Menzie Chinn posts a graphic from Rick Mishkin's money and banking textbook:
Menzie Chinn posts a graphic from Rick Mishkin's money and banking textbook:
Atrios flags briefing.com's report on the slightly worrisome initial unemployment weekly claims seasonally adjusted number:
- Initial claims surge 69K to 375K in the week of January 26.
- Continued claims rose 47K to 2.716 mln in the week of January 19.
- Poor seasonal adjustment helps explain the volatile January levels -- strong adjustment early in month but absent in this latest week.
- Pulls 4-week average back to 326K Should find a more accurate weekly level in the coming weeks.
- The 4-week average of continued claims fell for a second week (after thirteen weekly gains).
- Some increased clarity after the unbelievably low early year initial claims levels.
Seasonal adjustment provided some volatility early in the year as the over-adjustment for post holiday workers left a 300K level and under-adjustment (we hope) in the latest week left a surge to 375K. The 326K 4-week average provides a better read but may also be low given the 340Ks seen in December.... Claims provide a nearly real time read on layoffs and the labor market as the employment report reflects the broader combined read of layoffs and hiring. A 360+K level for the 4 week average has been consistent with recession -- 362K in 1990 and 373K in 2001....
Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth...
I have long wanted to write a paper comparing the careers of William Marshall in the twelfth century and William Gates in the twentieth, as a way of making points about the embedding of the economy in society and about the different channels into which entrepreneurship and enterprise are directed--what a young man on the make who wants to be seriously upwardly mobile does and where he goes in different eras.
William Marshal, 1st Earl of Pembroke (1146 – 14 May 1219), also called William the Marshal (Guillaume le Maréchal), was an Anglo Norman soldier and statesman. He has been described as the "greatest knight that ever lived."... He served five kings — Henry the Young King, Henry II, Richard the Lionheart, John and Henry III — and rose from obscurity to become one of the most powerful men in Europe....
As a younger son of a minor nobleman, William had no lands or fortune to inherit, and had to make his own way in life... serve[d] in the household of William de Tancarville... then served in the household of his mother's brother, Patrick, Earl of Salisbury. In 1168 William's uncle was killed in an ambush by Guy of Lusignan. William was injured and captured... ransomed by Eleanor of Aquitaine... knighted in 1167... [made] a good living out of winning tournaments... by capturing and ransoming opponents.... By 1170 his stature had risen so far that he was appointed tutor in chivalry for Henry the Young King, son of Henry II of England.... William stood by Henry during the Revolt of 1173–1174, during which he knighted the Young King.... William Marshal was accused of undue familiarity with Marguerite of France... ask[ed] for trial by combat... but was refused... crusading in the Holy Land from 1183 to 1186... rejoined the court of King Henry II, and now served the father through the many rebellions of his remaining sons (Richard, Geoffrey, and John)... unhorsed the undutiful Richard in a skirmish. William could have killed the prince but killed his horse instead, to make that point clear....
In August 1189, when he was 43, King Richard arranged for him to marry the second-richest heiress in England, Isabel de Clare (1172-1240), the 17-year-old daughter of Strongbow. Her father had been Earl of Pembroke, and this title was granted to William.... The marriage transformed the landless knight from a minor family into one of the richest men in the kingdom... included in the council of regency which the King appointed on his departure for the Third Crusade in 1190....
William supported King John when he became king in 1199, but they had a falling out when William did homage to King Philip II of France for his Norman lands.... Despite these differences, it was William on June 15, 1215 at Runnymede who dealt with the barons who made King John agree to the Magna Carta, and he was one of the few English noblemen to remain loyal to the royal side through the First Barons' War. It was William whom King John trusted on his deathbed to make sure John's nine-year-old son Henry would get the throne... named by the king's council (the chief barons who had remained loyal to King John in the First Barons' War) to serve as both regent of the 9 year old King Henry III, and regent of the kingdom... prosecuted the war against Prince Louis and the rebel barons... battle of Lincoln.... Self-restraint and compromise were the key-notes of Marshal's policy... reissued Magna Carta....
Fulfilling the vow he had made while on crusade, he was invested into the order of the Knights Templar on his deathbed. He died on May 14, 1219 at Caversham, and was buried in the Temple Church in London.... After his death, his eldest son, also named William, commissioned a biography of his father to be written called L'Histoire de Guillaume le Marechal. This book, written so soon after his death, has preserved (and probably enhanced) the legend of William Marshal for posterity...
Paul Kiel sends us to Today's Must Read:
Ex-9/11 Panel [Staff] Chief Denies Secret White House Ties: Book Charges Zelikow May Have Interfered With the 9/11 Commission's Report By JUSTIN ROOD: Jan. 30, 2008: The former executive director of the 9/11 Commission denies explosive charges of undisclosed ties to the Bush White House or interference with the panel's report. The charges are said to be contained in New York Times reporter Philip Shenon's unreleased book, "The Commission: The Uncensored History of the 9/11 Investigation," according to Max Holland... [who] says he bought a copy of the audio version at a bookstore....
9/11 Commission co-chairs Tom Kean and Lee Hamilton hired former Condoleezza Rice aide Philip Zelikow to be executive director, Zelikow failed to tell them about his role helping Rice set up President George W. Bush's National Security Council in early 2001 and that he was "instrumental" in demoting Richard Clarke, the onetime White House counterterrorism czar who was fixated on the threat from Osama bin Laden.... "[Zelikow] had laid the groundwork for much of what went wrong at the White House in the weeks and months before September 11. Would he want people to know that?" Shenon writes, according to Holland.
Zelikow denied that was the case. "It was very well-known I had served on this transition team and had declined to go into the administration. I worked there for a total of one month. I had interviewed Sandy Berger, Dick Clarke and most of the NSC staff."... Shenon also says that while working for the panel, Zelikow appears to have had private conversations with former White House political director Karl Rove, despite a ban on such communication.... Shenon reports that Zelikow later ordered his assistant to stop keeping a log of his calls, although the commission's general counsel overruled him, Holland wrote.
Zelikow told ABC News he was under no prohibition that barred his conversations with Rove.... Zelikow said 9/11 Commission general counsel Daniel Marcus did not raise the matter with Zelikow at the time. Reached by phone Wednesday afternoon, Marcus declined to confirm or deny the events. Zelikow flatly denied discussing the commission's work with Rove. "I never discussed the 9/11 Commission with him, not at all. Period." What's more, the idea of Zelikow and Rove conspiring over the commission's work was unrealistic, the ex-director indicated. "I was not a very popular person in the Bush White House when this was going on. There's a lot of carryover of that to this day."...
Halfway into the panel's operation, Zelikow told his bosses under oath of the once-hidden ties, Holland's blog says Shenon's book reports. Upon hearing the details, Shenon writes, Marcus concluded Zelikow "never should have been hired," according to Holland...
From Walter Jon Williams:
Angel Station: Audience Participation: Still working. And so, clearly, the only way to keep us both amused is to make you talk. Here's a quote from Steven Weinberg.
With or without [religion], you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion.
I agree with Weinberg and Williams. The problem of evil--why does God make a world in which bad things happen to good people?--is a hard one. But the problem of supernatural evil--why does God make a world in which good people do bad things in the name of God?--is a much harder one.
