Brad DeLong's Website

Three or Four Mistakes in American Monetary Policy?

In the circles in which I travel, there is near-universal consensus that here in America our monetary philosopher-princes have made three serious mistakes. This consensus is almost always qualified by fervent declarations that we have been very well served by our Federal Reserve chairs and others since at least Paul Volcker's accession to the chair at the end of the table in the Eccles' Building's conference room, and that each of us who has not sat in that chair knows that he or she would have made worse mistakes, but nevertheless there is a consensus that mistakes were made when:

• the Federal Reserve and the Treasury decided to nationalize AIG rather than to support AIG's counterparties last fall, allowing financiers to pretend that their strategies were fundamentally sound rather than things that would have shut down their firms had the Feds not paid AIG's bills.

• the Federal Reserve and the Treasury decided to let Lehman Brothers go into an uncontrolled bankruptcy last fall in order to try to teach financiers that having an ill-capitalized counterparty was not riskless and that people should not expect the government to come to their rescue always.

• the long-ago decision was made to eschew principles-based regulation and allow the shadow banking sector to grow unregulated with respect to its leverage and its compensation schemes in the belief that government regulation of finance should be minimal and that the government's guarantee of the commercial banking system was enough to keep us out of messes like the one we are currently in.

As I said, there is near-universal consensus in the circles in which I travel that these were mistakes and serious mistakes--and it is as certain as it is that the sun will rise in the east tomorrow morning that monetary policymakers will not make these mistakes again.

There is, however, active debate over whether there was a fourth mistake: whether Alan Greenspan's decision in 2001-2004 to push and keep nominal interest rates on Treasury securities very very low in order to try to keep the economy near full employment was a fourth mistake. Should Alan Greenspan have kept interest rates higher and triggered a much bigger recession with much higher unemployment back then in order to head off the growth of a housing bubble? If we push interest rates up, Alan Greenspan thought, millions of extra Americans will be unemployed and without incomes to no benefit--they will not enjoy the prolonged "staycations" they will be taking, and the rest of us won't have the stuff they could make. If we allow interest rates to fall, Alan Greenspan thought, these extra workers will be employed building houses and making things to sell to all the people whose incomes come from the construction sector and making things to sell to the people whose incomes come from making things to sell to people whose incomes come to the construction sector. Full employment is better than high unemployment if both can be accomplished without inflation, Alan Greenspan thought. If a bubble does develop, and if the bubble does not deflate but crashes, and if the crash threatens to cause a depression--well, Greenspan thought, then will be the time to deal with that, and the Federal Reserve is a very powerful institution with policy tools that can short-circuit that chain leading to catastrophe at any point.

With hindsight Alan Greenspan was wrong. Catastrophe does stare us in the face. His policies have crapped out. But not every good policy is certain to have a good outcome. The question is: was the bet that Alan Greenspan made a favorable one? Whenever in the future we find ourselves in a situation like 2003 should we try to keep the economy near full employment even at some risk of a developing bubble?

I am genuinely not sure which side I come down on in this debate. Central bankers have long recognized that it is imprudent to lower interest rates in pursuit of full employment if the consequence is an inflationary spiral in wages, resource prices, or consumer prices. On Tuesdays and Thursdays I think that going forward central bankers must now also recognize that it is imprudent to lower interest rates in pursuit of full employment when doing so risks an asset price bubble. On Mondays, Wednesdays, and Fridays I think that even with the extra information about the structure of the economy we have learned in the past two years that Greenspan's decisions in 2001-2004 were prudent and committed us to a favorable and acceptable bet. And I am writing this on a Friday.

I do, however, know that the way the issue is usually posed is wrong. People claim that the Greenspan Federal Reserve "aggressively pushed the interest rate below its natural level." But what is the natural level of the interest rate? Swedish economist Knut Wicksell defined the natural rate of interest in the 1920s: it is the interest rate at which, economy wide, desired investment is equal to desired savings and hence in which there is neither upward pressure for consumer price, resource price, and wage inflation to accelerate as aggregate demand outruns supply nor downward pressure on those three inflation rates as demand falls short of supply. On Wicksell's definition--which is the best, in fact, to my knowledge the only definition--the market interest rate was if anything above the natural interest rate in the early 2000s: not accelerating inflation but rather deflation threatened. The natural interest rate was very low because, as Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency).

You can argue--and on Tuesdays and Thursdays I will believe you--that Alan Greenspan's policies in the early 2000s were wrong. But you cannot argue that he aggressively pushed the interest rate below its natural level. The low interest rate was at its natural level. Rather, Greenspan's mistake--if it was a mistake--was his failure to overrule the market and aggressively push the interest rate up above its natural rate, thus deepening and prolonging the recession that started in 2001.

It's Friday, and I don't think Greenspan's failure to push the interest rate up above its natural rate to generate high unemployment and head off the growth of a mortgage-finance bubble was a mistake. There were mistakes--other places where the chain that has generated the catastrophe that faces us should have been interrupted. But today at least I don't think Greenspan's unwillingness to overrule the market's choice of the natural interest rate was one of them.

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Open publication - Free publishing - More wicksell

In Which Stanford Economist John Taylor Adopts the False, Exploded "Treasury View" of More than Eighty Years Ago...

You know, it is very odd: When nominal interest rates on short-term Treasury securities are at their normal levels--4% or 3% or even 2% per year--I am among the very first to declare that discretionary fiscal policy has no proper role to play, and that the task of managing the business cycle should be left to the fiscal automatic stabilizers and to the Federal Reserve.

