Grasping Reality on TypePad, by Brad DeLong

J. Bradford DeLong and Laura D. Tyson: Discretionary Fiscal Policy as a Stabilization Policy Tool: What Do We Think Now That We Did Not Think in 2007?

DRAFT 1.4: May 31, 2013: 31 pp. 8166 words

Six years ago there was near-consensus among economists and policymakers alike in support of Taylor's (2000) argument that aggregate demand management was the near-exclusive domain of central banks. Today central bankers like Federal Reserve Chair Bernanke (2013) are actively asking for help by fiscal authorities. What caused this shift? In part, the course of interest rates has made the costs of discretionary expansionary fiscal policy lower than anyone would have believed. In part, the benefits via Keynesian multiplier processes appear to have been much larger than was presumed. And in large part monetary policy has proven inadequate to the task without undertaking risky and untried non-standard policy measures at a scale that has so far proven too large for central banks to risk. Against this shift in the benefit-cost calculus toward use of discretionary expansionary fiscal policy in the current conjuncture we must set uncertain long-run costs of debt accumulation. These costs, however, remain especially hard to analyze, as they seem to substantially consist of “unknown unknowns”.

8362 words

John Maynard Keynes, from The Economic Consequences of the Peace:

After 1870 there was developed on a large scale an unprecedented situation, and the economic condition of Europe became during the next fifty years unstable and peculiar. The pressure of population on food, which had already been balanced by the accessibility of supplies from America, became for the first time in recorded history definitely reversed. As numbers increased, food was actually easier to secure. Larger proportional returns from an increasing scale of production became true of agriculture as well as industry. With the growth of the European population there were more emigrants on the one hand to till the soil of the new countries, and, on the other, more workmen were available in Europe to prepare the industrial products and capital goods which were to maintain the emigrant populations in their new homes, and to build the railways and ships which were to make accessible to Europe food and raw products from distant sources. Up to about 1900 a unit of labor applied to industry yielded year by year a purchasing power over an increasing quantity of food. It is possible that about the year 1900 this process began to be reversed, and a diminishing yield of Nature to man's effort was beginning to reassert itself. But the tendency of cereals to rise in real cost was balanced by other improvements; and—one of many novelties—the resources of tropical Africa then for the first time came into large employ, and a great traffic in oil-seeds began to bring to the table of Europe in a new and cheaper form one of the essential foodstuffs of mankind. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up.

Justice McReynolds screams in anger as Chief Justice Hughes has a Constitutional Moment:

NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937): Mr. Justice McREYNOLDS delivered the following dissenting opinion.

Mr. Justice VAN DEVANTER, Mr. Justice SUTHERLAND, Mr. Justice BUTLER and I are unable to agree with the decisions just announced.

Considering the far-reaching import of these decisions, the departure from what we understand has been consistently ruled here, and the extraordinary power confirmed to a Board of three, the obligation to present our views becomes plain.

The Court as we think departs from well-established principles followed in Schechter Poultry Corporation v. United States, 295 U.S. 495 (May, 1935), and Carter v. Carter Coal Co., 298 U.S. 238 (May, 1936). Every consideration brought forward to uphold the act before us was applicable to support the acts held unconstitutional in causes decided within two years. And the lower courts rightly deemed them controlling…

From Brad DeLong: Review of Robert Skidelsky (2000), "John Maynard Keynes: Fighting for Britain":

Time passed. The death toll from WWI mounted toward ten million, Keynes became angrier and angrier at this civilization-breaking catastrophe, and angrier and angrier at the politicians who could see no way forward other than mixing more blood with the mud of Paaschendaele.

At the Versailles peace conference the new democratic German government was treated as a foe rather than a potential ally. The object became to extract as much in plunder and reparations from Germany as possible. Jan Christian Smuts wrote about how he and Keynes sat up night after night and:

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

Eleanor Roosevelt:

WASHINGTON, Monday—After I reached Washington yesterday afternoon, I spent a quiet hour eating a rather frugal supper of iced tea and fruit on the south porch, and thought of people one remembers when one sits alone in this house or looks out at the view.

Austin Frakt: The Oregon Medicaid study and the Framingham risk score | Noam Scheiber: GOP Obamacare Strategy Is Dooming the Republican Party | Scott Eric Kauffman: It’s always been raining in Castamere |

• Mitt Romney on the causes of his loss to Obama: "That [47%] was not a statement, if you will. It was taken off the record. Nonetheless, it did not reflect my views. I said it didn’t come out the way I wanted it to. But surely, that didn’t help me, and there were other things that didn’t help my campaign either."

• Mitt Romney on the causes of his loss to Obama: "Obviously, a hurricane with a week to go before the election stalled our campaign. I wish the hurricane hadn’t have happened when it did because it gave the president a chance to be presidential and to be out showing sympathy for folks. That’s one of the advantages of incumbency. But, you know, you don’t look back and worry about each little thing and how could that have been different.”

Jim Henley reads the editors of Bloomberg:

Bloomberg: Oops on Austerity! bloomberg.com/news/2013-06-0…

— Jim Henley (@UOJim) June 7, 2013

Also the Bloomberg comments are full of what @delong calls stranded commandos who don't realize the war is over and they lost.