Jim Hamilton writes:
Econbrowser: Fed rate cut: although interest rates respond immediately to the anticipation of any change from the Fed, it takes a considerable amount of time for this to show up in something like new home sales, due to the substantial time lags involved for most people's home-purchasing decisions. The graph below gives my estimate of the average time delay between a change in the mortgage rate and a subsequent change in the number of new home sales. According to the historical correlations, we would expect the biggest effects of the January interest rate cuts to show up in home sales this April.
An annual growth rate of 0.6%:
Shobhana Chandra: Bloomberg.com: Economy: The U.S. economy teetered on the edge of a recession in the fourth quarter as home construction fell the most in 26 years and Americans cut back on spending. Gross domestic product increased at an annual rate of 0.6 percent, down from 4.9 percent in the prior three months, the Commerce Department said today in Washington. The pace of growth was half that forecast in a Bloomberg News survey and the slowest since the first quarter of last year.
We're on the verge of a recession,'' said Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts-based forecasting firm.The consumer really is tapped out. The housing numbers are going to keep getting worse, at least through mid-year.''
The Federal Reserve reduced its benchmark rate by half a percentage point today to 3 percent. Combined with last week's three-quarter point cut, it is the fastest easing of monetary policy since 1990. The world's largest economy is reeling from the collapse in subprime lending, falling house prices and a credit squeeze that's eroding business and consumer confidence. Factories also made fewer cars....
all of 2007, the economy expanded 2.2 percent, the least in five years, to $11.6 trillion after adjusting for inflation.
We're not happy with the number,'' Commerce Secretary Carlos Gutierrez said in an interview with Bloomberg Television after the report.We need a booster shot before the economy gets sick,'' he added, referring to a stimulus package lawmakers are considering in Congress...
Overheads for Global Poverty Lecture:
Overheads for Applying the Solow Growth Model:
Econbrowser: How Much Stimulus? Dollar Amounts versus Efficacy: I think a fiscal stimulus of 1 percentage point of GDP to soften the slowdown makes sense -- as long as we get the maximum "bang for the buck" of deficit spending, and the stimulus is not open-ended. In other words, I share Andy Samwick's (and Jim Hamilton's) queasiness about letting the Bush-ian deficit spending/debt building tendencies persist (plenty of documentation here, here and here). In addition, the deficit spending should be aimed at increasing aggregate demand, as opposed to providing a windfall to households and businesses that will only enhance wealth or profits.
In this latter respect, my views are in congruence with Krugman's views that the package agreed to between the Administration and the House (description here) leaves something (okay, a lot) to be desired. The main idea should have been to enhance the automatic stabilizers in the system. One has to ask: Where is the extension of unemployment benefits (as apparently mooted by Senate leaders)? Where is the increase in food stamp payments? (These are two of the four points I mentioned as ideal components in this post.) What is the point of the 1/3 of the package ($50 billion) that will be devoted to accelerating capital depreciation expenses (critiqued here)?
So, I think some serious thought has to be done -- do we want a flawed stimulus package, or should we forego the stimulus if we think that most of the resulting deficit spending will not actually do any stimulating of aggregate demand? At the moment, I think we can -- and should -- try to do better...
Sheryl Gay Stolberg badly needs to go back to school and be retrained for another career--but for what? What profession would possibly benefit?
Her lead this morning:
Echo of First Bush: Good Economy Turns Sour - New York Times: Will George W. Bush be remembered as the president who lost the economy while trying to win a war? Mr. Bush has spent years presiding over an economic climate of growth that would be the envy of most presidents. Yet much to the consternation of his political advisers, he has had trouble getting credit for it...
Outsourced to Paul Krugman, Dean Baker, and Ezra Klein:
Why doesnt Bush get economic credit?: Today’s Times asserts as fact: "Mr. Bush has spent years presiding over an economic climate of growth that would be the envy of most presidents. Yet much to the consternation of his political advisers, he has had trouble getting credit for it, in large part because Americans were consumed by the war in Iraq."... [This] is a theory, not a fact. And the evidence suggests that this theory is wrong.
On one side, the Bush economy, even during its good years, wasn’t all that great.... Even at its best, the Bush economy failed to deliver employment growth comparable to that under earlier presidents. And the Bush economy spent very little time at its best. Only Gerald Ford and Bush the elder failed to deliver performance better than the current occupant of the White House....
Dean Baker had the same reaction. He uses GDP growth rates and lumps Nixon-Ford together, so that his list of presidents who would envy the Bush economic record is as follows: 1. Bush I. 2. Nobody.... Ezra Klein makes it into a nice chart.
Why oh why can't we have a better press corps?
John N. Gray is supposed to be a reputable British academic, a professor at the London School of Economics, a respected political theorist.
John N. Gray writes, in Straw Dogs:
Financial markets are moved by contagion and hysteria. Mesmer and Charcot are better guides to the new economy than Hayek or Keynes...
I very much doubt that John N. Gray has ever read a word written by John Maynard Keynes.
Stupidest man alive...
Let's give the mike to John Maynard Keynesa, The General Theory of Employment, Interest and Money, chapter 12, "The State of Long-Term Expectation":
The General Theory of Employment, Interest and Money by John Maynard Keynes. Chapter 12. The State of Long-Term Expectation: WE have seen in the previous chapter that the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.
The considerations upon which expectations of prospective yields are based are partly existing facts... partly future events which can only be forecasted... future changes in the type and quantity of the stock of capital-assets and in the tastes of the consumer, the strength of effective demand from time to time during the life of the investment under consideration, and the changes in the wage-unit in terms of money.... We may sum [these] up... as being the state of long-term expectation....
It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain.... For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change....
The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully.... Our conclusions must mainly depend upon the actual observation of markets and business psychology.... The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market....
With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system. In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and 11 in the morning and reconsider whether he should return to it later in the week. But the daily revaluations of the Stock Exchange, though they are primarily made to facilitate transfers of old investments between one individual and another, inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased; whilst there is an inducement to spend on a new project what may seem an extravagant sum, if it can be floated off on the Stock Exchange at an immediate profit. Thus certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur. How then are these highly significant daily, even hourly, revaluations of existing investments carried out in practice?
In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely.... [T]he above conventional method of calculation will be compatible with a considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention.... But it is not surprising that a convention, in an absolute view of things so arbitrary, should have its weak points. It is its precariousness which creates no small part of our contemporary problem of securing sufficient investment. Some of the factors which accentuate this precariousness may be briefly mentioned.
(1) As a result of the gradual increase in the proportion of the equity in the community’s aggregate capital investment which is owned by persons who do not manage and have no special knowledge of the circumstances, either actual or prospective, of the business in question, the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them has seriously declined.
(2) Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market....
(3) A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.
(4) But there is one feature in particular which deserves our attention. It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.
Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.
If the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered, first of all, that there are, indeed, such serious-minded individuals and that it makes a vast difference to an investment market whether or not they predominate in their influence over the game-players. But we must also add that there are several factors which jeopardise the predominance of such individuals in modern investment markets. Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; — human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money — a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally....
These considerations should not lie beyond the purview of the economist.... As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase.... Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.... These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges.... The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise....
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is “liquid” (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk....
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before....
This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; — it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends....
