Grasping Reality on TypePad, by Brad DeLong

What can Washington do to boost the U.S. economy? - CBS News:

[T]he nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low…. Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government….

• Ezra Klein: We don’t have a spending problem, we have a military spending problem: "Have you read Brad Plumer’s terrific, chart-heavy primer on America’s insane defense budget? If not, I’ll wait while you do. Done? Good. The numbers there should shock you. In particular, this one: “Since 2001, the base defense budget has soared from $287 billion to $530 billion — and that’s before accounting for the primary costs of the Iraq and Afghanistan wars.”"

• Richard Crump, Stefano Eusepi, and Emanuel Moench: Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement?

• Simon Wren-Lewis: mainly macro: Avoiding the B word: "I heard the new head of the TUC (Trades Union Congress) talking about macroeconomic policy. She said the government’s policy of austerity has failed…. The interviewer asked whether… [we needed] more borrowing by the government. She avoided answering the question. Unfortunately I have heard exactly the same from many UK public figures who are critical of austerity. It is as if a memo has gone round with the following instruction: whatever you do, do not say your alternative policy will involve more government borrowing."

• Mark Thoma sends us to Matthew Yglesias: Economist's View: 'Romer and Romer on Monetary Policy Complacency': "Perhaps my favorite paper delivered at the American Economics Association meeting… was a historical essay from Christina Romer and David Romer…. The most dangerous idea, they say, is excessive pessimism about monetary policy. If you look back at the two key eras where we say monetary policy went awry—during the deflation of the 1930s and the inflation of the 1970s—the interesting thing that Romer and Romer find is that if you dig into the archives of the Federal Reserve minutes there weren't really "mistakes" as you might think of it. Policymakers in the '30s knew there was a deflationary slump, and they knew it was bad, just as policymakers in the '70s knew there was an inflationary spiral, and they knew it was bad. But in the '30s, policymakers persuaded themselves that with interest rates already low there was nothing more they could do, while policymakers in the '70s persuaded themselves that inflation represented a purely structural phenomenon that they couldn't cure. So you got a lot of talk about how other people need to step up. The funny thing, they say, is that in both cases it turned out the problems could actually be solved quite quickly once you put someone in office who thought it was possible to solve them."

Lt. Ben H. Rushing in North Africa flying B-17s:

Jan. 9, 1943: It was our day off. I stayed out at the field ’til noon then came home & hit the sack. Wish I had some letters from Bena & all. The B-26s went to Tripoli this morning. I think that we are going there tomorrow. Might be rough sledding for us but probably not.

Daniel Tompkins sends me Moses Finley to Yvon Garlan in 1972 on Berkeley:

World War II Today: To the Commander of the Sixth Army encircled at Stalingrad, General Paulus, or his deputy:

The Sixth German Army, the units ofthe 4th Tank Army and their reinforcements have been completely surrounded since November 23rd, 1942. The forces of the Red Army have drawn a secure ring around this German army. All hopes of rescue by means of a German offensive from the south and south-west have proved unfounded.

The forces which were rushed to your aid have been destroyed by the Red Army, and the remnants of these forces are withdrawing towards Rostov. The German transport planes which are supplying you with a bare minimum of food, ammunition and fuel are being forced to move between airfields, and to fly from great distances to reach your positions. Moreover, the Russian air force is inflicting great losses on German transport planes and their crews. Air transport is unlikely to continue for much longer.

Your encircled troops are in a grave situation. They are suffering from hunger, sickness and cold. The harsh Russian winter is only just beginning: hard frosts, cold winds and snowstorms are still to come, but your soldiers do not have winter uniforms and are living in unsanitary conditions. You, as commander, and all the officers of the surrounded troops know very well that there is no longer any realistic possibility of breaking through the encirclement. Your position is hopeless and further resistance is pointless.

Given the inescapable position that your forces now find themselves in, and in order to avoid unnecessary bloodshed, we propose that you accept the following terms of surrender:

John Quiggin:

Is there a consensus? Clearly there was a consensus as of early 2008…. Everyone agreed that the core business of macroeconomic management should be handled by central banks using interest rate adjustments to meet inflation targets. In the background, central banks were assumed to use a Taylor rule to keep both inflation rates and the growth rate of output near their target levels. There was no role for active fiscal policy such as stimulus to counter recessions, but it was generally assumed that, with stable policy settings, fiscal policy would have some automatic stabilizing effects…. It was generally agreed that this approach to macroeconomic policy, combined with financial deregulation had produced a ‘Great Moderation’ in the volatility of economic activity>This broad consensus was destroyed by the Global Financial Crisis and the Great Recession, but it wasn’t replaced by anything resembling a real debate. Rather, different groups have gone off in different directions. Academic macro went on more or less as before…. Central banks have, in effect, treated the entire period since 2008 as a Schmittian “state of exception”, during which normal rules cease to apply. They have used the crisis to push governments to adopt “reforms” favored by the financial sector, such as cutting welfare benefits and other areas of public expenditure. But their central concern has been to restore the status quo ante, and the exclusive primacy of monetary policy, as soon as possible. From the central bank viewpoint, the restoration of low and stable inflation after the shocks of the 1970s is their crowning achievement and one to be maintained at any cost….

