Every day that goes by with unemployment higher than it needs to be means that people are struggling needlessly. People need jobs. And not at some point in the future when Congress gets around to it (if they ever do), this can't wait another day. It should have been done months and months ago. Congress ought to have the same urgency in dealing with the unemployment problem as it had when banks were in trouble. Collectively the unemployed are too big to remain jobless, and the millions of individual struggles among the unemployed shouldn't be tolerated. But Congress doesn't seem to be in much of a hurry to do anything about it, or give any sign that it much cares.
“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end. Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.... Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession. Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.
Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand.... But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says. Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion. By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott... argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off. Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly....
Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable. But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking...
Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come.... Here in Southern California, Jean Eisen has been without work since she lost her job selling beauty salon equipment more than two years ago. In the several months she has endured with neither a paycheck nor an unemployment check, she has relied on local food banks for her groceries. She has learned to live without the prescription medications she is supposed to take for high blood pressure and cholesterol. She has become effusively religious — an unexpected turn for this onetime standup comic with X-rated material — finding in Christianity her only form of health insurance. “I pray for healing,” says Ms. Eisen, 57. “When you’ve got nothing, you’ve got to go with what you know.”
Warm, outgoing and prone to the positive, Ms. Eisen has worked much of her life. Now, she is one of 6.3 million Americans who have been unemployed for six months or longer, the largest number since the government began keeping track in 1948. That is more than double the toll in the next-worst period, in the early 1980s.... Twice, Ms. Eisen exhausted her unemployment benefits before her check was restored by a federal extension. Last week, her check ran out again. She and her husband now settle their bills with only his $1,595 monthly disability check. The rent on their apartment is $1,380. “We’re looking at the very real possibility of being homeless,” she said.
Every downturn pushes some people out of the middle class before the economy resumes expanding. Most recover. Many prosper. But some economists worry that this time could be different...
This Economic Letter examines the evidence for this “sectoral reallocation” interpretation of the current downturn. After describing the specifics of the argument, we turn to two primary sources of empirical evidence regarding its extent: the Beveridge curve, which depicts the relationship between vacancies and unemployment, hence the effectiveness of the job matching process; and direct evidence on the degree of sectoral reallocation of employment. Recent changes in the unemployment/vacancy plot are consistent with a modest decline in the efficiency of the job matching process, which may be associated with sectoral imbalances. However, these movements are consistent with cyclical as well as secular changes. More critically, direct measurement of the degree of sectoral dispersion in employment growth suggests that its extent has been limited thus far, providing little support for the claim of a higher NAIRU.
Quite by change I stumbled on this posted on the Heritage site written by guess who! "The obsessive focus on budget deficits is misguided. The debt ratio, a superior measure of government’s debt burden, is as dependent on economic growth as federal borrowing. The past decade has shown that a growing economy can absorb modestly increasing debt levels." http://www.heritage.org/research/budget/bg1820.cfm
Clearly conservative "economists" engage in faith based relativist economic theories. When conservatives run up huge deficits and drastically increase the debt burden, deficits and debt don't matter. But when "liberals" are in power, that is the time to drastically cut the deficit and reduce the debt burden no matter what the pain.
But then, how else can conservatives hope to win political power so they can shovel pork to their corporate supporters...
6) DELONG SELF SMACKDOWN OF THE DAY: DeLong (March 2000): Marking My Beliefs to Market:
The three on which I was wrong are--to me at least--more interesting.... That the rapid growth of the Japanese economy would continue.
After the crash of the Japanese stock and real estate markets at the end of the 1980s, I was still very optimistic about the medium-run growth prospects of the Japanese economy. I looked at the enormous gap between world best-practice and Japanese productivity outside of export industry. I looked at Japan's extraordinarily high level of domestic investment, and thought about how true it was that new capital goods embodied new and more productive technologies. I looked at the extent to which Japan was developing a comparative advantage in the most innovative and high technology components of manufacturing. And I thought that the end of Japan's "bubble economy" would produce a short and perhaps sharp recession, but would then be followed by a rapid recovery and a renewal of rapid Japanese productivity growth.
I was wrong.
The 1990s saw no motion toward eroding the extraordinary internal productivity gaps between export industry and the rest of the economy that characterize Japan's dual economy. Domestic investment remained high, but did not seem to generate visible improvements in technology and productivity. And those parst of high-tech in which Japan had a strong comparative advantage--memory chips, LCD screens, and so forth--turned out not to be the key capital goods of the information age but more like the rubber insulation you wrapped around your wires--a necessary but hardly high-value component. The dominant view is still that Japan's key troubles are financial and structural: that a failure to liquidate and nationalize institutions that were underwater as of 1992 destroyed the financial system's ability to do its job, and that even strongly stimulative fiscal policy and real interest rates near zero could not bring about permanent recovery in the absence of complete financial markiet restructuring. I don't know enough about Japan to be able to judge this dominant view, however...
7) GRAPH OF THE DAY: Monthly Global Mean Surface Temperature Anomalies
8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Adam Serwer: American Takfiris: The Arc of the Universe Is Long...:
The theological justification for al Qaeda's wholesale slaughter of civilians was provided by Sayyid Imam al-Sharif, also known as Dr. Fadl, one of the founding fathers of al Qaeda. Because the murder of innocents is forbidden in Islam and the murder of Muslims in particular, Ayman al-Zawahiri and Osama bin Laden required some sort of theological framework for justifying terrorism. This was provided by al-Sharif, who essentially argued in his book, "The Compendium of the Pursuit of Divine Knowledge," that apostates could be murdered, and that approach, takfir (which has come to be known as takfirism) allowed al Qaeda to, for all intents and purposes, kill anyone they wanted without violating the laws of Islam by declaring them to be apostates. In other words, Dr. Fadl helped provided a theological justification for something that everyone involved knew was wrong.
