes, interest rates have to be very high indeed for austerity to be worthwhile even on the metric of debt service burden alone...

When Jay's excellent paper arrived, I was rereading the late Charlie Kindleberger and thinking about his old line that Europe fell into the Great Depression in the 1930s because the world lacked an international monetary and financial hegemony, and also reading the transcript of the Bretton Woods Conference--where White and Keynes appear well aware of this, and working their hardest to make sure that this does not happen again by creating a hegemon: the IMF. Yet here we are again. And I think it is safe to say that we would not be here, but rather in an at least somewhat better place, either if the IMF had in the late 1990s been recapitalized at much more than its current scope or if Iceland, Ireland, and Greece had incorporated themselves in Delaware as bank holding companies and joined the Federal Reserve System.

If White and Keynes were here now, I think they would yell at us: of course, they would say, a dozen national governments cannot quickly strike a Coasian bargain under these circumstances. You need a hegemony. We gave you a hegemony. What have you done with it?

We are probably going to dodge the biggest bullets coming at us this time. But it really is not too early to start building institutions that will allow us to, next time, avoid both the policy mistakes of the 1970s and the policy mistakes of the 2000s so that we can make new and more original policy mistakes.

"Democratic Change in the Arab World, Past and Present," by Eric Chaney, Harvard University:

Comment: I like the focus of the long-term historical impact of "slaves on horses": the interaction of the ulema and the mamelukes from the Ummayid dynasty on, a pattern found in the regions of the 7th century conquests and the resultant expansion of the community of believers, but not elsewhere. I feel like I should channel the medieval historian Ibn Khaldun and wonder whether it is not 8th century institutions but rather, as Linda noted, desert ecology. The 7th century conquests are (with the exception of what is now Iran) places where desert power is important. And in deserts agriculture is not very productive: it is hard for the ruling institution to tax the surplus. Herding is even harder to tax. So the ruling institution taxes commerce, especially long-distance commerce, and does not embed its revenue sources in society. Thus you get a succession of dynasties playing the game of thrones whose major interest in the bulk of the population is autocratic domination rather than economic development, and this ecologically-driven political-economic equilibrium echoes down the centuries. It is then powerfully reinforced by oil.

Unfortunately, I see only one data point that was part of the 7th century conquests where desert power is not terribly important: the collapse of the Sassanid Empire. While the Byzantine Empire survived, and held the line where the desert turned into the Anatolian Plateau, the Sassanids collapsed and the Arab Conquest extended over the Iranian Plateau.

If Iran makes a successful democratic transition in the next fifty years, I would characterize that as strong evidence against Eric's hypothesis.

DeLong and Summers: Fiscal Policy in a Depressed Economy: Conference Draft


PRESENTATION: AS PREPARED FOR DELIVERY: Fiscal Policy in a Depressed Economy

J. Bradford DeLong and Lawrence H. Summers

March 23, 2012

We are here to say that, as a matter of arithmetic, in a depressed economy like the present, if a long deep recession casts even a small shadow on future potential output, with interest rates in the range at which the U.S. has been able to borrow, there is a substantial likelihood that expansionary fiscal policy right now would be self-financing, and an overwhelming likelihood that it would pass a benefit-cost test.

Since the start of 2007, CBO has repeatedly and substantially marked down its estimates of potential output a decade hence. For each percent that output falls below potential for a year, the CBO mark down its estimate of the long run potential of the economy by 0.2%.

The CBO is not an outlier among forecasters.

If higher output this year raises potential output in the future by a fraction η because it reduces the shadow cast by the downturn through discouraged workers, lost skills, broken organizations, and missing investment on future productivity, then boosting government purchases now, in an environment with a policy-relevant net-of-monetary-policy-offset Keynesian multiplier μ, boosts future real GDP by the multiplier times some hysteresis coefficient η. That means that in an environment with a tax rate τ, the flow of future total tax collections are boosted by τημ.

The extra debt incurred by a temporary government purchases expansion ΔG in an environment with a policy-relevant net-of-monetary-policy-offset Keynesian multiplier μ and a tax rate τ is (1 - μτ). If the government maintains a stable debt-to-GDP ratio then the cost of amortizing this extra debt is (r - g)(1 - μτ), where r is the real interest rate at which the Treasury borrows, and g is the long-term growth rate of the economy.


r < g + τημ/(1 - μτ)

then we simply cannot do a benefit-cost calculation for expansionary fiscal policy. It is self-financing. There are no costs. No future tax increases are needed to amortize the extra debt, because economic growth does it on its own.