— Jim Henley (@UOJim) June 7, 2013

The Bureau of Labor Statistics:

Transmission of material in this release is embargoed until 8:30 a.m. (EDT) Friday, June 7, 2013

Total nonfarm payroll employment increased by 175,000 in May, and the unemployment rate was essentially unchanged at 7.6 percent….

Household Survey Data: Both the number of unemployed persons, at 11.8 million, and the unemployment rate, at 7.6 percent, were essentially unchanged in May…. The civilian labor force rose by 420,000 to 155.7 million in May; however, the labor force participation rate was little changed at 63.4 percent. Over the year, the labor force participation rate has declined by 0.4 percentage point. The employment-population ratio was unchanged in May at 58.6 percent and has shown little movement, on net, over the past year….

Establishment Survey Data: Total nonfarm payroll employment increased by 175,000 in May, with gains in professional and business services, food services and drinking places, and retail trade. Over the prior 12 months, employment growth averaged 172,000 per month…. The average workweek for all employees on private nonfarm payrolls was unchanged in May at 34.5 hours…. In May, average hourly earnings for all employees on private nonfarm payrolls, at $23.89, changed little (+1 cent). Over the year, average hourly earnings have risen by 46 cents, or 2.0 percent….

The change in total nonfarm payroll employment for March was revised from +138,000 to +142,000, and the change for April was revised from +165,000 to +149,000. With these revisions, employment gains in March and April combined were 12,000 less than previously reported.

Biography:

• J. Bradford DeLong is a professor at the University of California at Berkeley, a research associate of the NBER, a visiting scholar at the Kauffman Foundation, and a visiting fellow at the Harvard Kennedy School. From 1993-95 he was a deputy assistant secretary of the U.S. Department of the Treasury.

C.V.:

• http://delong.typepad.com/files/20130401-delong-short-cv.pdf

Abstract:

• At the end of the 2008, the seriousness of the financial crisis and the resulting collapse in production and employment coupled with the Federal Reserve's exhaustion of its traditional monetary policy-management took, the open-market operation, raised the possibility that the U.S. government should consider using activist expansionary fiscal policy as a stabilization-policy tool. Doubters offered many reasons--some clearly invalid ex ante, others potentially valid--why such resort to activist expansionary fiscal policy as a stabilization-policy tool might be ineffective or harmful. How has our view of the validity of these doubts changed over the past six years? How has our view of the power of expansionary fiscal policy--especially when monetary policy is at and committed to remain at the zero lower bound--changed over the past six years? What are the current objections to more aggressive activist expansionary fiscal policy as a stabilization-policy than is contained in the current baseline? And what do we not know that we need to know in order to properly evaluate such policies?

Readings:

• J. Bradford DeLong and Lawrence H. Summers (2012), "Fiscal Policy in a Depressed Economy", Brookings Papers on Economic Activity http://www.brookings.edu/~/media/Projects/BPEA/Spring%202012/2012a_DeLong.pdf
• J. Bradford DeLong et al. (2013), "Rough Transcript: Stimulus or Stymied? The Macroeconomics of Recession" http://delong.typepad.com/sdj/2013/01/rough-transcript-stimulus-or-stymied-the-macroeconomics-of-recessions.html
• Carmen Reinhart et al. (2012), "Debt Overhangs Past and Present" http://delong.typepad.com/w18015.pdf

Jim MacDonald: The Farce of Ávila | Tim Duy: Falling Inflation Expectations | Peter Oppenheimer: Record equities highs are far from crazy | Ryan Grim: Grand Bargain Loses Center For American Progress Support In Major Blow To Austerity | Benjamin Wittes: What Conceivable Statement of Facts Could Have Produced this Order? | Neil Irwin: How much blame does Mervyn King deserve for Britain’s broken economy? | Josh Barro: "PRISM" Prism Spying Project Slides | Jared Bernstein: The Facts of the Case and Why We’re Not Following Them

collating responses, the "better plan" that the IMF ignored was "cast a magic spell to solve other people's political dysfunction" mainly

— Dan Davies (@dsquareddigest) June 6, 2013

• Ken Rogoff: Inflation Is Still the Lesser Evil: "The world’s major central banks continue to express concern about inflationary spillover from their recession-fighting efforts. That is a mistake. Weighed against the political, social, and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about. On the contrary, in most regions, it should be embraced."

Alan de Bromhead, Barry Eichengreen, and Kevin H. O'Rourke:

Political Extremism in the 1920s and 1930s: Do German Lessons Generalize?: We examine the impact of the Great Depression on the share of votes for right-wing extremists in elections in the 1920s and 1930s. We confirm the existence of a link between political extremism and economic hard times as captured by growth or contraction of the economy. What mattered was not simply growth at the time of the election, but cumulative growth performance. The impact was greatest in countries with relatively short histories of democracy, with electoral systems that created low hurdles to parliamentary representation, and which had been on the losing side in World War I.

When Adrian Hon started his http://mssv.net, it had three columns: one column was for what we now would call tweets, or supertweets; one column was for weblog posts; and one column was for longer pieces--articles, say. This seemed to me to be a good way to try to organize the stuff one was putting online.

