Brad DeLong

The Arkansas Medicaid Budget-Buster

Austin Frakt:

So efficient you can’t afford not to buy it: Medicaid private option edition: David Ramsey of the Arkansas Times has done a ton of great reporting on the private option. His latest post begins:

The strangest part of the “private option” is that the plan grew out of pressure from local Republican lawmakers, the very same folks who had the loudest concerns about costs of the original Medicaid expansion. That’s strange because the new “private option” is going to cost more (not necessarily for the state — see here and here — but almost certainly for the feds)…. There are a number of reasons that offering coverage via private insurance is costlier than offering it via Medicaid but the main one ain’t rocket science: private insurers reimburse at higher rates. Even conservatives that like the “private option” better agree that it will cost more. Well here’s the thing. Despite a broad consensus about cost, Republicans at the forefront of advocating for a “private option” as a possible alternative to Medicaid expansion do not agree. They think that the “private option” might not be any more expensive for the feds, and could even cost less.

He gives those Republican views a generous airing in the rest of his piece. Go read it! I didn’t see anything in it that I didn’t touch on in my “prebuttal.” (I should be clear. I’m not against expanding the scope of exchanges. I just think it will cost more and we should not be deluding ourselves that it won’t.) It’s crucial to separate two propositions: (1) Competition can be efficiency increasing; (2) Competition on a state insurance exchange of the type permitted under the ACA can bring spending below that of Medicaid. The former can be true even if the latter isn’t. That’s a reasonable expectation if Arkansas or any other state goes forward with the private option, as we currently know it (which is not very well).

Yes, Cameron, Osborne, and Ryan Will Never Admit That Austerity Is Not Expansionary. Why Do You Ask?

Paul Krugman:

Night of the Living Alesina: Ah, remember the good old days of expansionary austerity?… [A]usterians seized on academic work by Alberto Alesina and Silvia Ardagna claiming that fiscal consolidation, if focused on spending cuts, would if anything lead to economic expansion…. Since then we’ve had what has to be one of the most decisive combinations of scholarly critique and real-world tests…. The IMF went about identifying austerity through an examination of actual policy, and A-A’s results were reversed. Critics showed that all of the alleged examples of expansion through austerity involved factors like currency depreciation or sharp falls in interest rates…. Osbornian policies in the UK led to stagnation; and in the euro area, well….

So you might have expected austerians to change their minds, or at least to come up with other justifications.

But no.

Both David Cameron and Paul Ryan are still preaching that old expansionary austerity religion, confidence fairy and all. This is, by the way, a fairly big deal for the Ryan budget, which… keeps the tax hikes that finance Obamacare while canceling the Medicaid expansion and exchange subsidies. The result would be a lot of fiscal drag in 2014 and 2015…. Luckily it isn’t going to happen. And a quick read of reactions suggests that the new Ryan plan is being greeted with derision rather than adulation. Is our pundits learning? A bit, maybe.

Martin Wolf: David Cameron and George Osborne in the Bunker

Martin Wolf:

Britain’s perilous austerity bunker: David Cameron’s “there is no alternative” speech last week on the UK economy has aroused much criticism. This is justified. The British prime minister’s arguments for sticking to the government’s programme of fiscal austerity were overwhelmingly wrong-headed….

How does one defend this record?…. Mr Cameron argues that those who think the government can borrow more “think there’s some magic money tree. Well, let me tell you a plain truth: there isn’t.” This is quite wrong. First, there is a money tree, called the Bank of England, which has created £375bn to finance its asset purchases. Second, like other solvent institutions, governments can borrow. Third, markets deem the government solvent, since they are willing to lend to it at the lowest rates in UK history. And, finally, markets are doing this because of the structural financial surpluses in the private and foreign sectors.

When Will It Be "Crunch Time" for U.S. Debt Accumulation?

Six years ago I would have agreed with Greenlaw et al. that pushing U.S. net federal government debt up to more than 100% of a year's GDP would be very likely to be inconsistent with long-term Treasury yields in the range we have seen since 2000. Today I would change "inconsistent" to "consistent", and say that they are probably wrong.

Why? Because figure 3.14 of "Crunch Time: Fiscal Crises and the Role of Monetary Policy":

would appear to commit the authors to a currentcast that Japan's 10-year JGB interest rate is 25%/year rather than 1%/year. They escape this implication, of course, by allowing their regression to include "a country fixed effect that implies there is something very special about Japan".