It is, rather, austerity that requires future tax increases.

For a multiplier μ = 1.0, a hysteresis shadow-cast-by-the-recession coefficient η = 0.1, a growth rate g = 2.5%/year, and a tax share τ = 1/3, this critical value of r becomes:

r < 7.5%

The long-run Treasury borrowing rate needs to be above 7.5%/year in real terms--above 9.5%/year in nominal terms--for fiscal expansion to be a bad deal.

For a multiplier μ = 0.5, a hysteresis shadow-cast-by-the-recession coefficient η = 0.05, a growth rate g = 2.5%/year, and a tax share τ = 1/3, (6) becomes:

r < 3.75%

The long-run Treasury borrowing rate needs to be above 3.75%/year in real terms--above 5.75%/year in nominal terms--for fiscal expansion to be a bad deal.

Note that this applies only to a depressed economy, and only as long as the monetary authority cannot or will not--but in any case does not--carry out the government's full stabilization policy mission all by itself.

If the self-financing condition fails, there is a benefit-cost calculation to do. Write down the net effect of expansionary fiscal policy on the present value of future output:

ΔV = [μ(1 + η(1 + ξτ)/(r-g) - ξ(1 - μτ)]ΔG

with ξ being the national income lost from raising an extra dollar of revenue from future taxes.

The last term is the burden placed on the economy from the taxes needed to amortize the additional debt.

The second term is the extra future production because lessening the current downturn lessens the destructive shadow cast on the economy in the long run. This middle term plausibly doubles or triples the benefits of expansionary policy above those of higher output from the multiplier μ in the present period alone. (9) tells us that, for a multiplier μ = 0.5, an η = 0.05, τ = 1/3, g = .025, and an r = 6%, expansionary fiscal policy passes its benefit-cost test as long as raising $1.00 in extra tax revenue through distortionary taxes reduces national income by less than $10.00.

In this depressed-economy framework at least, you have to get far out toward the edge of the parameter space in order for expansionary fiscal policy to flunk its cost-benefit test.

Does this prove too much?


In normal times the logic of Taylor (2000) that stabilization policy should be left to the monetary authority still holds. It is only in extraordinary times, like now, that this argument has force.

In normal times expansionary fiscal policy as a stabilization policy will flunk its benefit-cost test. In normal times the multiplier μ will be close to zero. Perhaps the monetary authority will have a view about how the economy should evolve in a way that is consistent with long-run price stability, will not want its elbow joggled by others, and will thus take anticipatory steps to offset any effect of expansionary fiscal policy on output. Perhaps the monetary authority will watch fiscal expansion raise output, disapprove of the resultant increase in inflation, and then offset it by creating an equal and opposite output gap later. Either way the policy-relevant multiplier μ is zero. Either way, expansionary fiscal policy as stabilization policy has only costs and no stabilization-policy benefits.

In a depressed economy, however, there is less increase in inflationary expectations following from higher output, and less reason for the monetary authority to fully offset the effects of expansionary fiscal policy.

Hence our conclusions.

How could this argument go wrong?

The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government, and a spiking of interest and inflation rates to previously-unseen values.

But since austerity appears, for what we see as reasonable parameter values, at least as likely likely to erode the government's fiscal room to maneuver than temporary expansion, this seems backward. if the logic of this argument is correct, then it is a failure to engage in expansionary fiscal policy right now--a failure to speed recovery and so reduce the long-term shadow cast on future productivity by the downturn--that is the real threat to long-run fiscal stability.

Sovereign debt crises can be triggered by rises in spending due to expansion. They can also be triggered by falls in growth and taxes due to austerity.















Noah Smith on the Left Opposition Economists

Noah Smith:

Noahpinion: Did the Krugman insurgency fail?: I encourage everyone to read Henry Farrell and John Quiggin's new article, "Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis."… Keynesian policy briefly regained its old throne when everyone was panicking in 2009 - everyone became a Keynesian in a foxhole, as Bob Lucas would say - but this brief consensus fell apart under an assault from austerity-minded European central bank economists in 2010-11.

This makes me step back and think about the whole econ blogosphere…. Paul Krugman['s] article, "How Did Economists Get It So Wrong"…. A war was on. The blogosphere was Ground Zero for a very deep and fundamental argument about the purpose and practice of macroeconomics. And suddenly, the policy consequences couldn't be more important. After spending a year sitting on the sidelines of that argument, I decided to turn Noahpinion - which had just been a personal bullshit diary - into an economics blog.

