Brad DeLong

links for 2010-05-31

• 200 Years That Changed the World: Gapminder
• Jo Walton: OK, where do I start with that? G.
  JW: "I started reading Elizabeth Gaskell when she was described to me as a writer talking about how technology changed society when the technology in question was trains. The book that most meets that description is North and South, but what I suggest you start with is the adorable Cranford. Cranford is one of the most deeply enjoyable books ever written. It’s all small scale and domestic, it isn’t a romance, the characters are extremely real, it’s sweet and funny and short and just lovely."
• Justin Elliott: BP To Gov't Last Year: We Can Handle A 300,000 Barrels-Per-Day Spill Just Fine
• How is the aid industry like a piano recital? A defense of aid
• Marginal Revolution: Is there a general glut?
• "Identity Economics" by George Akerlof and Rachel Kranton: A Rambling Review - Whimsley
  TS: "[I]it seems to me that by staying with a qualitative approach, by phrasing their problems with care, and by introducing just enough identity into their models, Kranton and Akerlof have managed to find a way through the maze, to construct consistent, logical explanations for social patterns of real importance. This is a delicate and impressive balancing act; it remains to be seen if their success can be reproduced in other problems, or if the approach becomes limited by society’s complexity.... So what do sociologists, who recognize and understand identity, have to gain from identity economics? One answer is a single word: equilibrium, and my main disappointment with A&K’s book is that in simplifying their research they have avoided, even once, mentioning this crucial concept."
• Cogitamus: Memorial Day - Triple Chocolate Ice Cream
• Prairie Weather: What's preventing faster economic recovery?
• George Will on Obama and the Oil Spill: 'He's being unfairly blamed, and it sort of serves him right.' | Video Cafe
• slacktivist: Sex & Money, part 1

The $3000 Shirt

Eve Fisher:

What I always used in my class was the example of the $3,000 shirt. 1 shirt ("poet style", with yoke, sleeves, collar) takes approximately 7 hours of hard work to sew. To weave the cloth for that shirt takes approximately 7 times the 7 hours of sewing, i.e., 49 hours of hard work. To spin the thread for the cloth for that shirt takes approximately 7 * 7 * 7, i.e., 399 hours of spinning.

So, irrespective of the time either raising the wool (and the subsequent fleecing, washing, and carding required) or the linen (and the subsequent retting, hackling, etc. required), in that one shirt you have 400 (okay, I rounded) hours of hard work.  Multiply that times $7.25 (minimum wage) and you have a $2,900.00 shirt (okay, I rounded again).

After pointing out that then you'd have to figure out costs for pants or skirt, bodice or vest, jacket or cloak, stockings, etc....

I have had students who remembered that lesson for years.  And it perfectly explains why the Industrial Revolution was indeed all about clothing.

Nick Rowe's Two-Handed Stimulus Program: Expansionary Policy, Both Monetary and Fiscal, with Real Helicopters...

He writes:

The (mis-)coordination of monetary and fiscal policy: A commenter on my "loss of faith" post, jj, left the following comment:

So what's up with the new orthodox economists who think that printing money wouldn't work? Are they so orthodox they can't think of how to create money beyond the zero bound? Or because it has never been done in a serious country (kidding!) it is neither proven nor disproven to work, and can't be relied on? Or it's just political realism, because no serious government would try it? I mean it seems so simple and obvious, you don't even need a helicopter, just finance your fiscal programs with new money. Maybe it's TOO obvious for an economist? As a mere armchair economist I'd like to know how there can even be any debate about this. It's just so simple and obvious; just finance your fiscal programs with new money. Money doesn't pay interest, and doesn't have to be paid back (at least, irredeemable base money doesn't), so isn't really debt, in any sense that matters.

He's basically right.... And, by the way, that is helicopter money, and the only real difference I can see between helicopter money and what the Australian government did by mailing out cheques to every household is that the Australian Post Office probably used "utes" rather than helicopters to deliver the mail.... In order to explain why it isn't happening, I've got to make it less simple and obvious; I've got to make it complicated and obscure. Because that's how it will appear to the policy-makers; and explains why they aren't doing it.

Start by consolidating the government and central bank budget constraints: the deficit must be financed by issuing bonds plus issuing base money. So the policy-maker gets a choice between two ways of financing a deficit: any mix between bond-finance and money-finance. But that's not how it appears to the separate fiscal and monetary authorities. The fiscal authority chooses the deficit. The monetary authority does not see itself as choosing the mix between money- and bond-finance; it sees itself as choosing a nominal rate of interest (and that's currently stuck at zero), so it is the market that chooses the mix between money- and bond-finance. The stock of base money is demand-determined. So the policy-maker won't be asking "Should I make the deficit bond-financed or money-financed?". Instead, the fiscal policy-maker should be asking "Will the deficit be bond-financed or money-financed?", and the monetary policy-maker will reply "Dunno, I just set the interest rate on short-term safe loans". That's the first complication, converting the normative question of whether the deficit ought be financed by money or bonds into a positive question of whether the deficit will be financed by money or bonds. The second complication has to do with whether the deficit is merely temporarily money-financed or whether it is permanently money-financed. It makes a big difference.

A temporary increase in the money supply... will make little difference... no difference to the government's future tax liabilities.... The helicopter money thought-experiment was always understood, at least implicitly, to be a permanent increase in the money supply. The helicopter operation was not expected to be followed by a vacuum cleaner operation 6 months later.... So, we have to change the question once again. Instead of asking whether today's deficit ought to be money-financed today, we need to ask will today's deficit be money-financed permanently? And the answer to that question ain't so obvious.  It's not obvious to economists. More importantly, it's not obvious to policy-makers who must choose whether or not to run a deficit. And much more importantly still, because expectations matter for aggregate demand, and matter more than anything else, it is not obvious for ordinary people who make spending decisions.

At this point I am tempted to go off on an obscure rant about the disasterous consequences of central banks' choosing the promote the social construction of monetary policy as setting interest rates, because that is precisely what is making it so hard for people to see a money-financed deficit for what it is.... So, is it obvious to you whether deficits will be money-financed under the current monetary regime? No, and it ain't obvious to policy-makers either. Nor to ordinary people.... [Y]ou... need real helicopters, to make it obvious.

Oh S---! Oh S---!! Oh S---!!!

An attack on one NATO power is an attack on all:

CNN-IBN: Turkey recalled its ambassador to Israel and warned of unprecedented and incalculable reprisals. Two Turkish activists were reported to be among those killed in the flotilla. Ankara warned that further supply vessels will be sent to Gaza, escorted by the Turkish Navy....

Israel has sounded an alert throughout the country fearing rocket attacks by Hezbollah in Lebanon. The Arab League has called an urgent meeting on Tuesday to decide on a common response. Egypt is under pressure to end the blockade of Gaza while Greece has cancelled a military exercise with Isreal.

Who claims sovereignty over the waters off of Gaza these days, anyway?

Gapminder: 200 Years That Changed the World

---

http://www.gapminder.org/world/#$majorMode=chart$is;shi=t;ly=2003;lb=f;il=t;fs=11;al=30;stl=t;st=t;nsl=t;se=t$wst;tts=C$ts;sp=5.59290322580644;ti=2009$zpv;v=0$inc_x;mmid=XCOORDS;iid=phAwcNAVuyj1jiMAkmq1iMg;by=ind$inc_y;mmid=YCOORDS;iid=phAwcNAVuyj2tPLxKvvnNPA;by=ind$inc_s;uniValue=8.21;iid=phAwcNAVuyj0XOoBL_n5tAQ;by=ind$inc_c;uniValue=255;gid=CATID0;by=grp$map_x;scale=log;dataMin=194;dataMax=96846$map_y;scale=lin;dataMin=23;dataMax=86$map_s;sma=49;smi=2.65$cd;bd=0$inds=;modified=60

10-Year TIPS Yield

Look at this and tell me that the U.S. federal government is running up against the limits of its debt capacity...

Tyler Cowen: Your Inner Keynesian Is Missing...

Tyler Cowen's inner Keynesian to the white courtesy phone please...

Tyler appears to be confused. Or maybe I am hopelessly confused. He writes:

Is there a general glut?: Consider a simple model, in which uncertainty goes up, first because of the U.S. financial crisis, now because of Greece and the Euro and the open questions about Spain and how well Europe can cooperate.  I'm not saying that's the only or even the prime cause of what's going on, it's simply an illustrative story. With higher uncertainty, investors pull back, wait, and exercise option value. Aggregate supply declines, as does employment. As a result, aggregate demand declines too, and that includes real aggregate demand, not just nominal aggregate demand.  Until the underlying uncertainty is resolved, the economy remains in the doldrums...

And this I don't understand: what is this "aggregate supply declines"? How? Where?

Suppose we have a risk neutral representative worker with a rate of time preference β and an endowment of L hours of labor, which she can either use to produce consumption goods or investment goods with a linear technology. Suppose further you have a representative financier with no endowment, who must borrow from the representative worker and who invests in risky investment projects which have an ex-ante return distribution that is public knowledge but whose actual outcome is private information to the financier.

In this situation, financiers will strike wage bargains with workers--they can't credibly promise to give them a share of the investment project outcome--and will make debt constracts with households--they can't credibly promist to give them an equity share. Since the financiers have no endowment, they will be unable to post bonds. Hence households will be willing to fund only those investment projects that are certain to return at least 1/β. That much labor will be devoted to making investment goods, and the rest of labor will be devoted to making consumption goods.

In this environment, an increase in uncertainty--a mean-preserving spreading-out of ex ante investment project return distributions--causes a greater share of investment projects to fail to make the 1/β guaranteed gross-rate-of-return hurdle. So production of investment goods falls...

...and production of consumption goods rises, as labor is redirected.

There is no employment-reducing fall that I can see in aggregate supply in response to an increase in uncertainty. Yes, there is a structural readjustment as investment-goods industries shed labor and consumption-goods industries gain labor. But this is no more a fall in aggregate supply that leaves an extra 5% of the labor force with nothing productive to do than there was a fall in aggregate supply earlier, when perceived uncertainty fell and labor moved into investment-goods production--remember, back when financial engineering guaranteed by S&P and Moody's offered a way to create more of the AAA assets that the representative worker wanted to hold. There is a fall in aggregate supply in the sense that the value added by investment projects falls--but that fall shouldn't have implications for employment.

Now it is certainly true that the rise in uncertainty is a bad thing.[1] The market failure in the model is the inability of financiers to credibly reveal their private information about the outcome of investment projects. And this market failure means that the society underinvests in the future. And the rise in uncertainty makes this market failure worse, and reduces welfare because it increases the wedge between how much the economy is investing and how much it, in first best, should be. Real output--the sum of the wages of workers and the profits of financiers--does fall.

But "aggregate supply declines" when uncertainty rises? Aggregate supply as measured by the number of workers who ought to be doing things that add value doesn't decline. Aggregate supply stays the same--and aggregate demand should shift away from risky investment goods and toward consumption goods. But somehow it doesn't. Instead, it declines.

And, indeed, Tyler goes on:

Note that there is still a case for fiscal policy, based on the idea of intertemporal substitution.  With some labor unemployed, a sufficiently finely targeted fiscal policy can build a new road at lower social cost than before, by drawing upon unemployed resources...