• John Emerson: Les Érudits Maudits « Haquelebac: "Historically culture-producers were monks, gentlemen of leisure, military aristocrats, lackeys and retainers of the aristocracy and the church, and déclassé riffraff. Only in the nineteenth century did scholarship come to be defined as a job at a university, and even during that century most professors were ill-paid and dependent on family money. During the twentieth century professors gradually came to earn a middle-class income for the work they did and to take their place in the middle class…. What match is there between the universities’ goals and their funding? Very little. Many years ago a friend of mine, after spending some time researching “the purpose of education”, decided that education is an institution, like marriage, and that one way you know that something is an institution is that you don’t have to give reasons for it. Getting a college degree, like getting married (cf. “Repo Man”), is what people do."

• Felix Salmon: Why we won’t mint a platinum coin: "Let’s be clear about this: no one’s going to mint a trillion-dollar platinum coin. Nor is anybody going to mint a million million-dollar platinum coins. But it would probably be stupid for anybody in the government to say that they’re not going to do it…. [T]he real problem with the main argument for minting a coin, which is that “yes, it’s a stupid gimmick, but so is the debt ceiling, and the debt ceiling is a lot more harmful than a coin would be”. That’s true, but it’s important to recognize just how damaging the platinum-coin move would be, all the same. It would effectively mark the demise of the three-branch system of government, by allowing the executive branch to simply steamroller the rights and privileges of the legislative branch." That seems to me to be simply wrong: the legislature has commanded the executive not to borrow; the legislature has commanded the executive how much to spend; the legislature has commanded the executive how much to tax. Those commands are inconsistent. Only by minting the coin can the executive avoid breaking the law.

• Josh Barro: Why Platinum Coin Opponents Are All Wrong

• Wolfgang Münchau: US joins misguided pursuit of austerity

Scott McLemee:

Essay on Death of Eugene Genovese: An ancient and corny joke of the American left tells of a comrade who was surprised to learn that the German radical theorist Kautsky’s first name was Karl and not, in fact, “Renegade.”… Eavesdropping on some young Marxist academics via Facebook in the week following the historian Eugene Genovese’s death on September 26, I’ve come to suspect that there is a pamphlet out there somewhere about the Renegade Genovese…. Genovese published landmark studies like Roll, Jordan, Roll: The World the Slaves Made (1974) and – with the late Elizabeth Fox-Genovese, his wife -- Fruits of Merchant Capital: Slavery and Bourgeois Property in the Rise and Expansion of Capitalism…. The author of the most influential body of Marxist historiography in the United States from the past half-century turned into one more curmudgeon denouncing “the race, class, gender swindle.” And at a meeting of the Conservative Political Action Committee, no less. The scholar who did path-breaking work on the political culture of the antebellum South -- developing a Gramscian analysis of how slaves and masters understood one another… ended up referring to the events of 1861-65 as “the War of Southern Independence.” Harsher words might apply, but “renegade” will do….

tomslee

I love the singularity video at #22 http://www.jwz.org/blog/2012/05/welcome-to-life-the-singularity-ruined-by-lawyers/, and it highlights one of the major differences between the next round of technologies and previous ones, which is that the new ones will be pervasively governed by license agreements. The ways in which they benefit and harm us will depend more on the terms of those agreements than on the engineering aspects of the technology.

L. Randall Wray writes:

[M]y inquiring mind wants to know why Brad is worrying about “funding” tax cuts…. Here I only examine the notion that you must “pay for” tax cuts by either higher taxes or lower spending…. No analogy is perfect…. Economists often use a bathtub analogy to explain stocks and flows: water runs into the bathtub from the faucet (in-flow) that fills the tub (stock), so long as the water running out of the drain (out-flow) is less than the water running into the tub. If we plug the drain, the water stops running out—so the in-flow fills the tub. Brad wonders how do we “fund” the reduced outflow? I think that is a nonsensical question. Now, he might instead have wondered: what do we do when the tub is full? Would it then make sense to open the drain, or to slow the flow from the faucet? Sure. But how is that “funding” the previously reduced outflow during the period in which we closed the drain?

The answer, IMHO, is that reducing the outflow--lowering tax collections--means that that date is closer at which the tub is full and we have to either open the drain (i.e., raise taxes) or slow the flow from the faucet (cut spending).

Stephanie Kelton writes:

Brad DeLong is worried. And now I’m worried. He’s worried about “unfunded tax cuts,” which, he says, are “bad juju” in the long run. I don’t mean to pooh-pooh his juju, but what the heck is an “unfunded tax cut”?… Tax cuts leave taxpayers with more money to spend, but they don’t compromise the government’s ability to spend later. Nor is the debt ratio a binding constraint…. Can’t we just admit that the U.S. dollar comes from the U.S. government? That the i$$uer of the currency can never “run out” of money or be forced into bankruptcy…. Until people like us help awaken the population to the way modern money works, the deficit scolds will have the upper hand and the American people will suffer needlessly as Democrats and Republicans alike continue to hide behind the time-honored ”how will we pay for it?”

As I understand it, Stephanie’s hope is that the U.S. government can borrow and spend and that investors will always value U.S. government debt so highly as a safe store of value that, even without high inflation, the real interest rate on the debt will be on balance lower than the real growth rate of the American economy. If so, then the issuing of debt by the U.S. government is a very profitable business indeed: it makes something—safe nominal assets—that investors love and are willing to pay for through the nose, and we can finance whatever we want our government to spend on from the profits of this very profitable debt-issuing business.

If not, then while it is certainly true that the U.S. government cannot be forced into bankruptcy or “run out of money”, it would be imprudent not to take steps now to guard against the possibility of monetary and financial disruption—not now, not five years from now, but thirty or fifty years from now—when we can no longer refinance our debt on easy terms but instead need to retire our outstanding government debt via high taxes or very rapid rates of money creation.