So I have been--for those who want the articles and only the articles--started slowly populating http://delong.typepad.com/delong_long_form/ with things present and past…

The hope is that I can then figure out a good format to present @delong on twitter, Grasping Reality, delong_long_form, and probably https://www.rebelmouse.com/delong/Highlighted/--and that there will be advantages to such a presentation, as I think there were powerful advantages to the initial format Adrian Hon was experimenting with with

Right now we have a depressed economy, with the adult-employment-to-population ratio four and a half percentage points below what I see as its current normal demographic value of 63%. The adult-employment-to-population ratio fell from 63% to 58.5% in 2008-9. And since then--for four years--it has flatlined. I never thought I would see anything like this in my lifetime.

Right now interest rates are at levels far and away lower than I at least ever imagined I would see. Interest rates are extraordinarily low not just in the short term but all the way out the yield curve--if the United States government were to issue a nominal consul consol, its yield would be about 3.7% nominal. That would be an extraordinary low return in nominal dollars for giving your money to the federal government in perpetuity. If the U.S. government were to issue a real consol right now--I have no idea how to price it, because it would be a security that would have a duration of at least seventy years or so right now. I never thought I would see anything like this in my lifetime.

Michael Linden:

It’s Time to Hit the Reset Button on the Fiscal Debate: The federal budget has dominated the policy and political debate in Washington over the past three years. During this time, both the underlying fiscal landscape and the broader economic context for the debate have shifted in very important ways, yet the debate has remained remarkably static. Most policymakers, organizations, and policy leaders seem to be stuck in 2010, as if nothing has changed in the years since.

Much has changed, however, and the debate should change with it. If we are to move forward, it’s time to recognize all that has transpired in the past three years and begin the conversation anew. It’s time to hit the reset button on the entire fiscal debate.

General Brian Horrocks makes an unwise decision:

At the beginning of June I went to Bizerta to watch the 46th Infantry Division carry out a full-scale rehearsal of its assault on the Salerno beaches. While talking to the divisional commander in his headquarters I heard the air-raid warning sound.

Here was obviously a golden opportunity to see whether this U.S. smoke-screen was really effective or not, so we all went out into the street and watched it rolling steadily over the town. Suddenly out of the smoke emerged a low—flying German fighter with all guns blazing away into the blue — with no particular target at all.

Oliver Willis | The Daily Banter:

• What We Really See: GOP Senators Question Sotomayor
• Being Wrong Is Not Enough: How The Media Protects Conservative Punditry
• In Defense Of Michael Savage
• Smells Like A Movement
• When Oliver Willis talks the blogosphere listens | MetaFilter

Jonathan Coopersmith (2000): But Gore Did Help Invent the Internet | Digby: Deficit fever is definitely breaking | Susan Perry: The health risk of having a gun in the home | Josh Barro explains that this is why he is a Republican | Michael Hiltzik: Social Security should be expanded, not cut | Mike Konczal: We Just Had the Lowest Core Inflation in 50 years. What Does This Mean for "Expectations" and Monetary Policy? | Francesco Saraceno: Supporting Aggregate Demand in Fiscally Constrained Economies | Sparse Thoughts of a Gloomy European Economist |

• Paul Krugman: Non-prophet Economics: "My view is that a pretty standard IS-LMish macro model has done very well in recent years. It didn’t predict the housing bubble and collapse, but it certainly did not, unlike some other models, declare that deep recessions can’t happen at all. It predicted that once we were up against the zero lower bound, countries could run very large deficits without driving up interest rates, that central banks could drastically expand the monetary base without inflation, that contractionary fiscal policy would in fact be contractionary…. I’ve made some pretty wrong predictions in my time. The thing, however, is that all of these bad predictions involved stepping outside the models I understood. I underestimated the payoff to the internet…. I predicted a fiscal crisis in 2003; I really regret that, because my own models weren’t predicting any such crisis — they said, even at the time, that America wasn’t vulnerable to an Argentine-type crisis because it borrowed in its own currency. But I let my gut feelings override my analysis."

• Digby: Hullabaloo: "Deficit fever is definitely breaking. But we're not out of the woods just yet. Uh oh, here comes another shrill condemnation of deficit fever by a leftwing radical commie: 'The International Monetary Fund chief criticized the U.S. on Tuesday for cutting back government spending too much too fast, saying it was taking a toll on growth in one of the world's main economic engines…. "The U.S. is not doing as well as it should, largely because of self-inflicted fiscal wounds", she said, a reference to government belt tightening which the IMF says has gone too far too fast. She particularly criticized across-the-board federal spending cuts imposed in March known as sequestration.'… It's another data point showing that deficit fever may have finally broken…. Now if they could just get rid of sequestration altogether we'd be in good shape."

Mark Thoma sends us to:

M. Henry Linder, Richard Peach, and Robert Rich: Drilling Down into Core Inflation: Goods versus Services:

Drilling Down into Core Inflation: Goods versus Services - Liberty Street Economics: We find a strong relationship (both economically and statistically speaking) between core services inflation and long-term inflation expectations. There is also an important nonlinear relationship between core services inflation and the unemployment gap, indicating that the impact of changes in labor market slack on core services inflation depends on the level of slack itself.

For the core goods inflation model, the results suggest a very different set of factors influencing the behavior of the series. We find persistence in the series, that is, core goods inflation depends on its own past value. Relative import price inflation—growth in (non-petroleum) import prices less core goods inflation—also matters, suggesting goods prices act as the linkage between supply shocks and core inflation. There is also evidence of a relationship between core goods inflation and expected inflation, but that the relevant inflation expectations are associated with a short-term (one-year) horizon. Last, we find no meaningful effect of the unemployment gap on core goods inflation, consistent with commentators who contend that it is global (and not domestic) economic slack that impacts core goods inflation.

