Grasping Reality on TypePad, by Brad DeLong

• Noah Smith: Noahpinion: The swamps of DSGE despair: "A DSGE model starts with the assumption of optimization by various economic agents such as households and firms, which spits out a system of nonlinear equations representing people's optimal choices. These nonlinear equations are then 'log-linearized' around a 'steady state', and the linearized forms of the equations, which are very easy to work with mathematically and computationally, are used to compute the 'impulse responses' that tell you what the model says the effect of government policy will be. The linearization is equivalent to the assumption that the economy undergoes only small disturbances. That's probably not a good assumption… but it does make the models a LOT easier to work with. It also generally makes the equilibriim unique…. Braun et al. decide to venture into no-man's-land, and work with a non-linearized version of a New Keynesian model with a Zero Lower Bound. So what do we learn from these sorts of exercises? In my opinion, we learn relatively little about the real economy, but that's OK, since we do learn some important things about DSGE models. Namely: (1) Almost every DSGE result you see is the result of linearization, If you drop linearization, very funky stuff happens. In particular, equilibria become non-unique, and DSGE models don't give you a good idea of what will happen to the economy, even in the fictional world where the DSGE model's assumptions are largely correct!… So even putting aside the question of whether DSGE models accurately represent reality, we see that most of the DSGE models you see don't even accurately represent themselves."

• Ryan Avent: Innovation: Uncle Sam, venture capitalist: "Economics points to the need for a strong government role in setting clear property rights and supporting the functioning of markets. And an englightened government should also price externalities (like those generated by greenhouse gas emissions). And it should subsidise basic research—a public good that markets simply won't do enough of without state encouragement. What the government should not do, economists seem to agree, is play venture capitalist…. I think it would be a grand thing if America's government, and governments in general, began listening to what economists have to say on these issues, taxed carbon, and focused on providing substantial funding for basic research. But we—meaning economists, elected officials, and those of us trying to translate economics into advice for elected officials—should keep in mind two very important things. The first is that the stuff that economists can agree on might not, actually almost certainly does not, capture the full range of Sensible Things to Do. There is no question that sensible support for education and basic research and a healthy market economy have been important for America's rise to global technological leadership. But America also happens to have benefitted from innovations that directly resulted from a government wildly overstepping its bounds. To give just one example: during the formative years of the computing era, government was an enormous source of demand for all the intermediates to production of computing power and computing power itself. America's military machine brought brilliant people together, demanded they do work requiring extraordinary computational power, and plied them with the funds to develop and build early computers. That work created expertise, component supply, and even private demand that fueled subsequent private investments. And government remained a significant source of final demand for the output of those later private investments. It is quite probable that computers would have been developed somewhere without all of that effort, and it's almost impossible to know whether the money spent on these efforts might have been used better elsewhere. But I don't think it's absurd to look back and feel that the government's role in supporting the development of computing (or the web, for that matter) was a Very Good Thing. Government support for innovation obviously turns up its share of duds, representing waste of real resources that could have gone toward some other end. But even America's higgledy-piggledly defence-biased innovation support network seems to generate a lot of hits… communication advances, industrial chemistry, nuclear technology, computing, and much of the technology that goes into the iPhone in your pocket and the Google driverless car soon to be ferrying you to work…. The second important thing to keep in mind is that government isn't going to adopt first-best solutions even when we're confident we know what they are. And as far as second-best solutions go, I'm not sure that throwing a lot of government money and effort at innovation programmes that generate lots of misses but the occasional big hit (and plenty of ancillary knowledge along the way) is a bad thing."

Ezra Klein: Scalia’s gay adoption claim: Even wronger than I thought | Enochian | Richard Owen (1860): Review of the Origin of Species by Means of Natural Selection | Mark Thoma sends us to Paul Krugman: Economist's View: 'The Price Is Wrong' | Fungi Discovered In The Amazon Will Eat Your Plastic | | The good, the bad and... the austeritist! | Is That Sarah Palin’s Hand In Your Pocket Or Is She Just Happy To See You?: SarahPAC spent more than twice as much on consultants in the 2012 election cycle as it did on candidates. (Candidates received less than $300k of the $5 mill SarahPAC grifted from the doubtless aged and infirm.) You guys, that buys SO MUCH NORDSTROM. |

President Roosevelt mandates the rationing of butter, cooking oil, meat, and cheese in the United States--gasoline had already been rationed…

Rationing - Wikipedia:

The War Production Board (WPB) ordered the temporary end of all civilian automobile sales on 1 January 1942, leaving dealers with one half million unsold cars. Ration boards grew in size as they began evaluating automobile sales in February (only certain professions, such as doctors and clergymen, qualified to purchase the remaining inventory of new automobiles), typewriters in March, and bicycles in May. Automobile factories stopped manufacturing civilian models by early February 1942 and converted to producing tanks, aircraft, weapons, and other military products, with the United States government as the only customer. By June 1942 companies also stopped manufacturing for civilians metal office furniture, radios, phonographs, refrigerators, vacuum cleaners, washing machines, and sewing machines.

Civilians first received ration books—War Ration Book Number One, or the "Sugar Book"—on 4 May 1942, through more than 100,000 schoolteachers, PTA groups, and other volunteers. A national speed limit of 35 miles per hour was imposed to save fuel and rubber for tires. Later that month volunteers again helped distribute gasoline cards in 17 Atlantic and Pacific Northwest states. To get a classification and rationing stamps, one had to appear before a local War Price and Rationing Board which reported to the OPA (which was jokingly said to stand for "Only a Puny A-card"). Each person in a household received a ration book, including babies and small children who qualified for canned milk not available to others. To receive a gasoline ration card, a person had to certify a need for gasoline and ownership of no more than five tires. All tires in excess of five per driver were confiscated by the government, because of rubber shortages. An A sticker on a car was the lowest priority of gasoline rationing and entitled the car owner to 3 to 4 gallons of gasoline per week. B stickers were issued to workers in the military industry, entitling their holder up to 8 gallons of gasoline per week. C stickers were granted to persons deemed very essential to the war effort, such as doctors. T rations were made available for truckers. Lastly, X stickers on cars entitled the holder to unlimited supplies and were the highest priority in the system. Ministers of Religion, police, firemen, and civil defense workers were in this category. A scandal erupted when 200 Congressmen received these X stickers.

I did indeed used to hear that running up the national debt right now via expansionary fiscal policy would indeed turn the U.S. into "Greece" and deepen the current downturn. It is true that I am not hearing that nearly as much any more--that it is now the burden of financing the debt in future generations that is the problem.

When did the shift take place? Why did the shift take place? How did the shift take place?

Paul Krugman:

Cheating Our Children: So, about that fiscal crisis — the one that would, any day now, turn us into Greece. Greece, I tell you: Never mind. It’s as if someone sent out a memo saying that the… repeated warnings of a U.S. debt crisis that keeps not happening has outlived its usefulness. Suddenly, the argument has changed…. The deficit, we’re told, is really a moral issue….

There has, of course, been no explicit announcement of a change…. But… pundits who spent years trying to foster a sense of panic over the deficit have begun writing pieces lamenting the likelihood that there won’t be a crisis, after all…. So they have a new line: We must bring down the deficit right away because it’s “generational warfare,” imposing a crippling burden on the next generation.

Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down… business investment has actually recovered fairly strongly… the main reason businesses aren’t investing more is inadequate demand….