[A]ter giving full weight to the importance of the influence of short-period changes in the state of long-term expectation as distinct from changes in the rate of interest, we are still entitled to return to the latter as exercising, at any rate, in normal circumstances, a great, though not a decisive, influence on the rate of investment. Only experience, however, can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment.
For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.
Why oh why can't we have a better press corps?
Jared Bernstein points us to what I think is the stupidest thing published by the Washington Post so far this year: Steven Landsburg arguing:
The government cannot stimulate the economy because Say's Law guarantees that aggregate demand is determined by aggregate supply and not by government policies: "The idea, we're told, is to stave off an all-out recession by stimulating both investment... and consumption.... But hold it right there. Investment and consumption are natural rivals... more of one means less of the other.... The idea... is to give people tax cuts so they'll feel richer and spend more. But government can't make people richer on average; all it can do is shuffle wealth around.... Now maybe you can time things so Peter goes on a spending spree today but Paul doesn't tighten his belt until next month. (Then again, maybe you can't...). [E]ven if you manage to pull this trick off, sooner or later you must tax Paul. So today's fiscal stimulus comes at the expense of tomorrow's fiscal drag..."
If the government could boost aggregate demand, it could only boost aggregate demand in Asia: "[Y]ou'll put Asians to work producing goods for the U.S. market.... [O]nly marginal tax cuts put people to work. Non-marginal tax cuts... [that make] people feel richer... [make them] less eager to work. An unemployed laborer with a tax rebate in his pocket might well feel less urgency about getting retrained or finding a new job..."
A recession is a healthy thing that should be encouraged--not prevented: "To say it again: The more I consume, the poorer your grandchildren will be; the resources I use won't be available to build machines that make your grandchildren more productive. It's all well and good to worry about the people who are struggling today, but let's also remember the people who will be struggling in the future.... [I]t's no more painful to be unemployed for five weeks in the middle of a recession than it is to be unemployed for five weeks at the height of a boom. In fact, it's arguably less painful: Isn't it better to be unemployed at a time when unemployment carries less stigma and when you've got unemployed friends to hang around with?... [T]he only solution to unemployment is for displaced workers to get retrained and find their way back into the workforce. The new stimulus package only delays that process by propping up dying industries for a while and postponing the day of reckoning..."
From a historian of economic thought's perspective, the piece is a confused and incoherent mishmash of Say's Law, Hayekian over-investment theory--plus a strange and rarely seen doctrine going back to Nassau Senior on the handloom weavers about how only the spur of immediate poverty and privation could get the lower classes to move to new industries--that they needed to be pushed out of declining because (for some reason neither Senior nor Landsburg ever explained) they could not be pulled into expanding industries.
But let me turn the mike over to James K. Galbraith:
Landsburg is incoherent on so many fronts it's hard to know which to cover, but I'll rest on two points. First, the idea that the stimulus will be totally offset by increased private saving is nutty, but it's high nuttiness....
Second, the idea that my consumption benefits only me, while my saving benefits everyone, implies an obvious market failure which Landsburg cannot quite get his head around. If markets worked perfectly, the entire return to my saving would come to me, and there would be no benefit to anyone else. (They understood this in the 19th century, it was called the Iron Law of Wages.)
High academic conservatives routinely assert that saving is a public good, without thinking about the consequences. If it is, then of course government should provide it directly, to make up the difference between the marginal public and the marginal private benefit.
In other words, Landsburg should be arguing for the Edwards/EPI/Galbraith growth package. But he's not...
And to Mark Thoma:
Economist's View: [T]he idea that deficit spending now means we will have to raise taxes and lower GDP in the future is exactly right - that's [not an argument against but instead] the point of stabilization policy, to shave the peaks and fill the troughs. When the economy is having trouble, we deficit spend to bring up GDP, then when things are so good that the economy is beginning to overheat we run a surplus (raise taxes) to bring GDP down closer to trend. Since deviations from the long-run trend rate of growth are costly whether you are above or below trend, this type of stabilization raises economic welfare...
Yeah, I'm pretty sure giving people a few hundred extra bucks is going to stop them from looking for a job, they can live for months on that. Never mind that most of the people receiving the benefit are already employed. Now if we had extended the length of time for unemployment compensation, we'd have something to talk about - there is evidence on this point, lots and lots of it, but we didn't. Republicans would not allow one of the best means of stimulating the economy (e.g. see the rankings of programs at the CBO) to be part of the bill...
[I]t takes longer to get a job in a recession... extending the time period covered by unemployment benefits, increasing the resources available to programs that help to reemploy workers, hiring some of the excess workers into temporary government employment, using tax rebates to stimulate the economy and employment, and so on to compensate for the lowered probability of finding a job during a recession--i.e. implementing policies that make it equally likely that unemployed workers in recessions and unemployed workers during boom times will find a job--is not preferential treatment...
A nicely-argued point of view:
A Better Way to Deal With Downturns: [This] stimulus package is unjustified in the short run and harmful in the longer term.... The $150 billion agreement calls for tax rebates to low- and middle-income households as well as business incentives. Doubtless, this will boost economic activity. If you pull levers, you get movement. Personal consumption and business investment will increase relative to what they might otherwise have been. But there is no discussion of repaying the money through higher taxes in the near term. Let's drop the euphemism of "stimulus package" and call this agreement by its proper name: "deficit spending."...
[P]olicymakers' fear that unless "something" is done, a temporary economic downturn could become more protracted. This fear, to the extent that it is justified, is better addressed by the Federal Reserve lowering short-term interest rates, which would stimulate the economy more quickly and comprehensively than would fiscal policy. The Fed did just this on Tuesday. Yet the fiscal-policy lever has been yanked before any data have indicated whether the Fed's stimulus has had its intended effect....
[S]ome households will bear a disproportionate burden of an economic downturn, combined with a belief that "something" should be done to help them. Government has a choice in whom it taxes to finance this relief -- other taxpayers today or all taxpayers in the future. That the agreement holds the former group harmless was also praised by Bush. This "stimulus bill" is really $150 billion worth of some future generation's resources appropriated to finance our own consumption....
The imperative to do "something" is all the entitlement politicians need. In political arguments, you can't beat something with nothing. But we can learn from this experience to have a better menu of fiscal policy options the next time around. Two changes to our budget policy would go a long way toward that goal.
First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle.... [W]e must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.
Second, we can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year....
With a little forethought, short-term economic concerns and long-term budget goals need not be in conflict.
If-1i say if--ex-senator Rick Santorum is going to say that instead of being caught in bed with John McCain he would rather be caught in bed with anybody--absolutely anybody--with Barack Obama and a Labradoodle--with Hillary Rodham Clinton and a Weimeraner--with John Edwards and a Chihuahua--he should first get a room.
He should not do it on public, on Amtrak:
Outsourced to Matthew Yglesias and Ezra Klein:
Matthew Yglesias: Union Share Rising: Some interesting news on the labor front as it seems that the proportion of the work force that belongs to a union went up last year for the first time since the BLS started tracking this stuff in the early 1980s -- from 12 percent of the workforce to 12.1 percent. Ezra Klein comments:
Manufacturing, amazingly, has been so decimated that your average manufacturing employee is less likely to be unionized than another American worker picked at random. Given that the manufacturing sector was once the backbone of the union economy, that's real testament to how ruined the old order is, and how impressive even these small gains are. Now, one year does not a trend make, and the uptick is unquestionably minor. But still: Gains for the first time in 25 years. And centered around the fast-growing, immigrant-heavy economies of the West.