It's not just that a greater amount of government investment meets the benefit-cost test when the government can borrow at...

GLORY TO THE ONE WHO WAS AND IS AND IS TO COME!!! THE U.S. TREASURY IS NOW ISSUING A 30-YEAR TIP AND ITS YIELD IS... 1.83% per year?!?!?!?!??!?!?

The U.S. Treasury can borrow for thirty years, taking all CPI risk onto its own books, and pay only 1.83% per year in interest?

Wow.

Ahem.

It's not just that a greater amount of government investment meets the benefit-cost test when the government can borrow at 1.83% in inflation-proof bonds for thirty years, a whole bunch of tax postponements do as well. And so do a whole bunch of expanded social welfare programs. And so do a whole bunch of government issues of debt which are then invested in risky private ventures.

So I don't see how Tyler then gets to:

But even if that fiscal policy is a good idea...

Where does the "but even" come from? I see no "but even" earlier in the market: the cost of borrowing for the government has fallen--the market value troday of future cash tax flow earmarked for debt repayment has gone way, way up--therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea,

And I don't see how Tyler gets to:

[expansionary fiscal and monetary policy] won't drive recovery, at least not for plausible values of the multiplier.... We still have to wait for the uncertainty to be cleared up...

But what the rise in uncertainty means is that we don't, right now, want to finance investment-goods production through the private-markets securitization channel. The rise in uncertainty doesn't mean that we have to have an extra 5 percent of our labor force sitting idle because there is nothing socially productive that they can do.

---

[1] Note that in this model irrational exuberance--workers who believe that investment projects are guaranteed to meet the 1/β gross-rate-of-return hurdle when they are not--is a good thing in moderation: as long as the true expected return on the marginal funded project is greater than 1/β and as long as we don't care very much about zero-sum transfers from workers to financiers. And shady financial engineering that leads to a moderate amount of irrational exuberance is a good thing. But I digress...

Clement Attlee Liveblogs World War II: May 31, 1940

Clement Attlee:

The British People now realize the danger with which they are faced, and know that in the event of a German victory everything they have built up will be destroyed. The Germans kill not only men, but ideas. Our people are resolved as never before in their history...

Memorial Day: How Should We Remember Those Who Fought for the Bad Guys?

How should we remember those who fought for the bad guys on Memorial Day?

U.S. Grant describing his feelings at Appomatox Courthouse:

I had known General Lee in the old army... but did not suppose... he would remember me.... When I had left camp that morning I... was in rough garb... without a sword... a soldier's blouse for a coat.... I found General Lee.... What General Lee's feelings were I do not know. As he was a man of much dignity with an impassible face, it was impossible to say whether he felt inwardly glad that the end had finally come, or felt sad over the result and was too manly to show it. Whatever his feelings they were entirely concealed from my observation.... General Lee was dressed in a full uniform which was entirely new and was wearing a sword of considerable value, very likely the sword which had been presented by the State of Virginia.... In my rough traveling suit, the uniform of a private with the straps of a lieutenant-general, I must have contrasted very strangely with a man so handsomely dressed, six feet high and of faultless form. But this was not a matter that I thought of until afterwards....

My own feelings... were sad and depressed. I felt like anything rather than rejoicing at the downfall of a foe who had fought so long and valiantly and had suffered so much for a cause, though that cause was, I believe, one of the worst for which a people ever fought and one for which there was the least excuse...

Back when James Webb was a modern Republican, he gave a speech. Large parts of it are lousy, but some of it is good:

Remarks of James Webb at the Confederate Memorial: I am here, with you today, to remember. And to honor an army that rose like a sudden wind out of the little towns and scattered farms of a yet unconquered wilderness. That drew 750,000 soldiers from a population base of only five million-less than the current population of Virginia alone. That fought with squirrel rifles and cold steel against a much larger and more modern force. That saw 60 percent of its soldiers become casualties, some 256,000 of them dead. That gave every ounce of courage and loyalty to a leadership it trusted and respected, and then laid down its arms in an instant when that leadership decided that enough was enough....

These men, like all soldiers, made painful choices and often paid for their loyalty with their lives. It is up to us to ensure that this ever-changing nation remembers the complexity of the issues they faced, and the incredible conditions under which they performed their duty, as they understood it....

1,490 men volunteered to join the 37th regiment.... Company D... began with 112 men. The records of eight of these cannot be found. 5 others deserted.... 2 were transferred.... 29 were killed, 48 were wounded, 11 were discharged due to disease, and 31 were captured by the enemy on the battlefield.... The end result of all this was that, of the 39 men who stood in the ranks of the 37th Regiment when General Lee surrendered at Appomattox, none belonged to Company D....

There are at least two lessons for us to take away from such a day of remembrance. The first is one our leaders should carry next to their breasts, and contemplate every time they face a crisis, however small, which puts our military at risk. it should echo in their consciences, from the power of a million graves. It is simply this: You hold our soldiers' lives in sacred trust. When a citizen has sworn to obey you, and follow your judgment, and walk onto a battlefield to defend the interests you define as worthy of his blood, do not abuse that awesome power through careless policy, unclear objectives, or inflexible leadership.

The second lesson regards those who have taken such an oath, and who have honored the judgment of their leaders, often at great cost. Intellectual analyses of national policy are subject to constant re-evaluation by historians as the decades roll by, but duty is a constant, frozen in the context of the moment it was performed. Duty is action, taken after listening to one's leaders, and weighing risk and fear against the powerful draw of obligation to family, community, nation, and the unknown future.

We, the progeny who live in that future, were among the intended beneficiaries of those frightful decisions made so long ago. As such, we are also the caretakers of the memory, and the reputation, of those who performed their duty -- as they understood it -- under circumstances too difficult for us ever to fully comprehend.

links for 2010-05-30

• Paul Krugman: The Pain Caucus
  PK: "[T]he O.E.C.D. is saying right now is that policy makers should stop promoting economic recovery... this recommendation... seems disconnected... from the organization’s own economic projections... he O.E.C.D. declares that interest rates in the United States and other nations should rise sharply... to head off inflation. Yet inflation is low and declining, and the O.E.C.D.’s own forecasts show no hint of an inflationary threat. So why raise rates? The answer... is... we must worry... markets might start expecting inflation, even though they shouldn’t and currently don’t.... A similar argument is used to justify fiscal austerity... the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year."
• Jason Burke: Hundreds die in Indian heatwave
  JB: "Record temperatures in northern India have claimed hundreds of lives in what is believed to be the hottest summer in the country since records began in the late 1800s. The death toll is expected to rise with experts forecasting temperatures approaching 50C (122F) in coming weeks. More than 100 people are reported to have died in the state of Gujarat where the mercury topped at 48.5C last week. At least 90 died in Maharashtra, 35 in Rajasthan and 34 in Bihar. Hospitals in Gujarat have been receiving around 300 people a day suffering from food poisoning and heat stroke, ministers said. Officials admit the figures are only a fraction of the total as most of the casualties are found in remote rural villages."
• iPad: Writing stuff - Charlie's Diary
• Reader
• Stephen Williamson: New Monetarist Economics: The World Supply of Liquid Assets
• Whiskey Fire: A Special Strategy
• Gordon's Notes: From the archives - Sanford Weill before and after the crash
• Gordon's Notes: Post-industrial employment: adjusting to a new world
• Great Movie Scenes: The Grave Marked ‘Unknown’ « Touching From a Distance
• The Consensus On Big Banks Shifts, But Not At Treasury « The Baseline Scenario
• The Washington Monthly
• A Fine Theorem

The (Bob) Cat Came Back the Very Next Day...

...and embarked on a stern chase of a turkey. It pursued it at a walk-trot for 300 yards before they disappeared over the hill.

I didn't think chase-to-exhaustion was a bobcat hunting thing...

Amazon Will Almost Surely Replace It with a New One...

Josh Marshall is distressed at the state of his Kindle:

Kindle Woes: I've written several times before about the uncannily functional Kindle, which, aesthetic discomfort notwithstanding, has pretty much totally weened me from physical books. But today I'm writing with a more tragic tale. More or less out of the blue, my Kindle's screen has decided to commit suicide. No triggering event, no trauma and certainly no note. The result is one side totally gone, the other side totally bollixed.... Has anyone else had this happen? And is this thing has finished as it looks? At first I thought a little reseting or repowering or something might do the trick. But it seems not. Has anyone had to deal with Amazon trying to get one of these fixed? Good experience or bad?

Amazon does, I think, have a policy of replacing Kindles with busted screens, no questions asked.

But if I were him, I would switch to Kindle-on-the-iPad...

Percentage of Chart Which Resembles Pac Man

That is all...

The (Bob) Cat Came Back the Very Next Day...

... and a ten-year old Labrador Retriever charging uphill is not the most effective huntress of bobcats conceivable...

DeLong Smackdown Watch: Mark Thoma on Why the Macroeconomic Playbook Wasn't Consulted

Mark:

Economist's View: "A Missing Macroeconomic Playbook?": It's interesting that as we add the appropriate tweaks to modern models and then ask them these questions, in most cases the old wisdom emerges as the answer. I'm not sure that, in general, people were as unaware of this work as Brad implies. In some cases that was true, certainly.... But [many of] those who did know about this work discounted it. They found a way to argue that we had moved on from old models for good reason, that taking such advice from the past would be a step backwards. It was the arrogance that the present had nothing to learn from the past as much as ignorance of what the past had to say that caused policymakers to respond to the crisis with a deer in the headlights, "oh no my models have nothing to say about this," manner. After all, if the proponents of modern macro had thought there was something to be learned from the Kindlebergers and Bagehots of the past, then those who were ignorant of what they had to say would have already read and absorbed this work. The fact that they didn't gives an indication of the value they thought it had. Hopefully that assessment has changed.

Wingnut Republican Right Declares War on Illinois as Well...

Not satisfied with attacking the entire west coast and all of the east coast north of the Rappahanock, the Republican wingnuts have now declared war on Illinois as well: they don't know who is buried in Abraham Lincoln National Cemetery in Illinois, but they are certain that they are not worth a visit by the President on Memorial Day.

Wonkette watches the clown show:

Wonkette : Does Barack Obama Hate The Troops For Talking At A Chicago Cemetery, On Memorial Day?: [R]ight-wing radio hosts... like Glenn Beck and Erick Erickson are upset with Barack Obama’s decision to spend the long weekend in Chicago, where he will speak at Abraham Lincoln National Cemetery on Memorial Day, instead of staying in Washington to speak at Arlington National Cemetery.... Why is Barack Obama the first president to insult the troops like this — especially Southern troops, since he’s speaking at Abraham Lincoln’s death field?...