L'Esprit de l'Escalier: March 29, 2013

• Re: "'Islamic' is too broad an adjective here. The Ottoman timar system of land tenure in return for military service, while not the same as European feudalism, was certainly not 'mamlukism'." OK, how about "classical Islamic". Both Ottomans and Mughals (and, I would argue, Safavids) are different beasts that to a considerable degree escape the destructive Ibn Khaldun dynamic that hits the classical Islamic heartland after about 1000... http://delong.typepad.com/sdj/2013/03/noted-for-march-24-2013.html#tpe-action-resize-238

• You do know that this isn't an efficient market event study? That the direct and indirect effects of things like "47%" or debate #1 diffuse gradually through the voter population, and are not shown immediately in the next days polls? Proprietary materials I have seen do show that as many people think they voted for Obama over Romney because of 47% as think they voted for Romney over Obama because of debate #1. But you seem to know better... http://ipeatunc.blogspot.com/2013/03/brad-delong-versus-political-science.html

• Look: people are good at analysis, good at listening, good at coordinating. Most people are good at one. Most of my friends are really good at analysis but lousy at listening and coordinating. Someone like Sheryl Sandberg is superb at coordinating, excellent at listening, and very good at analyzing. But Mitt Romney is not Sheryl: he is superb at coordinating, so-so at listening, and not so smart at analyzing--a "Chet", in Belle Waring's parlance. That means that someone like Mitt will be vulnerable to this "47% moochers--nation of takers" stuff... http://www.democracyjournal.org/28/shrugging-off-atlas.php

• Corey Robin watches paste-eating pseudos at work at the Mercatus Center: "The libertarian Mercatus Center, which is located at George Mason University, has issued its third edition of… how much freedom there is, state by state, in the US…. North Dakota is the freest state in the union! (It’s also a state that has effectively banned all abortions.)… California is the 49th and New York is the 50th freest state in the union! In other words, the least free states. Which is why we’re color-coded black on the map. Like North Korea at night…. Update (9:30 pm):** Someone in the comments thread pointed out to me that one of the measures on the freedom index—that is, how free a state is—is 'Bachelor Party'. What the hell is that, you ask? According to our friends at Mercatus: 'This user-created category combines a variety of laws including those on alcohol, marijuana, prostitution, and fireworks'. Right. So no measure for abortion because, as the print edition of the report makes clear (see pp. 5-6), it is a controversial issue about which reasonable people disagree. But prostitution? Part, apparently, of what Rawls would call our 'overlapping consensus'."

• Mark Kleiman: We need to solve our alcohol problem to solve our crime problem: "Drugs are an important part of the question if you include alcohol as a drug…. All illegal drugs combined are to alcohol as the Mediterranean is to the Pacific…. Any sentence about drug policy that doesn’t end with “raise alcohol taxes” is an incoherent sentence…. Half the people in prison were drinking when they did whatever they did…. [A]lcohol shortens time horizons, and people with shorter time horizons are more criminally active because they’re less scared of the punishment. Most people who drive drunk are sensible enough to know when they’re sober that they shouldn’t be driving drunk. It’s only when they’re drunk that they forget they’re not supposed to drive drunk. We need to keep them from drinking, which is what the 24/7 program does. We could also require everyone to be carded. Maybe you still get carded, but I don’t. But imagine everyone got carded, and if I had a DUI, I had a driving license showing I wasn’t allowed to buy a drink. You’d make the alcohol industry regulate its own customers. And I think you’d cut down on crimes substantially. But if I say that, I’m a nanny state fanatic, and if I say adults should be allowed to smoke a little bit of pot, I’m a crazy drug reformer."

• Harold Pollack: What ‘This American Life’ missed on disability insurance: "Look at the employment rates for people who applied for disability but were then denied. And those are actually quite low, below 50 percent. That suggests we’re not pulling people out of the workforce who would otherwise be there. It’s also worth remembering that the adult benefits for disability are not that high. If people are leaving the labor market so that they can get $13,000 per year and health care because that’s better than anything that employers can provide, what does that tell you about the state of the economy?… [S]ince 1996, the welfare caseloads have also plummeted. It’s always been the case for parents of disabled children who are poor, there has either been welfare or disability, and parents often used one program or the other. So as welfare became more restricted, there were reasons for people to shift into the SSI disability program. But the shift hasn’t been nearly as dramatic as “This American Life” made it seem. The overall proportion of poor kids on SSI has been pretty constant in recent years. And even as the poverty rate has gone up, the rise in children on SSI disability has been dwarfed by the much bigger decline of children in the old welfare system…. There are occasionally anecdotal accounts of parents coaching their kids to misbehave in school so that they can qualify for disability. But that just doesn’t show up in the numbers…. [Nick Kristof's] statistic[s are] very misleading. The program is actually quite stringent at the front end. And that means the kids who do qualify are much more likely to have chronic issues that last into adulthood. Many of the kids on childhood SSI have unambiguous conditions that are lifelong. So the fact that most of them qualify for adult disability doesn’t tell you much about the program."

Walter Hickey: This one goes out to all the Monty Hall "Truthers" out there. You know who your are. | Ezra Klein: The Battle Over Obamacare Moves to the States | Jeff Toobin: Why the Gay-Marriage Fight Is Over | Jacqui Cheng: Frustrated with iCloud, Apple’s developer community speaks up en masse | Simon Wren-Lewis: Why we should stop teaching Mundell Fleming | Paul Krugman: On Mundell-Fleming | Wonkette: Francis Breaks Rule, Washes Lady-Feet | George Perry: The Fed's Trying To Get the Party Started, So Why All the Criticism? |

http://www.project-syndicate.org/commentary/the-great-depression-redux-by-j--bradford-delong

BERKELEY – In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP.

In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression – and equally painful, even though America’s real GDP today is 12 times higher than it was in 1929.

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

Michael Gerson and Peter Wehner eating an awful lot of paste: How to Save the Republican Party: Commentary Magazine:

Barack Obama should have lost the 2012 election. The economy… was weak…. The signature legislative achievements of the president’s first term—the Affordable Care Act and the stimulus package—were so unpopular that on last year’s campaign trail he rarely mentioned them…. [T]he Republican Party… was regarded as highly energized and poised to win. Michael Barone, one of the most knowledgeable political observers in America, predicted Mitt Romney would comfortably defeat the president. “Fundamentals usually prevail in American elections,” Barone wrote four days before the election. “That’s bad news for Barack Obama.” And yet Obama won going away, defeating Romney by 126 electoral votes (332 to Romney’s 206) and winning the popular vote by nearly 5 million…

I want you to pause and reread those last two sentences. Four days before the election Michael Barone got the popular vote edge wrong by 7% and got the electoral vote edge wrong by 218. And Gerson and Wehner use Barone as their "expert" to back up their claim that "Barack Obama should have lost the 2012 election",

You might say that Barone's fantasy-based meltdown was something new--that before 2012 he was a keen-eyed and reality-based observer of American politics. Not so! Here's Barone from eight years ago:

Montgomery's frontal assault against the Nazi position holding the Mareth Line in southern Tunisia having failed, Horrocks's corps' "left hook" through the desert succeeds in outflanking the position and making it untenable. Here a Universal carrier escorts a large contingent of Italian prisoners captured at El Hamma.

Arguments that looser monetary policy right now would be too risky:

The Jeremy Stein argument: At very low interest rates, banks will gamble not quite for resurrection but for (apparent) profitability, because bank executives who report losses tend to lose their jobs. Thus it is very important that the central bank keep nominal interest rates on loans banks can safely make above 3%/year in order to prevent the impact of the lower bound on deposits from generating unwise reaching for yield, and consequent systemic vulnerability.

The Gavyn Davies argument: Central banks won't dare unwind because politicians won't like it when central banks report losses. Therefore central bankers dare not adopt policies that have a chance of incurring losses because they will not be able to execute such policies.