The actual numbers involved here are, clearly, very small. But it's worth saying something about momentum. For a long time now, some heavily unionized sectors of the economy have been losing members. In more recent years, though, you've also seen quite a lot of vibrancy on the union front with a large amount of service-sector organizing. That, however, has tended to be masked by the continued decline of the manufacturing sector. What we seem to be seeing, however, is that the two lines are crossing -- manufacturing has declined so much already that continued declines no longer swamp gains in other sectors. If we have political change in 2009 that brings about labor law reform, pro-labor appointments to regulatory bodies and judgships, and perhaps even dares to use the bully-pulpit to make the case for union membership one can easily imagine seeing these trends continue.
Nelson Schwartz and Nicola Clark report Barry Ritholtz's suspicions:
Société Générale’s Sales May Have Incited Market Plunge: As panic swept European markets on Monday, word spread that a big hedge fund was in trouble and dumping stocks. Someone was selling, all right — Société Générale. The French bank was frantically unwinding an estimated $75 billion of bad bets on European stocks placed by a rogue trader, Jérôme Kerviel....
Société Générale rushed to unwind those trades during Monday’s market plunge, and trading in those futures contracts soared to record levels. The bank’s abrupt reversal contributed to a decline that snowballed into an avalanche of sell orders around the world, some traders said. The ensuing turmoil helped prompt the Federal Reserve to orchestrate the surprise cut in interest rates announced Tuesday.
“I have little doubt that Société Générale’s unwinding of those positions absolutely pressured indexes worldwide,” said Barry L. Ritholtz.... Granted, fears of a recession in the United States and continuing worries about the spread of the subprime mortgage collapse were also responsible for the market downdraft in the last 10 days. But Mr. Ritholtz argued the rapid move by Société Générale to close out tens of billions in futures positions might have been a major factor in pushing an already nervous market into an outright panic....
On Monday afternoon, with United States markets closed for Martin Luther King’s Birthday, Mr. Ritholtz said, many Wall Streeters were struggling to figure out just why Europe and Asian markets were off so steeply. “Instant messages were lighting up, and people were saying ‘This looks like a big European hedge fund blew up.’ ” Indeed, there was little market-moving data before the plunge.
He was quick to add that the French bank’s rapid turnover of the positions assembled by Mr. Kerviel would not have been enough to push the German market down 7.2 percent Monday. But in today’s fast-paced markets, hedge funds and investment firms often pile on once the selling starts. “These things take on a momentum of their own,” he said...
I see the Fed's response to the Asia-Europe panic storm as preserving its options--moving its planned rate cut forward by a week to assure markets that it was not asleep, and now able to reoptimize at its meeting this week. I'm curious to see what they will do.
Why oh why can't we have a better press corps? Peter Baker and Jonathan Weisman put on the floppy shoes and the big rubber noses and misinform the American public once again, this time about the stimulus package.
Outsourced to Matthew Yglesias:
Matthew Yglesias: Bipartisanship!: There's something hilarious about the tone of this Washington Post "analysis" article on the stimulus package. Basically, the theme of the piece is that bipartisanship is good, that passing legislation is good, and that bipartisanship is good because it makes it easier to pass legislation, which is good. Lost in the fog somewhere is the point that it's better to pass good bills than bad ones and that this stimulus package is a pretty bad one.
Indeed, the CBO estimated that the most effective stimulus idea would be a temporary boost in food stamps. They concluded that the second most effective stimulus idea would be an increase in the duration of unemployment benefits. Democrats proposed both of those things. But Republicans wouldn't go along with either. So in order to make the bill bipartisan, the best idea was stripped out. And so was the second best idea. I don't necessarily blame the Democrats for making the compromises necessary to get a bill passed, but the fact of the matter is that bipartisanship made this bill worse than a one-party bill would have been...
My friend Daniel Froomkin tells me that Peter Baker is an honorable reporter trying the best he can to inform the American people from the absurdly difficult position and under the extremely painful constraints of being a White House beat reporter. I reject that.
Why oh why can't we have a better press corps?
My bottom line: David Leonhardt needs a weblog.
This morning, David Leonhardt gets a story about John McCain on page A1--and buries the lead in paragraph 23:
The real lead:
McCain’s Fiscal Mantra Becomes Less Is More: On several occasions over the last year, Mr. McCain has said that tax cuts can reduce the deficit by spurring additional activity that, in turn, leads to more taxes being paid. But numerous studies have found that not to be the case.... During his campaign, Mr. McCain has focused much more on spending [cuts] than on taxes. He has called for the end of earmarks.... They are “a very small part of the budget,” he said, “but so symbolic.”... McCain would consider cutting the programs that the White House has identified as ineffective... has not specified which ones it would cut. In addition to Amtrak, the list includes various programs dealing with Defense Department communications, veterans’ disability and low-income heating assistance...
The printed lead:
Senator John McCain said that, if elected, he would do what other presidents had tried but failed to do: cut government spending sharply enough to reduce the budget deficit while lowering taxes at the same time.... Mr. McCain emphasized his experience working on economic matters in Congress and laid out an unorthodox version of conservatism. After initially opposing President Bush’s tax cuts, he has become a supporter of making them permanent and of pursuing additional tax reductions, saying they are the best way to encourage economic growth.
But unlike Mr. Bush — or other Republican presidential candidates this year — Mr. McCain favors government mandates to halt global warming and slow the growth of Medicare costs. His campaign says it would also cut financing for programs that the White House budget office has deemed ineffective, a list that includes Amtrak...
There is only one number in the entire article--"$250,000."
Now David Leonhardt is a smart guy, and his articles in the Business section are nearly always worth reading. But this leaves everybody who knows about taxation and the budget shaking their heads in disgust. And it leaves everybody who isn't already fully briefed-up on tax and budget issues misled and misinformed.
The article printed is very, very different from the post that David Leonhardt would write if he were proprietor of his own weblog. That post would be very much worth reading--it would lay out the long-term fiscal dilemmas, it would be chock-full of numbers about just how "symbolic" and insignificant earmarks are in the total budget context, it would have references to a whole bunch of good studies of the revenue impact of tax-law changes, it would put the entire budget issue in quantitative context. It would be something that David Leonhardt could be proud of. It would be something useful.
David Leonhardt needs his own weblog. He needs it really bad.
Stimulus Gone Bad - New York Times: the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.
Those are harsh words, so let me explain what’s going on.
Aside from business tax breaks — which are an unhappy story for another column — the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax. This ensures that the bulk of the money would go to people who are doing O.K. financially — which misses the whole point.
The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession. If the money the government lays out doesn’t get spent — if it just gets added to people’s bank accounts or used to pay off debts — the plan will have failed... sending checks to people in good financial shape does little or nothing to increase overall spending.... On the other hand, money delivered to people who aren’t in good financial shape — who are short on cash and living check to check — does double duty: it alleviates hardship and also pumps up consumer spending.
That’s why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office.
There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.
But the Bush administration has apparently succeeded in killing all of these ideas, in favor of a plan that mainly gives money to those least likely to spend it.... [T]he result is a plan that not only fails to deliver help where it’s most needed, but is likely to fail as a [recession-fighting] economic measure....
