Previous month:
May 2012
Next month:
July 2012

June 2012

"Constitutional Moments"

Five times in U.S. history the Supreme Court has eaten its wheaties and said that in the future the law will in a major way be very different--or, rather, that Americans before, including the Supreme Court, had been in error about what the law truly was and had been doing it wrong.

Call the first Marbury vs. Madison: the Supreme Court's 1803 assertion of the power that it was going to be the final arbiter--that its decisions about what the Constitution meant would be the ones that stuck. It could have gone another way…

Call the second Lochner: the Supreme Court's 1905 assertion that a late eighteenth-century Constitution enacted an early-twentieth century conception that your key liberty interest is the freedom to make whatever contracts you want to make without let or hindrance from the federal government.

Call the third the Switch-in-Time-that-Saved-Nine: the Supreme Court's 1937 assertion that Lochner was in error, and that Congress's power to regulate interstate commerce was a trump that gave it the right to regulate everything.

The fourth and the fifth are Warren Court actions: (a) in 1954 that legal racial apartheid will no longer be part of America, and (b) in 1966 that the poor will have at least some of the privileges in their interactions--both criminal and civil--with the law that the rich have always had.

You can add others: Dred Scott in 1857 as an attempt to turn the entire United States into a slave country, Roe v. Wade in 1973, the forthcoming overturning of the DOMA. The key is that the Supreme Court moves as a political (and moral) entity--and not as a judicial entity developing and extending precedent in an arena of laws set by common-law history and legislation. And, of course, the odd thing is that since Marbury vs. Madison (1803) there is precedent that the Supreme Court can do this.

In all previous Constitutional Moments, the stakes were political, but the stakes were also large, and the stakes were fundamental: about what kind of country we were going to be. Marbury vs. Madison was about whether the Supreme Court was going to be another anti-majoritarian brake on the powers of legislative majorities that were possibly transient. Lochner was about whether freedom of contract--or freedom to exploit--was going to be a core right. SiT was whether social democracy would come smoothly or would require an economic-regulation constitutional amendment, et cetera.

The interesting thing about the Constitutional Moment that now perhaps looms is that it is the first one in which the stakes are purely partisan, and purely political. The probable Supreme Court majorities in the ACA case have shown no inclination to restrict congressional power when it is a matter of exceeding black-letter patent clause authority to provide a payoff to Disney or to prohibit the medical use of marijuana--and will show no inclination to revisit and change those decisions in the future.

Bob Drummond:

The U.S. Supreme Court should uphold a law requiring most Americans to have health insurance if the justices follow legal precedent, according to 19 of 21 constitutional law professors who ventured an opinion on the most-anticipated ruling in years.

Only eight of them predicted the court would do so.

“The precedent makes this a very easy case,” said Christina Whitman, a University of Michigan law professor. “But the oral argument indicated that the more conservative justices are striving to find a way to strike down the mandate.”…

Five of the 21 professors who responded, including Whitman, said the court is likely to strike down the coverage requirement. Underscoring the high stakes and complexity of the debate, eight described the outcome as a toss-up.

During arguments in March, four justices appointed by Republican presidents questioned Congress’s constitutional power to enact the mandate, including Chief Justice John Roberts and Justice Anthony Kennedy, who had been viewed as potential swing votes. A fifth, Justice Clarence Thomas, rarely speaks during courtroom sessions. Questioning by four Democratic appointees was more sympathetic to the provision, a centerpiece of President Barack Obama’s health-care law.

“There was certainly a lot of hostile questioning by the more conservative members of the court,” said Jesse Choper, a law professor at the University of California at Berkeley who described the court as likely to support the mandate. “It’s relatively straightforward -- if they adhere to existing doctrine, it seemed to me they’re likely to uphold it.”

There was broad agreement that the ruling, barely four months before November’s presidential election, has the potential to hurt the Supreme Court’s reputation as an impartial institution.

Eighteen of the 21 professors said the court’s credibility will be damaged if the insurance requirement -- which passed Congress without a single Republican vote -- is ruled unconstitutional by a 5-4 majority of justices appointed by Republican presidents….

Nine of the law professors said if the coverage mandate is invalidated the justices are likely or very likely to throw out several related provisions, such as requiring insurance companies to offer policies without regard to pre-existing medical conditions. Five respondents said the justices will leave those provisions in place; seven called it a toss-up.

Belle Waring Rants at Martin Amis and the 1950s

Martin Amis Moves to Brooklyn, Sounds Like Jerk:

The New York Times sometimes does things just because it can… just to mess with us.

Many of you may have worried that literary Brooklyn wasn’t macho enough…. Let me tell you: Martin Amis just pulled your fat out of the fire, who doggie! He’s mannin’ up the borough right and left! He gestures out the window of his brownstone “Out there, it’s Arcadian,” he said. “It’s prelapsarian. It’s like living in the ’50s.”

You know what I love about the ‘50s? The rigid racial apartheid. That’s the best part, seriously. Oh, shit, no—I messed up—the crippling sexism and hatred of homosexuality. No, no—goddamnit! I’m going back to the rigid racial apartheid thing I said just now. That’s the best. It’s like having 3 favorite flavors of evil! That’s why the ‘50s are so tempting and delicious: just far enough away to see recognizable humans betraying their dearest in the service of ideology, just close enough that you know they knew better…


Stan Collender on How the Republicans Have Confused the Budget Debate

More Evidence The Federal Budget Debate Is Not Rational:

The ever-watchful CG&G alum Bruce Bartlett sent this new You Gov poll constructed by Dartmouth (home to another CG&G alum, Andrew Samwick) Associate Professor Benjamin Valentino…. [Q]uestion #7 ("Which of the following would you support as ways to reduce the nation's budget deficit?")… caught Bruce's and my eye.

  1. More than half (55%) said they would support tax increases on higher-income Americans.

  2. More than a third (35.4%) said they would support "major" cuts in military spending.

  3. Less than a tenth (9.7% said they would support "major" cuts in Social Security.

  4. Less than 12% said they would support "major" cuts in Medicare.

  5. Almost 30% said none of the above are acceptable to them.

In other words: There is significant support in the country for doing something to reduce the deficit -- tax increases on the wealthy -- the GOP in Congress absolutely refuses to do. Only one-third of the country is in favor of the reductions in military spending that are part of the sequester that will occur on January 2. Close to 90% of the country opposes the type of changes in Medicare that are one of the cornerstone's of the Republican budget…. Almost a third of the country is against tax increases and reductions in Social Security,  Medicare and military spending. That leaves only about $750 billion left to deal with a deficit that will exceed $1 trillion this year….

Americans don't want less government, they just want government that costs less. That makes for a debate in Washington that can't possibly be… and obviously isn't… considered rational.

Danny Sullivan Rants on the Microsoft Surface Tablet


When the event was over, I was really looking forward to when my appointment would come around. I had about an hour wait…. [W]e were allowed to go through in groups of about eight…. “Hands-on” was used in plenty of headlines, and that irked me, because I know we weren’t given any real hands-on with the device at all. That is, unless you believe holding an iPad or a Kindle Fire that’s not turned on is “hands-on.” That’s pretty much what it was like with Surface….

[T]he Microsoft guys were rambling on about all the awesome stuff that makes these keyboards work as well — if not better — than a real keyboard…. I wanted to try one of the damn things. You know, like hook it up to a Surface and see it for myself…. I asked one of the Microsoft guys if we could try the keyboard with the Surface he was holding, one that wasn’t on. Nope. Why not? He just kind of shrugged and said he didn’t know….

After seven minutes (according to the time stamps between my photos), we were moved to the next station, where the innards of the Surface were spread-out…. What I did care about was that this station had a keyboard hooked up to a Surface. Of course, the Surface wasn’t actually on. But at least I could get a sense of what it was like to open it….

[A]s the last group of the day, there was absolutely no one behind us. That meant, oh — yeah, there was no reason to rush us other than to keep our time as limited with the Surface — well parts of Surface — as possible.

No matter. At the last table were live, working units. As with the previous tables, this station had two Microsoft guys behind it…. That’s not a journalist holding Surface. It’s one of the Microsoft guys. They’d swing them around with a pretty picture on the front, I guess so we’d go “ooh” and “ahh.” If we were lucky, we were allowed to hold one for a few seconds. But if you tried to do anything with it, bang, it was gone.

Believe me, I know. I tried…. I brought up the Start screen by hitting the Windows button on the front of the tablet, hit Desktop to get to the Windows 8 desktop, did a long press guessing that would bring up the Screen Resolution setting and it did — at which point, the unit was literally jerked out of my hands…. I don’t think Microsoft guy number one quite knew what I was doing (you know, trying to actually use the damn computer the way I’d use a computer), so Microsoft guy number two didn’t catch on that by no means should I be allowed to hold one of these devices again. After more begging — “please can I hold it please please please can I hold it” — I got another maybe 10 seconds to repeat what I did before. That got the unit jerked away again, with a “Nice trick” remark.

Nice trick? No, you know what’s a nice trick? Bringing out devices that no one can actually use. I know they work. I could see that one of the Microsoft guys was all logged into his. But why not let us actually use them, especially when you’ve made us wait from 10 to 60 minutes specifically, as we were told, so we’d all have some close-up time with Surface?…

[T]o me the distinguishing point of Surface is Windows 8 itself, the fact that unlike the iPad, it looks to be a proper desktop computer tucked into a tablet. Can I really take one of these on the road, use it like a tablet, then plug back in at home or elsewhere to external monitors or keyboard to use like a desktop? I see some awesome in that….

Windows 8 is different, unique, seems to offer some compelling features…. At the SXSW conference in March, Microsoft had a non-Surface Windows 8 tablet out in its booth. It was fascinating to see a tablet with a real file system…. It’s a pity Microsoft didn’t have enough faith in Surface to let the journalists there actually have the hands-on that we wanted…

Liveblogging World War II: June 25, 1942

Claude Auchinleck - Wikipedia:

C-in-C Middle East Claude Auchinleck steps in to take direct command of the Eighth Army, having lost confidence in Ritchie's ability to control and direct his forces. Auchinleck discards Ritchie's plan to stand at Mersa Matruh, deciding to fight only a delaying action there, while withdrawing to the more easily defendable position at El Alamein. Here Auchinleck tailored a defence that took advantage of the terrain and the fresh troops at his disposal...

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

Outsourced to Henry Farrell:

A rather remarkable editorial on the Assange-Ecuador story from the Washington Post….

