J. Bradford DeLong's Grasping Reality with a Prehensile Tail

Ten Economics Paragraphs Worth Reading: December 16, 2009

1) Paul Krugman: Would cutting the minimum wage raise employment?:

Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage.... [R]educing wages would at best do nothing for employment; more likely it would actually be contractionary.... The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?... [T]he textbook argument... lower wages lead to a lower overall price level. This increases the real money supply, and therefore liquidity. As people try to make use of their excess liquidity, interest rates go down, leading to an overall rise in demand.... [Y]ou could achieve the same effect, much more easily, simply by having the Fed increase the money supply. But what if we’re in a liquidity trap, with short-run interest rates at zero? Then the Fed can’t achieve anything by increasing the money supply; but by the same token, wage cuts do nothing to increase demand. Wait, it gets worse. A falling price level raises the real value of debt. To the extent that debtors are more likely to cut spending in such a case than creditors are to increase it — which seems likely — the effect of the wage cuts will actually be a fall in demand. And... to the extent that people expect further declines in wages and prices, this raises real interest rates, which is even more contractionary. So proposing wage cuts as a solution to unemployment is a totally counterproductive idea. Not that I expect any of this discussion to make any impact on those proposing it.

2) Howard Gleckman: The Estate Tax Debate: Watch the Rate, Not the Exclusion:

Congress is trying to figure out what to do. It has only two basic options on the table: Extend the 2009 rules (a 45 percent rate and a $3.5 million exemption) for another year or two and figure it all out when it addresses the rest of the expiring Bush tax cuts in 2010. Or find on a permanent fix. The House has agreed to extend the current rules permanently. The Senate, tied in knots over the health bill, is likely to go for a temporary fix, but no-one knows when. Sometime soon, this will all sort itself out. But Congress is playing a game of hide-the-pea here. Most of the attention has been on the size of the exclusion. Should all estates valued at $3.5 million be excluded from tax? Should the exemption be increased to $5 million?  (And, btw, with a bit of estate planning, a couple can easily double their exemption).  Don’t get me wrong, the exemption matters, but the rate is far more important.  To see why, just ask yourself the question: Would I rather have a higher exemption or a lower rate? Then do some simple math...

3) OECD: The OECD today invited Chile to become its second member in Latin America after Mexico:

The OECD today invited Chile to become its second member in Latin America after Mexico. Chile will formally accept this invitation when an Accession Agreement is signed in the presence of Secretary-General Angel Gurría and President Michelle Bachelet on 11 January 2010 in Santiago. The invitation to Chile to become the Organisation’s 31st member comes at a time when the OECD is expanding its relations with the region. In addition to acknowledging Chile’s efforts to develop its market-based economy, it confirms the OECD’s determination to explore new frontiers to help governments address world economic challenges while championing the highest standards in public policy. “For the OECD, the accession of Chile is a great contribution in our drive to expand our global reach and to transform the Organisation into a more plural and inclusive institution that will play an increasingly important role in the global economic architecture,” OECD Secretary-General Angel Gurría said at a ceremony at OECD headquarters in Paris...

4) Free Exchange on Ben Bernanke:

I think his defining decision, this year at least, has been to conclude that 10% unemployment is acceptable—that having averted a Depression-style 25% unemployment scenario, his countercyclical work is complete. And that the risk of sustained high unemployment is outweighed by the risk of continued efforts to boost the economy (either by asking for more fiscal stimulus or targeting nominal GDP or generally committing the central bank to some level of inflation).... He does not think that pushing the unemployment rate down to, say, 7% would overextend the economy and touch off a big increase in wages and prices. He simply seems to think that leaving his primary job half done is acceptable. That's a pretty momentous choice, affecting millions of people directly and billions indirectly. It will shape American politics and economics for the next decade, at least. So sure, I'd say he deserves the person of the year award. But reappointment? That's another story entirely.

5) James Kwak: The Myth of Dick Fuld « The Baseline Scenario:

Dick Fuld began with $301 million in stock, received $62 million in cash bonuses, and sold $471 million in stock before losing his supposed $1 billion.... [L]et’s say you’re a bank CEO with a lot of wealth tied up in stock. Satan comes along and offers you the following deal: if you undertake a strategy with a lot of risk, every year you will get a cash bonus, every year your stock price will go up, every year you will be able to sell some (but not all) of your stock at this higher price, and every year you will get more restricted stock awards–until at some point everything collapses and the stock becomes bankrupt. Would you take that deal? Of course you would. Yes, it means that your losses in the final crash will be bigger than with a more conservative strategy. But it means that you would make a lot more money in the meantime.... Now, there are things in life besides money, and Dick Fuld has no doubt suffered tremendously in the past year. And at this point, maybe he would gladly give up that $533 million he took out to see a healthy Lehman Brothers. So yes, there are other reasons why CEOs do not want to see their banks blow up. But holding a lot of restricted stock is not necessarily one of them...

6) Kathy Ruffing and James R. Horney: President Obama Largely Inherited Today’s Huge Deficits — Center on Budget and Policy Priorities:

Some critics charge that the new policies pursued by President Obama and the 111th Congress generated the huge federal budget deficits that the nation now faces. In fact, the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years (see Figure 1). The deficit for fiscal 2009 was $1.4 trillion and, at an estimated 10 percent of Gross Domestic Product (GDP), was the largest deficit relative to the size of the economy since the end of World War II. Under current policies, deficits will likely exceed $1 trillion in 2010 and 2011 and remain near that figure thereafter. The events and policies that have pushed deficits to astronomical levels in the near term, however, were largely outside the new Administration’s control. If not for the tax cuts enacted during the Presidency of George W. Bush that Congress did not pay for, the cost of the wars in Iraq and Afghanistan that began during that period, and the effects of the worst economic slump since the Great Depression (including the cost of steps necessary to combat it), we would not be facing these huge deficits in the near term. While President Obama inherited a bad fiscal legacy, that does not diminish his responsibility to propose policies to address our fiscal imbalance and put the weight of his office behind them. Although policymakers should not tighten fiscal policy in the near term while the economy remains fragile, they and the nation at large must come to grips with the nation’s deficit problem. But we should all recognize how we got where we are today...

7) David Leonhardt: If Health Reform Fails, America’s Innovation Gap Will Grow/a>:

Greg Woock is the chief executive of Pinger, a fast-growing Silicon Valley company that makes iPhone applications. So Mr. Woock spends a fair amount of time interviewing job applicants. In almost every interview, he told me recently, the applicant asks about Pinger’s health insurance plan. Now think about that for a minute. In the cradle of American innovation, workers are making career choices based on co-payments, pre-existing conditions and other minutiae of health insurance. They are not necessarily making decisions based on what would be best for their careers and, in turn, for the American economy — that is, “where their skills match and where they can grow the most,” as another Silicon Valley entrepreneur, Cyriac Roeding, says. Health insurance, Mr. Roeding adds, “is distorting the decision-making.” It is impossible to know how much economic damage these distortions are causing, but they clearly aren’t good. Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance.... Given the consequences of the innovation deficit — slower growth, fewer jobs, lower living standards — you would want to look for every possible solution, wouldn’t you? You’d want to allow more talented immigrants to become citizens, so that the next Sergey Brin, Liz Claiborne or Andy Grove, immigrant entrepreneurs all, didn’t end up starting their companies elsewhere. You would want to clean up the tangled corporate tax code. You would want to finance more basic research. And you would want to make people feel confident that they could take risks — start a new company or join a young one — without worrying about whether they would still receive adequate medical care...

8) Yegor Gaidar: The Collapse of the Soviet Union: Lessons for Contemporary Russia:

In present Russian society, there is a disturbing tendency to mythologize the late Soviet period. The myths include the belief that the Soviet Union, despite its problems, was a dynamically developing world superpower, until usurpers initiated disastrous reforms.... The collapse can be traced to two factors in the Soviet economy: grain and oil. In 1928 and 1929, Russia debated whether to choose “the Chinese model” of agriculture, but Stalin chose forced collectivization and extraction of food from the countryside... a sharp decrease in long-term agricultural productivity.... [G]rain procurement did not increase at all from the 1960s on. Russia--the biggest exporter of grain during the prewar period--became the world’s largest importer. As the Soviet Union grappled with serious problems with agriculture, rich oil deposits were discovered in western Siberia in the 1970s. There was intense debate within the Soviet leadership on how to exploit the oil and production.... [T]he timeline of the Soviet downfall begins not in August 1991, but on September 13, 1985. Sheik Imani, the Saudi Arabian minister of oil, declared that his country would radically change its oil policy, ceasing to protect oil prices. Over the next six months, production in Saudi Arabia increased fourfold in real terms.... Short on hard currency, the Soviet Union had to choose between ending subsidies to Warsaw Pact countries, radically cutting food imports, or drastically reducing military production. None of these were seriously discussed by the Soviet leadership. They chose to close their eyes and hope the problem would magically disappear.... Maligned foreign minister Eduard Shevardnadze was ordered to secure funding at any cost. The Soviet leadership then realized the full gravity of the situation: the Soviet economy hinged on oil production...

9) STUPIDEST THING I HAVE READ TODAY: Armenian-American Person of Color Mark Krikorian Calls for a Boycott of the Census:

It's not surprising that such an effort would come from NALEO, the National Association of Latino Elected and Appointed Officials, because the more illegal aliens who get counted, the more seats the group's members get in Congress, state legislatures, county councils, etc., and the more taxpayer money non-profit groups will be able to siphon off to serve their ostensible constitutents. But it's also not surprising that NALEO would overlook the obvious implications that illegal aliens should return to their ancestral communities — its membership and staff are overwhelmingly left-wing Democrats (2008 ACU score for the chairman of the Congressional Hispanic Caucus Nydia Velazquez: 0; ACU score for Luis Gutierrez, sponsor of the Democrat amnesty bill: 0; Co-chairman of the Congressional Progressive Caucus: Raul Grijalva). If illegal aliens won't go back to their home towns to be counted, at least they can strike a blow against Caesar and boycott the census!

5) FROM THE ARCHIVES: The Lost[?] Promise of International Capital Flows (January 12, 2004):

Those of us card-carrying neoliberals who pushed for large-scale opening of capital flows in the early 1990s had a particular vision of the future in our minds' eyes--a vision of the future did not come to pass. We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products that they exported, and how expensive were the capital goods made in the post-industrial core that they needed to import in order to industrialize and develop. "Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked. Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge to the industrial structures and living standards of countries where people were rich. Certainly such large-scale borrowing and lending had played a key role in the economic development of the late-nineteenth century temperate periphery--Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa--more than a century ago. But the future we saw did not come to pass. Instead of capital flowing from rich to poor, it flowed from poor to rich--and overwhelmingly in recent years into the United States of America, whose rate of capital inflow is now the largest of any country, anytime, anywhere. Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash...

Listen to the IMF on Cimate Change

Carlo Cottarelli:

Climate Change—Some Simple (and Quite Convenient) Truths: As world leaders gather in Copenhagen, climate change is again in the headlines. The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let’s not forget, however, that much of the economics is simple.

It’s an externality, stupid—so price it

Climate change is an “externality” problem. Individuals, firms, and, yes, governments, do not take full account of the harm that others suffer when they emit greenhouse gases. So they emit too much. And the best way to stop them doing this is to charge them a price for the carbon content of what they emit: a “carbon price.” Admittedly, climate change is a particularly complicated externality. Since the damage will fall largely on future generations, the proper price depends very much on how we value their well-being relative to ours. The importance of such long-lived investments as power-stations, and the heavy sunk costs of investing in new technologies, mean that the carbon prices people expect in the future are even more important than the price now. And the fact that the world’s supply of fossil fuels is ultimately fixed means that the effect of carbon prices on total emissions is not as clear cut as it may seem. But the basic principle remains—polluters should pay...

Reconfirm Ben Bernanke...

Paul Krugman worries about his friend Ben Bernanke:

Bernanke and the cover curse - Paul Krugman Blog - NYTimes.com: So Time magazine has named Ben Bernanke Person of the Year. Be afraid, be very afraid. The magazine cover curse is a well-known phenomenon: you should always short the stock of a company whose CEO is the subject of a glowing cover story in a major magazine...

And immediately after I see this:

David Dayen: FDL News Desk: Jeff Merkley To Vote Against Bernanke Confirmation: Sources tell FDL News that Sen. Jeff Merkley (D-OR), a member of the Senate Banking Committee, will vote against Ben Bernanke’s nomination for a second term as Chair of the Federal Reserve.... [A]t least five Senators have placed a hold on a Senate floor vote, with many of them blocking the nomination until they get a standalone vote on auditing the Federal Reserve.... UPDATE: Here’s Merkley’s statement:

Tomorrow, I will vote against confirming Ben Bernanke as Chairman of the Federal Reserve. The reason, in short, is that as Chairman, Dr. Bernanke failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families. My decision is based on my fundamental belief that our economy cannot recover if we do not put Main Street first.... As a member of the Board of Governors, Chair of the Council of Economic Advisers, and then ultimately as Chairman of the Board of Governors, Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.... [A]lthough Wall Street prospered in the short-term from reduced leverage requirements, securitization of faulty mortgages, and the explosion of derivatives, Americans did not. The expansion that occurred from 2002 to 2007 became the first economic expansion in which working families were worse off at the end than at the beginning. This is not a path that we can afford to travel again.

In my view, Ben Bernanke has made four mistakes--at least three of which I said at the time were mistakes:

• Not supporting Ned Gramlich's push for tighter regulatory oversight of mortgage financing and associated securitizations and derivatives.

• Not moving immediately in early 2008 to nationalize more of the banking system and support asset prices to a greater extent.

• Believing in the late summer of 2008 that the big problem was that the Federal Reserve had pumped too much liquidity into the economy, and believing that a bankruptcy on the part of Lehman Brothers would send a healthy message to bankers that they would not always be bailed out by the government and would send that maessage without having damaging consequences for the economy as a whole.