And the worst of it is that the Democrats, who should have been in a strong position — does this administration have any credibility left on economic policy? — appear to have caved in almost completely. Yes, they extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent. But basically they allowed themselves to be bullied into doing things the Bush administration’s way...
Are any Democratic primaries winner-take-all?
Sam Boyd: The Convention Delegate Process Explained | The American Prospect: the actual rules that cover delegate selection and behavior are obscure... some of the rules are too complicated to get into even here... what follows is a brief overview....
Eighty percent of the total delegates, known as pledged delegates, are elected to represent a particular presidential candidate through caucuses and primaries in each state... all states, whether they hold primaries or caucuses... must award pledged delegates proportionally to candidates who receive more than 15 percent of the vote. The easiest way to understand this is to consider a state primary where Kucinich gets 10 percent of the vote, Edwards gets 20 percent, Obama gets 30 percent, and Clinton gets 40 percent. Under this scenario, Clinton, Obama, and Edwards get 40 percent, 30 percent, and 20 percent of the delegates awarded by the state while the remaining 10 percent are divided evenly among the three candidates.
This selection system has the odd consequence of disproportionately rewarding candidates who receive barely more than 15 percent of the vote, especially if a large fraction of the vote goes to candidates who do not meet the viability threshold....
While voters will assign four-fifths of the delegates, the actual results could easily be decided by the remaining fifth -- superdelegates... DNC members, all Democratic members of Congress, Democratic governors, and certain former party leaders...
Did John McCain really say, in public, "The reason Chelsea Clinton is so ugly is that her father is Janet Reno"?
David Corn: [T]his new standard in the practice of journalism seemingly does not extend to other political figures, at least not media darlings like Sen. John McCain, R-Ariz. Earlier this month, at a Republican Senate fund-raiser, McCain told a downright nasty joke making fun of Janet Reno, Hillary Rodham Clinton and Chelsea Clinton. The fact that McCain had made the tasteless joke was reported in major newspapers, as was the vain attempt by his press secretary to initially deny what McCain had done. But... the Washington Post... said the joke "was too vicious to print." The Los Angeles Times... provided an oblique rendering... that did not fully convey its ugliness.... Maureen Dowd... wrote that McCain "is so revered by the press that his disgusting jape was largely nudged under the rug." But Dowd chose not to relay the joke, either.
The joke did appear in McCain's hometown paper... the Associated Press did report the joke in full... But by censoring themselves, the Post, the Times and others helped McCain deflect flak and preserved his status....
[T]his is what [McCain] reportedly said: "Why is Chelsea Clinton so ugly? Because her father is Janet Reno."...
McCain's two-liner conveys some interesting insights... particularly since it was delivered to a Republican crowd... the party that champions pro-family values.
McCain's lapse in judgment... may be a significant clue into aspects of his "character."... But many voters have been spared this insight, thanks to the censors in the press....
McCain is also unusually popular with the media. He gives good quotes; he is outspoken. He takes positions that contradict the Republican leadership. When you talk to McCain, he converses in the manner of a real person, seemingly telling you what he thinks. That is rare among elected officials.... [T]he joke revealed more than a mean streak.... It also exposed how the Washington Post, New York Times and Los Angeles Times play favorites when reporting the foibles of our leading politicians.
Due at start of lecture, Feb 1 2007:
Economics 101b Problem Set 1
Spring 2008, U.C. Berkeley
Explain whether or not, why, and how the following items are included in the calculation of GDP:
Calculating real magnitudes:
Suppose that the appliance store buys a refrigerator from the manufacturer on December 15, 2007 for $600, and that you then buy that refrigerator on February 15, 2008 for $1000:
Why do DeLong and Olney think that the interest rate and the level of the stock market are important macroeconomic variables?
What are the principal flaws in using GDP per worker as a measure of material welfare? Given these flaws, why do we use it anyway?
Suppose a quantity grows at a steady proportional rate of 3% per year. How long will it take to double? Quadruple? Grow 1024-fold?
Suppose we have a quantity x(t) that varies over time following the equation: dx(t)/dt = -(0.06)x + 0.36.
Now you are allowed to integrate dx(t)/dt = -(0.06)x + 0.36.
What is the difference between the nominal interest rate and the real interest rate? Why do DeLong and Olney think that the real interest rate is more important?
Which do you think is a more important macroeconomic variable, real GDP per capita or the unemployment rate? Why?
Jim Hamilton observes:
Econbrowser: Another day, another dollar: All of which invites the question, What's left for the Fed to do at their regular meeting still scheduled for next week? Futures market participants, whom we left on Friday in the belief that a 75-basis-point cut by the end of January was more likely than a 50-basis-point cut, roared out of the box today, bidding the February fed funds futures contract up to 96.95, implying an expected fed funds rate of 3.05%. That sounds like an additional 50-basis-point cut at the meeting coming up next week, or, if not, a good chance of another intermeeting move in February.
Why is the yield curve inverted between six months and two years?
I'm Brad DeLong, and this is my morning coffee.
Jan de Vries ran our first Econ 210a class yesterday--"Introduction to Economnic History" for the first-year Ph.D. students in economics. He spent more time than I had in the past on what he called "apologetics"--outlining why we were requiring first-year Ph.D. students in economics to take an economic history course--and he gave a historian's answer to that question: a narrative, a particular individual story, a talk about the formation of the social sciences and the rise and fall of positivism and the subsequent vicissitudes of economic history as a subdiscipline within economics.
It struck me after the class that I should have taken up a bit of time to give the economist's answer to the question of why we make first-year Ph.D. students take economic history. I think it goes roughly as follows:
Economics is the hyper-positivist of social science disciplines: believing that everything of interest can be reduced to law-like theoretical and empirical propositions modeled after classical mechanics; that what cannot be reliably, repeatedly, quantitatively, and empirically demonstrated does not really exist as knowledge; that the only good social science is a deductive, analytical, model-based, general, experimental science.
But this misses a lot. Because we are people like those whom we study, we have psychological access to our subjects' internal decision-making processes and motivations at a level that we cannot obtain from market price-quantity data. There is lots of interest that happens once and only once. Natural experiments are rare, and so if we restrict ourselves to positivist tools alone much is underidentified. The individuals' preferences--the "tastes" part of "tastes and technologies" are not primitive but are themselves the result of long and complex historical, sociological, psychological, and--yes--economic processes. You need thickly-described case studies and anecdotes looking out from people's insides before you can tell if your statistical results mean what you assert they mean.
Most important, every piece of economic theory is ultimately a piece of crystalized history. And you have a much deeper and more sophisticated knowledge if you know the history that led people to think that elaborating these particular theories was worth doing. If you just do the crystalized stuff--well, there is a sense in which your thought processes are then on crack, unable to properly process and reflect on the systems of analysis you are using.
Of course, there is a parallel answer to the question of why historians should be forced to take economic history courses. It has, I think, two parts. First, certainly since 1800 and perhaps since 1500, what is most extraordinary and salient about our global society is primarily economic and scientific, so you cannot do post-1500 history without knowing economics anymore than you can do early Byzantine history without knowing theology.
Second, just as every piece of theory is ultimately crystalized history, so every individual historical narrative or judgment is based on a web of implicit social science theories. And your knowledge of the past is inadequate if you do not understand your implicit social science theories critically enough to be expert users of them.