As I have said, repeatedly, austerity now—and probably for the next five years—is counterproductive. But it is not the case that austerity is always and everywhere unneeded.

• Rick Mishkin and Michael Woodford: In Defense of the Fed's New Interest-Rate Policy

• Andrew Gelman: B-school Prof John Cochrane in a parody of short-term thinking

• Duncan Black: Eschaton: Grifters Only Good At Grifting: "Convincing people to give you lots of money is certainly a skill worth having. But I think increasingly we're seeing that it's the one trick the modern conservative moment has. It makes sense, really, as a big chunk of politics is about fundraising and the people who raise the money are quite well rewarded, both financially and with status. They have no interest in governing, so the GOP/conservative rulers are just the people most adept at getting people to throw money at them, and they aren't good at anything else."

• Don Taylor: Why don’t House Republicans replace IPAB with Paul Ryan’s proposed boards?

Peter Antill: Stalingrad:

World War II Today:

On the 6th January, 1943, at Donbaik, Mayo Peninsula, Burma, when two Carriers had been put out of action, Havildar Parkash Singh drove forward in his own Carrier and rescued the two crews under very heavy fire. At the time, the crews of the disabled Carriers had expended their ammunition and the enemy were rushing the two disabled Carriers on foot.

This N.C.O.’s timely and courageous action, entirely on his own initiative, saved the lives of the crews and their weapons.

On the 19th January, 1943, in the same area, three Carriers were put out of action by an enemy anti-tank gun and lay on the open beach covered by enemy anti-tank and machine-gun fire. One of these Carriers was carrying the survivors of another Carrier in addition to its own crew. Havildar Parkash Singh, on seeing what had happened, went out from a safe position in his own Carrier, and with complete disregard for his own personal safety, rescued the combined crews from one disabled Carrier, together with the weapons from the Carrier.

Having brought the crews to safety, he again went out on the open beach in his Carrier, still under very heavy anti-tank and machine-gun fire and with the utmost disregard for his personal safety, dismounted and connected a towing chain on to a disabled Carrier containing two wounded men. Still under fire, he directed the towing of the disabled Carrier from under enemy fire to a place of safety.

Havildar Parkash Singh’s very gallant actions, entirely on his own initiative, were an inspiration to all ranks both British and Indian.

Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)

Panelists:

• CARLO COTTARELLI (International Monetary Fund)
• PAUL KRUGMAN (Princeton University)
• VALERIE A. RAMEY (University of California-San Diego)
• HARALD UHLIG (University of Chicago)

Between 1985 and 2007--the period of the "Great Moderation"--the Federal Reserve and the rest of the U.S. government on the west edge and the central banks and institutions of the European Union on the east edge of the Atlantic Ocean provided a broadly stable macroeconomic environment within which private-sector businesses, workers and investors could make their economic plans. In the U.S., on an annual basis: the rate of nominal GDP growth dropped below 4% for only 3 of those years and rose above 7% for only 2 of those 22 years; the rate of consumer price inflation rose above 5% for only 3 and fell below 2% percent for only 2 of those 22 years; and the civilian adult employment-to-population ratio remained between 60% and 64% for that entire period. And Western Europe experienced a similar "Great Moderation" with low inflation, relatively smooth growth, and diminishing unemployment.

Then in 2008-9 the rate of nominal GDP growth in the U.S. crashed to -3%--a major, major downward surprise to anybody expecting and relying on a continuation of "Great Moderation" rates of nominal spending growth--the rate of consumer price inflation on an annual basis bottomed out at -2%, and the employment-to-population ratio dropped from 63% to between 58% and 59%, since when it has flatlined. In Western Europe the initial recession was smaller, but the subsequent labor market performance was even more disappointing, so that now the net fall relative to trend in Western European productio and employment exceeds that in the United States.

In this context, we are here to explore four questions:

1. Are their policies that the Federal Reserve and the rest of the U.S. government on the west edge and the ECB and the governments of the European Union on the east edge of the Atlantic Ocean could adopt that would quickly move the civilian adult employment-to-population ratio back toward what from 1985-2007 we thought of as "normal"--that could produce in the next couple of years rates of employment growth that are, say, within shouting distance of those the U.S. economy experienced over the Reagan boom of 1982-1989?

2. If so, what are those policies?

3. If so, are those policies desirable ones that the Federal Reserve and the rest of the government should adopt?

4. How is your view on questions (1) through (3) different today than it was six years ago?

Alas! I failed in my task as moderator: communication among the panelists was by and large not achieved…

Valerie Ramey brought bad news for multipliers--but left a glimmer of hope in that there is still no evidence or argument that the multiplier at the ZLB would not be much greater than the normal-time monetary-offset multiplier. She talked about the need for comprehensive cost-saving health-care reform, an argument would have applied just as well to 2007 or 2017 as to today.

Carlo Cottarelli presented the IMF’s new, revised view on the multiplier. He did not promise that there were policies that could lead to a rapid recovery to full employment or criticize government.

Paul Krugman ably presented his view, which is my view, that governments should borrow and spend more to boost employment and production and that the limits to fiscal policy for credit-worthy governments are so far beyond the bounds of the politically-feasible that there is no point in talking about them.