The U.S. “empire” [Correa] professes to despise happens to grant Ecuador (which uses the dollar as its currency) special trade preferences that allow it to export many goods duty-free. A full third of Ecuadoran foreign sales ($10 billion in 2011) go to the United States, supporting some 400,000 jobs in a country of 14 million people. Those preferences come up for renewal by Congress early next year. If Mr. Correa seeks to appoint himself America’s chief Latin American enemy and Julian Assange’s protector between now and then, it’s not hard to imagine the outcome.

So on the one hand, the Washington Post believes that the notion that the US has an ‘empire’ is self-evidently ridiculous. On the other hand, it suggests that if Ecuador is impertinent enough to host an individual whom the US doesn’t like (but would have a hard time pressing charges against), it should and will express its displeasure by crippling Ecuador’s economy and threatening the livelihood of 400,000 of its citizens. These few sentences are rather useful, despite themselves…

If Pundits Like Friedman Were Paying Attention, They Might Notice That Obama Has Proposed Exactly The Sort Of Policies They Endorse

Why oh why can't we have a better press corps--or at least a Tom Friedman-free op-ed page?

Jonathan Cohn:

If Pundits Like Friedman Were Paying Attention, They Might Notice That Obama Has Proposed Exactly The Sort Of Policies They Endorse | The New Republic: I may be a card-carrying member of the liberal blogging guild, but I'm not a Tom Friedman hater.... But Wednesday’s column was one of those that drove even me bonkers. And it’s not because the column as a whole was awful. It actually wove together some disparate ideas into an interesting thesis. The problem was the last paragraph....

That’s when he reprised some familiar advice for President Obama:

If I were President Obama, I’d focus my entire campaign now on an effort to reforge a “grand bargain” with Republicans based on a near-term infrastructure stimulus tied with a Simpson-Bowles long-term fiscal rebalancing. At a minimum, it would show that Obama has a sensible plan to fix the economy—which is what people want most from the president—and many in business would surely support it. We cannot wait until January to do serious policy making again. [italics in original]

What’s wrong with advising Obama to promote a balanced approach of stimulus and Simpson-Bowles style deficit reduction? Nothing at all.... Obama’s employment proposal, the American Jobs Act, calls for a burst of new spending on public works, aid to the states, and targeted tax breaks—precisely the kind of measures that, according to the majority of mainstream economists, would boost growth while bolstering the country’s infrastructure. Obama’s latest budget proposal calls for higher taxes on the wealthy and a variety of cuts to federal spending. According to Bob Greenstein of the Center on Budget and Policy Priorities, that proposal make “significant progress in reducing deficits”—enough to stabilize deficits at less than 3 percent of gross domestic product within a decade.

You can legitimately criticize either proposal. The deficit reduction proposal isn't enough to address the government’s long-term fiscal imbalance; Simpson-Bowles would, in fact, do more. But a major reason Simpson-Bowles would cut more is that it would raise more revenue. And the primary obstacle to raising more revenue right now isn’t Obama and the Democrats. It’s the Republicans....

Obama has taken up the approach Friedman recommends, the Republicans have made clear they want nothing to do with it, so Friedman has decided the party that needs to change its behavior is... Obama....

Obama has been talking up his "balanced approach" to deficit reduction for months. It's a major theme of his campaign. Here, for example, is an excerpt from Obama's most recent public speech, from his joint appearance with Bill Clinton on Tuesday night:

We can afford to rebuild our roads and our bridges and our airports and our broadband lines and high-speed rail, and putting people back to work. We can afford -- in fact, we can't afford not to invest in the science and research that's going to keep us at the cutting-edge.... We’re going to responsibly reduce this deficit. You know -- two Presidents over the last 30 years that have actually reduced the pace of the growth in government spending happen to be on this stage right here. They happen to be the two Democrats....

You can go through the White House website and find literally dozens of excerpts like these. The problem is that nobody seems to have noticed them—a problem that, you might think, a prominent New York Times columnist could help fix.

James Fallows on Why Keeping America's Future Bright Requires the Rapid Electoral Destruction of Today's Republican Party

James Fallows: SCOTUS Update: La Loi, C'est Moi:

[C]onfidence in the very idea that the Roberts majority will approach this as a "normal" legal matter, rather than as one more Bush-v.Gore front in the political wars, grows ever harder to maintain, especially after the latest labor-rights ruling. It is worth reading carefully this lead editorial in yesterday's New York Times. In short, the same five conservative Justices who in their pre-appointment phase had inveighed against "judicial activism" and "legislating from the bench," while promising to live the gospel of judicial "humility" if confirmed, went out of their way, in a ruling written by Samuel Alito, to decree new law contrary to what Congress had ordered and other courts had long approved.

Normally I shy away from apocalyptic readings of the American predicament. We're a big, messy country; we've been through a lot…. But when you look at the sequence from Bush v. Gore, through Citizens United, to what seems to be coming on the health-care front; and you combine it with ongoing efforts in Florida and elsewhere to prevent voting from presumably Democratic blocs; and add that to the simply unprecedented abuse of the filibuster in the years since the Democrats won control of the Senate and then took the White House, you have what we'd identify as a kind of long-term coup if we saw it happening anywhere else.   Liberal democracies like ours depend on rules but also on norms -- on the assumption that you'll go so far, but no further, to advance your political ends. The norms imply some loyalty to the system as a whole that outweighs your immediate partisan interest….

Three items for extra reading.

  1. On how Democrats in general should react if the Court, as seems likely, announces a plainly partisan ruling about the health care law, see Michael Tomasky's argument.

  2. If you want some bitter amusement, look back at Dahlia Lithwick's excellent real-time reports on how Samuel Alito and John Roberts presented themselves, back when they were trying out for their current lifetime roles: "At his hearings, Roberts sounded the notes of "humility" and "modesty" repeatedly. Over and over, he emphasized the need for judicial deference--to precedent, to the other branches of government, and also to his colleagues on the court. He declined to answer dozens more questions than did Alito. But his casting of himself as a modest cog in a vast and complicated machine afforded real comfort even to those of us concerned about his substantive views. At first blush, Alito's approach appears simply to be a different flavor of judicial modesty: Where Roberts spoke repeatedly of deference to other institutions, Alito persistently defers to the legal process itself. He tells us, over and over again, that he approaches cases with an "open mind." He says he would start analyzing any issue by closely scrutinizing the relevant statute. He insists--time and again--that he hasn't yet fully studied the issue at hand and cannot therefore offer an opinion." There's a lot more, and all in the same mode that in retrospect was quite plainly 100% cynical.

  3. Reflecting the change in norms leading to a change in reality brought by routine abuse of the filibuster, a Congressional reporter tells us that a recent proposal failed in the Senate, because "Sixty votes were needed to pass." Of course we students of government know that this answer is incomplete. These days, the actual number of votes needed is 60 -- or five.

Why Oh Why Can't We Have a Better Press Corps?: Yet Another David Brooks/New York Times Edition

It must be humiliating for everybody working on the New York Times to share space with Brooks.

Robert Wright:

David Brooks vs. Twitter: You could have spent pretty much all day today on Twitter…. My favorite tweet--and there were plenty of contenders for that title--was from the journalist Brendan Koerner (@brendankoerner), who summarized Brooks's point as:

The main problem with America is that the little people don't tremble in front of fearsome idols.

Brooks's column was about how recent monuments--the Vietnam Memorial, the Martin Luther King monument, etc.--don't hold a candle to the monuments of yore: Lincoln, Jefferson, etc. And, since this was a David Brooks column, the demise of monuments had to reflect an even larger trend: the demise of respect for authority….

[The column] did exude a certain impatience with people who don't fall in line. Brooks says he's not sure America has a leadership problem, but "it certainly has a followership problem." And as for those of us who say we'll be good followers as soon as you can show us some leaders who deserve to be followed: "To have good leaders you have to have good followers -- able to recognize just authority, admire it, be grateful for it and emulate it."…

I'll leave you with one more Brooks passage, in which he criticizes those who "reject hierarchies and leaders because they don't believe in the concepts," those who think "the whole world should be like the Internet -- a disbursed [sic] semianarchy in which authority is suspect and each individual is king."

Yeah, we wouldn't want the Brendan Koerners of the world to start getting uppity.

Robert J. Gordon: Is Modern Macro or 1978‐era Macro More Relevant to the Understanding of the Current Economic Crisis?

Robert J. Gordon: Is Modern Macro or 1978‐era Macro More Relevant to the Understanding of the Current Economic Crisis?:

This paper differs from other recent critiques of “modern macro” based on DSGE models. It goes beyond criticizing these models for their assumptions of complete and efficient markets by proposing an alternative macroeconomic paradigm that is more suitable for tracing the links between financial bubbles and the commodity and labor markets of the real economy.

The paper provides a fundamental critique of DSGE and the related core assumptions of modern business cycle macroeconomics. By attempting to combine sticky Calvo‐like prices in a theoretical setting that otherwise assumes that markets clear, DSGE macro becomes tangled in a web of contradictions. Once prices are sticky, markets fail to clear. Once markets fail to clear, workers are not moving back and forth on their voluntary labor supply curves, so the elasticity of such curves is irrelevant. Once markets fail to clear, firms are not sliding back and forth on their labor demand curves, and so it is irrelevant whether the price‐cost markup (i.e., slope of the labor demand curve) is negative or positive.

The paper resurrects “1978‐era” macroeconomics that combines non‐market‐clearing aggregate demand based on incomplete price adjustment, together with a supply‐side invented in the mid‐1970s that recognizes the co‐existence of flexible auction‐market prices for commodities like oil and sticky prices for the remaining non‐oil economy. As combined in 1978‐era theories, empirical work, and pioneering intermediate macro textbooks, this merger of demand and supply resulted in a well‐articulated dynamic aggregate demand‐supply model that has stood the test of time in explaining both the multiplicity of links between the financial and real economies, as well as why inflation and unemployment can be both negatively and positively correlated.

Along the way, the paper goes beyond most recent accounts of the worldwide economic crisis by pointing out numerous similarities between the leverage cycles of 1927‐29 and 2003‐06, particularly parallel regulatory failings in both episodes, and it links tightly the empirical lack of realism in the demand and supply sides of modern DSGE models with the empirical reality that has long been built into the 1978‐era paradigm resurrected here.

Liveblogging World War II: June 23, 1942

Viktor Brack writes to Heinrich Himmler:

Brigadefuehrer Globocnik pressed the view that the whole action against the Jews should be carried out as quickly as it is in any way possible, so that we will not some day be stuck in the middle should any kind of difficulty make it necessary to stop the action. You yourself, Mr. Reichsfuehrer, expressed the view to me at an earlier time that one must work as fast as possible, if only for reasons of concealment….