Winston Churchill Liveblogs World War II: May 30, 1940

Winston Churchill to BEF Commander Lord Gort:

Continue to defend the present perimeter to the utmost... to cover maximum evacuation.... [W]e shall send you an order to return to England... the momenet when we deem your command so reduced that it can be handed over to a Corps Commander.... If communications are broken you are to hand over and return as specified when your effective fighting force does not exceed... three divisions.... No personal discretion is left to you in this matter. On political grounds it would be a needless triumph to the enemy to capture you...

links for 2010-05-29

• Arctic Sea Ice News & Analysis
• Robert L. Cavnar: Top Kill Likely a Failure
• Ta-Nehisi Coates: Lanny Davis's Strange Take On Rand Paul
  T-NC: "[W]hat Davis cites is the inverse of reality. Davis's conjured Rand Paul is a libertarian. The actual Rand Paul told TIME, "I'm not a libertarian." Davis's conjured Rand Paul is pro-choice. The actual Rand Paul wants a constitutional ban on abortion. Davis's conjured Libertarian party nominated Rand Paul's father, Ron Paul, for president. The actual Libertarian party nominated Bob Barr. The conjured Rand Paul favors the decriminalization of "the use of drugs for medicinal or recreational purposes." That one may be true.... But according to TIME, Paul holds no such position... Actual opinion-journalism, the kind practiced by Rachel Maddow, is concerned with the actual positions of actual politicians and the actual parties they belong to. Science fiction opinion-journalism, the kind practiced in this instance by Lanny Davis, is concerned with the theory of parallel worlds."
• Mexican Repatriation - Wikipedia
  W: "The Mexican Repatriation refers to a forced migration that took place between 1929 and 1939, when as many as one million people of Mexican descent were forced or pressured to leave the US. (The term "Repatriation," though commonly used, is inaccurate, since approximately 60% of those driven out were U.S. citizens.)[1] The event, carried out by American authorities, took place without due process.[2] The Immigration and Naturalization Service targeted Mexicans because of "the proximity of the Mexican border, the physical distinctiveness of mestizos, and easily identifiable barrios." [3]... These actions were authorized by President Herbert Hoover and targeted areas with large Hispanic populations, mostly in California, Texas, Colorado, Illinois and Michigan."
• Greg Sargent: It remains unspeakably strange that in the alternate universe known as the U.S. Senate, one of the largest environmental calamities in history has made drilling more imperative to passing energy reform.
• Clay Dillow: Japan Plans a Moon Base by 2020, Built by Robots for Robots
  CD: "As currently envisioned, the robots that will land on the lunar surface in 2015 will be 660-pound behemoths equipped with rolling tank-like treads, solar panels, seismographs, high-def cameras and a smattering of scientific instruments. They'll also have human-like arms for collecting rock samples that will be returned to Earth via rocket. The robots will be controlled from Earth, but they'll also be imbued with their own kind of machine intelligence, making decisions on their own and operating with a high degree of autonomy. Those initial surveyor bots will pave the way for the construction of the unmanned moon base near the lunar south pole, which the robots will construct for themselves. That base will be solar powered and provide a working/living space future robot colonizers, as well as -- presumably -- a jumping off point for future human moon dwellers."
• Ed Dolan: Are Pay-for-Delay Drug Deals Anticompetitive?
  ED: "The legal status of pay-for-delay deals is murky. In the early years after passage of Hatch-Waxman, they were considered anticompetitive per se, and very few such deals were made. Then, beginning in 2005, federal appeals courts determined that the deals were legal, after all. The number of such deals increased rapidly. Now there is a push to end pay-for-delay deals once and for all. They are under attack both by the Federal Trade Commission and the Antitrust Division of the Justice Department. In addition, the House version of the omnibus health care bill currently under consideration by Congress would outlaw pay-for-delay. The Senate version does not include this language."
• Ed Dolan: Diamonds: How To Price a Finite Resource
  ED: "De Beers seems to think this way, too. Because it accounts for 40 percent of world diamond output, its supply decisions have a substantial impact on diamond prices, both now and in the future. It has recently announced that it will limit production to 40 million carats per year, well below the rate of production before the global economic crisis. Its aim in restraining production is to allow future diamond prices to rise at a target rate of about 5 percent per year. Could it be only coincidence that this is almost exactly the current yield on U.S. Treasury bonds?"
• Ed Dolan: Why Exchange Rates Matter in a Crisis: Latvia vs. the Czech Republic
  ED: " When the crisis hit, the koruna depreciated as quickly as it had earlier strengthened, quickly restoring competitiveness. The recession in the Czech Republic was among the mildest in the EU.... Without a devaluation, the only way Latvia could restore competitiveness was through deflation of prices and wages. This strategy, often called "internal devaluation," has been extremely painful. The unemployment rate has soared to 22 percent as prices and wages fall. Meanwhile, unemployment in the Czech Republic has risen only slightly.... The bottom line: During good times, the fixed exchange rate policy of euro area countries and others with pegs to the euro helps promote trade and integration. However, during a boom, a fixed exchange rate makes it hard to avoid dangerous overheating and bubbles. When a crisis comes, a fixed exchange rate makes adjustment slower and more painful. The euro has been a bold experiment, but today, the currency bloc is fighting to remain intact."

James Fallows on How the Republican Party Hurts America

James Fallows:

Weakening America: Mitch McConnell Shows How: Depressed about how hard it is to get first-rate people into federal jobs, so they're ready to handle emergencies like the BP oil disaster? Wondering if our systems of self-government really are up to the challenges of the moment? Curious about whether people who complain about Senate obstructionism and tyranny-of-the-minority are exaggerating? Consider the works of Sen. Mitch McConnell, R-KY (below), on the Senate floor 36 hours ago.... If you go to this White House site, you'll find a searchable, sortable list of all 820+ nominations and appointments made so far in the Administration; about 240 have not even come up for a Senate vote.... On Thursday afternoon, just before its Memorial Day recess, the Senate had planned to consider about 80 of these nominations as a group. They all had been through financial and security vetting; they had been through committee consideration; they were headed for jobs that in many cases now stood vacant; they were ready to go. Sen. Tom Harkin, Democrat of Iowa, moved for approval by unanimous consent, apparently believing that a deal to clear out the huge backlog had been struck. Sen. Mitch McConnell, the minority leader, begged to differ. He was still sore about the recess appointment of Craig Becker to the National Labor Relations Board. Therefore he wouldn't agree to the en-bloc vote...

I say it again: we would be better off as a country if we shut the Republican Party down today, and started up a very different opposition party to the Democrats.

A Missing Macroeconomic Playbook?

I am reminded of the extraordinary gulf between economics as I see it and economics as at least some others see it when I read things like Narayana Kocherlakota's opening paragrapb:

Modern Macroeconomic Models as Tools for Economic Policy: I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown...

My reaction to this is the old one: "Huh?!"

For "macroeconomics" did and does have a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances.

The playbook was first drafted back in 1825, during the bursting of Britain's canal bubble.

Let me briefly set out what the macro playbook is, and how it has been developed by economists and policymakers over the past 185 years. Start with Say's or Walras's Law: the circular flow principle that everybody's expenditure is someone else's income--ands everyone's income is somebody else's expenditure. It has to be that way: for every buyer there is a seller: and for every seller who is disappointed because they sell for less than their cost plus normal profit because of excess supply there must be another who is exuberant from selling at more than cost plus normal profit.

How, then, can you have a depression--a "general glut," a situation in which there is excess supply of not one or a few but all commodity goods and services? How can you have a situation in which workers laid off from shrinking industries where demand is less than was expected and thus less than supply are not rapidly hired into industries where demand is more than was expected and hence more than supply?

Moral philosopher, libertarian, colonial bureaucrat, feminist, public intellectual, and economist John Stuart Mill put his finger on the answer in a piece he published in 1844:

[T]hose who have... affirmed that there was an excess of all commodities, never pretended that money was one of these commodities.... [P]ersons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable...

Mill was thus explicitly refuting the older French economist Jean-Baptiste Say. Say had been well-embarked on a career in politics and government in the new French Republic of the early 1790s 1990s: special assistant to Gironde Party Secretary of the Treasury Clavier. But then Clavier fell: purged, arrested, imprisoned, and executed by Robespierre's "Mountain" faction. Somehow Say escaped the wreck with not just his life but his liberty and some property as well, and set out to pursue happiness by withdrawing from politics to write treatises on economic theory. In 1821 Say published his Letters to Mr. Malthus, in which he argued that the very idea of a "general glut" was self-contradictory, for the very fact that commodities had been produced meant that there was sufficient demand in aggregate to buy them:

[W]e do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own.... it is impossible... to buy any articles whatever to a greater amount than that which they have produced.... Thence follows... that if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets.... [W]henever there is a glut, a superabundance, of several sorts of merchandize, it is because other articles are not produced in sufficient quantities to be exchanged for the former... the superabundance of goods of one description arises from the deficiency of goods of another description.

Say was thus the first of a long line of economists to argue that the fact that something that appeared to exist in reality could not really be there because it was inconsistent with his theory.

In a normal microeconomic case of market adjustment--excess supply of one good and excess demand for another--it is clear how adjustment proceeds. Those entrepreneurs making the good in excess supply find themselves selling for less than their costs and so losing money. They cut back on the wages they pay and dismiss workers. But this is not a tragedy, because the profits they have lost have gone into the pockets of entrepreneurs in expanding industries, who are eager to expand production, raise wages, and hire more workers. After a short time the structure of production is better-suited to make what people want, and wages and profits in total are higher than if the structure of production had remained frozen in its old pattern.

But what if there is a general glut of commodities? What if the excess supply is for pretty much all goods and services, and the excess demand is for liquid cash or for safe investments that will not lose their value no matter what? How do you expand labor employed in the liquid cash-creating or in the AAA asset-creating businesses to make more of such assets?

One possibility is to rely on the private sector, saying: risky assets are at a discount and safe assets a premium? Good!

Make the profits from creating safe assets large enough, and Goldman Sachs and company will find a way. They will raise some capital willing to run large risks for large returns. They will hire people to shuffle the papers. They will finance enterprises, and then slice and dice the cash flows from those enterprises in order to create lots of AAA-rated securities. And when they do, the excess demand for safe assets will be satisfied, and that will by Walras's Law erase the excess supply of goods and services, and unemployment will return to normal.

Oh.

You say nobody trusts Goldman Sachs or Standard and Poor's when they say: "we know we lied last time when we warranted that the assets we were selling were AAA, but this time for sure!!"?

Well, how about investing abroad? There are still lots of AAA assets out there in the wider world. Suppose everybody devalues, puts people to work in newly-competitive export industries, and thus runs an export surplus and, in exchange, imports AAA assets from abroad for our savers and investors to hold.

Oh.

I see. Everybody can't devalue at once. Greece can run an export surplus only if Germany is willing to run an import surplus. The United States can boost its net exports only if China shrinks its own.

Maybe we could ship millions of our citizens to South Africa equipped with picks and shovels and put them to work as gastarbeiteren mining the gold of the Witwatersrand?

I know! Let's cut the price of every good and service by 25%! then our same stock of nominal AAA assets will meet a 33% larger demand for real AAA assets, and there will be no excess demand for safe assets, and thus no excess supply of goods and services! The problem with this "solution" is that "money" is not just a medium of exchange and a store of value, it is also a unit of account. Suppose that a 33% increase in the real supply of genuine AAA assets would fix the problem, and suppose we do succeed in cutting all goods and services prices and wages by 25%. Have we then fixed the problem? No. A lot of people have debts denominated in money and were counting on selling their goods and their labor at something like their previous prices to pay off their mortgages, their loans, and their bonds. A whole bunch of assets that were AAA before the decline in the price level are no longer AAA. You haven't fixed the imbalance. Each nominal AAA asset does indeed satisfy a larger slice of demand for real AAA assets as a result of the price-level decline. But the price level decline has shrunk the (nominal) supply of AAA assets just as it has shrunk the (nominal) demand for them. And how have you managed to reduce nominal wages and prices? By years if not decades of idle capacity and high unemployment.