Harald Uhlig… I am going to have to listen to Harald’s presentation again. It is clear that Harald Uhlig agrees with Valerie Ramey that there are no policies “that the Federal Reserve and the rest of the U.S. government on the west edge and the ECB and the governments of the European Union on the east edge of the Atlantic Ocean could adopt that would quickly move the civilian adult employment-to-population ratio back toward what from 1985-2007 we thought of as ‘normal’”. But it is not at all clear to me why he believes this…

Jan 06, 2013 8:00 am, Hyatt, Elizabeth Ballroom F American Economic Association

Presiding: VALERIE RAMEY (University of California-San Diego)

• Cyclical Variation in Labor Hours and Productivity Using the ATUS MICHAEL C. BURDA (Humboldt University Berlin) DANIEL S. HAMERMESH (University of Texas-Austin) JAY STEWART (Bureau of Labor Statistics)

• Hours and Work Sharing during the Great Depression: Comparisons and Contracts with Other Downturns in the 20th Century PRICE FISHBACK (University of Arizona) TODD NEUMANN (University of California-Merced) JASON TAYLOR (Central Michigan University)

• Job Search Theory and Unemployed Job Search over the Lifecycle MARK AGUIAR (Princeton University) ERIK HURST (University of Chicago) LOUKAS KARABARBOUNIS (University of Chicago)

Discussants:

• VALERIE A. RAMEY (University of California-San Diego)
• BRADFORD DE LONG (University of California-Berkeley)
• DALE MORTENSEN (Northwestern University)

Hostage-takers like Senator Mitch McConnell (R-KY) reason that although they do not like what happens if the situation blows up, you dislike what happens if the situation blows up more--so given that they have the power to blow up the situation if they are not satisfied, all they have to do is (a) declare what will make them satisfied, (b) wait, and (c ) accept your knuckling-under to their demands.

In order to get hostage-takers like Senator Mitch McConnell (R-KY) to back down from their crazy and accept a real deal, you have to persuade them of two things:

• They prefer the real deal to what happens if the situation blows up.
• You prefer--or are at least indifferent to--what happens if the situation blows up to the real deal.

I don't see a strategy from Obama to convince Senator Mitch McConnell (R-KY) and the other debt-ceiling hostage-takers that Obama has a path for what happens after the debt ceiling is breached that he prefers to a real defusing deal. And unless Obama has such a strategy, I don't see how the debt-ceiling cliff is defused.

• Greg Sargent: A veteran hostage negotiator’s advice on handling the GOP

• William Dickens and Rand Ghayad: It’s not a skill mismatch: Disaggregate evidence on the US unemployment-vacancy relationship

• Greg Ip: Cliff? What cliff?: "The Fed is currently buying $85 billion worth of Treasury and mortgage backed bonds per month via quantitative easing…. Leaving aside members who wanted to stop QE right away, the remainder 'were approximately evenly divided between those who judged that it would likely be appropriate for the Committee to complete its asset purchases sometime around the middle of 2013 and those who judged that it would likely be appropriate for the asset purchases to continue beyond that date'. So the median member probably wants to stop between the middle and end of 2013…. [T]he median dealer… [thinks] GDP would only grow 2.1% in 2013, fourth quarter to fourth quarter, whereas FOMC members thought it would grow 2.3% to 3%, a strangely upbeat forecast given their own, and the Fed staff’s, concern about fiscal drag. If the Fed once again proves itself too optimistic, the case for further stimulus will remain relatively firm through 2013. Yet there is a less benign scenario: that growth remains disappointing, but QE stops anyway. Fed officials have always predicated more QE on its benefits exceeding its costs. By the end of 2013 the median Fed member may be worried enough about the impact of zero rates on risk-taking, the Fed's growing ownership of the bond market, and the size of its balance sheet to call a halt to QE even if an economic case for more remains. With fiscal policy now turning decisively contractionary, America had better hope the animal spirits of business have revived enough for growth to continue without the help of policymakers."

• Emma Rowley: Triple-dip threat rises as UK service sector shrinks

• Roger E.A. Farmer, Carine Nourry, and Alain Venditti: The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World

• Aviva Aron-Dine, Liran Einav, and Amy Finkelstein: The RAND Health Insurance Experiment Three Decades Later

From my perspective, the remarkable thing about Sargent and Lucas is that it is very, very, very hard to write down a model in which expansionary monetary policy has effects on production and employment when the economy is away from the ZLB and in which expansionary fiscal policy does not have effects on production and employment when the economy is at the ZLB. In fact, I have not figured out how it could possibly be done. I understand Prescott's aversion to expansionary fiscal policy because he does not believe in expansionary monetary policy either. I don't understand Sargent's and Lucas's aversion…

Paul Krugman: Ideology and Economics:

Matthew O'Brien:

There are two things you need to know about the Federal Reserve right now. First, it's had to resort to unconventional measures ever since short-term interest rates, its usual policy lever, fell to zero back in 2008. And second, everything you've been told about these unconventional measures has been wrong. The wrong story… the Fed has cut long-term rates by buying long-term bonds…. Lower borrowing costs should mean more borrowing, and more borrowing should mean more growth…. It's the same story you always hear… it's the one Harvard professor and former Reagan adviser Marty Feldstein tells in the Wall Street Journal. Well, kind of. Feldstein worries this story has some unintended consequences -- namely, higher deficits and higher inflation -- that will give it an unhappy ending….

Howard Schneider:

“[IMF] Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,” [Olivier] Blanchard and co-author Daniel Leigh, a fund economist, wrote…. Blanchard… writes… that he could not actually determine what multipliers economists at the country level were using …. The number was implicit in their forecasting models…. Heading into a crisis that nearly tore the euro zone apart, in other words, neither Blanchard or any one of the fund’s vast army of technicians thought to reexamine whether important assumptions about the region would still hold true in times of crisis. That, it turns out, was a big mistake. Multipliers vary… get larger if interest rates are low, output is falling and the banking system is creaky – conditions that make everyone, from households to investors, less likely to spend, and thus makes the role of government-generated demand that much more important.

