Brad DeLong

links for 2010-09-30

• Procrustrean Economics (Wonkish) - NYTimes.com
• CEA Chair Austan Goolsbee Explains the Tax Cut Fight
• Bill Easterly: World Bank President starts brawl about development economics research
• Brad Johnson: McCain Has Become A Climate Conspiracy Theorist
• Barry Eichengreen: From currency warfare to lasting peace
• Depression Economics Needs to Become a Regular Part Macroeconomics - CBS MoneyWatch.com

When Speech Recognition Software Attacks!

What he said:

Hi Brad, it's Mike. I had a lunchtime appointment go long and I am bolting back to Evans. I'll be there shortly. See you soon. Thanks.

What Google Voice heard:

That it's mike. I had a list of women go a long and I am old thing. Back evidence. I'll be there for me to you soon. Thanks.

The interesting thing is that it got 17 out of the 26 words right--but those 17 words convey almost none of the information in the message...

Henry Farrell Continues His War on Rubber Tomatoes...

Henry Farrell:

How Do You Like Those Tomatoes? — Crooked Timber: Tim Lee takes exception to my post of a couple of weeks ago on James Scott and Friedrich von Hayek, suggesting that I construct a ‘curious straw-man’ of Hayek’s views. Unfortunately, he completely misreads the post in question. Nor – on serious investigation – do his own claims actually stand up.... This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning--direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly....

Hayek is claiming that markets are superior to planning (which must necessarily be done through a single centralized planner) or organized monopoly (which no-one actually likes). One could perhaps defend Hayek by arguing that there were indeed many people who argued for centralized planning at the time he wrote this essay. But one would then have to contend with the notorious contortions he got into about how Labour’s efforts to introduce planning into the economy would ineluctably lead to totalitarianism. The straw man is baked into the theoretical cake (which as a result tastes pretty godawful)....

When Scott says:

It seems to me that large-scale exchange and trade in any commodities at all require a certain level of standardization.

and later refers to Polanyi’s The Great Transformation as ‘the most important book I’ve ever read.’ he seems to me to be building on Polanyi’s crucial distinction between small scale and large scale markets. Roughly speaking, Polanyi sees local markets as fine, because they are ‘embedded’ in society, and hence do not threaten it. But when long distance trade first becomes unmoored from societies, and then to restructure them along its own principles of order, we start to get into trouble.

Scott’s specific twist on Polanyi’s thought is to identify standardization as a key facet of this unmooring. Local markets are embedded in local structures of knowledge, and rely upon them extensively – people know that Giovanni’s tomatoes usually taste better than Luigi’s, even if they are less regular and have more surface blemishes. International markets require technical standards – in order to buy and sell tomatoes, one has to be able to categorize them as Grade II (with certain defined attributes in terms of color, size, consistency etc), Grade III etc. Scott argues that there is a real and fundamental loss of knowledge that occurs in the standardization process, regardless of whether the standards are imposed by states are by markets. Indeed, he sees the two as going hand-in-hand. Brad DeLong (like Lee) made much of Scott’s critique of the state, but failed to observe how intricately this was linked to a critique of the market....

Hence – when Lee suggests that:

Although Scott specifically declines to endorse Hayek’s policy agenda, I think Seeing Like a State is squarely within the Hayekian intellectual tradition.

he is simply wrong, unless (contrary to what Lee and I both believe), Hayek has written somewhere within his voluminous opus on the problematic tradeoffs that markets face when they become unmoored from local society. This distinction is, I am pretty sure, an inherent part of Scott’s intellectual project.

Lee makes a positive Hayekian case on behalf of standards – this too, it seems to me, is wrong.... The key problem is in his (again standard Hayekian) defense of the processes through which certain rules come to dominate. What makes decentralized economic institutions powerful isn’t standardization but the possibility for competition among alternative standardization schemes. Rubber tomatoes create an entrepreneurial opportunity for firms to establish a more exacting tomato standard and deliver tastier tomatoes to their customers. In real markets, you see competition not only among individual firms but among groups of firms using alternative standards. Markets gradually converge on the standards that are best at transmitting relevant information and discarding irrelevant information. In contrast, when standards are set by the state, or by private firms who have been granted de facto standard-setting authority by government regulations, there is no opportunity for this kind of decentralized experimentation. The problem with this claim is that it relies (as Hayek relies) on quite heroic assumptions about the underlying conditions under which competition occurs.... Perhaps the very particular standards that Lee points to are different. He claims:

The web browsers we all used to retrieve this article conform to a variety of technical standards, including TCP/IP, HTTP, and HTML. … This suite of now-dominant protocols emerged from an intense process of inter-standard competition during the 1980s and 1990s. This competitive standardization process is not a market process—accessing a web page is not a financial transaction—but it is very much a Hayekian one.

Or again, perhaps not, if notorious libertarian-hater Dan Drezner is to be believed. In a detailed study of the adoption of TCP/IP, Drezner finds that state power was the key factor determining which standard won out.... But perhaps, in the absence of government power, we might expect Lee’s arguments to work? Almost certainly not. Hayek-style evolutionary arguments really only work when actors are indifferent between coordination outcomes (i.e. they want to coordinate, but do not care what outcome they coordinate upon).... This applies in spades to Lee’s other example of Hayek in action – the HTML standard. Anyone who has had to optimize web sites for various browsers will be familiar with the fact that different browsers have different ways of interpreting what is purportedly the same standard. And anyone who bothers to look into the politics behind this will be quite aware that Microsoft’s infamous policy of ‘embrace, extend, extinguish’ plays a significant role in this story. Microsoft Word’s .doc standard is an even purer example of how standard-setting processes play out in markets where businesses are competing to set the rules of the game. And if anyone wants to argue that Microsoft Word was an efficient outcome of a competitive process, all I can do is post this image and say: Sir. I refute you thus.

In short then: (1) Lee completely misreads my post. (2) James Scott is not a Hayekian under any reasonable definition of the term Hayekian. (3) Hayekian arguments about evolutionary competition both are implausible in general, and provide a demonstrably bad explanation of how technical standards evolve. (4) And, finally, rubber tomatoes suck. I think that covers everything.

I, by contrast, say that you have to either live in the countryside or live in the city and be really rich to say that rubber tomatoes suck. For those humans who live in the city and are not really rich, rubber tomatoes provide a welcome and tasty and affordable simulacrum of the tomato-eating experience.

When Artificial Intelligence Programs Attack!

GMail gets above itself:

No. I would be happy to email Jeffrey Greenbaum. But this message is not intended for him.

Just because Jeffrey is often a recipient on emails I send to Barry and Christina does not mean that I don't want to email my department chairman...

Obama Personnel Non-Policy: Jonathan Bernstein Pulls His Punches...

He writes:

A plain blog about politics: Two For the Fed: I've mostly thought that Rahm Emanuel has done a good job in many respects, but the appointment process is definitely not one of them, and Obama should keep that in mind when he's putting his new team together.

That won't do it. That doesn't describe the situation. And as I have eaten my wheaties and read Michael Foucault's final Berkeley lectures about parrhesia, I am going to say what needs to be said.

First, a longer quote from Jonathan:

The Senate apparently cut a deal yesterday, approving a long list of executive branch nominations, most notably Janet Yellen and Sarah Raskin to the Fed (but not the third Obama nominee, Peter Diamond).  Presumably in exchange for that, and for GOP co-operation on some technical stuff that would have been a (minor, I think) hassle for the Democrats during the lame duck session, Harry Reid agreed to hold pro forma sessions through October so that Barack Obama cannot do any recess appointments. Brad DeLong's reaction is that "we need a very different Senate."   It's certainly fair to criticize the Senate for taking forever to confirm nominations that are not controversial -- the Fed appointments were approved by voice vote, and the other 52 nominations were by unanimous consent.... The nominations were announced on April 29 of this year, so it took the Senate five months. That's not great...

[B]ut if I recall correctly, two of the openings here go back to the beginning of Obama's presidency... far more of the delay is the responsibility of the president, not the Senate. Moreover, by taking so long to nominate people for executive and judicial positions, the White House is sending a signal about priorities.... Now, granted, part of the reason that nominations are taking so long in the first place is presumably because of how hard they are to confirm.... Still, I put a lot of the blame here on the administration...