But things are--as we economists have known for nearly a century--different when short-term safe nominal interest rates are at their floor to make safe short-term bonds nearly perfect substitutes for cash, for then the standard mechanisms of monetary policy--flooding the system with cash and relying on the fact that holding wealth in cash is expensive (for it means that you forego interest) to trigger a rise in spending--is not guaranteed to work. And then fiscal policy has a place. To deny that fiscal policy has a place is then, it seems, to me, to fail the most basic test of thinking like an economist. As John Hicks put it back in 1937, we know that the speed at which people spend their cash--the velocity of money--is a function of the short-term safe nominal interest rate. And we know that the velocity of money becomes very elastic as the short-term safe nominal interest rate becomes very low:

On grounds of pure value theory, it is evident that the direct sacrifice made by a person who holds a stock of money is a sacrifice of interest; and it is hard to believe that the marginal principle does not operate at all in this field. As Lavington puts it:

The quntity of resources which (an individual) holds in the form of money will be suh that the unit of money which is just and only just worthwhile holding in this form yields him a return of convenience nad security equal to the... net rate of interest.

The demand for money depends upon the rate of interest!...

It is not only possible to show that a given supply of money determines a certain relation between [national] income and interest... it is also possible to say something about the shape of the cure. It will probably tend to be nearly horizontal on the left.... If is lies to the right, then we can indeed increase employment by increasing the quantity of money; but if IS lies to the left [and short-term safe interest rates are at their minimum], we cannot do so; merely monetary means will not force down the interest rate any further...

and we have to resort to fiscal policy and banking policy--things that affect not the quantity of money but the flow-of-funds through financial markets.

Now, however, we have to add John Taylor to the votaries of the 1920s-era "Treasury View": the claim that fiscal policy must be ineffective. He is thus one of those who, as Olivier Blanchard puts it, does not know things that Irving Fisher and Knut Wicksell (or at least John Hicks) knew.

Why John Taylor believes in the "Treasury View" is not at all clear. Paul Krugman writes:

The virus is spreading: I just taped Fareed Zakaria with John Taylor, who is a fine economist. But if I understood John’s position, it was that fiscal expansion is actually contractionary, because deficits drive up interest rates, unless the fiscal expansion takes the form of permanent tax cuts...

I'm not so sure about Taylor. The last paper of his I cracked... wasn't impressive. It was supposed to show that fiscal policy could not be powerful. And it didn't deliver.

Here's what I had to say about it at a conference at Stanford early in May:

Tuesday afternoon I sat down to... Cogan, Cwik, Taylor, and Wieland (2009).... I dug--and found that Cogan et al.’s claim [that they and the Obama administration had analzyed] “exactly the same policy change” was simply wrong. Romer-Bernstein model an increase in government spending with the Federal Reserve expanding and keeping on expanding the money supply in order to keep the short-term Treasury Bill interest rate the same. Taylor (1993) models an increase in government spending with the Federal Reserve contracting the real money supply to push the short-term Treasury Bill interest rate up over time as unemployment falls and inflation creeps up. There is no “robustness” problem with Romer-Bernstein at all: the results are different because the policy changes are different.

“Geez,” my first thought was, “this is embarrassing--none of four coauthors of Cogan actually read Romer-Bernstein at all carefully. Sloppy.” Then I got to page 5 of Cogan: “Romer and Bernstein assume that the Federal Reserve pegs the interest rate....” Cogan et al. know perfectly well that the policy changes are not “exactly the same.” They just say they are.

I am sorry. In Europe that gets you four red cards. In America that gets you sent to the showers. The first intellectual responsibility of critique is to accurately present what you are critiquing. When Cogan et al. learn that they can come back into the game. But not until then.

What is their explanation for not telling us up front that they are assuming a different monetary policy? They give none. What is their explanation for assuming a different fiscal policy? It is this:

Romer and Bernstein assume that the Federal Reserve pegs the interest rate—the federal funds rate—at the current level of zero.... [S]uch a pure interest rate peg is prohibited in new Keynesian models with forward-looking households and firms because it... lead[s] to instability and non-uniqueness.... Inflation expectations of households and firms become unanchored and unhinged and the price level may explode in an upward spiral….

In short, the monetary policy rule that Romer and Bernstein believe that the Federal Reserve is following makes fiscal policy incredibly powerful: so powerful that the level of nominal spending explodes. So we are going to make a different assumption about monetary policy that makes fiscal policy weak because we assume the Federal Reserve neutralizes the effects of government spending.

Do they provide any reason to justify their monetary policy assumption--any reason to believe that the Federal Reserve is currently engaged in raising short-term interest rates to neutralize the effects of fiscal expansion? No, they do not.

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Open publication - Free publishing - More macroeconomics

Hoisted from the Archives: DeLong Smackdown Watch: Henry Farrell on Brad DeLong, Friedrich Hayek, Ludwig von Mises, James Scott, High Modernism, Jane Jacobs, the Collectivization of Agriculture, Karl Polanyi, Rubber Tomatos, the Despised Medieval Jewish M

DeLong Smackdown Watch:: Henry Farrell writes about me, Friedrich Hayek, Ludwig von Mises, James Scott, High Modernism, Jane Jacobs, the collectivization of agriculture, Karl Polanyi, rubber tomatos, the despised medieval Jewish Maghribi traders, and the cheap restaurants of Florence, Italy. I am silenced: I will return to the lists to defend the rubber tomato and American Chinese food someday--but not yet.

Henry Farrell:

Crooked Timber » » DeLong, Scott and Hayek: I think that [DeLong] is fair up to a point – [James] Scott should develop his critique of bureaucratic capitalism in [Seeing Like a State] much more explicitly than he does. But I also think that doing what Brad wants him to do would have led him to write a very different book. Seeing Like a State is in large part an intervention in an internal argument within the left, arguing against the grand planners and for the Jane Jacobs types and the anarchists. Introducing a proper critique of Hayek, Mises and the rest would have greatly lessened its impact within that debate, by allowing the targets of Scott’s critique to focus on the mean things Scott would have probably said about pro-market types who they dislike, while ignoring the flights of arrows intended to pierce their own hides. I should note that I’m an unimportant member of one of the broad groups that Scott is attacking (I like and use rational choice theory; this doesn’t change the fact that Seeing Like a State is the only book in the social sciences I have read in the last ten years that made me want to write a fan letter to the author after reading it).

