UK first-quarter growth revised down: Britain’s economy is in a deeper double-dip recession than first thought after the official output estimate for the first quarter was revised from a contraction of 0.2 per cent to 0.3 per cent.
The Office for National Statistics reduced its second estimate of gross domestic product because construction output fell 4.8 per cent in the first quarter, more than the first estimate. Manufacturing output was flat and the output of the dominant services sector rose an anaemic 0.1 per cent.
Eurozone economy contracts sharply: Eurozone economic activity has contracted this month at the fastest pace for almost three years while German business confidence dropped sharply as the eurozone debt crisis gained significantly in intensity…. Purchasing managers’ indices showed eurozone private sector economic activity contracting in May at the fastest rate since June 2009. The slowdown was particularly sharp in France, but the German index also showed the eurozone’s largest economy had fallen into contraction territory.
Martin van Vliet, economist at ING, said the results “clearly indicate that the eurozone economy remains in dire straits” and “highlight the need for a more expansionary monetary policy, and a less contractionary fiscal thrust in the eurozone”. So far, the eurozone has avoided falling into a technical recession, defined as two quarters of negative growth. Gross domestic product in the first three months of the year was flat, thanks to a strong German performance which compensated for weakness across the rest of the region. But the latest PMI data were consistent with GDP contracting 0.5 per cent in the second quarter, according to Markit, which publishes the survey. An “increasingly steep slowdown” in the crisis-hit eurozone “periphery” countries was infecting both France and Germany, said Chris Williamson, Markit’s chief economist.
I have been telegraphing this question to Norm for a while. It is something I genuinely don’t understand: The Democratic barons of the center—the Lincolns and the Nelsons now, in an earlier day the Sassers, even the Moynihans. People who seemed to think that their proper political and policy strategy was to say “we restrained the Hick from Arkansas or the Hick from Honolulu from doing more liberal things”. That’s a complete disaster as a strategy for your own reelection. You are likely to lose your job. You are likely to lose your majority status. You are likely to lose your chairmanship—which Moynihan felt extremely bitterly—if the president of your party is not perceived to be a big success in his first two years. And yet while someone like Olympia Snow or Susan Collins or even Voinovich, will when the chips are down be a Republican partisan first and a patriot second, this doesn’t seem to hold for the Nelsons, the Lincolns, the Sassers, the Moynihans, the Borens, the Kerreys from Nebraska and a whole bunch of others. What’s going on with them?
It was the Heritage Foundation’s healthcare bill. Romney’s healthcare plan. Something that’s significantly to the right of Olympia Snowe's policy priorities, as demonstrated by her life up to 2008. Why is getting 60 Democratic senators to vote for a Republican health care bill an accomplishment? Wouldn’t an accomplishment have been getting 50 Democratic senators to vote for a Democratic health care bill via reconciliation?
Shouldn’t the Democrats have been organized enough to pass a carbon tax through reconciliation in February of 2009 and then bargain back in the Senate to cap-and-trade?
So is the problem that Daily Kos is not strong enough?
And this ideological small-government dynamic is why all the Republicans voted for unfunded Medicare Part D?
So why aren’t you advocating the rapid destruction of the Republican Party as fast as possible? Why aren’t you telling everyone: “go out and vote Democrat now, for this is your last chance”?
A point of view that has not been well-represented here today is that of Markos Moulitsas Zuniga--of Daily Kos. So let me try to channel what Kos would say:
Look. You two are expecting normal politics to rein in a Republican Party gone bonkers extreme. But it will not work. The press corps will continue to say "he said, she said, yadda yadda yadda" either because they are gutless cowards or because they are bought. In a world of low-information voters, the bonkers extremism and sheer total meanness of the Republican Party will not get through. The only way it could get through would be if moderate Republican barons were to announce that they had had enough and were crossing t'he aisle, and if they did so in a way that they brought their affinities with them. But I don't see Brent Scowcroft doing that, I don't see Colin Powell doing that, I don't see Greg Mankiw doing that, I don't see Marty Feldstein doing that, I don't see Gail Wilensky doing that, I don't see Bob Dole doing that, I don't see Jack Danforth doing that, I don't see Richard Lugar doing that--and I don't see you doing that, Mr. Ornstein. I don't see you calling for the defeat of every single Republican candidate this fall and every fall until the party comes back to reality.
And since all of you moderate Republicans are unwilling to take the only step that might fix the situation on your side, we have to take the only step open to us: We have to stop bringing a set of policy proposals and briefing papers to what the Republican Party has made a thermonuclear exchange. We have to oppose their noise, slime, and lie machine with a noise, disinfectant, and truth machine of our own--and at the same intensity.
That means you moderates need to pick a side and fasten your seat belts, rather than wringing your hands about how the Republicans are being so mean, and you wish they would be less so.”
Mr. Mann and Mr. Ornstein, please give me an alternative strategy I can follow to help the non-insane Republicans recapture their party. Please give me an alternative to signing up with Kos. And if you cannot give me an alternative, why are you two not signing up with Kos right now?
The stakes, after all, are high...
Alphaville: Brad DeLong's note on the first decades of central banking practice and theory didn't get as much attention as his paper on fiscal policy at the zero bound (co-authored with Larry Summers)--but we really think it's worth a read….
[T]here's a nuance in Walter Bagehot%u2019s writing in Lombard Street that often gets missed in discussions of how far policymakers should go during a crisis…. Bagehot never argued that central banks should lend only against good collateral. Bagehot was subtler than that, and less exclusive. What he argued was that central banks should lend against collateral that would be good "in ordinary times"… institutions that would be solvent if the crisis were to ease, not merely to institutions that are immediately solvent. Here's the relevant phrase from Bagehot:
If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security--on what is then commonly pledged and easily convertible--the alarm of the solvent merchants and bankers will be stayed...
And here is DeLong:
It is difficult to see how any institution whose solvency is common knowledge could possibly be illiquid. Indeed, it is only because the central bank's solvency is common knowledge that it can create the safe, liquid "outside money" needed to reflate the financial system in a financial crisis….
For just the latest example of "illiquid but not insolvent"… try Belgium Central Bank governor Luc Cone on eurozone Emergency Lending Assistance…. The phrase… is generally trotted out to insist that decisions about official sector lending in a crisis should be taken with appropriate amounts of caution and prudence. But as an interpretation of what Bagehot said, this is as wrong as it is unimaginative. If anything it gets things backwards: Bagehot was more worried about the possibility that the alarm would not be stayed than that the central bank would lend too liberally.
To read some of the passages from Lombard Street that DeLong includes in his note:
They must lend to merchants, to minor bankers, to "8this man and that man", whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them…. On the surface there seems a great inconsistency… like saying "first, that the reserve should be kept, and then that it should not be kept"…. The ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for… meeting a demand for cash…. [W]e keep that treasure for the very reason that in particular cases it should be lent…
[A]n opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money…
[W]e must keep a great store of ready money always available, and advance out of it very freely in periods of panic, and in times of incipient alarm…
The distinction surely does make for a more complicated world than the straightforward application of "illiquid but not insolvent"--nobody said this was easy….
The basic lesson we take from paper is rather that policymakers should be more worried about making the inclusive circle too small, and less worried about making it too big…. Inevitably this will lead to correspondingly greater concern about moral hazard than would a stricter rule…. But there is an appropriate way to mitigate that risk as well, which is to lend at a penalty rate. Back to DeLong:
And Bagehot's fourth rule is that central bank lending in a financial crisis should be undertaken at a "penalty rate": nobody--no organization, no manager, no trader, and no investor--should end the crisis in any sense happy that they were forced to rely on the government. This would appear to mean, particularly, that equity should be extinguished before the central bank begins providing support at interest rates that are at all concessionary.
