Grasping Reality on TypePad, by Brad DeLong

Notes of the Interim Committee Meeting:

PRESENT:

Members of Committee : Dr. Vannevar Bush, Dr. Karl T. Compton, Dr. James B. Conant, Mr. George L. Harrison, Acting Chairman

By Invitation : Maj. Gen. Leslie R. Groves , Brig. Gen Kenneth C. Royall, Mr. William L. Marbury, Lt. George S. Allan, Lt. George M. Duff, Jr.

I. RECOMMENDATIONS FROM SCIENTIFIC PANEL:

The Committee considered a memorandum... [that] requested the [Scientific] Panel to study in some detail the future program of research and development in this field with particular reference to the scale of effort that should be planned for in terms of scientific and technical personnel and financial outlay... so that the Committee might gain a more specific understanding of the dimensions of this subject and its implications to the scientific resources of the nation....

https://www.youtube.com/watch?v=d8rd53WuojE

Live from La Farine: Quo Usque Tandem Abutere, Trumpalina, Patentia Nostra?:

Live from La Farine: Political Coordinates:

My political coordinates are 47.2% Left, 61.1% Liberal: http://t.co/JZOxvqEBhV

— J. Bradford DeLong (@delong) July 18, 2015

Live from La Farine: Jeebus! Does the New York Times have a lot of stable-cleaning to do!

J. Bradford DeLong on Twitter: ".@HeerJeet David Brooks:: https://t.co/zCPBek6mmi"

.@HeerJeet David Brooks: https://t.co/zCPBek6mmi

— J. Bradford DeLong (@delong) July 17, 2015

Must-Read: Dean Baker: The 2001 Recession Actually Was Really Bad News: "I see that I have to disagree with Brad DeLong again...

...Brad wants to see the 2008 downturn as a uniquely bad event due to the overextension of credit and the ensuing financial collapse. I see it as overwhelmingly a story of a burst housing bubble and the resulting fallout in the real sector....

George Orwell: Review of Dorothy L. Sayers's: Gaudy Night

Norm Ornstein: The Birth of Obamacare: "It is worth going back and recounting what actually happened leading up to the enactment of Obamacare...

...and reflect a little bit on what might, and what should, happen going forward.

Did Obama Leap Rashly to Consider Healthcare Instead of Focusing on Jobs or the Economy?

There is no doubt that the president made healthcare reform a top early priority. There was good reason for doing so; past experience, including that of the Clinton health-reform plan, showed that waiting to pass a major social-policy change, in the absence of a great crisis, is a fool’s errand. A president’s momentum, his public support, and the backing of his party peak early, and major social-policy change by definition shakes up the status quo, creating losers along with potential winners and an even larger number of those unsettled by change. The longer presidents wait, the greater the likelihood that their opposition will mobilize and exploit uneasy voters. And the closer midterm elections loom, the more nervousness builds among lawmakers from the president’s party. [READ MOAR]

Must-Read: Paul Krugman: The Fed Is Going to Be Wrong When It Eventually Raises Rates: "What we do know is that inflation is still below target...

Doug Henwood (1998): Europe's Fateful Union: "In just a bit over nine months, the euro will be born...

...and the next stage in the process of European economic and monetary union (EMU) will begin. Of the fifteen countries that make up the European Union (EU), eleven (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) will begin a three-year process of dissolving their national currencies into a single continental one. Three (Denmark, Sweden, and the UK) are holding off on this step, and one (Greece) just wasn't tough enough to make the cut this time around.

: The Potsdam Conference: Milestones - Office of the Historian: "The Potsdam Conference, 1945

The Big Three—Soviet leader Joseph Stalin, British Prime Minister Winston Churchill (replaced on July 26 by Prime Minister Clement Attlee), and U.S. President Harry Truman—met in Potsdam, Germany, from July 17 to August 2, 1945, to negotiate terms for the end of World War II. After the Yalta Conference of February 1945, Stalin, Churchill, and U.S. President Franklin D. Roosevelt had agreed to meet following the surrender of Germany to determine the postwar borders in Europe. Germany surrendered on May 8, 1945, and the Allied leaders agreed to meet over the summer at Potsdam to continue the discussions that had begun at Yalta. Although the Allies remained committed to fighting a joint war in the Pacific, the lack of a common enemy in Europe led to difficulties reaching consensus concerning postwar reconstruction on the European continent.