Indeed.

When Paul Krugman and Matt O'Brien ask why the assumption is that there is "something special about Japan" rather than "something special about currencies that are not part of the eurozone", "Crunch Time" coauthor Jim Hamilton answers:

Budget Discussion Complete Dysfunction Weblogging

Ezra Klein:

Our deficits aren’t as bad as Washington thinks: On Tuesday, Rep. Paul Ryan presented the budget for House Republicans…. In honor of the season, Americans everywhere will wear traditional budget-season hats and eat the customary budget-season meals, which include, of course, a rich dessert that we assume will be offset by future weight loss.

Okay, that last part is just what we do in my house. Behind all these appendix-heavy documents lurks the specter of our budget deficits, which have emerged as pretty much the only problem in Washington that both parties can agree to focus on (sorry, millions of jobless Americans). But what kind of problem, exactly, do our budget deficits present? Here are three ways to think about them:

1. We’re experiencing severe and measurable economic drag from today’s deficits.

2. We’re not experiencing measurable economic drag from today’s deficits, but we’re worried about future deficits implied by today’s policies and demographic trends.

3. We’re not experiencing severe and measurable economic drag from today’s deficits, but we’re worried about future deficits implied by today’s policies and demographic trends, and we’re also concerned about the likelihood of additional budget-busting policies that some future Congress might pursue.

If you guessed No. 3, then congratulations! You get a double serving of budget-season cake. Delicious.

The Thoughtful and Intelligent Tyler Cowen Gets Four Wrong: Fiscal Finance Weblogging

Tyler Cowen:

Can we agree that…

1. Debt-financed government spending must eventually be paid off and the estimated deadweight loss of taxation is at least twenty percent.  That immediately puts a hurdle rate of twenty percent or more on projects, even when real borrowing rates are very low….

2. Private companies, when making investment decisions, often use hurdle rates as high as twenty or thirty percent… to constrain overeager empire builders, or “cowboys”… there should be a “cowboy premium” for the public sector as well, even if that premium should be lower for the public sector.

3. The real risk of public sector investment is not measured by the borrowing rate, but rather by the covariance of the value of public sector outputs with a very broad notion of the market portfolio.  I call this the Jensen premium, since Michael Jensen first outlined this argument clearly.

This is all standard stuff, none of it is like reading the “he said, she said” debates over the proper size of the fiscal policy multiplier.

Nope. It is not standard stuff. The standard stuff is:

1. The effect of taxation deadweight losses is to increase the hurdle rate not by 20% but by 20%/duration of the debt undertaken to finance the spending. That is a very different thing from 20%.

2. The right way to do benefit-cost calculations is to get the benefits and costs and discount rate right, not to overestimate the benefits and then screw up the discount rate by overstating it. Cowen's proposal creates a systematic bias against thinking about the long run--a pronounced myopia.

3. Since the residual risk from public investments is borne by the taxpayer, the right cost is the risk-free real rate plus (coefficient of risk aversion) x (covariance of public output with wealth as a whole). The covariance of public output with a market portfolio when the equity premium tells us that the market does a really lousy job of mobilizing societal risk-bearing capacity is neither here nor there.

4. It's not the Jensen premium, it's the Marglin premium. Stephen Marglin is much clearer on this stuff then Jensen...

We're talking about an adjustment to the real risk-free rate of less than 50 basis points here…

The Chicago School's Intellectual Collapse Continued: Richard Posner Is Uranus: Wednesday Hoisted from the Archives from Three and a Half Years Ago Weblogging

Richard Posner never managed to find the guts to apologize to Christina Romer, or Larry Summers, or his readers…

Brad DeLong : The Chicago School's Intellectual Collapse Continued: Richard Posner Is Uranus...: When I was a child, one of my favorite stories was that of the discovery of the planet Neptune on September 23, 1846 by Johann Galle, Heinrich D'Arrest, and Urbain Le Verrier. The astronomers of the nineteenth century found an anomaly in the orbit of Uranus: it was not going where Newton's law of gravitation said that it ought to be going

I wasn't going to revisit this, but I finally had enough time to think about Menzie Chinn's and Justin Wolfers's very useful attempts to strike a blow in the long twilight struggle for rational economic analysis of the stimulus package, and it struck me that here Richard Posner really is Uranus.