Oh.

So now--drumroll--it is time to pull the rabbit out of the hat. The solution is... the government! The government has the power to tax! And so the government can make AAA assets when nobody else can!

Or the government can until and unless the assets that it has created for others to hold--which are its debts--rise to the point where people begin to get nervous about whether the government's taxing power will actually be deployed in the end to repay those debts--and we in the United States are still very far from that point (although we in Greece are not).

The first and easiest way for the government to create more safe assets is for the central bank to create them by buying up risky assets for safe ones via open-market operations or lending cash and taking other, riskier assets as its sole security. As Walter Bagehot wrote about the Panic of 1825:

The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. 'We lent it,' said Mr. Harman... [one of the Directors] of the Bank of England:

by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power...

Since the fall of 2007 the central banks and the Treasuries of the world have been following this playbook. They have expanded the supply of safe assets via open-market operations, pumping out cash for the private sector to hold and in return accepting duration and interest-rate risk. They have topped up bank capital. They have guaranteed private-sector loans. They have swapped in risky private-sector debt in exchange for government bonds. They have--via expansionary fiscal policy--printed up huge honking additional tranches of government bonds and used the money raised to pull forward government spending and push back taxes.

Now it may be that we are creeping up on the point at which government debts are rising to the limits of politically-limited debt capacity. But that does not mean that the playbook comes to an end. Indeed, Ricardo Caballero is writing a new chapter about how even now governments can go on:

expanding the real supply of AAA assets.... [So far] governments in safe-asset-producing countries [have] produce[d] a lot more of them.... [We could also] let the private sector create the AAA assets... [with] governments... absorb[ing]... risk the private sector cannot handle... extreme systemic events... compounded by panic. Currently the focus (implicitly) is [still] on the former strategy. Indeed, funding fiscal deficits is very inexpensive these days… as long as one remains within the safe-asset-producer category. However... at some point it will make sense to decouple fiscal deficits from asset production.... The US Treasury... [could] start buying riskier private assets rather than running fiscal deficits as the counterpart for its supply of Treasuries to the market.... [A] sounder medium-term strategy than the purely public approach... [is to use] the securitisation industry..... The private sector is much more efficient than the government in producing micro-AAA assets, but the opposite is true for macro-AAA asset production.... [I]f the government only provides an explicit insurance against systemic events to the micro-AAA assets produced by the private sector, we could have a significant expansion in the supply of safe assets without the corresponding expansion of public debt...

by formalizing and making explicit what Charles Kindleberger always called their commitment to act as lender of last resort when systemic risk came calling.

The playbook is old and well-established, and has been put to effective use.

That Narayana Kocherlakota and company did not know it existed--that he and his circle had never studied Kindleberger and Minsky, let alone Fisher and agehot and Mill, and knew Keynes and Hicks only as straw men to be ritually denounced as sources of error rather than smart people to be listened to--will doubtless appear to future generations as an interesting episode in the history of political economy. But nobody should confuse the failure of Kocherlakota's branch of macroeconomics with the failure of macroeconomics in general.

Deepwater Horizon Situation Map

Tropical Storm AGATHA

Shut Down the New York Times Today...

Why oh why can't we have a better press corps?

I have reached my limit with the New York Times: I think it would be a better world if it shut tomorrow--all of the best and some of the good journalists would go elsewhere and do their work, and a lot of bulls--- would vanish from the public debate.

In the summer of 2009 President Obama and his administration reached out to Senator Arlen Specter (R-PA): "the wingnuts are going to beat you in the Republican primary next year," they said. "But we have a way for you to win another term: switch parties, abandon your support for Republican obstructionism, and we will smooth the way so that you can be the Democratic nominee for Senate in 2010." Specter bit. The Democratic head count in the Senate reached 60. Obama's legislative victories were made much easier, and more complete. And thereafter Obama and company kept their word to Specter by trying to do what they could to smooth his path to the Democratic Senatorial nomination in Pennsylvania.

A daring and successful political coup, right?

The New York Times does not think so:

Unintelligent Design of Mr. Sestak’s Job Offer - NYTimes.com: There doesn’t seem to be anything terribly unethical about the White House offer of an unpaid advisory position to Joe Sestak if he would bow out of the Pennsylvania Democratic primary, in which he later defeated Senator Arlen Specter. There does, however, seem to be something strikingly unintelligent about it. Why would the White House, using former President Bill Clinton as its agent, offer Mr. Sestak a job on the President’s Intelligence Advisory Board for which he was ineligible as a sitting House member? (It takes about 30 seconds to Google those rules, approved in 1993 by President Clinton himself.) Why would President Obama’s White House waffle and obfuscate about the matter for three months, allowing Republicans and the conservative blogosphere to hyperinflate it into the grave scandal it turned out, on Friday, not to be? Why, finally, can’t the White House avoid such unforced errors and get its political act together?...

Convincing Specter to switch and then keeping your promises to him by trying to lure Sestak out of the Senate race is not an "unforced error," is not "strikingly unintelligent," is not "unethical" to even a minor degree.

And it piles on, in the form of Peter Baker:

The Politicking Behind an Offer to a Specter: For Mr. Emanuel, such political maneuvering is instinctive. As a Congressional leader and President Obama’s top political adviser, he has spent years trying to position what he considers the strongest candidates to run in various races across the country, even if it means enticing or pressuring other Democrats to get out of the way. But the conversation with a two-term congressman from Pennsylvania has now grown into a dispute over whether business as usual is good enough for a president promising reform.... Republicans escalated their calls for a criminal investigation and dismissed the everybody-does-it defense. “What does that have to do with the campaign pledge and the repeated pledges by this president that this would be a more ethical White House?” asked Representative Darrell Issa of California...

And more Peter Baker:

Sestak Case Casts Light On Murky Political Boundaries: When the White House enlisted former President Bill Clinton to see if Representative Joe Sestak would accept a presidential appointment to drop out of a Senate race, there is no question it was committing politics. But was it committing a crime? The dispute surrounding the White House effort to nudge Mr. Sestak out of the Pennsylvania Democratic primary has once again cast a harsh light on the murky boundaries that govern American political life. When does ordinary horse-trading cross a line? When does behavior that may violate sensibilities actually violate federal law?

The law does ban promising any position to influence an election and Republican lawmakers have called for a special prosecutor or the F.B.I. to investigate whether Rahm Emanuel, the White House chief of staff, or his colleagues made an illegal quid pro quo proposal. So far, the Justice Department has rebuffed such calls and, as of a few days ago, officials said neither the department nor the Office of Special Counsel, which looks at politicking by federal employees, was investigating. The White House and independent Democratic lawyers have scoffed at the notion that anything illegal happened and accused the Republicans of trying to criminalize politics. Even former Attorney General Michael B. Mukasey, appointed by President George W. Bush, said on Fox News on Friday that it was “highly questionable if there’s any crime” and that a prosecution “really is a stretch.”...

William Burck, a white-collar defense lawyer at Weil, Gotschal & Manges and the former deputy White House counsel under Mr. Bush, said it did not matter that the position being discussed with Mr. Sestak was unpaid because a prestigious presidential appointment was itself a thing of value and the law made no distinction between paid and unpaid.... Joseph Gibson, former chief counsel to House Judiciary Committee Republicans and author of “Persuading Congress,” dismissed the defense that claims that everyone does it. “Most parents do not accept that excuse from their children and the public should not accept it here,” he said. “A line may have been crossed. But we do not know all the facts right now, and we cannot fairly judge the situation until we do.”

Eleanor Roosevelt Liveblogs World War II: May 29, 1940

Eleanor Roosevelt:

My Day: It is interesting to note in some of the papers during the last few days, the suggestion that to insist that the hours of labor shall not be increased is a short-sighted policy in view of the fact that rapidity of production is necessary. It seems to me that the people who say this are forgetting the fact that an employed nation is necessary for the survival of a democratic form of government, and that it will be time enough to increase the hours of labor when we have cut our unemployment to the minimum. It may be said that the type of workers needed are not those who are unemployed. It seems to me, with industry really wishing to cooperate on this defense front, it might be possible to train some of those who are now unemployed and who have not previously been mechanics, so that they would be able to go to work when new factories are ready to receive them. Some people seem still unable to realize the fact that it is important to make democracy worth fighting for. Unless that challenge is met, we are apt to find ourselves with large numbers of people in our midst who care very little under what form of government they have to exist...

links for 2010-05-28

• Anya: DIY U
• Matthew Yglesias: The Chinese Economic Model: State-Led Development to the Max
  MY: "The really striking facts... “of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks.” The closest analogy it seems to me is probably to France... the western country to have been least-impacted by the neoliberal turn away from state ownership of firms. And somewhat like in France, the Chinese speak specifically about the idea that over the past thirty years their development has been enhanced by the creation of a better-educated better-trained bureaucracy and their aspirations to continue doing this in the future. By the lights of the American conventional wisdom, this whole situation seems mostly like a warning sign... though the prevailing policy consensus in the United States would lead you to believe that a country with France’s policies would necessarily be a basketcase, France is itself a very successful and prosperous nation and society."
• David Pescovitz: Snails on Meth
• Harrison Hong and Jeremy C. Stein: Disagreement and the Stock Market (pdf)
• Doug Elmendorf: Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output
  DE: "CBO estimates that in the first quarter of calendar year 2010, ARRA’s policies: Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent, Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points, Increased the number of people employed by between 1.2 million and 2.8 million, and Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.) The effects of ARRA on output and employment are expected to increase further during calendar year 2010 but then diminish in 2011 and fade away by the end of 2012."
• Dan Moren: iBookstore now allows individuals to submit their e-books
• Jillian Rayfield: Rand Paul Suggests Children of Illegal Immigrants Should Not Be U.S. Citizens
• ark Coddington: This Week in Review: Facebook’s privacy tweak, old and new media’s links, and the AP’s new challenger

Peaceable Kingdom FAIL: Bobcat Hunting Moles (It Caught It)

Posted via web from delong's posterous

Also today: evidence of a skunk, turkeys sounding the alarm in the thicket, reports of a mountain lion sighting on the property next door, two dead deer, and many turkey vultures...

Congestion Pricing: Ryan Avent Takes Slate and Matt DeBord to Econ 1 School

Why oh why can't we have a better press corps?

This is, I think, yet another example of the global Slate failure: they tried to copy Michael Kinsley's early New Republic trick of attracting readers by being contrarian and edgy and counterintuitive. But when Kinsleyism worked--which wasn't always, and which got rarer and rarer over time--the primary source of its success wasn't that it was contrarian and edgy and counterintuitive, but that it was smart. And Slate has found that it is a lot easier to be contrarian and edgy and counterintuitive if you are also really dumb--and is, here, clearly taking the line of least resistance.