Over at Equitable Growth: It is a commonplace among Anglo-Saxon economists that Saxon-Saxon "ordoliberalism" was a post-World War II success only because somebody else--the United States--was both looking after the level of demand in the system as a whole, and also willing to act as an importer of last resort to allow other countries that had insufficient domestic demand to use the United States consumer to rebalance their individual economies at full employment even when domestic demand was grossly insufficient. READ MOAR

Must-Read: Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain?: "Is the euro zone's leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece...

Must-Read: Simon Wren-Lewis: The Non-Independent ECB: "The real explanation for the ECB’s actions is much simpler...

Must-Read: Stefan Laseen et al.: Systemic Risk: A New Trade-off for Monetary Policy?: "We introduce time-varying systemic risk in an otherwise standard New-Keynesian model...

Must-Read: Amir Sufi: Out of Many, One? Household Debt, Redistribution and Monetary Policy during the Economic Slump: "Monetary policy has been especially weak in advanced economies over the past 7 years...

Must- and Should-Reads:

• Must-Read: Joe Romm: Hottest June Puts 2015 on Track for Hottest Year on Record by Far
• Must-Read: Karl Whelan: Alice In Schäuble-Land: Where Rules Mean What Wolfgang Says They Mean
• Peter Orszag: Wagner and Weitzman have some policy recommendations, including electricity-grid reform and higher gas taxes. But the real power of their book is its explanation of the right way to think about climate change. Do we really want to take an 11 percent gamble with the planet?
• Ben Thompson: I didn’t make the connection explicitly, but yesterday’s piece on "Why Web Pages Suck" was different angle on the issues raised by "Publishers and the Smiling Curve". Another way to think about the effects of modularizing previously integrated parts of the value chain is that the curve has been inverted: publishers and other middle men used to be king of the hill; not so much anymore...
• Must-Read: Hilary W. Hoynes and Ankur J. Patel: Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income
• Mario Draghi: "It's uncontroversial [that Greek debt relief is necessary]. I don't think anyone has ever disputed that. The question is what form this takes within our framework. I think we should focus on this point in the coming weeks..."
• Corey Robin: Monday Morning at the Wagners
• Lawrence Mishel and Alyssa Davis: Top CEOs Make 300 Times More than Typical Workers: Pay Growth Surpasses Stock Gains and Wage Growth of Top 0.1 Percent | Economic Policy Institute
• Larry Mishel: Top CEO Compensation Soars, and Why We Do Not Look at “Average CEOs”
• Must-Read: Ryan Avent: The Economist explains: How inequality Affects Growth

Over at Equitable Growth--The Equitablog

• Stability of General Equilibrium and Monetary Policy: Baby Steps
• Notes on "Trekonomics"...
• Bridget Ansel: Reforms to “just-in-time” scheduling practices now before Congress
• Nick Bunker: Beware of simple U.S. tax reform plans
• Nick Bunker: Weekend Reading

Plus:

• Things to Read at Lunchtime on July 17, 2015

And Over Here:

Must-Read: Joe Romm: Hottest June Puts 2015 on Track for Hottest Year on Record by Far: "It’s now all but certain 2015 will be the hottest year on record...

Must-Read: Karl Whelan: Alice In Schäuble-Land: Where Rules Mean What Wolfgang Says They Mean: "Neither [John] Bruton nor [Simon] Nixon explains which eurozone rules Greece has been breaking that necessitated threats of expulsion...

Over at Equitable Growth: The very sharp Nick Rowe has a useful piece today giving the baby-step intuition behind Schmidt and Woodford's argument that, no, expected and actual inflation do not as a rule decline one-for-one when a central bank lowers nominal interest rates:

Nick Rowe: Understanding Schmidt and Woodford on Neo-Fisherianism: "Suppose you are really bad at algebra... can't solve...

