Re-Capturing the Friedmans: BERKELEY – On my desk right now are reporter Timothy Noah’s new book The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It and Milton and Rose Director Friedman’s classic Free to Choose: A Personal Statement. Considering them together, my overwhelming thought is that the Friedmans would find their task of justifying and advocating small-government libertarianism much harder today than they did in 1979.
Discrepancy between forecast and outcome: Nearly four years after the start of the global financial crisis, many are wondering why economic recovery is taking so long….
He has good reason to do so, I believe:
James Fallows: 'Even Jimmy Carter': Mitt Romney informs us that the raid that took out Osama bin Laden one year ago was no big deal, because "even Jimmy Carter would have given that order." Grrrrr….
- Jimmy Carter is a graduate of the U.S. Naval Academy who spent ten years in the uniformed service of his country. As far as I can tell, this is ten years more than the cumulative service of members of the Romney clan….
Nouriel Roubini: We at RGE expect the Fed to announce sterilized QE in June when Operation Twist ends. Follow @roubiniglobal
B&N teams up with MSFT: If you’d told me that B&N and MSFT had teamed up back in 2002 I would have thought ‘how Orwellian,’ and yet in this picture, they’re both the underdogs. But this will give Microsoft things to offer as it tries to come out with a tablet soon. And while I’m not the world’s biggest Microsoft fan, I do love competition…
Economist's View: No "Noticeable Increase in Mismatches in Recent Years": Here's the conclusion from a summary of a recent FRBSF conference on whether labor market mismatches (structural issues) are holding back employment:
In sickness and in health: like Ann Romney. She strikes me as a charming, dignified, and tough advocate for her husband’s presidential campaign. On Thursday, she appeared on Entertainment Tonight to discuss her experiences as a breast cancer survivor and her challenges arising from multiple sclerosis. Having sat white-knuckled in a gritty Chicagoland hospital waiting room as my wife lay unconscious in the cardiac ICU, I feel some kinship with Mitt Romney in seeing a life partner facing profound medical challenge. [But] neither Romney nor I know what it felt like for many families sitting near me, who faced a medical crisis while also fearing crushing medical bills.
My view is that it is incredibly easy to run off the rails in macroeconomics unless you start by firmly grounding yourself in John Stuart Mill's (1829) insight: A general glut is an excess demand for financial assets at full-employment levels of activity, which by Walras's Law is the same thing as an excess supply of currently-produced goods and services (at full-employment levels of activity). With economy-wide planned spending below expected income (at full employment), the fact that everybody's income is somebody else's spending means that the circular flow of economic activity spirals down until people forget that they want to build up financial asset holdings and once again have spending equal to income in aggregate.
Becky, who is 10 years old, lives with her parents and an older brother Sam in a suburban town in America's Midwest. Becky's father works in a firm specializing in property law. Depending on the firm's profits, his annual income varies somewhat, but is rarely below 145,000 US dollars ($145,000). Becky's parents met at college. For a few years her mother worked in publishing, but when Sam was born she decided to concentrate on raising a family. Now that both Becky and Sam attend school, she does voluntary work in local education. The family live in a two-storey house. It has four bedrooms, two bathrooms upstairs and a toilet downstairs, a large drawing-cum-dining room, a modern kitchen, and a family room in the basement. There is a plot of land at the rear - the backyard - which the family use for leisure activities.
"The history of enterprise in antiquity therefore falls naturally into two periods. First is the development of economic practices in Mesopotamia circa 3500-1200 BC. By the end of antiquity we find gain-seeking shifting away from productive enterprise to land acquisition, usury, profiteering from political office, and extraction of foreign tribute by force."