Ryan:

Reduced Congestion is Good for Drivers: I don’t know what’s most strange about this Matt DeBord post... his insistence on making every policy discussion into a tribal battle between Team Car and everyone else, his bizarre suggestion that drivers have no problem with congestion, or the ludicrously hyperbolic assertion that using pricing to cut congestion will mean that “we just won’t be able to do the car thing anymore”.

Congestion pricing really isn’t that hard. Congestion is a classic negative externality. When a driver gets on the road, he doesn’t have any reason to think about the additional traffic he is creating, and since the same is true for everyone using scarce, valuable road space, drivers opt to drive until traffic grinds to crawl. We confront problems like this all the time.... The idea is to allow cars to use the road as intended, at appropriate speeds, predictably and efficiently. If driving falls below the level at which congestion is a problem, you drop the [congestion] price. In the meantime, we cut out the billions in annual losses due to time and gas wasted in traffic. DeBord writes as though climate control and a radio station eliminate the pain of sitting in a traffic jam. As far as I can tell, no sane person actually think this.... A pleasant side effect of pricing roads is the revenue, which can be used to fund additional transportation capacity.... If congestion pricing offers drivers a guaranteed smooth commute and, at the same time, enables the provision of high-quality, reliable transit, why would anyone in their right mind think that’s a bad thing?

Cars are useful inventions insofar as they make for effective transportation. Traffic-choked roads are not effective.... [I]t’s sad for Matt DeBord (and embarrassing for the Big Money) that he can’t conceive of the issue outside some drivers-versus-utopians nonsense frame.

Morning Bulletin: Peaceable Kingdom Edition

Well, a bobcat on the deck, deer on the driveway, and turkeys in the straw.

No pictures, however: the kingdom is not that peaceable...

Morning Bulletin: The Group of 30 Has Lost Its Collective Mind...

Paul Krugman blogs:

Martin Wolf Is Not A Serious Person : And neither am I. Wolf writes:

I have now lost faith in the view that giving the markets what we think they may want in future – even though they show little sign of insisting on it now – should be the ruling idea in policy.

Amen. Yet most of the men in the room where I’m now sitting believe the contrary. With a few exceptions, everyone is calling for fiscal austerity everywhere, right now.

Awesome.

As Ricardo Caballero says, the big problem right now is that the world economy has too little safe high-quality financial assets, and thus excess demand for them is, by Walras's Law, producing excess supply of goods and services:

It’s the general equilibrium, stupid: [T]he fundamental problem... is a shortage of safe “AAA” assets. The world seems to need more US Treasury-like instruments than are available.... The demand for these assets has expanded as a result of the fear triggered by the crisis.... But this time the private sector industry created to supply these safe assets – the securitisation and complex-assets production industry – is severely damaged. Much of what we see that confuses us today is the equilibrium consequence of living in an environment with this shortage. There is enormous asset price volatility, especially as assets transit out of the safe assets category... the recent difficulties in the Eurozone can be seen in this light, with Greece and others dropping from the potential safe-asset producers list. This shortage also leads to chronically low safe real interest rates.... These however, are the consequences, not the source. The US Congress and the Bank for International Settlements’ knee-jerk reactions are (mostly) bound to reallocate the malady, rather than cure it.... [A] more effective goal would be to focus on expanding the real supply of AAA assets... two basic ways of achieving this in the short run... governments in safe-asset-producing countries [could] produce a lot more of them [by running fiscal deficits]... the private sector create the AAA assets and for the governments (at a fair price) to absorb only that part of the risk the private sector cannot handle.... [F]unding fiscal deficits is very inexpensive these days... as long as one remains within the safe-asset-producer category...

In short, expansionary fiscal policy (credit-worthy governments print up a huge honking tranche of AAA assets, and then use the money to buy goods and services) or expansionary monetary policy (credit-worthy central banks take on duration and interest rate risk by buying securities for cash, and by increasing the money stock increase the supply of the most AAA of AAA assets) or expansionary banking policy (Treasuries and central banks turn leaden risky assets into golden safe ones by offering guarantees of one sort or another). The hope is that, by Walras's Law which tells us that excess demands across all markets must sum to zero, that relieving excess demand for AAA assets will produce as a consequence the relief of excess supply and full-employment balance in the markets for goods, services, and labor as well.

This is the line of policy that was recommended by John Stuart Mill in the aftermath of the very first industrial business cycle--the 1825 crash of Britain's canal bubble:

John Stuart Mill: It must, undoubtedly, be admitted that there cannot be an excess [supply] of all other commodities, and an excess [supply] of [AAA assets] at the same time. But those who have, at periods such as we have described, affirmed that there was an excess of all commodities, never pretended that [AAA assets] was one of these commodities; they held that there was not an excess, but a deficiency of [AAA assets]. What they called a general superabundance, was not a superabundance of commodities relatively to commodities, but a superabundance of all commodities relatively to [AAA assets]. What it amounted to was, that persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess [AAA assets] than any other commodity. [AAA assets], consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, [AAA assets] is collected in masses, and hoarded; in the milder cases, people merely defer parting with their [AAA assets], or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable...

And that had in fact been carried out by the Bank of England in 1825-1826. Let me turn the microphone over to Walter Bagehot:

The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. 'We lent it,' said Mr. Harman... [one of the Directors] of the Bank of England:

by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power...

This is the line of policy that, broadly, the world has been following since the subprime crash started in mid-2007 and excess demand for AAA assets first became grossly apparent. And this is the line of policy that the Group of 30 now wishes to reverse--without putting anything in its place.

Now it is certainly the case that the government budget constraint holds in the long run--that governments cannot keep running deficits and raising their debt and taking on tail risk forever without cracking the AAA status of their own debt and so not relieving but instead aggravating the excess demand for AAA assets which is the Walras's Law balancing entry to excess supply in the markets for goods and services and high unemployment. As Ricardo writes:

[W]ere we to continue along this path, at some point it will make sense to decouple fiscal deficits from asset production--lest we find ourselves cast in an epic Greek tragedy. The US Treasury would have to start buying riskier private assets rather than running fiscal deficits as the counterpart for its supply of Treasuries.... [In the medium term] the second, private-public approach is probably... sounder.... The private sector is much more efficient than the government in producing micro-AAA assets, but the opposite is true for macro-AAA asset production. Issuing public debt leaves the government in charge of bundling and producing both the micro- and the macro-AAA assets. Instead, if the government only provides an explicit insurance against systemic events... we could have a significant expansion in the supply of safe assets without the corresponding expansion of public debt...

But we are extremely far from cracking the U.S. government's status as the supplier of AAA assets to the global economy right now. When we see signs that further issues of Treasury bonds or loan guarantees by the U.S. government are starting to erode the AAA status of U.S. government debt, then will be the time to back off of expansionary U.S. fiscal, monetary, and banking policy. Then--not now.

Newt Gingrich Contradicts Himself in the Same Sentence

He writes:

Newt Gingrich: I recognize the horror and the evil of the Nazi regime and nothing in my new book To Save America should be interpreted as a statement of moral equivalence between totalitarian regimes and the secular-socialist left. My intent instead was to define the scale of the challenge to classic American civilization posed by secular-socialism...

So Adolf Hitler and Barack Obama both pose equal threats to classic American civilization. Glad to have that out there. But to the extent that one views the destruction of classic American civilization as a moral wrong, equal threats to it are morally equivalent.

As I've said before, repeatedly, there is no excuse for anybody to support, fund, work for, or vote for the Republican Party in its current incarnation. Its existence in its current form is a dire threat to classic American civilization--not, admittedly, a threat on anything like the same scale that Adolf Hitler was, but a threat nevertheless.

Shut it down now. We need a very different opposition party to oppose the Democrats than the one we have now.

And Meg Whitman Is the Good Manager Among the Republican Candidates...

Taegan Goddardd:

Twitter / Taegan Goddard: Whitman denies her CA-Gov ...: Whitman denies her CA-Gov ads feature a border fence, except they do... http://pwire.at/9kulkT

Winston Churchill Liveblogs World War II: May 28, 1940:

Winston Churchill: May 28, 1940:

In the House of Commons: The House should prepare itself for hard and heavy tidings. I have only to add that nothing which may happen in this battle can in any way relieve us of our duty to defend the world cause to which we have vowed ourselves; nor should it destroy our confidence in our power to make our way, as on former occasions in our history, through disaster and through grief to the ultimate defeat of our enemies.

links for 2010-05-27

• Jonathan Cohn on Health Care
  JC: "I’m skeptical that, with a different set of decisions, the Democrats could have produced a substantially better law. Some of this is because of things I learned, or at least came to appreciate, only recently... the institutional constraints on legislation—the technical challenges of reconciliation, the accounting standards of the CBO, the nature of campaign finance—make the enactment of sweeping legislation nightmarishly difficult. Liberals frustrated with the Affordable Care Act’s final shape ought to concentrate on changing those facts of political life, by reforming institutions of government, starting with the filibuster, and building the kind of grassroots movement that can dilute the awesome power of money in politics.... What’s most important to remember about the Democratic leaders is that they took on health care reform when the conventional wisdom said it was too politically risky—and then stuck with it when the conventional wisdom said it was time to give up."
• Martin Wolf: Spare Britain the policy hair shirt
  MW: "The UK should tighten fiscal and monetary policy now, in the depths of a slump. That... is what the Organisation for Economic Co-operation and Development calls for... I wonder what John Maynard Keynes would have written in response. It would have been savage, I imagine. The OECD argues: “A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential. The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation, but a concrete and far-reaching consolidation plan needs to be announced upfront.” Furthermore, monetary tightening should begin no later than the fourth quarter of this year.... Let us translate this proposal into ordinary language: “If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.” But might it not make sense to get better first?"
• Alex Seitz-Wald: Charlie Crist flip-flops to support ‘Don’t Ask, Don’t Tell’ repeal.
• Jonathan Bernstein: Watching primary elections
  JB: "the two things I'd want to know... are economic growth from now through November, and Barack Obama's approval ratings.... The other key variable, however, is candidate quality, and we're going to learn more about that soon.... [C]ampaign effects... are small and are likely to balance out.... What does matter are the candidates... ideological moderation is a plus... experienced politicians who have successfully contested elections... do far better than inexperienced, amateur candidates.... [W]hile both of these effects are significant, they are limited: We're talking a few percentage points.... So... how many (if any) seats will be lost because primary electorates choose the weaker nominee.... I do suspect that there's a story there, that it's on the Republican side, and that the GOP will wind up losing a handful of seats as a result..."
• CBO: The Effect of Automatic Stabilizers on the Federal Budget (pdf)
• Paul Krugman on the OECD Economic Outlook
  PK: "The only explanation seems to be at the beginning of that passage: some people, the report claims, are starting to think there might be inflation, so even though they’re wrong according to our forecasts, see, we need to head off this phantom threat and slow the economy’s recovery … what? What’s so scary about this is that the OECD virtually defines conventional wisdom; it’s a numbered-paragraph sort of place, where a committee has to sign off on everything, policing the nuances as they say. So what we get from this is that among sensible people the idea that you should undermine recovery to appease those who think there might be inflation even though actually there isn’t has become conventional wisdom — so conventional that it’s treated as self-evident. This is really, really bad."
• Conor Friedersdorf: The Best Case Against Arizona's Immigration Law: The Experience of Greater Phoenix
• Ato Onoma: Security of Property
  AO: "Common sense seemed to dictate that if lands were dutifully surveyed, demarcated, and adjudicated, and chiefs were given registers in which they could record allocations, they would surely avoid infringing on each other’s parcels and end these problems. So I asked Muntari... what the state was doing to help chiefs solve these distributive conflicts.... He claimed that, after working with chiefs for seventeen years, he had come to the conclusion that chiefs did not want clear boundaries, functional property registers, and an environment devoid of disputes. He argued that the chiefs would sabotage any effort to provide these features. According to Muntari, in the absence of such mechanisms, cash-strapped, land-hungry chiefs could conveniently “mistakenly” allocate the lands of neighboring chiefs or sell land that their ancestors had sold earlier. Further, where tenants engaged in subversive political behavior, chiefs could conveniently award their rights to more loyal subjects…"
• Ta-Nehisi Coates: Toward A Manifested Courage Cont.
  T-NC: "It is extremely important that, while speaking the truth, we do not forget that we are talking about humans. I don't know that thinking of humans as evil is wrong--likely in some capacities it is essential. In my capacity, as someone interested in describing the world, it is borderline useless. Early in my Civil War reading I found that whenever I came across the name Nathan Bedford Forrest, a small rage flickered in me.... It isn't clarify, it's obfuscating. I have found that blanket condemnation requires little, and returns roughly the same. I have also found that understanding (something of a profane concept in our times) requires a lot, but returns much, much more. With that said, this is, by far, the coolest part of my job. Meeting actual people. Talking to actual people. I had thought I was having a hard week on the blog. That was vanity. It's a privilege. For me, especially, it is always a privilege."
• Economist Debates: This house believes the euro area will fragment over the next ten years
• John Gruber: Mick Jagger Goes Back to Exile
  MJ: "But I have a take on that — people only made money out of records for a very, very small time. When The Rolling Stones started out, we didn’t make any money out of records because record companies wouldn’t pay you! They didn’t pay anyone! Then, there was a small period from 1970 to 1997, where people did get paid, and they got paid very handsomely and everyone made money. But now that period has gone. So if you look at the history of recorded music from 1900 to now, there was a 25 year period where artists did very well, but the rest of the time they didn’t."
• What if the oil spill just can’t be fixed? | Grist
• I eat weeds | Grist