And indeed, this is where we think the proper criticism of the various kinds of bailouts in the US should begin…. Sure, wiping out equity holders would likely have required something like nationalisation and all the difficulties that would bring. And the debate over future financial reforms will continue to be complicated…. But these issues don't negate the case that the stakeholders of the biggest banks in particular got a sweeter deal than they deserved. Saying as much is not inconsistent with the wisdom of having bailouts in the first place….
[P]olicymakers should pursue policies that both reduce the demand for and increase the supply of safe assets in a crisis. As the gap narrows, households become more comfortable spending their incomes; companies are more likely to invest retained earnings; banks will feel more comfortable lending given the increased availability of good collateral; and investors will begin moving into riskier assets. Our regular readers will recognise this as a prism through which to view the past few years that FT Alphaville finds sensible.
There are other ways besides lending liberally against collateral that central banks and fiscal policymakers can accomplish this, and the recent examples come easily to mind: buying the risky assets of financial institutions, accepting previously unsuitable securities as collateral, emergency lending, debt guarantees, liquidity swaps, etc. The US has done a relatively better job of this than Europe, replenishing the safe assets that formerly were privately provided with safe assets that are publicly provided. And in a world where safe, liquid assets take on money-like properties, this is another reason to worry about tightening fiscal policy before the recovery has accelerated enough for more privately-produced collateral to return…. [T]he relevant European policymakers haven't done enough to shrink the gap between the demand for safe assets and existing supply; indeed they've done a few things to make it bigger.
Who will be the next Treasury secretary?: Top of the list if Obama gets re-elected is Larry Fink, of Blackrock…. The other main name on the Democratic side of things is Erskine Bowles…. Dan Tarullo… is being presented as Bowles lite…. Roger Altman….
There are four names put forward on the Republican side: John Taylor, Glenn Hubbard, Robert Zoellick, and Kevin Warsh. The first two, I think, would be dreadful: you really don’t want your Treasury to be a political hack. Zoellick and Warsh would be much more credible.
But most likely, if Romney gets elected, he’ll pick someone unexpected — someone he knows well from his Bain Capital days, and feels he can trust.
Jack Thomas interviewing Ann Romney in 1994:
Jack Thomas: Would she try to talk her sons out of gayness, or out of an interracial marriage?
Ann Romney:If they did that, they would obviously have reached the point where they had made the decision, and so, you love your children no matter what. It shocks me that people turn away from children when they make tough decisions. You sometimes hear that if someone joins a religious faith, parents vow not to speak to them. Why do that? Why deny yourself the blessings of associating with children or anybody else you love because they made a choice that may not be exactly what you would choose?
Indeed not. That's not what Bain was about--or supposed to be about.
I don't think that Mitt Romney can legitimately say that he learned anything about how to create jobs in the LBO business. The LBO business is about how to strip cash out of old, long-in-the-tooth companies and how to make short-term profits…All the jobs that he talks about came from Staples. That was a very early venture stage deal. That, you know they got out of long before it got to its current size.
UPDATE: Paul Krugman points out that:
More than half the US population lives in states with more than 8 percent unemployment.... Less than a tenth of the population lives in states with less than 6 percent unemployment...
Sensible Keynesians see no easy way out: [W]hen persistent high unemployment leads the long term unemployed to lose the habits and skills that make them employable. This is probably the more pertinent case in several industrial countries, such as the US and Spain. Increasing employment in a sustainable way today could more than pay for itself if people who would otherwise drop out of the workforce earn incomes.
The key question then is whether more government spending can make a real difference to the most severe employment problems. Here the case for a general stimulus becomes less compelling. In the US, demand is weakest in communities where a boom and bust in house prices has left an overhang of household debt. Lower local demand has hit employment in industries such as retail and restaurants. A general increase in government spending may be too blunt – greater demand in New York is not going to help families eat out in Las Vegas (and hence create more restaurant jobs there). Targeted household debt write-offs in Las Vegas could be a better use of stimulus dollars…. Policy should instead help workers move where there are suitable jobs – for instance, by helping them offload their homes and the associated debt without the stigma of default….
Japan, which had a huge property boom and bust in the late 1980s, provides a salutary warning of the difficulties of stimulus through infrastructure spending. Even though Japan covered much of the country with concrete, it never fully emerged from the crisis. For the Japanese, the long run has arrived, and they are older, fewer and have the highest government debt in the G7.
The US government can still spend. The UK is more on the margin. With a huge financial sector dependent on the government’s financial standing, it can take fewer chances with its finances. Austerity is painful, which is why austerity tomorrow is not credible….
Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery. But we should examine each policy based on a country’s circumstances. We should be particularly wary of populist Keynesians, who parrot “in the long run we are dead” to justify any short-sighted government action. They do the world a disservice by suggesting there are easy ways out. By misleading people and their leaders, they may well precipitate revolution rather than recovery.
See Eichengreen and Sachs (1986), "Exchange Rates and Economic Recovery in the 1930s". History repeats itself, the first time as tragedy, and the second time as… tragedy.
Let's All Devalue Against Each Other: Jeremy Siegel echoes a lot of what some of us have been saying for years about the infeasibility of internal devaluation, but then argues that the answer is devaluation of the euro as a whole. Um, against whom? I mean, it’s not as if America or Japan are towers of economic strength, easily able to provide the demand Europe lacks. That leaves emerging markets. And while I and others have been pushing for years for an end to Chinese currency manipulation, China is at this point (a) not looking very strong itself (b) just not that big in the world economy — not yet. More generally, Europe as a whole, like America, remains a relatively closed economy. Its salvation must be mainly internal.
Now, if devaluation is a code word to mean raising the inflation target, fine.
The last time I got to hear the late James Tobin, he gave a talk in which he joked that as far as he could tell, all the world’s major currencies needed to devalue against each other. This is sort of one of those times — and what that actually tells you is that we need fiscal and monetary stimulus.
From Abdul Abiad, Ravi Balakrishnan, Petya Koeva Brooks, Daniel Leigh, and Irina Tytell, "What’s the Damage? Medium-term Output Dynamics After Banking Crises", cited as IMF (2009):
In trotting around the country giving versions of DeLong and Summers, “Fiscal Policy in a Depressed Economy”, I have found that a point that seemed completely obvious to us is not obvious at all to many.
Here is the point: an optimizing central bank that cares about inflation and unemployment but not about the level of interest rates will, as long as it does not find itself at the zero nominal lower bound, engage in full fiscal offset: will take care to make sure that the net-of-monetary-policy-reaction fiscal multiplier is very close to zero by making the monetary policy reaction function in (r, Y) space nearly vertical.
Econbrowser: State Dependence and Fiscal Multipliers: I found this graph from the April IMF Fiscal Monitor of interest…. The authors describe the results underpinning this graph thus:
The model finds significant evidence that the impact of fiscal policy on economic activity varies with the business cycle and that the effect of fiscal policy on output is nonlinear. Average fiscal multipliers in G-7 countries are significantly larger in times of negative output gaps than when the output gap is positive…. Assuming… that two-thirds of the adjustment comes from spending measures, a weighted average of spending and revenue multipliers in downturns yields an overall fiscal multiplier of about 1.0. In line with the bulk of the previous literature (including the survey by Spilimbergo, Symansky, and Schindler, 2009), short-term spending multipliers are found to be significantly higher than revenue multipliers….