I'm Brad DeLong, and this is my morning coffee, drunk this morning out of my Revelation of Saint John the Divine mug, it happens.
Paul Krugman thinks they are. Recovery from the old pre-1990 the-Federal-Reserve-has-hit-the-economy-on-the-head-with-high-interest-rates recessions was quick once the Fed had concluded that inflation was under control and had eased up. But he thinks (and I more than half agree) that these days recessions are credit-channel-overinvestment-bubble-bursting events, and that on the labor side at least recovery from them is a much more lengthly and difficult process.
He may well be right.
Here is Paul Krugman:
Deep? Maybe. Long? Probably. - Paul Krugman - Op-Ed Columnist - New York Times Blog: I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But both were followed by prolonged “jobless recoveries” that felt like continuing recessions. Below is the employment-population ratio since 1989, with shading showing the official recessions. In both cases the employment slump went on for a long time after the recession was supposedly over.
There’s every reason to think that the same thing will happen this time. There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending.
There’s still the question of how deep the slump will be. I can see the case for arguing that it will be nasty. The 1990-91 recession was brought on by a credit crunch, the 2001 recession by overinvestment; this time we’ve got both. I guess we’ll see. In any case, whatever happens will probably last quite a while.
Here is the graph that Paul attaches:
The extremely slow employment rebounds of the "Jobless Recovery" of 1991-1993 and of the "Bush Boom" of 2001-2005 are only two data points, but they are two data points.
Econ 210a, January 23, 2008. Jan de Vries Speaks:
Here to present apologetics--a response to the question "why are we here, in this class, studying this material?" And this talk is going to give a historian's answer, a narrative, response to this question...
History and Economics:
The emergence of the social sciences' out of moral philosophy in the 19th century. Positivism--seek truth from facts. resisted positivism; economics embraced it... "Historicism": you can't test, you have to understand... "Historicism": it's an illusion to suppose that we van reduce social science to natural science-like laws like those of mechanical physics... History: Inductive, descriptive, narrative, unique, example... As opposed Economics: Deductive, analytical, model-based, general, experiment...
Robert Solow: embedding of economy in society
All data are historical data... All theory is crystalized history... All history is based on an implicit theory...
CE is a historically-based inquiry into the nature and causes of the wealth of nations--to see through the accidents of history to the natural laws of social organization... For the CEs, "natural" is good
Moses Finley: Aristotle was a really smart guy, but Aristotle the economist is not very impressive. Finley claims this was the fault of ancient society--organized in such a different way so that Arostotle's categories make no sense. Wealth should flow to virtue...
So how eternal are the theoretical insights of Adam Smith? Do they apply to Athens in 350 BC?
The reaction against CE--German and Austrian reaction. Between 1860 and 1890: Jevons, Walras, Marshall and the rise of NE; institutional and historical critique--economics should recognize that different eras and different regions have different economicses. German Historical School vs. Austrians in the streets of Vienna: methodenstreit. Who won this battle? NE. But should we recover something of the losing side? Cunningham's review of Marshall and his Principles of Economics
Schumpeter, Gerschenkrom, Solow: economic history has a civilizing function when applied to economists... Marx: What's going down in Manchester tells us what will go down in Bombay... Gerschenkron: modified stage theory Return of institutionalism via DE...
Cliometrics: the New Economic History: economic history as a branch of applied NE... The New Institutional Economics, the Annales School, and Paul David's call for a historical economics
Doug North: NIE: price theory is not enough. Transaction costs as the only thing worth thinking about. The old institutionalist agenda in new clothes...
Annales: Braudel, Le Roy Ladurie... Longue duree... The different paces of time... The interplay of event and structure...
Paul David: The demand for a Historical Economics: make up your own mind for how valuable Paul David's project is... Replace mechanical with biological metaphors, complexity instead of linearity. Are episodes of path-dependence trivial? Does qwerty matter? Is qwerty typical? Decreasing/constant/increasing returns? How long and how large a shadow does the past cast? If you have ever seen a typewriter in a museum...
How much does the path of historical development matter?
Is capitalism "natural" in a Smithian sense, or a unique historical individual process?
Does the market system allows us to partake "of the common heritage of mankind", or is it a particular--and passing--phase?
Whimsley: The Big Switch: The Big Switch, by Nicholas Carr, is published by W.W.Norton, January 2008.... Unlike most technology commentators Nicholas Carr knows that if you want to predict what's happening next, you've got to follow the money. And he does so very well, which makes this book (and his weblog) recommended reading for anyone interested in where technology is taking us.
Google is everywhere in The Big Switch and the reason is simple: cost.
No corporate computing system, not even the ones operated by very large businesses, can match the efficiency, speed and flexibility of Google's system. One analyst [Martin Reynolds of the Gartner Group: see here ] estimates that Google can carry out a computing task for one tenth of what it would cost a typical company.
That means, if you are a company and you have a computing task to be done that Google already does, you can save a bunch of money and you can now start outsource your CPU cycles just as you previously outsourced other tasks. And that means that the computing landscape will get shaken up. Not in a matter of months, but over the next decade or so. It's amazing how quickly we get used to a landscape and many of us are now so accustomed to PC's and the basic layout of corporate computing systems that they seem almost natural. But Carr warns us that this is going to change and, as if to confirm his claims, last week Sun Microsystems, supplier of many of the computers that make up corporate data centres, announced that by 2015 it won't have a single data centre. Information Technology is not sacrosanct.
Google's cost advantage comes partly from a built-in inefficiency of corporate computing: capacity underutilization. Many applications demand their own servers, and those servers must be able to handle the peak load that the application will experience even if that peak load happens only rarely. As a result most corporate computers, most of the time, do nothing except consume electricity and produce heat. This inefficiency was unavoidable until recently, but now high-speed Internet availability makes it possible for companies that have the resources (Google and a few others) to build warehouses full of servers that look like power stations (see Google's The Dalles centre in Oregon, below, with two football-stadium-sized buildings full of perhaps 60,000 servers). And then they can supply CPU cycles over the Internet just like electrical utilities supply electricity. The demand on Google's CPU cycles is smoothed out, being balanced among many consumers in different timezones with different needs, and that only helps their efficiency. It's what Carr calls utility computing...
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 firstname.lastname@example.org for an appointment also produces good results.
Pre-Class Memo Topic for January 30: Was it in fact the case--as UCLA's Jared Diamond maintains--that the invention of agriculture was the worst mistake in the history of the human race? What can we say about the causes of the fact that in some human societies technological and organizational progress appears relatively slow and in others relatively fast? And is there a relationship between these two questions?
Submit your 450-word, two page memo on this topic and post the text as a comment to this webpage by the start of the relevant class: noon on Wednesday January 30.
In addition to the four readings for January 30--Diamond, Finley, Temin, and Baumol--let me give you three other short things to read to orient yourselves for the class:
(1) Exchange and its vicissitudes as fundamental to human psychology and society? Adam Smith:
http://www.adamsmith.org/smith/won-b1-c2.htm: Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.... When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons....
[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love....