Harold Meyerson on the Latest Pathology of Washington DC

Harold:

Harold Meyerson - Deficit hawks ignore the R-word: Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don't really believe we're still in recession. Or maybe, they just don't care. How else to explain the continual harping on the deficit by editorialists, centrist think tanks and the like when the nation is still enmeshed in the most serious economic downturn since the 1930s? How else to understand the growing opposition to the jobs bills Congress is set to vote on this week, particularly when nobody has identified any future engine of American economic growth save countercyclical public investment?

It's not that the American people aren't concerned about the deficit. But in poll after poll, they make clear that their No. 1 concern is jobs. Forty-seven percent of respondents to a Fox News poll this month, for instance, said they were concerned with the economy and jobs, while just 15 percent acknowledged concern over the deficit and spending. Eighty-one percent of respondents to a Pew Research Center poll from this month thought it "very important" for Congress to address the jobs situation -- more than for any other topic. "There is no significant difference across party lines," Pew reported. Beneath these numbers lies broad public anxiety over job loss and downward mobility....

[N]o one at any point on the political spectrum has a complete prescription for what ails the American economy. But we do know how to preserve and create enough jobs to keep a recession from becoming a depression and, more particularly, how to keep still-reeling state and local governments from deepening the downturn by laying off thousands more workers. We did just that last year.... The official unemployment rate is 9.9 percent; there are still more than five unemployed job seekers for every opening; and a record percentage of the unemployed have been jobless for more than six months.

Yet the deficit hawks' rejoinder is essentially: So what? Government spending is out of control. We need to cut back now. The problem with this ostensible solution is... it conflates short-term deficits needed to stanch the recession with long-term issues of fiscal sustainability... it calculates the dollar cost of the stimulus but neglects to factor in the dollar benefit from, for instance, keeping hundreds of thousands of teachers, police and firefighters on the job....

Those who oppose the jobs bills in the House and Senate this week should be compelled to answer some questions, starting with: Absent more stimulus, what do they see as the plausible engine of economic recovery? What effect will laying off as many as 300,000 teachers have on the education of American children? And, more elementally, don't they know there's a recession on?

Urk!!!!

This is not good. Not good at all. The "yell 'fire, fire!' in Noah's flood" wing of the Federal Reserve ought to be a lot smaller and quieter than this right now.

Annie Lowrey:

Three Fed Presidents Recommend Interest-Rate Increase: Today, the Federal Reserve released the minutes of its Board of Governors meetings to discuss the United States’ monetary policy in April. In February, all twelve Federal Reserve regional bank presidents requested to keep the primary credit rate at 0.75 percent.... In mid-April, the heads of the Kansas City, St. Louis and Dallas banks all voted to establish a rate of 1 percent...

The Flight to Quality: Project Syndicate

The Flight to Quality - Project Syndicate: BERKELEY – In late May, the yield to maturity of the 30-year United States Treasury bond was 4.07% per year – down a full half a percentage point since the start of the month. That means that a 30-year Treasury bond had jumped in price by more than 15%. So a marginal investor was willing to pay more than 15% more cash and more than 30% more equities for US Treasury bonds at the end of the month than at the beginning. This signals a remarkable shift in relative demand for high-quality and liquid financial assets – an extraordinary rise in market-wide excess demand for such assets.

Why does this matter? Because, as economist John Stuart Mill wrote in the first half of the nineteenth century, excess demand for cash (or for some broader range of high-quality and liquid assets) is excess supply of everything else. What economists three generations later were to call Walras’s Law is the principle that any market in which people are planning to buy more than is for sale must be counterbalanced by a market or markets in which people are planning to buy less.

We have seen this principle in action since the early fall of 2007, as growing excess demand for safe, liquid, high-quality financial assets has carried with it growing excess supply for the goods and services that are the products of ongoing human labor. This is true to such an extent that there is now a 10% gap between the global economy’s current output and what it would be producing if it were in its normal relatively healthy state of near-balance.

And global financial markets are now telling us that this excess demand for safe, liquid, high-quality financial assets has just gotten bigger.

To some small degree, a change in investor sentiment has induced the rise in excess demand for such assets. After all, we can assume that the animal spirits of investors and financiers has been further depressed as a psychological reaction to the exuberant belief just a few years ago in the powers of financial engineering.

But most of the recent shift has come not from an increase in demand for safe, liquid, high-quality financial assets, but from a decrease in supply: six months ago, bonds issued by the governments of southern Europe were regarded as among the high-quality assets in the world economy that one could safely and securely hold; now they are not.

The argument six months ago in favor of those bonds seemed nearly airtight. Yes, the liabilities of southern Europe’s private sector were speculative and potentially insecure; but the region was part of the eurozone, and thus its governments’ debts were backed by the European Central Bank, which in turn was backed by the governments of France and Germany, which in turn were backed by the willingness of French and German taxpayers to pay for the long-run project of closer European integration. Neither the French nor the Germans, obviously, want to contemplate any possibility of a return to the days when every generation they would kill each other over the question of which language should be spoken by the mayor of Strasbourg (or is it Strassburg?).

Now things are not so certain.

When there is excess demand for safe, liquid, high-quality financial assets, the rule for which economic policy to pursue – if, that is, you want to avoid a deeper depression – has been well-established since 1825. If the market wants more safe, high-quality, liquid financial assets, give the market what it wants.

After all, as a social-resource planning mechanism does, a market tells us which things are valuable and thus gives us the signal to make more of them. Markets are now signaling that US Treasury bonds are much more valuable assets than they were a month ago. So those governments whose credit is still unshaken and whose assets are still the benchmarks of quality for the world economy should be creating a lot more of them.

Creditworthy governments around the world can create more safe, liquid, high-quality financial assets through a number of channels. They can spend more or tax less and borrow the difference. They can guarantee the debt of private-sector entities, thus transforming now-risky leaden assets back into golden ones. Their central banks can borrow and use the money to buy up some of the flood of risky assets in the market.

Which of these steps should the world’s creditworthy governments take in response to the asset-price movements of May? All of them, because we really are not sure which would be the most effective and efficient at the task of draining excess demand for high-quality assets.

How much should they do? As long as there is a clear global excess supply of goods and services – as long as unemployment remains highly elevated and inflation rates are falling – they are not doing enough. And the gap between what they should be doing and what they are doing grew markedly in May.

This isn’t rocket science or capping deep-sea oil blowouts. These are problems that we have long known how to solve.

Forecasting U.S. Stock Returns

Neil Hume of FT Alphaville directs us to Jim Reid of Deutsche Bank:

A century-long look at the US equity market: If you are a market historian, you have to decide whether the 1900-[to]-end-1994 best fit line was vaguely the correct basis for a long-term trend of equity prices or whether you believe something changed fundamentally in the mid-1990s in a positive manner (earnings?, the economy?, EM?) that permanently elevated the price level of Western equity markets. If you don’t believe that anything really changed from the mid-1990s (maybe only debt levels?) then the Dow at 10,000 still historically looks a bit stretched....

What we would say is that after the 1929 crash, markets took until 1954 to get back to their pre-crash levels. Also after the 1966 peak (Dow 995 in Feb 1966), the Dow only permanently crossed 1000 for the last time on 17th December 1982. So the market hovered around 1000 for nearly 17 years. This is stunning given its a period in which the price level (as determined by CPI) tripled in the US. Given that Western equity markets were approaching their most overvalued point in history when the Dow first traded through 10,000, one would have to bet against history to suggest that we can permanently leave current levels behind anytime soon. Interestingly in a high inflation world the Dow crossed 900 97 times between 1965 and 1982, and crossed 1000 65 times between 1972 and 1982. Since 1999 we haven’t had inflation to ease the adjustment as the overall CPI price level is only a third higher...

Five comments:

1. Yes, the evidence that the market centers on round numbers for the DJIA (and not for other indices) for generations is strongly suggestive, albeit not fully compelling.

2. In the early 1990s dividend yields fell substantially as firms began pumping more money out to shareholders via share buy-backs. You would expect that to lift the trend of the DJIA even without any other changes.

3. The late 1980s-early 1990s were also the period where it became apparent that there had been a shift not just in the post-tax but in the pre-tax distribution of income in the U.S. away from labor and toward capital. You would expect that to lift the trend of the DJIA even without any other changes.

4. The 1990s were also the period that saw the North Atlantic core lose its effective monopoly over the location of high-value manufacturing. Even without any shifts in the U.S. income distribution, the ability to have your stuff made by low-wage workers in Mumbai or Shenzhen would be likely to lift profits and thus the trend in the DJIA even without any other changes.

5. It's hard to see there being a large, permanent wedge between average real stock returns on the one hand and average earnings yields on the other. With trend earnings on the DJIA somewhere around 600 and with Treasury rates as low as they are, it's hard to argue that U.S. stocks will be outperformed by other asset classes over any even moderately long horizon.