What I find of interest are the US results…. [G]overnment spending has large output effects, particularly in the presence of a negative output gap, once nonlinearities are allowed. Tax revenue changes have much smaller impacts (which are nonsignificant statistically in the linear specification). Similar results are obtained by Auerbach and Gorodnichenko (AEJ:EP, 2012) (ungated version), who use a similar methodology:
Our findings suggest that all of the extensions we developed in this paper—controlling for expectations, allowing responses to vary in recession and expansion, and allowing for different multipliers for different components of government purchases— all have important effects on the resulting estimates. In particular, policies that increase government purchases have a much larger impact in recession than is implied by the standard linear model, even more so when one controls for expectations, which is clearly called for given the extent to which independent forecasts help predict VAR policy “shocks.” Given the historical experience of the US economy, our preferred estimates of the government spending multiplier are between 0 and 0.5 in expansions, and between 1 and 1.5 in recessions.
One interesting implication of these results, beyond the fact that further spending cuts now would be disastrous, is that the hundreds of billions of stimulus during the 2004-08 period –- during which the output gap was slightly positive -- could have been better spent now. (After all, publicly held Federal debt increased by $3.4 trillion going from 2001Q1 to 2009Q1.) Or, as I wrote nearly six years ago:
What we can be certain of is that the choices made by policy makers in the past five years have circumscribed our ability to manage a downturn.
A tag team. Via Judd Legum:
Republican Texas Governor Rick Perry: “The idea that you’ve got private equity companies that come in and take companies apart so they can make profits and have people lose their jobs, that’s not what the Republican Party’s about.”
Republican former House Speaker Newt Gingrich: “The Bain model is to go in at a very low price, borrow an immense amount of money, pay Bain an immense amount of money and leave. I’ll let you decide if that’s really good capitalism. I think that’s exploitation.”
Republican Texas Governor Rick Perry: “It’s all about how much money can we make, how quick can we make it, and then get out of town and find the next carcass to feed upon”
Republican former House Speaker Newt Gingrich: “We find it pretty hard to justify rich people figuring out clever legal ways to loot a company, leaving behind 1,700 families without a job.”
Republican Texas Governor Rick Perry: “Now, I have no doubt Mitt Romney was worried about pink slips — whether he was going to have enough of them to hand out because his company, Bain Capital, of all the jobs that they killed”
Republican former House Speaker Newt Gingrich: “He claims he created 100,000 jobs. The Washington Post, two days ago, reported in their fact check column that he gets three Pinocchios. Now, a Pinocchio is what you get from The Post if you’re not telling the truth.”
Republican Texas Governor Rick Perry: “There is something inherently wrong when getting rich off failure and sticking it to someone else is how you do your business, and I happen to think that’s indefensible”
Republican former House Speaker Newt Gingrich: “If Governor Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years, then I would be glad to then listen to him”
Republican Texas Governor Rick Perry: “If you’re a victim of Bain Capital’s downsizing, it’s the ultimate insult for Mitt Romney to come to South Carolina and tell you he feels your pain, because he caused it.”
Republican former House Speaker Newt Gingrich: “I think there are things you can legitimately look at in Bain Capital. I think there are things you can legitimately look at in anybody’s record including Mitt Romney’s record.
Republican Texas Governor Rick Perry: “They’re vultures that sitting out there on the tree limb waiting for the company to get sick and then they swoop in, they eat the carcass. They leave with that and they leave the skeleton”
Me? I don't think it's Bain Capital's business to worry about the overall level of employment in the country, or about whether the labor market is tight enough and the educational system strong enough to provide labor with the appropriate bargaining power vis-a-vis capital. Bain Capital is not the Federal Reserve, and it is not responsible for funding and staffing America's educational system.
I do think that there is every sign that while at Bain Capital Mitt Romney became convinced that the only real stakeholders in the economy are investors, financiers, and top executives. That's an OK attitude to have if you are running Bain Capital--and if the Federal Reserve is doing its monetary-policy job and if the legislature of California is doing its education-system staffing-and-funding job.
That's not an OK attitude to have if you are the President of the United States. You need to be the president of all the people--not just of the investors, financiers, and top executives.
Via Duncan Black, The Manchester Guardian on the eurocrisis:
Eurozone crisis live: IMF warns UK may need fiscal stimulus: 2.18pm: The Ernst & Young ITEM Club has welcomed the Christine Lagarde's recommendation that UK interest rates should be cut. Andrew Goodwin, its senior economic advisor, said:
Cutting interest rates from 0.5% would certainly be a good place to start – the Fed's target range is 0-0.25% and we have always said that ours should be the same. It won't be the solution on its own, but would certainly send out the right signal.
Goodwin is less convinced that yet more quantitative easing would work (another proposal from the IMF today). Instead, he favours more spending on infrastructure projects, such as high-speed broadband networks, the smart grid and the revival of projects for Carbon Capture at power stations, or new nuclear plants….
1.55pm: Here's economics editor Larry Elliott's take on this morning's announcement from the IMF:
Britain needs a plan B. That was the stark message from the International Monetary Fund on Tuesday as it announced the findings of its checkup on the UK economy. The Washington-based Fund says growth is weak, unemployment too high and the risks are clearly weighted to the downside. Extra stimulus, it says, is needed and needed now.
So, game and set and match to the shadow chancellor, Ed Balls, who has been warning George Osborne for the past 18 months that the government's austerity package is too much, too soon for an economy as enfeebled as Britain's at a time when its major trading partner, Europe, is involved in a life-or-death struggle to save the single currency?…
11.50am: Here's a quick summary of what happened at the International Monetary Fund's briefing in London this morning. The IMF has warned that the UK government should consider a new fiscal stimulus plan, if the British economy does not recover. Should growth remain below target, new fiscal easing measures should be considered -- including temporary tax cuts and more infrastructure spending.
Christine Lagarde, head of the IMF, said that economic growth was currently too low, while unemployment (especially among young people) was too high. The IMF also urged the Bank of England to stimulate the economy through another round of quantitative easing, and to also consider fresh interest rate cuts.
The IMF also congratulated the UK government on its progress in dealing with the crisis, but argued that Britain's current record low interest rates gave it the opportunity to borrow more today. As the FT puts it, Britain "should prepare for Plan B" (although Lagarde didn't put the issue such political terms)….
11.22am: You can also read the full details of the conclusion of the IMF's mission to the UK, here on the Treasury's website. The key points with regard to a new fiscal stimulus are number 12:
There is scope within the current overall fiscal stance to improve the quality of fiscal adjustment to support growth
and number 13:
Fiscal easing and further use of the government's balance sheet should be considered if downside risks materialize and the recovery fails to take off. In particular, if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered
11.12am: The UK Treasury has uploaded a copy of George Osborne's remarks at today's press conference, here on its website. They show that Osborne did not respond to the IMF's argument that a new fiscal stimulus could be required, but instead focused on the recommendation for the Bank of England to cut rates or create more electronic money now....and on the crisis in Europe. Osborne said:
The IMF identifies setbacks in the euro area as the key risk to the UK's economic prospects and financial stability. In the UK, we have a flexible exchange rate and independent monetary policy, which allows us to ease the process of fiscal adjustment with a lower exchange rate and supportive monetary policy. The IMF has advice for the Bank of England on that today. But in the eurozone, indebted countries have to deal with high budget deficits without that support.