--David S. Landes, Joel Mokyr, William J. Baumol, eds., The Invention of Enterprise
The Economist fails the Turing Test again: Applied to serious subjects, [the current Economist line] is depressingly predictable and hence tedious. Rather more fun to think of an Economist editorial on, say, the appointment of the new England manager (actually you could generate that by substituting just a couple of words in your summary of the Hollande editorial), or imagine Pride and Prejudice written in the style of an Economist editorial[:]
The Bennet household is in desperate need of far-reaching reform, as it faces up to the consequences of nearly two decades of profligacy and maybe-an-heir-will-turn-up short-termism. Its structural over-production of daughters and unrealistic estimations of future prospects, however, driven by a fixation on landed property and a pervasive anti-business and anti-trade snobbery, and the lackadaisical attitude and resistance to change of its leader, suggest that it will continue to be out-performed in the marriage market by more forward-looking neighbours willing to accept conventional austerity as the price of financial security and the condescension of Lady Catherine de Burgh…
Jonathan Chait on Paul Ryan:
The Legendary Paul Ryan: The basic elements of Ryan’s plan are this: The tax code would be collapsed into two rates, with the top rate dropping to 25 percent, but eliminating unspecified tax deductions would keep tax revenues at the current level, as set by the Bush tax cuts. Medicare would remain untouched for those 55 years old and older, but those under would be given vouchers at a capped rate. Given that the Medicare savings would not begin to take effect for more than a decade, that taxes would stay level (at best), and that military spending would increase, Ryan would achieve his short-term deficit reduction by focusing overwhelmingly on programs targeted to the poor (which account for about a fifth of the federal budget, but absorb 62 percent of Ryan’s cuts over the next decade). The budget repeals Obamacare, thereby uninsuring some 30 million Americans about to become insured. It would then take insurance away from another 14 to 27 million people, by cutting Medicaid and children’s health-insurance funding.
@Atrios: i used to read the economist religiously. stopped when a) realized they were totally wrong about stuff and b) they became tribal republicans
@altmandaniel: @Atrios @delong @Noahpinion - It happened while I was there. Emmott abandoned "economic and social liberalism" in favor of rightist reflex.
http://krugman.blogs.nytimes.com/2012/04/29/were-doomed-2/: Update: So you see what I mean. We have a terrible failure of demand — and Carly Fiorina thinks the key problem is excessive taxes on corporations (our effective rate is actually fairly low). Hey, if only we had low rates like Ireland, we could have 14.7 percent unemployment… oh well, never mind.
Meanwhile, Eric Schmidt thinks the problem is a shortage of workers in some high-skill fields. As Dean Baker points out, businesses were saying the same thing in 1935; so were the era’s Very Serious People.
Everything makes David Walker think of the need for entitlement reform. Everything makes George Will think of Ronald Reagan.
Gavyn Davies is greatly puzzled:
Has the Fed’s reaction function changed?: Inflation is currently a little above the official 2 percent target, but the FOMC says that it will soon drop below target and remain there consistently over the next two years. Meanwhile unemployment is predicted by the FOMC to remain higher than the structural or “natural” rate for several years into the future. With inflation expected to be lower than target and unemployment higher than target over the entire horizon relevant for policy, it is surprising that FOMC has been unwilling to signal any inclination towards further easing….
The surprising thing is that Lessig appears to have forgotten how Scalia prostituted his high office--and demonstrated that if you are not a Legal Realist you are a dupe--in Bush v. Gore. That train has sailed, that bus has rolled, that ship has hit the highway:
If there truly is a principled distinction to be made here--if Scalia and company are striking down gun regulation and violence against women statutes while upholding copyright and medical-marijuana restrictions not because they are political hacks but because they are judges--nobody, to my knowledge, has ever been able to explain how.
If Scalia does not vote to strike down Obamacare, it will be because of political pressure, not because of judicial doctrine or judicial restraint.
"‘My brother [James] will lose his kingdom by his bigotry and his soul for a lot of ugly trollops’, [King Charles II] was reputed to have predicted."
--Tim Harris, Revolution: The Great Crisis of the British Monarchy, 1685-1720
Mark Thoma figures out that Christy Romer's column is up before I do:
Christina D. Romer: Austerity Is No Quick Answer for Europem: rowth in European gross domestic product was negative in the last quarter of 2011. Unemployment in the entire euro zone in February was 10.8 percent; in Spain it was an astounding 23.6 percent… investors don’t believe that prosperity is just around the corner.
If Joe Nocera had started putting $1,000 inflation-adjusted dollars a month into the S&P 500 in January 1980--back then it would have been $340/month--he would now have $1.3 million in his 401(k): real contributions of $384,000, and $916,000 of accumulated reinvested dividends and capital gains. At a retirement spending rate of 5%/year that is $65,000/year of income: not princely, but the median American worker makes $26,500/year.
… and notes that Joe does not seem able to add 2 and 2:
Take The Next Step, Joe: It's time to increase Social Security benefits.