What Scott argues, as I understand it, is as follows: First – that processes of rationalization lead to the destruction of metis, or local knowledge if you would prefer, and the prioritization of codifiable, quantifiable, epistemic knowledge. Second, that this process involves obvious and (sometimes quite important) trade-offs, but may often be worth it – e.g. there is no point in idealizing serf-like conditions that preserve local knowledge at the expense of human freedom. Third, that the real problem is when the creation of epistemic knowledge is combined with high modernist attempts to engage in social engineering. This arrives at similar conclusions to Hayek etc about how terrible collectivization processes are, but from different premises. Specifically, what Hayek etc would see as the result of state planning, Scott sees as the result of broader forms of rationalization (hence, perhaps, the linkages to Foucault that Brad worries about) when they coincide with a certain kind of state hubris (the hubris doesn’t necessarily follow from the creation of codifiable knowledge).

Thus, I think there is a argument against the Hayekians which is not very far from the surface of Seeing Like a State and which can be drawn out quite easily. First – Scott makes it clear that the processes of market development and of state imposition of standards goes hand in hand. Brad talks about how the very first example that Scott draws on – German scientific forestry in the nineteenth century – is intended to show the failures of state planning. But as Scott makes clear, the relevant failures are driven as much by the market as by the state – Scott writes about how the “utilitarian state could not see the real, existing forest for the (commercial trees)” and about how the

forest as a habitat disappears and is replaced by the forest as an economic resource to be managed efficiently and profitably. Here, fiscal and commercial logics coincide; they are both resolutely fixed on the bottom line.

This is an important sub-theme of the book, and indeed of our understanding of how states and markets have developed hand-in-hand. Sometimes, the state has sought to impose its view for reasons of its own interest and survival (whether this be the promotion of ‘public order,’ the increase of fiscal revenues or whatever), sometimes at the behest of market actors who are interested in standardization, and sometimes for rationales that blur these two together.

Scott doesn’t draw this out as a critique of the Austrians, but it is still clear evidence of his profound difference from them. He is much more interested than they are in the actual political processes through which markets come into being. To misquote Tilly, markets make the state and the state makes markets. This is something that is touched on by the new institutional economics in its own way (cf. Doug North) but that doesn’t, to my knowledge, get any proper attention in the Hayekian or von Misean corpus. I stress the words “to my knowledge” since Hayek’s arguments on this theme are scattered across various books – but I strongly suspect that there isn’t anything that is really germane to this. More generally, I think that there’s a kind of selective blindness in the Austrian corpus to the question of exactly how active states are in constituting markets, because this would raise all sorts of awkward theoretical and political problems. Markets – even and perhaps especially Hayekian markets – don’t exist in an institutional vacuum – and the institutions on which they rely are going to shape the extent to which they succeed or fail in making use of local knowledge. In particular, markets that involve interaction between people who don’t know each other (impersonal exchange) require substitutes for personal knowledge and relationships(in the form of mutually understood standards and enforcement mechanisms).

This leads on to the second point – that a lot of what Scott argues is correct. His claim, as I read it is less about the specific problems of state-created institutions, than the ways in which a large variety of abstracting institutions or standards miss out on, and perhaps undermine important forms of local knowledge. As I understand him, any standards sufficient for impersonal exchange are likely to abstract away the actual relationships that people have with their environment. Here, Scott is less a closet-Hayekian than a more-or-less-overt Polanyian, who develops some of Polanyi’s arguments (especially his claims about the institutional consequences of long distance trade, and the economy as an instituted process) to make them sharper and more interesting.

I think that Scott’s claims are more credible than Brad suggests. Again, modern markets require long distance exchange between people who don’t know each other, and hence require impersonal forms of knowledge that are instantiated in commonly held standards of one sort or another. My favourite example of this is the Codex Alimentarius’s standard lexicon describing different stages of putrescence in fish. These standards have to substitute for more intimate and more direct forms of knowledge – large scale markets typically can’t work without them.

A good example of this is credit markets. It used to be that they depended primarily on personal knowledge of the borrower and his character (here, I’m borrowing from the work of Bruce Carruthers). Now, they depend on a variety of formal metrics, risk scores and pseudo-quantified assessments by credit rating agencies and the like. This is by no means necessarily a bad thing – it has resulted in a vast expansion of credit, and allowed many people to borrow money who couldn’t previously. But it does mean that some forms of knowledge that may have been valuable, and that were available in an era when bank managers knew all their customers personally, have been lost. It also may result in a fetishization of the quantifiable and a lack of attention to the realities underlying abstract metrics (which is arguably part of the reason for the recent crash in mortgage lending markets – the metrics that markets used were palpably insufficient to describe the underlying risks of particular complex financial instruments).

Another, more homely example is food. Brad criticizes Scott’s discussion of the much-cited tasteless tomato arguing that it are an example of market success rather than failure – people bought tasteless tomatoes because they were cheap. This seems to me to have a bit of a flavor of a revealed preferences argument, and also to miss the point. I lived in Florence for three years, a city which has cheap and delicious tomatoes, despite being some distance from the parts of Italy where tomatoes are grown. While I can’t prove it, I strongly suspect that the deliciousness of the tomatoes had a lot to do with informal relationships between the small shops where you bought the tomatoes, the small companies that delivered them, and the small farms from where they were bought. Certainly, this would be consonant with the research that I and many others have done on the Italian political economy and how it works. Italy protects small businesses and local communities in a lot of ways. This means that it misses out badly on certain economies of scale. It also means that certain kinds of high quality production are possible in Italy that are difficult or impossible to replicate elsewhere – a myriad of small firms cooperating to produce final goods through purely informal means. Hence the success, for example, of Italian sunglasses, shoes, and (the rather unglamorous topic of my own research) packaging machinery. All of these build on forms of informal knowledge that would likely be damaged in a more standard market economy, where collaboration happened (to the extent that it did), within the hierarchy of the firm, or through arms-length contracts.