• Failing to walk down the strategy tree in the fall of 2008 and thus to place a high priority on ensuring that if the government's interventions in financial markets worked to stabilize asset prices and avert depression then the government would profit and would be seen to profit healthily from its interventions.

In these mistakes, Bernanke played second fiddle (and Geithner played third fiddle) to first Alan Greenspan and then Hank Paulson. But they were not Paulson and Bernanke's mistakes only: they were Bernanke's.

Now I am morally certain that had I been in Bernanke's (or Paulson's, or Geithner's) shoes over the past two years, I would have made more and bigger mistakes, and we would right now be worse off. He has done better as Fed Chair than I would have, or indeed that almost everyone I can think of would have. So I am inclined to judge Bernanke lightly, and say that the Senate should confirm him for a second term in spite of his mistakes: he is, I think, one of the very best we can get for the job right now, and he won't make the same mistakes again

We Mourn the Death of Yegor Timurovich Gaidar

R.i.P. Yegor Timurovich Gaidar (March 19, 1956 - December 16, 2009.

I talked to him at length only once--when he came to Berkeley to give a lecture in the late 1990s, and wound up at my house for Thanksgiving dinner.

He said that in retrospect he had had only two important decisions to make:

• At the start of his tenure, whether to decontrol prices or to send the Red Army out into the country to collect the harvest for the cities at gunpoint.

• In the middle of his tenure, whether to go ahead with voucher privatization or try a more "Chinese" style system by which the private sector grew up around the still-operating state-owned sector.

He believed that he had made the right decisions. If he had sent the Red Army to collect the harvest at gunpoint, he said, people would have gotten shot and the political consequences woukd have been incalculable and could have been very bad indeed. If he had attempted ther "Chinese" approach, he said, it would have led to the nomenklatura stealing absolutely everything as they used their positions as managers of the state-owned sector to tunnel everything valuable out from the state-owned sector and into their own private businesses. The only thing that made the "Chinese" approach feasible in China, he said, was that China was so poor that there was effectively nothing for the nomenklatura to steal.

He was a friend of the people. He tried very hard.

I had never known that his father was a friend of Raul Castro's and had fought in the Bay of Pigs, or that he was the son-in-law of Russian science-fiction writer Arkady Strugatsky. I would have had him sign my copy of his father-in-law's book if I had known.

Five Economics Paragraphs Worth Reading: December 15, 2009

1. Antonio Fatas: Using a hammer or a wrench to pop asset price bubbles?: I am very sympathetic to this argument: [the] interest rate is probably not the right tool to deal with asset price bubbles and using regulation or a 'macroprudential instrument' is the right thing to do. However, we still need to ask the question: What if those instruments are not available or are simply failing to do their job? Is there a role for monetary policy? He cites the example of Spain as a country where the central bank was stressing the importance of dynamic provisioning for banks and still went through a real estate bubble. It might be that the Bank of Spain was not aggressive enough, but how do we know that the systems that we are setting in place now will take care of the next bubble or financial imbalance? One can argue that interest rates should not be used to deal with an imbalance in financial markets, because this is not part of their mandate, but I think this is a very narrow view of the role of central banks. There is no doubt that imbalances in financial markets spread to the real economy. In fact, there were many signs of a macroeconomic imbalance prior to the crisis such as excessive consumption, current account imbalances. Aren't interest rates the tool to deal with macroeconomic imbalances? If we apply Adam Posen's logic to some of the previous recessions, we could come up with the conclusion that central banks should never use the interest rate as a stabilizing tool. We could always claim that previous recessions originated in a specific sector of the economy and it would be better to deal with these developments using 'sector-specific' tools...

2. Matthew Yglesias: Insurance Coverage Status Affects Mortality Rate in Pediatric Trauma Patients: Nothing to see here, I’m sure: "A study led by Heather Rosen, MD, MPH, research fellow in the Department of Plastic Surgery at Children’s Hospital Boston and Harvard Medical School, found that uninsured children were over three times more likely to die from their trauma-related injuries than children who were commercially insured, after adjustment for other factors such as age, gender, race, injury severity and injury type in an analysis of data from the National Trauma Data Bank. Moreover, publicly-insured children were 1.19 times more likely to die from trauma when compared with commercially-insured children." Some people in earlier posts on this topic claim to find a contradiction between my belief that many Americans overtreated and my belief that the uninsured minority of Americans are undertreated. The consistency seems pretty clear to me. In fact, the reality that both of these things are true is one reason why taxing cadillac insurance plans is a good way to pay for expanded coverage...

3. Daniel Davies -- FOR bigger pies and shorter hours and AGAINST more or less everything else: Grasping reality with one hand and my wallet with the other...: After the "first hundred days" in the term of a new Democratic President comes the next stage; the almost impreceptible transition among his supporters from saying "of course, he's been hampered by all sorts of obstacles to date, but he's about to start delivering on all those promises he made to his supporters on the left" to saying "well, he never really promised anything and it's terribly naive to think he was ever going to deliver anything to his supporters on the left" Apparently we've reached it. It's rather like, although not quite the same phenomenon as, that by which literally millions of people who all evidence suggests were highly likely to have been U2 fans in the past, have reconstructed a version of history in which they always hated U2 (I am entirely guilty of this last one myself).

4. STUPIDEST THING I HAVE READ TODAY: Megan McArdle on Non-Recourse Loans: [I]t sure sounds like they just decided that once the price of their property fell, they shouldn't have to pay back the money they'd borrowed. There is a sizable school of thought that says why shouldn't they?  They made a contract with the bank under known rules, and as long as they're willing to pay the penalties, why shouldn't they just walk away, the way a corporation would?  Well, for one thing, companies don't always behave like this, and those who get a reputation for stiffing their suppliers run into trouble.  But for another, because society doesn't really work on such clean logic.  The reason we can have easy bankruptcy and a pretty robust credit market (usually) is that most people act like debts are obligations which should always be paid off if possible.  I'm not saying you should live on Kraft dinner and water for twenty years to slave at an impossible mountain of debt.  But I think before you walk away from three different mortgages, you should explore life options that do not include $1,800 worth of new furniture...

5. FROM THE ARCHIVES (NOT MINE, HOWEVER): Henry Farrell: DeLong, Scott and Hayek=: Brad DeLong has a review of James Scott’s Seeing Like a State which I found pretty useful in clarifying some of my disagreements with him (Brad, not Scott). What he sees as a fundamental problem in Scott (that Scott is a Hayekian in denial, and that his denial of his intellectual heritage leads him erroneously to claim that markets are harmful to human freedom) I see as pointing to an important, but underplayed set of themes in Scott’s argument. Which is to say that I would have liked Scott to develop the reasons why he disagrees with Hayek more explicitly, but I think that they are clearly present in the book, and are in some respects at least, compelling.... I... think that doing what Brad wants him to do would have led him to write a very different book. Seeing Like a State is in large part an intervention in an internal argument within the left, arguing against the grand planners and for the Jane Jacobs types and the anarchists. Introducing a proper critique of Hayek, Mises and the rest would have greatly lessened its impact within that debate, by allowing the targets of Scott’s critique to focus on the mean things Scott would have probably said about pro-market types who they dislike, while ignoring the flights of arrows intended to pierce their own hides...

We Are Live at The Week: "I Did Not Run for Office to be Helping Out a Bunch of Fat-Cat Bankers

"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street," President Obama told Steve Kroft of 60 Minutes. In a narrow sense, that may be true. But Obama did run for office in part to keep the unemployment rate from rising to -- and staying above 10 percent. And his pursuit of that end has aligned the president with the fat cats.

In a financial crisis like the one we are in, spending falls and unemployment rises. To curb the rise in unemployment, something has to be done to boost spending. There are two broad mechanisms. First, Obama could use the government directly to boost spending--nationalize banks and get them to lend to people who will spend; order government-sponsored enterprises to lend to farmers, home buyers and others who will spend; and boost direct government purchases.

With the roll out of its $787 billion stimulus plan, the administration has done a little along those lines. But using government to boost spending also requires boosting the short-term government budget deficit extravagantly. And it is clear that Obama thinks he did not run for office to do that.

So the first mechanism is out. What is the second?

The second is to persuade the private sector to boost its spending. It is to use the government indirectly‹by making households feel that they are richer and can spend more; making businesses feel that their expansion plans will be profitable (and thus justify spending more); making banks feel that additional lending to businesses will be safe and that they can reliably profit by lending more.

Government achieves this by intervening in financial markets to change the balance of supply and demand in order to boost asset prices, including real estate, businesses, stocks and corporate bonds. As a result, consumer households feel richer and willing to spend more; businesses feel optimistic about expansion and willing to spend more; banks feel that additional lending to businesses is safe and profitable.

Bur for indirect government policies to boost spending, they must boost asset prices--especially long-term, risky asset prices. And guess who owns the most long-term, risky assets? Guess who benefits most when those long-term, risky asset prices rise?

Yep. It's fat-cat bankers. That's what fat-cat bankers do: they raise money--mostly by borrowing--from people who want to keep their wealth liquid and relatively safe, and they use this money to buy long-term risky assets, relying on their technical skill and judgment to preserve a margin between what they are paid by borrowers and what they must pay, in turn, to their creditors.

In a crisis like the present, if you avoid the nationalization and extravagant deficit-spending route, and you still succeed in avoiding persistent mass unemployment, you will have done so by a process that boosts asset prices and enriches fat-cat bankers.

The fact that the policies you undertake to avoid persistent mass unemployment also help fat-cat bankers doesn't mean that you can¹t implement other policies to place burdens on them. Progressive income and wealth taxes, tight capital and regulatory requirements, impositions of enormous risk on financiers in order to remove the possibility that they will retain their wealth even as their organizations go bankrupt these are all policies that make fat-cat bankers' lives less fat and less feline. And I am strongly in favor of enacting all of these long-term structural reforms.

But there¹s no point in pretending that the policies that avoid persistent mass unemployment are not the same policies that enrich fat-cat bankers. They are. At this moment, what is good for JPMorganChase is good for America -- and vice versa.

In effect, Obama did run for office to help out a bunch of fat-cat bankers on Wall Street. He just may not have realized it at the time.

Support Health Care Reform!

Paul Starr lays down the party line:

Deal or Die on Health Caret: [T]he central provisions of the legislation... would extend health coverage to an estimated 33 million of the uninsured, raise standards of protection for millions... eliminate some of the most hated abuses of the insurance industry... create a new system of insurance exchanges that would enable people who buy policies individually or through small groups to get new choices and better prices for coverage.

Yet these provisions... are poorly understood by the public, including many of those who would benefit from the changes.... because the supporters of reform have been fixated on one goal -- saving the public option.... Strategists will argue about whether it ever made sense to include a public option in the bill, given the low probability it had of being enacted in a strong enough form to be significant and sustainable. If it turns out to have been useful, it was precisely because it could be dropped in the end and serve as evidence that moderate Democrats had won concessions....

[I]f Democrats succeed in getting a bill through Congress in the next several weeks, they can return to some of the issues in the reconciliation process next year. And at that point they won't necessarily need to have Lieberman on board.

If progressives in Congress can see that far ahead, they'll see their way to vote for a compromise.

Ten Economics Paragraphs: December 14, 2009

Worth reading:

1. Tom Barnett: Chinese turbines, Texas wind farm: "This is just the beginning": U.S. NEWS: "Chinese-Made Turbines Will Fill Texas Wind Farm," by Rebecca Smith, Wall Street Journal, 30 October 2009. 'This is becoming a political storm of sorts, as Chuck Schumer is pressuring Energy Secretary Steven Chu to disallow any stimulus money to be used to buy Chinese turbines. China's Export-Import Bank is providing $1.5B in financing for the West Texas project. The U.S. was the global center for such turbine production in the 1980s, but then it shifted to Europe. Now it sits with China. A Chinese executive says, "This is just the beginning."' I think he's right...

2. Pro-Growth Liberal: Free Trade as a Stimulus Proposal – Little Bang: The Washington Post asks - How much bang would he get for the borrowed bucks? – in reference to the President’s latest stimulus proposals. This is an odd place to suggest that freer trade with Colombia and South Korea could represent “truly fresh thinking about job creation”. As Paul Krugman notes: "if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X-M, it’s a wash, because X and M rise equally … Even if the proposed trade deals with Korea and Colombia were remotely big enough to bear mentioning in the context of the crisis — which they aren’t — they wouldn’t be job creation measures." Using this source, one can see that our exports to these two nations during 2008 were only $46 billion, while our imports from these two nations were $61 billion. Let’s say the “equally” part of what Krugman wrote isn’t quite right and that free trade increases our exports by 20 percent (some $9 billion) while imports rise by only $10 billion (some $6 billion). With GDP in excess of $14 trillion, even our generous estimate of this WaPo policy proposal has it adding a mere 0.02 percent to aggregate demand. Not exactly a big bang! Do the folks at the Washington Post know how to look up trade information?...

3. Nate Silver: Greg Mankiw, Stimulus Critic: So Wrong He's Actually Right: So, to summarize: Mankiw is wrong that the stimulus consists mostly of Keynesian-type investments. So far, it has been closer to the tax cut end of the spectrum. But he's also wrong that the stimulus is not working. By the benchmark that he implicitly endorses -- GDP -- it's done very well. Mankiw is so wrong, in other words, that he may actually be right: the stimulus looks a lot like one he might have designed, and it's helping the economy...