Team Romney: "You know that auto bailout Mitt opposed? well, it was his idea, so give him credit for it working, even if Mitt opposed it"
Noah Smith does the honors:
Noahpinion: A standard intellectual-Republican narrative of history: John Cochrane has a new post up in which he discusses the historical importance of Milton Friedman's book Free to Choose…. The first half of the post is a discussion of the difference between negative and positive rights, with which I largely (but not completely) agree. But the second half consists of a reading of events since 1980 with which I take a number of exceptions….
Bob Jacobsen, Academic Senate Chair- Berkeley Div:
The process for selecting Chancellor Birgeneau's successor is moving forward… the selection committee has been (mostly) formed…. The more central part is five faculty members, plus President Yudof and Regent Chair Lansing serving ex-officio… Fiona Doyle… Marjorie Shapiro… Donald McQuade… Robert Powell… Judith Stepan-Norris….
Paul Krugman sends us to Martin Wolf:
The impact of fiscal austerity in the eurozone: I have defined the fiscal tightening as the percentage point change in the structural (or cyclically-adjusted) general government deficit from 2008, the year of the crisis, to the forecast for 2012. The assumption is that this change represents the results of policy, rather then cyclical effects. I have taken growth as being the proportional change in GDP from 2008 to 2012….
"Nevertheless, the process by which intellectuals and others were drawn into anti-fascism and therefore towards the left, and often the Marxist left, was neither as linear nor as unproblematical as might appear at first sight. The zig-zags and turns of Comintern and Soviet policy have already been mentioned, and need not detain us: the delay in liquidating the sectarian strategy of the ‘Third Period’ and the about-turn of 1939–41."
--Eric Hobsbawm, How to Change the World: Reflections on Marx and Marxism
The problem was that--outside of central banks--there was never any common analytical framework at all. There was just an illusion on Simon's part (and mine) that there was a widely-agreed upon common analytical framework for macroeconomic analysis.
MY FELLOW AMERICANS:
It is nearly five months since we were attacked at Pearl Harbor. For the two years prior to that attack this country had been gearing itself up to a high level of production of munitions. And yet our war efforts had done little to dislocate the normal lives of most of us. Since then we have dispatched strong forces of our Army and Navy, several hundred thousand of them, to bases and battlefronts thousands of miles from home. We have stepped up our war production on a scale that is testing our industrial power, (and) our engineering genius and our economic structure to the utmost. We have had no illusions about the fact that this (would be) is a tough job -- and a long one….
As President Roosevelt outlines US war economy measures, the Office of Price Administration takes title to all 500,000 new 1942 cars in stock. The nation's production lines have already switched over to weapons, and OPA doles them out from government warehouses to bonafide applicants, like country physicians. By July 1944, only 30,000 will be left. Most Americans have to get by with three gallons a week on car rationing. Civilians are also rationed to two pairs of shoes a year, and shoes are soon third on American hijackers' lists, behind liquor and rayon. In Britain, however, fuel rationing is tougher...most Britons put their cars up on chocks for the duration.
If Bernanke told Obama and Geithner how he viewed the world before they renominated him, we have a major malpractice case here:
Bernanke's Shift: Note - and I think this is important - when Bernanke's Fed took the opportunity to shift down the path of inflation by sanctifying the 2 percent target, they were comfortable with the subsequent shift in the distribution of outcomes. And consider that shift. At a time when households were overwhelmed with excessive debt, the Fed deliberately chose to increase the real burden of the debt by changing the inflation trajectory.
"I shall argue that there was a point in human pre-history when big-brained, cultural, learning people for the first time began to exchange things with each other, and that once they started doing so, culture suddenly became cumulative, and the great headlong experiment of human economic ‘progress’ began. Exchange is to cultural evolution as sex is to biological evolution."
--Matt Ridley, The Rational Optimist
A correspondent emails:
In his paper on Japan, BB explicitly said "a target in the 3-4% range for inflation, to be maintained for a number of years" would be a good idea for various reasons. Now he says that would be "reckless" [for the U.S. today]…
Fed’s doves lose appetite for easing: The fact that the hawks have lost enthusiasm for more quantitative easing is scarcely surprising, given the fall in unemployment, and the stickiness of inflation. But until very recently the hawks have not been in control of the committee. What is more surprising is that the powerful group of doves which includes Ben Bernanke, Bill Dudley and Janet Yellen, and which normally has disproportionate weight on the FOMC, has also taken QE off the agenda…. The doves seem to have changed their policy conclusion without changing their basic view of the economy. In recent speeches, they have all repeated that the current unemployment rate of 8.2 per cent will remain two to three percentage points above the level consistent with the Fed’s mandate….