Thus, there are trade-offs. Italian firms in small-firm districts are excellent at gradual innovation and refinement of knowledge – in part because of their reliance on metis. They are not so good at producing profound, industry-changing forms of innovation. They also tend to stick closer to home than their equivalents in other countries (somewhat ironically, they replicate the logic of Avner Greif’s mediaeval Maghribi merchants far more than the behaviour of his Genoese traders).

To return to the more homely example of food, Florence has an excellent restaurant culture, where you can eat out cheaply and incredibly well if you avoid the tourist traps.(1) But it systematically emphasizes local cuisine, along with a few imports from the South (pizza and pasta) and the north (some Bolognese and Milanese dishes). Chinese food in Florence is (or was when I was there) terrible, and Indian food was relatively very expensive and no better than mediocre in quality. In contrast, most US cities of my experience have a lower overall standard of food, but a much greater variety of restaurants producing different cuisines, sometimes at a quite high standard of quality (if rarely as high as in the cuisine’s home countries or regions). US cities are far more open to different kinds of food than Italian cities. I suspect that much of this can be attributed to the dominance of particular forms of local knowledge in Italy, which on the one hand preserve certain traditions of quality that would be infeasible to preserve in the US, but on the other hand make people less likely to branch out into new forms of production and consumption that don’t fit with their prior experience.

This allows me to come back to the roots of my disagreement with Brad. Brad is a fan of markets, and believes that they contribute in very important ways to human freedom. I agree with him on this. But I think that Brad sometimes underemphasizes the real trade-offs that markets may involve, and overstates his criticisms of people who are concerned with these trade-offs. Sometimes, perhaps often, these trade-offs are relatively slight – as Brad says, many forms of redundant local knowledge can be discarded without compunction. Sometimes, these trade-offs are real, but still worthwhile – while we should acknowledge the costs of markets, we should acknowledge that the benefits of introducing them are higher. And sometimes they are not worth paying – there are areas of social life where marketization has more downsides than advantages. (the question of which areas of social life fall under which category is obviously important, but this post is much too long already).

(1) I seem to remember (although I can’t find the post) Brad rudely disagreeing a couple of years ago with someone who suggested that delicious cheap food was available in European cities in a way that it wasn’t in the US, and claiming that this was an illusion of the upper middle classes who could afford to eat well anywhere, or words to that effect (my memory could be flawed, in which case I apologize in advance). For what it’s worth, as a grad student with a relatively meagre stipend in Florence, I could afford to eat out three nights a week in good restaurants.

While I Was Making Coffee, the Future Arrived...

In my inbox:

I hope people pay attention to what Moussavi has posted to facebook, as it's a huge statement of intent for the Iranian opposition...

Six Reasons that the Washington Post Is Much Weaker as an Information Source Now than It Was Two Days Ago

It is--I confess--very rare that I learn anything save the multiple forms of error from Washington Post stories: what's true in them is rarely new to me, and what's new to me in them is rarely true. But here are six very good stories over the past six months that taught me things:

1) June 8, 2009:

Dan Froomkin: How Cheney Bent DOJ to His Will: Three newly-disclosed Justice Department e-mails thoroughly vindicate the most cynical suspicions about how former vice president Dick Cheney bent ostensibly independent Justice Department lawyers to his will and forced them to manufacture legal cover for his torture policies.... They reveal Cheney's extraordinary influence over then-attorney general Alberto Gonzales and key lieutenants.... Comey describes an exchange with Ted Ullyot, then Gonzales's chief of staff: "I told him that the people who were applying pressure now would not be there when the s--- hit the fan. Rather, they would simply say they had only asked for an opinion."...

The e-mails date back to DOJ's second round of finding legal rationalizations for torture. By 2005, the department had renounced the original August 1, 2002, "torture memo" from the OLC, the CIA's office of inspector general had questioned the legality and effectiveness of the techniques being used at the CIA's secret prisons, and the CIA had abandoned waterboarding -- but not many other extreme measures. Cheney's quest to restore the necessary legal cover resulted in three new memos, which were among those declassified and released in April by the Obama administration. The first memo concluded that brutal interrogation techniques including waterboarding did not individually violate the federal criminal prohibition against torture. The second memo concluded that even the combined use of those techniques didn't violate that particular statute. Those two memos were issued on May 10, 2005. The third memo, dated May 25, managed to conclude that the techniques didn't even violate the United Nations Convention Against Torture's prohibition of "cruel, inhuman or degrading treatment."

The previously undisclosed e-mails from Comey were Web-published on Saturday by the New York Times. But Scott Shane and David Johnston chose to focus on a minor point -- that Comey and other lawyers, even while expressing their grave concerns about the interrogation methods in question, had approved the first memo.... [T]he e-mails were probably leaked to the Times in a "pre-emptive strike" on an upcoming report from the DOJ's Office of Professional Responsibility. That report is said to harshly criticize former OLC lawyers John Yoo, Jay Bybee and Steven Bradbury for their role in approving torture. The message their defenders clearly wanted to send -- and which the Times conveyed -- was that even those DOJ officials who had thus far "escaped criticism because they raised questions about interrogation and the law" agreed with at least some of the rationales put forth by Yoo et. al.

But the actual e-mails, in which Comey documents his various conversations on the matter, don't really support that message. Rather, they paint a portrait of a hopeless rear-guard action by Comey and others against Cheney and his willing lackeys.... In his April 27 e-mail, Comey describes telling Gonzales directly about his "grave reservations" about the second memo. Gonzales's response? "The AG explained that he was under great pressure from the Vice President to complete both memos, and that the President had even raised it last week, apparently at the VP's request and the AG had promised they would be ready early this week."... Comey concludes: "People may think it strange to hear me say I miss John Ashcroft, but as intimidated as he could be by the WH, when it came to crunch-time, he stood up, even from an intensive care hospital bed. That backbone is gone." And by his May 31 e-mail, his wistful regrets have turned into barely contained fury...