To this I have two things to say:

1. Blame is not zero-sum. Jonathan Implies that the blame should be taken off of the Senate and placed on... Rahm Emmanuel. No. It doesn't work that way. Both ends of Pennsylvania Avenue are blameworthy, and should be blamed.

2. The COSSACK WORKS FOR THE CZAR!! THE APPOINTMENTS %^$#@$% SCREW-UPS IN THE OBAMA ADMINISTRATION ARE NOT RAHM EMMANUEL'S FAULT BUT BARACK OBAMA'S. In a sane system of government--a parliamentary system, for example--Obama's failure to take appointments seriously would be proper grounds for his immediate elevation to the House of Lords and exclusion from any and all levers of power. Nobody should accept a senior appointment to the cabinet or the White House staff until Obama names somebody else as Deputy President for Personnel--Chris Edley or Erskine Bowles or John Podesta or whoever--and agrees to rubber-stamp their decisions. If Obama isn't interested in that part of the job, fine: he shouldn't do it. But he needs to let somebody else do it--and do it now, and blaming Rahm for this is not accurate.

Austan Goolsbee on the Tax Cut Fight

What Is This "Demand for Money" of Which You Speak?

If our big macroeconomic problem of deficient demand for currently-produced goods and services were the result of a deficient supply of liquid cash money--the stuff you keep in your pockets and use for clearing and functions as a medium of exchange--then the prices of all alternatives to money would be very low: people would be trying to dump their holdings of other assets to build up their stocks of liquid cash money, and only very low prices of and very high expected rates of return on those alternatives could check that desire. Thus we would expect a downturn caused by a shortage of liquid cash money to be accompanied by very high interest rates on, say, government bonds--which share the safety characteristics of money and serve also as savings vehicles to carry purchasing power forward into the future, but which are not liquid cash media of exchange.

Nevertheless, David Beckworth writes:

Macro and Other Market Musings: Martin Wolf, the Paradox of Thrift, and the Excess Demand for Money: Martin Wolf concludes more borrowing may be just what the economy currently needs.... [His] paradox of thrift idea is really nothing more than another way of saying there is a monetary disequilibrium created by an excess demand for money. And, of course, an excess demand for money is best solved by increasing the quantity of money.  The painful alternative is to let the excess money demand lead to a decline in total current dollar spending  and deflation until money demand equals money supply... the paradox of thrift requires the Fed to be asleep on the job.

Let me explain why the Paradox of Thrift is really just an excess demand for money problem.... [I]ndividual households can save... by cutting back on consumer spending and hoarding  money... by spending income on stocks, bonds, or real estate and... by paying down debt.... [I]ncreas[ing] their holdings of money by cutting back on expenditures... will create an excess demand for it and a painful adjustment process will occur. If, on the other hand, the Fed adjusts the money supply to match the increased money demand then the painful adjustment is avoided.... In the latter two cases where assets are bought and debt is paid down the money is passed on  to the seller of the assets or to the creditor. Here, the only way to generate the painful adjustment is for the seller or creditor--or any other party down the money exchange line--to hoard the money. If the creditor or seller does not hoard the money then  it continues to support spending  and price  stability. All is well. Increased austerity, then, only becomes an economy-wide problem when it leads to an excess demand for money.... The fundamental proposition of monetary theory is that an individual household can adjust its money stock to the amount demanded, but the economy as a whole cannot...

The hole in David's argument is, I think, where he says "the Fed adjusts the money supply" without saying how. Suppose that we have a situation--like we have today--where people are trying to cut back on their expenditure on currently-produced goods and services in order to build up their stocks of safe assets: places where they can park their wealth and be confident it will not melt away when their back is turned. They switch spending away from currently-produced goods and services and try to build up their stocks of safe assets--extremely senior and well-collateralized private bonds, government securities, and liquid cash money. Now suppose that the Federal Reserve increases the money supply by buying government securities for cash. It has altered the supply of money, yes. But it interest rates are already very low on short-term government paper--if the value of money comes not from its liquidity but from its safety--then households and businesses will still feel themselves short of safe assets and still cut back on their spending on currently-produced goods and services and the expansion of the money supply will have no effect on anything. The rise in the money stock will be offset by a fall in velocity. The transactions-fueling balances of the economy will not change because the extra money created by the Federal Reserve will be sopped up by an additional precautionary demand for money induced by the fall in the stock of the other safe assets that households and businesses wanted to hold.

So, yes, Beckworth is right in saying that there is an excess demand for money. But he is wrong in saying that the Federal Reserve can resolve it easily by merely "adjust[ing] the money supply. The problem is that--when the underlying problem is that the full-employment planned demand for safe assets is greater than the supply--each increase in the money supply created by open-market operations is offset by an equal increase in money demand as people who used to hold government bonds as their safe assets find that they have been taken away and increase their demand for liquid cash money to hold as a safe asset instead.

Increasing the money supply can help--but only if the Federal Reserve does it without its policies keeping the supply of safe assets constant. Print up some extra cash and have the government spend it. Drop extra cash from helicopters. Have the government spend and. by borrowing to finance it, create additional safe assets in the form of additional government debt. Guarantee private bonds and make them safe. Conduct open market operations not in short-term safe Treasuries but in other, risky assets and so have your open market operations not hold the economy's stock of safe assets constant but increase it instead.

These are all ways of increasing the money supply or of decreasing the effective demand for money by shifting some of the precautionary demand for money-not-as-liquid-but-as-safe-asset over to newly-created other safe assets.

These are all ways that ought to work, the Lord willing and the creek don't rise.

But to say that the problem is an excess demand for money is, I think, misleading, for it suggests that the standard way of increasing the money stock--open market operations that swap liquid cash for other assets while holding the total stock of safe assets in the economy constant--will also work. And by this point I think we have a bunch of evidence that it does not.

And to describe these other policy moves--printing up some extra cash and having the government spend it; dropping extra cash from helicopters; having the government spend and. by borrowing to finance it, create additional safe assets in the form of additional government debt; guaranteeing private bonds and making them safe; conducting open market operations not in short-term safe Treasuries but in other, risky assets and so having your open market operations not hold the economy's stock of safe assets constant but increase it instead--as "monetary policy" seems likely to me to add to the general confusion. When the excess demand for liquid cash money is itself the result of a spillover from a more fundamental excess of (planned) savings over investment or of (planned) safe asset holdings over supply, standard open market operations that are designed to hold the stock of safe assets and the stock of savings vehicles constant are unlikely to work. And when Federal Reserve monetary expansions do work, it is likely to be because they not only increased the supply of money but more important increased the supply of safe assets or increased the supply of savings vehicles.

The point, I think, is that liquid cash money is not only a medium of exchange but it is also a store of value--a savings vehicle--and a hedge--a place of safety that you hold in your portfolio to satisfy your precautionary demand, and so the transactions demand for money is only part of the whole. But because other assets are stores of value and hedges a well, to focus exclusively on the supply and demand for money is to miss much of the action in times like these.

I am still frustrated that all of this seems so clear to me and is to opaque to so many other smart people. Personally, I blame Olivier Blanchard for making us spend three weeks on Lloyd Metzler's "Wealth, Saving, and the Rate of Interest" in my first year of graduate school...

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UPDATE: Nick Rowe comments on David Beckworth:

Yes! There is no paradox of thrift. There is a paradox of hoarding the medium of exchange. That's because there are two ways to buy more money: sell more other things; buy less other things. One of those two options is always open to the individual, but not to everyone.

The only case where Say's Law is wrong is when there is an excess demand (or supply) of money, the medium of exchange.

Could I make Nick Rowe happy by saying that there is too a "paradox of thrift," in this sense:

When there is an excess of (planned) savings over investment, savers will be unable to find enough bonds to satisfy their demand and will park the excess demand in liquid cash money instead, which they will hoard. They will thus diminish the supply of money available to meet the transactions demand for money and that imbalance creates the excess demand that breaks Say's Law. Thus even though the problem as an excess demand for money, standard open-market operations will not resolve it: they will increase the money supply, yes, but by diminishing the supply of other savings vehicles they will also increase the amount of the money stock not available for transactions purposes because it is being held as a savings (or a safety) vehicle

?