Now it seems that the war is winding down… the frequency of titanic clashes seems to have peaked…. Policymakers… no longer feel a need to deviate from the comfortable pre-2008 consensus that monetary policy is the only necessary tool of demand management…. So does that mean Krugman's insurgency failed? Seen narrowly as a push for countercyclical fiscal policy, I'd have to conclude "yes."… But I do not believe that this is the case…. [T]he Krugman insurgency launched a much deeper, more profound, and more long-lasting war.… [W]hen Krugman, a Nobel Prize winner, came out and said publicly that the macro profession had allowed itself to be satisfied with uselessness and irrelevance, it broke the facade of unity…. If macroeconomists hadn't conclusively discovered how to avert crises and also hadn't conclusively discovered how to recover from crises, what good had they done for society? Why were we paying professors hundreds of thousands of dollars to study this subject if nothing usable had emerged?

I take a different view. My view is that macroeconomists know a great deal about how to avert and cure the macroeconomic consequences of financial crises, and have known how to do it since John Stuart Mill drafted his "Essays on Some Unsettled Questions in Political Economy" back in 1829. A general glut--a desire on the part of agents in the economy as a whole to spend less than their total incomes--is the consequence of a general belief on the part of agents that they are holding too few or the wrong kind of financial assets. It can and should be cured by having some lender-of-last-resort-like agency--the tallest midget in the room--create the financial assets needed for people to be happy with the amount and type of their holdings, and so push economy-wide spending up to income.

And yet, in spite of everything, this was not done. There were lots of technocratic details and questions about how to do it. But back in late 2008 I had no doubt that all of us economists agreed that that was what needed to be done, and it would be done.

I still don't understand why it was not done. I thought that those of us who understood John Stuart Mill (1829) exercised intellectual hegemony over economic policy discourse. And it turns out we did not…

Charles Calomiris (2008): How To Prevent **Manage** Foreclosures

Charles Calomiris (2008):

How To Prevent Foreclosures: Forbes: [T]he successful Mexican "Punto Final" plan of 1999, which resulted in substantial debt write-downs very quickly and the resolution of much financial gridlock in that country. The government would share losses borne by lenders from mortgage principal write-downs on a proportional basis. For example, taxpayers could absorb 20% of the write-down cost borne by lenders on any mortgage so long as it is agreed through a voluntary renegotiation between lenders and borrowers, and so long as doing so creates a sufficient write-down for borrowers to be able qualify for refinancing under the FHA facility….

The group of borrowers whom it would help are those whose mortgages need a little more of a write-down than their lenders would be willing to do without a subsidy. For this "marginal" group, foreclosure creates only a small private benefit to lenders compared with the alternative of agreeing to a viable mortgage write-down….

This plan could avoid a lot of foreclosures at lower taxpayer cost… without rewarding the worst kind of behavior by lenders and borrowers. Relatively careful lenders and borrowers who are close to reaching renegotiation on their own would be "pushed over the goal line" of avoiding foreclosure…. I would guess that a 20% loss sharing offer would make a big difference at modest cost…

Roger Altman: The U.S. Needs a More Progressive Income Tax System and More Public Investment in Education

By coincidence, exactly what I told my Econ 1 students yesterday:

No more inaction on income inequalitym: Two solutions stand above the rest. The US needs a more progressive tax system and one that raises more revenue. The latest data reveal that the top 1 per cent of earners got 93 per cent of all increases in after-tax personal income in 2010. That reflects, among other things, low effective tax rates for much of this group, which are largely explained by the high percentage of their income that consists of capital gains and dividends…. In the longer term, it is imperative to raise education levels. This means better secondary-school completion rates, which lead to increased university attendance. And it also means higher university completion rates, with the greater lifetime earnings that follow. In America, wide-ranging public school reforms are necessary to achieve the first goal, including better methods for teacher training, evaluation and compensation, improved curriculums and upon graduation, as a minimum, assured admission to community colleges. Fortunately, this reform movement is finally showing some signs of life. We need a big initiative to make university affordable and inclusive.

These steps are not impossible. Far from it. They are readily attainable with the right leadership. Mr Obama’s welcome focus on the problem should now be coupled with genuine solutions.

Yes, Mitt Romney Is Running a Con on Somebody… We're Not Sure Who, But Somebody...