Arguments that looser fiscal policy right now would be contractionary:

• Andrew Kohut: The numbers prove it: The Republican Party is estranged from America: "While there are no catchy phrases for the Republicans of 2013, their image problems are readily apparent… the more extreme party, the side unwilling to compromise or negotiate seriously to tackle the economic turmoil that challenges the nation…. [E]ven elements of the Republican leadership that had been so confident of a Mitt Romney victory… are now looking at ways to find more electable candidates and cope with the disproportionate influence of hard-liners…. [A] staunch conservative bloc… has undermined the GOP’s national image. The Republican Party’s ratings now stand at a 20-year low, with just 33 percent of the public holding a favorable view of the party and 58 percent judging it unfavorably…. The values gap between Republicans and Democrats is now greater than the one between men and women, young and old, or any racial or class divides…. [A} bloc of doctrinaire, across-the-board conservatives has become a dominant force on the right…. There was less diversity of values within the GOP than at any time in the past quarter-century."

• David Frum sends us to Tim Montgomerie: The shrinking Cameron project: "I have never been a huge fan of Cameron. The über-modernisation. The disregard for the views of Tory MPs and grassroot members. The incompetent 2010 general election campaign. The rush to coalition, including a badly-negotiated deal on AV. The decision to backload spending cuts and frontload tax rises. The lack of a proper growth strategy. This last week has taken me to a new place, however. The shambolic handling of press regulation. The decision to offer a childcare subsidy that wasn't in the Coalition Agreement… a failure to deliver a marriage tax allowance that was…. [T]he Budget that gave up on deficit reduction and, in its place, announced a housing policy that may create another dangerous boom. Cameron's leadership is indeed looking like a lost decade. In Cameronism's first phase there was huge ambition… transform Britain and conservatism… fight climate change, protect the NHS… rebuild the family, cut big business down to size and work towards a ministerial team that was one-third women. The second more modest phase of Cameronism began when the economic crisis struck… form a government of national unity to balance the books. But we now know that the books won't be close to balanced. There has been no reimagining of the state and no grand plan for economic renewal. Our government added £120 billion to the national debt last year. It'll add another £120 billion this year and another £120 billion next. In what parallel universe does that add up to deficit reduction or fiscal responsibility? We're now into phase three of Cameronism. Plan A for deficit reduction is on the back burner and plan B(eer) for re-election is underway. And, you know what - despite the collapse in party membership, the defection of the centre right press and the splintering of the Tory vote - it might even work."

David Frum: The Free-Market Merits of a Carbon Tax | John Carney: Our Massively One-Sided Immigration Debate | David Frum: I Was Wrong About Same-Sex Marriage | The Museum of Bad Art |

Memorandum of Conversation by Mr. Harry L. Hopkins, Special Assistant to President Roosevelt regarding a meeting with Anthony Eden March 27, 1943 :

March 27, 1943.

Subject: Eden Visit--Conference with the President, Anthony Eden, Cordell Hull, Sumner Welles, Viscount Halifax, Mr. Wm. Strang

Hull raised the question of the 60 or 70 thousand Jews that are in Bulgaria and are threatened with extermination unless we could get them out and, very urgently, pressed Eden for an answer to the problem. Eden replied that the whole problem of the Jews in Europe is very difficult and that we should move very cautiously about offering to take all Jews out of a country like Bulgaria. If we do that, then the Jews of the world will be wanting us to make similar offers in Poland and Germany. Hitler might well take us up on any such offer and there, simply are not enough ships and means of transportation in the world to handle them.

Eden said that the British were ready to take about 60 thousand more Jews to Palestine but the problem of transportation, even from Bulgaria to Palestine is extremely difficult. Furthermore, any such mass movement as that would be very dangerous to security because the Germans would be sure to attempt to put a number of their agents in the group. They have been pretty successful with this technique, both in getting their agents into North and South America.

Brad DeLong (March 2009): Kick-Starting Employment: Unemployment is currently rising like a rocket, because businesses that normally would be expanding and hiring are not, and those businesses that would normally be contracting and shedding workers are doing so very rapidly. Businesses that ought to be expanding and hiring cannot, because the depressed general level of financial asset prices prevents them from borrowing money or selling bonds on profitable terms.

In response, central banks should purchase government bonds for cash in as large a quantity as needed to push their prices up as high as possible. Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices.

Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment.

In addition, governments need to run extra-large deficits. Spending - whether by the United States government during World War II, following the Reagan tax cuts of 1981, by Silicon Valley during the late 1990's, or by home buyers in America's south and on its coasts in the 2000's - boosts employment and reduces unemployment. And government spending is as good as anybody else's.

https://www.rebelmouse.com/annmariemarciarille/

• Larry Summers vs. The Mammon of Unrighteousness: "I do not believe that the long run can be ceded to the avatars of austerity. I am the father or stepfather of six children. Yes, on their behalf, I am concerned about the possibility that an overly inflationary psychology will develop in my country. Yes, on their behalf, I am concerned that an excessive debt not be placed upon them. But I am vastly more concerned, because I care about their long-run future, that a slack economy will not provide them with adequate jobs when they leave school. I am vastly more concerned, on behalf of their long-run future, that they will live in a country with decaying infrastructure that will not permit investment to maintain leadership. I am more concerned on their behalf that inadequate resources forced by countercyclical austerity will stunt the ability of their generation to be educated. I am more concerned, on their behalf, that excessive austerity-oriented policies will lead to slower economic growth, and as a consequence to ultimately higher debt-to-annual-GDP ratios--and more pressure, in terms of higher tax burdens, on the future. Those concerns, which come out of the improper management of current conditions, seem to me to be a larger issue especially for the long run than the concern that somehow unstable and overly expansionary policy starting from where we are now will stunt the opportunities that are open to them…. [S]tarting from where the United States or much of Europe or much of the rest of the industrialized part of the world is starting today, the risks of profound stagnation are a more pressing concern than the risks of a resurrection of stagflation."

• Josh Barro: For 'Faster Growth,' Soak the Poor?: "This weekend, the Wall Street Journal assembled a redoubtable list of conservative heavies in economics (George Schulz! Gary Becker! John Taylor!) to produce a completely insane account of what is wrong with America's economy and how to fix it. The upshot of the piece is that the U.S. economy is in the tank because the government gives too much money to poor people, and so it should stop. What's most amazing about this piece is what's not in it: any acknowledgement of the specific circumstances that led to the downturn of 2008 and the slow recovery from it. There's no discussion of the housing bubble and the financial crisis, of weak consumer demand as households struggle to deleverage, or of the vast number of job seekers for each available job. Instead, the authors identify the country's pressing problems as 'excessive spending and taxes, growing debt, interventionist monetary policy, and burdensome regulations that have slowed economic growth and job creation'. Some of these conditions have indeed arisen from the 2008 crash: Recessions cause government spending and debt to rise relative to the economy. But the authors have the causation wrong: Slow growth has led to rising spending and debt, not the other way around…. The choice to ignore current economic conditions allows them to advance the same set of soak-the-poor policy solutions at any time and in any economic condition."

Noah Smith: Noahpinion: Markets in almost nothing | Corey Robin (2005): Why Did Liberals Support the Iraq War? | Patrick Wolff: What It Is Like to Be a Bat | Menzie Chinn: Econbrowser: Reflation and Expenditure Switching in a Two-Speed World |

Why Don’t Politicians Care about the Working Class?: If we want to ensure that our children and grandchildren have the brightest possible future, the national debt is not the most important problem to address. Reversing the polarization of the labor market… is much more important. But money driven politics and a political class that has all but forgotten about the working class… stand in the way of progress…. [A]round two-thirds of the jobs lost during the recession were in moderate-wage occupations… more than one-half of subsequent job gains have been in low-wage jobs….