The legal memos justifying torture aren't very different in terms of reasoning--it's clear that John Yoo and his cohorts in the Office of Legal Counsel saw their job not as binding the president to the rule of law, but to declare legal any tactic that the executive branch believed necessary to fight terrorism. They worked backwards from this conclusion, and ethics officials at the Department of Justice, we now know, decided that they they had violated professional standards in doing so.... The torture memos--indeed, all of the pro-torture arguments rest on a similar intellectual themes to the takfiris. Suspected terrorists are "illegal enemy combatants", outside the framework of laws that would otherwise guide us. Just as the takfiris justify the killing of even self-identified Muslims by excommunicating them as "infidels", torture apologists argue that even American citizens like Jose Padilla who are accused of being terrorists become legal "apostates" without any rights the president is bound to respect. This are extraordinary circumstances, this is an extraordinary war--and so, the Bush administration turned to Yoo, a man who believes the president is bound by no laws during wartime: he can murder a village of innocent civilian non-combatants just as surely as he can crush the testicles of a child or deploy the military against residents of the United States. The architects of torture are the intellectual mirror image of their declared enemies, depending on the perceived inhumanity of their foes to justify monstrous actions....
From his cell in an Egyptian prison, al-Sharif denounced his former colleagues in al Qaeda, declaring that the killing of innocents was wrong. He essentially renounced his earlier work providing the theological basis for politically motivated murder and destruction, declaring, "There is no such thing in Islam as ends justifying the means," now arguing that the murder of innocents, Muslim or otherwise, was sinful. Whatever theological cover al-Sharif's original arguments provided were meaningless against the body count of mostly Muslim innocents amassed by al-Qaeda in their war against the "West", which by the numbers has been a war against fellow Muslims. In combination with the furious efforts of moderate Muslims and even committed Islamists like al-Sharif, al Qaeda and its methods have been largely discredited, to the point where, as Fareed Zakaria writes, we don't fear "a broad political movement but a handful of fanatics scattered across the globe."
I confess to being bothered that we haven't seen a similarly backlash against the architects of torture here--part of the reason we haven't, is because even though innocents were tortured, we still see them as fundamentally alien.... [M]en like John Yoo and Jay Bybee have yet to be held responsible for the crimes they enabled.... The Justice Department's David Margolis overruled the original conclusions of the Department's ethics lawyers that Yoo and Bybee had... committed "professional misconduct."... Margolis... instead concludes that they had excercised "flawed legal reasoning" that could be forgiven in part because of the context in which the memos were written, months after the 9/11 attacks....
The American conscience is often slow to action, but not because it cannot recognize evil--but because our view of ourselves as a people guided by justice is so important to who we are that when confronted with proof of our own shortcomings, we recoil in shame and precious vanity. Eventually, with the big stuff, we usually find our way.... And while those who stained America's honor with war crimes have escaped accountability for now, these American takfiris will eventually be judged by history with a clarity we cannot muster today.
The arc of the universe is long... you know, all that stuff.
STUPIDEST THING I HAVE READ TODAY: I refuse to read anything stupid on the Sabbath Day. Read this instead: Arnold Schwarzenegger Calls Out GOP On Stimulus Hypocrisy:
SCHWARZENEGGER: I find it interesting that you have a lot of the Republicans running around pushing back on the stimulus money and saying this doesn’t create any new jobs. Then they go out and they do the photo ops and they’re posing with the big check and they say, “Isn’t this great?”... Anyone that says it hasn’t created a job, they should talk to the 150,000 people that have been getting jobs in California.... In the private sector and from the public sector. … So I’m happy that we got this money. I’m happy that we have put 150,000 people to work and there will be more people that are put to work because of it.
10) HOISTED FROM THE ARCHIVES: DeLong (July 2009): A Wise Latina Justice Might Indeed in Some Cases Make Better Decisions than an Old White Man:
And this then led me to Justice Oliver Wendell Holmes in Buck v. Bell (1927):
Carrie Buck is a feeble-minded white woman who was committed to the State Colony.... She is the daughter of a feeble-minded mother... and the mother of an illegitimate feeble-minded child.... An Act of Virginia, approved March 20, 1924, recites that the health of the patient and the welfare of society may be promoted in certain cases by the sterilization of mental defectives.... The attack is not upon the procedure [i.e., due process] but upon the substantive law.... We have seen more than once that the public welfare may call upon the best citizens for their lives. It would be strange if it could not call upon those who already sap the strength of the State for these lesser sacrifices, often not felt to be such by those concerned, in order to prevent our being swamped with incompetence. It is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind. The principle that sustains compulsory vaccination is broad enough to cover cutting the Fallopian tubes. Jacobson. v. Massachusetts, 197 U. S. 11. Three generations of imbeciles are enough.
Just as buff young men can be drafted and compelled to give their lives for the health of the state (or is it the volk?) in war, so feeble-minded women can be drafted and compelled to give their fertility for the improvement of the genome.
Let me say that this is a case where I suspect that a wise Latina justice might have been more able to consider the proper equities than Justice Holmes was.