Blanchard and Leigh deduced that IMF forecasters have been using a uniform multiplier of 0.5, when in fact the circumstances of the European economy made the multiplier as much as 1.5, meaning that a $1 government spending cut would cost $1.50 in lost output…

It is a fact that when distributions have thicker tails than the normal Gaussian distribution, trimmed-mean and other robust estimators do a better job of estimating central tendencies than simple averages. It is a fact that food and energy sector prices, especially, have deviations from the overall inflation rate that have much thicker tails than the Gaussian normal. And it is a fact that over the past fifty years in America whenever the full CPI inflation rate has moved away, either up or down, from the core CPI inflation rate--the inflation rate excluding food and energy prices--the odds are better than 9-1 that the gap will then be closed by the full CPI moving back to the core, and not the core moving to the full CPI:

Thus our jaws drop when we read things like those below:

Markus Zusak: The Book Thief:

It was Russia, January 5, 1943, and just another icy day. Out among the city and snow, there were dead Russians and Germans everywhere. Those who remained were firing into the blank pages in front of them. Three languages interwove. The Russian, the bullets, the German.

Sam Baker:

House Republicans signaled Thursday they will not follow rules in President Obama's healthcare law that were designed to speed Medicare cuts through Congress…. The rules package says the House won't comply with fast-track procedures for the Independent Payment Advisory Board (IPAB)…. House Republicans have tried unsuccessfully to repeal the IPAB, the central cost-cutting feature in the Affordable Care Act. The IPAB was designed to take Medicare payments largely out of Congress's hands, similar to the independent panel that recommends closing military bases, because lawmakers would rarely sign off on such politically risky moves….

The healthcare law says the House must begin taking up the IPAB's recommendations as soon as they're made… requires House committees to pass them quickly… can only change the IPAB's recommendations if it comes up with the same level of savings elsewhere in the budget.

But the 113th Congress won't abide by those procedures…

Nick Rowe said:

Yes, I think you may be missing something…. If the central bank is targeting (future) headline inflation correctly, by responding correctly to current headline and core inflation, then neither headline nor core should forecast future headline inflation. This is an immediate implication of the orthogonality of forecast errors wrt the information set under rational expectations on the part of the central bank…. If (for example) you find that current core predicts future headline, that tells you nothing structural. Instead it tells you that the central bank didn't have rational expectations and was making systematic mistakes by not responding strongly enough to core.

This is just one application of a more general theme I've been hammering away at for the last 12 years. If the Bank of Canada is targeting 2% headline inflation at a 2 year horizon, then headline inflation should be unforecastable from everything in the Bank's information set 2 years (or more) prior. If we find headline inflation is forecastable then we have prime facie evidence of systemic mistakes in the Bank's monetary policy reaction function, and can use that evidence to improve its reaction function, in a sort of "learning by past mistakes" method.

Given that it takes 3 or more years for open-market operations to have their full effect on inflation (one year for interest rate changes to affect employment, and then two years or more for employment to affect rates of price increase and price increase expectations) there is useful information about more than the optimality of monetary policy to be found in the correlation between current core and headline inflation and future inflation at horizons of up to three years.

• Zachary Goldfarb: How the fiscal cliff deal will affect the economy and deficits, in six charts

• Philip Stephens: The new prisoners of ideology: "Ideology used to belong to parties of the left. The right concerned itself with the exercise of power. On either side of the Atlantic politics has been turned on its head. The conservatives are now the utopian zealots forsaking centrist broad appeal for ideological absolutism. Liberals and social democrats are the new realists."

• Jordi Gali: Notes for a New Guide to Keynes (I): Wages, Aggregate Demand, and Employment: "I revisit the General Theory's discussion of the role of wages in employment determination through the lens of the New Keynesian model. The analysis points to the key role played by the monetary policy rule in shaping the link between wages and employment, and in determining the welfare impact of enhanced wage flexibility. I show that the latter is not always welfare improving."

• LizardBreath: Unfogged: "The platinum coin option is ridiculous and isn't going to happen, much as I wish it would. But if it were attempted, I don't think a court would stop it, and I'm sure that a court that did stop it would be acting unusually and for politically motivated reasons. Courts are expected to do what legislatures say, not what they mean: 'legislative intent' can only be considered where there's an ambiguity in the law. Even if what the legislature said is obviously not what they meant, courts are still expected to follow the letter of the statute. And the platinum coin statute isn't ambiguous."

Matthew Yglesias: Empirical evidence for high fiscal policy multipliers:

Two papers I saw presented this morning took very different approaches to reach a similar conclusion—inside a currency union there can be big fiscal policy multipliers. In other words, large positive effects of running budget deficits and negative effects of fiscal consolidation. First Olivier Blanchard and Daniel Leigh presented "Growth Forecast Errors and Fiscal Multipliers" which takes advantage of the fact that economic forecasters typically make mistakes… the scale of the error was… systematically correlated with the amount of deficit reduction the countries did. The conclusion is simple—previously the IMF had been underestimating the "multiplier"…. Daniel Shoag's "Using State Level Pension Shocks to Estimate Fiscal Multipliers" is very different but reaches a very similar conclusion…. [A] bad hit to your [state] pension fund is correlated with bad economic performance, seemingly because there's a state spending multiplier greater than one.