To be successful, we must make jobs our top priority. Instead, our focus has been on the debt, but all of the hand wringing over the debt and the future of our children is a ruse by Republicans that diverts our attention from the plight of the working class. As I explained a few weeks ago, we can pay our bills. If we have problems, it will be because of the politics surrounding the debt, the political brinksmanship conservatives have used in pursuit of ideological gains, not the economics…. Republicans see the large debt, much of which was caused by the recession, as a golden opportunity to reduce the size of government…. I don’t blame Republicans for their efforts. I wish the working class was more important to Republicans, and I cannot understand the indifference to the struggles of so many people. But… [f]undamentally, it’s the party of the rich and this is a chance to lower government spending and reduce the pressure for tax increases on high-income households.

Brad DeLong (2011) 2013: The Interest Rate That Did Not Bark in the Night: The Surge in U.S. Treasury Debt and the Non-Reaction of Rates: A U.S. government that had been paying back $240 billion a year at the start of the 2000s and issuing a net of $300 billion a year in the mid-2000s was suddenly issuing $1.1 trillion a year of bonds.

Back in the third quarter of 2008 I wondered: "Who is going to buy all of these things?" There were nearly $4.3 trillion of Treasuries held by the real public in mid-2008. But we were about to start adding to that at a pace of $1.1 trillion a year: $5.4 trillion by mid-2009, $6.5 trillion by mid-2010 $7.6 trillion by mid-2011--doubling U.S. Treasury debt held by the public in four short years.--and we are on track to have $10.7 trillion early 2014, an increase to a factor of 2.5 in less than five years.

Who I wondered back in 2008 would buy these things?

And at what prices would they buy and hold them?

Samuel Eliot Morrison: Off the Komandorski Islands, March 26, 1943:

Admiral McMorris's task group had been cruising on a north - south line west of Attu for several days in order to intercept Japanese reinforcements…. A recent and fortunate accession to the group was Salt Lake City, Captain Bertram J. Rodgers; "Swayback Maru," as the crew called this thirteen year old heavy cruiser because of her pronounced sheer. She had spent six months being repaired after the Battle of Cape Esperance, and with a new crew, almost half of them fresh from boot camp, had just relieved Indianapolis. On March 11, when assigned to the North Pacific Force, she had had but a week of intensive firing practice. Eleven days later she joined McMorris, who had commanded San Francisco in the Battle of Cape Esperance and knew what to expect of Salt Lake….

At 0730 March 26th, an hour before sunrise, this task group lay 180 miles due west of Attu and 100 miles south of the nearest Komandorski Island. The ships were strung out in scouting line six miles long, steering N by E….

http://delong.typepad.com/sdj/2011/06/hoisted-from-the-archives-if-you-are-looking-for-a-monument-to-john-hicks-look-around-you.html

At the very start of the 2000s in the years of the Clinton budget surpluses--remember those?--the U.S. government was repaying its debt at the rate of $60 billion a quarter: each quarter saw $60 billion less of U.S. Treasury debt out there in the private market for savers to hold.

George W. Bush--with assistance from Alan Greenspan and the entire rest of the Republican Party--quickly fixed that: from 2002 to 2007 the average quarter saw net Treasury issues of some $70 billion. Each quarter saw the U.S. Treasury having to find extra buyers for another $70 billion of bonds.

A bunch of us (definitely including me) feared that this shift from prudent to feckless fiscal policy would put substantial upward pressure on interest rates. We were wrong. A weak economy lowered private issues of bonds to fund investment. The desire of China and other emerging economies to keep their currency values low made them eager to soak up every dollar earned by their businesses' exports that they could find and invest it in U.S. Treasury debt. Add to that the emerging private rich abroad for whom U.S. Treasuries became more and more desirable as a hedge, and late-2007 saw the 10-year U.S. Treasury rate exactly where it was when the Clinton surpluses had come to an end at the end of 2001. The market took six years of this swing in bond issues and ate it, without a burp.

Then came the recession. Revenues collapsed. Spending on unemployment insurance and other social insurance expenditures rose. The Recovery Act added an extra $600 billion of debt on top of that. And Treasury interventions in financial markets required debt issues as well. A U.S. government that had been paying back $60 billion a quarter at the start of the 2000s and issuing a net of $70 billion a quarter in the mid-2000s was suddenly issuing $380 billion a quarter of bonds.

• Ezra Klein and Evan Soltas: Wonkbook: What we learned from the Senate Democrats’ budget: "If there was a surprise in the Senate Democrats’ budget, it’s that Harry Reid and Patty Murray got so many of their colleagues to sign onto a framework, however vague, that sits to the left of the deal President Obama is currently offering the Republicans. A key thread of the past few years is that the White House has believed Senate Democrats have little spine on taxes. In fact, quite a bit of the White House’s negotiating strategy has been driven by the worry that in a crisis situation, Senate Democrats would take a deal with very little revenue, undercutting the White House’s leverage. This was also part of why Republicans were so eager to see Senate Democrats produce a budget… [they thought] the deep fissures in the party were being papered over by Reid’s refusal to actually release a budget. If Senate Democrats had to release a budget, the uneasy consensus would crack…. On Friday, however, Senate Democrats stood up and voted for almost a trillion dollars more in tax hikes — and that’s on top of the tax hikes in the fiscal cliff deal. That’s about $375 billion more in tax increases than even Obama has been asking for lately. Republicans always said Senate Democrats needed to show the American people where they stand on the budget, and now, they have. To the GOP’s disappointment, it’s to the left of Obama, and far from them."

• Joe Gandelman: The GOP’s [and the Press's] Bachmann Problem: "[T]he New York Time’s Charles Blow who, in a superb column about Republican over the top, demonizing and hateful rhetoric — this time turned on OTHER Republicans — notes this about the Queen of Inaccurate Political Charges, Rep Michele Bachmann: 'Last year The Washington Post quoted Jim Drinkard, who oversees fact-checking at The Associated Press, as saying, “We had to have a self-imposed Michele Bachmann quota in some of those debates.” It’s sad when you are so fact-challenged that you burn out the fact-checkers. People like Bachmann represent everything that is wrong with the Republican Party… hyperbolic, reactionary, ill-informed and ill-intentioned… synonymous with the Republican brand…. When all the dust settles… Republicans will still be left with the problem of what to do with people like Bachmann. And as long as the party has Bachmanns, it has a problem.' It’s not just a matter of having Bachmann. It’s enabling her, not calling her out on obvious political statements (ahem) at variance with the facts. And not repudiating her."

Justin Lahart: Mortgage Securitizers Didn’t Know Housing Was Going Bust | Eurointelligence | Justin Lahart: Mortgage Securitizers Didn’t Know Housing Was Going Bust | Yes, Noam Chomsky is a hack. Why do you ask? | Jeff Weintraub: The Chomsky problem | Jeff Weintraub: Mark Kleiman grapples with the Chomsky Problem | Mark Kleiman: Greenwald on Chomsky | Brad DeLong (October 23, 1998): My Allergic Reaction to Noam Chomsky | Brad DeLong (June 17, 2002): My Very, Very Allergic Reaction to Noam Chomsky: Khmer Rouge, Faurisson, Milosevic | Courtney Weaver: Russians prepare to quit Cyprus |

Lawrence Summers says that Axel Weber is "crying 'Fire! Fire!' in Noah's Flood":

I think you got it right when you spoke of allowing people to have higher living standards and more choices in their lives and to live more comfortably. I cannot resist taking the opportunity, though, to disagree with the broad spirit of Axel [Weber's] last comment. I do not believe that the long run can be ceded to the avatars of austerity.