Does that make anything clear, or just deepen the darkness?

Yes, a Lot of Our Current Unemployment Is Cyclical, and Would Melt Away If Demand Were Higher...

Mark Whitehouse:

Employers Aren’t Trying Hard to Hire: Steven Davis of Chicago Booth School of Business, R. Jason Faberman of the Philadelphia Fed and John Haltiwanger of the University of Maryland — take a deep dive into Labor Department data and come up with an estimate of what they call “recruiting intensity,” a measure of employers’ vacancy-filling efforts including advertising, screening and wage offers. Their finding: Employers haven’t been trying as hard as they usually do. Estimates provided by Mr. Davis suggest that over the three months ending July, recruiting intensity was about 12% below the average for the seven years leading up to the recession. Their lack of effort probably accounts for about a quarter of the shortfall in the hiring rate.

In Which Matthew Yglesias Observes That Innumeracy Is an Awful Thing...

Chris Bertram writes:

New Labour and Inequality: Blair, Mandelson, Milburn and the rest of the gang not only failed to achieve Labour’s goals concerning inequality and social justice, they abandoned them, an abandonment summed up in Mandelson’s notorious statement that he was “intensely relaxed” about people at the top becoming “fithy rich”. New Labour, taking their cue from the Clinton Democrats, abandoned the distributive objectives of the left on the basis that the rising prosperity engendered by growth, markets and globalisation would benefit everyone. Well it hasn’t. Personally I think it was never going to, for “spirit-level” type reasons, among others. But anyway, that model ran into the wall of the banking crisis and we’ll shortly see the absolute standard of living of the poorest falling as the deficit gets clawed back at their expense.

And Matthew Yglesias wonders why Chris Bertram cannot add:

I’m always blown away by the level of righteous indignation that British lefties are able to muster about the economic record of the Blair/Brown “New Labour” governments.... [H]ere’s Lane Kenworthy’s chart of income growth by decile.... New Labour had these (presumably finance-driven) gains at the tippy-top but also major progress for the bottom half... [I]t’s quite true that Cameron/Clegg austerity is likely to lead to bad outcomes for the poor, but it’s odd to say that New Labour cardinal sin was that it could “only” stay in power for 12 years.

If anything that point strengthens the case that voting Labour—even New Labour—is crucial to the interests of the British working class....

[I]f anyone has just cause to complain about the New Labour record it’s educated professionals up there in the 70th to 90th percentiles who did better under Thatcher even as they’ve had to watch their classmates move on to riches in finance.

Finally...

At least one year late and many dollars short:

Nominations Confirmed: September 29: These nominees were confirmed by Voice Vote:

Sarah Bloom Raskin, of Maryland, to be a Member of the Board of Governors of the Federal Reserve System for the unexpired term of fourteen years from February 1, 2002

Janet L. Yellen, of California, to be a Member of the Board of Governors of the Federal Reserve System for a term of fourteen years from February 1, 2010

Janet L. Yellen, of California, to be Vice Chairman of the Board of Governors of the Federal Reserve System for a term of four years

We need a very different senate.

links for 2010-09-29

• Photo Gallery: Full Speed Ahead at Hamburg's Port - SPIEGEL ONLINE - News - International
• Riksbank's Svensson Warns Against Rate Rises Amid Housing Boom - Bloomberg
• The European crisis gets quietly worse | Analysis & Opinion |
• Why liberals will be glad to see Rahm Emanuel go. - By David Weigel - Slate Magazine
• Sean Carroll: Aristotle on Household Robots

Today's Additions to the Pile...

Posted via email from delong's posterous

Six Lectures on Depression Economics

EPUB and PDF versions of the first tranche of the fall 2010 lecture notes...

PDF version: 20100929 six lectures.pdf

EPUB version: J. Bradford DeLong, Six Lectures on Depression Economics

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Open publication - Free publishing

Files for September 29 Econ 1 Lecture: Growth Economics: Background

September 29: Growth Economics: Background:

• Slides
• Audio

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Open publication - Free publishing

links for 2010-09-28

• Michel Foucault: Discourse and Truth: the Problematization of Parrhesia
• Faust on Harvard, Hauser, Peretz, and other news | Harvard Magazine

Michel Foucault: Discourse and Truth

Michel Foucault: Discourse and Truth: the Problematization of Parrhesia: 1983 Berkeley Lectures...

Shades of "Hai Rui Reprimands the Emperor"...

"Hash Is Illegal! And Lentil Loaf Ought to Be!"

That was my favorite line from Cyra McFadden's 1974 The Serial. But I had never actually seen Lentil Loaf. Until now:

What Paul Krugman Says...

PK:

Structural Problems, Not Structural Unemployment: Maxine Udall responds to my writing about structural unemployment and the absence thereof by arguing that the US economy probably does have some major structural problems. She’s right, of course — but there’s no contradiction between arguing that structural unemployment has very little to do with the sharp rise over the past three years, and arguing that the economy was badly distorted even in 2007. To be fair, Udall seems to get that; but others might not...

Something Totally Batshit Insane Shows Up on Henry Blodget's Clusterstock

Amazing:

Gonzalo Lira: Is Krugman Actually Suggesting War As A Fiscal Solution?

No. Paul is not.

The pile of rubbish grows ever larger...

We Are Number Four!

The National Resource Council http://www.nap.edu/rdp/ put Berkeley Economics at number 12 in 1983 and number 7 in 1995.

We are now in the top 5--even though our ranking in graduate student support, frankly, sucks:

The Bank of England’s Adam Posen Joins the Reanimation Caucus

We have moved beyond mere need for more stimulus to get the recovery on track. The recovery is dead We are now at the stage where what is needed is more: the reanimation of dead tissue.

David Wessel listens to Adam Posen as he joins the reanimation caucus and says: "GIVE THE ECONOMY... LIFE!!!":

Bank of England’s Posen: Central Banks Should Do More — A Lot More: Adam Posen, an American who sits on the Bank of England’s Monetary Policy Committee, is no on-the-one-hand-this/on-the-other-hand-that economist.  In a speech at the Chamber of Commerce in Hull today, Posen made the case that the world’s central banks — not only in the U.K. — urgently need to pursue more aggressive bond-buying to rescue the world economy from stagnation that clouds the future as well as the present.

Along the way, he adds a few new metaphors to the debate over central banking: “Fear of looking ineffective should not be a deterrent to doing the right thing," he said:

When facing a worsening situation, you work with the tools you have, whether you’re a central bank in the aftermath of a financial crisis, or someone stranded on the road with a car problem when night is falling. And you try to get help. In every major country, actual output has fallen so much versus where trend growth would have put us, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation...

Despite a 3.1% increase in consumer prices over the past 12 months in the U.K., Posen said that “if price stability is at risk over the medium-term, meaning over the two- to three-year time-horizon for the Monetary Policy Committee’s decisions, it is on the downside.”

The risks posed by doing too little monetary easing far exceed risks posed by doing too much, he argued, making a case for looking beyond the economic metrics:

There are… some very serious risks if we make policy errors by tightening prematurely, or even if we loosen insufficiently. Those risks are not primarily the potential for a double-dip recession or even of temporary measured deflation. While bad, those situations would still be within the range of short-term cyclical developments, and could be weighed against simple inflationary pressures from monetary policy trying to stimulate too much. The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy’s productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them.

Posen, a Harvard Ph.D. economist who maintains a perch at the Peterson Institute for International Economics, a Washington think tank, said the only central bank weapon with sufficient oomph is likely to be more “large scale asset purchases,” or LSAP, another term for “quantitative easing.” Although he suggests the Bank of England buy more gilts, or U.K. government bonds, he expressed interest in purchasing corporate or other private bonds as well.

Posen expressed impatience with central bankers around the world who would rather wait and gauge the impact of the steps they have taken already.

We will only know we will have done enough with QE [quantitative easing] or other monetary stimulus when we have clear indications that our policies are moving the desired variables — market interest rates, wages, output, employment, and inflation expectations — sufficiently and in the right directions on a sustained basis. I do not think that is not enough for a central bank to say, ‘Look, we expanded our balance sheet more than any time in history,’ or ‘we did things we never did before,’ and argue that therefore we must have done a lot, if not too much (not that the Bank of England has done so). In my opinion, that is backwards logic. It would be like saying ‘that fire must be out, because we’ve already pumped more water than for any previous fire we’ve fought,’ or ‘we must have gotten to our destination, because I’ve been driving for hours and we’ve already used a full tank of gas.’