...X = 0.5X. So you make a tentative first guess at the answer, say X=1, plug your guess into the right hand side, get X=0.5, which is your second guess, which you plug into the right hand side again, to get X=0.25, which is your third guess, and so on. Eventually your guesses converge to X=0... tatonnement (groping) towards the answer, just like the Walrasian auctioneer who solves the supply and demand equations in micro by raising prices if there's excess demand, and cutting prices if there's excess supply. But... if the equation is X = 2X... your guesses will diverge further and further away from the right answer.... READ MOAR

John Burgoyne (1780): The State of the Expedition from Canada:

• Inkshares

• Trekonomics: "A 200-page non-fiction book: The economics of Star Trek: how does it work, and how do we get there? By Manu Saadia. Found the future in Asimov (age 8). Never looked back."

• DeLong: Notes on Trekonomics

Jeremy Thomas on Periscope:

Must-Read: Ryan Avent: The Economist explains: How inequality Affects Growth: "INEQUALITY sits at the top of the political agenda...

Must-Read: Charlie Stross (2007): The High Frontier, Redux: "When you get down to it, there's not really any economically viable activity on the horizon...

Must-Read: Ogged: 11th Dimensional Chess: "[Ta-Nehisi] Coates is actually not a good writer...

Must-Read: Hilary W. Hoynes and Ankur J. Patel: Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income: "We provide the first comprehensive estimates of this central safety net policy...

"Fokker EIII 210-16". Licensed under Public Domain via Wikimedia Commons

Fokker Eindecker fighters:

The Fokker Eindecker fighters were a series of German World War I monoplane single-seat fighter aircraft designed by Dutch engineer Anthony Fokker.[2] Developed in April 1915, the first Eindecker ('Monoplane') was the first purpose-built German fighter aircraft and the first aircraft to be fitted with a synchronization gear, enabling the pilot to fire a machine gun through the arc of the propeller without striking the blades.[2] The Eindecker granted the German Air Service a degree of air superiority from July 1915 until early 1916. This period was known as the 'Fokker Scourge,' during which Allied aviators regarded their poorly armed aircraft as 'Fokker Fodder'.

Across the Wide Missouri: Joseph A. Califano, Jr.: The Triumph & Tragedy of Lyndon Johnson | Kansas City Public Library: "Wednesday, July 15, 2015 6:30pm @ Plaza Branch...

Must- and Should-Reads:

• Mike Konczal: On Paleo and Faith in Government
• Must-ReadPaul Krugman: Faithocrats
• Barry Eichengreen and Ugo Panizza: A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem?
• Jacques Delpla and Pierre-Olivier Gourinchas: How to Keep Greece in the Euro, and Why Europeans Should Do It
• Must-Read: Paul Waldman: The next GOP president won’t walk away from the Iran deal
• Must-Read: Elizabeth Jacobs: The Declining Labor Force Participation Rate: Causes, Consequences, and the Path Forward
• Must-Read: Nick Bunker: Should Average Investors Be Chasing Unicorns?

Over at Equitable Growth--The Equitablog

• Policy Paralysis and/or Secular Stagnation? - Washington Center for Equitable Growth
• When Greece, Her Knee in Suppliance Bent...

Must-Read: Nick Bunker: Should Average Investors Be Chasing Unicorns?: "Accredited individual investors today are analogous to “angel” investors...

Must-Read: Elizabeth Jacobs: The Declining Labor Force Participation Rate: Causes, Consequences, and the Path Forward: "It is important to avoid being distracted by policies that have little to do with the trends in the labor force participation rate...

###Some Talking Points from Fall 2014:###

Over at Equitable Growth: I never turned this into a proper piece...

At some deep level, the overwhelming problem is that Eurocrat elites--and, to a remarkably and unhealthy degree, American elites and not just republican legislators--believe that:

1. Something called "structural reform" is essential for future economic prosperity.
2. "Structural reform" cannot be accomplished during a time of prosperity and full employment, but requires deep and visible pain to get politicians to do what must be done.
3. The remarkable failure of austerity to produce either a successful structural rebalancing or political pressures that lead to meaningful "structural reform" since 2007 means only that austerity has not been austere enough.