Macro as I Saw It Back in 2003: Tuesday Ten Years Ago on the Internet Weblogging

Brad DeLong : Economics 236: Your Last Course in Macroeconomics

PART I: A QUICK OVERVIEW

January 22: Introduction

• Olivier Blanchard (2000), "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?" Quarterly Journal of Economics 115:4 (November), pp. 1375-1410.
• Olivier Blanchard (1990), "Why Does Money Affect Output? A Survey", in B.M. Friedman and F. Hahn eds, Handbook of Monetary Economics, 1990, Vol 2, 779-835.

January 29: Unemployment and Institutions

• Dale Mortensen and Christopher Pissarides (1994), "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies 61, pp 397-416.
• Olivier Blanchard and Justin Wolfers (2000) "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, 110 (March), pp. C 1 —33.
• Olivier Blanchard and Lawrence Katz (1997), "What We Know and Do Not Know About the Natural Rate of Unemployment", Journal of Economic Perspectives 11-1 (Winter), pp. 51-73.
• Steven Nickell (1997), "Unemployment and Labor Market Rigidities: Europe versus North America", Journal of Economic Perspectives 11-3 (Summer), pp. 55-74.

February 5: Contracts and Aggregate Output

• Robert Townsend (1979) "Optimal Contracts and Competitive Markets with Costly State Verification", Journal of Economic Theory 21 (October), pp. 265-293.
• Benjamin Bernanke and Mark Gertler (1989), "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review 79 (March), pp . 14-31.

Jonathan Portes Does the Intellectual Garbage Cleanup on David Cameron

Are there no conservative or lib-den members of parliament in Britain who love their country, and will vote no confidence tomorrow to end this disaster?

Jonathan Portes:

Not the Treasury view...: Believing in "miracles"? Self-defeating austerity and self-financing stimulus: Believing in "miracles"? The Prime Minister's speech on the economy on Thursday was, leaving the policy aside, notable for some of its analytical claims.  Simon Wren-Lewis's dissection is thorough and comprehensive; Danny Blanchflower and Adam Posen have a lengthy discussion here. In particular, much has already been written about the Prime Minister's misinterpretation of the OBR's position on the impact of fiscal consolidation on growth; for a thorough explanation, see Duncan Weldon.

Department of "HUH?!?!?!": I Really Do Not Understand Jeff Sachs These Days: Mark Thoma Tries to Explain Weblogging

Mark Thoma tries, but he fails. Either I am a bear of very little brain indeed, or Sachs is just not making any sense at all:

Economist's View: Crude Sachsism: On Twitter, [Sachs] goes a bit further:

@madarts13 @ktguru @joenbc @kdrum I don't. I think short-run stimulus has little effect on GDP. I want long-term growth strategy instead. — Jeffrey D. Sachs (@JeffDSachs) March 9, 2013

He can think whatever he wants, but the evidence says otherwise. In a severe recession government spending multipliers are much larger than in normal times. That's why this statement is so puzzling:

…First off, here is what I mean when I say that Krugman is a crude Keynesian... There are four elements of crude Keynesianism and, indeed, of Krugman's position: (1) The belief that multipliers on tax cuts and transfers are stable, predictable and large; (2) The belief that America's employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term aggregate demand management; (3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession; (4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending. I believe that all of these positions are misguided.

Again, he can believe whatever he wants, but the evidence is against him.

Paul Krugman: No, Our Deficit Is Not "Unsustainable"

Paul Krugman:

Gone Deficit Gone: So says the CBO, although not directly…. [W]hen the economy slumps, revenues fall and some kinds of expenditure, like unemployment benefits, rise. You want to take out these “automatic stabilizers” when assessing the underlying state of the budget…. [W]e don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP. So CBO… estimates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit…. [T]here’s about $11.5 trillion in federal debt in the hands of the public…. [N]ominal GDP will in future grow by [more than] 4 percent per year, half from real growth and half from inflation. This means that the sustainable deficit is 4 percent of $11.5 trillion, or $460 billion. Hey, we’re there! And next year the adjusted deficit is projected to be much smaller

Yes, late this decade deficits will start to rise again thanks to rising health costs and an aging population, yada yada. But I have yet to hear a coherent argument about why the long-term problem of paying for the benefits we want — which will eventually have to be resolved through a combination of cost savings and revenue increases — should constrain our fiscal policy right now, in the midst of what remains a terrible economic slump. And I would say that the figure above is, in fact, a portrait of deeply irresponsible fiscal policy — because it is just crazy that in this deeply depressed economy we are now pursuing a fiscal policy that is tighter than the policy we followed at the height of the housing bubble.