According to my impression there are at least 2-3 million men and women well fit for work among the approx. 10 million European Jews. In consideration of the exceptional difficulties posed for us by the question of labor, I am of the opinion that these 2-3 million should in any case be taken out and kept alive.

Of course this can only be done if they are in the same time rendered incapable of reproduction. I reported to you about a year ago that persons under my instruction have completed the necessary experiments for this purpose. I wish to bring up these facts again. The type of sterilization which is normally carried out on persons with genetic disease is out of the question in this case, as it takes too much time and is expensive.

Castration by means of X-rays, however, is not only relatively cheap, but can be carried out on many thousands in a very short time. I believe that it has become unimportant at the present time whether those affected will then in the course of a few weeks or months realize by the effects that they are castrated.

In the event, Mr. Reichsfuehrer, that you decide to choose these means in the interest of maintaining labor-material, Reichsleiter Bouhler will be ready to provide the doctors and other personnel needed to carry out this work. He also instructed me to inform you that I should then order the required equipment as quickly as possible.

Heil Hitler!



A Note from Maury Obstfeld on Kindleberger, Hegemony, and Speculation

In my inbox, from Maury:

Nice piece...

I would just underscore 2 points:

Hegemony means deep pockets, and a domestic politics capable of internalizing the benefits from systemic stability so that the hegemon is in a position to provide fiscal resources in support of the system. The euro zone has a centralized monetary authority, but treaty provisions have intentionally hobbled it from playing a fiscal support role (including through seigniorage).

Second, modern macro as we knew it before 2007 ignored the financial plumbing at the heart of the crisis. But pre-crisis finance papers such as Shleifer-Vishny's "Limits of Arbitrage" provide the most convincing response to Friedman['s claims that destabilizing speculation is impossible] ... if only they had been integrated into macro models...

Alan Taylor adds:

We are on the brink of repeating 1931 with a banking/financial sector that is N times larger relative to advanced country GDP, where N is at least 2 in many countries and even bigger in some key countries. Until sometime in the last year I used to console myself that this was compensated for by the fact that our macro policy making system was M times more flexible/intelligent than what we had back then with M>>N.

Leadership Secrets of Nazi General Friedrich Paulus

Friedrich Paulus to the corps commanders of VI Army, June 1942:

Recently numbers of reports have come to my attention and that of the higher leadership in which division commanders have described the condition of their divisions with extreme pessimism. This I cannot tolerate.

The personnel and material deficiencies afflicting the divisions are well known to the higher leadership. Nevertheless, the higher leadership is determined to carry out its intentions in the eastern theater of war to the full. Therefore it is up to us to get the most out of the troops in their present condition.

I request that you exert influence on the division commanders in this sense.

Can anybody imagine a worse commander than Friedrich Paulus? To announce before the start of the campaign that you do not want to hear about reality…

Department of "Huh!?": Oxford Macroeconomics Curriculum Department

Simon Wren-Lewis writes:

mainly macro: Teaching macroeconomics after the crisis: I was asked the other day how macroeconomics teaching at Oxford had changed as a result of the Great Recession of 2008-9. My answer, which was not much…. John Vickers, who gives the first year macro lectures, has added material on bank runs, leverage and banking reform…. My own second year undergraduate lectures include a wealth of topical examples to illustrate basic theory…. Martin Ellison now gives a couple of weeks of lectures on recent developments in modelling financial frictions as part of the core post-grad macro course.

So why was my answer not much? Because although the crisis has added material, nothing has really been thrown away as a consequence of what has happened. We have not, either individually or collectively, decided that the Great Recession implies that some chunk of what we used to teach is clearly wrong and should be jettisoned as a result. Speaking for myself and my second year undergraduate lectures, quite the opposite is the case. As Paul Krugman has pointed out many times, recent developments have in many ways been a vindication of the basic Keynesian model that lies at the heart of any undergraduate macro course.

Indeed, I would go even further. The mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis. As a result, I teach this stuff with renewed vigour and determination….

I also teach the first part of the core macro for our MPhil (Oxford’s two year masters) course, and you might think that the basic Ramsey model which is covered there has less relevance to recent events. To some extent this is true: I’ve noted how the standard intertemporal consumption model is not going to explain trends in savings in the UK or US over the last few decades, and my colleague John Muellbauer has written extensively on this. On the other hand, I find the Ramsey model and its OLG variant very useful in discussing issues around the control of government debt.

So while the Great Recession has clearly shown that macroeconomics is incomplete in important respects, it has not shown that what we thought we knew is all wrong.  In many respects it has shown it is exactly right.

However I think I should add one important rider to this. Anyone wanting to understand what has happened over the last five years would be better off reading an undergraduate macro textbook like Mankiw than a masters textbook like Romer…. I am not suggesting anything is wrong with what we currently teach. Rather that the inevitable focus at the masters level on the recent macroeconomic literature leaves no place for the history of macroeconomic thought, and that is a problem…

When I read this, my immediate reaction is that Oxford's masters program badly needs to replace its "current macroeconomic issues" course with "monetary and financial history" and "history of macroeconomic thought" courses…

Department of "Huh?!": Who Was Noam Scheiber Talking to Department

Noam Scheiber:

The Lousy Jobs Number & Obama's Original Sin: Which, in the end, brings us back to the original sin of the Obama administration. As I report in my recent book on Obama and the economy, the administration’s top economists knew the amount of stimulus they were proposing was much too small to solve the unemployment problem within a few years. One reason they felt okay about this relates to a concept called “escape velocity,” which held that you didn’t need the full amount of stimulus your math suggested (something approaching $2 trillion). If you just provided an initial boost, the economy could take care of the rest on its own: Consumers would start spending, which would raise GDP, lower unemployment, and lead to further spending. And the whole process would accelerate as people gained confidence, leading to a self-sustaining recovery…

I don't know anybody who had lived through the post-1991 or post-2001 recoveries, and thought about the issues, who had any confidence in 2009 that the U.S. economy would experience a V-shaped recovery. Going small with the recovery package and reappointing Bernanke to head the central bank was a gamble--and was seen as a gamble at the time by everybody I could talk to…

Let Me Offend James Fallows by Saying That for 36 Months Bernanke and Geithner Have Been Acting Like Boiling Frogs

Jared Bernstein has a graph:

Microsoft Excel 7

You would think that that degree of deterioration in the growth forecast would cause somebody to press the big red button, no?

The problem is that when short-term safe nominal interest rates are zero, boosting the monetary base by buying assets that have become very close substitutes for cash does next to nothing, and you have to resort to other tools….

Microsoft Excel 8

Microsoft Excel 9

Sam Brittan on the 45 Degree Turn of the Cameron-Osborne-Clegg British Government

The right thing to do, of course, is for Nick Clegg to end this farce immediately…

Sam Brittan is unfair to bookkeepers:

Enough of the bookkeeping, Mr Osborne: Does the plan to boost credit for British business, outlined by chancellor George Osborne and Bank of England governor Mervyn King in their Mansion House addresses, amount to a U-turn? Let us say it marks some change, and call it a 45-degree one. We should at least be pleased that the British authorities have at last recognised the need for a stimulus over and above minor so-called supply-side reforms. The more important questions, though, are whether these changes are in the right direction and whether they are adequate. The answer to the first question is “yes”, and to the second, “probably not”….

Instead of risking the Budget deficit-reduction programme by boosting public spending and cutting taxes, the government is trying to encourage the private sector to borrow on special terms. The package is said to be worth £100bn.... Why is it better to encourage others to undertake investment projects rather than finance them directly? It is basically so that Mr Osborne can say that he has not added to some crude measure of the Budget deficit, leaving the chicken to come home to roost in a later parliament. I had intended to call this article “The accountancy approach to policy”, but decided that this might be unfair to accountants and preferred to call it the bookkeeping approach.

A permanent secretary under an earlier Labour administration once asked me what I thought were the limits to permissible Budget deficits. My answer was: “Up to the point where the gains to output and employment are offset by the inflationary effects of a fall in the exchange rate.”… [A]part from the peripheral members of the eurozone, most industrial countries are nowhere near having to face these dilemmas. Interest rates, both long and short (which are of course relevant to exchange rate prospects), are close to record lows both in the US and the UK; indeed, they are sometimes negative in real terms.

RIP Anna J. Schwartz

Anna Schwartz was probably the greatest monetarist economist of the second half of the twentieth century.

Milton Friedman:

Anna did all the work, and I got most of the recognition...

UPDATE: Methinks Michael Bordo is misquoted in the New York Times obituary. Let me fix it:

NY Times: After Even before Mr. Friedman’s death in 2006, Mrs. Schwartz “became the standard-bearer” of Friedman monetarism, said Michael D. Bordo, a professor of economics at Rutgers University and for decades a Schwartz collaborator himself.

Though “not a deep theorist,” "A superb analyst and empiricist," he said, Mrs. Schwartz was “probably among the very best woman monetarist economist*s* of the 20th century.”

Liveblogging World War II: June 22, 1942

The Nazis prepare for their offensive in southern Russia:

[T]he OKH Organization Branch made a study of Army Group South's readiness for the summer offensive in terms of its basic units, the divisions. The study disclosed, in the first place, that whereas formerly all divisions of one type, say infantry, could be assumed to be nearly identical in quality, that was no longer true. The divisions for BLAU would fall from the outset into three categories.

In the first were fifteen infantry and six panzer and motorized divisions which were either new or fully rebuilt behind the front. They would be at full allotted strength and would have had time to let their experienced troops rest and to break in the replacements.

The second category, consisting of seventeen infantry and ten panzer and motorized divisions, would be the same as the first, but the divisions would be rebuilt in the front, and there would be no time to rest.

In the third category were seventeen infantry divisions, a good quarter of the total number, that would neither be rested nor fully rebuilt. They would be at "approximately" full strength in personnel and material, but they would be short on officers and noncommissioned officers, and they would have to depend on the output of the repair shops for equipment.

In all three categories, some corners had been cut. The infantry divisions' supply trains would be horse-drawn, and every division would have to take about a thousand of the so-called young troops, eighteen- and nineteen-year olds who had no more than eight weeks' training. In the panzer divisions, the rifle battalions would be reduced from five to four companies. The panzer and motorized divisions would also have fewer tracked personnel-carrying vehicles. They would reach about 80 percent of full mobility, but about 20 percent of that would have to be attained by using trucks and, in consequence, would entail some loss of cross-country capability. Since there was nothing in reserve, all equipment would have to come from current output, which meant that the schedules for rebuilding could not be accelerated, and unanticipated losses in preliminary operations could not be replaced.