Alex Seitz-Wald

Top Romney Adviser: Don't Worry, He'll Flip-Flop On Everything Soon: [Eric Fehrnstrom says] the candidate [has] a “reset button” on any positions he’s taken during the primary campaign if he wins the nominations and faces off against President Obama in the fall. Appearing on CNN this morning, Romney Communications Director Eric Fehrnstrom was asked if he’s concerned that Romney may alienate general election voters with some of the hard-right positions he’s taken during the primary to appeal to conservatives. Fehrnstrom brushed this concern off:

HOST: Is there a concern that Santorum and Gingrich might force the governor to tack so far to the right it would hurt him with moderate voters in the general election.

FEHRNSTROM: Well, I think you hit a reset button for the fall campaign. Everything changes. It’s almost like an Etch A Sketch. You can kind of shake it up and restart all of over again.

Water Will Not Long Be (Nearly) Free

Peter Orszag on how we need to invest more in our water supply, and do much more to conserve our use:

Atlanta’s Water War Is First in a Gathering Flood: There is an alarming global supply-demand imbalance, worsened by pollution and draining of underground aquifers reducing the available fresh water supply…. [I]n the past two decades, groundwater resources in Great Lakes communities like Chicago and Milwaukee have fallen by 1,000 feet. Our aging water pipes are another challenge… pipes account for about 70 percent of the cost of a water system.

So what can we do to preserve our access to fresh drinking water? One major need, as I have written about previously, is to address the pricing problem. The typical American uses 100 gallons of water per day, but in most places, prices aren’t adequately adjusted to usage. Prices that reflected usage would not only raise more money for addressing emerging water issues but also help raise everyone’s awareness of them.

Today’s low interest rates offer an ideal situation in which to finance investment in new or replacement pipes. We also need to invest in new technology -- from desalination to strategies for water reuse…. There’s no reason to wait passively for the next water battle…

Felix Salmon Is Very Unhappy with Superfreakonomics's Stephen Dubner...


Felix Salmon: it’s possible that Dubner is unaware of Wonkblog, or of Klein’s Bloomberg View column, and therefore is unfamiliar with his actual mode of writing. Possible, but unlikely. What’s impossible is that Dubner believes that Klein’s rapidly-deleted tweet is in any way representative of his work as a whole.

It baffles me why Dubner would engage in a low and dirty and deeply dishonest ad hominem attack on Ezra Klein at all — let alone in the middle of a post in which he’s trying to defend his reputation. The only reason I can possibly think of is that, to coin a phrase, he seems to be in the business of attacking at any cost. Even when the cost paid is that people are sure to take him even less seriously now than they did before.

Some backstory:

American Scientist recently ran a column by Andrew Gelman and Kaiser Fung attacking the book’s m.o. And the book’s co-author, Stephen Dubner, has now responded to that column at astonishing and mind-numbing length (7,500 words). Dubner says at the top of his post that he tends “to not reply to critiques”. But buried further down you’ll find this:

Gelman-Fung write that our argument was “picked apart by bloggers.” Their American Scientist article includes only a cursory bibliography and no footnotes or endnotes, nor do Gelman-Fung cite any specific sources in this case, so it’s unclear who those bloggers were and what they picked apart. From what I can tell, this is the main critique; its author is reputable but he has also written things like this (NSFW!), so he too seems to be in the business of attacking at any cost.

To be clear: Gelman and Fung accused Dubner of some slightly intellectually-dishonest practices. And in his self-defense, Dubner engages in some of the most egregious and blatant intellectual dishonesty I’ve ever seen on a blog.

There are lots of ways that Dubner might have responded to Klein; most of them involve mentioning him by name. Only one of them involves exhuming a drunken and deleted tweet from January 2008…

Joe Weisenthal: Ben Bernanke vs. the Gold Standard

Joe Weisenthal:

Ben Bernanke Murders The Gold Standard: Ben Bernanke just gave the first lecture of his 4-part series on the origins of the Fed. We'll have full transcripts and slides later, but one thing really stood out…. He spent a lot of time talking about the gold standard, and he just murdered it.

Among his points:

To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It's nonsensical.

The gold standard ends up linking everyone's currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they've fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked.

It creates deflation, as William Jennings Bryan noted. The meaning of the "cross of gold" speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.

The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact opposite of what monetary policy should be doing.

The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).

The only way the gold standard works is if people are convinced that the central bank ONLY cares about maintaining the gold standard. The moment there's a hint of another priority (leaking falling unemployment) it all falls apart.

Gold standards leave central banks open to speculative runs, since they usually don't hold all the gold...