Behind the scenes, Treasury officials are also briefing that the IMF has not made a dramatic change in position, and still supports the government's plans.
Greg Mankiw today denounces the faulty memory of "Democratic partisans". Kettle, meet pot:
Greg Mankiw, May 2012:
Greg Mankiw's Blog: Faulty Memories: [A]s I recall, President Bush did not spend as much time blaming his predecessor for bequeathing him a sick economy as President Obama has.
Greg Mankiw, working for George W. Bush, January 2004:
Econbrowser: The 2001 recession revisited: [Data] revisions… strongly suggest that the business-cycle peak was before March 2001. The median date of the peak for the five series discussed here is October 2000. Other data support the notion that economic activity had slowed sharply or even begun to decline by this point, including the stock market, business investment, and initial unemployment claims. For these reasons, the analyses throughout this chapter (including the charts that compare this recession to past recessions) use the fourth quarter of 2000 as the peak of economic activity and the start of the recession…
Mankiw appears to forget not only what he wrote in 2004, but that bequeathing your successors with an unemployment rate rising to 10.0% within a year is very different than unemployment bequeathing your successors with an unemployment rate rising to 5.7% within a year…
None So Blind: Eddie Lazear has an op-ed in the WSJ on the fiscal cliff that, among other things, pooh-poohs any concerns that sudden cuts in spending might hurt the economy. He weasels a bit, but basically conveys the impression that there’s no evidence for Keynesian effects. What this signifies to me is the politicization and corruption overtaking the economics profession…. [I]n the midst of a crisis that has both provided overwhelming evidence for Keynesian views of fiscal policy and inspired a great deal of empirical work that also confirms the case for a Keynesian view, the right wing of the profession is just covering its ears and yelling “La, la, la, I can’t hear you.”
Now how do I structure things so that I keep effectively marking my beliefs to market as we learn more about the world and also as the world changes? How do I keep from becoming a crazy old man yelling at the clouds?
The economy: a calamitous strategy, with no end in sight: The economic conditions through which Britain is living reflect a disgraceful abdication of responsibility by a government that has consigned millions of lives to unnecessary and avoidable hardship and great anxiety about their future prospects….Britain confronts [today's] risk[s] from a position of great weakness in substantial measure because of the economic strategy being pursued by the coalition government, whose leaders shamelessly blame an event that has not occurred for their mistakes. The true problem is that the framework in which economic policy is cast is 100% wrong.
At the heart of this calamitous strategy is a wholesale misdiagnosis of how the market economy functions and a complete failure to understand why the financial crisis took place…. For a generation, business and finance, cheered on by US neoconservatives and free market fundamentalists, have argued that the less capitalism is governed, regulated and shaped by the state, the better…. The lesson of the financial crisis is that this is complete hokum that serves the political and personal interests of the very rich. It has been an intellectual carapace to permit the creation of dynastic personal fortunes while dismantling the social contract…. Yet it has been this flyblown thinking that has informed British monetary, fiscal and financial policy for the last two years – uniting the governor of the Bank of England with the equally bewildered George Osborne. Both are at sea.
The lesson of the financial crisis is unambiguous. Risk – the existence of incalculable unknowns – cannot be handled by markets alone. It has to be socialised…. For 20 years, the titans of high finance assured governments, central banks and regulators that no longer did they have to worry their bureaucratic heads over systemic risk in finance…. The genius innovators of finance, informed by Nobel prize-winning free market economists, had created new financial instruments that worked so effectively distributing risk around the financial system that banks could grow their balance sheets to hitherto unheard of levels, underwritten with ever-less capital.
It was dangerous nonsense, but it did serve to make those at the top of finance very, very rich….
Dismantling a position that has taken a generation to build was obviously going to take at least a decade. Worse, the task was superimposed on another calamitous mistake originating from the same mindset. Britain had vastly overinvested in the business sectors that benefited from rocketing and unsustainable credit growth….
Britain's stock of public debt was modest, giving an intelligent government flexibility in how quickly it lowered the deficit. Britain had a private debt crisis, not a public debt crisis. The intellectual lesson was clear – states, business and society are interdependent; risk has to be socialised.
Instead, the government has done the exact opposite. It has abandoned the scope to manage the economy intelligently and pursued a scorched earth policy of trying to eliminate the structural deficit in four years. It claims that the lowest interest rates for 300 years demonstrate its credibility: rather, they prove the depth of Britain's problems….
We have seen two years of torched economic forecasts – and this unbalanced, stricken economy has yet to be hit by the bulk of the spending cuts. There is still no serious new framework in which innovative businesses can be built and financed. The Lib Dems are threatened with extinction as a national party, proper reward for complicity in such epic mistakes. The Tories should be no less concerned. Their capacity to exist outside the gilded constituencies of London and the south-east is under threat. In democracies, the neglected can hit back and hit back they will.
What Are the Core Competences of High Finance?: Harrumph; I could just as easily say that the core competences of academic economists were a) playing office politics with journal editors and b) recycling the same two or three ideas in irrelevant models. It would be just as kinda-sorta-but-not-really true.
I don't parse the "but not really" in that sentence.
I am reminded of a professor in 1984 telling me that there were good careers to be made reading Keynes's General Theory and stopping every five pages to write an article mathing-up what you had just read.
The baseline for finance is that nearly everybody should be doing buy-and-hold dollar-cost-averaging with a portfolio that is the appropriate for them mix of a Vanguard equity index fund and safe money. But finance does not make it easy for people to do that, and not many people do.
Limits to Arbitrage Bites Again: "In what universe do they have to pay off the protection and not make a fortune on the bonds?"
The universe in which they got the hedge ratio wrong, as they did according to the conference call.
Let me rephrase: in what universe does a well-run hedging investment bank put on a hedge that requires you go far out into the tails on one leg--a 20-to-1 hedge ratio, or more--without worrying about model uncertainty?
The San Francisco Chronicle:
Last Japanese Leave San Francisco - 1942: For the first time in 81 years, not a single Japanese is walking the streets of San Francisco. The last group, 274 of them, were moved yesterday to the Tanforan assembly center. Only a scant half dozen are left, all seriously ill in San Francisco hospitals.
Last night Japanese town was empty. Its stores were vacant, its windows plastered with "To Lease" signs. There were no guests in its hotels, no diners nibbling on sukiyaki or tempura. And last night, too, there were no Japanese with their ever present cameras and sketch books, no Japanese with their newly acquired furtive, frightened looks.
A colorful chapter in San Francisco history was closed forever. Some day maybe, the Japanese will come back. But if they do it will be to start a new chapter—with characters that are irretrievably changed. It was in 1850 — more than 90 years ago — that the first Japanese came to San Francisco, more than four years before Commodore Perry engineered the first trade treaty with Japan. The first arrival was one Joseph Heco, a castaway, brought here by his rescuers. What happened to Heco is, apparently, a point overlooked by historians. He certain came and probably went – but nobody seems to know when or where.
Not for another 11 years did the real Japanese migration begin. In 1861, the second Japanese came here. Five years later, seven more arrived. The next year there were 67, and from then on migration boomed. By 1869 there was a Japanese colony at Gold Hill near Sacramento. In 1872 the first Japanese Consulate opened in San Francisco – an office that passed through many hands, many regimes, and many policies before December 7, 1941. On that fateful day, according to census records, there were 5,280 Japanese in San Francisco.