[I]t is this same trucking disposition which originally gives occasion to the division of labour. In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer. Another excels in making the frames and covers of their little huts or movable houses. He is accustomed to be of use in this way to his neighbours, who reward him in the same manner with cattle and with venison, till at last he finds it his interest to dedicate himself entirely to this employment, and to become a sort of house-carpenter.... [T]he certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.
The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men... is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education... and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.... By nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog....
Among men... the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for...
(2) Different technologies as producers of different societies which give rise to different types of economies? Karl Marx:
Preface to A Contribution to the Critique of Political Economy: In the social production of their life, men enter into definite relations that are indispensable and independent of their will, relations of production which correspond to a definite stage of development of their material productive forces. The sum total of these relations of production constitutes the economic structure of society, the real foundation, on which rises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the social, political and intellectual life process in general. It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.
At a certain stage of their development, the material productive forces of society come in conflict with the existing relations of production, or — what is but a legal expression for the same thing — with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution. With the change of the economic foundation the entire immense superstructure is more or less rapidly transformed. In considering such transformations a distinction should always be made between the material transformation of the economic conditions of production, which can be determined with the precision of natural science, and the legal, political, religious, aesthetic or philosophic — in short, ideological forms in which men become conscious of this conflict and fight it out....
In broad outlines Asiatic, ancient, feudal, and modern bourgeois modes of production can be designated as progressive epochs in the economic formation of society...
(3) Living standards and the pace of economic progress: Brad DeLong:
Jan 23: What is economic history? [de Vries]
Jan 30: Modes of production [DeLong]
William Baumol (1990), "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy 98:5(1) (Oct), pp. 893-921 http://links.jstor.org/sici?sici=0022-3808%28199010%2998%3A5%3C893%3AEPUAD%3E2.0.CO%3B2-Z
Feb 6: Malthus and the demographic transition [de Vries]
Feb 13: The industrious revolution [de Vries]
Feb 20: Early modern institutions [de Vries]
Feb 27: Early modern globalization [de Vries]
Mar 5: Wars, colonies, canals, finance, and northwest European divergence [de Vries]
Mar 12: Technology, investment, and the industrial revolution [DeLong]
Mar 19: Marx and urbanization and industrialization and marketization [DeLong]
Apr 2: Imperialism and colonialism [de Vries]
Apr 9: Why did the European settler colonies industrialize? [DeLong]
Apr 16: Gold standard and pre-WWI globalization [DeLong]
Apr 23: WWI and the Great Depression [DeLong]
*John Maynard Keynes (1920), The Economic Consequnces of the Peace, chapters 1, 2, and 6 http://www.gutenberg.org/files/15776/15776-h/15776-h.htm * Christina Romer (1990), "The Great Crash and the Onset of the Great Depression," Quarterly Journal of Economics 104, pp.719-736, http://www.jstor.org/view/00335533/di971078/97p00037/0 * Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" American Economic Review 73, pp. 257-276, http://www.jstor.org/view/00028282/di950033/95p00602/0 * Paul Krugman, "Introduction" to John Maynard Keynes, The General Theory of Employment, Interest and Money http://www.pkarchive.org/economy/GeneralTheoryKeynesIntro.html * John Maynard Keynes (1932), "The World's Economic Outlook," Atlantic http://www.theatlantic.com/unbound/flashbks/budget/keynesf.htm * Margaret Weir and Theda Skocpol, "State Structures and Social Keynesianism: Responses to the Great Depression in Sweden and the United States," International Journal of Comparative Sociology pp. 4-29 http://books.google.com/books?hl=en&lr=&id=GLQ3AAAAIAAJ&oi=fnd&pg=PA7-IA3&dq=Margaret+Weir+and+Theda+Skocpol,+%22State+Structures+and+Social+Keynesianism&ots=P2iXGFkFfu&sig=APmY6D1P2QkJ0l28RRWX5YxjBmg#PPA29,M1
Apr 30: WWII and the thirty glorious years [DeLong]
May 7: The twentieth-century experience: half empty or half full?
Your research paper is due on the first Friday after the end of spring classes: May 16.
Aim for roughly 20 pages for the final paper.
We take the word "research" seriously: the paper should provide new information or evidence on a topic in economic history. It should not merely summarize an existing literature in the field. The writing and submission process requires that you meet an intermediate benchmark: submit approximately ten pages' worth of a literature review and a statement of your hypotheses by the last day before spring vacation.
The paper should go beyond summarizing or synthesizing an already-existing literature: students should use the tools of economic theory and empirical analysis to pose and answer an historical question. Warning: the paper must have historical substance. This is not a requirement in applied economics or econometrics that can be satisfied by relabeling the variables in theoretical models taught elsewhere or by mechanically applying modern statistical techniques to old data.
Topic: The paper may cover almost any topic in economic history. You are certainly not limited to the material covered in 210a. You may, for example, work on time periods or countries of particular interest to you. The only requirement is that the topic must genuinely involve the past. Comparisons of past and current events are certainly fine, but studies of developments solely after 1973 are not.
Evidence: As the readings on the syllabus make clear, historical evidence comes in a wide range of form and styles. It is often empirical, but not always. Sometimes the key evidence is just a list of goods traded or what policymakers said they were trying to accomplish. With empirical evidence, tables and graphs of important variables are often enough to make a compelling argument.
Length: Good papers do come in a wide variety of sizes. However, for this assignment aim at a length of ten pages or so for the literature review, and more for the final paper. A final paper less than 15 pages tends to make your instructors suspicious, while a final paper more than 25 pages (unless it is very good indeed) tends to make your instructors cranky.
Successful Paper Topics from Previous Years: Coming up with a promising paper topic is arguably the most useful part of this exercise. Your entire graduate career (indeed, for most of you, your entire career) will center around identifying interesting questions to be answered. For this reason we will not give you a list of topics (though we often toss them out in the course of class discussion). Instead, we will describe the type of topics that have been successful in the past and suggest ways of finding similarly successful topics.
Analysis of an interesting source: While it is not a good idea to let data availability drive your topic, it is perfectly reasonable to let serendipity play a role. Have you come across an unusual source in the library or during your undergraduate years? Is there an interesting question that this source could be used to answer?
A new test of an old debate: Take some interesting debate in economic history and come up with a clever, alternative way of testing it. Usually, such a test involves using a new type of data. For example, if everyone has been using quantities, think about a way to use prices. An example of this type of paper involves the debate over how business cycles have changed over time. One researcher suggested that instead of fighting over very imperfect estimates of real GDP, one could look at stock prices as an indicator of the volatility of the macroeconomy.
University of California at Berkeley, Berkeley, CA 94720
Economics 210a: Introduction to Economic History: Spring 2008
Course: Economics 210a is required of Ph.D. students in Economics, and is taken in the first year of the graduate program. Graduate students in other degree programs may enroll subject to the availability of space and with the instructors' approval. The course is designed to introduce a selection of themes from the contemporary economic history literature. While themes are presented chronologically, the purpose of the course is not to present a narrative account of world economic history. Instead, emphasis is placed on the uses of economic theory and quantitative methods in history and on the insights a knowledge of history can give to the practicing economist.
It is naturally required that you do the reading and attend class. Informed participation in the latter is encouraged. Class meetings will consist of a mixture of lecture and discussion. When the course goes well, it is primarily discussion; when the course goes badly, it is primarily lecture. Because discussion will focus on the issues raised, resolved, and left unanswered by the assigned readings, readings should be completed before class.