We are indeed trapped in the sewer of Romulus... READ MOAR

Over at Equitable Growth: The big cost to the Eurozone of Greece's exit is that then the Eurozone becomes transformed from a currency union into a fixed exchange rate system, and fixed exchange rate systems are unstable. Therefore the economic integration an increased prosperity that was anticipated from the currency union will vanish. READ MOAR

Hoisted from Others' Archives from Two Years Ago:

Jamelle Bouie: The Trayvon Martin Killing and the Myth of Black-on-Black Crime: "Last week, in Chicago, 16-year-old Darryl Green was found dead in the yard of an abandoned home...

Must-Read: It is important to remember that the austerity-forever dead-enders who dominate Republican economic policy right now are not exceptional in any way. The "global warming isn't happening" dead-enders are, rhetorically and cognitively, the same. The "ObamaCare is failing" dead-enders likewise. And the same thing is happening in security policy:

Paul Waldman: The next GOP president won’t walk away from the Iran deal: "Now that we have a nuclear deal with Iran, Republicans are jostling each other to determine...

Live from La Farine: Matthew Yglesias**: A Successful Third Party Would Be a Trumpist Party: "Trumpism... [is] what a third party would have to sound like to get traction...

...a grab-bag of issue positions that appeal to a substantial minority of the electorate but neither party wants to wholeheartedly embrace because the ideas are too toxic in the elite circles that fund campaigns.... Normally whenever you see the big shots of the worlds of politics, business, and media get together to muse about alternatives to partisan politics they come up with an agenda that sounds a lot like an agenda that big shots from the world of politics, business, and media might come up with... a globalization-oriented, business-friendly agenda watered down with light dollops of social concern for the indigent, the global poor, and the environment... liberalish on social issues, but deferential to the police and armed forces; open to tax hikes to reduce the deficit and to government spending on infrastructure and basic research, but fundamentally skeptical of the welfare state; friendly to the aims of environmental groups but hostile in practice to noisy green activists; disdainful of labor unions (especially in the public sector) but admiring of immigrants. These were also the politics of the Simpson-Bowles Commission... No Labels... Unity '08....

Trumpism.... Recently, Donald Trump's main theme has been the evils of immigration, especially from Mexico. In this he speaks for the nearly 40 percent of pollsters who tell people there are too many immigrants in America.... Similarly, polls show that huge swathes of the electorate believe free trade agreements reduce Americans' wages, kill jobs, and even slow economic growth.... Trump criticized other Republicans... who want to 'do a big number' on Social Security and Medicare.... The Trump worldview... holds together... popular among highly 'ethnocentric' white voters...

Must-ReadPaul Krugman: Faithocrats: "One of the ideas floating around in the aftermath of the sack of Athens...

Live from La Farine: DougJ: Peak Mark Halperin:

TV's Brendan James ✔@deep_beige: Mark Halperin just now: "Trump is strong, that's part of his strength" 5:04 AM - 9 Jul 2015

Live from La Farine: Theodoric of York, Medieval Eurozone Technocrat:

Must- and Should-Reads:

• Must-Read: Tim Duy: More Mediocrity
• Doug Henwood (1998): Europe's Fateful Union
• Must-Read: Daniel Davies: Groptimism
• Wolfgang Munchau: Greece’s brutal creditors have demolished the eurozone project: stripped of ambitions for a political and economic union, the bloc changes into a utilitarian project
• Must-Read: Noah Smith: We're All Smart. And Dumb. Sometimes
• Must-Read: Matthew Yglesias: The Retirement Age
• Mariana Mazzucato: Greece and the EU: a macro and micro mess up
• Must-Read: Paul Krugman: The Laziness Dogma
• Must-Read: Barry Eichengreen: Saving Greece, Saving Europe
• Reuters: European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept 'deep upfront haircuts' on their loans to Athens, the report said.... Greek debt... peak at close to 200 percent of economic output.... The latest projections 'remain subject to considerable downside risk'.... In the laconic technocratic language of IMF officialdom, the report noted that few countries had ever managed to sustain for several decades the primary budget surplus of 3.5 percent of GDP expected of Greece....)
• Mark Thoma: Complicated ties between inequality and growth