An outtake from the in-progress DeLong and Summers, "Fiscal Policy in a Low-Interest Rate Environment". This digression has no proper place in the paper, so I am posting it here...

Suppose that we have an economy growing at rate n + g, population growth plus productivity growth, with a government borrowing at an interest rate r. Suppose that the social welfare function is a sum over all periods of ln(C(t)), with three different possible sums:

1. the simple sum of per-capita consumption levels in each period: ln(C(t))
2. a population-weighted sum of per-capita consumption levels in each period: ln(C(t))(N(t))
3. a sum that treats increases in real GDP from higher population and increases in real GDP from higher per-capita consumption symmetrically: ln(C(t)(N(t))

Lawson Reichard:

Trade and Distribution

One of the basic building blocks of the political economy of international trade is the Stolper-Samuelson result: the shift from no trade to free trade is good for the owners of the abundant factor of production, but bad for the owners of the scarce factor of production. This accounts for why support for free trade tends to be stronger in democratic than in authoritarian regimes. The scarce factor of production tends to be, well, scarce. Hence not many potential voters own a lot of it. Hence the political support for trade protection in any system of government that gives weight to broad as opposed to strong preferences will tend to produce trade liberalization.

Lawrence Summers: Opening Remarks to Senate Budget Committee Hearing on “The Fiscal and Economic Effects of Austerity” June 4th, 2013:

Thank you for the opportunity to speak before this committee. You have chosen to address issues relating to austerity at an opportune time as both our economic and our budget situations are in considerable flux and as a broad rethinking of reflexively austere policies is underway worldwide. In my testimony today I want to do three things:

First, I will characterize the economic and fiscal outlook. Second, I will reflect on the economics of austerity, arguing that too little of the policy debate in recent years has focused on the imperative of increasing economic growth which, in the short and medium term, goes back to issues relating to demand. Third, I will comment on some of what I see as policy priorities for the years ahead.

Gerald F. Seib and David Wessel: Transcript: Larry Summers on Austerity:

JERRY SEIB: OK. So let’s get started. Thanks for coming. You all know Larry Summers. I won’t spend a lot of time introducing you to the former Treasury secretary, former Harvard University president, former head of the National Economic Council and all that. Larry, you know, you’re here – aside from the fact you wanted to have breakfast with us, you are here to talk about – to talk in Congress I guess later today about the great austerity versus no austerity debate. So maybe we can start in that neighborhood, if you don’t mind. So let’s see. Unemployment’s down. The deficit is dropping. Health care costs are slowing. Things seem to be pretty good. Should we just forget about reducing the deficit in the short term given that all those things are happening?

Josh Barro: The Reformists and Me | Jonathan Portes: Monetary policy and fiscal consolidation? | Duncan Black: Eschaton: Repetition | Dani Rodrik: Turkey’s protesters have been let down by all sides | John Maynard Keynes: The Economic Consequences of the Peace | Brad DeLong: Robert Skidelsky (2000), "John Maynard Keynes: Fighting for Britain" | William Galston and Elaine Kamarck (1989): The Politics of Evasion: Democrats and the Presidency | Storm of Swords: "It gets better--not really" | Mike the Mad Biologist: Maybe We Should Give Up on Peer Review and Just Dump Everything in ArXiv | James Pethokoukis: Have conservative reformers really won the battle on monetary policy? Not quite… | Paul Krugman: Our Driven Elite (Trivial and Time-Wasting) | Transcript: Larry Summers on Austerity | Brad DeLong: Where the Money Is Going to Be | Ezra Klein: Ron Brownstein thinks Rick Perry may be about to turn Texas blue | Josh Barro: Erick son of Erick shows the worst in GOP | Tuesday Delong-Being-Stupid Self-Smackdown Stock Market Forecast Watch (1995) |

• Duncan Black: Eschaton: Repetition: "What Daniel Hallin (via Jay Rosen) called the Sphere of Legitimate Controversy seems to be changing. Since Serious People don't acknowledge dirty hippies, it's hard to know whether we've had anything to do with that. Perhaps the R-squared embarrassment was a tipping point, giving cover for people to change positions without admitting having been idiots. Still--encouraging!"

• Josh Barro: The Reformists and Me: But while market monetarism is the shining success of the conservative reform movement, it also points to trouble for the reformists. We have had zero success in convincing Republican elected officials that easy money is ever a good idea. The Republican party has gotten, if anything, more rabidly afraid of inflation and more flirtatious with the idea of returning to a gold standard. The 2012 Republican National Convention adopted a platform calling for a “commission to investigate possible ways to set a fixed value for the dollar. In this specific case, the reformists were able to get a hearing from the Republicans who count: the ones at the Fed, including Ben Bernanke. But in almost any other area, changing the conservative policy agenda will require getting Republican politicians to listen to you. And on that subject, Pethokoukis ran a disheartening quote from an anonymous GOP Senate staffer: 'It’s not that we don’t know about your ideas or understand them. We just don’t think they’re any good.' This is the key problem for reformists — actual Republican elected officials aren't interested in what we have to say unless it can be used to craft anti-Obama talking points. That has me pessimistic about changes in areas beyond monetary policy, and it makes me angry. And I suspect, in time, it will make my fellow reformists angry, too."