2) June 3, 2009:

Dan Froomkin: Celebrity Journalism at the White House: What would you do if you -- and your 32 camera crews -- were granted unparalleled access to the White House for a day? And then you had two full hours of prime-time TV to fill? There are many mysteries you might try to explore. How does President Obama actually make decisions? What if anything changes his mind? What blows his cool? How does he settle disputes among his advisers? Who is the last one to whisper in his ear? How does he treat his staff? How furious is the competition for his attention? Who wins? Why is he so sure, so confident, that thinking big is the solution to every problem? How do he and his staff really feel about the mess Bush left them? How does the former constitutional law professor reconcile his devotion to civil liberties with a handful of recent decisions that have horrified civil libertarians? Does he have second thoughts?

But sadly those were not the sorts of things that seemed to interest anchor Brian Williams and the more than two dozen NBC News producers responsible for the "Inside the Obama White House" special showing last night and tonight, a show that treats Obama like a celebrity rather than a president.... [W]hat seems to fascinate Williams the most is what everyone is eating. There are, it turns out, apples and M&Ms all over the White House. In fact, the show devotes a whole montage to people pouring, throwing and consuming M&Ms. And the high point of the day, the centerpiece of the hour-long show last night, what Williams calls Obama's "brief shining moment," is a hokey, obviously staged burger run to Five Guys. The cameras literally languish over greasy paper bags full of french fries.

It's the kind of substanceless fawning that leads some to conclude that the press is soft on Obama. But this show wasn't about his politics or his policies. It was a celebration and amplification of the star power of the presidency in general, and of this president in particular. Simply showing him eating a burger they apparently consider great television. And tonight, we're promised an interview with Bo the dog...

3) May 26, 2009:

Dan Froomkin: Why “playing it safe” is killing American newspapersb: We’re all in a state of despair these days over our inability to monetize our journalism online the way we’ve been used to doing in print. A big part of the problem is that we’re doing a really poor job of connecting buyers and sellers on our newspaper Web sites.... But some of our shortcomings are purely journalistic. We... are still fundamentally failing to deliver the value of our newsroom to Internet users. Our reporters and editors are curious, passionate, and voracious discoverers and devourers of information; talented storytellers; and smart people with excellent bullshit detectors. As long as human beings are curious about each other and clamor for trusted information, there’s a place for us out there. The Internet hasn’t changed that. In fact it’s increased the market for what we’ve got: The Internet highly values people who know things, who can find things out, who can distinguish between what’s important and what’s not, who can distinguish between what’s true and what’s not, and who can communicate succinctly and effectively.

But we’re hiding much of our newsrooms’ value behind a terribly anachronistic format: voiceless, incremental news stories that neither get much traffic nor make our sites compelling destinations.... [T]he dispassionate, what-happened-yesterday, inverted-pyramid daily news story... is mostly a throwback... a relic of a daily product delivered on paper to a geographically limited community....

The Internet doesn’t work on a daily schedule. But even more importantly, it abhors the absence of voice.... If we were to start an online newspaper from scratch today, we’d recognize that toneless, small-bore news stories are not the way to build a large audience.... One option might be to imitate cable TV.... But that would come at the cost of our souls. The right way to reinvent ourselves online would be to do precisely what journalists were put on this green earth to do: Seek the truth, hold the powerful accountable, expose the B.S., explain how things really work, introduce people to each other, and tell compelling stories. And we should do all those things passionately and courageously — not hiding who we are, but rather engaging in a very public expression of our journalistic values.... We stifle some of our best stories with a wet blanket of pseudo-neutrality. We edit out tone. We banish anything smacking of activism. We don’t telegraph our own enthusiasm for what it is we’re doing. We vaguely assume the readers will understand how valuable a service we’re providing for them — but evidently, many of them don’t....

Making political decisions through triangulation – trying to stake out a safe middle ground between the two political parties — is still making a political decision. It’s just often a not very good one. Those who argue that truth-telling has become too political for us to engage in need to reexamine why they are in this business.... That seven in 10 Americans at one point believed that Saddam Hussein had a role in the 9/11 attacks is a profound indictment of our reluctance to champion the truth when it is under attack.... The high priests of the church-state separation may take offense, but the fact is that there’s long been a confusing continuum in journalism ranging from straight news to opinion. And I suspect our hairsplitting distinctions have been lost on our readers. In the Internet age, the answer is not censoring ourselves in the name of obscure in-house rules, or trying to put inscrutable labels on everything. The answer is for us to call things as we seen them, and be up front about it....

[L]et’s allow the folks on the “news” side to give members of the public the kind of analysis they’re craving. That means putting things in their proper context. It means not being afraid to explain that one position on an issue is better supported by the facts than the other, when that’s the case. It also allows for the advocating of basic human and journalistic values. I don’t think that conveying outrage over nondisclosure of public records — or children going hungry, or torture — disqualifies someone from calling themselves a news reporter...

4) April 14, 2009:

Dan Froomkin: Obama Connects Most of the Dots: ware that many Americans are wondering how all his different economic programs and policies fit together, President Obama today tried to connect the dots. He explained why he believes each of his various short-term economic initiatives is a critical element of the economic recovery, how his ambitious long-term budget proposals are essential to building an economy that won't crash like this one did, and that, although some initiatives are already producing glimmers of hope, most of the hard work still lies ahead....

He strongly rebutted the criticism, largely from Republicans, that he shouldn't be spending so much either now or in the long term. He noted how it is economic common sense that "the last thing a government should do in the middle of a recession is to cut back on spending." And, in an analogy that resonated particularly well with an audience heavy on college students, he talked about the need to invest in the future. "Look, just as a cash-strapped family may cut back on all kinds of luxuries but will still insist on spending money to get their children through college -- will refuse to have their kids drop out of college and go to work in some fast food place, even though that might bring in some income in the short term, because they're thinking about the long term -- so we as a country have to make current choices with an eye to the future."...

But he failed to persuasively rebut the most urgent critique of his economic policies.... Obama raised it on his own, noting that some critics think he has "been too timid" about shoring up the banking system. "This is essentially the nationalization argument that some of you may have heard. And the argument says that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks and that our failure -- my administration's failure -- to do so is yet another example of Washington coddling Wall Street: 'Why aren't you tougher on the banks?'"