Over at Equitable Growth--The Equitablog

• Nick Bunker: The vexing question of the U.S. housing bubble origins
• Needed: More Government, More Government Debt, Less Worry
• DeLong and Eichengreen: New Preface to Charles Kindleberger, "The World in Depression 1929-1939": Hoisted from the Grasping Reality Archives

Plus:

• Things to Read on the Evening of July 14, 2015

And Over Here:

Must-Read: Three percent of the prime-age population who really ought to be at work right now in a full-employment economy are not at work. Whatever your estimate of potential output growth is, the economy is surely not growing markedly faster than it. Inflation is below your target. And yet the Federal Reserve believes that it is time to tighten policy?

It is very hard to understand...

Tim Duy: More Mediocrity: "Federal Reserve Chair Janet Yellen will be playing a game of mixed messages with Congress tomorrow...

Across the Wide Missouri The first sign on whether Zanny Minton Beddoes has managed to improve the Economist that John Micklethwaite handed her is a "no":

Scott Eric Kaufman: The Economist: Ta-Nehisi Coates’ “Between the World and Me” is “just good enough to get away with” justifying its existence: "Wrestling with the ideas contained in a book that’s difficult for many people to read...

New Preface to Charles Kindleberger, "The World in Depression 1929-1939":

J Bradford DeLong and Barry J. Eichengreen: New preface to Charles Kindleberger,* The World in Depression 1929-1939*:

The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.

Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973.[1]  Where Kindleberger’s canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasised that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects.[2]

Must-Read: Barry Eichengreen: Saving Greece, Saving Europe: "The Greek people deserve better than what they are being offered...

Must-Read: Paul Krugman: The Laziness Dogma: "The real source of [J.E.B. Bush's] remark was the ‘nation of takers’ dogma that has taken over conservative circles...

Must-Read: Daniel Davies: Groptimism: "Well, a deal is done.... And any deal was better than no deal....

Eleanor Roosevelt: My Day: July 14, 1945:

One day last week I went down to Orange, New Jersey, to see my cousin, Mrs. Henry Parish, who has not been very well. A charming looking woman spoke to me on the tube and, when I got into the train, came and sat beside me. It was a heartwarming experience, because she said she had long wanted to have an opportunity to talk with me. Once before she had spoken to me in a New York shop, but that was not exactly an opportunity for conversation. She told me how much my husband's leadership had meant in the past few years, and we talked of the things that must be done by each one of us as individuals if we hope for peace in the world of the future.

I have an itch I need to scratch, ever since I found Ken Rogoff writing:

Robert Barro... has shown that in canonical equilibrium macroeconomic models... small changes in the market perception of tail risks can lead both to significantly lower real risk-free interest rates and a higher equity premium.... Martin Weitzman, has espoused a different variant of the same idea based on how people form Bayesian assessments of the risk of extreme events...

Rogoff, Barro, and Weitzman are all sharper than I am by substantial margins. But this seems to me to be wrong. I don't think that what their papers mean is that the equity return premium is driven by fears of the rare event of a complete macroeconomic catastrophe. And it definitely does not mean what the math of Barro (2005) says: that high equity prices in 1929 and 2000 were driven by a much higher than normal expectation of such a complete macroeconomic catastrophe.

Barro and Weitzman both work in a model in which safe assets are in zero aggregate supply. What they both found seem to me to be consequences of an observation by John Geweke (2001) https://ideas.repec.org/a/eee/ecolet/v71y2001i3p341-345.html: Because constant relative risk aversion does not play well with zeroes, in any model with (a) a representative agent with constant relative risk aversion, and (b) no safe assets at all, adding a very small amount of kurtosis (could be downward skewness as well, but doesn't have to be skewness) to a geometric-normal stochastic process for the evolution of wealth introduces negative-infinities into the asset pricing formulas.

I wrote the first draft of this in late 2005, and then taught it in 2007-2009:

A (Graduate) Teaching Note on Barro's (2005) "Rare Events and the Equity Premium" and Rietz's (1988) "The Equity Premium: A Solution":

Must-Read: Matthew Yglesias: The Retirement Age: "Raising the retirement age is a strange prescription for countries suffering from mass youth unemployment...