Readings: Readings are either available on the web or on reserve in a folder at the Haas Library. Access to readings available through JSTOR and other proprietary sources may require you to log on through a university-recognized computer and/or enter your Calnet ID to authenticate your proxy server. In past years, students have found it useful to purchase some of the books from which material is assigned through their favorite online book seller and to assemble the materials for reproduction at a local copy shop.
Grades: Your grade will be an equally-weighted average of two components: your weekly memos and the Economics 210a research paper.
Weekly memos: Each week your instructors will post an Economics 210a question on their websites. You will then write a memo of two pages (double-spaced, 12-pitch, 450 words) on that question, which is due at the beginning of lecture the following Wednesday. Two page memos cannot be exhaustive, nor can they provide definitive answers on the basis of what may still be unfamiliar material. But they can explain why the question is important, summarize what the articles assigned for the upcoming lecture have to say about it, and provide a provisional assessment of their conclusions.
Research paper: Your research paper is due on the last class meeting. We take the word research seriously: the paper should provide new information or evidence on a topic in economic history. It should not merely summarize an existing literature in the field. The writing and submission process requires that you meet an intermediate benchmark: submit approximately ten pages' worth of a literature review and a statement of your hypotheses by the last day of the fall semester.
Aim for roughly 20 pages for the final paper.
This paper should go beyond summarizing or synthesizing a literature: students should use the tools of economic theory and empirical analysis to pose and answer an historical question. Warning: the paper must have historical substance. This is not a requirement in applied economics or econometrics that can be satisfied by relabeling the variables in theoretical models taught elsewhere or by mechanically applying modern statistical techniques to old data.
The grading policy for memos will be:
14 memos. 2 points each. As follows:
0 - not handed in 1 - handed in, but could have been written without thinking about the reading 2 - reflects upon the reading 3 - teaches us professors something
Weekly pre-class memo questions
January 30: Was it in fact the case--as UCLA's Jared Diamond maintains-that the invention of agriculture was the worst mistake in the history of the human race? What can we say about the causes of the fact that in some human societies technological and organizational progress appears relatively slow and in others relatively fast? And is there a relationship between these two questions?
February 6: malthus
February 13: industrious revolution
February 20: Judging by the readings, how much of a difference does "good government"--that is, a government that cares about commerce and enforces contracts more-or-less honestly--appear to have made in the centuries before the industrial revolution in Britain?
February 27: early modern globalization
March 5: wars, colonies, et cetera
March 12: Maxine Berg and Pat Hudson write that the "historiography of the industrial revolution in England has moved away from viewing the late eighteenth and early nineteenth centuries as a unique turning point in economic and social development." Do you agree with their conclusion that the literature has moved too far in this direction? Why or why not?
April 9: An influential literature cites the scarcity of labor as a key factor in the emergence of the "American System of Production." How much of this argument (if any) survives Peter Temin's 1966 critique?
April 16: Textbooks say that the gold standard had internal mechanisms that worked automatically to maintain both price and balance-of-payments stability. On what grounds do Arthur Bloomfield and Hugh Rockoff challenge this textbook view? Are their points convincing?
April 23: Great Depression
April 30: A growing literature develops explanations for 'Europe's golden age' (the European economy's fast growth in the third quarter of the 20th century). Is this effort misguided? In other words, do we really need fancy explanations for a straightforward phenomenon that is easily explained in terms of convergence and delayed structural change?
May 7: The economic history of the world both in the post-WWII period 1945-1990 and, in broader perspective, over the past two centuries has been one in which the world has shrunken enormously in distance along every conceivable measurement, and yet in which income and productivity differences between societies have grown enormously. What, in your judgment, are the possible big-picture theories for explaining this phenomenon that are worth investigating?
J. Bradford DeLong email@example.com office hours W 10-12
Marc Gersen firstname.lastname@example.org office hours tba Lecture MW(F) 247 Cory 9-10
Section 1 MW 237 Cory 8-9
Section 2 WF 61 Evans 11-12
W Jan 23: INTRODUCTION: The Problems of Macroeconomics
F Jan 25: The Solow Model: Capital and Equilibrium
M Jan 28: The Solow Model: Dynamics and Feedback
W Jan 30: How Much of Today's World Can We Explain with the Solow growth model?
F Feb 1: What happened this week in the macroeconomy?
M Feb 4: From Malthus to Modernity: Understanding the Industrial Revolution
W Feb 6: Technology
F Feb 8: What happened this week in the macroeconomy?
M Feb 11: Institutions
W Feb 13: Resources
F Feb 15: PROFESSORIAL REALITY CHECK EXAM
W Feb 20: Components of Aggregate Demand
F Feb 22: Full-Employment Equilibrium
M Feb 25: The International Side--Plus Government Budgets and Investment Booms
W Feb 27: The Monetary Side: The Quantity Theory of Money, Inflation, and Expectations
F Feb 29: What happened this week in the macroeconomy?
M Mar 3: Sticky Prices and Aggregate Demand
W Mar 5: The IS Curve and Employment
F Mar 7: What happened this week in the macroeconomy?
M Mar 10: The Phillips Curve and Inflation
W Mar 12: Tying Up the Short-Run and the Medium Run
F Mar 14: What happened this week in the macroeconomy?
M Mar 17: Loose Ends
W Mar 19: CORE THEORY EXAM
M Mar 31: Stabilization Policy since WWII
Macroeconomics, review 10.3, review 12.4, 13, 14.1, 16.1-16.4 W Apr 2: Should Conservatives Be Central Bankers?
Notes: Central Bankers: Stabilizers, Credible Inflation-Fighters, and Lenders of Last Resort
F Apr 4: What happened this week in the macroeconomy?
M Apr 7: Looking Back at the Great Depression: What Went So Wrong?
W Apr 9: Is There a Political Business Cycle?
F Apr 11: What happened this week in the macroeconomy?
M Apr 14: U.S. Long-Run Budget Balance
W Apr 16: "Fixing" Social Security
F Apr 18: What happened this week in the macroeconomy?
M Apr 21: Productivity Speed-Ups and Slow-Downs
W Apr 23: U.S. Income Distribution
F Apr 25: What happened this week in the macroeconomy?
M Apr 28: European Youth and Structural Unemployment
W Apr 30: "Animal Spirits": Understanding the Stock and Real Estate Markets
F May 2: What happened this week in the macroeconomy?
M May 5: Global Imbalances
W May 7: APPLICATIONS EXAM
F May 9: What happened this week in the macroeconomy?
M May 12: FINAL REVIEW
F May 16: FINAL EXAM 8-11
Course website: available through http://bspace.berkeley.edu or http://delong.typepad.com/berkeley_econ_101b_spring/
This is a go-faster do-more course--intended for people who would be bored in Economics 100b (and, I think, not nearly enough people take it). The curve will be high--the idea is that nobody should get a grade lower than they would have gotten in Econ 100b. You will, however, work harder. And the harder you all work, the higher will be the median grade in the class.
How many people are on Facebook?
MW lectures--spend them on theory and tools
F lectures--spend them on current events
W sections... do problems like those on the next problem set...
Facebook: http://www.facebook.com/group.php?gid=8834189518 join the Berkeley network, and then join the group...
Lecture: 247 Cory 9-10 AM M, W, and most F