But his answer was vague and unconvincing: "So let me be clear. The reason we have not taken this step has nothing to do with any ideological or political judgment we've made about government involvement in banks. It's certainly not because of any concern we have for the management and shareholders whose actions helped to cause this mess. Rather, it’s because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it’s more likely to undermine than create confidence."

Obama's belief has never been in question. It's the reasoning behind that belief that we've been missing, as well as the source of his faith in the judgment of economic advisers. But he once again left us all in the dark on that count...

5) March 30, 2009:

Dan Froomkin: Bush's Torture Rationale Debunked: Abu Zubaida was the alpha and omega of the Bush administration's argument for torture. That's why Sunday's front-page Washington Post story by Peter Finn and Joby Warrick is such a blow to the last remaining torture apologists. Finn and Warrick reported that "not a single significant plot was foiled" as a result of Zubaida's brutal treatment -- and that, quite to the contrary, his false confessions "triggered a series of alerts and sent hundreds of CIA and FBI investigators scurrying in pursuit of phantoms."

Zubaida was the first detainee to be tortured at the direct instruction of the White House. Then he was President George W. Bush's Exhibit A in defense of the "enhanced interrogation" procedures that constituted torture.... But as author Ron Suskind reported almost three years ago -- and as The Post now confirms -- almost all the key assertions the Bush administration made about Zubaida were wrong. Zubaida wasn't a major al Qaeda figure. He wasn't holding back critical information. His torture didn't produce valuable intelligence -- and it certainly didn't save lives. All the calculations the Bush White House claims to have made in its decision to abandon long-held moral and legal strictures against abusive interrogation turn out to have been profoundly flawed, not just on a moral basis but on a coldly practical one as well.

Indeed, the Post article raises the even further disquieting possibility that intentional cruelty was part of the White House's motive. The most charitable interpretation at this point of the decision to torture is that it was a well-intentioned overreaction of people under enormous stress whose only interest was in protecting the people of the United States. But there's always been one big problem with that theory: While torture works on TV, knowledgeable intelligence professionals and trained interrogators know that in the real world, it's actually ineffective and even counterproductive. The only thing it's really good as it getting false confessions. So why do it? Some social psychologists (see, for instance, Kevin M. Carlsmith on NiemanWatchdog.org) have speculated that the real motivation for torture is retribution. And now someone with first-hand knowledge is suggesting that was a factor in Zubaida's case. Quoting a "former Justice Department official closely involved in the early investigation of Abu Zubaida," Finn and Warwick write that the pressure on CIA interrogators "from upper levels of the government was 'tremendous,' driven in part by the routine of daily meetings in which policymakers would press for updates.... "'They couldn't stand the idea that there wasn't anything new,' the official said. 'They'd say, "You aren't working hard enough." There was both a disbelief in what he was saying and also a desire for retribution -- a feeling that 'He's going to talk, and if he doesn't talk, we'll do whatever.'"'...

Author and investigative reporter Suskind first exposed the rampant fallacies of the administration's Zubaida narrative in his explosive June 2006 book, The One Percent Doctrine. See my June 20, 2006 column for a summary. But mainstream news organizations, unable to match Suskind's sources, largely refused to acknowledge his reporting. Indeed, in September 2006, when the White House for the first time publicly acknowledged the existence of a secret CIA detention and interrogation program, Bush had no qualms about putting Zubaida front and center. In a major speech, he proudly described how Zubaida -- "a senior terrorist leader and a trusted associate of Osama bin Laden" -- was questioned using the CIA's new "alternative set of procedures" and then "'began to provide information on key al Qaeda operatives." All lies and euphemisms. But all reported pretty much straight at the time by a mainstream media that, if it noted Suskind's reporting at all, did so as an afterthought...

6) January 12, 2009:

Dan Froomkin: Bush's Last Press Conference: Bush responded most angrily to Washington Post reporter Michael Abramowitz's observation that members of the incoming Obama administration have spoken extensively about the need to restore America's moral standing in the world. "I strongly disagree with the assessment that our moral standing has been damaged," Bush said. (Even though it has, dreadfully. See, for instance, this Pew Global Attitudes Project report.) "It may be damaged amongst some of the elite. But people still understand America stands for freedom; that America is a country that provides such great hope," Bush continued, before launching into a defensive tirade heavy on 9/11 references....

He continued to prove unable to admit any serious mistakes on his part. As before, he expressed regret for his cowboy rhetoric and said he should have pursued immigration before Social Security restructuring. But while he acknowledged disappointments, he avoided responsibility. "Abu Ghraib, obviously, was a huge disappointment, during the presidency. You know, not having weapons of mass destruction was a significant disappointment," he said. "I don't know if you want to call those mistakes or not, but they were -- things didn't go according to plan, let's put it that way.... Look, I have often said that history will look back and determine that which could have been done better or, you know, mistakes I made."...

One thing Bush hadn't shared previously was his thinking about Hurricane Katrina, which up until the financial crisis was seen as his biggest domestic failure. "I've thought long and hard about Katrina; you know, could I have done something differently," he said. Like what? "[L]ike land Air Force One either in New Orleans or Baton Rouge." But the problem with the archetypal photo of Bush peering out at the catastrophic damage from his 747 was not that he didn't land -- it was how the photo symbolized his overall lack of concern and the inadequacy of the federal response. Later in the press conference, Bush grew angry defending that federal response. "Don't tell me the federal response was slow when there was 30,000 people pulled off roofs right after the storm passed," he said. But this is not exactly a controversial conclusion. A 2006 report from House Republicans concluded that leaders from Bush on down disregarded ample warning of the threat posed by Katrina and did not execute emergency plans or share information that could have saved lives. And the White House's own report acknowledged that the response was botched because federal officials were confused, poorly prepared and communicated badly...