This is a worse fire than any of us have ever seen in our lifetimes, and we are farther from home than we have ever been, and so we cannot judge our progress by how much effort or resources we have already put in,” he continued. “We can only gauge the success of our efforts by our results, and until we achieve those results, there is no danger from our heavy use of the available instruments. This is not a normal situation with finely balanced risks on both sides or with monetary policy able to finely calibrate to an outcome...

OGMB "Slimes" John Cochrane

Hoisted from Comments: Reacting to other comments on Howard Kurtz's inaccurate and mendacious Paul Krugman profile, OGMB writes:

Martin Wolf Understands Economics: If posting an embarrassing old quote counts as sliming, then I'm happy to slime John "Bantam Cock" Cochrane once again...

Most of all, caveat emptor -- these are a matters for buyers and sellers, not regulators. Nobody else gets hurt if you buy a lousy mortgage pool. The government does not need to write a new rule every time someone buys a rotten tomato. Investors will demand the right transparency, complexity, and risk-sharing or monitoring of mortgage pools. That is, unless they get bailed out and learn to count on that instead! The history of the mortgage market is a grand story of bringing credit to people who need it, upon the removal of layer after layer well-intended but counterproductive "protective" regulation. -- John Cochrane, 2007

Crowding Out

Menzie Chinn:

Econbrowser: Portfolio Crowding Out, Illustrated: I have been updating graphs for my money and banking course... to illustrate the tremendous impact of government borrowing on interest rates via portfolio crowding out.... Oops. Well, the tremendous impact isn't showing up now. It might in the future. Although, it's useful to recall that the ten year interest rate is, under the expectations hypothesis of the term structure, the average of the expected short term interest rates over the next ten years.... One can localize the low interest rates by inspecting the interest rates of different maturities. For the next five years, we can look at the 5 year constant maturity rates.... On 9/22, the 5 year TIPS yield was 0.01%.

links for 2010-09-27

• Clifford Bob: Marty Peretz, Harvard, and the First Amendment
• John Cole: Marked for Death
  I’m at a loss to describe how truly radical, wrong, and evil this is.... We’ve lost our way as a nation, and Obama really is trying to be worse than Bush in some areas. I guess when they said they were going to bring back accountability and transparency, they meant in other areas...
• Peretz-Harvard Finale - James Fallows - Politics - The Atlantic
• Republicans On Obama Debt Commission Push For Corporate And Capital Gains Tax Cuts | TPMDC
• Ober, Josiah
• Julia Jeffries and Gautam Kumar: Protestors Fight Against Marty Peretz
• The Philosopher's Stone: HARVARD AND PERETZ
• Impact of Hurricane Igor in Canada - by Cameron Scott - Helium

Clive Crook Has Driven Henry Farrell Insane

Wow. This is impressive. The hypothesis that there is something about writing for the Atlantic these days that is likely to rot your brain gains further support.

Henry Farrell:

Hair-tearing: I don’t know whether Clive Crook is deliberately trying to show us how thin the partitions are between supposedly sensible centrism and grand guignol style theater, but he’s certainly doing a damn fine job of it.

These and other compromises disappointed the left. But the message to the electoral centre was consistent: Mr Obama would have let the left have its way if he could. What he should have done – and what he ought to do from now on – is simple. Instead of blessing leftist solutions, then retreating feebly to more centrist positions under pressure, he should have identified the centrist policies the country could accept and advocated those policies. … The left will tear its hair over another surrender and the centre will note where the president’s sympathies actually lay. … Substantively, whether taxes on high-income households rise now or two years from now does not matter very much. … Symbolically, though, Mr Obama’s position speaks volumes. … Nothing short of the Scandinavian model (plus stronger unions, minus the commitment to liberal trade) will ever satisfy the Democratic left. Its role, its whole purpose, is to be betrayed. So betray it, Mr President, and start leading from the centre.

This really is a rather wonderful piece of writing in its own, quite particular way. Mr. Crook doesn’t have a theory of politics (he never bothers to provide any evidence for all those confident assertions about how centrists are vigilantly monitoring the Obama administration for the slightest hint of hippy-hugging), so much as a kind of torrid internal psychodrama that (for reasons best known to him) he has chosen to inflict upon us repeatedly in printed form and that (for reasons best known to them) the editorial team of the Financial Times has decided to pay him for. And that psychodrama is on full display here. The dithering Obama, trying to resist the siren-calls of the left and only half-succeeding. The ever-disappointed centrist voter, sadly shaking its collective head yet again as the president hesitates over whether to embrace his true love or to succumb to the allures of forbidden passion. And that frenzied maenad, the left, fated always to be betrayed, because it is only in being betrayed that she can achieve her true destiny. It’s like an opera. A very bad opera. Or perhaps one of those Greek plays in which everyone ends up killing each other after having had sex with their parents and siblings. What it doesn’t resemble – at all – is a piece of serious political thinking and writing. I’d have thought that this would be a significant problem for a political column myself – but then I’m not an editor for the Financial Times.

Obama's Choices for the Republicans on His Debt Commission Was Another Enormous Unforced Error

Brian Buetler:

Republicans On Obama Debt Commission Push For Corporate And Capital Gains Tax Cuts

Hookudanoed?

Martin Wolf Understands Economics...

...as John Cochrane does not.

John Cochrane complains about being accurately quoted by Paul Krugman:

John Cochrane of the University of Chicago, who wrote that Krugman was sliming a growing enemies list: "Don't argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let's just not pretend this has anything to do with economics..."

John Cochrane's problem is not one embarrassing quote. It is that he keeps saying, over and over again, things that are wrong on a basic level, that reduce the level of the debate, and spread ignorance.

For example, Mike Sandifer:

Speaking of ignorance, I saw John Cochrane on Bloomberg a couple of weeks ago... at the 3:23 mark, he said that fiscal stimulus was ineffective because a dollar of spending is a dollar that had to come from someone else. Correct me if I’m wrong, but isn’t this an obvious fallacy? The stimulus is being financed with deficit spending, with government debt being bought by at least some of that money that may otherwise be on the sidelines. The link to the video: http://www.youtube.com/watch?v=HO4E1bs4CbE

Now comes Martin Wolf to--patiently--argue with John Cochrane and his ilk:

We can only cut debt by borrowing: “You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”), who complain about the huge fiscal deficits that have followed the financial crisis?

The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term. Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.

Before leaping to that conclusion, however, let us approach the issue of de-leveraging - or debt reduction - analytically....

Since the financial balances of the household, corporate, government and foreign sectors must sum to zero, a rise in the surplus of the household sector must be offset by an offsetting move in other sectors. During a post-crisis recession, the surplus of the corporate sector always rises... because managements slash investment.... [N]on-financial corporate sectors were running substantial financial surpluses in the high-income countries before the crisis and are running still bigger surpluses now.... [S]urplus countries do not want to make the adjustments needed to allow the US, UK and other former deficit countries run huge current account surpluses at full employment levels of income.... When one has eliminated everything else, it turns out that the only sector both able and likely to offset a large move of the household sector towards financial surplus in a post-crisis slump is the government. Indeed, that is exactly what has happened.

My conclusion, then, is... the only way that the private sector can de-leverage, when large economies are in a post-crisis recession, is for the government to leverage. The economy, as a whole, cannot de-leverage in any other way, other than via accelerated mass bankruptcy, which would certainly deepen the recession.... The recommended alternative of slashing the fiscal deficit while the private sector tries to slash its debt suffers from a fallacy of composition: it is impossible for all sectors of the economy to spend less than income at the same time...