4. Tony Judt: What Is Living and What Is Dead in Social Democracy?: Americans would like things to be better. According to public opinion surveys in recent years, everyone would like their child to have improved life chances at birth. They would prefer it if their wife or daughter had the same odds of surviving maternity as women in other advanced countries. They would appreciate full medical coverage at lower cost, longer life expectancy, better public services, and less crime. When told that these things are available in Austria, Scandinavia, or the Netherlands, but that they come with higher taxes and an "interventionary" state, many of those same Americans respond: "But that is socialism! We do not want the state interfering in our affairs. And above all, we do not wish to pay more taxes."... [M]y concern tonight is the following: Why is it that here in the United States we have such difficulty even imagining a different sort of society from the one whose dysfunctions and inequalities trouble us so? We appear to have lost the capacity to question the present, much less offer alternatives to it. Why is it so beyond us to conceive of a different set of arrangements to our common advantage? Our shortcoming—forgive the academic jargon—is discursive. We simply do not know how to talk about these things. To understand why this should be the case, some history is in order: as Keynes once observed, "A study of the history of opinion is a necessary preliminary to the emancipation of the mind." For the purposes of mental emancipation this evening, I propose that we take a minute to study the history of a prejudice: the universal contemporary resort to "economism," the invocation of economics in all discussions of public affairs...

5. Paul Samuelson: Proof that Perfectly Anticipated Prices Fluctuate Randomly: One should not read too much into the established theorem. It does not prove that actual competitive markets work well. It does not say that speculation is a good thing or that randomness of price changes would be a good thing. It does not prove that anyone who makes money in speculation is ipso facto deserving of the gain or even that he has accomplished something good for society or for anyone but himself. All or none of these may be true, but that would require a different investigation. I have not discussed here where the basic probability distributions are supposed to come from. In whose minds are they ex ante? Is there any ex post validation of them? Are they supposed to belong to the market as a whole? And what does that mean? Are they supposed to belong to the "representative individual" and who is he? Are they some defensible or necessitious compromise of divergent expectation patterns? Do price quotations soehow produce a Pareto-optimal configuration of ex ante subjectivie probabilities? This paper has not attempted to pronounce on these interesting questions...

6. Joe Gagnon: The World Needs Further Monetary Ease, Not an Early Exit: Without additional stimulus, unemployment rates are likely to remain above equilibrium levels for many years at great cost to the world economy in terms of lost income and personal hardship. Moreover, with inflation rates already below desired levels, excess unemployment threatens to cause an unwelcome fall in prices that would further damp recovery and retard the necessary process of deleveraging. In light of high and rising levels of public debt, additional monetary stimulus is preferable to additional fiscal stimulus. Indeed, monetary stimulus reduces the ratio of public debt to GDP by reducing interest expenses, increasing GDP, expand- ing tax revenues, and enabling an earlier start to fiscal consolidation...

7. Paul Samuelson: Economics: Even if the authorities should succeed in forcing down short-term interest rates, they may find it impossible to convince investors that long-term rates will stay low. If by superhuman efforts, they do get interest rates down on high-grade gilt-edged government and private securities, the interest rates charged on more risky new investments financed by mortgage or commercial loans or stock-market flotations may remain sticky. In other words, an expansionary monetary policy may not lower effective interest rates very much but may simply spend itself in making everybody more liquid.... In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. “You can lead a horse to water, but you can’t make him drink.” You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs. You can get some interest rates down, but not all to the same degree. You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods.

8. Paul Krugman: Gauti Eggertsson is in the process of presenting a new paper on fiscal policy; the paper is here. In his presentation — though not in the paper — he offers great phrase: the “paradox of toil.” According to his paper, when you’re in the liquidity trap, certain kinds of tax cuts have perverse effects. Cutting taxes on capital income, for example, encourages more saving — which is a bad thing, because we’re suffering from the paradox of thrift. In fact, reduced taxes on capital income actually end up reducing investment. So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employment. All of this only applies in a situation of zero interest rates, which wouldn’t be interesting except that that’s the situation we’re in. The general point is that we’re really through the looking glass, in a world in which lots of things have perverse effects — and basing your policy ideas on intuition from “normal” times can lead you very much astray...

9. STUPIDEST THING I HAVE READ TODAY: Michael Cannon of the (Surprise! Surprise!) Cato Institute

10. FROM THE ARCHIVES: Brad DeLong (March 8, 2008): Does Michael Walzer Really Believe the American Revolution Was Illegitimate?: I knew that Nino Scalia thinks the American Revolution was illegitimate, sinful and blasphemous, first cousin to Satan's War Against Heaven. But can it be true that Michael Walzer agrees with him? Say it ain't so. But let me turn the mike over to Russell Arben Fox, who cites: 'In Medias Res: Thoughts on Kosovo, Mill, and Walzer: [In] Jeremy Waldron's review of Walzer's thought that I mentioned above... [Waldron] writes that "political community is the heart of Walzer's writing," and that he believes "communal integrity has a nonrelative claim upon us"; we morally and prudentially ought to, in short, allow all (or almost all) self-identifying communities the space to work out (and deepen, and thereby perhaps through an education in democracy extend) their own identities and claims. What others may see as a clear-cut issue of humanitarian justice (a state oppressing its ethnic minorities, a violence-prone secession movement gaining power), Walzer sees--at least in many cases--as more of the "traditional philosophical dislike for politics." Waldron adds: "Even in the absence of democracy, Walzer wants to hang on to the principle of self-determination. A political community 'is self-determining even if its citizens struggle and fail to establish free institutions, but it has been deprived of self-determination if such institutions are established by an intrusive neighbor'. The compromises that people make, the sacrifices they forgo, may trouble a philosopher.... But 'I don't believe', says Walzer, 'that the opposition of philosophers is a sufficient ground for military invasion'..."' The point, of course, is that the victory of the West Atlantic Anglospheric secessionists in their 1775-1783 struggle to depart from the unitary Anglospheric United Kingdom was the work of... THAT INTRUSIVE NEIGHBOR THE FRENCH!!!! Does Walzer really want to commit himself to the slogan: "LAFAYETTE, GO HOME!!"?

Health Care Reform Watch: Senator Joe Lieberman Humiliates Himself Yet Again...

Wow! Just wow!

Greg Sargent FTW, who writes:

VIDEO: Watch Lieberman Endorse Medicare Buy-In Three Months Ago: Here’s some video of Joe Lieberman only three months ago.... Lieberman discussed the Medicare buy-in a meeting with the Connecticut Post in September, according to an article in the paper at the time, as TPM noted today. But the article only paraphrased Lieberman. I asked the paper to send over the video, and it’s worth watching, because it gives you Lieberman’s actual quotes... at odds with the Lieberman camp’s claim today.... Lieberman appeared to go further than the current Senate deal, which would expand Medicare to those aged 55-64, saying he supported the idea of expanding it to people aged 50 and over. Lieberman referenced his proposal along these lines during the 2006 campaign, and added:

My proposals were to basically expand the existing successful public health insurance programs Medicare and Medicaid.... When it came to Medicare I was very focused on a group — post 50, maybe more like post 55. People who have retired early, or unfortunately have been laid off early, who lose their health insurance and they’re too young to qualify for Medicare. What I was proposing was that they have an option to buy into Medicare early and again on the premise that that would be less expensive than the enormous cost. If you’re 55 or 60 and you’re without health insurance and you go in to try to buy it, because you’re older … you’re rated as a risk so you pay a lot of money...

Lieberman['s]... tone is clearly positive and approving... yet another sign, as if you needed one, that Lieberman’s current opposition to the Senate proposal doesn’t appear to have any roots in a genuine policy disagreement.

Accurately But Embarrassingly Quoted...

Lindsey Wilson writes:

Please look over your comment and make revisions (or let me know if everything is okay). The transcript wasn’t in good shape this time so we had to guess on some of the comments; therefore, please review your remarks carefully.

Bradford DeLong argued that the New Keynesian model is built on foundations of sand. The only intelligent way to view it is as an attempted exercise in mental consistency, a way to try to organize certain beliefs while leaving aside the reasons for those beliefs. Most of the time the fiscal multiplier is taken to be very low because the labor supply elasticity is low and markups are not strongly countercyclical, and almost all of the rest of the time the fiscal multiplier is very low because the Federal Reserve has a strong view about what nominal spending will be and acts to offset whatever fiscal policy initiatives Congress attempts. DeLong argued that there are times—namely, when the federal funds rate is essentially zero, and the effects of standard open-market operations on relative prices are unclear because cash and Treasury securities look like nearly perfect substitutes—when a combination of quantitative easing and banking recapitalization on the demand side of the credit channel, and of government asset purchases and guaranty policies on the supply side, together with fiscal expansion, have a role to play that they normally do not. It is hard, however, to justify any particular numbers that attempt to answer how much each of these supplements to normal monetary policy tools should be contributing.

It's accurate. It's embarrassing, however. This was definitely not me at my most coherent...

Paul Samuelson (May 15, 1915 – December 13, 2009)

Paul Krugman brings us P.A. Samuelson (May 15, 1915 – December 13, 2009):

He died yesterday. But there is a sense in which he is still very much alive.

Paul Krugman quotes:

Samuelson, Friedman, and monetary policy: [H]re’s Paul Samuelson, from pages 353-4 of his 1948 textbook:

Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected.

By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, “no nothing,” simply a substitution on the bank’s balance sheet of idle cash for old government bonds. If banks and the public are quite indifferent between gilt-edged bonds — whose yields are already very low — and idle cash, then the Reserve authorities may not even succeed in bidding up the price of old government bonds; or what is the same thing, in bidding down the interest rate.

Even if the authorities should succeed in forcing down short-term interest rates, they may find it impossible to convince investors that long-term rates will stay low. If by superhuman efforts, they do get interest rates down on high-grade gilt-edged government and private securities, the interest rates charged on more risky new investments financed by mortgage or commercial loans or stock-market flotations may remain sticky. In other words, an expansionary monetary policy may not lower effective interest rates very much but may simply spend itself in making everybody more liquid...

[...]

In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. “You can lead a horse to water, but you can’t make him drink.” You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs. You can get some interest rates down, but not all to the same degree. You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods...

And comments:

Paul Samuelson was a great economic theorist. But he was also an acute observer of the real world, to such an extent that many of the things he said in his 1948 textbook ring truer than what many, perhaps most economists believed on the eve of the current crisis. This is especially true with regard to monetary policy. By the 1980s, I think it’s fair to say that the vast majority of economists had been convinced by Milton Friedman’s assertion that aggressive monetary policy could have prevented the Great Depression. Some of us started to have doubts after contemplating Japan’s troubles in the 1990s; but as late as 2002 Ben Bernanke declared, on behalf of the Federal Reserve, “You’re right. We did it. But thanks to you, we won’t do it again.” But here’s Paul Samuelson...

Ten Economics Paragraphs: December 13, 2009

Worth reading:

1. Jonathan Leake on the Younger Dryas: Climate change catastrophe took just month: Six months is all it took to flip Europe’s climate from warm and sunny into the last ice age, researchers have found. They have discovered that the northern hemisphere was plunged into a big freeze 12,800 years ago by a sudden slowdown of the Gulf Stream that allowed ice to spread hundreds of miles southwards from the Arctic. Previous research had suggested the change might have taken place over a longer period — perhaps about 10 years. The new description, reminiscent of the Hollywood blockbuster The Day After Tomorrow, emerged from one of the most painstaking studies of past climate changes yet attempted...

2. Jim Hamilton: Should the Fed be the nation's bubble fighter?: It is hardly the role of the Fed to be deciding that it knows better than the market what the price of every asset should be. Nevertheless, I think it is necessary for the Fed at least to be forming an opinion about what's driving asset prices as one input into the Fed's decision making. Booming U.S. real estate prices were accurately signaling that there was a problem with both the interest rate target and financial supervision, and it's desperately important to ensure that this same mistake is never repeated. Of course, it's easy enough to say what should have been done in 2004. but the real challenge is figuring out what to do in 2010. Are commodity prices experiencing a bubble right now?... [O]ther economic objectives take precedence at the moment, and it is too early to start raising rates yet. But it is not too early to remember that there are limits to how much you can help the U.S. economy by keeping interest rates low...

3. Paul Krugman: Paul Samuelson, R.I.P.: Oh, my. Paul Samuelson has died. He had a long, good life; yet he will be sorely missed. It’s hard to convey the full extent of Samuelson’s greatness. Most economists would love to have written even one seminal paper — a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars. And he was a wonderfully down-to-earth human being besides. For a number of years I shared an office suite with him and Bob Solow; he always had time to talk...

4. Christie Romer: Obama economic adviser pitches job stimulus: WASHINGTON – A White House economic adviser says it would be "suicide" for the government to focus exclusively on the deficit when the economy is sorely in need of jobs. Christina Romer says money freed up from the repayment of financial bailout funds gives the government the leeway to boost try to employment while seeking to control the deficit over the longer term. She says "no one is talking about raising taxes" during a recession to pay for the proposed new stimulus plan. Romer, who heads the White House Council of Economic Advisers, was asked Sunday on NBC's "Meet the Press" whether the recession was over, She said it might be over in official terms, but that it's not truly over until unemployment goes back down to normal levels, in the range of 5 percent...

5. Iris J. Lav, Nicholas Johnson and Elizabeth McNichol: Additional Federal Fiscal Relief Needed to Help States Address Recession’s Impact: Without It, States’ Steps to Balance Their Budgets Could Cost Economy 900,000 Jobs Next Year: States — which continue to face huge budget shortfalls that they must close — are taking steps now to plan their budgets for state fiscal year 2011, which starts on July 1, 2010 in most states. Governors will send their budget proposals to their legislatures between next month and February 2010 in almost all states. The legislatures will have to pass budgets as early as March or April in some states and by the end of June in almost all states. If states do not know they will receive additional federal fiscal relief, they will begin implementing new budget cuts and tax increases by this summer, at the latest. Presuming they will get no more fiscal relief, states will have to take steps to eliminate deficits for state fiscal year 2011 that will likely take nearly a full percentage point off the Gross Domestic Product. That, in turn, could cost the economy 900,000 jobs next year. [1] Mark Zandi, Chief Economist of Moody’s Economy.com, recently warned that these state budgetary actions “will be a serious drag on the economy at just the wrong time.” For economic and other reasons, federal policymakers should provide some additional fiscal relief, so that such relief is extended or phased down after 2010 rather than ending abruptly. That would constitute one of the most effective uses of additional federal dollars to boost the weak economy and preserve or create jobs.