They left San Francisco by the hundreds all through last January and February, seeking new homes and new jobs in the East and Midwest. In March, the Army and the Wartime Civil Control Administration took over with a new humane policy of evacuation to assembly and relocation centers where both the country and the Japanese could be given protection. The first evacuation under the WCCA came during the first week in April, when hundreds of Japanese were taken to the assembly center at Santa Anita. On April 25 and 26, and on May 6 and 7, additional thousands were taken to the Tanforan Center. These three evacuations had cleared half of San Francisco. The rest were cleared yesterday.
These last Japanese registered here last Saturday and Sunday. All their business was to have been cleaned up, all their possessions sold or stored. Yesterday morning, at the Raphael Weill School on O'Farrell Street, they started their ride to Tanforan. Quickly, painlessly, protected by military police from any conceivable "incident," they climbed into the six waiting special Greyhound buses. There were tears – but not from the Japanese. They came from those who stayed behind – old friends, old employers, old neighbors. By noon, all 274 were at Tanforan, registered, assigned to their temporary new homes and sitting down to lunch.
The Japanese were gone from San Francisco.
If Ellis and Geshekter think that America should not aim to be a "just, free, and equal society", they need to take it up with Thomas Jefferson.
It really is remarkable the tripe that the Los Angeles Times will print:
UC system faculty replaces academics with activism: [T]he tilt to the left among college faculty members has been growing nationwide for several decades. At UC Berkeley, the ratio of Democrats to Republicans even in the hard sciences had grown to 10 to 1 in 2004…. The visible signs of activism at work are shocking. Why should the mission statement of the sociology department at UC Santa Cruz claim that a "just, free and equal society" may require "fundamental social change"? Sociology classes should help students understand how societies work, but at Santa Cruz, the mission seems to be enlisting students in activism…
Why oh why can't we have a better press corps?
Of each of you individuals of the home front I demand the same hardness as is displayed out there at the fighting lines. This includes, above all, that same hanging together which can be found out there in the fighting lines, forged with blood. With proud contempt we shall refute all enemy propaganda, for it consists of nothing but lies, after all. Those who are sending this propaganda to us are the same men who could perform in this same theater in the streets of Berlin during the period of the System. Just as his newspapers at that time, proficient in lying, were full of lies, in the same manner the Jew is lying today, denying the blue of the sky, just as he did then, with the only exception that he can not do it today in our midst, thank God. So he tries to force this garbage originating from his brain by all possible means of propaganda upon the German people. He is mistaken….
The people… will abide by the war laws which had to be passed…. They have been decreed because they were necessary in order to uphold the life of a German people and to assure its victory…. Because the leadership is doing all in efforts to take care of the people, therefore the people has to be sufficiently well behaved and decent and to have understanding and confidence in the action of the leadership. There are always the same few, who exclude themselves from the community. We know them since the war period, yes, we know their previous attitude….
The time has passed when the German people could be fooled; as was the case in the years of 1917-18, and when it finally perished because of its foolishness. We are quite well aware of the fact that the German people are willing to bear the necessary hardship of this war and to hold out during the war, irrespective of its duration, with stern determination. The Fuehrer expressed gratitude and appreciation for this to the German people recently in the session of the German Reichstag. But in this hour the German people, all its fronts and all its classes, have all reason to thank the Fuehrer, and his titanic performance should be visualized by them.
He is the foremost and greatest producer of arms in our war production, he is the brilliant, heroic commander of our armed forces; above all he is the guarantor of German victory. A little while ago I gave you a demonstration of the tremendous shocks to which the Fuehrer is exposed. I showed how strong he has been and how able to bear the hardest, yet to conduct all to a good end as he has mastered all obstacles from whatever source they may have come, as he has exterminated weakness where he has been present. Such a Fuehrer is the guarantor of victory, and the German people, and no other one, has such a Fuehrer. And alone for this reason, we may look forward with a proud sense of security toward the outcome of this fighting, as one of victory…
In terms of the speed of the unemployment rate decline after the recession unemployment peak, we are not doing that badly:
In terms of the speed of the recovery of the labor-force participation rate after the recession unemployment peak, we are doing uniquely badly indeed:
And the same holds for the recovery of the employment-to-population ratio:
Henry Farrell says smart things:
Hayek and the Welfare State: Bruce Caldwell’s defense is not that Hayek didn’t claim that the welfare state was the slippery slope to gulags and jackboots – it’s that he didn’t say this in The Road to Serfdom, although he did say it in his later works, and that one shouldn’t mix up the two arguments. Although Caldwell doesn’t mention it, Hayek himself conflates these arguments in his own introduction to the US edition of The Road to Serfdom…. Finally, Judt doesn’t actually attribute this argument of Hayek to The Road to Serfdom in any of its editions; he is talking, more generically, about Hayek’s “writings.” So I’m calling this one unequivocally in favor of Judt – contra Tyler Cowen, he wasn’t being unfair at all...
Ms. Drew’s firm hand began to weaken after she contracted Lyme disease. Her absences opened the door for tensions among her deputies to flare into the open.... [H]er deputy in New York was increasingly at loggerheads with her deputy in London who spearheaded the strategy behind the losing bet, Achilles Macris.... But there was only so much she could do when she was away, even though some current traders and senior executives at the bank emphasized that Ms. Drew remained vigilant....
[T]he chief investment office was performing well, earning sizable profits for JPMorgan even as other businesses at the bank, like home loans, began to hemorrhage money. Those gains came as the size of the unit’s trades was increasing, but the office’s success blunted questions that were raised about the added risk. During this time, Mr. Macris gained more latitude to build and expand trades.... Althea Duersten, who was Mr. Macris’s counterpart in New York and oversaw North American trading, raised objections to Mr. Macris’s outsize bet but was routinely shouted down by Mr. Macris during conference calls between London and New York, former traders said....
Ms. Drew eventually returned from sick leave and reasserted herself as head of the chief investment office. But instead of sitting one floor above the trading desk, as she had done previously, Ms. Drew, in a reflection of her rising profile, moved upstairs to an office among senior executives on the 48th floor.... The situation worsened in early 2011 when Irene Tse, who came from the hedge fund Duquesne Capital Management, took over for Ms. Duersten as head of the North American trading desk. The chief investment office continued to post healthy profits in 2011, as it had in 2010 and 2009. But the size of its bets continued to grow, and many of the trades assembled by Mr. Macris’s traders were growing more complex, making them harder to exit.... In addition, Ms. Tse was even less equipped to battle Mr. Macris because, unlike Ms. Duersten, she was a newcomer to the firm.... On the conference calls, the yelling continued, only now it was between Ms. Tse and Mr. Macris...
Oppressed White Guys Blogging: On reply 8, I catch Scalzi making a claim that the scalzi can't honestly make. He claims to have tripped on his shoelaces, when "Scalzi" means "barefoot". Actually this brings up reply 3 too. Scalzi's ancestors were shoeless back when surnames were assigned…
The core competences of high finance are supposed to be (a) assessing risk, and (b) matching people with risks to be carried with people with the risk-bearing capacity to carry them.
Robert Waldmann has a different view:
Limits to Arbitrage Bites Again: I think their core competencies are (a) finding fools for counterparties and (b) evading regulations/disguising gambling as hedging.
Regulatory arbitrage, and persuading those who do not understand risks that they should bear them--those are not socially-valuable activities.