Test Your Knowledge Questions for September 27 Econ 1 Lecture

1. Since the interest rate on Treasury debt r is less than the economy’s growth rate g, our budgetary situation is fine, except that we want short-term deficits in order to reduce cyclical unemployment—right?
2. How do you calculate what the long-run debt-to-GDP ratio will be?
3. Why is it important that a government run or be expected to run a permanent primary surplus?
4. Even if the national debt is sustainable, why is it good to run a balanced budget—or even a surplus—over the business cycle?
5. Why don’t governments run balanced budgets over the cycle?
6. What is James Buchanan’s critique of cyclical deficit spending?
7. What is the Laffer curve?
8. Should you ever trust the Wall Street Journal?

Why Does Howard Kurtz Have a Job?

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

What we learn about Howard Kurtz from his profile of Paul Krugman: Kurtz does not understand patriotism.

Paul Krugman:

[T]here’s a hint in Kurtz’s article of an attitude one sees all the time – namely, that there’s something inauthentic about people who complain about current policies and the state of the economy when they are personally doing well. This brings to mind a review I once read of a bad movie in which Mel Gibson played a Revolutionary War patriot. The film made a point of showing the Gibson character as being apolitical – until the British did him personal harm; that’s when he got involved. As the reviewer pointed out, this gets the notion of patriotism all wrong – you’re supposed to care about the cause regardless of your personal interests. In fact, there’s something especially laudable if you oppose a regime even though you were doing fine under that regime.

So: I support tax increases that will reduce my own after-tax income; I worry greatly about unemployment, even though my own living is secure; I warn about growing inequality, even though I’m of the class that has gained from rising disparities; I’m upset about the direction this country is going, even though my own life is comfortable. And this is supposed to cast doubt on my motives?...

That Howard Kurtz takes George Will as his principal expert on economic policy is perhaps the most conclusive proof that no publication has any business publishing Kurtz. Kurtz quoting Will:

"If certainty were oil, he'd be Saudi Arabia," says conservative columnist George Will. "He is a Keynesian who believes government knows how to organize everything and should just get on with it. He believes government is dangerously frugal. I don't think so."... Will says Krugman undermines the administration "because he gives voice to the disaffected left." After one such Sunday morning appearance, the Fox Nation site headlined a piece, "Even Egghead Elites Are Fed Up With Obama."

But for Kurtz to actually interview somebody who knew something--that would be work.

Ali Slivinski and Nathan Sussman: Taxation Mechanisms and Growth in Medieval Paris

Philippe IV "Le Bel" Capet...

Maurice Druon, Les Rois Maudits...

Paris/London peaks at 6 in 1400...

Maintenance of Paris's fiscal autonomy until the Wars of Religion...

Files for September 27 Econ 1 Lecture: Budget Economics II (J. Bradford DeLong, U.C. Berkeley, Fall 2010)

September 27: Budget Economics II:

• Slides
• Audio

---

Open publication - Free publishing

On the Honor Due to King Morgant of Madoc

From Lloyd Alexander's The Black Cauldron:

"Morgant?" asked Taran.... "How can there be honor for such a man?"...

"Until the search for power parched his throat, he was a fearless and noble lord.... These things are part of him and cannot be put aside or forgotten.

"And so shall I honor Morgant," Gwydion said, "for what he used to be..."

In the Words of the Emperor Titus Flavius Vespasianus T. fil. T. fil.: "Pecunia Non Olet!"

Robert Paul Wolff:

There is one more matter about which I feel I must say something. I refer to the controversy to which Richard Tuck referred in his opening remarks this morning [ed. Tuck, the current head of Social Studies and a splendid man, had said a few words about the controversy during his welcoming speech, distancing himself from the content of Peretz's statements.] I have anguished a great deal about this matter, at one point uncertain whether I ought even to attend the celebration. If I were a religious man, I could let my bible fall open at random, relying on The Lord to guide me to a chapter and verse in which I might find some wisdom. But since I am an atheist, that course was not open to me. So I did the next best thing. I took down my copy of Volume One of Das Kapital. As I turned the old, familiar pages, covered with my underlinings and notes, my eye fell on this famous passage from the great chapter on Money. Since you are all former or present Social Studies students, I am sure you will all recall it. Here is what Marx says.

Because money is the metamorphosed shape of all other commodities, the result of their general alienation, for this reason it is alienable itself without restriction or condition. It reads all prices backwards, and thus, so to say, depicts itself in the bodies of all other commodities, which offer to it the material for the realisation of its own use-value. At the same time the prices, wooing glances cast at money by commodities, define the limits of its convertibility, by pointing to its quantity. Since every commodity, upon becoming money, disappears as a commodity, it is impossible to tell from the money itself, how it got into the hands of its possessor, or what article has been changed into it. Non olet, from whatever source it may come.

Marx assumed that the working men and working women for whom he wrote this book all had a classical education, but since I did not, I was forced to look up the source of the Latin tag, non olet. It seems that in the time of the Emperor Vespasian, the Roman state raised a little extra money by taxing the public urinals. One day, Vespasian sent his son, Titus, to collect the taxes from the urinals. Titus was offended by the task, which he considered beneath him, and when he returned he flung the money at his father's feet. Vespasian looked down with equanimity and remarked languidly, "Pecunia non olet." The money does not stink.

In the realm of higher education, Harvard is an imperial power, so quite naturally it adopts Vespasian's point of view toward the money it accepts, Pecunia non olet. But from its founding, fifty years ago, Social Studies has held itself to a higher standard, and so I would hope that it will reject this money for a scholarship, because pecunia olet. The money stinks.

links for 2010-09-26

• The Law Museum > Edward Coke, 1552-1634
• Structural Unemployment: The First Generation - NYTimes.com
• Dean Absent as Obama Introduces His Pick for D.N.C. Chairman - NYTimes.com
• Mondoweiss » A ‘party for Marty’ greets Peretz at Harvard

The Sad Thing Is That Narayana Kocherlakota Was Supposed to Be the Smart One Among the Minnesota Economists...

...and that Bill Clinton once knew what economists to talk to to construct his talking points.

Paul Krugman:

Structure of Excuses: What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve. But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act. In other words, structural unemployment is a fake problem, which mainly serves as an excuse for not pursuing real solutions.

Who are these wise heads I’m talking about? The most widely quoted figure is Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, who has attracted a lot of attention by insisting that dealing with high unemployment isn’t a Fed responsibility: “Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs,” he asserts, concluding that “It is hard to see how the Fed can do much to cure this problem.” Now, the Minneapolis Fed is known for its conservative outlook, and claims that unemployment is mainly structural do tend to come from the right of the political spectrum. But some people on the other side of the aisle say similar things. For example, former President Bill Clinton recently told an interviewer that unemployment remained high because “people don’t have the job skills for the jobs that are open”...

When jobs are open, it is because employers think that they could sell what new employees would make for a handsome price and profit. Therefore they will be eager to hire--and eager to pay what the market will bear in order to hire. If it is indeed the case that people do not have the skills for the jobs that are open, or if firms have jobs but cannot find appropriate workers, then we ought to see tight labor markets and rapidly rising wages in those occupation-region pairs where there are ample jobs.

We don't.

Both Kocherlakota and Clinton appear to be following the doctrines that French economist Jean-Baptiste Say set out in 1803: that if there is excess supply in one industry for one kind of labor, then there must be a countervailing excess demand in another industry for another kind of labor--and if unemployment stays high it is a "structural" problem because workers with the skills needed to work in the declining industry don't have the skills needed for the rising industry.

As economist Thomas Robert Malthus pointed out at the time, this argument sounds good in theory but fails in practice:

It may be said, perhaps, that the cotton trade happens to be glutted; and it is a tenet of the new doctrine on profits and demand, that if one trade be overstocked with capital, it is a certain sign that some other trade is understocked. But where, I would ask, is there any considerable trade that is confessedly under-stocked, and where high profits have been long pleading in vain for additional capital?

And Jean-Baptiste Say had come around to Malthus's view, and argued that high unemployment in Britain in 1825=6 was the result of derangement in the financial sector rather than of inadequate skills on the part of workers that kept them from satisfying excess demand for labor in expanding industries:

The Bank [of England]... ceased to put new notes into circulation...cease[d] to discount commercial bills. Provincial banks were... obliged to follow... commerce found itself deprived at a stroke of the advances on which it had counted.... As the bills that businessmen had discounted came to maturity... each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work...