Army Group South looked at the same divisions in terms of probable performance and concluded:

Owing to diverse composition, partial lack of battle experience and gaps in their outfitting, the units available for the summer operation in 1942 will not have the combat effectiveness that could be taken for granted at the beginning of the campaign in the East. The mobile units, too, will not have the flexibility, the endurance, or the penetrating power they had a year ago. The commands will have to be aware of this, and in assigning missions and setting objectives, they will have to take into account the composition and battle-worthiness of the individual divisions. The attack elements will have to be put together with painstaking care.

The question was how serious the flaws would be. Army Group South saw reason for concern. Others, closer to the front, were downright worried, as the following letter from General Paulus, commander of the Sixth Army, to his corps commanders indicates:

Recently numbers of reports have come to my attention and that of the higher leadership in which division commanders have described the condition of their divisions with extreme pessimism. This I cannot tolerate.

The personnel and material deficiencies afflicting the divisions are well known to the higher leadership. Nevertheless, the higher leadership is determined to carry out its intentions in the eastern theater of war to the full. Therefore it is up to us to get the most out of the troops in their present condition.

I request that you exert influence on the division commanders in this sense.

CBO’s Long-Term Budget Outlook Says: Our Future Entitlement Spending Is Affordable

Jared Bernstein: CBO’s Long-Term Budget Outlook: What It’s Telling Us:

While chatting with a colleague today about the new CBO long-term budget outlook, we agreed there wasn’t much new there, but then he said something that stuck with me:

Of course, it shows that we can afford the entitlements.

To hear everyone from the WaPo editorial page to Bowles/Simpson to all the R’s and many of the D’s, there’s an entitlement crunch, crisis, death spiral, or whatever…waiting for us out there in the future if we fail to muster the steely-eyed courage to face it.... cutting benefits, privatizing, voucherizing, raising the retirement age, means testing…basically, fixing them by breaking them....

Under that [current law] scenario, which in fact happens to be current law (meaning all the Bush tax cuts expire, for example), debt stabilizes as a share of the economy in a few years and then starts down a slow glide path.  And Medicare, Medicaid, and Social Security as we know them today are all in that bottom line.... [T]axes go up and spending is restrained.... Some of the assumptions—like we allow Medicare payments to doctors to fall sharply or all the tax cuts permanently expire next Jan—are wholly unrealistic.  But there are unrealistic assumptions under the other scenario too.... [T]here’s no reason why something like that bottom line’s baseline couldn’t prevail.... [A]side from dysfunctional politics feeding a largely misleading public debate, we could do this.  If we, as a nation, decide that we want to achieve fiscal sustainability and preserve the entitlement programs, along with gov’t’s other critical functions, it is well within our means to do so.

So sayeth the CBO.

So say we all!

The Lost Soul of the Cato Institute

John Mashey on the Cato Institute:

The Battle for the Cato Institute: Crane was quite happy taking money year after year from the tobacco companies, who stay in business addicting children, of whom about half will eventually die of smoking-related diseases. Very few people start smoking after age 18, so the only thing that really counts is getting kids to smoke.

1991-2001: CATO was 3rd biggest think tank recipient of Philip Morris funds…

Crane thanks RJ Reynolds, who was then running Joe Camel, the most successful campaign to get more kids to smoke earlier. But RJR's money was good:

We are delighted to have RJ Reynolds as a significant corporate supporter of the Institute and look forward to working with you in the months and years ahead…. Let's get together for lunch on one of your upcoming trips to Washington.


It is our pleasure to be able to support the work that is being done by the Cato Institute…

I Picked a Bad Day to Give Up Licking Toads...

Microsoft Excel 5

Microsoft Excel 6

Six basis points off the 10-Yr Treasury yield, -1.5% off equity values. The S&P is where it was a year ago. Nominal earnings are 12% above what they were a year ago and 6.7% above what they were six years ago. 10-Yr Treasuries have half the nominal yield.

I really, really, really want somebody to give me a coherent and credible theory of what Ben Bernanke and Tim Geithner think they have been doing over the past four years.

Answers to Five Easy Euroquestions...

(1) Q: Who Should Eat the Losses from the Existing Greek Debt?

A: The German banks that made the loans to Greek politicians who did not have authority to impose taxes high enough to repay the debt--and the German government that backs the banks--should eat the losses from the existing Greek debt.

(2) Q: How Should Greece Balance Its Taxes and Its Government Spending Going Forward?

A: That's nobody's business but the Greeks'. It would, however, be nice if they would stop spending money like water in an attempt to maintain "strategic parity" vis-a-vis Turkey in the Aegean.

(3) Q: How Should Greece Balance Its Spending on Imports and Its Exports Going Forward?

A: Borrowing to cover the gap between imports and exports that exists at current exchange rates and price and wage levels is not going to happen, so Greece has a choice between (a) deep prolonged depression to make Greeks too poor to afford imports, (b) Grexit, devaluation, and a subsequent export boom, and (c ) Germans opening up the monetary spigots to produce higher inflation in northern Europe and meanwhile giving Greece an additional fortune to keep the pain in Greece low enough for adjustment to take place within the Eurozone framework.

(4) What Will Happen If Greece Exits the Euro?

A: Germany will then have a choice between (d) a Great Depression in Europe, and (e) a much bigger inflation in Europe and a much larger fortune given away to cushion adjustment than would be needed to make (c ) work.

(5) We Will Then See (c ), Right? Germans Opening Up the Monetary Spigots to Produce Higher Inflation in Northern Europe and Meanwhile Giving Greece an Additional Fortune to Keep the Pain Low?

A: Ha!!

Akhil Reed Amar Looks at the Prospect of Having Wasted His Life...

Akhil Reed Amar:

I’ve only mispredicted one big Supreme Court case in the last 20  years. That was Bush v. Gore. And I was able to internalize that by saying they only had a few minutes to think about it and they leapt to the wrong conclusion. If they decide this by 5-4, then yes, it’s disheartening to me, because my life was a fraud. Here I was, in my silly little office, thinking law mattered, and it really didn’t. What mattered was politics, money, party, and party loyalty…

Fred Rodell tried to warn Akhil. He should have listened.

There has been one and only one judge who followed the law when he believed it commanded him to do things that were (i) bad policy, (ii) bad ethics, and (iii) disadvantaged his political friends.

The Changing Mean Reversion of Unemployment in the United States

Microsoft Excel 2

Back in 1948-1980, you could expect 47% of a rise in the unemployment rate to be recaptured within a year: if unemployment went up by 1% point, you could expect the economy to suffer 2.12% point-years of cumulative unemployment as a result. Between 1980 and 1996 that coefficient dropped from 47% to 30%: in that period if unemployment went up by 1% point, you could expect the economy to suffer 3.33% point-years of cumulative unemployment as a result. Since 1996 the unemployment-rate mean-reversion coefficient has been only 12%: now if unemployment goes up by 1% point, you expect the economy to suffer 8.33% point-years of cumulative unemployment as a result.

This is an astonishing and stunning difference--albeit one that is just at the edge of statistical significance. And I have not seen an explanation of it nailed down...

Smackdowns!: Ta-Nehisi Coates Smacks Down the Astonishingly Deceptive Josh Trevino on Twitter...


tanehisi: For you to misquote me, you would have had to actually make an attempt to quote. You couldn't even do that. @jstrevino

Dean Baker smacks down the astonishingly ignorant Casey Mulligan on his weblog:

Microsoft and Apple: The History Casey Mulligan Doesn't Know: Casey Mulligan used his NYT blogpost this week to tell readers:

there is no such thing as a monopoly in the computer industry….

[T]here is some history that Mulligan apparently does not know. Back in 1997 Apple was in the intensive care ward with its survival very much in doubt…. The big question facing Apple was whether Microsoft would continue to design its office suite to be compatible with Apple computers. After all, Apple had a relatively small share of the market at the time, why should Microsoft go through the effort and expense of making Word, Excel and the rest compatible with Apple's silly system. Here's what the NYT had to say at the time about Microsoft's decision to throw $150 million Apple's way and to continue to produce Apple compatible software:

Odd or not, the bailout is good for both. Apple users are assured that their beloved company gets desperately needed cash and that Microsoft will continue to supply them up-to-date word processing and other applications software. Many would-be Apple buyers had been turning away out of fear that as Apple's market share shriveled, so would the programs made available for use on Apple machines. The bailout is also good for Microsoft because it preserves a demand for its software programs designed to be compatible with Apple machines. But some suspect a more Machiavellian purpose by Microsoft as well. Microsoft can now fend off antitrust charges by pointing out that Apple's continued existence will prevent Microsoft from acting as a monopolist. If Apple dies, Microsoft will appear nakedly monopolistic, the only major producer of operating systems for personal computers….

The implication of the NYT's assessment is that the threat of anti-trust litigation forced Microsoft to be less predatory even to the point of working to keep a competitor alive. In this case, the competitor in question turned out to be an enormously innovative company that now produces great products that consumers value immensely.

That story makes the government's anti-trust case against Microsoft look pretty damn good…

And the Virginia Beach Virginian-Pilot smacks down the astonishingly incompetent UVA Rector Helen Dragas in print:

U.Va.'s rector should resign: Helen Dragas, rector of the University of Virginia, has failed repeatedly to explain why President Teresa Sullivan was forced out a week ago. Dragas has, however, built a convincing case for another departure - her own. The Virginia Beach developer and 1984 U.Va. grad was the architect of Sullivan's ouster. She is also the board's spokeswoman, a strange post for someone who has failed so utterly to communicate with everyone. The resulting chaos has caused substantial damage to the commonwealth's premier institution of higher education….

Dragas doubled down on her initial generalities and platitudes. Worse, her efforts to strike a conciliatory tone devolved into parody…. Dragas refused to address what happened or how. She was silent on reports that at least three board members knew nothing of efforts to remove Sullivan…. She declined to comment after one board member publicly opposed a motion to promote Carl Zeithaml, the dean of the McIntire School of Commerce, as interim president, effective Aug. 16. She failed to address the resignation of Peter Kiernan, chairman of the Darden School Foundation's board of trustees, just days after he sent an email saying he had worked for weeks with Dragas, at the behest of two "important Virginia alums," on a new presidential search.

Sullivan addressed board members in private Monday. Her remarks, made public afterward, suggested she was unwilling to go along with demands for "corporate-style, top-down leadership." She talked about the culture of U.Va., and the need to protect and nurture it. She highlighted the administrative changes she had made, which provided a foundation for more significant change to come. It was a comprehensive defense of her tenure, and the contrast with the inadequate indictment by the board could not have been clearer.