Federal Government Should Be Borrowing More Right Now | Stan Collender's Capital Gains and Games: [A] good story by Binyamin Appelbaum about how low interest rates are significantly driving down the government's borrowing costs…. Appelbaum's piece… misses the real story. As Jesse Eisinger of ProPublica wrote about a months or so ago in The Times and I posted about here, there are three important budget implications of this situation.
First, as any business and many individuals would be doing in a similar very low interest rate environment, this is the time the federal government should be borrowing more rather than less, especially if the funds were used to pay for capital projects.
Second, it demonstrates that, to the extent possible, the government should be doing whatever it can to lock-in these low/negative interest rates by borrowing as much long- rather than short-term….
Third… the real question is why government borrowing has been and continues to be such a political issue….
The answer, and something that a pure business/financial reporter such as Appelbaum isn't likely to discuss, is that the whole issue of federal debt has nothing to do with facts…
Jeff Kearns, Caroline Salas Gage and Aki Ito:
Hysteresis Undermining Labor Pattern Becomes Bernanke Fed Focus: After looking for work since May 2009, Raquel Barron, 40, hears the same thing when she interviews: We don’t want to hire someone who’s been jobless for so long. “They still put me at the bottom of the list when I tell them I’ve been unemployed for three years,” said Barron, who moved into her parents’ home in El Sobrante, California, after losing her administrative job at a construction company. “Every single day, I go on Craigslist to look at their listings. But I feel like my chances are only getting worse.”...
Federal Reserve Chairman Ben S. Bernanke agrees. If the labor market heals too slowly, the 5.1 million Americans out of work for at least six months may face declining odds of ever finding a job -- leading to permanently higher unemployment, a phenomenon known as hysteresis. Bernanke says while this hasn’t happened yet -- as weak growth is mainly responsible for the “elevated” jobless rate -- the risk that it could bolsters his case to keep record monetary stimulus in place....
Vice Chairman Janet Yellen said April 11 that continued monetary accommodation is warranted because of the risk that high unemployment may cause “more persistent structural problems” if temporary joblessness becomes more permanent. While she, like Bernanke, doesn’t see any “substantial” evidence of hysteresis yet, it might occur if the labor market doesn’t heal fast enough, she said in New York...
The curious thing is that potential-GDP and NAIRU estimates from not just private-sector forecasters and the CBO but from the Federal Reserve itself suggest that hysteresis has started--only started, but definitely started--to bite already.
Why don't Bernanke and Yellen see the evidence that it is starting to chomp down right now that I do? And why don't they see that the fact that hysteresis is starting to chomp down makes it much more urgent to boost aggregate demand now before even more of our cyclical unemployment turns into structural unemployment?
General Paulus commanding the Nazi Sixth Army launches a general attack on Marshall Timoshenko's forces from the north of the Izyum salient. Bock's troops continue to attack from the south. They hope to surround and annihilate the Soviet armies in the salient. Marshall Timoshenko again pleads to be allowed to retreat from the exposed position. This time Stalin agrees.
Macroeconomic Morality: [C]ontrary to what some people may think, I don’t regard anyone who disagrees with me as necessarily a mendacious idiot. Economics is hard, and people will disagree. Sometimes people will give advice with the best of intentions that turns out, in hindsight, to have been disastrous; that’s a tragedy but not a sin.
But here’s what is indeed a sin: choosing your position based on what is personally convenient.
I may make jokes along the way – I kind of need to in order to stay sane – but the stuff I write about is extremely serious; there’s a vast human tragedy taking place, and anyone who has the ear of the public has a duty to make a good-faith effort to get it as right as he can....
I like to think that I have enough integrity to change my views when it becomes clear that they were wrong. Maybe, maybe not — although it’s probably worth pointing out that I didn’t believe in the liquidity trap and was pretty down on old-fashioned Keynesianism until 1998, when a hard look at Japan and an attempt to understand what was happening there led me to change my mind. Anyway, I try, because the ideas of economists and political philosophers matter.
And too many people aren’t trying, which is, as I said, a sin.
Like John Scalzi Says, White Straight Male Is Life’s Easiest Difficulty Setting. So Why Do White Guys Think They’re Oppressed?: John Scalzi put up a hell of a blogpost yesterday. Titled “Straight White Male: The Lowest Difficulty Setting There Is”…. Go read it. Done? Cool. Because I had a thing or two to say about the comments.
One common theme among Scalzi’s critics is the idea that white guys used to have it good, but affirmative action has put an end to that, and now the deck is stacked in favor of women and people of color. Here’s a snippet of a representative argument (from commenter bpmitche) to that effect:
In the case of academia, for instance, the admittance guidelines often restrict the number of applicants who will be accepted according to their stated race and their declared major…
Bpmitche goes on from there to report admission rates for various demographic categories to the nearest tenth of a percent. (“as a white male, your chances … are at best 31.8% … for a black male or female, 81.9%; for a hispanic male 61.7%, female 60.9%; and 100% for both asian males and females.”)
Damning, right? There’s only one problem with this analysis. It’s completely made up…. Bpmitche estimates that about 45% of the school’s students are white, while the true number is above 60%. He figures the school’s Latino enrollment at 22%, when in fact it’s just 13%. And black students, who bpmitche likewise estimates at 22% of the school’s enrollment, amount to just 0.9% — just 47 students in a school of more than five thousand.
And this, ultimately, is why folks like bpmitche think they’re oppressed.
It’s because they have literally no idea what the facts are.
The fact that somebody both thinks that every Asian-American who applies to Cal Poly Engineering gets in and is capable of using a computer makes me tremble for my country…
And John Scalzi's follow-up:
“Lowest Difficulty Setting” Follow-Up: It’s been a couple of days…. Straight White Males who cannot abide the idea that their lives play out on a fundamentally lower difficulty setting than everyone else’s, and have spun themselves up in tight, angry circles because I dared to suggest that they do. Those dudes are cracking me up, and also making me a little sad.
There have been some general classes of statement/questions about the piece both on the site and elsewhere on the Internet, that I would like to address, so I’ll do that here….
I fundamentally disagree with every single thing you said! That’s fine. It happens.
Your metaphor/analogy is good, except… Well, yes. Metaphors are not perfect; it’s why they’re metaphors and not the thing the metaphor describes. Likewise analogies break down…. Please, make a different and better [metaphor or analogy] — the more ways we can make a general point to people who need to understand that general point, the better chance they will listen.
Your description should have put wealth/class as part of the difficulty setting. Nope. Money and class are both hugely important and can definitely compensate for quite a lot, which I have of course noted in the entry itself. But they belong in the stats category because wealth and class are not an inherent part of one’s personal nature — and in the US particularly, part of our cultural sorting behavior…. You can disagree, of course. But speaking as someone who has been at both the bottom and the top of the wealth and class spectrum here in the US, I think I have enough personal knowledge on the matter to say it belongs where I put it.
I’m a straight white male and my life isn’t easy!… That’s actually fully accounted for in the entry. Go back and read it again….
What about affirmative action (and/or other similar programs)? It just proves SWMs don’t have it easy anymore! Asserting that programs designed to counteract decades of systematic discrimination are proof that Straight White Males are not operating on the lowest difficulty setting in the game of life is not the winning argument you apparently believe it is. I’ll let you try to figure out why that is on your own….
Your piece is racist and sexist. This particular comment was lobbed at me primarily from aggrieved straight white males…. [L]et me just say that I think it’s delightful that these straight white males are now engaged on issues of racism and sexism…. Keep at it, straight white males! You’re on the path now!