In both cases, the policy implications are subjective but not conclusive. The worst-hit European countries generally didn't have the option of doing fiscal stimulus. And states obviously can't choose to get well-timed stock market windfalls. But in both cases the implication of the research is that timely bailouts could be very helpful to the recipients.

Michael Derby: Fed’s Historic Error Is in Not Acting Boldly Enough, Paper Argues:

Federal Reserve officials have been underestimating their powers and have wounded the economy in the process, a new research paper argues. That observation will certainly surprise many in light of the wide range of unprecedented actions taken by the central bank in recent years. That said, a new paper by University of California, Berkeley, economists Christina and David Romer said policy makers need to embrace the powerful tools at their disposal, believing that when they don’t, the economy pays the price. The paper will be presented Saturday at the American Economic Association annual gathering in San Diego. The research is titled “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter.“

Come January 6 I will be not in New Orleans but in San Diego, and hence not at the AALS Luncheon with the Legal Adviser of the U.S. Department of State, Harold Hongju Koh.

So I will not get to ask Dean Koh the following question:

Dean Koh,

According to John Reeves, author of the History of English Law from the Time of the Romans to the End of the Reign of Elizabeth, a declaration of outlawry—that such-and-such a man could and should be shot or knifed on sight—proceeded according to a legal process in front of judges at least since the reign of Henry III Plantagenet. To quote:

[T]hose of inferior age, as they were not sub lege, could not properly be ever said to be outlawed, or put out of the law: the same of a woman, who, as she also was never in laughe—that is, in frank pledge, or in a decenna, could not be outlawed; but if she fled upon commission of any felony she might be wayviata, as they called it…. esteemed as one deserted and forlorn….

The time necessary to complete the outlawry was this: the offender was to be demanded at four counties, from county to county, till he was outlawed; but at the first county there was only to be what they termed simplex vocatio; and that was not computed towards the time of one of the four counties; so that in truth five were to pass before the outlawry was had; the outlawry therefore was to be at the fourth of those after the simplex vocatio. At the fifth or, as they called it, the fourth county, no essoin or excuse could be received, nor was it sufficient that any one would engage to produce him at the next county…. [T]he fugitive had till the fifth county to render himself to prison or defend himself and purge his innocence, but after that time the outlawry stood in the way, and he could not return till that was removed by the mercy of the king….

In… instances where the king would have pardoned a conviction of the fact [of the underlying crime], he would readily pardon the outlawry, as in case of homicide per infortunium, or se defendendo; and in general where there was really no offence committed. Process of outlawry would not lie against a clerk…

Today, by contrast, in order to be outlawed—and thus in order to have your death commanded not just by blade or bow or gun but by teleoperated robot drone—there needs to be no public process by which you are commanded and offered the opportunity under the king’s peace to surrender and publicly defend yourself at five different successive county sessions. Instead, all that has to happen is that the high functionaries of the President, men and women not bound to others by feudal ties of mutual obligation or republican ties of election and representation but simply chosen at the President’s pleasure to sit on the National Security Council, in secret proceeding without judicial or other scrutiny, put your name on a list. And if you are a minor? Then a high functionary of the President will say, with a straight face, that you “should have chosen a better father” than one who was himself outlawed.

This is not a good trend in the rule of law as applied to outlawry that we have seen since the thirteenth century, is it?

What steps have you taken while in government to reverse this trend, and return the law of outlawry to something that would not have caused the justiciars of Henry III to raise their eyebrows and suggest that we remember what the common law is?

I cannot ask this question. I would dearly love to hear Harold Hongju Koh answer it.

Yes, I know it is unfair to complain. And although it was far from free the dinner at Bayona was truly superb, but…

Was there anything on any of our plates (save the sweet potato brioche) that would have made us think that we were in the Mississippi Delta rather than in the shadow of Mt. St. Helena?

The BLS Employment Situation Summary:

Nonfarm payroll employment rose by 155,000 in December, and the unemployment rate was unchanged at 7.8 percent….

The number of unemployed persons, at 12.2 million, was little changed in December. The unemployment rate held at 7.8 percent and has been at or near that level since September…. [T]he number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 4.8 million and accounted for 39.1 percent of the unemployed. The civilian labor force participation rate held at 63.6 percent in December….

Total nonfarm payroll employment increased by 155,000 in December. In 2012, employment growth averaged 153,000 per month, the same as the average monthly gain for 2011…. The change in total nonfarm payroll employment for October was revised from +138,000 to +137,000, and the change for November was revised from +146,000 to +161,000.

Newsmap. Monday, January 4, 1943 : week of December 25 to January 1, Sequence: 1 | UNT Digital Library:

Between 1985 and 1995--the years in which my neural network was trained to respond to reality--the gap between the interest rate on 10-year Treasuries and the nominal GDP growth rate averaged 3%/year. In order to maintain a constant debt-to-GDP ratio with a debt-to-GDP ratio of 50% of a year's required a primary surplus of 1.5% of GDP. In order to maintain a constant debt-to-GDP ratio with a debt-to-GDP ratio of 100% of a year's GDP required a primary surplus of 3% of GDP. Running up the national debt was thus quite costly.

• Heidi Shierholz: Five-year anniversary check-in: still nearly nine million jobs down: This morning’s jobs report was status quo. The labor market added 155,000 jobs in December, right in line with the 153,000 average of the first 11 months of the year, and the unemployment rate, at 7.8 percent, was unchanged from the revised November unemployment rate. The problem, of course, is that a status quo report in today’s labor market represents an ongoing jobs crisis. The jobs deficit – the number of jobs lost since the recession officially began five years ago plus the number of jobs we should have added just to keep up with the normal growth in the potential labor force – remains nearly nine million. At December’s growth rate the labor market will not fill in that gap until the end of 2021.