I am the father or stepfather of six children. Yes, on their behalf, I am concerned about the possibility that an overly inflationary psychology will develop in my country. Yes, on their behalf, I am concerned that an excessive debt not be placed upon them.

But I am vastly more concerned, because I care about their long-run future, that a slack economy will not provide them with adequate jobs when they leave school. I am vastly more concerned, on behalf of their long-run future, that they will live in a country with decaying infrastructure that will not permit investment to maintain leadership. I am more concerned on their behalf that inadequate resources forced by countercyclical austerity will stunt the ability of their generation to be educated. I am more concerned, on their behalf, that excessive austerity-oriented policies will lead to slower economic growth, and as a consequence to ultimately higher debt-to-annual-GDP ratios--and more pressure, in terms of higher tax burdens, on the future.

Those concerns, which come out of the improper management of current conditions, seem to me to be a larger issue especially for the long run than the concern that somehow unstable and overly expansionary policy starting from where we are now will stunt the opportunities that are open to them.

Now, of course, if policy were starting from a different place I would reach a different judgment.

But starting from where the United States or much of Europe or much of the rest of the industrialized part of the world is starting today, the risks of profound stagnation are a more pressing concern than the risks of a resurrection of stagflation.

http://www.bloomberg.com/video/bernanke-doesn-t-see-beggar-thy-neighbor-policies-ONeX8ABcQz2po8ueJfp52Q.html

Tyler Cowen:

What to look for in the Cyprus deal: The capital controls will have to be strict. What will the price of a Cypriot euro be, relative to a German euro? 50%? I call this Cyprus leaving the euro but keeping the word “euro” to save face.

Paul Krugman: Psychological Roots of Austerity:

Simon Wren-Lewis has a thoughtful post on the reasons for austerity mania, in which he accepts the role of special interests but argues that there are also psychological roots. Specifically, he suggests that politicians know that they are often irresponsible, and:

when the market starts to punish fiscal profligacy, it is as if a parent has discovered the child’s guilty secret. (The market is seen by many as a mysterious deity.) The politician wants to repent (or at least be seen to repent), and atone for past sins. After eating too many pastries, we go on a crash diet. After deficit bias, we have austerity.

Joseph Cotterill:

Scratch one stupid idea [Updated]: Monday morning’s Eurogroup statement on Cyprus…. Count how many times they now promise that insured deposits below €100k will not be bailed-in. There is a lot of mind-bleach being pushed on Europeans here. Still, a deal’s a deal. So, the bullet-points from the Annex:

1. Laiki will be resolved immediately – with full contribution of equity shareholders, bond holders and uninsured depositors….
2. Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.
3. The good bank will be folded into Bank of Cyprus (BoC)…. Only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.
4. The Governing Council of the ECB will provide liquidity to the BoC….
5. BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.
6. The conversion will be such that a capital ratio of 9% is secured….
7. All insured depositors in all banks will be fully protected….
8. The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of Cyprus.

Robert Waldmann asks a question:

Brad DeLong : Noted for March 17, 2013: In the linked review you agree with Friedman (and Bernanke at the time) that loose monetery policy could have prevented the great depression from being great. We now have new evidence. Bernanke et al did what Friedman told them to do. Indeed the great recession wasn't a depression or the lesser depression wasn't great. But it seems clear to me that the past 5 years show that Friedman was fundamentally wrong. GDP can tank while m2 is growing more quickly than usual. Do you agree that the view you expressed in your review has been falsified?

Yes, if "loose monetary policy" is defined as standard open-market purchases of short-term government bonds for cash in the context of a fixed medium- and long-run inflation target.

Doug J.:

It’s in the order of the hedgerows: Conor Friedersdorf has a good round-up of various principled Burkean arguments in favor of the Iraq war.

Andrew Sullivan:

FABULOUSLY ANTI-WAR: No, I don’t mean Madonna. I mean a group called Glamericans. These are drag queens, performance artists, and sundry others who form “a non-partisan group of funky Americans committed to non-violence and its promotion through glamorous, media-savvy, cultural events. We believe in America’s potential to be a peaceful and powerful force in the world. We believe that war is bad for our country, bad for our environment and bad for our travel plans.” Dammit. Let Saddam test nerve gas on political prisoners strapped down in hospital beds. Let him gas the Kurds. Let him protect terrorist groups.

Jonah Goldberg:

I want to rub it in the anti-war crowd’s face so badly. I want to hear the protesters explain why it’s a bad thing we released more than 100 children from an Iraqi gulag for underage political prisoners.

Some idiot named Brendan O’Neill who opposed the war but hated the protesters more than the war:

Most of the new antiwar groups express an entirely personal opposition to war, one based more on moral revulsion than effective political opposition. Protesters voice a personal distaste for violent conflict, rather than organizing a collective stand against it. And when opposing war is about making pompous moral statements about me, myself, and I, you can count me out.

He left out my favorite, from Megan McArdle:

I can’t be mad at these little dweebs. I’m too busy laughing. And I think some in New York are going to laugh even harder when they try to unleash some civil disobedience, Lenin style, and some New Yorker who understands the horrors of war all too well picks up a two-by-four and teaches them how very effective violence can be when it’s applied in a firm, pre-emptive manner.

Atrios puts it well:

I know all the ‘liberal hawks’ perceive themselves as having engaged in some sort of high minded intellectual exercise back in the day, but what they were really doing most of the time was punching hippies. The respectable position, then, was to support the war, never mind the details like how many soldiers to send in and how to deal with sectarian strife. Freedom isn’t free! Just as now the respectable position is austerity, never mind the real world effect it might have on the economy. End the debt!

I do wish that just once, someone who supported the war but who isn’t a total asshole would admit that they backed it because that’s just what serious people did at the time, that they had no idea, in practice, how the war might work out, that they’d never thought about it all.

Those of us who tried to deal with Robert Dole's root-and-branch opposition in 1993-1995 to so many of what had been his own policies from 1981-1992 are sardonically amused at (a) his distress at the Washington that he did so much to help make, (b) his apparent lack of self-knowledge of what he did, and (c ) Michael Kranish's gullibility and willingness to butter Dole up.

It really isn't funny, though:

Michael Kranish:

The story of Washington gridlock seen through the eyes of Bob Dole: It had been 16 years since Bob Dole stepped down as Senate Republican leader, ending a legislative career in which he earned a reputation as a master of bipartisanship. Yet there he was at the end of 2012, trying to close a deal.

David Warsh:

The Newspapers and the War in Iraq: Like many others in the commentary business, I went back last week and read what I was writing around the time of the US invasion of Iraq. I was not very happy…. I was a reluctant endorser of what I understood to be the Bush Administration’s aims for the war, though by the end of the year, in "Texas against the World", I had, like many others, turned around.

Reading over my clips from 2003 I noticed… I was forming my views… from the newspapers that I read…. Over thirty years, [Wall Street Journal op-ed] editor Robert Bartley built his fief into the single most powerful venue in the print media, championing supply-side economics in the 1980s and the Whitewater investigations in the  ’90s, before stepping down in 2002 to write a column…. Equally interesting in September 2001 was what was going on uptown, at The New York Times. A new executive editor, Howell Raines, had just taken charge, determined to distinguish himself from his predecessor, Joseph Lelyveld, by “trigger[ing] news” instead of merely reporting it when it happened…. Aggressive reporting, especially by Judith Miller, helped set the stage for the war. As Times public editor Daniel Okrent later wrote, “To anyone who read the paper between September 2002 and June 2003, the impression that Saddam Hussein possessed, or was acquiring, a frightening arsenal of W.M.D. seemed unmistakable.”  Nor was Miller the only Times reporter whose stories proved useful in making the case for going to war….