I feel this piece is an attack on straight white men. You need to re-calibrate your definition of “attack,” then, because it’s depressingly (or hilariously) out of whack. Suggesting all straight white men should be defenstrated into a courtyard covered with spikes would be an attack. Noting that straight white men operate at the lowest difficulty setting in life is an observation….
You did not lay out in exhaustive factual detail, with graphs and charts, your assertion that straight white men operate at the lowest difficulty setting in our culture. Also generally lobbed at me by aggrieved straight white men. And indeed I did not. Also, when I write about tripping over my shoelaces and falling on my ass, I do not preface the comment with a comprehensive discussion of the theory of gravity….
In your comment thread with the article, you censored people who disagreed with you. I indeed malleted quite a few people in that comment thread. Most of them disagreed with me philosophically on the issue under discussion. They were also being assholes. They were malleted for the latter, not the former. Who gets to judge when someone’s being an asshole here? Why, I do. Because it’s my site…. Now, people may be upset that in addition to deleting people’s comments, I also mocked them when I deleted their comments….
I am never going to buy anything you write ever again. I don’t care.
Not every straight white man thinks what you wrote is wrong. Of course….
You wrote the article and pointed out the straight white men live life on the lowest difficulty setting. Okay, fine. What do I/we do next? Well, that’s up to you, isn’t it? What I’m doing is pointing out a thing. What you do with that thing is your decision. That said, here’s what I do: recognize it, and work to make it so the more difficult settings in life becomes closer to the one I get to run through life on — by making those less difficult, mind you, not making mine more so.
Glaukon: "Wow. What a crowd. And after graduation too!"
Adeimantos: "It's a lot cheaper than seeing them at the Commonwealth Club."
Glaukon: "And all this time you have claimed to be a political scientist! I always new you were an economist…"
Adeimantos: "I am no economist. I have just spent too much of my life around you horrible people…"
I asked a bunch of questions. Here is a question I did not ask:
"A point of view that has not been well-represented here today is that of Markos Moulitsas Zuniga--of Daily Kos. So let me try to channel what Kos would say:
"'Look. You two are expecting normal politics to rein in a Republican Party gone bonkers extreme. But it will not work. The press corps will continue to say "he said, she said, yadda yadda yadda" either because they are gutless cowards or because they are bought. In a world of low-information voters, the bonkers extremism and sheer total meanness of the Republican Party will not get through. The only way it could get through would be if moderate Republican barons were to announce that they had had enough and were crossing t'he aisle, and if they did so in a way that they brought their affinities with them. But I don't see Brent Scowcroft doing that, I don't see Colin Powell doing that, I don't see Greg Mankiw doing that, I don't see Marty Feldstein doing that, I don't see Gail Wilensky doing that, I don't see Bob Dole doing that, I don't see Jack Danforth doing that, I don't see Richard Lugar doing that--and I don't see you doing that, Mr. Ornstein. I don't see you calling for the defeat of every single Republican candidate this fall and every fall until the party comes back to reality.
"'And since all of you moderate Republicans are unwilling to take the only step that might fix the situation on your side, we have to take the only step open to us: We have to stop bringing a set of policy proposals and briefing papers to what the Republican Party has made a thermonuclear exchange. We have to oppose their noise, slime, and lie machine with a noise, disinfectant, and truth machine of our own--and at the same intensity.
"'That means you moderates need to pick a side and fasten your seat belts, rather than wringing your hands about how the Republicans are being so mean, and you wish they would be less so.'
"Mr. Mann and Mr. Ornstein, please give me an alternative strategy I can follow to help the non-insane Republicans recapture their party. Please give me an alternative to signing up with Kos. And if you cannot give me an alternative, why are you two not signing up with Kos right now?
"The stakes, after all, are high."
Jack Citrin writes:
UC Berkeley | Institute of Governmental Studies: Special Session of the Research Workshop on American Politics: Please join us Friday, May 18 at noon in the IGS library (109 Moses Hall), for a special session of the Research Workshop on American Politics with authors Thomas Mann and Norm Ornstein. As always lunch will be served. Mann, a senior fellow at the Brookings Institution, and Ornstein, a resident scholar at the American Enterprise Institution, have observed Washington politics for more than 40 years — and they're acclaimed for their carefully nonpartisan positions. Now, they say, Congress is more dysfunctional than it has been since the Civil War, and they know who to blame.
One of the two major parties, the Republican Party, has become an insurgent outlier — ideologically extreme; contemptuous of the inherited social and economic policy regime; scornful of compromise; unpersuaded by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition
they write in their new book, It’s Even Worse Than It Looks, How the American Constitutional System Collided with the New Politics of Extremism
With 80 gigabytes of disk space free, this is not a message that Microsoft Word should ever be giving me--especially as it then gives me no options but to kill and restart the program, losing everything done since the last save:
Frantically taking screenshots with Skitch of every page that I have changed before I euthanize Microsoft Word is no way to live…
Is Eurozone Austerity Self Defeating: Suppose DeLong and Summers (full paper here) are right, and at the zero lower bound temporary fiscal stimulus leads to an eventual reduction in the debt to GDP ratio because of hysteresis. Does that mean that all this austerity in the Eurozone is counterproductive?…
‘Stimulus’ involves in the short term cutting government spending less (at least). Unless multipliers are implausibly large this will raise both deficits and the debt to GDP ratio in the short run (the red line). What DeLong and Summers argue is that the negative effects of austerity on output in the medium term will mean that the two paths for debt to GDP will at some point cross. In other words stimulus will at some point lead to a better outcome for the debt to GDP ratio.
For any government not having to pay a large risk premium on their debt, and not likely to encounter such a premium, this is an important argument. If true, it does indeed suggest that the rapid austerity being undertaken by countries such as the UK will eventually make their fiscal position worse. In addition, arguments that we have to follow the austerity path because the stimulus path is not credible are beside the point…. Nor does the argument that we cannot change course now make much sense. In the UK and US fiscal policy does not have to be credible, it just needs to be sensible.
In the case of Ireland and other Eurozone countries the immediate motivation for austerity is a high risk premium on government debt. What potential investors in Irish government debt are worried about is not where debt is likely to end up, but the likelihood of default before we get there. Here the credibility argument does apply.
One reason why government might default is a political inability to cut spending or raise taxes enough to get the primary budget balance into surplus. Governments can demonstrate that they do have that ability by cutting the deficit rapidly now….
The markets are, quite rightly, not very interested in what happens into the medium term, because by that time default risk under either policy has all but disappeared. So if the overwhelming priority is to reduce the risk premium on government debt, austerity makes sense….
Which brings us to Germany. In the past I and others have written as if this Hobson’s choice faced by periphery Eurozone countries could be partially relieved if only Germany would expand more rapidly. However, as I outlined here, this was not a very realistic wish…. The reason we will not see rapid expansion in Germany is because the economy is doing all right as it is. While inflation of 5% in Germany would certainly be very useful for Spain et al, it would not be in the national German interest. The only possible exception might be if the Eurozone as a whole looked like coming apart, in which case it might be in Germany’s interests to incur these costs….
Seeing the Eurozone as a single bloc, it makes sense to note that fiscal correction in this bloc is far more rapid than in the US or even the UK, and for the area as a whole that will be very damaging. If there was a Eurozone government, it should be undertaking a substantial fiscal stimulus in Germany right now. But to blame Germany for not doing this of their own accord is rather pointless….