The Board of Visitors has the legal right to hire and fire the president. But it has a responsibility to explain…. Dragas and other board members have failed to even try. The result is tumult, the likes of which U.Va. has never seen. The rector has shown disrespect for the university's shareholders and utter disregard for the value of transparent governance. She has shredded her credibility…. In the best interests of herself, the governor and the university she professes to love, Dragas and her collaborators should resign….

A tremendous amount of work must be done at U.Va. to quell the suspicion, the anger and the distrust that have roiled the campus. That work cannot be done if the person responsible for it remains there.

"In 2005 I would have given you 10,000 to 1 odds that future historians would regard Ben Bernanke as a better central banker than G. William Miller"

So a learned colleague emails. He continues:

I still think Bernanke has a 75% chance of coming out on top in the eyes of historians.

But if I had put $1000 down in 2005 on what I then regarded as a next-to-sure thing, I would now have to report a mark-to-market loss of $2.5 million...

I see this much more as a statement about how these jobs are harder than they look, and you never know how somebody will do in them until they are tested--that, as Robert Solow likes to quote Damon Runyon: "there was nothing between human beings that is more than 3-to-one".

And I do find myself now having much more sympathy for G. William Miller than I ever thought I would...

Bloomberg TV Hong Kong

Talking Points:

  1. The Fed took less action than expected: interest rates are now higher and stock prices lower than people at the end of last week expected them to be now.

  2. Over the past year--the ten-year bond rate is half what it was at the end of last July. Back then we said that the long bond was pricing in three more years of liquidity trap depression followed by a rapid normalization of interest rates. Now what do we say? That the bond market is pricing in seven more years of liquidity trap and near zero federal funds rates?

  3. An astonishing shift last August in market expectations about future inflation rates, interest rates, and output levels has been met with very marginal changes in policy on the part of the Federal Reserve.

  4. It is probably the case that the desired tool would be fiscal policy--or banking policy, i.e. large-scale mortgage refinancings. But we are not going to get that, are we?

  5. If further monetary steps are not necessary now, when would they be?

  6. There has been no recovery in employment in the past 33 months: if a flat-lining employment-to-population ratio for 33 months does not trigger more aggressive action on the part of the Fed, what would?

Hoisted from the Archives: In Praise of Volumes 1 and 2 of Robert Skidelsky's Biography of John Maynard Keynes

Robert Skidelsky's Biography of John Maynard Keynes: Archive Entry From Brad DeLong's Webjournal; August 06, 2004: Robert Skidelsky (1983), John Maynard Keynes: Hopes Betrayed (London: Macmillan: 033357379x). Robert Skidelsky (1992), John Maynard Keynes: The Economist as Saviour (London: Macmillan: 0333584996). Sitting next to Lord Skidelsky in the Sala Maggioranza of the Italian Treasury (after they turned off the air conditioning, I took off my tie when he took off his jacket) impelled me to reread his Keynes biography. And, after rereading, I find that I cannot improve on what I wrote about them three years ago: my thoughts then were totally enthusiastic and totally adulatory. And my thoughts are the same now. (I haven't yet reread volume three, about which I am less enthusiastic). In his first two volumes, Skidelsky gives us John Maynard Keynes's life, in all its dimensions. And he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important.

The place to start is with Skidelsky's observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted.

Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician--trying to advance the chances of Britain's Liberal Party between the wars--but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the "Bloomsbury Group" of artists and intellectuals that did so much to shape interwar culture.

For the litterati it is Keynes of Bloomsbury--his loves, enthusiasms, acts of patronage, and wit--who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world--whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith's "system of natural liberty" but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.

How did this man come to be?

That is the question answered by the first volume of Skidelsky's biography: Hopes Betrayed. Hopes Betrayed is a bildungsroman, a story of growth and development. Skidelsky writes the best narrative interpretation of growing up as a smart and privileged children of academics in late Victorian Britain than I can ever conceive of being written. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain's upper class at Eton, and thus became part of "an intellectual elite thrust into the heart of a social elite" (HB, page 77). An entire cohort of Britain's upper class thus learned before they were twenty that Keynes could be very smart, very witty, very entertaining--and very helpful if there was a hard problem to be thought through or something to be done.

Skidelsky then writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete common among the students of the philosopher G.E. Moore. As Keynes put it in 1938, he believed that one should arrange one's life to achieve the most good, where "good" was nothing more or less than

states of mind... states of mind... not associated with action or achievement or with consequences [but]... timeless, passionate states of contemplation and communion…. a beloved person, beauty, and truth.

Thus Keynes left Cambridge convinced that "one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first..." (HB, page 141).

This embrace of aestheticism was and remained the key to the "Bloomsbury" avatar of John Maynard Keynes, for whom the lodestars were to "be in love with one’s friends, with beauty, with knowledge" and who was and remained an enthusiastic member of the Bloomsbury group, sharing "its intellectual values and its artistic enthusiasms," and participating "in its wild fancy dress parties" (HB, page 234). Keynes was a man who could celebrate this appointment to the British Treasury with

…a party for seventeen… at the Café Royale.... Afterwards they went back to 46 Gordon Square for Clive [Bell]’s and Vanessa [Bell, the sister of Virgina Woolf]’s party. There they listened to a Mozart trio... and went upstairs for the last scene of a Racine play performed by three puppets made by Duncan [Grant], with words spoken by the weird-voiced Stracheys. ‘The evening ended with Gerald Shove enthroned in the center of the room, crowned with roses...’ (HB, page 300).

But at the same time Keynes's pursuit of knowledge was shading over into politics and policy as well. For Keynes it was never enough to pursue knowledge in order to achieve a good state of mind, one had also to be sure to cause the knowledge to be applied to make the world a better place. And how one could act in politics and policy was greatly constrained by the limits of our knowledge. One argument from Edmund Burke, especially resonated with Keynes. As he wrote:

Burke ever held, and held rightly, that it can seldom be right... to sacrifice a present benefit for a doubtful advantage in the future.... It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear... We can never know enough to make the chance worth taking... (ES, page 62).

Keynes's industry and intelligence thus made him a trusted and effective member of Britain's intellectual and administrative elite well before the eve of World War I. Sir Edwin Montagu, especially, pushed him forward both before and during the war. Before the war Keynes decided that he wanted the life of an academic rather than of an administrator: Cambridge rather than the India Office or the Treasury. Yet he kept a strong presence in both worlds, writing his practical and policy-oriented book Indian Currency and Finance in spare moments as he worked on the deeper and philosophical project that was his Treatise on Probability.

Thus it was no surprise that Keynes found an important and powerful job at the Treasury during the national emergency that was World War I. How do you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power? These are all deep and complicated questions. These are what Keynes worked on. But as the death toll from World War I mounted up toward ten million, Keynes became angrier and angrier at this monstrous botch of human lives and social energy that was World War I--and angrier and angrier at the politicians who could see no way forward other than mixing more blood with mud at Paaschendale.

Keynes's friend David Garnett wrote him a letter condemning his work for the government, calling Keynes

an intelligence they need in their extremity.... A genie taken incautiously out... by savages to serve them faithfully for their savage ends, and then--back you go into the bottle.... Oh... our savages are better than other savages.... But don’t believe in the profane abomination.

The interesting thing was that Keynes "agreed that there was a great deal of truth in what I had said..." (HB, page 321). And then the whole project of post-World War I reconstruction went wrong at Versailles--when the new German government was treated as a foe rather than a democratic ally, when the object seemed to be to extract as much in plunder and reparations from Germany as possible ("until the pips squeak").

Skidelsky quotes South African politician Jan Christian Smuts on the atmosphere at Versailles:

Poor Keynes often sits with me at night after a good dinner and we rail against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense... (HB, page 373).

Under this unbearable pressure, Keynes exploded. Keynes exploded with a book called The Economic Consequences of the Peace. It condemned the political maneuvering of Versailles and the treaty that resulted in the strongest possible terms. He excoriated short-sighted politicians who were interested in victory rather than peace. He outlined his alternative proposals for peace: "German damages limited to £2000m; cancellation of inter-Ally debts; creation of a European free trade area… an international loan to stabilize the exchanges...."

And he prophesied doom--if the treaty were carried out and Germany kept poor for a generation:

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy... the civilization and progress of our generation... (HB, page 391).

The Economic Consequences of the Peace made Keynes famous. His horror at the terms of the peace treaty won him friends like Felix Frankfurter, a powerful molder of opinion in the United States. In his book, propelled by "passion and despair," Keynes "spoke like an angel with the knowledge of an expert" and showed an extraordinary mastery not just of economics but also of the words that were needed to make economics persuasive. Before The Economic Consequences of the Peace Keynes was primarily an academic (with some government experience) with a lot of influential literary friends. Afterwards he was a celebrity. He was not only the private Keynes: "the Cambridge don selling economics by the hour, the lover of clever, attractive, unworldly young men, the intimate of Bloomsbury." He was also--because of what he had done with his pen after Versailles--"the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble... conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity..." (HB, page 400).

So after World War I Keynes used what power he had to--don't laugh--try to restore civilization. In Skidelsky's--powerful and I believe correct--interpretation, Keynes before 1914 "believed (against much evidence, to be sure) that a new age of reason had dawned. The brutality of the closure applied in 1914 helps explain Keynes’s reading of the interwar years, and the nature of his mature efforts... to restore the expectation of stability and progress in a world cut adrift from its nineteenth-century moorings..." (ES, page xv).

Skidelsky's narrative of the mature Keynes--Keynes in the 1920s--is far from being a one-note recounting of the brave but losing struggle against the approaching Great Depression, against political insanity, and against the Nazi Party's attempted revenge for the German defeat in World War I. Bloomsbury takes up a good chunk of the narrative. Skidelsky's book includes love letters from Keynes to his future wife Lydia Lopokova:

In my bath today I considered your virtues—how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages—a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises? (page 181).

But when he tries to paint a picture of what it was like to be a member of the Bloomsbury culture group in the 1920s, even Skidelsky cannot quite reach the full range. So he resorts to the imaginings of one of the characters of novelist Anthony Powell, who thinks that Bloomsbury must have been "...every house stuffed with Moderns from cellar to garret. High-pitched voices adumbrating absolute values, rational statse of mind, intellectual integrity, civilized personal relationships, significant form…. The Fitzroy Street Barbera is uncorked. 'Le Sacre du Printemps' turned on, a hand slides up a leg.... All are at one now, values and lovers" (page 11).