6. Dean Baker on Brady Dennis of the Washington Post: The Post Flacks for the Financial Industry #43,875: Thirty Democratic members of the House voted against the creation of a consumer financial products protection agency. The Post told readers that these members were "moderate," and that "like-minded" Democrats in the Senate hold far more power. How does the Post know that the these members voted against a consumer protection agency because they are "moderate," and that their compatriots in the Senate are actually "like-minded" as opposed to both being under the influence of the financial industry? The Post would have as much justification in righting 30 Democrats in the House with strong ties to the financial industry voted against the bill and then warning readers that Senators with close industry ties have much more power in the Senate. It may not be possible to determine with certainty that these members of Congress cast their votes in ways that serve their political backers, it surely is not possible to determine the opposite, as the Post implies...

7. Jon Hilsenrath: Economists Revising Up Fourth Quarter Growth Projections: A string of stronger-than-expected economic reports provoked several analysts to revise up their projections for fourth quarter gross domestic product.  The reports show that businesses are rebuilding inventories at a faster pace than many economists thought, consumer spending has been firmer than expected and the U.S. trade deficit narrowed. GDP expanded at a 2.8% annual rate in the third quarter. Now it looks like it’s going at a fast pace in the fourth quarter. If it’s sustained, that could help to bring down the unemployment rate. Here’s a sampling of revisions we’ve picked up so far for the Q4 growth rate: RBS Securities: 5.0% from 3.7%. J.P. Morgan 4.5% from 3.5%. T. Rowe Price:3.8% from 2.7%. Macroeconomic Advisers: 4.2% from 3.8%. Nomura Securities: 3.3% from 3.2%. Aladdin Capital: 3-3.5% from 2.8%. Action Economics: 2.8% from 2.3%...

8. Tony Barber and George Parker: EU leaders urge IMF to consider Tobin tax: European Union leaders urged the International Monetary Fund on Friday to consider a global tax on financial transactions in spite of opposition from the US and doubts at the IMF itself. In a communiqué issued after a two-day summit, the EU’s 27 national leaders stopped short of making a formal appeal for the introduction of a so-called “Tobin tax” but made clear they regarded it as a potentially useful revenue-raising instrument. In a separate initiative, Mr Brown and Nicolas Sarkozy, France’s president, suggested that revenues from the Tobin tax could be devoted to the world’s fight against climate change, especially in developing countries. They suggested that funding could come from “a global financial transactions tax and the reduction of aviation and maritime emissions and the auctioning of national emissions permits.” However British officials later argued the main point of a financial transactions tax would be provide insurance for the global taxpayer against a future banking crisis. European support for the Tobin tax, named after the late US economist James Tobin, has grown since the world’s financial system plunged into crisis 15 months ago, forcing governments in the US and Europe to rescue and recapitalise banks to the tune of hundreds of billions of dollars. But Tim Geithner, the US Treasury secretary, said last month at a meeting of the world’s 20 main advanced and emerging economies that the US was unwilling to back a tax on daily financial market activity. Opposition was also voiced by Dominique Strauss-Kahn, the IMF managing director, who said the Tobin tax was “a very old idea that is not really possible today”. The EU statement drew attention to “the importance of renewing the economic and social contract between financial institutions and the society they serve”...

9. STUPIDEST THING I HAVE READ TODAY: Stephen Bainbridge: The Demise of Newspapers: A Market Failure? I Don't Think So: I'm puzzled. What exactly is the market failure here? Welfare economics classically recognizes four basic sources of market failures: producer monopoly; externalities; the good to be produced is a public good; and informational asymmetry between producer and consumer... [As an exercise, readers are urged to tell Professor Bainbridge why there is necessarily a market failure involved in the production of commodities--like both breaking news and in-depth investigative journalism--that are non-excludible. For extra credit, your explanation should cite Sanford J. Grossman and Joseph E. Stiglitz (1980), "On the Impossibiility of Informationally-Efficient Markets." This isn't rocket science, people. This isn't even cutting edge.]

10. FROM THE ARCHIVES: Brad DeLong (August 1, 2002): Glassman and Hassett's Dow 36000 Once Again: I see that James Glassman and Kevin Hassett are writing in the Wall Street Journal today, lying about what their Dow 36000 book says. There are two different Dow 36000 books that they could have written. The first would say four things: (i) It looks like stocks held for a very long periods--30 years or more--are no riskier than bonds. (ii) If you valued stocks on the same cash-flow principles as you valued bonds, the Dow would be valued at 36000 (if you get your math wrong.) (iii) As long as you are planning on holding stocks for a very long time--more than 30 years--the overwhelming bulk of your returns from holding stocks come from the cash flows you receive, and the fact that stocks have not historically been valued on the same cash-flow principles as bonds will not greatly diminish your return. (iv) Thus if you have a long time horizon--can afford to let your investments ride for more than 30 years--you should realize that buying-and-holding a diversified market portfolio of stocks will be superior to a bond-based portfolio as long as stocks are cheaper than the Dow would be at 36000. The second book would say: THE DOW SHOULD BE WORTH 36000 NOW!! THE DOW WILL BE WORTH 36000 SOON!! IF YOU DON'T BUY STOCKS NOW, YOU ARE MISSING THE ALMOST-CERTAIN OPPORTUNITY TO TRIPLE YOUR MONEY OVER THE NEXT SEVERAL YEARS!! Which book did they write?.... Which book are they now pretending that they wrote? I leave that as an exercise to the reader...

Ten Things on Which Matt Taibbi Really Does Not Know What He Is Talking About

It's hard to know how seriously one is supposed to take a Matt Taibbi who begins:

Obama's Big Sellout: Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing...

Ummm... No. Barack Obama ran as a post-partisan African-American technocrat. His campaign fundraisers were chock-full of people from the left investment banks--you know, those people who spend 3/4 of their time making money and 1/4 of their time working to elect politicians who will tax them at higher rates because you were slaves to Pharoah in the land of Egypt, and for other reasons. The policy advisors on his conference calls during the campaign were the--very good assistant secretaries, undersecretaries, and secretaries from the Clinton administration. Barack Hussein Obama was out in front in support of Paulson's plan (which was remarkably effective in softening the downturn) to shovel government money at the bankers in the fall of 20098.

When an author is apparently as clueless as to what was going on a year ago as Matt Taibbi is, one has to wonder just how seriously one is supposed to take anything he writes. It's a purple rhetorical exercise in overstatement--we hope;

But in case anyone is tempted to take its truthiness as truth, its factoids as facts, let me lay down ten markers. I could lay down 50:

1. The financial reform bill that just passed the House is not nearly as strong a bill as the Treasury wanted. The reason is not that Obama and Geithner did not push for a stronger bill, but rather that the members of congress balked at a stronger bill.

2. Citigroup did not receive a $306 billion bailout as the first major act of Obama's presidency. First, where does the $306 billion number come from? The number I associate with Citigroup is $45 billion of TARP money. Certainly Citigroup would be bust and gone if not for government aid extended to it during George W. Bush's presidency--aid that Obama endorsed--but it now looks as though Citigroup will pay everything back: that the government will profit from the aid it extended to Citigroup.

3. James P. Rubin is not James S. Rubin.

4. The James Rubin whom Mike Froman brought in to staff the economic policy search was not Bob Rubin's son.

5. The Obama economic policy inner circle--Tim Geithner, Gene Sperling, Larry Summers, Christie Romer, Peter Orszag--is not "a group of Wall Street bankers." It is only 5% Wall Street banker--only 1/4 of Larry Summers can possibly count as a Wall Street banker.

6. Mike Froman staffed the economic policy search. Mike Froman--a very smart and capable man--did not lead the economic policy search. He was not some corrupt Svengali who foisted advisors who would whisper evil in the innocent Obama's ear. Obama led the economic policy search.

7. Austan Goolsbee's absence from the transition staff was not notable. Austan Goolsbee does have a senior subcabinet appointment. And Austan Goolsbee is not a voice on the economic left--this is the man who told the Canadians not to take Barack Obama's claims that he wanted to renegotiate NAFTA seriously. I don't kknow the story of Karen Kornbluh.

8. Ah. Taibbi says: "the government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets." First of all, $277 + $45 = $322, not $306. But a guarantee is not money at risk and money at risk is not money lost. As I said, it looks like the government is going to make money off of its support of Citi. (Albeit not off its support of AIG.)

9. Tim Geithner was not hired as Treasury Secretary by Mike Froman. Tim Geithner was hired as Treasury Secretary by Barack Obama.

10. According to CBO, the ARRA so far is not worth 640,000 extra jobs as of September 2009 but rather 1.1 million plus or minus 500,000--and that number will grow.

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

Ten Economics Paragraphs: December 12, 2009

Worth reading:

1. Calculated Risk: Refinancing with Negative Equity: Unfortunately David Streitfeld doesn't provide any further information on Belvedere's loan. If the loan was held by a bank, then it might make sense for the bank to refinance the loan (this lowers the bank's risk of default). However Belvedere's "lender" might be a servicing company and the loan may have been securitized. Then it is impossible to refinance because the current holders of the note would be paid off, and no new lender would make a loan greater than the value of the collateral...

2. Mark Whitehouse: American Dream 2: Default, Then Rent: Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard. But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits. Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments. "It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth...

3. Fake Steve Jobs: A not-so-brief chat with Randall Stephenson of AT&T: And now here we are. Right here in your own backyard, an American company creates a brilliant phone, and that company hands it to you, and gives you an exclusive deal to carry it — and all you guys can do is complain about how much people want to use it. You, Randall Stephenson, and your lazy stupid company — you are the problem. You are what’s wrong with this country. I stopped, then. There was nothing on the line. Silence. I said, Randall? He goes, Yeah, I’m here. I said, Does any of that make sense? He says, Yeah, but we’re still not going to do it. See, when you run the numbers what you find is that we’re actually better off running a shitty network than making the investment to build a good one. It’s just numbers, Steve. You can’t charge enough to get a return on the investment. Now there was silence again. This time I was the one not talking. There was this weird lump in my throat, this tightness in my chest. I had this vision of the future — a ruined empire, run by number crunchers, squalid and stupid and puffed up with phony patriotism, settling for a long slow decline. “Okay,” I said. “Nice talking to you.” Then I hung up.

4. Paul Krugman: Jobless Recovery: There was ample warning, even before the severity of the crisis was clear, that the recession was likely to be followed by a prolonged jobless recovery. E.g., here (January 2008): "I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But … in both cases the employment slump went on for a long time after the recession was supposedly over. There’s every reason to think that the same thing will happen this time. There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending..."

5. Stan Collender: Baucus To Conrad And Gregg On A Budget Commission: Yo Mama: Finance Committee Chairman Max Baucus (D-MT) yesterday delivered this speech on the Senate floor against the budget commission proposed by Senate Budget Committee Chairman Kent Conrad (D-ND) and Budget Committee Ranking Republican Judd Gregg (R-NH).  Although it was couched in the polite language typically used on the Senate floor, this absolutely was the Washington equivalent of "Yo mama"...

6. Mark Kleiman: "Anyone Telling You Uncertainty About Climate Change Is a Reason for Inaction Is Either a Fool or a Scoundrel": [G]reater uncertainty argues for more caution--more willingness to accept certain current losses to avoid possible large future losses--not less. That’s because it’s easier to adjust to small changes than it is to large ones, so damage is likely to increase more-than-proportionally as the size of the change increases...

7. Brad DeLong: Is This a Congressional Joke?: I am--in normal times--a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole. But when I look at Senators Conrad and Gregg, I don't recognize fellow members of my species. They may be glueing the feathers of deficit hawks onto themeselves, but they are birds of a very different order--doves, turkeys, chickens, whatever, but I hope they are dodos...

8. Mark Thoma: Why it May Take Almost Seven Years for Unemployment to Reach Five Percent: The average rate of decline in the unemployment rate over the last three recessions is .061 percent Using this figure, and starting from an unemployment rate of 10 percent — the rate that exists today — how long would it take for the unemployment rate to get to 5 percent? Answer: (10-5)/.061 = 81.8 months, or almost 7 years. (Getting to 6% would take 65.5 months, or just short of 5 and a half years.)

9. Ed Hugh: The Velocity Of Modern Financial Crises: Jean-Claude Trichet, European Central Bank president, noted when speaking in Cambridge last Thurdsay that the speed at which financial disruption can spread had “accelerated tremendously over the past few decades”. While debt crises in the 1980s occurred over years, the effects of the Lehman collapse “spread around the world in the course of half-days”. As Ralph Atkins pointed out, the Greek government is but the latest to learn that in the modern world you can be catapulted from relative obscurity to global prominence in a matter of hours. Everyone can be famous for five minutes, as Andy Warhol said, but this kind of fame most of us could well live without...

10. Brad DeLong (October 10, 2008): The wrong financial crisis: All of us from Lawrence Summers to John Taylor were expecting a very different financial crisis. We were expecting the ‘Balance of Financial Terror’ between Asia and America to collapse and produce chaos. We are not having that financial crisis. Instead we are having a very different financial crisis. Catastrophic failures of risk management throughout the entire banking sector caused a relatively minor collapse in housing prices to freeze up global finance to a degree that has not been seen since the Great Depression. The first good thing about this situation is that it does not call for different central banks and Treasuries to do different things, but rather for them all to do the same thing in unison without fouling each other’s oars. That should be relatively easy to arrange. What we need right now are: (a) Coordinated fiscal expansions across the globe. (b) If the world economy is not now in something close enough to a liquidity trap to make no difference, it soon will be: coordinated monetary expansions across the globe. (c) A bank is any organisation that borrows or accepts investments short and lends long; the durations of its assets and liabilities are deliberately mismatched; when the entire banking sector is insolvent at current market prices, anything that reduces interest rates all along the yield curve helps reduce the magnitude of the insolvency: coordinated banking sector recapitalisations across the globe. (d) Since at least 1844 there has been broad consensus that the short-term price of safe liquidity is too important to be left to the market; now there is growing consensus that the price of risk is too important to be left to the market as well. For the government to operate on the price of risk through Operations-Twist on a Galactic scale is infeasible. That means that the aggregate degree of capitalisation of the banking system must become the object of policy choice. Call it socialism in one sector. What we need in the longer term are: (e) Global rules to make outsized compensation incentive-compatible. The Princes of Midtown Manhattan and Canary Wharf need to know that their fortunes will be lost if their institutions blow up within a decade of their handing over operational control – only in this way can you make them truly long in the fortunes of their firms and of the global economy rather than simply long in volatility. (f) More progressive global tax systems...