Samuel Grafton: British Lead: We Must Catch Up:

• Owen Zidar sends us to Larry Katz and Bob Margo: Technical Change and the Relative Demand for Skilled Labor: The United States in Historical Perspective: "This paper examines shifts over time in the relative demand for skilled labor in the United States. Although de-skilling in the conventional sense did occur overall in nineteenth century manufacturing, a more nuanced picture is that occupations “hollowed out”: the share of “middle-skill” jobs – artisans – declined while those of “high-skill” – white collar, non-production workers – and “low-skill” – operatives and laborers increased. De-skilling did not occur in the aggregate economy; rather, the aggregate shares of low skill jobs decreased, middle skill jobs remained steady, and high skill jobs expanded from 1850 to the early twentieth century. The pattern of monotonic skill upgrading continued through much of the twentieth century until the recent “polarization” of labor demand since the late 1980s. New archival evidence on wages suggests that the demand for high skill (white collar) workers grew more rapidly than the supply starting well before the Civil War."

• Ezra Klein interviews Chrystia Freeland: ‘Romney is Wall Street’s worst bet since the bet on subprime’: "I found the hostility towards Obama astonishing. I found the commitment to getting him out astonishing. I found the absolute confidence that it would work astonishing…. The Romney comments to his donors, for which he was roundly pounced on by Republican politicians… accurately reflected the view of a lot of these money guys… this 47 percent idea. They believe that Obama has been shoring up the entitlement society, and if you give enough entitlements to enough people, they’ll vote for you…. [T]his class… [is] convinced that it just so happens that their self-interest coincides perfectly with the collective interest. That’s where you get this idea of the “job creators”. The view is that to seek a low tax environment or less regulation, that’s not special pleading for yourself, it’s not transactional politics. It’s that this set of rules is the most conducive to economic growth for everybody…. By his own definition, Romney’s single strongest qualification to become president was analytically based, managerial excellence. And if the election campaign were the test of that, and even if you were ideologically his fan, you should think it right that he lost [because his campaign was so managerially un-excellent]…. I find it truly mystifying. I don’t claim to have particularly unique insight. I think it could be a combination of things. One is a generic belief that in order to run for president you have to think you’re going to win…. A second thing, and this is not so much about the rich guys as about the Republican Party in America, I think Republicans have felt since the time of Ronald Reagan that they are the party that represents the true America…. And when it comes to the super-rich guy dimension… it can make it hard to see reality, especially when you’re paying your campaign staff great salaries, as Romney was."

Kathleen Geier: The Siren Song Of War: Why Pundits Beat The Drums For Iraq | Jared Bernstein: Growth and Debt: It’s What Everyone’s Talkin’ About! | Paul Krugman: Why Don't We Have Deflation? |

• Chris Blattman sends us to Lisa Blaydes and Eric Chaney: Why did the Glorious Revolution happen in England, not Egypt? Slaves-on-Horses Weblogging: "What was it about feudalism that promoted both ruler stability and economic growth? And how did feudal institutions compare to methods of social control and organization in the Islamic world? European monarchs lacked the financial resources to outsource their military needs to foreign mercenaries following the fall of the Roman Empire. The feudal relationships which evolved served as the foundation for military human resources as the landed nobility of Europe emerged as a “warrior class.” When monarchical abuses took place, barons were able to impose forms of executive constraint on European kings that formed the basis for more secure property rights. Sultans in the Muslim world, by contrast, inherited more capable bureaucracies from conquered Byzantine and Sassanid lands and introduced mamlukism—or the use of slave soldiers imported from non-Muslim lands—as the primary means of elite military recruitment. Mamluks—segregated from the local population—swore their allegiance to the sultan. Local elites in the Muslim world did not serve as the source of elite military recruitment and, thus, were poorly positioned to impose the types of constraints on the executive that became evident in Europe…. This pattern suggests a “reversal of fortune”… where fiscal and administrative capacity actually hindered long-term economic prosperity by providing Islamic dynasties with the means to avoid bargaining with their own elite populations."

• Paul Krugman: Ireland Recovers, and Recovers, and Recovers: "March 2010: 'Greece has a role model, and that model is Ireland' — Jean-Claude Trichet. December 2011: 'As European leaders scramble to overcome the Continent’s debt crisis, many are pointing to Ireland as a model for how to get out of the troubles.' March 2012: 'Confidence is returning to Ireland and to Europe. The Irish economy is turning the corner.' — Jose Manuel Barroso. The latest GDP figures. Feel the boom! OK, maybe a bit more exegesis: Ireland embraced austerity early and forcefully, and has been a good soldier all along; so according to the austerians, it should be a success story. And they keep on seizing on any bit of good news as proof that austerity is working. Now, sooner or later Ireland will recover. But guys, we’re already four years into this story…"

David J. Lynch: Economists See No Crisis With U.S. Debt as Economy Gains | Pawel Morski: Cyprus, Fight Club & Capital Controls | Nicolas Véron: Europe’s Cyprus Blunder and Its Consequences | Ewald-Heinrich von Kleist-Schmenzin | An Open Letter to Google: Google Alerts Broken, Now Useless | Brad DeLong (1996): Why Not the Gold Standard? Talking Points on the Likely Consequences of Re-Establishment of a Gold Standard | Lisa Pollack: “I thought, I thought that was, that was not realistic, you know, what we were doing” – The London Whale |

http://www.bruegel.org/nc/blog/detail/article/1048-europes-cyprus-blunder-and-its-consequences/#.UU22wb9DFTQ

Why do the Weekly Standard's writers work so hard to persuade me that they lack both intelligence and honor? I mean, they work really hard to do so--and they do so quite effectively.

Let's back up, and start with one of my favorite readings from Thomas Nagel (2012), Mind and Cosmos:

If I decide, when the sun rises on my right, that I must be driving north instead of south, it is because I recognize that my belief that I am driving south is inconsistent with that observation [that the sun is rising on my right], together with what I know about the direction of rotation of the earth. I abandon the belief because I recognize that it couldn’t be true…. If I oppose the abolition of the inheritance tax, it is because I recognize that the design of property rights should be sensitive not only to autonomy but also to fairness…. I operate in the space of reasons. The appearance of reason… seems… something radically emergent…. Like consciousness, reason is inseparable from the physical life of organisms that have it…. It was originally a biological evolutionary process…. This, then, is what a theory of everything has to explain… the emergence from a lifeless universe of reproducing organisms… greater and greater functional complexity… consciousness… [and] the development of consciousness into an instrument of transcendence that can grasp objective reality and objective value.

I claim that Thomas Nagel's mind is not an instrument of transcendence grasping objective reality and objective value. I claim that, as Thomas Nagel claims to transcendentally grasp objective value when he concludes that there should be an inheritance tax, he is wrong. I claim that, as Thomas Nagel claims to transcendentally grasp objective reality when he concludes that if he is facing south the rising sun must be on his left, he is wrong.

As evidence for his wrongness, I point out that I once was facing south and saw the sun rising in front of me: in the south. True story. During northern hemisphere winter, a plane flying over the pole from Europe to America can exit the earth's shadow at a point where the sun is due south, thus the sun can rise in the south, and it did.

Every history tells a story of what happened: one damned thing after another. But which story do you tell?