So the only real hope is monetary policy…
I would disagree. It is in Germany's long-term interest to be a good macroeconomic steward for Europe: to be a proper Kindlebergian hegemon. The fact that Germany now has a relatively undervalued internal price level, is experiencing an export boom, and has no internal desire for more-rapid demand expansion is neither here nor there.
A country as large as Germany in the European economy needs to act like a responsible grownup. If it isn't going to be a proper hegemon, then perhaps it should divide itself into six smaller countries, let France become the single largest European economy, and let France try to do the job…
Larry Meyer, however, says that it does not really matter:
Macroadvisers: Good News for the Fed!: The Senate today finally confirmed Jerome (Jay) Powell and Jeremy Stein as Governors of the Federal Reserve Board…. excellent choices and will surely strengthen the deliberations around the FOMC table, even though they will not affect the outcome!… Jay Powell has an impressive background in financial markets and macro policy…. [H]e practiced law and worked both in investment banking and private equity. He served as Under Secretary of the Treasury for Domestic Finance under President George H.W. Bush.
Jeremy Stein is a distinguished economics professor at Harvard with a worldwide reputation and a record of public service…. His specialties include finance, monetary policy, risk management, and banking. He served earlier in the Obama Administration as a senior advisor to the Treasury Secretary and was on the staff of the National Economic Council.
The two new Governors will strengthen whatever Board committees they serve on-to which the Chairman delegates significant authority-but will not directly affect monetary policy decisions. They will make especially important contributions to discussions and decisions related to financial stability and bank supervision and regulation. They will also add valuable insights on financial market developments.
Other than through their interaction with the Chairman, however, which we shouldn't discount, Jay Powell and Jeremy Stein will not affect decisions on the funds rate and the Fed's balance sheet. The Chairman is and will continue to be the dominant force on the Committee for such decisions. He is the "decider," as we like to say…
Austerity, American Style: Via Mark Thoma, Antonio Fatas has a good piece on the exceptional weakness of government spending in this recovery. I thought I might add to that observation. Let’s look at real government… purchases of goods and services — from all levels of government during three recoveries: the current expansion, the Bush Boom (such as it was), and Morning in America…. Which one is different? Now, this doesn’t include safety-net spending…. But actual government purchases have been uniquely weak, largely because of budget distress at the state and local level…
Much To Answer For: The esteemed political scientist and criminologist James Q. Wilson died in March. He wrote many important works, including a leading textbook on American government currently in its twelfth edition. He was awarded the Presidential Medal of Freedom in 2003.
His most significant legacy, however, lies in the impact of his scholarship and journalism on the contemporary structures of social control in the United States. His 1975 book Thinking About Crime provides academic justification for a massive increase in imprisonment in the United States that began in the late 1970s and has yet fully to run its course. (The United States incarcerates at five times the rate of Britain, the leading jailer in Europe.) It is therefore entirely fitting—indeed, imperative—that there be extensive, critical public discussion about the intellectual impact of this towering figure of the study of American government….
In 1987 we co-edited a volume on families, schools, and delinquency prevention. We served together for a decade on the editorial board of the influential neoconservative magazine The Public Interest. And in the early 1990s we were colleagues on the Council of Academic Advisors at the American Enterprise Institute.
That last association ended for me in 1995, when I publicly resigned my position after AEI fellows wrote two incendiary and what seemed to me borderline racist books—The Bell Curve and The End of Racism (1995), by Dinesh D’Souza. In those years, and partly in response to those two books, I began my long march out of the right wing of American intellectual life. And, in so doing, I slowly came to the view—which I continue to hold—that some of Wilson’s labors have done enormous damage to the quality of American democracy. His rationalizing and legitimating of over-reliance on incarceration in U.S. social policy have been particularly destructive. It frustrates me that even as mounting evidence over the past decade showed that crime control had become too punitive, Wilson stubbornly reiterated the views that he had developed four decades ago….
Call me unforgiving, but I can still remember sitting at Jim and Roberta Wilson’s dinner table in Malibu, California in January 1993 listening to Murray explain, much to my consternation and with Jim’s silent acquiescence, that social inequality is inevitable because “dull” parents are simply less effective at child-rearing than “bright” ones. (I rejected then, and still do, Murray and Herrnstein’s claim that profound social disparities are due mainly to variation in innate individual traits that cannot be remedied via social policy.) Neither can Glenn Loury in 2012 ignore what he failed to see in 1983: that Wilson and Herrnstein’s Crime and Human Nature—a book that sets out to lay bare the underlying bio-genetic, somatic, and psychological determinants of individuals’ criminal behavior—is an enterprise of dubious scientific value. The behavioral theories of social control that Wilson spawned—see, for instance, his 1983 Atlantic Monthly piece, “Raising Kids” (not unlike training pets, as it happens)—and the pop–social psychology salesmanship of his and George Kelling’s so-called “theory” about broken windows is a long way from rocket science, or even good social science. This work looks more like narrative in the service of rationalizing and justifying hierarchy, subordination, coercion, and control. In short, it smacks of highbrow, reactionary journalism.
But, unlike most tabloid scribblers, Wilson’s writings had a massive effect….
With all due respect to the influence of his writings on bureaucracy, policing, and social policy, I’m just not buying the hagiographies that appeared in the likes of the Wall Street Journal, Los Angeles Times, and Boston Globe after his passing. For my money, he died with an awful lot to answer for.
Looking Forward to Four Years During Which Most if Not All of America's Potential for Human Progress Is Likely to Be Wasted
With each passing day Donald Trump looks more and more like Silvio Berlusconi: bunga-bunga governance, with a number of unlikely and unforeseen disasters and a major drag on the country--except in states where his policies are neutralized.
Nevertheless, remember: WE ARE WITH HER!
The purpose of this weblog is to be the best possible portal into what I am thinking, what I am reading, what I think about what I am reading, and what other smart people think about what I am reading...
"Bring expertise, bring a willingness to learn, bring good humor, bring a desire to improve the world—and also bring a low tolerance for lies and bullshit..." — Brad DeLong
"I have never subscribed to the notion that someone can unilaterally impose an obligation of confidentiality onto me simply by sending me an unsolicited letter—or an email..." — Patrick Nielsen Hayden
"I can safely say that I have learned more than I ever would have imagined doing this.... I also have a much better sense of how the public views what we do. Every economist should have to sell ideas to the public once in awhile and listen to what they say. There's a lot to learn..." — Mark Thoma
"Tone, engagement, cooperation, taking an interest in what others are saying, how the other commenters are reacting, the overall health of the conversation, and whether you're being a bore..." — Teresa Nielsen Hayden
"With the arrival of Web logging... my invisible college is paradise squared, for an academic at least. Plus, web logging is an excellent procrastination tool.... Plus, every legitimate economist who has worked in government has left swearing to do everything possible to raise the level of debate and to communicate with a mass audience.... Web logging is a promising way to do that..." — Brad DeLong
"Blogs are an outlet for unexpurgated, unreviewed, and occasionally unprofessional musings.... At Chicago, I found that some of my colleagues overestimated the time and effort I put into my blog—which led them to overestimate lost opportunities for scholarship. Other colleagues maintained that they never read blogs—and yet, without fail, they come into my office once every two weeks to talk about a post of mine..." — Daniel Drezner
"I now know it is a rising, not a setting, sun" --Benjamin Franklin, 1787
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