What Could Be More Cowardly that to Surrender Your Theory in the Face of Facts?

I thought there was something very, very wrong with George Mason's Charles Rowley when he began trashing Avner Greif for no reason.

Now Henry Farrell and company watch the wreckage...

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UPDATE: A correspondent tells me that there is now a Godwin's Law violation there--something about how John McCain's ideology is the same as that of the Nazis. I'm not going to look...

Slides for December 2009 Macro-Finance Talks...

Oh Dear...

What House Majority Leader Steny Hoyer should be saying:

Because of the uniquely high unemployment rate, the benefits to government spending are much greater than usual--not only does it deliver needed services and build necessary infrastructure, but it puts people who otherwise would be jobless and broke to work. Because of the uniquely good terms on which the government can borrow, the costs of bringing government spending forward into the next three years from the distant future are much smaller than usual. But a commitment to spend more by the government over the next three years must not be allowed to destabilize expectations of the long-run fiscal soundness of the American government--that could produce an economic disaster.

Hence our commitment to create jobs by spending more in the next three years shall and must be accompanied by putting in place the institutions and procedures--automatic triggers on both the spending and tax side--to close the deficit and keep the debt from exploding should congress prove unable to do its job through the normal legislative procedures.

Thus next year the focus will be on jobs and fiscal responsibility...

What House Majority Leader Steny Hoyer is saying:

Coming Up In 2010: All About The Deficit: Top aides on both ends of Pennsylvania Avenue say 2010 will be the year of fiscal responsibility, even if President Obama has to battle with progressive Democrats to make cuts they won't like. "Next year the focus will be jobs and fiscal responsibility," House Majority Leader Steny Hoyer told TPMDC in a briefing with two reporters Thursday. Hoyer (D-MD) said one reason Democrats are having a tough time one year before the Congressional midterm elections is that voters are concerned about the nation's fiscal health, and they also want to see the unemployment rate shrink. He said he knows there may seem to be disconnect with those two things in short term, but in long term they make sense. "The American public are right, we have to do both," Hoyer said.

Deficit reduction over the long term will be the White House's primary focus next year, and Chief of Staff Rahm Emanuel said at the Wall Street Journal's CEO Council conference last month it will be a "key component" of the president's State of the Union address. "It is foremost on his mind and the mind of the economic team," Emanuel said.

Office of Management and Budget spokesman Ken Baer told TPMDC it will be a top priority. "As part of the FY2011 Budget process we are exploring a range of options to put the country back on a fiscally sustainable path," Baer said.

These strike me as very different things.

It is certainly true that you can enact bad economic policies and win both the applause of the Washington press corps and reelection--look at Ronald W. Reagan and George W. Bush. The race is not always to the swift or the battle always to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; nor does good economic news always come to the enactors of good economic policies. Time and chance happen to them all.

But if you want the odds on your side, enact policies that make sense--not policies that leave you stammering to reporters about how you know " there may seem to be disconnect with those two things in short term," but "in the long term they make sense" even though I cannot explain how...

James Kwak Is Now Grand Heresiarch of the Ancient, Hermetic, and Occult Order of the Shrill!!

A Partisan Post: You Have Been Warned

That is all.

Ph'nglui mglw'nafh Kwak R'lyeh wgah'nagl fhtagn!!

A Nice Follow-Up Piece from Noam Scheiber on the White House's Thinking...

He writes, among other things:

Is The Administration's Economic Thinking Incoherent?: Brad DeLong parses my piece today on the administration's struggle to create jobs while still minding the deficit and pronounces himself "increasingly bewildered about administration thinking."...

Now, obviously, not every member of the administration and every Democrat on the Hill signed onto the [relatively-optimistic late-summer] consensus I describe. But, based on several conversations with people in the administration and on the Hill, I'd say it was the prevailing view. It was the September jobs report (which came out in early October) that really jarred people....

I quote a senior administration official who says that, “The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs.”... I happen to agree with DeLong that such a canceling-out is unlikely. But, in fairness to the administration official, my sense is... [he meant] just that it's a risk the administration wants to minimize when it spends money on job creation, not a reason not to spend money on job creation....

If I understand him correctly, DeLong is essentially saying that... it can either be the case that more stimulus now will be ineffective because people will assume we'll run bigger deficits in the future, which raises long-term interest rates. Or it can be the case that more stimulus now will be ineffective because people will assume we'll run smaller deficits in the future [because of higher taxes], and will simply save [to pay the taxes] rather than spend the money. But it can't be the case people will assume we'll run both larger and smaller deficits in the future....

DeLong has put his finger on a relatively important feature of administration thinking on these questions, which is that it's (understandably) a bit all over the place. Some officials think an imminent rise in long-term rates is a potential problem; others think low rates of consumption of additional stimulus is a potential problem; some think both could be problems (under different scenarios); some neither; of the people who think both, different people attach different weights to the different scenarios, etc., etc. I guess the bottom line is that there isn't really a coherent Administration Position here...

And this is the puzzle. Yes, uncertainty is enormous. And any one policy might not work. But that any one individul policy initiative might not work is not an argument for not trying anything--unless you are happy if things develop according to the current-policy forecast and we see an unemployment rate between 9% and 11% for the next year and a half at least.

Thus if I were in the administration I would be trying everything:

• pushing the Fed to buy lots of long-term private bonds by selling some more of its stock of Treasuries...
• pushing the Fed to engage in additional quantitative easing with still more of its current stock of Treasuries...
• pushing the Fed to set an explicit inflation rate target--and to set its GDP deflator inflation target at 3% per year...
• pushing the Fed to declare that if the price level falls below its target it will push to catch it up to where it had hoped to see it...
• more aid to the states to keep them from turning even more into fifty little Herbert Hoovers...
• more infrastructure spending...
• bringing forward in time spending on health care access...
• bringing forward in time spending on controlling global warming...
• tax-increase triggers should the deficit be too large in 2015 and beyond to calm fears that America's fiscal policy will be unbalanced in the long run...
• more banking recapitalization...
• more taking on of private-sector tail risk by the government...
• the full (albeit temporary) nationaization of mortgage finance...

And then reinforce whatever seems to be working.

As one notable economist said yesterday, it's as if once the banks passed their stress tests the High Politicians inside the White House decided that it should simply declare victory on macroeconomic policy and go do other things. And nobody at a higher level than the economic team thought of what had been clear to us since April, and assessed either the medium-run economic consequences--a 10% plus peak unemployment rate likely to be followed by a jobless recovery--or the political consequences--it's hard to think that congress in 2011 and 2012 will be supportive of Obama's initiatives if the 2010 election takes place in an environment of a 10% unemployment rate

The Arithmetic of a Jobless Recovery

Macro Advisors has just upped their tracking estimate of seasonally-adjusted fourth-quarter real GDP growth to a 4.2% annual rate. We know that the fourth-quarter labor input growth rate will be about -1.0%. That means another high--5.0%-labor productivity growth rate quarter.

If productivity growth continues at 5% for a while, we would need a real GDP growth annual rate of 7% or more in order to lower the unemployment rate by even on percentage point per year...

The Real Unemployment Rate...

The real unemployment rate--the share of Americans who say that they are actively looking for work and don't have jobs--has been drifting down since late spring--from 9.7% in June to 9.4% in November. The seasonally-adjusted unemployment rate over that same period has risen from 9.5% to 10.0%, as the actual unemployment rate has drifted down much more slowly than it usually drifts down from June to November as things pile up for the Christmas rush.

Starting now the seasonal adjustment factors reverse themselves. American unemployment not seasonally adjusted is going to rise by about one full percentage point between mid November and mid January. It will be harder to find a job in a month than it was a month ago, whatever the seasonally-adjusted figures say.

This Is a Congressional Joke

Senator Mitch McConnell, that is:

Brian Beutler:

Is This a Congressional Joke?

Senator Conrad voted for Medicare Part D. Senator Gregg voted for the Bush tax cuts. Of the $36 trillion Auerbach-Orszag present-value fiscal gap through 2080 $11 trillion is due to the Bush tax cuts and $6 trillion is due to Medicare Part D. Eliminate those two fiscal policy mistakes, and our long-run (out to 2080) fiscal problem is half the size.

Isn't the easiest thing--and the most obvious thing, and the most constructive thing--Senators Conrad and Gregg could do in order to help fix the deficit is for them to stop making it worse? Isn't the obvious thing for them to resign, and as they resign to tell Americans that they should never elect senators like them again?

Yet now come Senators Kent Conrad and Judd Gregg dressed up in the feathers of deficit hawks:

Colloquy Between Senate Budget Committee Chairman Kent Conrad and Budget Committee Ranking Member Judd Gregg On the Bipartisan Task Force on Responsible Fiscal Action Act

December 10, 2009

Mr. Conrad: This is the headline from "Newsweek" December 7. In fact, it was a cover story: "How Great Powers Fall. Steep debt, slow growth, high spending kill empires -- and America could be next." If you go to the story -- and, by the way, interestingly enough, this is on December 7, Pearl Harbor day. If you go into the story that's in the magazine, it says -- and I quote -- "This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force ... If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power." All we have to do is look at the facts. This shows the debt of the United States from 2001 projecting to 2019....

I hope people are listening. I hope they're paying attention. I hope our colleagues are. A group of us yesterday introduced legislation to confront this debt threat head-on. There are now 31 cosponsors of that legislation: 18 Republicans, 13 Democrats....

It is going to take a special process, a special commitment of the members here and representatives of the Administration to develop a plan that gets us back on track. And it is going to take a special process to bring that plan to this floor for a vote, up or down. That holds, I believe, the best prospects for success. I believe this is a defining moment for this Chamber, for this Congress, for this Administration....

Mr. Gregg: Mr. President?

The Presiding Officer: The Senator from New Hampshire.

Mr. Gregg: It is an honor to join with the Chairman of the Budget Committee. We've worked together for awhile and have a piece of legislation which accomplishes the goals as they have been outlined by the Senator from North Dakota, and that's good news. And really the outpouring of support here in the Senate -- over 31 co-sponsors in just a very short time -- is a sign they are willing to move in this area, and that's good news. Right now in this country, after the possibility of a terrorist getting a weapon of mass destruction and using it against us somewhere here in the United States, the single biggest threat that we face as a nation is the fact that we're on a course toward fiscal insolvency...

I am--in normal times--a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole.

But when I look at Senators Conrad and Gregg, I don't recognize fellow members of my species. They may be glueing the feathers of deficit hawks onto themeselves, but they are birds of a very different order--doves, turkeys, chickens, whatever, but I hope they are dodos.

The Bond Market Is Very Calm Indeed...

Treasury sells $13 bln in 30-year bonds at 4.52%:

Since the middle of 2008 the U.S. Treasury has increased the supply of Treasury bonds held by the public by $2.5 trillion. And it has done this without moving the needle at all on either the real or nominal interest rates it has to pay.

It requires a very strange mind indeed to say at this moment that the price elasticity of demand for U.S. Treasury securities right now is so high that additional fiscal stimulus is self-neutralizing...

Jon Chait FTW!!!!

He writes about the Conrad-Gregg deficit commission:

The Deficit Commission Bill Is Here, And It's Insane: Let me get this straight. You have a commission proposing a package of highly unpopular legislative changes. And, in addition to having to surmount the 60-vote barrier in the Senate, which is nearly insurmountable for major legislation and which was avoided for both of the last two major deficit-reducing bills, it's also going to impose a new supermajority requirement in the House and a 78% threshold in the commission itself? To say that this procedure "is designed to get results" shows a very odd understanding of American political institutions. Conrad and Gregg seem to think that instituting major reforms in the public interest is rare because the threshold for passing legislation is too low. Thus they've designed a process that creates new and higher supermajority requirements, on an issue where getting even 51% to sign on is probably impossible. And if that fails, maybe they'll conclude the process was too easy. Next time they could also require the commission members to create a cold fusion reactor or retrieve a magical ring from inside a volcano.

No, no, Jonathan! You have it wrong! The commission will have to destroy the deficit by throwing themselves and it into the erupting volcano!

Why Do I Keep Thinking that William's First Name Is "Richard"?

As in my recent link to here: William Easterly (2009), "Why there’s no “GrowthGate:” Frustration vs. Chicanery in Explaining Growth".

I think the answer is that "Easterly" is just a little too close to "Easterlin," and my brain is now full: there is one and only one pattern of neurons that fires when I think about a very smart economist interested in economic growth whose last name begins with "Easter"...

in Which I Am Becoming Increasingly Bewildered About Administration Thinking

Noam Scheiber reports from inside the Obama Administration:

Balancing The Budget: As of late this summer, Democrats in Washington shared a tidy consensus about the economy: The stimulus was working more or less on schedule, and the job market was gradually recovering. That meant the administration could start thinking about how to rein in the country’s yawning budget deficit, if not actually scale it back yet...

To this my first reaction is: "Huh?" On August 16, 2009 many--Barry Bosworth for one--were saying that the stimulus was, as someone in his audience put it, "1. too slow; 2. too small; 3. too much in silly tax cuts out of which the M[arginal ]P[ropensity to ]C[onsume] will be much less than 1." It's not clear to me whether Noam is setting up an overstated rhetorical antithesis here, or whether the political Democrats really were in a bubble about the state of the economy late last summer.