So I finally made a chunk of time to read and think about Michael Kinsley's response to Paul Krugman's rebuttal of Kinsley's claim that Krugman was engaged in a "misguided moral crusade against" rather than a technocratic critique of "austerity".

First and most essential, I need to set some rules here: If I'm going to be called a canine of any form, standards must be maintained.

I insist that it be not "attack dog" but either:

• the Maoist "running dog", or
• Jon Snow's direwolf: Ghost.

Those are the approved options. Pick one. Use it. Stick to it. It's really not hard at all to do.

Capisce?

I hope that that is now clear...

Committee Hearings - Senate Budget Committee: Jun 4 2013 10:30 AM:

SD-608: There will be a hearing of the Committee on the Budget on Tuesday, June 4, 2013 at 10:30 AM in Room SD-608 to consider The Fiscal and Economic Effects of Austerity

Witnesses:

• Larry Summers, PhD, President Emeritus and Charles W. Eliot University Professor, Harvard University

• Simon Johnson, PhD, Ronald A Kurtz (1954) Professor of Entrepreneurship MIT Sloan School of Management and Senior Fellow, Peterson Institute for International Economics

• Salim Furth, PhD, Senior Policy Analyst, Macroeconomics, The Heritage Foundation

Ezra Klein and Evan Soltas:

Wonkbook: The terrible deal for states rejecting Medicaid: Curious why some hardcore conservative governors, including Jan Brewer of Arizona and Rick Scott of Florida, are fighting with their legislators to accept Obamacare’s Medicaid expansion?… The 14 states that have said they will opt out of the new Medicaid funds… will… get $8.4 billion less in federal funding, have to spend an extra $1 billion in uncompensated care, and end up with about 3.6 million fewer insured residents…. States rejecting the expansion will spend much more, get much, much less, and leave millions of their residents uninsured. That’s a lot of self-inflicted pain to make a political point….

The Affordable Care Act will implemented in states that reject Medicaid…. The campaign to tell people making between 133 and 400 percent of poverty that they can get some help buying insurance will catch quite a few people making less… those people will be told that they would get health insurance entirely for free but for an act of their governor and/or state legislature…. Federal law already says Americans making less than 133 percent of poverty are entitled to Medicaid coverage. All that needs to happen is for recalcitrant state governors and legislators to get out of the way. The publicity the benefit will get, the value it has to the target population, and the clear political path to getting that benefit all present an extraordinary organizing opportunity.

In Texas, for instance, 38 percent of the Hispanic population is uninsured. Will having that security so near, and then learning that it’s been blocked by their government, activate that voting bloc in the way Prop 187 did in California? It’s a possibility…. Ron Brownstein….

In 1994, California Republican Gov. Pete Wilson mobilized his base by promoting Proposition 187, a ballot initiative to deny services to illegal immigrants. He won reelection that year—and then lost the war as Hispanics stampeded from the GOP and helped turn the state lastingly Democratic. Texas Republicans wouldn’t be threatened as quickly, but they may someday judge their impending decision on expanding Medicaid as a similar turning point.

Josh Barro: Erick Erickson Shows The Worst in GOP:

Conservative pundit Erick Erickson doesn’t like me. This morning he wrote 900 words about why.

But the main thing his post reveals is what’s wrong with Erickson – and with a Republican party that is built to appeal to people like Erickson.

He starts by noting that I am “a late twenty-something gay male.” I’m not sure why my sexual orientation is mentioned right at the top of his hit piece on me, following only my age. (Just kidding; I know exactly why Erickson mentioned this so early.) But at least this statement, unlike some that follow it, has the virtue of being correct….

We have had 5.8%/year real returns on the S&P since the fall of 1995. Not one of my best…

What Will the Stock Market Do? (10/17/1995):

Economists are always being asked this question--even though many of our theories have been constructed to demonstrate that we do not (and why we do not) have very good answers. Stock prices are (or are very nearly) a random walk: they are as likely to go up as down tomorrow, and whether they will go up or down tomorrow has nothing to do (or very little to do) with what has happened about the past and everything (or almost everything) to do with what we will learn in the future.

Jules Schelvis:

In the morning of Friday 4 June we finally stopped at Chelm, close to what had once been the Russian border.

The journey had made us so weary that we were no longer interested in where we would end up. Only one question remained how to get out of this foul–smelling overloaded cattle wagon, and get some fresh air into our lungs. That Friday morning at around ten, after a seventy-two hour journey, we finally stopped in the vicinity of a camp. It turned out to be Sobibor.

The Jews of the Banhofskommando were very heavy-handed getting us off the train onto the platform. They let on they were Jewish by speaking Yiddish, the language of the Eastern European Jews.

It is very good to be here, among a bunch of economists, sociologists, historians, operations researchers and others who understand what the point of the game is.

Social science having to do with the economy is about trying to track the emergent property that arise from the fact that we as a world have decided to organize our extraordinarily productive and diverse 7.3-billion human global division of labour largely through decentralized market exchange, mediated by firms that are islands of hierarchy and bureaucracy swimming in a larger market-oriented albeit government-regulated sea.

