[I]t’s time for a reassessment of what we know.... It was tempting for macroeconomists and policymakers to take much of the credit for the steady decrease in cyclical fluctuations from the early 1980s on and to conclude that we knew how to conduct macroeconomic policy. We did not resist temptation. The crisis naturally forces us to question our earlier conclusions.... [E]conomists and policymakers alike were lulled into a false sense of security by the apparent success of economic policy ahead of the crisis—a period known as the “Great Moderation.”... The crisis has taught us a lot and we want to proactively draw lessons from the “Great Recession.”...
Keeping output close to potential and inflation low and stable should be the two targets of policy. And controlling inflation remains the primary responsibility of the central bank. But the crisis forces us to think about how these targets can be achieved... [and] the crisis has made clear... that policymakers have to watch many other variables, including the composition of output, the behavior of asset prices, and the leverage of the different participants in the economy.... Interest rates are a poor tool to deal with excess leverage, excessive risk taking, or apparent deviations of asset prices from fundamentals. We need a combination of monetary and regulatory tools... traditional regulatory and prudential frameworks need to acquire a macroeconomic dimension....
The crisis has shown that interest rates can actually hit the zero level, and when this happens it is a severe constraint on monetary policy that ties your hands during times of trouble. As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now if whether this could justify setting a higher inflation target in the future.... [L]arge shocks to the system can and do happen.... Maybe policymakers should therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks. To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?...
The crisis has returned fiscal policy to center stage as a macroeconomic tool, for two main reasons: first, to the extent that monetary policy, including credit and quantitative easing, had largely reached its limits, policymakers had little choice but to rely on fiscal policy. Second, from its early stages, the recession was expected to be long lasting, so that it was clear that fiscal stimulus would have ample time to yield a beneficial impact despite implementation lags. It has also shown the importance of having “fiscal space,” again the room to maneuver during times of trouble. Some advanced economies that entered the crisis with high levels of debt and large unfunded liabilities have had limited ability to use fiscal policy, and are now facing difficult adjustments.... [W]e should revisit target debt to GDP ratios. Maybe we should aim for much lower ratios than before the crisis. This is a long way off, given where we start, but this is another issue we must revisit...
The idea of using reconciliation has raised concern among some supporters of health care reform. They fear that reform opponents would consider the use of recon- ciliation high-handed. But in fact Congress created reconciliation procedures to deal with precisely this sort of situation — its fail- ure to implement provisions of the previous budget resolution. The 2009 budget resolution instructed both houses of Congress to enact health care reform. The House and the Senate have passed sim- ilar but not identical bills. Since both houses have acted but some work remains to be done to align the two bills, using reconciliation to implement the instructions in the budget resolution follows es- tablished congressional procedure.
Here are the results of the latest New York Times/CBS News poll....
When asked what the most important problem facing the country is (question 4), here are the winners: Jobs: 27% Economy: 25% Other: 16% Health Care: 13% Budget Deficit: 4% DK/NA: 4%. This shows the divide between the country, which cares about jobs, and the Washington punditocracy, which cares (or professes to care) about the deficit. Now, I’m not saying that something’s actual importance is a function of its perceived importance. Governing requires doing what’s best for the country, whether or not people realize it. But neither is it true to say that Americans are overwhelmingly concerned about the deficit. They’re not. And looking at the numbers, you would think most would favor increased spending or lower taxes to create jobs. Later on, though, when given that explicit question, we find a much smaller margin (47-45) in favor of jobs. This, of course, is largely an artifact of question design, so you can argue about which design is more relevant depending on what question you’re trying to answer.
On questions 6-10, Obama gets positive marks for foreign policy and terrorism, but negative marks for the economy, health care, and the deficit. This is what you would expect for a Republican president, not a Democratic one (with the possible exception of the deficit question, since Democrats are still seen as big spenders, the past two administrations notwithstanding). Probably the most likely explanation is that the last three are simply things that people are unhappy about in general; also, the economy and health care are issues where Obama faces disapproval both from the right and the left, for opposite reasons. Basically, we have a centrist president.
Only 8% of Americans think that “most members of Congress” deserve re-election. This, it seems to me, is one of those survey results that is inherently self-defeating. All of the Republican base should be happy with Republican Congressmen for successfully fighting off the Obama agenda. Many though not all Democrats no doubt blame the last year on the Republicans and should be reasonably happy with their Congressmen. And we know the vast majority of members of the House will be returned to office. So all this means is that people have an unfocused antipathy toward Congress as an institution.
When you ask if “homosexuals” should be allowed to serve in the military (page 24), people are in favor 59-29. When you ask about “gay men and lesbians,” you get 70-19. (If you follow up by asking about serving “openly,” the margin falls to 44-41 and 58-28, respectively.) Words matter.