Virginia Woolf had a different, less happy and romantic view. She wrote of her "vivid sight of Maynard by lamplight--like a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginate. One of those visions that come from a chance attitude, lost as soon as he turned his head. I suppose though it illustrates something I feel about him. He’s read neither of my books..." (page 15). There is a clear lesson: if your circle includes Nobel Prize-winnning caliber novelists with wicked pens, read their books and praise them as often as possible.

The bulk of this second volume--The Economist as Saviour--is, however, devoted to Keynes's political and intellectual struggle for stable money and full employment, and against deflation, overvalued exchange rates, and the sacrifice of the happiness of today's populations in the hopes of regaining the imagined benefits of the classical gold standard at some time in the distant future. Keynes spent more than a decade arguing against central bankers who "think it more important to raise the dollar exchange a few points than to encourage flagging trade." He tried to prevent Britain's return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain's Treasury Minister, Winston Churchill, was willing

… the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages. This policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts.... Deflation does not reduce wages 'automatically.' It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a Depression! (page 203).

But in the end Keynes failed in the 1920s. He was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. He failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen--though strong--was not strong enough. His allies were too few. And among central bankers and cabinet ministers, understanding of the situation in which they were embedded was rare.

So the 1930s saw a change of emphasis. Fewer short polemical articles were written. Instead, Keynes concentrated his attention on writing a book, a book which he thought

…will largely revolutionize--not, I suppose, at once but in the course of the next ten years--the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change... (pages 520-521).

And he was right.

His General Theory of Employment, Interest, and Money did change the world. It ends with a bold claim for the importance of ideas rather than interests that, in context, has to be read not as a considered judgment but as his desperate hope:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.... But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil... (page 570). 

The extraordinary thing is that Keynes was right.

The other extraordinary thing is that Skidelsky has told the story so well.

Skidelsky is superb at getting at the heart of what the key contribution of Keynes's General Theory. As Skidelsky puts it, Keynes's key contribution was to find not a middle way but a genuine Third Way between "laissez-faire and central planning... conservatism and socialism." His proposals did not split the difference, but instead promised to achieve the benefit each of the traditional poles of politics had claimed but had never been able to deliver. Socialists promised full employment without economic freedom. (And Communists promised full employment without either economic or political freedom.) Conservatives promised economics (and sometimes political) freedom without full employment. Keynes, by contrast, promised both. His doctrines were thus politically irresistible: they would have been extraordinarily attractive to politicians and bureaucrats even if the doctrines and theories had not been true. Fortunately for all of us, they were true--or at least true enough to be very useful indeed in their historical context.

Skidelsky is also very good at focusing on the underlying liberal--classical liberal, that is--nature of Keynes's thought. Brought up in the laissez-faire classical liberal tradition, Keynes came to see it as a con: based on false claims about the world. But, Keynes believed, a good and smart government could make the claims of laissez-faire true enough.

Keynes saw the market economy as having two great flaws. The first was that demand for investment was extraordinarily and pointlessly volatile, as business leaders and investors attempted the hopeless task of trying to pierce the veil of time and ignorance. The second was that the fluctuations in the wage level that classical economic theory relied on to bring the economy back into balance after such an investment fluctuation either did not work at all or worked too slowly to be relevant for economic policy. (No, I am not going to be drawn into a debate about "unemployment disequilibrium.") But Keynes believed that if these problems could be fixed, then the standard market-oriented toolkit of economists would once again be worthwhile and relevant. And he showed a way to fix them or at least come close enough to fixing them, a way that we still use today--as you can see if you watch what Alan Greenspan's Federal Open Market Committee does next week.

So buy these books. Read these books. These are great books. Time spent with them is time well-spent. Robert Skidelsky deserves great honors for having devoted so much of his life to writing down the story of John Maynard Keynes, and writing it down so well.

Posted by DeLong at August 6, 2004 08:01 PM

From EH.Net: Christopher Tassava On Jim Lacey, "Keep from All Thoughtful Men: How U.S. Economists Won World War II"

Christopher Tassava:

Lacey (a retired U.S. Army officer and current writer on defense matters) describes the bureaucratic fights between civilian experts and military staff over the extent and speed to which the American economy -- hardly firing on all cylinders as war began in Europe -- could be reoriented to produce the munitions necessary for a serious military effort. At the center of Lacey's story are three economists who, he shows, had far-sighted views of the true capacity of the American economy: the reasonably well known Simon Kuznets and two nearly forgotten figures, Robert Nathan and Stacy May.

Lacey capably uses archival and secondary sources to show that these three men, along with a small group of other civilians inside the federal bureaucracy, were able to use social-scientific methods, including, crucially, statistical techniques, to assess how large the U.S economy could grow, how quickly that growth could occur, and how much war materiel the economy could produce for use by the U.S. and Allied militaries. Lacey persuasively shows that Kuznets, Nathan, and May were able to forecast in late 1942, before the first anniversary of Pearl Harbor, that June 1944 would be the moment at which the American “arsenal of democracy” would be able to produce sufficient materiel to launch a substantial invasion of Europe.

This date, of course, coincides with D-Day, which -- in Lacey's telling -- is due straightforwardly to the fact that the economists won their battle with their adversaries in the military. In what might now be termed “data-driven decision making,” Army Chief of Staff George C. Marshall (and his lieutenants) duly altered his plans for a cross-channel invasion to reflect the forecast realities of American industrial production….

Lacey's contribution to economic history consists of his ability to plumb these debates, at least up to late 1942, more deeply than previous scholars. Much of the material in this study is covered more accessibly in other scholarship, such as Paul A.C. Koistinen's specialist-oriented "Arsenal of World War II: The Political Economy of American Warfare, 1940-1945" (2004) or David Kennedy's popular "Freedom from Fear: The American People in Depression and War", 1929-1945 (2001)…. Lacey's narrow focus is a strength insofar as he uncovers new documentary evidence to support his arguments, and makes considerable effort to debunk several “myths” of the war, including General Albert Wedemeyer's claim to have developed the “Victory Plan” that matched American industrial production to Allied military needs…

Supreme Court Possible Health Care Decisions

Jonathan Cohn:

Health Care Supreme Court Outcomes:

  1. Uphold the entire law: If you believe in health care reform, as I do, this is obviously the best outcome. And it remains a very credible one. Remember, two very conservative judges at the appellate level found the law to be constitutional, despite tough questioning during oral arguments.

  2. Strike the mandate, keep everything else, including the penalty: This would be a moral victory for the critics and it would, quite possibly, limit federal power for generations to come. But it would probably do very little…. If Justices Roberts and Kennedy want to have their cake and eat it too—to issue a major ruling with long-lasting doctrinal effects, but in a way that doesn't look like a naked usurpation of legislative authority—this is the way to do it.

  3. Strike the mandate and the penalty, keep everything else. I keep reading that this would be equivalent to gutting the law. That is very, very wrong. Such a ruling would significantly weaken the law: Many fewer people would get insurance and, at least initially, and individual insurance premiums would be higher. But middle-class people buying coverage on their own would basically pay the same as they would if the mandate stayed in place, because of the way the subsidies work. (People who get coverage through employers or through Medicaid would also fare the same.) The law would still bring coverage to between 10 and 20 million people, according to the projections, and the deficit would actually end up slightly lower. In the future, state and federal lawmakers could bolster the law by thinking up alternatives to the mandate, or versions designed to meet the Supreme Court’s legal criteria.

  4. Strike the mandate, the penalty, the insurance reforms, but keep everything else. This would be a lot more devastating. The dysfunctional insurance market would remain…. We'd have universal coverage for the very poor and for the old (thanks to Medicare). The non-elderly middle class would be the ones left out.

  5. Strike the whole law—in other words, keep nothing. This is as bad as it sounds. Thirty million people lose health insurance they were supposed to get. People who would have had insurance anyway lose consumer protections and guarantees of minimum benefits. The deficit goes up, according to projections. Incentives to make the health care system safer and more efficient disappear.

This list is not exhaustive. The Court could decide that it can't decide the case until the law is in place and somebody can allege actual harm. The Court could also make a ruling on one part of the law and then "remand" the case to a lower court to sort out the rest. Those outcomes, and other permutations I've heard, seem far less likely, at least according to the experts I've consulted. But this is the Supreme Court. The justices can do pretty much what they want.

Modern Classical Economics Flunks Its Reality Tests

Interest Rates Varieties of Error  NYTimes com

Paul Krugman:

Interest Rates: Varieties of Error: I wrote recently about how the failure of inflation to soar was one of the three key tests that classical economics, in all its forms, failed in this depression, while Keynesian economics succeeded.

A second was the effect of austerity; Jared Bernstein points us to one of the many charts, this time from Jay Shambaugh, showing that euro experience looks awfully Keynesian.

The last point is interest rates. But I constantly encounter people claiming that high bond prices and hence low interest rates are just a bubble. I don’t think so, but even aside from that, this claim misses a key point about the original nature of the argument. Originally, claims that deficits would drive up rates weren’t based on arguments about solvency; they were based on the “crowding out” claim that the government would be competing with the private sector for a limited supply of savings. Then, when the promised rate spike failed to materialize, this was attributed to Fed purchases, with the claim that rates would spike when those came to an end. Wrong, and wrong again. As I wrote at the time, all this represented a basic misunderstanding of how the economy works.

Now, maybe there’s a solvency issue, and bond vigilantes will turn on America over that — although of course this keeps not happening either to us or to anyone else with their own currency. But you do need to know that many of the people making the solvency argument originally made a completely different argument — one that was completely wrong.

Hoisted from Comments: Austrian Insanity Department

dilbert dogbert said...:

Re: #4

This pin-headed amateur wonders if the argument that increased government spending is canceled out by decreased private spending can also apply within private spending? Increased Business spending is canceled out by a decrease in demand by individuals. The money has to come from somewhere.

Hayek appears to have made this argument, to hoots of derision, at a Cambridge seminar in the early 1930s:

Joan Robinson (1972 Richard T. Ely Lecture):

What was the state of orthodox opinion when the world was struck by the great slump? First of all, there was the famous Treasury View of 1929…. The Chancellor of the Exchequer was Churchill; he could not bring himself a second time to defend deflation and sound finance. It was left to the officials to produce the argument for the Treasury. Their case was very simple. It was based on the idea that investment is governed by saving. If the government borrowed £100 million to spend on public works, there would be £100 million less for foreign investment. The surplus of exports would fall by a corresponding amount. There would be a transfer of employment but no change in the total. It is not fair to put much weight on this. The Treasury, after all, was required to say something and this was what they thought of to say. The fact that it appeared to be a respectable argument, however, certainly was a symptom of the state of opinion at that time….

While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles…. R. F. Kahn… asked in a puzzled tone:

Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?

"Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

This pitiful state of confusion was the first crisis of economic theory that I referred to…

Hayek's argument, as best as we can reconstruct it, was:

  1. Richard Kahn takes money out of his bank account to buy an overcoat.
  2. His bank reduces its amount of construction lending.
  3. Unemployment is generated in construction.
  4. Overcoat manufacturers become optimistic and hire the unemployed to expand capacity.
  5. Overcoat manufacturers realize they were overoptimistic and fire their extra workers.
  6. As the pattern of demand returns to normal, the unemployed are rehired in construction.

Thus Hayek's argument is that Kahn's temporary boost to apparel demand and reduction in construction demand causes unemployment first as the economy adjusts to what it thinks is a permanent shift in the structure of production and then again causes unemployment as the economy returns to its initial configuration.

It is rather curious that Hayek is the only person who makes this Full Fama argument who has the guts to say that it applies to shifts in private-sector spending as well as to boosts to public-sector spending. For Hayek, the Confidence Fairy is not a factor...

Felix Salmon: Why Bernanke’s Not Doing More

Why Bernanke’s not doing more | Felix Salmon:

Bernanke feels as though he has at least some extra ammunition in the back of his armory in case things get worse still. Which raises the obvious question: why isn’t he using that ammunition now? Binyamin Appelbaum asked that question of Bernanke in April; here’s how Bernanke responded.

The view of the committee is that that would be very reckless. We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

From today’s presser, my feeling is that Bernanke maybe doesn’t feel as strongly any more that he would be reckless to act more aggressively. But he does still feel that the upside from doing so is “doubtful”. If he’s forced by crisis to pull out the ammo, he’ll do so. But Bernanke clearly doesn’t consider the unemployment crisis to be a crisis in that sense. If something happens suddenly, then policymakers can act strongly and decisively. Years of high unemployment are in many ways more damaging than the sudden drop in government spending that risks arriving with the fiscal cliff. But because the damage is slow-acting and invidious, it seems that unemployment, on its own, is incapable of persuading Bernanke to do more.

World War II Day-By-Day: Day 1024 June 20, 1942

World War II Day-By-Day: Day 1024 June 20, 1942:

Libya. Rommel unleashes a surprise attack on Tobruk beginning at 5.30 AM with artillery and a succession of bombing raids involving every German and Italian bomber in Libya plus some from Crete. 11th Indian Infantry Brigade cracks under the barrage, creating a gap on the Southeast corner of Tobruk’s perimeter which 100 German and Italian tanks pour through at 7 AM. By noon, Rommel is in view of the port. South African General Klopper does not rush reinforcements into the breach, so British and South African troops remain in their trenches and gun pits in other sectors or along the coast. German infantry fight their way into the town against shore-based British naval personnel and are in control of the port by 7 PM. British start destroying stocks of food, fuel and ammunition while an exodus of small boats leaves Tobruk harbour under heavy German artillery fire.

Romney Is Wrong on What Drives a Recovery

Romney Is Wrong on What Drives a Recovery

The original draft:

Governor Romney Pretends That There Is No Glass at All

For almost 200 years economists have known two sources of high unemployment: structural unemployment, when the salaries workers expect to get are greater than those businesses expect to pay; and cyclical unemployment, when households, businesses, and governments in the economy are collectively planning to spend less than they take in.

Governor Mitt Romney, the presumptive Republican Party candidate for November’s Presidential election, has a plan for dealing with structural unemployment. He does not have a plan for dealing with cyclical unemployment.

This is, in itself, a big problem for the rest of us--for right now the country does not suffer from the disease of structural but rather from the disease of cyclical unemployment. Structural and cyclical unemployment are different diseases with different cures. You cure the first by bringing workers’ and businesses’ expectations salaries into accord. You cure the second by rearranging matters so that household, business, and government planned spending is equal to what they take in.

As the Washington Post’s Greg Sargent complained, Governor Romney responds to questions of what he would do to cure cyclical unemployment with zero proposals for dealing with cyclical unemployment, and six proposals for dealing with structural unemployment: (i) opening more international markets to American trade, (ii) balancing the budget over the long term, (iii) subsidizing drilling for oil and gas, (iv) “revamping” the National Labor Relations Board, (v) lowering tax rates for businesses, and (vi) repealing ObamaCare.

I don’t think these are particularly good policies for dealing with structural unemployment, with the exception of opening markets and balancing the budget--but anybody looking at Republicans Reagan and the Bushes on the one hand and Democrats Clinton and Obama on the other knows that one and only one political party has stepped up to the plate and worked to try to balance the budget. Hint: it’s not the Republicans. Claiming in the next breath that he wants to lower business tax rates undoes claims to want to balance the budget. Everybody not bought and paid for by the oil companies knows by now that clean energy is a better and in the long run much cheaper place for America to invest in than carbon energy. The National Labor Relations Board’s teeth have already been pulled so that it has no effect on the economy, for ill or good. And ObamaCare--well, back when it was called RomneyCare and Governor Romney was its biggest booster, he was not scared that it would cost jobs. RomneyCare in fact has not cost jobs in Massachusetts: that businesses and households can purchase insurance through the Health Exchange makes Massachusetts a more attractive place to move to and locate in.

But let that pass. These are at least policies. We can have a substantive debate over them.

Our big problem: The biggest crisis facing the American economy today is a cyclical employment crisis. One of our major political parties is about to nominate a candidate for President who has no plans at all for even attempting to solve it.

If 2012 were a normal business cycle year, 63% of American adults would have jobs. Instead, only 58.6% do. At least two out of three Americans now are or have a close relative who ought to be working, and would be working in normal times, but is jobless. 58.6% is better than the 58.2% who had jobs late in 2009, when the emergency stabilization policies--the Bush TARP bank bailout and the Obama administration’s Recovery Act and stress-test bank recapitalizations--brought the decline to a halt. But to go from 58.2% to 58.6% when you ought to have a plan for getting to 63% leaves lots of work to be done.

President Obama has a plan for doing this work: the American Jobs Act--payroll tax holidays; investment incentives; employing more people (not, as Governor Romney wants to do, fewer) as cops, firefighters, and teachers; mortgage refinancing; reforming the unemployment insurance system.

Governor Romney has no plan for dealing with cyclical unemployment.

If the Democrats and Republicans in Congress had passed Romney's plans last year, right now employment in the U.S. would be exactly where it is.

If the Republicans in Congress had not blocked the American Jobs Act last year, employment in the U.S. right now would be between one and three million higher. That would not have gotten us all the way to the 63% of full employment. But you cannot climb out of as deep a hole as we are in in a single year. And the AJA was a bid to break partisan gridlock--it was built on ideas that moderate Republicans had supported in the past--and would be supporting now if they were proposed by a Republican president.

President Obama plans to fill the glass. His plans--if not blocked by Republicans last year--would by now have filled the glass half full, and this year there would be an AJA II proposal to fill the glass completely.

But Governor Romney pretends that there is no glass at all.

And I guess I should be replying to commenters over at the Detroit News...

Two things stand out about the critics:

  1. They seem to sit around hating California.
  2. Nobody says: "That's wrong: Romney does have a plan for dealing with cyclical unemployment."

Some comments:

  1. Some parts of the New Deal were awful--raising taxes in 1937-8 to try to balance the budget, the National Industrial Recovery Act. Some parts of the New Deal worked extremely well: abandoning the gold standard in 1933, faster monetary expansion, dropping Hoover's policy of trying to balance the budget immediately in the years before 1937. On balance, the New Deal seems to have worked quite well: looking over North Atlantic industrial countries in the 1930s, the sooner countries adopted New Deal-like policies the faster they started to recover from the Great Depression--with Japan and Britain leading the way, Germany and the U.S. in the middle, and France, which stuck to policies much like those of today's Republicans, bringing up the rear. In Japan and Britain recovery began in 1931. In Germany and the U.S. recovery began in 1933. But in France recovery did not begin until 1937. That's a striking pattern--and it matches a country's starting its own New Deal to a Model T...

  2. I think that there is a distinction that you are missing here--and a lot of it is us economists' fault. "Saving" can mean two things. A first kind of saving is really a kind of spending, but you are spending not on things that you use up immediately but on things that make your economy more productive in the future: roads, bridges, ports, the human capital of 12 year olds, large turbine generators, and so forth. America does much too little of this kind of saving, and we really ought to be doing a lot more. The other kind of saving is when people cut back on their spending on currently-produced goods and services to try to hoard financial assets that they think are safe or liquid stores of value. That kind of savings excess is what we see now, and that is very damaging: that is what has gotten us to our current pass where 3/4 of Americans are or have a close relative who is cyclically-unemployed. As I said, your confusion is our fault--a failure of rhetoric and communication on us economists' part. One of the things I get to do this summer is to think about how to write textbooks to try to eliminate or at least reduce this confusion...

  3. If I may add another comment: One truly scary thing is that Romney has some very smart advisors who have what I, at least, think are good and sound plans for addressing our cyclical unemployment crisis. Glenn Hubbard, for example, wants to reorganize mortgage finance to break the logjam that keeps construction depressed, and keeps so many others who are underwater on their homes frantically trying to cut their spending in order to build up their stocks of financial assets to feel safe. (And, of course, when everybody tries to cut spending the fact that your income is somebody else's spending is what sends us into depression.) Greg Mankiw has some very good ideas about how monetary policy should be used to temporarily raise the rate of inflation and so trigger processes to put Americans back to work. (The third of the triad, John Taylor, doesn't seem to me at least to have many good ideas.) But there is no sign at all that Romney is listening to these advisors. I hope he is. But I don't think we can count on it...

  4. Re: "stimulus did not work the first time". I'm with Christy Romer on this: The stimulus ought to have been about $2000 per American per year, and we actually did only $500 per American per year at the Federal level--and that was offset by state level cuts. And right now the burden of the debt is higher than if we had done more stimulus because slow (or rather negative) growth greatly raises the burden of the debt on the economy. Let me see if I can add a picture originally from Jared Bernstein Jay Shambaugh:

    That is pretty striking, to me at least: countries that cut their spending most have gotten into the most trouble in the past three years. Countries--like China and Germany--that have kept their own government spending on an even keel or even raised it have done best...