It is clear to everyone who tries to do this seriously that figuring out what the emergent properties of this complicated decentralized systems are hinges on the details of the institutions: productive, organizational, and regulatory details matter and matter a lot. There is a very narrow limit to what you can do that is useful by following in the hyper-abstract footprints of David Ricardo. To say anything real, you have to say what’s going on in the industry.

Krugman and Zakaria on Reinhart-Rogoff | John Kasich: GOP Governor Urges His Party To Expand Medicaid: 'What Would Ronald Reagan Do?' | Sarah Kliff: Hospital chains keep getting bigger | Paul Krugman: Ben Bernanke Endorses A 73 Percent Tax Rate | Sequester Drags on GDP; No Help From Job Market | NYC BikeShare | Jeffrey Young: Medicaid Expansion Denial Will Cost States Billions: Report | Steve Benen: Avik Roy and the wonk gap | Jonathan Cohn: Obamacare in California: How conservatives distort the debate: Anatomy of a Bogus Obamacare Argument: How an irresponsible Forbes writer distorted the debate |

• Wonkette: David Plouffe Calls Darrell Issa A Crybaby Car Robber Firebug To His Face (On Twitter): "Steve Benen remembers the good times in this New Yorker report about Darrell Issa’s car robbing and firebugging, the one we always get great glee in citing whenever we talk about how Darrell Issa loved to rob cars and start fires (and cry). 'For the record, Lizza’s report on Issa highlighted one run-in with the law after another, including arrests and indictments. There are also many suspected crimes — he’s accused of deliberately burning down a building and threatening a former employee with a gun — which did not lead to formal charges, but which nevertheless cast the congressman in a less-than-flattering light. The New Yorker report also noted an incident in which Issa was in a car accident with a woman who needed to be hospitalized. He drove away before the police could arrive because, as he told the person he hit, he didn’t have time to wait. Issa didn’t face charges, but he was sued over the matter, and agreed to an out-of-court settlement. And in case that weren’t quite enough, the same article also noted instances in which Issa appears to have lied about his background.'"

• Robert Waldmann: Most [economists] have gone all the way back to an IS curve (real interest and output) assuming AS doesn’t matter and with the LM curve replaced with something like a Taylor rule. AS if anything, is an adaptive expectations augmented Phillips curve which matters only because of real interest rates, the monetary authority’s response to inflation and debt deflation/inflation.

In letter, DOJ affirms Holder agreed there was probable cause to believe Rosen committed a crime. Not encouraging: judiciary.house.gov/news/2013/Sens…

— Ryan Lizza (@RyanLizza) June 4, 2013

Robert Skidelsky:

Unrepentant Economists: A bit of history to remind us where the economists stood on the matter of fiscal austerity: On February 14, 2010, the Sunday Times published this letter:

It is now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world. In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely. In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery…. The government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year. The bulk of this fiscal consolidation should be borne by reductions in government spending….

Noni Mausa: A Nation of the Non-Productive?:

Now and then for fun, I dip into the Wealth of Nations. Here’s a snippet from the beginning of Chapter III:

A man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude or menial servants. The labour of the latter, however, has its value, and deserves its reward as well as that of the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up, to be employed, if necessary, upon some other occasion. That subject, or, what is the same thing, the price of that subject, can afterwards, if necessary, put into motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leave any trace of value behind them, for which an equal quantity of service could afterwards be procured.

David Cay Johnston: Inequality Rising — All Thanks To Government Policies | Miles Kimball: De Laudibus Trolles | Venkat: A Brief History of the Corporation: 1600 to 2100 | Dani Rodrik (2011): Turkey’s Democratic Dusk | Justin Lahart: Fed's Challenge: Avoid the Bull's Horns |

• Catherine Rampell: Affordable Care Act Could Be Good for Entrepreneurship: "The Affordable Care Act is expected to produce a sharp increase in entrepreneurship next year, according to a new report from the Robert Wood Johnson Foundation, the Urban Institute and Georgetown University’s Health Policy Institute. The number of self-employed people is expected to rise by 1.5 million — a relative increase of more than 11 percent — as a direct result of the health care overhaul…. Economists have looked at whether this insurance-related job lock is deterring self-employment and the formation of new businesses, and the data suggest it is." | Paul Krugman: A Sad Story--I Mean, AS-AD Story |

• Timothy Burke: Recombinant Friedman: "My rephrasing of Thomas Friedman’s column today: 'One of the best ways to learn about the changing labor market, if you can’t find a taxi driver to have a conversation with on your way to the airport, is to find some well-connected guy who used to work at Goldman-Sachs, who has a start-up that he’s desperately trying to flog, and let him tell you all about how great his start-up idea is. If you let that guy write half your column for you, you’ll discover that today’s employers, unlike yesterday’s, would like their employees to have useful skills. And they don’t care where you got your skills from…. Just take the energy to teach yourself neurosurgery, high-tech manufacturing assembly, preparation of petri dish cultures, Python, persuasive analytic writing, and graphic design when you get home from working two different low-wage service jobs, and you’re sure to find an employer looking for those skills who will overlook you because there’s no real way on a resume to show that you’ve acquired those skills through self-study…. A world of opportunity awaits if you know the right people at Davos.'"