The political upside for Democrats to crafting a bipartisan jobs bill is obvious: they get a "win" on an issue the public cares about, and they show they can work with the opposition party, which people want them to do. There is, however, a downside. Securing Republican support means whittling the bill down to the verge of meaninglessness. And then you get blamed for the meaninglessness. Here's the A.P.:
It's a bipartisan jobs bill that would hand President Barack Obama a badly needed political victory and placate Republicans with tax cuts at the same time. But it has a problem: It won't create many jobs. Even the Obama administration acknowledges the legislation's centerpiece - a tax cut for businesses that hire unemployed workers - would work only on the margins. As for the bill's effectiveness, tax experts and business leaders said companies are unlikely to hire workers just to receive a tax break. Before businesses start hiring, they need increased demand for their products, more work for their employees and more revenue to pay those workers.
I still think it's a smart move for Democrats. But it does show just how steep the price of securing bipartisan support actually is -- you're reduced to essentially symbolic legislation.
[W]hile Bush ("admirably stalwart") comes in for similar praise, Paulson has little positive to say about other Republicans. Sarah Palin annoyed him from the get-go. When he spoke to House Republicans about efforts to help Fannie and Freddie, he was chagrined that many responded with speeches about ACORN, the low-income housing activist group. House Minority Leader John Boehner was ineffectual. John McCain comes off worst of all: impulsive, ill-informed, and counterproductive. "This was crazy," Paulson writes of McCain's decision to suspend his campaign in late September 2008 and demand a White House meeting on the bailout. At the climactic meeting in the Cabinet room, Obama spoke for the Democrats, delivering a "thoughtful, well-prepared presentation." But McCain? "When it came right down to it, he had little to say in the forum he himself had called."... As the narrative lurches from crisis to crisis—TARP, AIG, GM—the reader, and Bush, are continually presented with bailout moves as unavoidable faits accomplis. Bush was "visibly shocked" when Paulson told him in November 2008 that Citigroup was in big trouble. "I thought the programs we put in place had stabilized the banks," the president said.
The main problem with this fast-paced book was the main problem with Paulson's tenure—a surprising inability to see the big picture. And as tough as he is on congressional Republicans, Paulson lets some people off much too easy. If many smart, highly regarded people had simply carried out their responsibilities with a bit more diligence—Bernanke, SEC Chairman Christopher Cox, Wall Street bankers—much of the catastrophe could have been avoided. "As first responders to an unprecedented crisis that threatened the destruction of the modern financial system, we had little choice," Paulson writes. But the first responders assembled the bonfire and helped light it. Paulson was among the Wall Street chief executives who, in 2004, lobbied the SEC to allow them to use much larger amounts of debt—a move that set the stage for the debacles of Bear Stearns and Lehman. Finally, given that Paulson knew this culture from the inside, it's disappointing that he doesn't reflect more on Wall Street's pathological need for compensation, on its pathetic leadership and corporate governance. But this is to be expected. Investment bankers look forward, not backward. So, largely, does this engaging, well-written narrative. It is what it is.
For most of the last century, educational attainment grew rapidly. Schooling noticeably leveled off in the late 1960s, however, and it actually hit a peakin the late 1990s before pulling back. Now, one obvious thing to note is that 14 years of school generally means an entire primary and secondary education and perhaps one year of post-secondary education. That's quite a bit, and to boost the mean above that level would not necessarily be easy. At the same time, given dynamics in the current economy, a world in which the average student does not get multiple years of post-secondary education—in occupational or technical training or in professional or typical undergraduate studies—is one in which a large share of the population is languishing in fields that pay poorly or that are subject to competition from lower wage labour abroad or automation. And so it's distressing enough that educational attainment has ceased growing. If the declining trend were to continue—as with the share of students dropping out of high school rising, this is not at all impossible—then economic growth is likely to slow and to become more uneven.
7) GRAPH OF THE DAY:Via Jeff Weintraub:
8) SECOND BEST NON-ECONOMICS THING I HAVE READ TODAY: Ezra Klein: Blame Rahm?:
It's a bit weird to see so much blame accruing to Rahm Emanuel for the administration's woes. Emanuel wasn't part of the campaign team. He was brought in to help govern. In that capacity, his primary job was shepherding the administration's agenda through the legislative process. Ugly as that process was, Emanuel -- and more to the point, Harry Reid and Nancy Pelosi -- did a fairly masterful job at it. In the Senate, Democrats got all 60 of their members to sign onto the same large, controversial bill. That's a legislative achievement unheralded in modern times. Bill Clinton didn't manage it on any bills of this size and scope, and neither did George W. Bush.
Then the game changed, and unexpectedly. Ted Kennedy's death wasn't unpredictable, but the loss of his seat was certainly a surprise. It wasn't, however, a surprise that's easy to track back to Emanuel.