As Paul writes:

[W]hat should we be seeing if statements like those of Mr. Kocherlakota or Mr. Clinton were true?... [S]ignificant labor shortages somewhere... major industries that are trying to expand but are having trouble hiring, major classes of workers who find their skills in great demand, major parts of the country with low unemployment.... None of these things exist. Job openings have plunged in every major sector, while the number of workers forced into part-time employment in almost all industries has soared. Unemployment has surged in every major occupational category. Only three states, with a combined population not much larger than that of Brooklyn, have unemployment rates below 5 percent....

So all the evidence contradicts the claim that we’re mainly suffering from structural unemployment. Why, then, has this claim become so popular? Part of the answer is that this is what always happens during periods of high unemployment — in part because pundits and analysts believe that declaring the problem deeply rooted, with no easy answers, makes them sound serious.... [P]owerful forces are ideologically opposed to the whole idea of government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society.

So what you need to know is that there is no evidence whatsoever to back these claims. We aren’t suffering from a shortage of needed skills; we’re suffering from a lack of policy resolve. As I said, structural unemployment isn’t a real problem, it’s an excuse — a reason not to act on America’s problems at a time when action is desperately needed.

The kicker, of course, is that if we do not act now when our unemployment problem is one of deficient aggregate demand, two years from now we will have a different unemployment problem--our big problem will turn from cyclical into structural unemployment.

Social Studies 50th Anniversary Symposium: Is There Hope for the Rule of Law in America?

That was the question asked by Denver University Professor Alan Gilbert during the morning panel.

Here is the answer I gave, as best as I can reconstruct it:

The question is: "Is there hope for the rule of law in America?" My answer is: No.

Begin with the assassination of George Villiers, Duke of Buckingham and Prime Minister to King Charles I Stuart, on 23 August 1628. Nobody at the time doubted the king's power to torture the confessed assassin, John Felton, on the rack--the king's father James I Stuart had tortured Guy Fawkes and the other Gunpowder Plot suspects. But the king's power to torture was part of his prerogative powers of state, and Charles I Stuart sought to reserve his prerogative powers for use in more important arenas--that is, to raise money with them.

Thus Charles I asked his judges to authorize the torture of John Felton not as an act of state under the royal prerogative but as part of the process of the criminal law. And let's let William Blackstone pick up the story at IV, 25, 326 of his Commentaries on the Laws of England:

[T]rial by rack is utterly unknown to the law of England; though once... [the] ministers of Henry IV [Lancaster]... laid a design to introduce the civil law into the kingdom as a rule of government... erected a rack for torture, which was called in derision the Duke of Exeter's daughter, and still remains in the Tower of London; where it was occasionally used as an engine of state, not of law, more than once in the reign of queen Elizabeth.

But when, upon the assassination of Villiers, duke of Buckingham, by Felton, it was proposed in the privy council to put the assassin to the rack in order to discover his accomplices, the judges, being consulted, declared unanimously, to their own honour and the honour of English law, that no such proceeding was allowable by the laws of England...

With the Great Revolution of the 1640s the prerogative powers of the monarch of the United Kingdom shrank. And with the Glorious Revolution they shrank again. And with the accession of the German-speaking Hanover dynasty they shrank yet again. And by 1789, when James Madison and company moved the then-powers of the monarch of the United Kingdom to make them the powers of the President of the United States, there were no prerogative powers left: the President was 100% Chief Magistrate with the power and the duty to take care that the laws be faithfully executed, and 0% princeps legibus solutus.

So things stood for 200 years--save for Abraham Lincoln's arrogation of Congress's Art.I §9 power to suspend the "privilege of the writ of habeas corpus in "cases of rebellion or invasion" but only when such suspension was "required" for the public safety.

So things stood until John Yoo.

Now John Yoo is an interesting case. In 2000 he was arguing at the Cato Institute that the President's powers as commander-in-chief were extremely crabbed and narrow--and that President Clinton had, in fact, exceeded his c-in-c powers and undermined the rule of law by ordering American soldiers to obey the orders of a British NATO general. That the president--or, indeed, that any commander--does not have the power to place American soldiers under allied command would have been a great shock to Dwight D. Eisenhower, or Harry S Truman, or Franklin D. Roosevelt, or Woodrow Wilson, or William McKinley, or indeed George Washington himself. Yoo's claim in 2000 had absolutely no warrant in the constitution, in the law, in precedent, or in history.

But that is how it is with Yoo.

Sources who should know and whom I believe to be reliable tell me that when histenure case moved through the University of California at Berkeley, historians objected to his use of history in his published articles: "What the frackity-frack is this?" they asked. "This isn't history. This isn't how it happened. This isn't wie es eigentlich gewesen." The response of then then-Dean of Berkeley Law School, a response that was convincing to the then-Chancellor of the University of California is said to have been that history plays a special role in legal academia and argument. In legal academia, one's claims about history do not have to be true, the argument went. Indeed, a major mode of legal argumentation and academic debate is to make false claims about what the law has been in past in the hope that those claims will then shape what the law will be in the future.

By 2001 with a Republican as president John Yoo had reversed field 180 degrees. He was making a very different set of false claims about what the law of America had been. He was then claiming that the president's commander-in-chief powers contained within them prerogative powers to torture and kill outside of legal procedure that would have astonished George III Hanover, and even exceeded those of William I Conqueror. When William I Conqueror tortured or killed, he agreed owed his barons at least an after-the-fact accounting of why if not any before-the-fact procedural checks.

Backed by John Yoo and company, George W. Bush claimed that he did not owe even an after-the-fact accounting. And Barack Obama holds to the same line.

So I see no hope.

Liveblogging World War II: September 26, 1940

Death of the 41 year old Mikhail Ilyich Koshkin, chief designer of the Soviet T-34 main battle tank.

High Structural Unemployment Leads to Rising Inflation When Unemployment Falls

Paul Krugman:

What Structural Unemployment Looks Like: One thing I should probably make clear in this discussion of structural unemployment is that I have no problem in principle with the idea that shifts in the economy can temporarily lead to a large rise in the “natural” rate of unemployment. Let me offer a case in point: it was quite clear, circa 1990, that Britain was no longer capable of running unemployment rates as low as those of the 1960s and early 1970s.

But how did we know this? First, through experience: the Lawson boom of the late 1980s never brought unemployment below 7 percent, yet it was accompanied by a sharp rise in inflation. Clearly, the economy was hitting speed limits even at relatively high unemployment by previous standards.

And all the kinds of mismatch so conspicuously not present in America today were very clearly in evidence in Britain during the 1980s. Think "Full Monty." There were large regional disparities in unemployment, with the south and east doing well but the north and west deeply depressed. There were obviously declining industries — steel, coal, shipbuilding — coupled with rising service and financial sectors. Times were terrible for blue-collar workers, not so much for white-collar.

In a way, the key insight about America now is that it doesn’t look at all like Thatcherite Britain. Legend aside, this is not mainly about displaced construction workers — and there are no other dying industries to point to. Lousy labor markets span the country, except in a handful of states with almost no people. It’s a terrible job situation for college graduates as well as high-school graduates.

The idea that this economy is primarily suffering from mismatch is simply bizarre.

links for 2010-09-25

• The Perennial Quest to Lower Health Care Spending by Uwe E. Reinhardt - NYTimes.com
• tax.com: So How Did the Bush Tax Cuts Work Out for the Economy?
• The Way Out of the Slump by Paul Krugman and Robin Wells | The New York Review of Books
• Debunking the theory of structural unemployment
• Structural Failure - NYTimes.com
• Matthew Yglesias » The Shape of Things Not to Come
• FT.com / Comment / Opinion - Bernanke ponders QE2 to keep America afloat

Larry Mishel on Structural Unemployment Once Again

Larry Mishel:

• Claims that today’s unemployment is predominantly “structural” should be treated skeptically since that implies that people gainfully employed a year or two ago are now inappropriate for available jobs; The notion that work processes have dramatically changed over the recession, leaving millions of workers unqualified for work, is hard to square with the low levels of investment in equipment and software and the meager productivity growth, just 6.3% in two and-a-half years.

• Though construction employment has fallen substantially, this has not fueled either unemployment or long-term unemployment as construction’s share of both unemployment and long-term unemployment remains very near its pre-recession level.