What followed turned that tidy consensus into a pigsty.... “The entire town is more schizophrenic than I’ve ever seen,” says one senior administration official. “Everyone cares about jobs, and everyone cares about fiscal discipline. The weight shifts week by week, unemployment report by unemployment report.”...

[T]here’s no such win-win solution this time... the only way to further stimulate the economy is to spend. “Now is not the time politically or economically to emphasize fiscal austerity,” says Simon Rosenberg, president of NDN, a Washington think tank. “That day will come.” Rosenberg is surely right about the need to punt for the moment on the deficit. But it turns out that this choice is only the beginning of the discussion, not the end... spending more money now could actually raise long-term rates, thereby offsetting its effect. “The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs,” says one senior administration official.

To this, my reaction is: I've been looking for such Wall Street analysts, and have had a hard time finding them--except among the goldbugs, the politically-motivated fellow travelers of Donald Luskin, and others of that ilk. I see a lot of people saying that such a scenario might happen--that it is one possibility. I don't see credible people saying that it is the central tendency. And I don't see anybody selling long-term Treasuries on any substantial scale as a way of betting that such a scenario will come to pass.

Does anybody know to whom Noam and this SAO are referring?

And, of course, if you do fear adverse bond-market reaction to more shot-term government spending, there is an immediate and natural cure:

On paper, the way to deal with this is to spend now while pledging to cut later on, so as to persuade the bond market the infusion is temporary. “Everyone would of course like to be able to do something substantial on jobs in the short term and lock in tough, fiscally responsible policies in the medium term,” says a second administration official. But actually executing this fiscal maneuver is unspeakably difficult.... “The odds that you could get both done in an election year with ten percent unemployment are mighty low,” says this official. It would be hard enough to rally liberals around the cause of deficit reduction so soon after the deepest recession in 70 years; getting the GOP on board would be hopeless. Already, Republicans have shamelessly highlighted Medicare cuts in order to derail health care reform...

This seems to be simply wrong: Those Democrats concerned with jobs now appear to me to be eager to get more spending now even if they have to pay for it with spending caps and revenue triggers five years and more into the future. And those Democrats who are deficit hawks above all are willing to provide more spending now to sweeten the long-term curve bending. It might not work, but there is a sweet spot that everybody on the Democratic side is willing to vote for.

Then the administration, speaking through Noam, becomes less than coherent:

If the administration were to announce, say, a $200 billion job-creation bill along with a tough deficit-reduction package beginning in three or four years, anticipation of the latter could undercut the former. The reason: People who think their taxes will get raised save more and consume less. And, of course, the whole point of additional stimulus is to goose consumption...

You can either say that you think that bigger deficits now that create expectations of bigger deficits in the future will be ineffective, or (if you are Ricardian about it) that bigger deficits now accompanied by expectations of smaller deficits in the future will be ineffetive, but you cannot say both at the same time.

New Unemployment Insurance Claims Rose Just a Teeny Bit Faster than the Seasonal Adjustment Factor Was Expecting Last Week...

I feel like I'm looking at my Magic 8 Ball: "Reply hazy, ask again..."

Incentive Compatibility

A good move by Goldman Sachs.

Sue Chong:

Goldman Sachs management won't get cash bonus: SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group (GS 166.27, -0.18, -0.11%) said Thursday its management committee will be receiving its bonus in the form of "shares at risk" in 2009 instead of cash. The shares at risk cannot be sold for five years and include other restrictions. "Discretionary compensation represents the vast majority of senior management's compensation and is directly tied to the firm's overall performance," Goldman Sachs said in a statement. Shareholders will also have an advisory vote on the compensation package at the financial firm's annual meeting in 2010. The announcement comes after the board approved various changes to the 2009 compensation program.

Paul Krugman on the New Candidate for the Worst Washington Post Editorial Ever

Paul Krugan:

Things free trade doesn’t do: There are a lot of good things you can say about international trade. But it does not, repeat not, do anything to alleviate a shortage of overall demand. Yes, if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X-M, it’s a wash, because X and M rise equally. Which makes this WaPo editorial on things Obama should be doing about jobs truly bizarre. Even if the proposed trade deals with Korea and Colombia were remotely big enough to bear mentioning in the context of the crisis — which they aren’t — they wouldn’t be job creation measures. But then, the bit about reducing minimum wages is equally off point, because the level of wages has nothing to do with the overall employment problem.

OK, they don’t like Obama’s policies. But these are ridiculous alternatives.

Shut the Washington Post down. Shut it down now.

And let me say that now that the Sixteen-Year-Old's PSAT scores have come back, it is very clear to us that Princeton Review is a much better test prep company than Stanley Kaplan.

To Market, To Market...

Humans have, as Adam Smith wrote more than 200 years ago, a natural propensity to "truck, barter, and exchange"--to enter into reciprocal gift- exchange relationships with one another. These reciprocal relationships do three things: (i) they allow us to trade things that we value less or that are less useful to us but more useful to somebody else for things that we value more or find more useful; (ii) they make us view our fellows as friends and partners who are useful aids rather than obstacles to us, and (iii) they allow us to gain status and put others under obligation: I did something very valuable for you, now it is your turn to do something very valuable to me.

Let's move--as economists like to do--into a fictional toy economy with a fictional toy market to try to gain some intuition about these issues. Let's work through a stylized example that I call "Blessed Are the Cheesemongers..."

We have a crossroads. Five days a week, 8 hours a day, every 24 minutes a guy with a highly perishable cheese--a seller--and a guy who likes cheese--a buyer--come by, meet each other, try to bargain, and then leave.

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20091209 to market to market i.pdf

Econ 1--To Market, To Market.1.xls

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Economics 210a: Introduction to Economic History: Proposed Class Topics (U.C. Berkeley, Spring 2010, Intended for First-Year Graduate Students in Economics)

I. Pre-Industrial Economies

Jan 20: Modes of Production

Jan 27: Malthus and the Demographic Transition

Feb 3: Industrious Revolutions

Feb 10: Trade, Law, and State

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II. The Industrial Economic World

Feb 17: Industrial Revolutions

Feb 24: Globalizations

Mar 3: Divergences

Mar 10: WWI and the Great Depression

Mar 17: WWII and the Thirty Glorious Years

Mar 31: The Forward March of Social Democracy Halted?

Apr 7: China Stands Up

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III. Macroeconomics in Historical Perspective

Apr 14: Lombard Street, 1825-1914

April 21: The Great Contraction, 1929-1933

Apr 28: The Panic of 2007-2010

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IV. Conclusion

May 5: Reflections

Depression Economics: Some Basic Fiscal Arithmetic

This is an exceptional time--a time in which many of the normal rules of the Dismal Science are changed and transformed. It is a time for, as Paul Krugman puts it, not normal economics but rather “depression economics.” The terms on which the U.S. government can borrow now are exceptionally advantageous. And because of high unemployment the benefits of boosting government purchases are exceptionally large.

The result is that the normal benefits and costs of borrow-and-spend policies by the government are overturned for the short run—for as long as the current economic crisis of high unemployment lasts. Yet I find that many people do not understand that and how arguments that hold perfectly well in normal times do not apply today. In normal times a boost to government purchases:

• Produces a limited increase in production and employment,
• Is associated with a substantial increase in national debt,
• Which crowds out productive private investment,
• And which then must be financed at a sizeable interest rate.

Thus only government spending initiatives that promise a high value for the dollar are worth undertaking. Now, however, things are very different. Let’s run through the arithmetic--first in normal times, and then in a financial crisis-ridden environment like this one.

20091008d epi.pdf

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In Which Thers Arms Himself for the Climate Wars' Intellectual Battles of Wits...

Ahem:

Thus wroth against the deniers he put on the gift of the god,
Which Hephaistos had wrought for him by his art.
First on his legs he set the fair greaves fitted with silver ankle-pieces,
Next he donned the cuirass about his breast.
Then round his shoulders he slung the bronze sword silver-studded;
lastly he took the great and strong shield,
And its brightness shone afar off as the moon's....
And forth from its stand he drew his father`s spear, heavy and great and strong:
That spear could none other of the Akhaians wield...

Thers:

Eschaton: Here are the places I personally go when I want the lowdown on the most current wingnut lies about climate change, particularly, nowadays, to do with the email theft. List not remotely definitive (I'm in the humanities, dammit). Deltoid -- Tim Lambert is worth reading for his own stuff, but the real fun is the comments, where you'll see silly denialist trolling avant la lettre. Tomorrow's bullshit, today! And just as quickly debunked. DeSmogBlog: Don't miss the Crock of the Week. SwiftHack is a good repository. Real Climate, and responses: here, here, here. This Nature editorial. George Will, filleted. And I like Eli's site.

Statistics: Industrial Revolution as a Treatment

Chris Blattman experiments on humanity... well, on some people in Ethiopia...

Marx vs Smith: The randomized evaluation:

The laborer receives means of subsistence in exchange for his labor-power; the capitalist receives, in exchange for his means of subsistence, labor, the productive activity of the laborer, the creative force by which the worker not only replaces what he consumes, but also gives to the accumulated labor a greater value than it previously possessed. The laborer gets from the capitalist a portion of the existing means of subsistence. For what purpose do these means of subsistence serve him? For immediate consumption. But as soon as I consume means of subsistence, they are irrevocably lost to me, unless I employ the time during which these means sustain my life in producing new means of subsistence, in creating by my labor new values in place of the values lost in consumption. But it is just this noble reproductive power that the laborer surrenders to the capitalist in exchange for means of subsistence received. Consequently, he has lost it for himself.

That is Marx’s rather pessimistic view of wage labor. It is from 1891, in Wage Labor and Capital his precursor to Das Kapital. Marxists ever since fear wage labor means earnings are lost, enslavement to capital emerges, and with it a loss in humanity. There are plenty of unsavory factories to worry about in the world. But the Marxist view is difficult to reconcile with the thousands of Africans that line up for the chance at a factory job (when they’re available). A good number of people--maybe most--already farm or have small businesses. Perhaps the lineup simply illustrates the paucity of other options and the ravages of global capitalism.

Another view is that farming and small business are hard work, risky, unrewarding, and unpleasant. Factories give a steady wage and less risk, at possibly monotonous tasks. But at what cost? Ill health? Or the noble reproductive power lost?

I'm in Ethiopia with Stefan Dercon partly to see if we can figure that out. An industrialist will be opening a dozen businesses this year: commercial farms, mines, tool factories, and the like. There will be thousands of applicants for several hundred unskilled jobs. Which unskilled workers they hire is often practically random, so we’re seeing if we can make it perfectly so. The result (if we can make it happen): the effect of wage labor on incomes, health, aspirations, and happiness. Also, if I can figure out what it is, that noble reproductive power.

Here's an alternative view of self-employment versus factory labor. Farmers and micro-entrepreneurs seldom specialize in the activity that brings the highest return. Earnings get invested in new, often less productive activities--maybe some goats, maybe a shop, maybe bricks or charcoal production. This spreads the risk, but lowers average returns. Give a woman a micro-loan or a small grant and she's likely to add a new activity to her portfolio rather than put it in her current, highest return one. All perfectly sensible under the circumstances.

So what happens when one family member suddenly gets a steady, fairly riskless stream of income? Quite possibly the other members start to specialize too. Land gets concentrated in, and worked by, fewer fewer hands. Perhaps they add capital investment to make up for the lost laborer, or hire a neighbor. Productivity in the household rises by a tenth, or a quarter, or maybe more. This is Adam Smith's specialization at work.

That, at least, is the theory. Look for updates on the test. Today I am off to the an herb farm and a plastics factory on the outskirts of Addis.

My only remark is that WLaC comes from 1848, not 1891...

Another Such Defeat and We Will Be the Winners!

Is there a word for the opposite of a Pyrrhic victory?

Robert Waldmann on the health care "compromise":

The Current Health Care Reform Compromise: the public option is replaced by an sub–exchange of private non profit insurers (which is very close to nothing at all), and people from 55 to 65 can buy into Medicare.... Ezra Klein beat me to it.... [T]he compromise is actually better than a level-playing-field public option, assuming that extended Medicare pays Medicare rates.... His key sentences are:

Right now, Medicare's rates are largely hidden, as no one pays the full premiums, and so no one can really compare it to private offerings. But if the premiums become visible, and Medicare's superior bargaining power is capable of offering rates 20 to 30 percent lower than its private competitors can muster, we'll see how long it is before representatives begin getting calls from 50-year-olds who'd like the opportunity to exchange money in return for insurance as good as what 55-year-olds can get...

I agree with Klein that if the public sees what a good deal they can get from the US government, provided it uses its bargaining power with providers, the compromise will not last... people and firms... will demand the option to buy it from the US government. He has, by the way, been arguing this since Edwards proposed a reform with a public option.... The 55 year limit is totally arbitrary and unfair. I don't think that's an easy line to hold once 54 year olds see how much extra they are paying to keep private insurance companies in business. The 65 year minimum... is now so long standing and familiar that tea partiers can sincerely argue that government run health insurance is unacceptable because it isn't good for Medicare. I can't even imagine how people will argue that it was OK to let people over 55 buy in but not to let people under 55 buy in.

65 made sense because it was the "retirement age." But I agree that 55 is not sustainable.

We should compromise like this more often!

Prime-Aged Males Aint so Choice Any More

Justin Fox:

Employment-to-population ratio among men 25-54 hit all-time low in November: As of November, 19.4% of American men in their prime working years didn't have jobs.... [T]he current job situation (for men, at least) is much, much worse than in any downturn since the BLS started measuring this stuff in 1948. Either that or there are just a lot more stay-at-home dads, grad students, and men who voluntarily spend their days playing golf or pinochle...

There are a lot more men in school or getting their heads together than there used to be. But the fact that we will touch 80% of 25-54 year old men with jobs in this recession is stunning.

Econ 115: Sample Final Exam

20091208 mock final.pdf

Econ 115: Fall 2009: Final Problem Set (Due December 14)

Post-WWII Economic Growth: >20091202 115 problem set final.pdf

What is Ben Bernanke Thinking?