• Barney Frank: I Want The Massachusetts Senate Appointment

• Brian Powell: The Oklahoman's New Year Prayer For Cooler Temps Ignores Climate Change: "The Oklahoman's wish reeks of irony; the paper has regularly denied the existence of global warming while pushing for energy policies that would benefit the paper's billionaire owner, oil and gas tycoon Philip Anschutz, and continue us on the path of further warming. Unsurprisingly, the paper's complaint about the extreme weather was devoid of deeper context…"

• Paul Krugman: Debt in a Time of Zero: "[W]hy does the Federal government have to borrow at all? Why can’t it just print money to pay its bills? After all, haven’t people like me been saying that this isn’t actually inflationary? Now, it turns out that there really is a problem…. [P]rinting money isn’t at all inflationary under current conditions…. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought…"

• Josh Marshall: Remains the Same: "Everything that happened over the last few days leaves us exactly where we were, which is that everything now comes down to a fight over the debt-ceiling — and now without the cudgel of the automatic end of the Bush tax cuts…. Just a short while ago I had a Dem point me to some tweets from former Bush administration spokesman Tony Fratto saying basically that pushing the country into default just isn’t a legit negotiating position. Well, if only Tony Fratto were running the House GOP. When it comes to budgetary hostage taking and threatening the country’s full faith and credit (which is a constitutional imperative, it’s worth noting) I don’t believe we’re nearing or will likely ever hit Peak Crazy. All that means this looks like a chaotic and destructive couple months ahead of us."

• Kevin Drum: Crime Is at its Lowest Level in 50 Years. A Simple Molecule May Be the Reason Why: "I've written several posts recently about the idea that America's great crime epidemic, which started in the 60s and peaked in the early 90s, was caused in large part by lead emissions from automobiles…. The long version of the story is on the cover of the current issue of Mother Jones, and today it's available online for the first time."

Russell Braddon on the Burma Railroad:

Once again time ceased to have any significance, for almost a year no man knew what day of the week nor what week othe month nor even what month of the year it was. It was just 1943 and the Railway. If one were to survive it was essential not to acknowledge the horror that lay all around, still more not to perceive the effect it had upon oneself. It was not wise ever to look in a mirror.

Life accordingly evolved into a blur of continuous work, people dying, guards bellowing, heavy loads to be carried, fever which came in tides of heat and cold on alternate days, dysentery and hunger. All those became the normal. Upon them, occasionally, an event super-imposed itself with sufficient violence to be remembered. There was little scope for planning one’s way of life. To preserve my health, I vowed to wash whenever it rained, lying under the dripping edge of the hut, and to clean my teeth every day, using the tooth brush Piddington had given me and ground-up charcoal for powder.

Charcoal was also useful as a medicine against dysentery. To preserve some dignity, I vowed I would shave at least once a week if only I could remember the days. To preserve my self-respect, I vowed that whenever necessary I would make the latrines or bust; and to preserve at least some mental agility, I determined to learn off by heart one page a day of Mr Hitler’s Mein Kampf.

As the days succeeded one another for the rest of that black year, this particular vow became increasingly difficult, but I managed never to yield to the temptation of excusing myself from my task-and in return derived a perverse pleasure from the daily assimilation of so much vile prose.

http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

David Drake:

Five Firebases: I was very pleased when I got the materials for the "Hammer’s Slammers" role-playing game…. I like the art as well, but that leads to a different question: does it look the way I meant it to? The truth is that I write from the mental pictures I formed in the field in 1970 with the 11th Armored Cavalry Regiment, and I wasn’t thinking much about US equipment then.  An M48 tank (for example) was something I rode on, having generally mounted by climbing the bow slope. I spent much more time looking from tanks than at them. Therefore I write from the viewpoint of people who don’t think much about the appearance of their own vehicles or fellow crewmen, and whose view of the surrounding landscape is primarily concerned with potential ambush sites and whether the fellow with the hoe in the rice paddy has a Kalashnikov hidden nearby….

Growthology: Economics Bloggers Forum 2012

Aimai:

No More Mister Nice Blog: In the Weeds: The Boston Globe had a long post mortem on the Romney Campaign…. [U]nless your Schadenfreude tank is low I wouldn't recommend it…. [W]hat is really quite gripping is down in the weeds, in the comment section…. [W]e can see… people who probably did vote for Romney when they thought he might win now disavowing having voted at all…. Here's "Dotcomsiren"….

As Peter Brimelow, Dick Morris, and Sean Trende have shown, Romney lost the white vote. He took white voters for granted and they didn't bother to vote. I should know, I am white and I didn't vote either. What would have been the point?