Zoot Suit Riots - Wikipedia, the free encyclopedia:

The second incident took place four days later on the night of June 3, 1943. About eleven sailors got off a bus and started walking along Main Street in Downtown Los Angeles. At some point they ran into a group of young Mexicans dressed in zoot suits and got in a verbal argument. It was then that the sailors stated that they were jumped and beaten by this gang of zoot suiters. The Los Angeles Police Department responded to the incident, many of them off duty officers calling themselves the Vengeance Squad, who went to the scene “seeking to clean up Main Street from what they viewed as the loathsome influence of pachuco gangs.” The next day, 200 members of the U.S. Navy got a convoy of about 20 taxi cabs and headed for East Los Angeles. When the sailors spotted their first victims, most of them 12-13 year old boys, they clubbed the boys and adults that were trying to stop them. They also stripped the boys of their zoot suits and burned the tattered clothes in a pile. They were determined to attack and strip all minorities that they came across who were wearing zoot suits. It was with this attack that the Zoot Suit Riots started.

Wolfgang Munchau:

Austerity, like a B-movie monster, will keep coming back: Did austerity end last week? This is what the headlines suggested when the European Commission gave five eurozone countries more time to meet their fiscal targets. The message from Brussels is that policy is no longer focused on austerity but on structural reforms. I am afraid that this apparent shift in policy amounts to little more than a tactical retreat….

Joe Weisenthal:

DEATH BY BICYCLE: Wall Street Journal Goes Absolutely Ballistic Over New York's New Bike Share Plan: Big thanks to Josh Brown for pointing this gem out.

The Wall Street Journal has made an epic editorial video blasting NYC's new bike share program (called Citibikes).

The lead plaintiff is editorial board member Dorothy Rabinowitz, who calls Bloomberg totalitarian, and says that she speaks for the great majority of New Yorkers who detest the bikes, and that they're a fire hazard.

Ivan Southall:

1855 hours. The turrets moved slowly while eyes strained in the sunlight. This was indeed the Tiger Country, a slaughteryard, a stage for a play of suspense and savagery, where all men at one time or another knew the meaning of fear. Here there were no parachutes and no patriots in the back country.

1900 hours. Goode, swinging his tail turret to the right, suddenly stopped. His eyes widened and his heart missed a beat: “Tail to Control,” he barked.“Eight aircraft. Thirty degrees on the port quarter. Six miles. Up one thousand feet.”

Ezra Klein smacks down Avik Roy: The shocking truth about Obamacare’s rate shock | Obituary: Bob Fletcher saved farms of interned Japanese-Americans during WWII | EconoSpeak: The Return of MaxSpeak | Rick Ungar vs. Avik Roy: The Dull Knives Come Out As Anti-Obamacare Forces Falsely Attack California Healthcare Exchange Prices | Jeff Weintraub: Let's face it, the Republicans are the problem (Mann & Ornstein, by way of Jonathan Chait) |

• Aimai: Why No Cheap Solution To Tornado Deaths?: "Just by the by, since we've just had another deadly tornado in Oklahoma.  Can anyone explain why a cheap and effective solution to the problem of OK's not being willing to build storm shelters and basements (this has been extensively covered in the news recently as being partially thrift, partially market failure, partially a rejection of 'government intervention') has not been found?  You'd think that a mandated (government intervention!) slit ditch behind each house and public school, possibly with a piece of clean sewer pipe lowered into it, only half above ground, would be a good solution? The rounded upper half would, theoretically, be resistant to the force of the tornado, the buried lower half would make it stable.  It would be hard to clean from year to year but it only has to be useable for a few minutes at a time.   At the rate Tornados are sweeping through there is going to have to be some general, inexpensive, solution.  Sounds like a good time for the hated national government to put up a prize for architects and disaster relief specialists to come up with an inexpensive, easily installed, quick fix for storm shelters."

• V. C. Pasupathi: Mark Bauerlein IS WRONG ON THE INTERNET: "Is addressing somebody directly with an angry tone an ad hominem attack? Or does one need to, you know, call a person names? I guess I hardly care right now. I do not like to be impolite, but man, Mark Bauerlein, you are WRONG ON THE INTERNET–with a bad argument that will, XKCD-style, ensure I stay up writing long after I should in order to respond. Something bad happened to English, you say…. You do, I’m afraid, spend quite a bit of time disparaging other departments. Here’s one instance: 'I have seen the same thing in departments all across the country, freshman courses that teach Derrida’s “Structure, Sign, and Play in the Discourse of the Human Sciences,” departments that don’t require a sophomore Chaucer-to-Joyce survey for the major, professors unpersuaded that Lyrical Ballads by Wordsworth and Coleridge are more important than Angels in America.'… I will concede that it’s entirely possible that you have done some research into first-year and other courses at 'departments all across the country'. But I will not believe that there are multiple first-year courses that require Derrida at universities in the Unites States until you produce a list of them. I’m calling bullshit on that. You say it’s not? Fine. Prove me wrong."