The Gulf of Campeche, Ixtoc-1, and Deepwater Horizon

Leila Landress:

Relief-Well Plan Was Used in Worst Blowout Ever, Took 9 Months: The worst blowout on record took about nine months to cap using two relief wells.... In 1979, Ixtoc-1, an exploratory well owned by Petroleos Mexicanos in 150 feet of water, blew out 600 miles (966 kilometers) south of Texas in Mexico’s Bay of Campeche and spilled an estimated 3.3 million barrels into the Gulf, according to the Royal Swedish Academy of Sciences and the American Petroleum Institute.... The oil and natural gas blowing out of Ixtoc-1 ignited, causing the platform to catch fire.... Two wells were drilled to relieve pressure from Ixtoc-1 so that it could be capped, according to NOAA....

The differences between the two spills are more worrisome than the similarities, said Boehm, who is now principal scientist at Exponent.... The oil from Ixtoc-1 took two months to be transported, which changed the composition of the crude and made it less toxic, Boehm said. The length of time allowed U.S. responders to prepare for the spill. The composition of the oil from the BP well will be different, Boehm said. “The oil has been out there eight days now,” he said. “The more it weathers, the less toxic it is.”

About 71,500 barrels of oil from Ixtoc-1 affected 162 miles of U.S. beaches and more than 10,000 cubic yards of oiled material were removed, according to the Industry Technical Advisory Committee, a U.K.-based oil-spill organization of technical experts. The U.S. Fish and Wildlife Service used volunteers for handling oiled birds and beach patrols on South Padre Island. “This will be a lot worse,” said Miles Hayes, a coastal geologist with Research Planning Inc. in Columbia, South Carolina, who studied the Ixtoc-1 spill. The oil from the Ixtoc-1 spill hit the 90-miles of Texas barrier islands, protecting the environmentally fragile marsh lands from the spill, Hayes said in a phone interview. “You want to keep the oil from getting past the barrier islands,” Hayes said. “After Ixtoc, in Texas it wasn’t too tough because we had only three inlets. Louisiana is a different scenario.”

Deepwater Horizon is currently at perhaps a quarter of Ixtoc-1...

New York Times FAIL

Why oh why can't we have a better press corps?

The New York Times gives space to David Einhorn to... tell lies. Dean Baker observes:

Looniness in the Cause of Deficit Reduction at the NYT: David Einhorn.... Einhorn is a bit more knowledgeable about basic economics than many of those who worry that the United States will be unable to find investors to buy its debt. Since he has heard of the Federal Reserve Board, he recognizes that the actual concern should be inflation, not insolvency.... However, since one would have to struggle to find any evidence of inflationary pressures in recent economic data, Einhorn chooses to invent his own evidence.... The main source of the difference between the government statistics dismissed by Einhorn and the "Shadow Government Statistics" he cites is due to the inclusion of asset prices, like house prices, in the shadow statistics. There are good reasons for excluding asset prices from measures of inflation.... Einhorn also complains that his assessment of the understatement of inflation:

doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)

Actually, the government has a wide variety of inflation measures, many of which do include the full weight of health care expenditures. They all show the same thing as the consumer price index: inflation is very low and falling. In short, Mr. Einhorn either has no clue about government data, or he is deliberately trying to mislead readers...

Why Oh Why Can't We Have a Better Press Corps?

Jacob Weisberg, four years ago:

A similar pattern describes his views on gay rights. I remember McCain telling me during an interview in the mid-1990s about how a gay member of his staff sensitized him to the issue. When he ran for president in 2000, he won the endorsement of the Log Cabin Republicans. The Advocate calls him “notoriously pro-gay.” In 2004, McCain was one of only six Republican senators to vote against the Federal Marriage Amendment, and after a Massachusetts court affirmed gay unions, he took the position that states could decide their own marriage laws without federal help. McCain has lately fallen back into formation, saluting an obnoxious Arizona bill that would deny benefits to unmarried couples. Gay leaders in his state, who know better than to take such maneuvering seriously, have already let him off the hook. The rest of us should be sophisticated enough to recognize that politics is the art of the possible, and that what’s in McCain’s heart on this subject (as President Bush might say) is not a viable stance for any presidential candidate just yet, especially a Republican one...

John McCain today:

Armed Services ranking member John McCain said Thursday that he would “without a doubt” support a filibuster if the bill goes to the floor with repeal language. “I’ll do everything in my power,” the Arizona Republican said, citing letters from the four service chiefs urging Congress not to act before a Pentagon review of the policy is complete. “I’m going to do everything I can...”

Scott Lemieux calls Jacob Weisberg another example of "media incompetence about McCain":

Of Course They Are!: Meanwhile, speaking of media incompetence about McCain, I offer the following juxtaposition. John McCain, in real life.... John McCain, in the dreamlife of a certain kind of center-left pundit.... But don’t kid yourself, one of these days politics will end, and What’s In McCain’s Heart will finally emerge!

When Jacob Weisberg attacks people as naive for saying that perhaps McCain believes what he says:

Weisberg: McCain's not really a conservative: John McCain, whom everyone expects to run for president in 2008, is pandering to the Republican base in a way that is politically shrewd but disappointing to his nonconservative admirers.... Most liberal commentators take McCain's love fest with the neo-Calvinists at face value, arguing that he's finally revealing his true colors.... To the American Prospect, McCain is Barry Goldwater's true heir. A couple of weeks ago in the New York Times, Paul Krugman wrote, "The bottom line is that Mr. McCain isn't a moderate; he's a man of the hard right." But the literal-minded left has McCain all wrong. He's trying to win over enough of his party's conservative base to win, for sure. But this is a stratagem—the only one, in fact, that gives him a shot at surviving a Republican presidential primary. Discount his repositioning a bit, and McCain looks like the same unconventional character who emerged during the Clinton years: a social progressive, a fiscal conservative, and a military hawk. Should he triumph in the primaries, we can expect this more appealing John McCain to come roaring back...

It's not "incompetence" that Weisberg is exhibiting. It's something else...

Erwin Rommel Liveblogs World War II: May 27, 1940

Erwin Rommel: May 27, 1940:

Dearest Lu--

I'm very well. We're busy encircling the British and French in Lille at the moment. I'm taking part from the southwest. I'm all right for washing, etc. Guenther takes good care of that. I've taken a lot of photographs.

links for 2010-05-26

• TBogg: Shorter Ross Douthat: Separate checks, please
  SRD: "You know that guy who came into the restaurant with us and then started flipping over tables, throwing food, screaming at the other diners and smearing his feces on the walls? Yeah. That guy. We’ve never seen him before."
• Oliver Kamm on Eric Hobsbawm: It takes an intellectual to find excuses for Stalinism
  OK: "In his memoir he accords a fleeting mention to a pamphlet he wrote at Cambridge with the future literary critic, Raymond Williams, on the Russo-Finnish War. Hobsbawm laments: “Alas, (the pamphlet) has been lost in the alarums and excursions of the century. I have been unable to rediscover a copy.” This is just as well, because the Russo-Finnish War consisted in Stalin’s invasion of Finland two months after his non-aggression pact with Hitler. As loyal Communists, Hobsbawm and Williams supported both the invasion and the pact."
• aapl market cap - Wolfram|Alpha
• Ryan Powers: Obama, Corker, and Bipartisanship
  RP: "Alan Abramowitz documents.... “Rather than indicating that there is a ‘disconnect’ between politicians and voters, polarization in Congress actually indicates that Democratic and Republican members are accurately reflecting the views of the voters who elected them.” He also suggests that the effect of this is more obvious in the Senate than in the House due to reliance on unanimous consent and the filibuster. It seems that the sooner Obama et al recognize this political reality and learn to work with in it, the better. Recent weeks suggest, however, that the President is getting there."
• Ben Armbruster: GOP won’t allow ideas to raise taxes on new site, but Hitler references and anti-Hispanic rhetoric are ok.
• Sound Notes
• Narayana Kocherlakota: Modern Macroeconomic Models as Tools for Economic Policy
  NK: "I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast- evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown."
• Harold Meyerson: Deficit hawks ignore the R-word
  HM: "Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don't really believe we're still in recession. Or maybe, they just don't care. How else to explain the continual harping on the deficit by editorialists, centrist think tanks and the like when the nation is still enmeshed in the most serious economic downturn since the 1930s? How else to understand the growing opposition to the jobs bills... when nobody has identified any... engine... save countercyclical public investment?... Forty-seven percent... said they were concerned with the economy and jobs, while just 15 percent... over the deficit and spending. Eighty-one percent... thought it "very important" for Congress to address the jobs situation -- more than for any other topic. "There is no significant difference across party lines," Pew reported. Beneath these numbers lies broad public anxiety over job loss and downward mobility."
• Ricardo Caballero and Francesco Giavazzi: Long live the euro – at parity with the dollar
• Duncan Black; Inscrutable
  DB: "I'm not quite sure which is worse, the "people in other countries believe crazy things" genre or the "isn't it weird that people in other countries get upset when soldiers enter their homes and point weapons at them" genre. But, anyway, good thing that people in other countries don't think crazy things like the US has WMD!!!"
• John Heileman on FinReg
  JH: "Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.’”
• Martin Feldstein: Chronicle of a Currency Crisis Foretold
  MF: "Despite its problems, the euro is very likely to survive the current crisis. But not all of the eurozone’s current members may be there a year from now. In retrospect, it is clear that some of the countries were allowed to join prematurely, when they still had massive budget deficits and high debt-to-GDP ratios. Moreover, some countries’ industrial composition and low rates of productivity growth mean that a fixed exchange rate would doom them to increasingly large trade deficits. For the rest, some mechanism of enhanced surveillance and control may be adopted to limit future fiscal deficits. But, even with a smaller group of member countries and some changes in budget procedures, the fundamental problems of forcing disparate countries to live with a single monetary policy and a single exchange rate will remain."
• David Kurtz: Political Consulting 101
  DK: "Do NOT have written communications with the alleged lover of your candidate."
• Herbert Feis: Europe, the world's banker, 1870-1914
• Paul Krugman: Reasons To Despair
  PK: "For some reason today’s papers made me feel especially grim about the prospects for economic recovery... growing GDP, but mass unemployment still the law of the land, with only tiny progress so far. What can be done? Well, we could have more fiscal stimulus — but Congress is balking even at the idea of extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low! We could get tough with China.... Geithner went to China, got nothing .. and pronounced himself very pleased. We could do more through monetary policy... get central banks to commit to a higher inflation target. But the Fed and the Bank of Japan say no, because … well, that’s not what central bankers do.... [S]hibboleths and conventional wisdom are blocking all routes out of this slump. And I worry that policy makers will just sit there, for years and years, all the while congratulating themselves on the soundness of their policies."
• Jay WInter, ed.: Capital Cities at War: Paris, London, Berlin 1914-1919
• Harold Wilensky: The welfare state and equality: structural and ideological roots of public expenditures
• James Fallows on the New York Times and Richard Blumenthal
  JF: "his Atlantic item, by Richard Blumenthal's long-time friend Ben Heineman Jr., seems to me to do the fairest job of weighing the overall evidence pro and con. To me it's a more convincing presentation that that of the NYT's ombudsman Clark Hoyt, whom I generally agree with and admire but who in this case seemed (to me) defensive on the paper's behalf. We'll see how the evidence emerges."