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UP:DATE: Dan Froomkin emails:

I would like to make a minor point. Of the six Post items [in the last six months] you generously list as being valuable to you, two of them were notably not in the Post. The second one was actually spiked by my editors (and yes, you can say that if you want) so I ran it on NiemanWatchdog and Huffpo instead. The third, I admit, I never even pitched to the Post, It ran over at the Nieman Journalism Lab Web site.

It is... interesting... that the Washington Post do not want to publish this kind of report on the hall-of-mirrors that is the White House press corps:

[A]nchor Brian Williams and the more than two dozen NBC News producers responsible for the "Inside the Obama White House" special.... a show that treats Obama like a celebrity rather than a president.... [W]hat seems to fascinate Williams the most is what everyone is eating... a whole montage to people pouring, throwing and consuming M&Ms.... [T]he centerpiece of the hour-long show last night, what Williams calls Obama's "brief shining moment," is a hokey, obviously staged burger run to Five Guys. The cameras literally languish over greasy paper bags full of french fries...

If you read the Post, think hard about what the editors are spiking and not showing you. Just saying...

More on the Romer Symposium at the Economist

I confess that I think Alan Meltzer's contribution to the Christie Romer symposium at the Economist ill-advised for two reasons. Meltzer writes:

Romer roundtable: Think, plan, and tell us the plan: CHRISTINA ROMER... like generations of policymakers before her... counsels "trust us"... [I]t was they who allowed banks to circumvent the Basel regulations, that permitted Fannie and Freddie to expand beyond any reasonable standard, that brought us too big to fail and, as John Taylor has shown, abandoned a policy that brought us almost 20 years of the Great Moderation....

[L]ike most other defenders of this inflationary, low productivity policy, Christina puts the choice as whether we act against recession now or against inflation now. That leaves out a multitude of options.... [Y]es, stimulate now to reduce unemployment, but avoid creating a big inflation in a year or two. And even announce in advance how you propose to reduce the high money growth rate and the excessive deficits. Don't just say you'll do it, think, plan, and tell us the plan.

The first reason that it is ill-advised is that Meltzer really should not be claiming that Christina Romer is one of the "they" who "allowed banks to circumvent the Basel regulations... permitted Fannie and Freddie to expand... abandoned a policy that brought us almost 20 years of the Great Moderation..." Christie has not been doing any of these things. She has been sitting in her southeast corner office on the sixth floor of Berkeley's Evans Hall lecturing about monetary policy before, during, and since the Great Depression. If Meltzer wants to blame the actions of the American conservative politicians he has consistently voted for and the officials they appointed for our current mess, fine. But to say that Christie Romer = Phil Gramm because both are "policymakers" is simply wrong.

The second reason that it is ill-advised is that Meltzer misleads when he implies that the Obama administration and the Federal Reserve have not "announce[d] in advance how [they] propose to reduce the high money growth rate and the excessive deficits..." The Obama administration wants, as OMB Director Peter Orszag explains every hour on the hour, to balance America's long-run budget by reducing the extraordinary economic inefficiency of the American health-care system via health care reform. The fact that the people staffing the executive branch are in large part those who in the Clinton administration did such great work at bringing America's public sector back toward fiscal balance in the 1990s (but whose work was then largely undone by the American conservative politicians Alan Meltzer has consistently voted for and the officials they appointed) should give observers some confidence that they will at least try to reduce excessive deficits. At the very least Alan Meltzer should not be claiming that they have not told us how they intend to do so.

The same applies to the Federal Reserve, which Meltzer implies needs to "tell us the plan." I have found the Federal Reserve extremely eager and anxious to explain how it intends to unwind the large increase in the money supply when monetary velocity starts to recover. The basic problem, I learned back in my first year of graduate school, is that the central bank's ability to soak up excess liquidity in an economy and reduce the supply of "monnaie" is limited by its balance sheet: it needs to be able to induce banks to part with their cash by offering them something else to hold, and the Fed cannot offer what it does not itself have to trade. The solution the Federal Reserve is proposing is to allow it to create additional kinds of liabilities on its balance sheet. If congress grants the Federal Reserve the power to accept not just interest-free but interest-paying reserve deposits (which it has) and the power to issue and sell its own interest-bearing bonds (which I hope it will), then the Federal Reserve will have no trouble reducing the transactions balances that make up our monetary base when it wishes to do so. Once again, we have already been told the plan--and it is unfair to claim that Bernanke and company have not told us.

Comment for the Economist on Christina Romer (2009), "The Lessons of 1937"

Five Lessons from 1937 and Otherwhen

J. Bradford DeLong
U.C. Berkeley and NBER
delong@econ.berkeley.edu

June 17, 2009

Comment on Christina Romer (2009), "The Lessons of 1937":

Let me make five points to eliminate or refute or at least to fight against or lay down a marker that there is--well, call it "confusion" about what the right state of American macroeconomy should be.

Last December’s Unemployment-Rate Forecast and Outcome to Date

Source: Romer and Bernstein (2009).

My first point is that over the past six months the economy has been a severe disappointment. Output and employment have fallen much faster than people were projecting last December. Romer and Bernstein (2009) projected at the very start of this year that unemployment in the U.S. would reach a peak of 7.9% in the summer of 2009. But unemployment now in mid-June is about 9.7%, with 10% baked in the cake and the possibility existing that it might go much higher. The signs that the cliff-dive of employment has come to an end are very few. The level of new unemployment claims is still consistent with a rapidly-collapsing labor market nationwide.

New Weekly Unemployment Claims (Red, Right Scale, Four-Week Average) and Monthly Fall in Payroll Employment (Blue, Left Scale, Thousands)

Source: Paul Krugman.

Six months ago a net federal fiscal stimulus of about $1 trillion--$400 billion each year for about 2.5 years--seemed appropriate: that seemed to balance the benefits of filling-in the hole in aggregate demand without running too great a risk of triggering worrisome inflationary fever further down the road. Now the hole in aggregate demand is greater than was thought likely last December--about twice as great--and the likelihood of heightened future inflation is less. Thus if it was appropriate to set a $1 trillion federal fiscal stimulus in motion last December given what we knew then, if we had known then what we know now it would have been appropriate to set a roughly $2.4 trillion fiscal stimulus--$800 billion for 3 years--in motion back then.