If you are telling a story of the history of five hundred years ago, you most-likely focus on Martin Luther and Jean Calvin’s Protestant Reformation, on the Spanish conquest of the Americas, on the rise of the Shāhān-e Gūrkānī—the Moghul Empire—in the Indian subcontinent, and maybe a couple more. Those are the axes of the history of the 1500s: religion, expansion, and conquest. If you are telling a story of a thousand years ago, you most-likely focus on the rise of the Song Dynasty in China, on the waning of the golden age that was Abbasid Baghdad-centered Islamic civilization, and on, perhaps, the establishment of feudal “civilization” in western Europe. Those are the axes of the history of the 1000s: politics and culture. Other stories of other centuries would most-likely focus on the Christianization of the Roman Empire, the shift of China’s population center of gravity to the rice-growing south and and so forth. The rise, diffusion, and fall of dynasties, empires, religions, and cultures are the axes of history, with perhaps some reference to what the cultures of material subsistence in the background were and how they slowly changed.

Battle of El Guettar - Wikipedia:

On 17 March, the U.S. 1st Infantry Division moved forward into the almost abandoned plains, taking the town of Gafsa and starting to set it up as a forward supply base… the 1st Ranger Battalion—led by Colonel William O. Darby—pushed ahead, and occupied the oasis of El Guettar… Another operation by the Rangers took one of the Italian positions and 700 prisoners on the night of 20 March, after scaling a sheer cliff and passing ammunition and equipment up hand-over-hand. They were now in an excellent position for an offensive.

The Axis… decided that the 10th Panzer Division should stop them…. Von Arnim held Rommel′s opinion on the low quality of the U.S. forces and felt that a show of force would be enough to clear them from the Eastern Dorsals again. At 06:00 on 23 March, 50 tanks of Broich′s 10th Panzer emerged from the pass into the El Guettar valley…. They quickly overran front-line infantry and artillery positions. Major General Terry de la Mesa Allen, Sr.—commanding the U.S. 1st Infantry Division—was threatened when two tanks came near his headquarters, but he shrugged off suggestions of moving, "I will like hell pull out, and I'll shoot the first bastard who does."

German efforts took a turn for the worse when they ran into a minefield. When they slowed to clear the field, U.S. artillery and anti-tank guns opened up on them, including 31 potent M10 tank destroyers which had recently arrived. Over the next hour, 30 of the 10th Panzer′s tanks were destroyed, and by 09:00 they retreated from the valley.

A second attempt was made starting at 16:45, after waiting for the infantry to form up. Once again the U.S. artillery was able to disrupt the attack, eventually breaking the charge and inflicting heavy losses. Realizing that further attacks were hopeless, the rest of the 10th dug in on hills to the east or retreated back to German HQ at Gabès.

• Ryan Avent: Monetary policy: Unconventional policy forever: THE Federal Open Market Committee concluded its two-day meeting today with a nothing-burger of a statement…. [T]he Fed doesn't anticipate unemployment returning to its natural level until 2015 at the earliest. It should go without saying that seven full years with unemployment above normal is a sign of a pretty lousy monetary-policy performance. A good part of the explanation for that miserable showing can be summed up in three words: zero lower bound (ZLB)…. Surely, then, the Fed is looking ahead and trying to make sure that in the future it doesn't have to use unconventional tools. Right? Not exactly…. I attempted to ask Ben Bernanke whether the FOMC was concerned about the lack of a cushion between the fed funds rate and the ZLB and whether the FOMC had considered adjusting policy to address the issue—by raising the long-run inflation target, for instance. His answer, essentially, was that the Fed had only just announced its 2% inflation target and had no plans to change it. And he reckoned that weighing the costs and benefits of ZLB events with an eye toward computing the optimal inflation target was a matter for academic debate. Some research suggests that at low inflation rates an economy will hit the ZLB more often than was previously assumed, he noted, which might make the cost-benefit trade-off of a higher target more attractive…. Most of the other questions at the press conference concerned the problem of continued high unemployment and the Fed's assessment of the risks of unconventional policy. We are living the consequences of the ZLB and the Fed's best estimates have America right back in the same hole when the next recession hits. If the Fed is simply waiting for academia to sort things out, that's really disconcerting. Alternatively, if the Fed is actually pretty comfortable using unconventional policy and not particularly worried about rolling it out again during the next downturn then one has to ask why it isn't doing much more now to address unemployment."

• Mark Thoma: Economist's View: 'The Future of the Euro: Lessons from History': "[DeLong] goes on to try to explain why the system ended up with so many dysfunctional features. (I would add the us-them nature of the interactions between the nations in Europe that the various crises have exposed. It is not the 'all for one and one for all' attitude that is needed to implement the things Brad is suggesting, e.g. a 'a single Eurovia-wide banking regulator' and a 'fiscal-transfer' system. Instead it's a point your finger at others and moralize about the differences in behavior. It's a lot like the peace we thought we had in macroeconomics -- the convergence of thought between the various schools that people like Olivier Blanchard talked about -- until the Great Recession exposed the deep divisions that still exist)."

The D-Squared Digest One-Minute MBA | Rudiger Dornbusch and Alejandro Werner: Stabilization, Reform, and No Growth | Simon Johnson: The London Whale, Richard Fisher and Cyprus | Caroline M. Hoxby and Christopher Avery: The Hidden Supply of High-Achieving, Low Income Students | Raj Arunachalam and Suresh Naidu: The Price of Fertility: Marriage Markets and Family Planning in Bangladesh | Brookings Papers on Economic Activity: Latest Conference |

Comment on Ricardo Reis (2013, forthcoming), "Mis-Allocation of Capital Flows: The Portuguese Lost Decade(s) and the Euro-Crisis", Brookings Papers on Economic Activity:

Nineteen years ago I was sitting in this exact same seat, in this exact same room. I don't think David Wessel was sitting behind me--I think he was sitting along the exterior wall. And up on the podium was not Ricardo Reis but the late Rudi Dornbusch, presenting his paper with Alejandro Werner on Mexico: "Mexico: Stabilization, Reform, and No Growth".

Mexico had, Rudi said, "come to be viewed as a showcase of successful stabilization and economic reform, institutional stability, and financial predictability… becoming what Chile already had become and what all of Latin America hoped to be…. The stabilization strategy has led to an overvaluation of the exchange rate, a precarious financial situation, and a lack of growth…."

"An avalanche of capital," Dornbusch and Werner continued, "has strengthened the currency in real terms… financing not only investment but also a high level of consumption and intermediate goods imports, with the large external deficit dampening demand for domestic goods…. To a large extent… real depreciation is needed to improve the long-term economic prospects of Mexico and secure the benefits of economic reform."

Ricardo did not express the thought that I think lay behind Rudi's calls for large real depreciation in Mexico two decades ago. It was, I believe, precisely that real depreciation gives you a set of obvious places to productively direct the inflow of capital--to export agriculture and industry--that is exactly what an economy that has a difficult time productively allocating capital internally needs.

And it is not just Latin America. It is not just southern Europe where this happens. Can any of us think of an economy that had very large capital inflows between 2000 and 2007 and decided to allocate a great deal of them to building 4-bedroom houses with swimming pools and cathedral ceilings in the desert between Los Angeles and Albuquerque?

British war correspondent Alan Moorehead embeds with the American army:

In the drizzling rain little groups of infantrymen were drawn up to receive their last instructions. They were hardly more than boys, most of them, wonderfully tall and proportioned and looking very forbidding under their Nazi-like helmets.

Unlike the British battledress and equipment, which tends to hold a man stiffly upright, these boys were in a uniform which gave them plenty of free movement. The short and formless weatherproof jacket was scarcely a garment of beauty, but it allowed the men to walk in the easy stooping way to which they were accustomed.

Most of the American stuff was first-class, and even as good or better than the German. Their mess tins, water bottles, rubber-soled boots, woollen underclothes, shirts and windbreakers were all superior to the British equivalents and their uniforms in general were made of finer stuff.