Matthew Yglesias is puzzled:

Matthew Yglesias: Bernanke Used to Know What to Do: Even though Ben Bernanke is a conservative Republican Bush appointee, and even though the Fed mishandled a lot of things before the Bear Stears meltdown and Lehman Brothers bankruptcy, a lot of people I know were reasonably glad he was Fed chair as the country headed into major economic crisis. Why? Well largely because his pre-government academic work really seemed to indicate that he appreciated the need for drastic anti-crisis measures.... [Y]et here in the contemporary United States when Bernanke has the chance to put these ideas in practice, he’s not doing it. But we’ve been having below-target inflation for a while now. And we’ve got 10 percent unemployment. And our forecasts tell us that elevate unemployment will continue for a loooong time. The appropriate solution, as Bernanke laid out here, is for the central bank to continue monetary expansion until the price level “catches up” with where we’d be on a reasonable growth trend. That means a limited period of time in which inflation exceeds the standard target by a limited amount. But instead of doing this, the Fed remains obsessed with trying to eliminate all risk of inflation rising above the long-run target for even a moment. But why?

I am puzzled too.

Snap 'Em Up!

Looking down this New York Times buyout list from Gawker, I am reminded of the cartoon where Dibert explains his company's buyout program thus:

we have to pay the good people to leave.

If any news organization wants to gain credibility with me at least, hiring a chunk of these and turning 'em loose to write what they think is going on would be a way to do it...

Climatologist James Hansen Does Not Understand the Economics of Pollution Control

Fortunately, Paul Krugman does:

Unhelpful Hansen: [T]oday’s op-ed article suggests that he really hasn’t made any effort to understand the economics of emissions control. And that’s not a small matter, because he’s now engaged in a misguided crusade against cap and trade, which is — let’s face it — the only form of action against greenhouse gas emissions we have any chance of taking before catastrophe becomes inevitable.... [A]n emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap and trade, are essentially equivalent.... A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits... so the incentives... for individual action to reduce emissions are the same under the two systems. This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity... if you use a cap, you know the quantity but not the price.... [T]he question about uncertainty is secondary; the fact is that cap and trade works. Hansen admits that the sulfur dioxide cap has reduced pollution, but argues that it didn’t do enough; well, it did as much as it was designed to do. If Hansen thinks it should have done more, he should be campaigning for a lower cap, not trashing the whole program...

Life at Berkeley

Matthew Kahn writes:

The Return of a Minor League Blogger: I twice had the chance to sit down and chat with Brad Delong. He was blogging so I didn't want to bug him but we had a chance to talk and I enjoyed it...

But I wasn't blogging! I was frantically trying to get ready to run the finance panel of the "Green Buildings" symposium...

From Geldzins und Guterpreis

Knut Wicksell, 1898:

Those people who prefer a continually upward moving to a stationary price level forciblyremind one of those who purposely keep their watches a little fast so as to be more certain of catching their trains. But to achieve their purpose they must not be conscious or remain conscious of the fact that their watches are fast; otherwise they become accustomed to take the extra few minutes into account and so after all, in spite of their artfulness, arrive too late....

It follows that... the ideal position, affording common advantage to the overwhelming majority... would undoubtedly be one in which... the general average level of money prices... would be perfectly invariable and stable.

And why should not such regulation lie within the scope of practical politics?... Absolute prices... are a matter in the final analysis of pure convention, depending on the choice of a standard of prices which it lies within our power to make.... [I]t is the part of man to be master, not slave, of nature, and not least in a sphere of such extraordinary significance as that of monetary influences...

DeLong Smackdown Watch (Wil Wilkinson Edition)

Will Wilkinson writes::

Anything at All?: Brad DeLong writes:

At this point, anything that boosts the government’s deficit over the next two years passes the benefit-cost test–anything at all.

30,000 more troops to Afghanistan? Anything?

He says it with special emphasis, as though he’s not goofing. But is it even possible to take a claim like that seriously?

All right. Anything that is not positively harmful on its own terms.

The point is that with so many unemployed the resource cost of the government doing things is very close to zero--it is using hands that would otherwise be idle and would not be happy being idle...

The Wrong Jobs Summit

Did I ever remember to post this here? From The Week Online:

The White House is hosting a jobs summit this week. I, however, cannot but think that it is the wrong jobs summit—that it will be the wrong people talking about the wrong things.

Let me back up. Ever since the 1930s and John Hicks--if not before--economists trying to analyze the determinants of spending have focused on two of the economy’s markets: the market for liquidity and the market for savings.

Irving Fisher first analyzed the market for liquidity—the money market—which matches the supply of readily spendable purchasing power in the economy (cash, checking account balances, credit lines) with the demand of households and businesses to hold some of their wealth in the form of readily spendable purchasing power. Supply and demand in this market is influenced by interest rates and the flow of spending.

Knut Wicksell first analyzed the market for savings—usually called “the bond market”—which matches households wishing to boost the value of their savings with businesses seeking capital to expand their productive capacity. Interest rates are crucial here, as well.

At first glance, it seems there are three variables at play: spending, income, and interest rates. But when we recognize that everyone’s spending is someone else’s income, we see that there are really only two variables—that the economy will settle at that level of interest rates, spending, and income where supply equals demand in the market for liquidity and in the market for savings.

We now have a framework for managing the economy. For the government to boost jobs, it must to do something to change the balance of supply and demand in either the market for liquidity or the market for savings. In general, the central bank—the Federal Reserve—acts to tweak supply and demand in the market for liquidity. The president and Congress act to tweak supply and demand in the market for savings. But they must make sure that whatever spending, income, and job-stimulating effect they create by intervening in one market is not undone by changes in the other market.

Right now, if you ask the decisive members of congress—by which I mean the Blue Dog Democrats in the House, or the most conservative Democrats and most liberal Republicans in the Senate —why the president and the Congress are not doing more to reduce unemployment and boost spending and income, the answer you’ll get is ... well, you probably wouldn't get an intelligible answer.

But if you did get an explanation for the lack of congressional action it would go something like this: Attempts to move supply and demand in the market for savings in order to boost spending would (a) increase the national debt burden on future taxpayers and (b) lead to a large decline in bond prices and a boost in interest rates. Why? Because businesses would try to increase their liquidity to support higher spending, driving up interest rates, which, in turn, would cause businesses to cut back on investment, thus neutralizing most or all of the stimulative policies.

Similarly, if you were to ask the Federal Reserve why it isn’t doing more to reduce unemployment and boost spending and income, the answer you would get is this: Spending is in no way constrained by a shortage of liquidity. We have already done all we can do, indeed we have “flooded the zone” with liquidity. As a result, the Fed is disinclined to pursue additional tweaks of supply and demand in the market for liquidity because it fears such efforts would fuel destructive inflation in the future without boosting employment and spending in the present.

Both of these arguments are comprehensible; each might well be true. But they cannot both be true at the same time. Either the economy is so awash in liquidity that the Federal Reserve cannot do much to boost spending—in which case additional spending by the government won’t generate any substantial rise in interest rates. Or additional government spending will crowd out investment as businesses scramble for liquidity and interest rates rise—in which case the economy is not awash in liquidity, and quantitative easing by the Federal Reserve could do a lot right now to boost spending and employment.

It appears that what we have here is a failure to communicate.

In truth, that is nothing new on this front. It was clear, for example, by Feb. 17 of this year, the day Obama signed the stimulus package, that the economy was in much worse shape than earlier projections had supposed. The administration’s policies were targeted at an economy in which the current—December 2009—unemployment rate was projected at 7.8 percent, with a decline to 6.9 percent projected by December 2010.

But we do not live in that world. We live in a world in which the unemployment rate this month is likely, in the final data, to come in at 10.4 percent, and in which the unemployment rate in December 2010 may well exceed 9.6 percent. All of this was known, or suspected, on Feb. 17. But the High Politicians and High Spinmasters of the Obama administration chose not to communicate that grim news. The problem is not that the administration’s policies have not performed as expected; they have, more or less. The trouble is they were devised to treat a bad crisis. And we were living through an even worse one.

Thus we need a jobs summit right now. We need the White House's National Economic Council and key congressional “centrists” on one side and the Federal Reserve Open Market Committee on the other to meet. Those two groups seem to have very inconsistent views of the economic situation. They seem to be working at cross-purposes. Something has to give. If they could reach agreement on whose view of the economy is likely correct, then a rescue plan—entailing either more government spending or greater liquidity—would become obvious.

Until that “jobs summit” is convened, others are moot.

Hoisted from Archives: A Short Dialogue on Santa Clara County v. Southern Pacific Railroad Company

Stephen Bainbridge writes, apropos of (as best I can see) nothing at all:

ProfessorBainbridge.com: I don't read Kos or Brad DeLong or, for that matter, Brookings Institute position papers very often...

Let me say that in my view this is a serious mistake: reading people with whom one does not already agree is, after all, the only way one can can become smarter. Otherwise one becomes stupider every day.

As it happens, I do read Professor Bainbridge, and occasionally it provokes thoughts that I value--of which I think this is the best:

---

A Short Dialogue on Santa Clara County v. Southern Pacific Railroad Company

John of Salisbury: I see that Brad DeLong is getting smacked down from the left and from the right.

Thrasymakhos: Something that would make the world a better place if it happened more often, but about what, exactly?

John of Salisbury: Well, DeLong wrote down an off-the-cuff list of ten "constitutional moments" when American judges had changed the law. Fourth on his list is:

• The post-Civil War empowering of corporations with exorbitant privileges of citizenship and limited liability at the expense of government regulators and creditors.

Justinian: And?

Edward Coke: Nathan Newman accused him of Amnesia on the Death of Reconstruction--when the Grant administration was trying to suppress the anti-Negro terrorist insurgency in the U.S. South in the 1870s, the Supreme Court betrayed it and broke the legal tools it was using. Because the Supreme Court threw its weight onto the scales, Newman argues, the terrorists won.

Thrasymakhos: And what does DeLong say?

John of Salisbury: He wimps out. Something about the Supreme Court being a bit player--the main actors being executive and legislative.

Thrasymakhos: But the Supreme Court was active?

John of Salisbury: Very.

Thrasymakhos: Seems like Nathan has a fair point.

Justinian: And what else?

John of Salisbury: This is interesting. I can't claim to fully understand it. From the right, Stephen Bainbridge cheered on by Glenn Reynolds, takes aim at DeLong's example number 4:

I assume that DeLong's talking about the post-Civil war cases [like Santa Clara County v. Southern Pacific Railroad Company].... Congress substituted the word "person" for the word "citizen" [in the text of the Fourteenth Amendment] precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporations, from oppressive legislation.... (Admittedly... the legislative history is not uncontroverted.)...

The... cases establishing the corporation as a legal person with constitutional rights were (a) required by the legislative history of the 14th amendment and (b) made good policy sense. Hence, my conclusion that's you're "wrong" was intended to suggest that # 4 doesn't belong on your list. It was also intended to suggest that your rehetorical claim that the post-Civil War cases provided corporations with "exorbitant" privileges was, frankly, over the top. I should have thought that was apparent...

Justinian: I don't understand. Is Bainbridge defending the ruling of the Supreme Court in Santa Clara County v. Southern Pacific Railroad Company because the Court had a choice as to how to rule and chose the just result--the one that made "good policy sense"--or because the Court had no choice as to how to rule, being contrained by the plain meaning of the text?

Thrasymakhos: Neither.

Justinian: Neither?

Thrasymakhos: Neither. Notice that Bainbridge claims not that the Court was constrained by the meaning of the text, but by the legislative history of the amendment. He can't claim that the text requires his interpretation: it doesn't. And notice that Bainbridge cannot claim that justice alone--the fact that this interpretation would make "good policy sense"--is sufficient to justify his interpretation. That would mean that good judges are "activists" because they can make choices, and Bainbridge is certain that good judges aren't activists.

Edward Coke: No, that's not it at all. What good judges do is that they understand the law at a deeper level than other people. They see more clearly than others what the law always meant--but what their predecessors were too blurry-eyed to see.

Thrasymakhos: But the Fourteenth Amendment was then only sixteen years old.

Edward Coke: But the real Constitution--the Constitution that is true justice--had always included a Fourteenth Amendment. The drafters in 1787 had simply failed to see that it did. The life of the law, after all, is reason. The law that is written down is simply crystalized reason itself, to the extent that we can understand and follow it. So it had to be the case that true justice required and the properly-interpreted Fourteenth Amendment required that corporations be persons with the right to the equal protection of the laws. Anything else would be unreasonable.

John of Salisbury: Are you Edward Coke or G.F.W. Hegel?

Justinian: But this "required"? How can claims made about legislative history that are "not uncontroverted" "require" anything?

Edward Coke: Got me.

Justinian: How does this Fourteenth Amendment read?

Edward Coke: Like this:

Section. 1. All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens.... No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Section. 2. Representatives shall be apportioned... counting the whole number of persons in each State....

Justinian: So if you have more corporations in your state, you get more representatives in the legislature?

John of Salisbury: No, no, no! "Persons" in Section 2 refers only to human beings...

Edward Coke: And "persons" at the start of Section 1 refers only to human beings...

John of Salisbury: Only "persons" at the end of Section 1 refers to legal persons, i.e. corporations, as well as human beings...

Justinian: If anybody had tried to place such a strained interpretation on one of my laws...

John of Salisbury: Yes. Justices Hugo Black and William O. Douglas had things to say about Bainbridge's "required":

Wheeling Steel Corporation v. Glander , 337 U.S. 562 (1949): Mr. Justice DOUGLAS, with whom Mr. Justice BLACK concurs, dissenting.