My first point is thus that the Obama administration's federal fiscal stimulus programs are on the low side of what is appropriate by a substantial margin: this is the largest economic downturn since the Great Depression and the standard tools of expansionary monetary policy are tapped out and broken right now.

My second--related--point is that the need for federal-level fiscal expansion is reinforced by what state governments are doing right now. The federal government's discretionary actions are expanding aggregate demand by about $400 billion over fiscal year 2010, but state governments are right now cutting their spending and raising their taxes in order to offset this federal fiscal expansion more or less completely. On net, the government sector will be on autopilot as far as discretionary policy moves to stimulate the economy are concerned: federal-level expansion is offset and neutralized by state-level fiscal contraction. This is not an appropriate macroeconomic policy stance: this is the largest economic downturn since the Great Depression.

My third--unrelated--point is that the policy innovations of the past year have created a potentially dangerous weakness in the Federal Reserve system. The Federal Reserve's balance sheet has more than doubled over the past year, as it has acquired an enormous and bizarre menagerie of assets. On the liability side, it has funded this acquisition by expanding the monetary base, and has increased private-sector willingness to hold this monetary base by paying interest on reserves. This has added a fourth motive--profit--to the three traditional motives for holding reserve deposits at the Fed: the transactions demand, the emergency liquidity demand, and the speculative demand.

As long as the dollar remains the safest currency in the world, as long as the dollar remains the linchpin of the global financial system, there is no problem in the Federal Reserve's funding by what is essentially overnight borrowing the expansion of its balance sheet and the purchase of private securities that will vary up or down in market price with an eye toward holding them to maturity.

However, at some future time the dollar will cease to be the linchpin of the world financial system, in which case the Federal Reserve's financing its balance sheet via overnight borrowing will leave it vulnerable to the mother of all bank runs. It would be very good to fix this now: to give the Federal Reserve now the option to borrow not in what are essentially demand but rather in time deposits--to grant the Federal Reserve the power to issue its own bonds. This diminishes the chance of a great financial crisis in 2050 or so, with no downside that I can see.

My fourth point is the obvious one that health care is the only thing tht matters for the long run budget. The other points that the Hon. Dr Christina Romer raises, are--as is almost always the case--accurate and important. America's long-run fiscal problems are caused by health care, and will not be appreciably made worse by this half-decade's federal fiscal stimulus. If restructuring the health care system can bend the curve on the rise in overall (and hence public as well as private) health care costs, then America has ample debt capacity to borrow whatever we wish in this crisis--and to borrow it at extraordinarily favorable rates as well. If the curve of rising health-care costs is not bent, then the government's long-term finances are in trouble and so is the growth of private-sector non-health living standards: health care costs that rise as fast as CBO is projecting in the baseline cause lots of long-run economic problems, of which government fiscal bankruptcy is not the worst. Health care reform to bend the long-run curve of costs is now just what it was back in 1993: the most important issue for the American political system to deal with.

Fifth, I have the sense that the Obama administration's economic policymakers have forgotten one of the most basic lessons taught by Robert Rubin during his stewardship of economic policy during the 1990s. The lesson is to think probabilistically: to project yourself forward into the possible futures, to ask in each one what would be the actions that you would then wish you hd undertaken today, and then to actually take the appropriate action today. Looking forward into the future, (a) I see a 10% chance that something happens to create renewed cliff diving--a recession that bottoms out not with an unemployment rate in the 10-12% range that we currently anticipate but an unemployment rate that blows through 12% and keeps on rising. (b) I see a 30% chance of a rapid recovery as confidence and asset prices recover, and firms take advantage of high unemployment to hire new workers in droves at wage levels that make increasing production very profitable. But (c) I see a 60% chance of the end of the current cliff-dive in employment being followed by what happened in Japan in the 1990s, in the U.S. after 1991, in the U.S. after 2001, and to some extent in the U.S. after 1933--a recovery that does not see the market exert sufficient upward pressure on employment to return the unemployment rate to normal levels in two or three years, but that instead sees a jobless or low-job recovery during which the unemployment rate continues to drift upward for years, or falls only then to rise again.

The Obama administration's policies appear to me to be the ones that would be adopted if we believed that there was a 75% chance of scenario (b) and a 25% chance of scenario (a). But I don't think those are the probabilities. And I wonder what the Hon. Dr. Christina Romer thinks the probabilities are. For she is the one who warns of how:

[t]he 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy following an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently [than in normal times]. If the government withdraws support too early, a return to economic decline or even panic could follow...

The blunt fact is that the economic recoveries that have been rapid and seen fast growth in employment are those that ended when a Federal Reserve following strongly restrictionary policies to fight inflation eased off and significantly lowered interest rates. No such lowering of interest rates is possible this time--interest rates are already as low as they can possibly go at the short end. So I can see no reason to anticipate a rapid recovery and employment when the cliff-diving stops. And I do not understand why the Obama administration is following policies that presume such a rapid recovery--a V rather than an L for the shape of the recession--is not just possible but probable.

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Posted via email from http://braddelong.posterous.com/comment-for-the-economist-on-christina-romer at Brad DeLong's Scrapbook

Spring 2008 Teaching

• Introduction to Economic History
• Intermediate Macroeconomics (Spring 2008)
• Wednesday Macro Lunch (W 12-1)
• Economic History Seminar (M 2-4)

Spring 2008 Schedule

It's the spring semester. I think my office hours are going to be Wednesday 2-4, but that may change. Calling 925 708 0467 or emailing delong@econ.berkeley.edu for an appointment also produces good results.

Berkeley Schedule Spring 2008

It's the spring semester. I think my office hours are going to be Wednesday 2-4, but that may change. Calling 925 708 0467 or emailing delong@econ.berkeley.edu for an appointment also produces good results.