• Claims that we are experiencing an anomalous rise in unemployment relative to job openings are not true: the same thing happened in the deep recessions of the 1970s and 1980s.

• Lack of geographic mobility can’t explain unemployment since the 11 states with less than 7.0% unemployment would have to double their labor forces to absorb the unemployed.

• There have been between five and six unemployed for every job opening (the job seeker ratio) since mid-2009, suggesting a shortage of jobs. The job seeker ratio is roughly double what it was in the last recession and reflects, in large part, that job openings are one-fourth lower now than they were in the last recovery.

• In the first 12 months of this recovery there were 32.0 million job openings, 10.0 million fewer than the first 12 months of the prior recovery, one known for being a jobless recovery.

• The shortfall of job openings in this recovery compared to the last one is pervasive: it is evident in nearly every sector including labor intensive service industries such as hospitality, entertainment, and accommodation. Construction is responsible for just 6% of the overall shortfall in openings in this recovery compared to the last one.

• Layoffs during the early stages of this recovery are comparable to those in the prior recovery, and cannot explain high unemployment.

• Hiring exceeds openings in the private sector more so now than earlier in this recession and more so than in the early 2000s recession...

Things Not to Do: Part XLIV

Memo to self: do not, in the future, let organizers put the line about me being "Tim Geithner's Chief Internet Apologist" in my biography for a Social Studies conference.

That is all...

The Barrington Moore Problematic and Its Discontents

As delivered in Harvard's Science Center B on Saturday morning:

Audio

John Stuart Mill was perhaps the last who was substantially at home in and competent in all the branches of moral philosophy.

Afterwards young scholars paying their dues found it impossible to learn everything and still have time to write anything. Since it is easier to teach undergraduates what you know, specialization in research drove specialization in curriculum. But dividing up the social sciences makes no sense for undergraduates: What use are economics B.A.s who know no political science or history? None at all. What good is a government department where, in my day, an undergraduate, without trying, could find himself assigned Graham Alison's Essence of Decision five times in five different classes?

But to try to construct an undergraduate education with its foundation as a simple injunction to read widely in the social sciences would be an enterprise doomed to failure. We think in patterns--analytical classifications and narratives. A program needs a backbone, something to give it enough structure to make sense to the minds of nineteen year-old East African Plains Apes, with our limited brains. Yet we do not want to reproduce the narrowing blinders of the disciplines? And how could such a program attract teachers when the incentives are all on the side of working on the core concerns of the disciplines in which they must eventually make their homes?

The project of building a Social Studies was "rescued," if that is the word, by history.

The Eurocentric view of the world before 1914 was of one in which the wonders of science drove prosperity, prosperity drove order, order allowed the spread of liberty, and liberty promoted peace and thought, and peace and thought drove science. All was not for the best in the best of all possible worlds but, in the words of Lennon and McCartney, getting better all the time,

Then came World War I. Lenin. Mussolini. Stalin. Hitler. Franco. Mao. Idi Amin. Augusto Pinochet. The virtuous circle turned out not to be the natural path but instead a fragile accident. No discipline was designed to or qualified to think how to get the North Atlantic world at least back to its happy place, back to something like the society of progress in which people once thought they had lived--that pre-WWI world in which the extra-judicial slaughter of thirty-five Europeans at Kishinev excited horror and condemnation, even if they were Jews.

Call this problematic presented by the history of the world from 1914 to 1945, or perhaps 1953 or perhaps 1975 or perhaps even 1989, the "Barrington Moore problematic": it is to understand the historical and social origins of dictatorship and democracy, of slavery and freedom, of ideology and rationality, of poverty and prosperity. Humanity had moved from societies of illiterate farmers producing little more than subsistence dominated by thugs with strong arms and sharp spears to urban, literate, industrial ones. That produced Abraham Lincoln but also Vladimir Lenin, Franklin Delano Roosevelt but also Mao Zedong, Konrad Adenauer but also Augusto Pinochet.

And Adolf Hitler as the sole historical member of the my-regime-killed-50-million club. Why? How? And what could be done to make it stop?

The Barrington Moore problematic provided the spine of the Social Studies major--and indeed of pretty much all the interdisciplinary social sciences majors on the North American continent for two generations. In their gallop through the issues of the Barrington Moore problematic students had, as Alexander Gerschenkron put it to those in his office he allowed to drink the good sherry, to read an awful lot of books that were very good to have read--if not fun in the moment or easyto read.

And so the major has been a great fifty-year success--and not just because budgetary restrictions capped it and the best Harvard students will gravitate like lemmings toward anything that promises to exclude some applicants.

Can the Barrington Moore problematic serve a role similar in the next generation to the one it has served in the past two?

Echoing Seyla, I would say not. For one thing, the era of modern history that the BMP was created to grapple with has indeed come to its end. For another thing, the Enlightenment preconditions for the BMP have not yet been secured.

First, Adolf Hitler is now sixty-five years in his grave. Societies in transition to urban-market-mass political-economic modernity and how to keep more Lenins and Hitlers from arising in them does not seem to be the globe's most urgent problem any more.

Second, our most recent modern monsters seem of a different and perhaps older kind: Saddam Hussein always reminded me more of the Caliph Uthman or of Mehmet II than of Hitler. Hamas, Al Qaeda, and Hezbollah seem more like updated versions of the Assassins of Syria plus plastic explosives rather than of the Comintern. Rwanda seems more like the Sicilian Vespers with radios than like the terror-famine of the Great Leap Forward.

Third, the Barrington Moore problematic assumes that we have consensus, at least within our own circle of debate, that the hard-won victories of the Enlightenment are the bedrock that we seek to protect and advance. Roosevelt had four freedoms. Freedom from want--that is, freedom to earn a living, freedom to not have to spend one's life frantically trying to avoid penury, what Locke called the right to property. Freedom from fear--that is, freedom from arbitrary arrest, from being beaten up on the street corner by people who don't like who one is, or who don't think you have a right to live here, what Locke called the right to life and liberty. Freedom of speech and expression--saying what you think and making the laws.

And, of course, there is the first of Roosevelt's four freedoms, the oldest of the Enlightenment freedoms, perhaps the most hard-won in the seventeenth century and the pattern for the others, John Locke's toleration, freedom of religion--freedom to peaceably assemble with one's fellow believers to worship one's own conception of God. You cannot even start thinking in the Barrington Moore problematic unless you start with consensus that the Enlightenment freedoms are the bedrock of what we want to protect and advance.

It is at this point in my argument that I found that I could not not notice Martin Peretz. Do I have to pretend," he asked, "that I think Muslims are worthy of the privileges of the First Amendment, which they are so likely to abuse?" That is a speech act that not only asserts that people called "Muslims" don't "deserve" the "privilege" of Lockean toleration, but also that he will be pretending if he ever says that they do.

To this the only appropriate response is: "What the fracking frack?"

So not only are the problems the BMP addresses not our biggest problems here in the North Atlantic--they appear to have been largely solved--and not only are our current monsters arising from other sources than contemplated, but we don't even have consensus in this room on the basic Lockean bedrock which has to serve as the foundation on which the whole structure was built. We thus need something more advanced--that deals with problems we have not yet solved rather than those we have--focused on very real but lesser threats to liberty and prosperity than the high totalitarianisms--but also something more basic as well. We are thus, historically, both too late and too early for that intellectual project to make sense. In his contribution to "A Critique of Pure Tolerance" Robert Paul Wolff could claim that basic Enlightenment issues were settled, that mere Lockean tolerance was not something at which we should aim--that we should aim "beyond pluralism and beyond tolerance." But surely we cannot aim beyond tolerance until and unless we have at least gotten into its neighborhood?

So how then should Social Studies organize itself for the next generations?

What intellectual thread should you follow as a guide through the labyrinth that is the study of human society? You need to expose students to the broadest range of ideas and perspectives. You need to avoid dissolving into a blooming, buzzing confusion. And yet you need to avoid the narrowing--I would say crippling--straightjackets of our current disciplinary perspectives. And you still need to allow individual students to find and study their own ultimate interest.

We out there at Berkeley face much the same problem.

We do not have good answers.

I occasionally play with "global history" a la Gellner, McNeill, and Diamond.