Why It Would Be Good for America If the Republican Party Simply Closed Up Shop Today

Via Ben Armbruster:

NEWT GINGRICH: I said at that time that I thought Henry Paulson should not have been Treasury Secretary. I thought it was totally wrong for the former chairman of Goldman Sachs to be funneling billions of dollars from the taxpayers to Goldman Sachs. And I have said over and over, you can’t have capitalism on the way up and socialism on the way down because you get socialism both ways...

Versus:

NEWT GINGRICH: I think that [George W. Bush] was very sincere in his desire to protect America. I think he was very sincere in his basic conservative social values. I think he began his Administration with a real commitment on lower taxes and more economic growth, precisely in the Reagan model. And I think that late in his Administration that he was frankly worn down by the bureaucracies in Washington.... And then I think when the crisis hit in the fall of 2008 everybody panicked. Candidly, there was a period there when you had the Federal Reserve chairman and the Secretary of the Treasury saying, “If we don’t do X, Y and Z, the entire world economy is going to collapse.” That’s pretty good grounds for stopping and trying to do something. It’s easy for people to say, “Well, I’d rather have risked a world depression.” But most of the people I talked to in the private sector at the time were really worried about the system freezing up totally...

The noteworthy thing is that Gingrich says these contradictory things on the same day, and he says them in the same interview.

Deepwater Horizon Live Video Link

Live video link from the ROV monitoring the damaged riser

Franklin Delano Roosevelt Liveblogs World War II: May 26, 1940

FDR:

Fireside Chat 15: On National Defense (May 26, 1940): There are many among us who in the past closed their eyes to events abroad --because they believed in utter good faith what some of their fellow Americans told them -- that what was taking place in Europe was none of our business; that no matter what happened over there, the United States could always pursue its peaceful and unique course in the world.

There are many among us who closed their eyes, from lack of interest or lack of knowledge; honestly and sincerely thinking that the many hundreds of miles of salt water made the American Hemisphere so remote that the people of North and Central and South America could go on living in the midst of their vast resources without reference to, or danger from, other Continents of the world.

There are some among us who were persuaded by minority groups that we could maintain our physical safety by retiring within our continental boundaries -- the Atlantic on the east, the Pacific on the west, Canada on the north and Mexico on the south. I illustrated the futility -- the impossibility -- of that idea in my Message to the Congress last week. Obviously, a defense policy based on that is merely to invite future attack.

And, finally, there are a few among us who have deliberately and consciously closed their eyes because they were determined to be opposed to their government, its foreign policy and every other policy, to be partisan, and to believe that anything that the Government did was wholly wrong.

To those who have closed their eyes for any of these many reasons, to those who would not admit the possibility of the approaching storm -- to all of them the past two weeks have meant the shattering of many illusions.

They have lost the illusion that we are remote and isolated and, therefore, secure against the dangers from which no other land is free.

In some quarters, with this rude awakening has come fear, fear bordering on panic. It is said that we are defenseless. It is whispered by some that, only by abandoning our freedom, our ideals, our way of life, can we build our defenses adequately, can we match the strength of the aggressors.

I did not share those illusions. I do not share these fears...

links for 2010-05-25

• John Holbo: Conservative Principles: Liberaltarian Afterthoughts
  JH: "In response to my request for him to explain what conservative-libertarian principle it is that Goldwater (read: Any Good, Principled Conservative) should have bent, and why, to accommodate the Civil Rights Act, [Conor] Friedersdorf quotes quite a bit from Brink Lindsay and a bit more from Julian Sanchez. This is all fine.... If the conscience of a conservative should be, ideally, the conscience of a liberaltarian.... the conscience of a Lindsayan liberaltarian is pretty darn liberal – with some policy disputes on top... liberals tend to adopt self-defeating policies. When Lindsay stands with liberals it is mostly on philosophical grounds. This point fits in with the one I made in this post, about different sorts of libertarians: basically liberal or basically feudal. If you are a feudal libertarian, you really shouldn’t have a problem with Jim Crow, in principle. If you are a liberal libertarian, you should..."
• MIchael Berube: Rhetorical Styles of the Left
  MB: "In the debate over how to try Khalid Sheik Mohammed, I see three options: (1) Denounce the civilian trials praised by Wright, on the Liz Cheney Rationale that they allowed 9/11 to happen; (2) Agree with Wright that civilian trials for suspected terrorists are the right way to proceed, and that they would shore up the credibility and integrity of the American system of justice; (3) Insist that the American system of justice never had credibility or integrity in the first place. Once again with feeling, I do not understand how (3) is an effective argument for anyone who seeks a civilian trial for Khalid Sheik Mohammed. For the record, I... expect... Obama... to cave.... [M]y wing of the left, I think, will prefer to say “the Obama Administration has given in to the voices of fear and authoritarianism; this is a travesty, for there was a time, not long ago, when the United States responded to terrorism more sanely and lawfully.”"
• Ed Kilgore: FiveThirtyEight: Politics Done Right: Move Right and Win, Revisited
  EK: "Emory University political scientist Alan Abramowitz... strong empirical support for the "median voter theorem."... "For every additional one point increase in conservatism, Republican incumbents lost an additional three percentage points in support relative to their party's presidential candidate."... There are abundant reasons other than candidate electibility for conservatives to urge the GOP to become more conservative, with the most obvious being the desire to achieve conservative policy goals.... But a clear-eyed view of the political marketplace remains essential, and in a representative democracy, it's also a matter of principle to care about what a majority of actual voters want, if not each minute, then over time. And let's face it, there's really no recent precedent for a major political party reacting to two consecutive bad election cycles by becoming more ideologically rigid." "
• Sean Carroll: Remarkable Creatures - Tracking the Ancestry of Corn Back 9,000 Years
  SC: "[B]otanists led by my colleague John Doebley... 60 samples of teosinte... all maize was genetically most similar to a teosinte type from the tropical Central Balsas River Valley of southern Mexico... genetic distance between modern maize and Balsas teosinte, they estimated that domestication occurred about 9,000 years ago. These genetic discoveries inspired recent archeological excavations of the Balsas region.... In the Xihuatoxtla shelter, they discovered an array of stone milling tools with maize residue on them. The oldest tools were found in a layer of deposits that were 8,700 years old. This is the earliest physical evidence of maize use... what it tells us about the capabilities of agriculturalists... small groups and shifting their settlements seasonally... transform a grass with many inconvenient, unwanted features into a high-yielding, easily harvested food crop... in many stages... as many different, independent characteristics of the plant were modified."
• Gauti Eggertson: What Fiscal Policy Is Effective at Zero Interest Rates? (pdf)
• Adam Posen: The Realities and Relevance of Japan’s Great Recession: Neither Ran nor Rashomon (pdf)
• Felix Salmon: NYT side door opens up again
  FS: "Peter Kafka actually bothered to ask the NYT about how traffic from side doors (as opposed to the “front door”, which is the home page) would be treated once the paywall goes up. And he got a pretty unambiguous answer... the paywall is more of a navigation fee than an FT-style meter. All paywalls have workarounds, and it’s silly to spend a lot of effort trying to stop the determined from reading your content for free. The NYT paywall instead targets the loyal readers who go straight to the site. Of course, there are consequences to that decision. For one thing, it shrinks the universe of potential subscribers, and therefore the amount of revenue the paywall scheme might realistically make. And more invidiously, it places the NYT’s own blogs at a huge disadvantage compared to everybody else’s. I can link to an NYT article knowing that my readers will always be able to follow the link, but Paul Krugman can’t. Which isn’t going to make him very happy."
• Felix Salmon: Those panicky markets
  FS: "European bourses... started off low and basically haven’t moved... FTSE 100 is now pretty definitively below 5,000 for the first time since September. There’s the flight-to-Germany... Libor... looking ugly... the euro... at 1.22. And... the proposed German short-selling ban. All of which makes the downward lurch in US stock prices seem pretty reasonable.... Stocks are naturally volatile thing... you might want to have another look at the spreadsheet that Frank Tantillo and I put together.... The S&P 500 is down 2.8% today: another day like this, and it’ll break back down into triple digits. Just remember, though, that it was not all that long ago the S&P was trading below 700. As ever, if you’re invested in stocks, make sure you have a strong stomach. And expect a lot more volatility going forwards."
• Ron Hera: Forget About Housing, The The Real Cause Of The Crisis Was OTC Derivatives
• Richard Epstein: Rand Paul's Wrong Answer

Information Wants to Be Forced to Circle Robin Hood's Barn...

Felix Salmon:

NYT side door opens up again: Peter Kafka actually bothered to ask the NYT about how traffic from side doors (as opposed to the “front door”, which is the home page) would be treated once the paywall goes up. And he got a pretty unambiguous answer:

Readers that are referred from third party sites such as blogs will be able to access that content without hitting their limit, enabling NYTimes.com to continue being a part of the open web.*

That’s great news, and it confirms that the paywall is more of a navigation fee than an FT-style meter. All paywalls have workarounds, and it’s silly to spend a lot of effort trying to stop the determined from reading your content for free. The NYT paywall instead targets the loyal readers who go straight to the site. Of course, there are consequences to that decision. For one thing, it shrinks the universe of potential subscribers, and therefore the amount of revenue the paywall scheme might realistically make. And more invidiously, it places the NYT’s own blogs at a huge disadvantage compared to everybody else’s. I can link to an NYT article knowing that my readers will always be able to follow the link, but Paul Krugman can’t. Which isn’t going to make him very happy...

But Felix can link to whateve, and Paul can then link to Felix. More link love for everybody...

Our Way of Life Depends on Proper Action by the Federal Government

Bobby "No Volcano Monitoring Wanted Here!" Jindal, Governor of Louisiana, syas that our way of life depends on the federal government.

Nice to know

Blue Texan:

Bobby Jindal: “Our Way of Life Depends” on Federal Government: [I]t wasn’t so long ago that [Jindal said that] “Washington” and “big government” was the root of all our problems.

In the end, it comes down to an honest and fundamental disagreement about the proper role of government. We oppose the national Democrats’ view that says the way to strengthen our country is to increase dependence on government. We believe the way to strengthen our country is to restrain spending in Washington and empower individuals and small businesses to grow our economy and create jobs.

And now?

“We have been frustrated with the disjointed effort to date that has too often meant too little, too late to stop the oil from hitting our coast,” Louisiana Gov. Bobby Jindal said during a Monday news conference at Port Fourchon with Homeland Security Secretary Janet Napolitano and Interior Secretary Ken Salazar. “BP is the responsible party, but we need the federal government to make sure they are held accountable and that they are indeed responsible. Our way of life depends on it,” Jindal said...

Chutzpah from Lexington Books

Amazon.com: Wu Han, Historian: Son of China's Times eBook: Mary G. Mazur: Kindle Store:

Winston Churchill Liveblogs World War II: May 25, 1940

Winston Churchill: May 25, 1940:

Prime Minister to Secretary of State for War and C.I.G.S.: Pray find out who was the officer responsible for sending the order to evacuate Calais yesterday, and by whom this very lukewardm telegram I saw this morning was drafted, in which mention is made of "for the sake of Allied solidarity." This is not the way to encourage men to fight to the end. Are you sure there is no streak of defeatist opinion in the General Staff?