If the administration has failed at anything, it's been holding public support for its bills. But that's not really Emanuel's job. That's where David Axelrod and the rest of the political team come into play. But it's not obvious that much can be done on this front. The best thing that could've happened to health-care reform was that Congress stuck to the timetable that Emanuel and the White House originally set. Once they decided not to do that -- and no Jedi mind tricks from the White House chief of staff were going to dissuade them -- the ugly and endless process was certain to erode support for the bill.
9) BEST NON-ECONOMICS THING I HAVE READ TODAY: Kung Fu Monkey: Farm Fetish:
This will just break Neil's heart, as he does see me as a champion of fighting regionalism, but this CNN piece (from over at Atrios) is the sort of thing that, Jesus H. Christ on a crutch, gives me a headache. They send a reporter to literally Middle America, and surprise, discover that they don't much care for them Hollywood movies. Suuuurrr-prise! But one chunk of this report, to me, is symptomatic of a larger issue that grinds my molars. ANDERSON: We stopped by the Lebanon [Kansas -- ed.] hotspot, Ladow's Market, where one local told us Hollywood just can't relate to a farming way of life. UNIDENTIFIED MALE: They've never been back in here to know what it's like to actually have to make a living doing this.
You know what, Unidentified Male? You're right. I don't know what it's like to have to make a living farming. NOBODY DOES. For chrissake, only 17% of Americans live in rural settings anymore. Only 2 million of those people work on farms or ranches (USDA figures). Hell, only ten percent of the average farm family's income even comes from farming anymore (did you know that? I didn't. Funky). The median age of the United States is 37. I am more than willing to point out that the agriculture industry is a crucial, nay vital part of the American economic infrastructure generating a sizable amount of the GDP. But why in the name of John Deere's Blood-Soaked Wood-Chipper Gears, every time I hear a news report on what "real Americans" think do I wind up watching some farmer in their fifties and sixties bitch as they survey the blasted plains landscape behind them, and not only that, somehow their cultural observations are assumed to have more relevance than anyone else's?...
There are four times as many Americans living in urban than rural areas. There are four times as many people sucking back coffee in New York city alone than make a living farming. According to the Burea of Labor, there are just as many people employed in Architecture and Engineering as farming, hell, 3 million people working in Computer and Mathematical jobs. But when one of these "What does America think about culture" pieces comes on, do I ever see a mid-30's software engineer onscreen bitching about having to download BitTorrents of "The IT Crowd"? F--- and no.
Four million people in the US play World of Warcraft. And yet, do I ever hear: ANDERSON: We stopped by the gates of Ogrimmar in Durotar, on the east coast of Kalimdor, where one local told us Hollywood just can't relate to the level-grinding life. UNIDENTIFIED ORC: They've never been back here, questing Razormane or Drygulch Ravine, y'know ... or farming for Peacebloom and Silverleaf. They're out of touch. No. No I do not....
I grew up in Massachusetts, and we didn't go around nodding and saying "This is the very birthplace of America both geographically and ideologically, those idiots in Kansas have no idea what being a real American is, like we Commonwealth bastards." One would be considered insane. Whatever connection people in rural America have to the "idea" of America is the exact same as mine -- the Declaration of Independence and the Constitution. They are public documents, accessible by all (well, for now), and last time I checked the versions printed in textbooks in Kansas didn't have special magical ink and secret clauses not included in the versions handed out in the Northeast urban great city of Philadelphia where, if we remember, the damn things were actually written...
10) HOISTED FROM THE ARCHIVES: J. Bradford DeLong and Lawrence H. Summers (1992), "Macroeconomic Policy and Long Term Growth":
In light of the zero inflation targets that have been set in a number of countries, periodic proposals for a zero inflation target in the United States, the very low rates of inflation now prevailing in much of the industrialized world, and the commitment of many traditionally inflationary economies to a fixed exchange rates, it seems worthwhile to ask: can austerity be overdone? At the grossest level, the answer to the question is surely "yes." Monetary policies in the early years of the Depression in the United States by allowing a deflation that penalized debtors at the expense of creditors surely contributed to the depth of the Depression.... OECD experience does not permit a judgment of the merits of very low inflation, since the two countries with the lowest average inflation rates after 1955, Switzerland and Germany, have inflation rates that have averaged three percent per year, a rate at which prices double every generation.... [T]he macroeconomic strain associated with strong disinflation in New Zealand and Canada in recent years, and the extraordinary strains imposed on European countries as the ERM forced rapid disinflation up to its recent suspension, both point up the potential transition costs of moving to regimes of strict price stability.
These arguments gain further weight when one considers the recent context of monetary policy in the United States. A large easing of monetary policy, as measured by interest rates, moderated but did not fully counteract the forces generating the recession that began in 1990. The relaxation of monetary policy seen over the past three years in the United States would have been arithmetically impossible had inflation and nominal interest rates both been three percentage points lower in 1989. Thus a more vigorous policy of reducing inflation to zero in the mid 1980s might have led to a recent recession much more severe than we have in fact seen...