L'Esprit de l'Escalier: March 22, 2013

• Natalie Raabe nraabe@theatlantic.com wrote: "In the forthcoming issue of The Atlantic, National Correspondent Jeffrey Goldberg profiles King Abdullah II of Jordan, the most pro-American Arab leader in the Middle East—and arguably the most candid..." Would it not be much, much, much, much better if Jeffrey Goldberg conducted a series of interviews with himself, explained the bullshit he wrote in 2002 and 2003, and set out concrete steps for how we was going to operate in the future to avoid misleading his readers to such an extraordinary degree?

• If you want to raise the Medicare and Social Security ages, you had better have a full-employment economy that produces lots of jobs...

• At least as I read him, O'Brien does not deny that the U.S. might someday run into the unpleasant monetarist arithmetic of fiscal dominance. And his denial that the U.S. can become Greece seems to me well-founded. As he writes: "Countries that borrow in a currency they control play under a different set of rules. They can never run out of money to pay back what they owe, since they can always print what they need as a last resort. That's not to say they actually do or should turn to the printing-press to finance themselves. But the option to do so calms markets. After all, inflation is a lot less bad than default for creditors. That's why it's no so easy for countries that don't borrow in a currency they control. They can default. And this is a case where thinking can make things so. Indeed, as Paul De Grauwe points out, countries that don't have their own central bank, like euro members, can fall victim to self-fulfilling panics that push them into bankruptcy. In other words, markets force up interest rates because they fear default -- which then pushes them into default. It's a bank-run on a country." Where you [James Hamilton] go most wrong, I think, is in your claim that: "Whether a country is able to borrow in its own currency is completely irrelevant for the above calculation.... [P]rinting money does not generate any magical resources with which to resolve a real fiscal shortfall." But it does. A country that can print money has the option of taxing nominal debt holders and sticky-price contract participants to resolve a real fiscal shortfall. A country that cannot is forced into an explicit default that robs its debt of its status as a safe nominal asset. Unless you believe that the costs of explicit bankruptcy are trivial (and why, after Lehman Brothers, would anybody ever believe that?) the option to tax nominal debt holders and sticky-price contract participants to resolve a real fiscal shortfall is a valuable one.

• The Republican plan for dealing with Medicare is like the Republican plan for dealing with Katrina. It's like Obama is saying: "I'll get you a Honda Accord for $25,000". While the Republicans are saying: "No, what you really want is a Honda Civic for $50,000!"

Martin Feldstein (1997):

EMU and International Conflict: For many Europeans, reaching back to Jean Monnet and his contemporaries immediately after World War II, a political union of European nations is conceived of as a way of reducing the risk of another intra-European war among the individual nation-states. But the attempt to manage a monetary union and the subsequent development of a political union are more likely to have the opposite effect. Instead of increasing intra-European harmony and global peace, the shift to EMU and the political integration that would follow it would be more likely to lead to increased conflicts within Europe….

What are the reasons for such conflicts? In the beginning there would be important disagreements among the EMU member countries about the goals and methods of monetary policy. These would be exacerbated whenever the business cycle raised unemployment in a particular country or group of countries. These economic disagreements could contribute to a more general distrust among the European nations. As the political union developed, new conflicts would reflect incompatible expectations about the sharing of power and substantive disagreements over domestic and international policies….

Although 50 years of European peace since the end of World War II may augur well for the future, it must be remembered that there were also more than 50 years of peace between the Congress of Vienna and the Franco-Prussian War. Moreover, contrary to the hopes and assumptions of Monnet and other advocates of European integration, the devastating American Civil War shows that a formal political union is no guarantee against an intra-European war. Although it is impossible to know for certain whether these conflicts would lead to war, it is too real a possibility to ignore in weighing the potential effects of EMU and the European political integration that would follow.

• Larry Mishel: David Brooks is wrong on the CPC’s Back to Work budget. In other news, the sun rose in the east today: "David Brooks recently wrote a misguided column…. Brooks sees an economy that “is finally beginning to take off” and no longer has 'a large and growing gap between the economy’s current output and what it is capable of producing.'… [But] the U.S. economy in late 2012 was running $985 billion (5.9 percent) below potential output for the year—which is equivalent to each person losing $3,100 (annually). I will grant Brooks that this 'output gap' is not currently growing larger… it is just 'large and not shrinking'…. Brooks snidely describes those who wrote the Back to Work budget as “people hermetically sealed in the house of government.” I think the stronger case is that people who see today’s economy as not needing any additional support are hermetically sealed in the house of privilege…. [T]he Back to Work budget actually greatly boosts the incentives and payoffs to working for lower-wage workers. It reinstates an expanded Making Work Pay tax credit for three years and permanently extends the recent expansion of the earned income tax credit and other tax credits benefiting low-income households. Policies such as these would increase incentives for low-income workers to work. So it boosts the payoffs to low-wage workers from adding hours to the labor force, but may provide some slight disincentives to those at the very top of the distribution. I can live with that tradeoff—why can’t Brooks?"

• Simon Wren-Lewis: The 2013 Budget and UK Monetary Policy: "[R]ead the minutes just released of the last MPC meeting, where the committee voted 6 to 3 not to undertake any further Quantitative Easing… which basically boil down to: 'Inflation was above the 2% target and was likely to stay above it for an extended period, and there was a risk that could lead to inflation expectations drifting upwards with adverse consequences for wage and price setting behaviour. Further monetary stimulus might increase that risk. It might also lead to an unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.' In other words, any attempt to use the very flexibility that the Treasury emphasises the MPC has risks a loss in the credibility of the medium term inflation target. So 6 of the 9 member committee decided it was best not take take that risk. I cannot see anything in the new guidance issued by the Treasury yesterday that would have influenced any of the 6 who voted to do nothing to change their minds. Now I guess the Treasury is hoping that the new governor will persuade some on the committee to vote the other way…. But surely the key question is why they need persuading in the first place. Why are possible risks to the credibility of the medium term inflation target allowed to outweigh the current almost 100% certainty that we have chronic demand deficiency which no one else is going to do anything to change? Perhaps a remit that places medium term inflation stability at its core, and says nothing about eliminating demand deficiency, might just have something to do with it."

Tim Duy: If Communication Is Effective... | Paul Krugman: Cyprus: The Sum of All FUBAR | Federal Reserve: Oversight and Disclosure | Center for American Progress |

This isn't cherry-picking, this is…

This is something I certainly did not expect from Alberto Alesina…

Jim Tankersley:

Sequester, to some economists, is no sweat: [T]he academic godfathers of “cut and grow” say recent economic indicators are proving their theory correct. The Standard & Poor’s 500-stock index is up 9 percent since Jan. 1. Consumer spending remains higher than many forecasters expected. Nonresidential fixed investment rose by nearly 10 percent in the fourth quarter. The labor market added 119,000 jobs in January and 236,000 jobs last month.

What could explain the booming stock markets, the latest data on private investment in the fourth quarter of 2012 and the January employment data?

Alberto Alesina, a Harvard professor who has written several papers suggesting that budget cuts done correctly can lead to better growth, wrote in an e-mail last week.

Sure the budget cuts [had] not taken place yet but investors and companies look into the future when they hire. Given that the future implies budget cuts, it must mean that they welcome them.

Winston Churchill:

Here let me remark that the best way to insure against unemployment is to have no unemployment.

There is another point: unemployables, rich or poor, will have to be toned up. We cannot afford to have idle people. Idlers at the top make idlers at the bottom. No one must stand aside in his working prime to pursue a life of selfish pleasure.

There are wasters in all classes. Happily they are only a small minority in every class, but anyhow we cannot have a band of drones in our midst, whether they come from the ancient aristocracy or the modern plutocracy, or the ordinary type of pub crawler.