"Filibuster Jones" makes a related argument--all voters are fools and knaves and any politician who doesn't treat the that way will be rejected. Romney's voters, mysteriously being neither fools nor knaves, stayed at home:

Menzie Chinn: Econbrowser: The Year in Review II: Yet More Fantastical Pseudo Economics:

Worth Reading:

• Mark Thoma: Some reactions to the fiscal deal

• Brad Plumer U.S. now on pace for European levels of austerity in 2013

• Paul Krugman: Is Our Austerians Learning?: "Paul Solman has a post on Greg Mankiw’s attempt at a gotcha over my views circa 2003 on the consequences of deficits. As Solman notes, not only are the situations very different, I’ve also long since acknowledged that I was wrong, and have explained how and why I modified my views as a result. Extra bonus: notice how Mankiw, faced with the failure of his gotcha, immediately tries to claim that he wasn’t actually saying what he was, in fact, saying. Anyway, as I told Joe Weisenthal, you’re supposed to change your views when events don’t pan out as you expected. The real gotchas should come on people who stick with their ideology no matter how badly it performs in practice…. But we don’t have to go to hard-liners and marginal figures to find people who refuse to learn. Basically the whole austerian movement has been wrong about everything for two and a half years — wrong about interest rates, wrong about the effects of austerity on GDP in Europe. Yet where is the reconsideration? And utter wrongness seems to be no disqualification for being considered a source of wisdom. It’s hard to top Alan Greenspan’s record these past seven or eight years: he went from denying that there was a housing bubble (or even that such a bubble was possible), to declaring the housing bust over in the fall of 2006, to declaring that US deficits would produce high inflation and interest rates (along with expressing his regret that it hadn’t happened yet). Yet there he was at the founding of Fix the Debt, apparently still considered the Maestro."

• Gavyn Davies: Another year in thrall to the central bankers

David Frum: Americans for Insurrection:

In National Review Online before New Year's, Kevin Williamson explained that the Second Amendment guarantees the right of individual Americans to launch an insurrection against governments they believe tyrannical.

There is no legitimate exception to the Second Amendment for military-style weapons, because military-style weapons are precisely what the Second Amendment guarantees our right to keep and bear. The purpose of the Second Amendment is to secure our ability to oppose enemies foreign and domestic, a guarantee against disorder and tyranny.

To deliver the rebuttal, we welcome guest blogger Abraham Lincoln. In his first message to Congress, July 4, 1861, the sixteenth president explained:

Our popular government has often been called an experiment. Two points in it, our people have already settled,--the successful establishing and the successful administering of it. One still remains,--its successful maintenance against a formidable internal attempt to overthrow it. It is now for them to demonstrate to the world that those who can fairly carry an election can also suppress a rebellion; that ballots are the rightful and peaceful successors of bullets; and that when ballots have fairly and constitutionally decided, there can be no successful appeal back to bullets; that there can be no successful appeal, except to ballots themselves, at succeeding elections. Such will be a great lesson of peace; teaching men that what they cannot take by an election, neither can they take it by a war; teaching all the folly of being the beginners of a war.

Let me say that I will never, never, never forgive Andrew Sullivan for what he hired Charles Murray to do to the New Republic--or, for that matter, for any other of his manifold sins against the Holy Ghost.

Nevertheless, he and his myrmidons are always worth reading, and definitely worth funding now that they go Full Utopian on us:

New Year, New Dish, New Media: So it's over to you. We're in your hands. The meter won't start until February 1, but you can become a member now. It takes two minutes tops. All you need is a credit card and a zip code - and you're done. The more of you who decide to contribute more than $19.99 the deeper and richer and more ambitious a Dish we will be able to provide. We have no marketing, no ads, no corporation behind us now. We only have you.

The link is here. Join us and keep the Dish alive and ad-free here.

And change the media world just a little - for the better.

So everybody go to http://www.tinypass.com/andrewsullivan/ and pony up your $19.99. Pony up twice!

Obama, at his point of maximum leverage, gets… very little done:

Zachary Goldfarb: The agreement… fails to defuse the prospect of a catastrophic national default two months from now… does not raise the debt ceiling…. Nor does the package do anything to address stubbornly high levels of unemployment, with 12 million Americans out of work. Instead… [b]y allowing the payroll tax cut to expire, the deal takes money out of the hands of many Americans, sucking it out of the economy and slowing economic activity. And, finally, the deal is too modest to fundamentally tame the government’s soaring debt.

Joe Weisenthal:

[I]ncome taxes are lower for everyone today than they would have been if the American Taxpayer Relief Act hadn't gone into effect. While top marginal rates are rising for those making over $400K, those earners still get a cut on their income up to $400K.

The difference between the [2013] Obama Tax Cuts and the [2001] Bush Tax Cuts? Obama's are permanent.

And now on to our big long-run problem:

Unfunded tax cuts are, in the long run, bad juju. We cannot make policy on the expectation that the U.S. will always be able to borrow at negative real interest rates. And we should make policy aiming for a low debt-to-GDP ratio, because emergencies will arise in which we will want to boost federal spending quickly and substantially to attain important national purposes.

Obama needs a policy to fund these tax cuts--not in the short-term or (probably) in the medium-term but in the long run. What is that policy going to be? Carbon tax? Include health and other benefits in the tax base? Cut defense spending? Lower the top bracket amount down to $100K?

Inquiring minds would like to know...

American and Australian troops capture Buna in New Guinea:

Enemy is reduced in numbers, short of ammunition, food and supplies, whilst our Air Force and PT boats are preventing any large reinforcements or delivery of supplies. He is weak in artillery, has no tanks and has suffered a series of defeats. He has been attacked by our Air Force and artillery and has no adequate countermeasures.

He has had over six weeks to develop his defences and along all good approaches we can expect timber pill-boxes in depth which can only be located by actual contact. He is a determined defensive fighter and fights to the death, taking a heavy toll of attacking troops. He has used guns and Molotov cocktails in the jungle effectively against our tanks.

The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP--in order to avoid renewed recession.

But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be.

That isn't enough to make it worthwhile to make a deal before the new congress. After Boehner's reelection as Speaker and after the expiration of the Bush tax cuts eliminates the U.S.'s structural deficit, the politics become very different...

Tedra Osell.pdf