Given the doves’ determination to interpret these key issues in the direction of highly accommodative policy, it is hard to explain why they have shelved their desire to introduce another bout of QE. To judge from their underlying economic rationale, they are probably just biding their time while inflation is somewhat above target, and will seek to bring easing back on the agenda as soon as they can.
Eschaton: [A]t home GDP growth at a sad 2.2%. It's a complete mystery why this is happening.
Real federal government consumption expenditures and gross investment decreased 5.6 percent in the first quarter, compared with a decrease of 6.9 percent in the fourth. National defense decreased 8.1 percent, compared with a decrease of 12.1 percent. Nondefense decreased 0.6 percent, in contrast to an increase of 4.5 percent. Real state and local government consumption expenditures and gross investment decreased 1.2 percent, compared with a decrease of 2.2 percent.
Like Krgthulu I'm not especially optimistic that the powers that be will own up to being wrong or change their policies. They've convinced themselves that the only thing that matters is "low government borrowing costs" because this means that the people who have all the money have "confidence" in them. Of course low government borrowing costs don't just reflect market confidence by the bond vigilantes, they reflect the fact that their economies are crap and there aren't any productive investments anywhere. But, hey, as long as interest rates are low, nothing else matters.
I might actually prefer evil. This is mostly just stupid.
Mark Thoma comments on Antonio Fatas, who gets hives when he reads James Capretta, who was highlighted by Greg Mankiw playing for Team Republican:
Economist's View: I don't think the evidence supports the assertion that the preponderance of the [Recovery Act] stimulus was saved rather than spent. But suppose that it was. For consumers in particular, this is a form of balance sheet repair…. [I]t looks like the policy is doing nothing. But since consumers won't begin spending normally until their balance sheets are repaired, high savings allows us to exit the recession faster than otherwise….
Again, though, there is plenty of evidence that runs counter to the claim that the stimulus [was saved and so] did nothing…
The argument that current monetary policy in Japan is in fact quite accommodative rests largely on the observation that interest rates are at a very low level. I do hope that readers who have gotten this far will be sufficiently familiar with monetary history not to take seriously any such claim based on the level of the nominal interest rate…. A more respectable version of the argument focuses on the real interest rate…. [T]oday’s real interest rate may not be a sufficient statistic for the cumulative effects of tight monetary policy on the economy…. [O]ne might want to consider indicators other than the current real interest rate—-for example, the cumulative gap between the actual and the expected price level—-in assessing the effects of monetary policy.
And if we apply Bernanke-1999's test applied to the U.S. economy today, we see a deflationary gap.
This deflationary gap is what Scott Sumner means when he claims that Bernanke's monetary policy has been "tight". This is what Ben Bernanke-1999) would be referring to were he--as he would--claim that Bernanke-2012's monetary policy is "tight".
Romney’s fiscal fantasy plan: The Romney campaign has been very clear about what the former governor is promising: $5 trillion in tax cuts on top of extending the Bush tax cuts, with those benefits heavily weighted toward the country’s wealthiest taxpayers. Romney himself has acknowledged the lack of details, stating in reference to his tax plan that “frankly, it can’t be scored.” I have been party for many years to searches for “high-income tax shelters” that can feasibly be closed. I know of no reputable expert in either political party who would find that there is anything even approaching $5 trillion in potential revenue to be generated from this source.
Romney’s fiscal fantasy plan: Political arithmetic is always suspect, and one should always examine carefully the claims of those seeking votes. Smart observers have learned to distinguish between the claims of political candidates and their advisers and proposals that have been evaluated by independent scorekeepers such as the Congressional Budget Office (CBO).
There's this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation….
Congress and Long-Term Unemployment: The talk in Washington these days is all about budget deficits, tax rates, and the “fiscal crisis” that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed…. [T]he percentage of working adult Americans is as low as it’s been in almost thirty years….