  5. If I may add another comment: One truly scary thing is that Romney has some very smart advisors who have what I, at least, think are good and sound plans for addressing our cyclical unemployment crisis. Glenn Hubbard, for example, wants to reorganize mortgage finance to break the logjam that keeps construction depressed, and keeps so many others who are underwater on their homes frantically trying to cut their spending in order to build up their stocks of financial assets to feel safe. (And, of course, when everybody tries to cut spending the fact that your income is somebody else's spending is what sends us into depression.) Greg Mankiw has some very good ideas about how monetary policy should be used to temporarily raise the rate of inflation and so trigger processes to put Americans back to work. (The third of the triad, John Taylor, doesn't seem to me at least to have many good ideas.) But there is no sign at all that Romney is listening to these advisors. I hope he is. But I don't think we can count on it...

  6. "JoAnne Hite: Brent, the state has rebounded because of the auto bailout. Stimulus spending does work if it's not spent on tax cuts which most of Obama's "stimulus" was for. Tax cuts will not work, businesses want demand for their products before they hire and there won't be demand if people either have no jobs or are not making enough money." I would say "rebounding". I would not say "nicely"...

  7. "Michael Smitka · Professor of Economics at Washington and Lee University: FDR had a plan? He was initially elected on a promise to cut spending to balance the budget. And he did, as soon as the economy began recovering in 1936, pushing us back into recession. The Civilian Conservation Corps? -- it was never more than 300,000 out of a population of 125 million. The Army? -- small until war loomed in 1940. And my grandfather, a teacher (by then principal) in Wyandotte, was paid in script. Most government workers were (and remain) local teachers and police, and the Great Depression hit local revenues and employment hard. FDR did nothing to offset that." There is a very eloquent letter from John Maynard Keynes to FDR in 1937/38 asking him "why are you doing this?"...

  8. Those countries that have cut the most over the past four years are those countries that have done the worst. Those that have actually expanded government spending--China, Germany--have done the best. There are countries where increasing government spending adds to uncertainty. There are countries where increasing government spending reduces uncertainty--where the big uncertainty is whether there are going to be any customers, and knowing that at least some of your potential customers will have income is reassuring. How can you tell the difference? Look at the interest rates at which the government can borrow. If they are high--Greece, Spain--the government has no business trying to boost the economy by spending more. If they are low--the U.S., Germany--the government does have business doing so...

  9. "Diane Burton: Brad DeLong germany is not spending, she knows thats trouble." Diane: In Europe, Greece, Ireland, Italy, Portugal, Spain, and Slovenia have cut. Finland, the Netherlands, Belgium, Austria, Slovakia, France, and Germany have not. Where are you getting your information? They don't seem interested in informing you...

  10. "Jeff Banker: JoAnne Hite - you are wrong - most of the roughly $800B stimulus did not go to tax cuts. that piece was only ~$60B/yr for 1-2 years. The bulk of the stimulus went to preserving gov't jobs such as teachers, police, and firefighters." Jeff Banker: Like everything else, it depends. Spending money on mortgage refinancings and investment tax credits looks to me to have been likely to have had the biggest bang for the buck--but loans or grants to states, and direct federal funding of construction don't look bad. We will be combing through the frustratingly noisy data for years to come...

  11. "Mary Fitzgerald Feola · Oakland Community College: The state has come back because of the auto bailout. Period." Mary Fitzgerald Feola: I wouldn't say "just". I would say "largely". Liquidating GM and Chrysler would have been very bad news--and contrary to what Romney now claims, there was nobody willing to advance debtor-in-possession financing in 2008-9, so back then bankruptcy = liquidation and shutdown.

  12. "Mike Corey: You should do stand-up comedy. You're hilarious." Do you really think comments like this convince anybody? Or inform anybody? I am curious why you do this...

  13. "Mike Corey: Once I saw Berkeley in your job title, your comment made sense. That was all that made sense." It is odd... I have never heard anybody in Berkeley say anything like "as soon as I saw 'Michigan'... your comment made sense". What kind of a person judges whole sections of the country in such a way?

  14. "Rhonda Fuller: He calls himself an economics professor, ha! We weathered the situation created by Barney Frank, Fannie Mae and Freddie MAC." Do you really believe that Barney Frank ran U.S. financial regulatory policy, or are you just saying that to try to confuse the issue?

  15. "Lonnie Heuer: I suggest you take care of Caliphony! What we don't need is more of our tax dollars going to government unions. The Private sector workers pay the bills, along with private sector businesses!" I somehow get the impression that you don't like California. Why not? I mean, people in California don't sit around and say that they don't like Michigan...

  16. "Lonnie Heuer: Maybe The Professor could explain baseline budgeting to us! Maybe Stabenow could tell us what's she doing to cut our deficits?" As Mitt Romney would be among the first to tell you, now is not the time to cut the federal deficit: the U.S. government can borrow on extraordinarily easy terms, and we badly need the jobs funded by government demand. The time to cut the deficit is when the economy is growing rapidly, not when the economy as stagnating. As for Stabenow... she voted for the Affordable Care Act, which--if the Supreme Court allows it to go into effect--does the greatest amount of reduction in government deficits over the next fifty years ever planned in America. It really socks it to insurance companies that don't manage health coverage and improve their efficiency over the next decade...

The Spread Between the 30-Year Treasury Bond Rate and the 30-Year TIPS Rate Is Now 2.22%/Year

Suppose that we assume the two states of the world are permanent liquidity trap, with inflation at 1%/year indefinitely, and inflationary blowout with inflation at 10%/year starting ten years from now…

Then the 30-year-TIPS breakeven probability--the chance that we will get an inflationary blowout starting ten years from now that would make the expected returns from investing in TIPS and nominal bonds equal--is 0.094…

The Thirty-Year Treasury Nominal Rate is Now at 2.73%/Year...

Suppose that we assume a normal-time nominal short-term interest rate of 5%/year, suppose that the market expects us to remain in a liquidity trap--with short-term safe nominal interest rates at 0--for k years, and then expects short-term safe nominal interest rates to normalize immediately…

Then the 30-year-bill breakeven--the date k must be expected to be in order to get the same expected return from investing in long-term bonds as from rolling over Treasury bills…

…is k=13.5 years…

That puts us out at the end of 2026 before we exit this current liquidity trap…

And if we suppose that investors are somewhat averse to the risk of temporary capital loss associated with 30-year bonds--that the 30-year bond rate is above the average of expected future short rates--then k is even longer…

National Review Continues Its Old Traditions...

Remember when William F. Buckley and National Review used to support the terrorists?

Jeet Heer: On September 15, 1963 a bomb went off at the 16th Street Baptist Church in Birmingham, Alabama, killing 4 black girls and injuring many more children. (Those killed were Cynthia Wesley, Carole Robertson, Addie Mae Collins, Denise McNair; McNair had been a classmate of the young Condoleezza Rice). The bomb was set by members of the Klu Klux Klan, as part of a wave of terror designed to intimidate the civil rights movement. Here is how National Review commented on the bombing….

The fiend who set off the bomb does not have the sympathy of the white population in the South; in fact, he set back the cause of the white people there so dramatically as to raise the question whether in fact the explosion was the act of a provocateur – of a Communist, or of a crazed Negro. Some circumstantial evidence lends a hint of plausibility to that notion, especially the ten-minute fuse (surely a white man walking away from the church basement ten minutes earlier would have been noticed?). And let it be said that the convulsions that go on, and are bound to continue, have resulted from revolutionary assaults on the status quo, and a contempt for the law, which are traceable to the Supreme Court’s manifest contempt for the settled traditions of Constitutional practice….

So there you have: barely a whit of sympathy for the murdered and a quick desire to exonerate “the cause of the white people” and to shift the blame elsewhere, to a suppositious “communist”, to an imaginary “crazed Negro” and to the Supreme Court…. The church bombing was… part of a long tradition of extra-judicial white supremacist violence…. [T]he editors were being wilfully obtuse. The purpose of the editorial is to obfuscate the question of guilt and blame the victims of a slaughter for their temerity in standing up for their rights.

In the early 1960s, a renegade band of military men in France tried to assassinate Charles de Gaulle…. National Review celebrated the would-be assassins and excoriated the French President. About Maurice Challe, the leader of the putsch, the magazine wrote he:

has been, for France, the highest living embodiment of the ideal of the soldier: absolute in courage, skill, dedication, loyalty, self-sacrifice…. All normal and legal means having been exhausted, these soldiers … placed their duty to their country, their civilization, and their God above their duty to their commander in chief. By sheer interposition of their united will, they made a desperate and supreme attempt to block the enemy’s advance, and thus save France and Europe, and the Free World from a mortal danger.

This is a pretty explicit defence of assassination as a weapon against a democratically elected leader….

On September 21, 1976 a bomb went off in Washington, DC killing Orlando Letelier (an exiled Chilean diplomat and critic of the Pinochet dictatorship) and his assistant Ronni Moffitt…. National Review… defame[d] Letelier as a communist and suggest[ed] (somewhat illogically) that he had been killed by the Cuban government…. William F. Buckley wrote that “there are highly reasonable, indeed compelling, grounds for doubting that Pinochet had anything to do with the assassination”…

Meet National Review's David "it shall be a felony punishable by 20 years in prison to knowingly act in furtherance of, or to support the, adherence to Islam" Yerushalmi:

Islam was born in violence; it will die that way. Any wish to the contrary is sheer Pollyannaism. The same way the post World War II German youth were taught by their German teachers and political leaders to despise the fascism of their fathers, with strict laws extant still today restricting even speech that casts doubt on the Holocaust, so too must the Muslim youth be taught from the cradle to reject the religion of their forebears.

Mother Jones:

Meet the White Supremacist: In a 2006 essay for SANE entitled "On Race: A Tentative Discussion", Yerushalmi argued that whites are genetically superior to blacks. "Some races perform better in sports, some better in mathematical problem solving, some better in language, some better in Western societies and some better in tribal ones."… Yerushalmi, who is Jewish, suggests that liberal Jews "destroy their host nations like a fatal parasite." Unsurprisingly, then, Yerushalmi offered the lone Jewish defense of Mel Gibson, after the actor’s anti-Semitic tirade in 2006. Gibson, he wrote, was simply noting the "undeniable Jewish liberal influence on western affairs in the direction of a World State."… Yerushalmi co-authored a report on the threats posed by Islamic law—among other things, he worries Sharia-compliant finance could spark another financial collapse—that earned plaudits from leading Republicans like Michigan Rep. Pete Hoekstra. The report was released by Frank Gaffney's Center for Security Policy, for which Yerushalmi is general counsel… called for the deportation of all Muslim non-citizens, and a ban on Muslim immigration. The United States, he urged, must declare "a WAR AGAINST ISLAM and all Muslim faithful."…

SANE is "dedicated to the rejection of democracy and party rule," and Yerushalmi has likewise criticized the universal suffrage movement. As he once put it, "there's a reason the founding fathers did not give women or black slaves the right to vote."