I occasionally play with a narrower dialogue of centralization vs. decentralization a la John Maynard Keynes, Karl Polanyi, Joseph Schumpeter, Friedrich Hayek, and James Scott.

I have had only one really good idea: that is to invite your Chair Richard Tuck out to Berkeley this fall for our internal review of our Political Economy major this fall, so that he can come down from the mountaintop, reveal the tablets, and tell us what the answer is and what we should do.

What Should I Ask Michael Walzer?

Harvard Saturday Morning

Posted via email from delong's posterous

links for 2010-09-24

• Obama to coddle bankers « LBO News from Doug Henwood
• LBO News from Doug Henwood
• Emerging Markets Investor Conference 2010
• What makes the US health care system so expensive – Outpatient Care | The Incidental Economist
  Aaron Carroll: What makes the US health care system so expensive – Outpatient Care: http://tinyurl.com/299g73g #worthreading

Citigroup's View of the Obama Administration in February 2009...

On 25 February 2009, Ryan O'Connell and Jerry Dorost of Citigroup's research arm wrote an "Industry Flash" about Obama Administration banking policy:

New Treasury Stress Test Guidelines Do Not Appear Onerous

• Treasury's plan appears relatively bank-friendly and investor-friendly — The Treasury has released guidelines for new stress tests for the largest US banks and the terms for the banks to issue convertible preferred securities to the government to address any capital shortfalls. The Treasury’s announcement indicates, in our opinion, that the US government is following a relatively bank- friendly, investor-friendly approach.

• Treasury’s goal is to increase banks’ capital — We think that several banks may need to increase their capital because of the new stress test. However, the Treasury’s goal, in our view, is to increase banks’ capital while minimizing the amount and duration of any government’s direct ownership of common stock.

• Stress scenarios do not seem onerous or draconian to us — The guidelines require the banks to estimate their potential losses under a baseline scenario and a “more adverse” scenario for a two-year period. These scenarios do not seem onerous or draconian to us; indeed, they appear fairly close to the scenarios that JP Morgan discussed this week when it announced its dividend cut. We think that most banks may be using similar assumptions in running their own stress tests.

• Emphasis on common equity — The Treasury did not set a target equity ratio and said that it was not imposing a new capital standard, while pointing out that common equity should be the “dominant” component of Tier 1 capital. We interpret this statement to mean that common equity should be at least half of Tier 1, which would indicate a ratio of tangible common equity to risk weighed assets of 3%, although it could be somewhat higher (i.e., 4%). Although the banks and regulators will discuss the stress tests, the Treasury made it clear that bank regulators would determine the amount of equity capital that banks need.

Today--nineteen months after this document was written--it is of historical interest only: none of Citigroup's paying clients would pay a cent for the information contained in it, for nobody could in any way profitably trade today on Citigroup's February 2009 analysis of the policies of the Geithner Treasury.

Nevertheless, Citigroup has sent Doug Henwood http://lbo-news.com/ a DMCA takedown notice, demanding that he remove this now nineteen-month old document from his website.

Whatever you think about the DMCA, it should not be used to prune the historical record of primary sources about how various economic policies were perceived at the time.

So here it is:

---

CitiOnStress.pdf

Fiscal Policy Multipliers at the End of the Great Depression

The smart, keen-eyed, and incredibly fast-reading Ryan Avent directs us to Robert Gordon and Robert Krenn:

Fiscal policy: War on depression: ROBERT GORDON and Robert Krenn have produced some interesting new assessments of the fiscal impact of America's military build-up from 1939 to 1941. Here's their abstract:

This paper is about the size of fiscal multipliers and the sources of recovery from the Great Depression. Its baseline result is that 89.1 percent of the 1939:Q1-1941:Q4 recovery can be attributed to fiscal policy innovations, 34.1 percent to monetary policy innovations and the remaining -23.2 percent to the combined effect of the basic VAR dynamic forecast and innovations in non-government components of GDP.Traditional Keynesian multipliers assume that there are no capacity constraints to impede a fiscal-driven expansion in aggregate demand. On the contrary, we find ample evidence of capacity constraints in 1941, particularly in the second half of that year. As a result our preferred government spending multiplier is 1.80 when the time period ends in 1941:Q2 but only 0.88 when the time period ends in supply-constrained 1941:Q4. Only the 1.80 multiplier is relevant to situations like 2009-10 when capacity constraints are absent across the economy.

Two sets of new insights emerge from a review of contemporary print media. We document that the American economy went to war starting in June 1940, fully 18 months before Pearl Harbor. We also detail the bifurcated nature of the 1941 economy, with excess capacity in its labor market but capacity constraints in many of the key manufacturing industries. By July 1941, the American economy was in a state of perceived national emergency.

Citigroup Attacks Doug Henwood

Doug writes:

http://lbo-news.com/2010/09/24/citigroup-feels-violated/: This morning, WordPress informed me that they’d received a “valid DMCA notice”—as in Digital Millennium Copyright Act—notice about a Citigroup research report I posted here in February 2009. Until the issue could be “resolved”—meaning I acknowledged this grave offense against intellectual property—I couldn’t post anything to this blog. Once I said “Yes, Sir,” my posting privileges were restored. The document was, of course, deleted.

The report was an analysis of the Treasury’s proposed bank capital requirements in the run-up to the stress tests. Citi’s conclusion—and I think even the DMCA allows me to quote a phrase this brief from the doc—was that “the US government is following a relatively bank-friendly, investor-friendly approach.” So there you have it, just for the record.

Ed Luce Worries About America's Long-Term Economic Development Strategy

Applied Materials is the canary in the coal mine.

Ed Luce:

Summers’ departure opens door for new ideas: Given that Congress appears to have abandoned any pretence of a serious debate on what needs to be done to restore America’s declining economic competitiveness, the move will doubtless come as an intellectual liberation for Mr Summers. The bigger question is whether Mr Summers’ departure offers Mr Obama his own opportunity for intellectual liberation.

There is barely an economist in the world who would deny that Mr Summers has a bigger brain than they do. Nor, in spite of valid criticisms of how the politics has been conducted, would most dispute the fact that the Obama administration’s handling of the bank bail-out and fiscal stimulus was indispensable to preventing another Great Depression. Mr Summers was the architect.

These are high marks. Yet many of Mr Summers’ very same admirers have also become his detractors. Put simply, they see him as the face of a paradigm that has outlived its usefulness – the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.

Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.

But in practice researchers benefit from proximity to the production processes, which require constant trial and error. A cursory look at the US’s trade deficit illustrates the trend. Far from importing low cost manufactured goods, the US is buying high-tech stuff from such countries as China and Brazil, including aircraft engines, computers, turbines and heavy duty trucks. And it is exporting growing volumes of low-tech stuff, including pulp and paper, oil seeds and other commodities. People who lose their jobs in the US are on average moving to jobs that pay roughly a fifth less than their previous jobs. Others are having difficulty finding any jobs at all.

That trend has only been accelerated by the Great Recession.... America is not producing new jobs in anything like the quality or the quantity it needs to replace the high-end jobs it is losing. Mr Summers’ exit therefore offers Mr Obama an unusually important chance to think radically about the kind of economic legacy he wishes to leave.

Speculation has focused on whether Mr Obama will choose somebody from the business community to counter the growing distemper corporate America feels towards his administration. It has also focused on whether the job will be taken by a woman. Ann Mulcahy, the former chief executive of Xerox, has been mentioned as has Laura Tyson, who held the job in the 1990s.

A bolder choice would be Jeff Immelt, the chief executive of GE, who is one of the few corporate leaders to have worried openly about America’s declining competitiveness. As the head of a company that has done as much offshoring as any, Mr Immelt knows what is driving the reduction of America’s productive capacity. Presumably, therefore, he would have some ideas about how to reverse it. Somebody must.

The Republican View of America: 80% Male, 20% Female; 75% Over 50, 25% Under 50; 99% White, 1% Horse

Jed Lewison writes:

Daily Kos: Republicans say that today they announced their pledge with America.... [L]ook at this collage... of every person photographed in their "governing document"...

This calls my attention to the fact that the Republican congressional caucus does not look like America: the front ends of horses are underrepresented and the back ends of horses overrepresented...