It has been implicit in all of our decisions since 1886 that a corporation is a 'person' within the meaning of the Equal Protection Clause of the Fourteenth Amendment. Santa Clara Co. v. South. Pacific R. Co.... [I]t wrote no opinion on the point.... There was no history, logic, or reason given to support that view.... The Fourteenth Amendment became a part of the Constitution in 1868. In 1871... Mr. Justice Woods (then Circuit Judge) held that 'person' as there used did not include a corporation.... [I]n 1873. Mr. Justice Miller... adverted to events 'almost too recent to be called history' to show that the purpose of the Amendment was to protect human rights--primarily the rights of a race which had just won its freedom....

[W]hat was clear to these earlier judges was apparently plain to the people who voted to make the Fourteenth Amendment a part of our Constitution.... There was no suggestion in [the amendment's] submission that it was designed to put negroes and corporations into one class and so dilute the police power of the States over corporate affairs....

[H]ow strained a construction it is of the Fourteenth Amendment so to hold.... It requires distortion to read 'person' as meaning one thing, then another within the same clause and from clause to clause....

History has gone the other way..... But now that the question is squarely presented I can only conclude that the Santa Clara case was wrong and should be overruled...

Edward Coke: And things get worse. If you look in Justice John Marshall Harlan's opinion in Santa Clara Co. v. South. Pacific R. Co. you see no holding that a corporation is a "person." The Court does not reach the question:

Santa Clara County v. Southern Pacific Railroad Company: The special grounds of defense by each of the defendants were: (1) That its road... a... franchise... derived from the United States, cannot, without their consent, be subjected to state taxation. (2) That the provisions of the constitution and laws of California... are in violation of the fourteenth amendment... denying to it the equal protection of the laws....

Mr. Justice FIELD overruled the first of the special defenses... but sustained the second.... The propositions embodied in the conclusions reached in the circuit court... belong to a class which this court should not decide unless their determination is essential.... [If not,] there will be no occasion to consider the grave questions of constitutional law....

[T]he court below might have given judgment... upon the ground that the assessment... included property... the state board was without jurisdiction to assess.... As the judgment can be sustained upon this ground, it is not necessary to consider any other questions...

Justinian: So Harlan writes explicitly that the Supreme Court is not deciding this question, and people like Bainbridge assert that the Supreme Court did decide the question?

Edward Coke: Yep.

Justinian: Wow.

[Pause]

Justinian: But Bainbridge talks about the legislative history. He says the legislative history requires his reading of the Fourteenth Amendment.

John of Salisbury: Now we get to the interesting case of Roscoe Conkling. Roscoe Conkling claimed that the drafters of the Fourteenth Amendment had used the word "persons" in the equal protection clause so that subsequent courts could use it to protect corporations from legislatures--and that the drafters had kept this secret throughout the ratification process, and that he was only now in 1882 revealing the true meaning of what the states had ratified.

Justinian: Under what theory of ratification is a Court "required" to adopt a secret meaning of a law--a meaning unknown to those who adopted it?

Edward Coke: Got me.

Justinian: If Roscoe Conkling had written an extra clause on the original of the Amendment text in invisible ink, and the Amendment had then been ratified, would Bainbridge say that the invisible ink text was a valid part of the Constitution?

Edward Coke: Got me.

Justinian: Is Bainbridge serious when he writes that this claim by Conkling "requires" that judges adopt Conkling's reading of the Fourteenth Amendment?

Edward Coke: Apparently.

Thrasymakhos: It gets worse: Conkling appears to have misquoted his own diary, and to have done so deliberately: Howard Jay Graham (1938) "The 'Conspiracy Theory' of the Fourteenth Amendment," Yale Law Journal.

Justinian: Your modern jurisprudents appear to be a scurvy lot.

Edward Coke: I cannot disagree.

John of Salisbury: It's your fault.

Edward Coke: My fault?!

John of Salisbury: Yes. You started this practice of pretending that what judges wanted to do was in fact what precedent demanded that they must do. You with your "Great Charter" business--the rights of Englishmen against arbitrary arrest dating back to 1215. If anybody had shown up before Queen Elizabeth I demanding that someone she held in the Tower be released because of the "Great Charter"--well you, you as her Speaker blocked a proposed reaffirmation of it, didn't you? But you wanted to curb the power of a Scottish-born king, and pretending that Magna Carta had always been good law since 1215, and that it had always applied not just to barons with knights in the field but to all crown subjects was just the tool you needed. Modern lawyers have a nasty habit of making false claims about the past--that such and such a reading is "required" because of the past--in the hope that their claims will be true about the future. And it's your fault.

Justinian: I'm still stuck at this "required by the legislative history" business...

Thrasymakhos: It doesn't make "sense." It's not supposed to make sense. It's simply a way of avoiding admitting that the post-Civil War Supreme Court made choices about how American corporate law was to develop, and those choices could have gone different ways...

Barack Obama Is On Message...

Good to see:

ROBERT KUTTNER: You know, most of the things that have been proposed today cost money, and there is this concern about the federal deficit. I hope that your administration will recognize, as I know you will, that it's possible, first of all, to reduce the deficit over time and sometimes in the short run realize that you need to increase the deficit. And I hope the concern about the deficit in the long run doesn't crowd out the need for additional spending in the short run. And I also think that some of these programs that increase jobs and increase GDP are probably the fastest way to get the economy back on a track that will reduce the deficit over time. It's certainly a better way to reduce the deficit than putting ourselves into a -- into a debtor's prison and assume we can deflate our way to recovery.

BARACK OBAMA: Well, I think this is an important point. You know, we've been talking a lot about specific initiatives. There is a macroeconomic element to this whole thing. And so let me just amplify what was just said.

We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We're spending about 23 percent of GDP and we take in 18 percent of GDP and that gap is growing because health care costs, Medicare and Medicaid in particular, are growing. And we've got to do something about that.

You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis and the greater demands for unemployment insurance and so forth. That's another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I mean, I think there's a misperception out there that somehow the Recovery Act caused these deficits.

No, I mean, we had -- we've got a 9-point-something trillion- dollar deficit, maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks. In turns out actually TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated.

So that's not what's contributing to the deficit. We've got a long- term structural deficit that is primarily being driven by health care costs, and our long-term entitlement programs. All right? So that's the baseline.

Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes and businesses that are making profits have taxes -- are paying taxes. That's the most important thing we can do.

We understand that in this administration. That's not always the dialogue that's going on out there in public and we're going to have to do a better job of educating the public on that.

The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don't have the capacity to engage in deficit spending, some of that obligation falls on the federal government.

Having said that, what is also true is that unless businesses and global capital markets have some sense that we've got a plan, medium and long term, to get the deficit down, it's hard for us to be credible, and that also could be counterproductive. So we've got about as difficult a economic play as is possible, which is to press the accelerator in terms of job growth, but then know when to apply the brakes in the out-years and do that credibly. And you know, we are trying to strike that balance, but we're going to need help from all of you who oftentimes are more credible than politicians in delivering that message.

Because we want to leverage whatever public dollars are spent, and we are under no illusion that somehow the federal government can spend its way out of this recession. But it is absolutely true that any of the ideas that have been -- been mentioned here are still going to require some public dollars, and those are actually good investments to make right now.

It's so nice to have an intelligent, thoughtful, and industrious president...

Joe Gagnon for Fed Chair...

Just saying...

This, from Ben Bernanke yesterday, was unprofessional:

Silla Brush: Federal Reserve Chairman Ben Bernanke on Thursday threw cold water on efforts to push a major new fiscal stimulus package. At his confirmation hearing for a second term as chairman, Bernanke emphasized that the government has spent less than half of the money in the $787-billion package passed earlier this year and that analysts are still determining its impact. "Only about 30 percent of the funds have been disbursed," Bernanke said. "It's a little bit early to make a strong judgment, a little bit early to decide whether or not to do additional fiscal actions..."

I call bullshit.

30% of the funds have been spent, but 100% of the increase in the pace at which the government is spending money has already occurred.

The ARRA has already had its full impact on the growth rate of GDP.

It has had or is about to have had its full impact on the level of GDP. After the end of this year, the effects of the ARRA on the economy die away and it delivers not an addition to but a subtraction from the GDP growth rate.

You can say many things about the ARRA.

You cannot say that it is too soon to assess its impact because only 30% of the funds have been disbursed.

Bernanke could say that additional fiscal stimulus is unwarranted because of the long-term deficit situation and the limited debt capacity of the U.S. government. (I think that is a hard argument to make, but he could make it.) But he doesn't. He says that it is too soon to judge because we don't yet know the effect of the ARRA.

That is, at best, incoherent.

Joe Gagnon, by striking contrast, has a coherent and informed view of the macroeconomic situation.

Joe, via Tim Duy, via Mark Thoma:

Joe Gagnon: The Case for $6 Trillion More Monetary Stimulus: A lively debate is under way between those who want more fiscal stimulus to create jobs and those who worry that our national debt is already too high. Both sides are ignoring the obvious alternative... easier monetary policy in all the main developed economies....

[T]he United States, the euro area, Japan, and the United Kingdom are suffering from historically high rates of unemployment... forecasters see weak economic growth and lackluster job creation over the next two to three years.... Clearly, we need more macroeconomic stimulus to reduce the suffering and allay the long-term damage caused by persistent unemployment as well as to ward off the risk of harmful deflation. But record peacetime fiscal deficits and rapidly rising public debt point to monetary policy, rather than fiscal policy, as the way to go.

Short-term interest rates already have been reduced to near zero. But the Federal Reserve and its counterparts have other tools to use for monetary stimulus... large-scale purchases of long-term bonds. There is considerable scope for additional purchases... combined purchases of an additional $6 trillion in long-term bonds designed to push 10-year bond yields down another 75 basis points. At a time of concern about fiscal deficits, it is important to note that reducing yields on government debt actually reduces the federal deficit. Reducing yields on private debt will also speed the repair of private sector balance sheets and encourage businesses to invest and expand employment. A more rapid recovery further reduces fiscal deficits by raising revenues.

It is time to stop arguing about tradeoffs. Monetary policy can create jobs and reduce the deficit at the same time.

I would prefer a different word than "monetary policy" to describe Joe Gagnon's proposed policy: it affects the economy not by changing the monetary base but rather by changing the riskiness and duration of the asset pool held by the private sector, and thus seems to me to be more banking than monetary policy. But it is a coherent plan based on a coherent, and in my view likely to be accurate, view of the world.

I can't say that about the policies Bernanke set forth yesterday.

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UPDATE: Matthew Yglesias:

Matthew Yglesias: Bernanke’s Plan for Unemployment: Do Nothing: I’ve been holding out some kind of vague hope that Ben Bernanke’s confirmation hearings might provide a way out of our political impasse on the jobs front. After all, Bernanke’s job is to try to achieve as close to full employment as is possible consistent with the goal of price stability. The Federal Reserve, not the elected officials in Congress and the White House, is the public institution with the largest influence over employment levels. And right now employment levels are very low indeed. So at his hearings either Bernanke might publicly discuss his determination to do more to lower the unemployment rate, or else he might confess his lack of confidence in the ability of monetary policy to do more to lower the unemployment rate and call for more fiscal measures.

But he didn’t do either. Instead, as David Dayen recounts, he just said we should cut Social Security benefits to reduce the long-term deficit even though this clearly had nothing one way or another to do with the current labor market situation:

No second stimulus, no jobs bill, no public investment to deal with the worst hiring crisis since the Depression, no relief for a jobless recovery, but yes to cutting people’s meager Social Security benefit and their health care in their old age. And this is what he’s saying when he WANTS his job back. What will it be if he gets it?

And there’s the rub. It’s good that we don’t have congress driving monetary policy from the backseat. That’s why the Fed Chairman serves a fixed term. But this is still a democracy, which is why the terms have ends. And we need a Fed Chairman who’s not willing to accept a years-long period of high unemployment.

Wall Street Journal Crashed-and-Burned-and-Smoking Watch

I remember my first noticing current Wall Street Journal editorial page editor Paul Gigot back when I joined the Clinton Treasury. "But... he's lying!" I said. "Yes," said the Assistant Secretary for Public Affairs. "Deal with it."

Sixteen years later, and Paul Gigot is still lying:

Problems with CBO Stimulus Report: [Jared] Bernstein claims vindication on the basis of a new Congressional Budget Office report that finds that 600,000 to 1.6 million more people are employed and GDP is 1.2% to 3.2% higher than if Congress had done nothing. After rehearsing some of our greatest hits—"It's hard to imagine a more complete repudiation of Keynesian stimulus than the evidence of the last year's job market"—Mr. Bernstein says that we're "more interested in scoring political points" than acknowledging the stimulus reality. We stand by our economic judgment....

A word about that CBO report: It sets up a nonfalsifiable standard for judging the Administration's policies by using large macroeconomic forecasting models, including a Keynesian "multiplier" that says each dollar government injects into the economy yields more than a dollar in output.... No one ever doubted that the stimulus spree would create or "save" some jobs.... But that $1 has to come from someone or some business in the private economy that might have put it to more productive, job-creating uses.... These new jobs that aren't created don't get picked up in Bernstein-CBO econometric models, but their loss leaves the economy less prosperous overall. What can be measured with greater, if not perfect, accuracy is how many new jobs are being created across the economy, and how many people want to work but can't find a job...

To the extent that there is an argument here--and I am not sure that there is--it is Eugene Fama's fallacy:

Fama's Fallacy, Take I: Eugene Fama Rederives the "Treasury View": The problem is simple: bailouts and stimulus plans are funded by issuing more government debt.... The added debt absorbs savings that would otherwise go to private investment.... [S]timulus plans do not add to current resources in use. They just move resources from one use to another.... I come back to these fundamental points several times below...

Greg Mankiw tried to defend Fama:

Fama's arguments make sense in the context of the classical model... presented in Chapter 3 of my intermediate macro textbook.... [W]ether one leaves the classical model behind to embrace the Keynesian model is a judgment call...

But, as Greg writes in chapter 3 of his intermediate macro textbook, the classical model

assume[s] that the labor force is fully employed...

Does anybody think that this is a good assumption to make right now?

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

And would there be any social loss if the WSJ were shut down tomorrow morning, and all its subscribers shifted over to the FT?