• Nick Rowe: Monopolistic Competition vs the Plucking Model: "To use Milton Friedman's metaphor, it's like a string stretched tight along a board. You can pluck the string away from the board but it returns to the board when you let go and can't go past the board…. What look like mountains are really just places where there is no valley. What look like booms are really just times when there is no recession…. So how do I reconcile monopolistic competition and the plucking model? Perhaps this is the answer: if monopolistically competitive firms are hit with a small positive demand shock, and their prices are sticky, they will increase output to satisfy demand. But if monopolistically competitive firms are hit with a large positive demand shock, and their prices are sticky, they will not increase output to satisfy demand, because doing so means they would go past the point at which price equals marginal cost. Small booms are possible, but large booms are impossible. But both small and large recessions are possible. The model is a hybrid of 1m and 2m. The SRAS curve continues a small way to the right of the LRAS curve, but then stops dead. And the outcome would also look like a hybrid of pictures 1 and 2."

…along comes something like this, where Paul nails what is going on absolutely--and in a way that somebody really does need to say:

We Are Not Having A Serious Discussion, Obamacare Edition: I fairly often receive mail pleading with me to take a more even tone, to have a respectful discussion with people on the other side rather than calling them fools and knaves. And you know, I do when I can. But the truth is that on most of the big issues confronting us, there just isn’t anyone to have a serious discussion with.

Ezra Klein offers a nice illustration of this point today, in his takedown of Avik Roy on Obamacare in California.

Robert Fickler, Mario Krenn, Radek Lapkiewicz, Sven Ramelow, and Anton Zeilinger (2013): Real-Time Imaging of Quantum Entanglement, Scientific Reports 3:1914 http://www.nature.com/srep/2013/130529/srep01914/full/srep01914.html

University of Vienna & Institute for Quantum Optics and Quantum Information Real-Time Imaging of Quantum Entanglement:

Quantum entanglement - which Einstein called "spooky action at a distance" - is one of most prominent and mind boggling features of quantum mechanics. To image the effects of entanglement directly, we created in our experiment a pair of entangled photons. The video shows images of single photon patterns, recorded with a triggered intensified CCD camera, where the influence of a measurement of one photon on its entangled partner photon is imaged in real-time. In our experiment the immediate change of the monitored mode pattern is a result of the polarization measurement on the distant partner photon.

Mao Zedong:

Some Questions Concerning Methods of Leadership:

1. There are two methods which we Communists must employ in whatever work we do. One is to combine the general with the particular; the other is to combine the leadership with the masses.

2. In any task, if no general and widespread call is issued, the broad masses cannot be mobilized for action. But if persons in leading positions confine themselves to a general call--if they do not personally, in some of the organizations, go deeply and concretely into the work called for, make a break-through at some single point, gain experience and use this experience for guiding other units--then they will have no way of testing the correctness or of enriching the content of their general call, and there is the danger that nothing may come of it. In the rectification movement of 1942, for example, there were achievements wherever the method of combining the general call with particular and specific guidance was used, but there were no achievements wherever this method was not used. In the rectification movement of 1943, each bureau and sub-bureau of the Central Committee and each area and prefectural Party committee, in addition to making a general call (a rectification plan for the whole year), must do the following things, gaining experience in the process. Select two or three units (but not too many) from the organization itself and from other organizations, schools or army units in the vicinity. Make a thorough study of those units, acquire a detailed knowledge of the development of the rectification movement in them and a detailed knowledge of the political history, the ideological characteristics, the zeal in study and the strong and weak points in the work of some (again not too many) representative members of their personnel. Furthermore, give personal guidance to those in charge to find concrete solutions for the practical problems facing those units. The leaders in every organization, school or army unit must do likewise, as each of these has a number of subordinate units. Moreover, this is the method by which the leaders combine leading and learning. No one in a leading position is competent to give general guidance to all the units unless he derives concrete experience from particular individuals and events in particular subordinate units. This method must be promoted everywhere so that leading cadres at all levels learn to apply it.

Mark Thoma: Economist's View: 'The Beginning of the End for Eurozone Austerity?' | Noah Smith on Stephen Keen | Ezra Klein: The cost curve is bending. Does Obamacare deserve the credit? | Rebecca Theiss: Social Security’s challenges continue to be modest and manageable |

• Austin Frakt: Medicare Advantage Spillovers: "Katherine Baicker, Michael Chernew, and Jacob Robbins estimate the extent to which Medicare Advantage (MA) induces changes in other parts of the health care market…. It’s unlikely that additional MA payments are fully offset by spillovers [improving efficiency in the system as a whole]. Prior TIE coverage… explains why you can’t keep raising MA payments forever and expect large spillovers…. At some point all the practice pattern changes have been wrung out of the system and there’s no more spillover juice left. Where’s the threshold? I don’t know. Nobody does…. The paper itself also has a nice discussion of spillover mechanisms."

• Kevin Drum: Internal Polling Proves It: That First Debate Was a Disaster For Obama: "As you may recall, last year Obama's poll numbers fell off a cliff after his first debate performance…. Today, Josh Green gets his hands on internal Obama campaign polling that shows just how dramatic the drop was. The Obama organization surveyed 10,000 people per night in swing states, so their polling was far more accurate than the smaller tracking polls of outfits like Gallup. There are four main turning points: (1) Romney's selection of Paul Ryan as his running mate (or perhaps something else around the same time) produced a monthlong slide in Obama's numbers, capped by a small but sharp drop during the Republican convention. (2) The Democratic convention produced a sharp uptick. (3) The 47 percent video produced a sharp uptick. (4) The first debate was a disaster, wiping out nearly all the gains from the convention and the video. In the end, though, what you see is a lot of regression to the mean:"