So let’s try to stop doing that. And everyone repeat with me: there is no deficit problem.

Matt O'Brien vs. the Chicken Littles Who Think the U.S. Faces an Imminent Debt Tipping Point That Will Turn It into Greece

Matt O'Brien:

No, the United States Will Never, Ever Turn Into Greece: Have you read the opinion section of any newspaper in the last three years? Yes? Then there is a better-than-even chance you have come across some impressive-sounding analyst predict that the United States is "turning into Greece."… As far as scare stories go, this is pretty damn scary. It's also just a story….

[An] 80 percent… [debt-to-annual-GDP ratio] was the bright white line drawn in a recent paper by David Greenlaw, James Hamilton, Peter Hooper and Frederic Mishkin. Greenlaw & Co. ran regressions on 20 advanced economies from 2000 to 2011 to see if there's a relationship between a country's borrowing costs one year and its… debt… the previous one…. They found a link… increasing… debt levels [above 80%] by 1 percentage point of GDP would increase borrowing costs by 4.5 basis points (or 0.045 percentage points)… This is a big deal…. Our gross debt to GDP is already at 102 percent -- enough to send our borrowing costs soaring…. If they are right. They almost certainly are not…. (1) For countries that can borrow in their own currency, like the U.S., higher debt doesn't clearly lead to higher interest rates. (2) For countries that don't control their currencies, like Greece, it's borrowing too much from foreigners (NOT borrowing too much in general) that clearly leads to much higher borrowing costs….

Understanding Jeremy Stein: Are-Executives-Gambling-for-Banking-Sector-Job-Tenure Weblogging

The recent emergence of Obama Federal Reserve Board appointee Jeremy Stein as the intellectual leader of those engaged in trying to push the Federal Reserve to abandon its policy of persistent low interest rates and massive asset purchases as soon as possible raises the task of understanding the argument for monetary tightening now--and, if it turns out to be wrong, critiquing it--to PRIORITY #1 RED DELTA OMEGA.

In general, when I embark on an understanding-and-critique task, I find myself in one of four situations. Sometimes the people I am reading are not as smart as I am and have not done their homework: they are my lawful prey. Sometimes the people are smarter than I am but have not done their homework: I critique them by doing yet more homework. Sometimes the people have done their homework but are not as smart as I am: I critique them by working hard to be smart.

In 2005-2013, the Long-Run Came First, and the Short-Run Came Later

Shares of GDP

The housing boom reached its peak in mid-2005. Thereafter, for two and a half years, from mid-2005 to the end of 2007, the economy underwent a smooth long-run adjustment to changing expectations about the future. Housing went from being a sector to invest in to a sector to avoid. Residential construction fell by 2.5% points. But the money that would have funded housing went elsewhere--0.5% points of it into business equipment investment, and 2.0% points of it into exports--and full employment was maintained.

The Current State of the Macro Policy Debate: Musings on Paul Krugman vs. The Three Tweeters of Bruxelles

The original argument against expansionary fiscal policy in the current conjuncture was that it was not worth undertaking because of crowding-out. Fiscal expansion would push up long-term real interest rates and that would diminish private investment. The net effect on demand, employment, and spending would be zero--or even less than zero: the "expansionary austerity" meme.

The Keynesian counter-argument was that accommodative monetary policy would prevent any crowding out. That counter-argument was dismissed with the claim that while central banks controlled short-term interest rates, long-term rates had a mind of their own, and that bond markets would require sacrifices to make it clear that debt would never explode in order to maintain or restore their confidence.

Years passed, It became clear that unprecedented volumes of bond issues issues were not in fact putting upward pressure on long-term interest rates--save in eurozone countries that had a hard exchange rate peg and no ability to control their own monetary policy.

The argument against expansionary fiscal policy was counterproductive shifted.

Eric Rauchway: Louis Menand and New Deal Denialism in The New Yorker

Eric:

Louis Menand and New Deal Denialism in The New Yorker: In the current New Yorker, Louis Menand says there is a puzzle about how Franklin Roosevelt got reëlected:

When Roosevelt ran for reëlection in 1936, the unemployment rate was 16.9 per cent, almost twice what it had been in 1930. Yet he won five hundred and twenty-three electoral votes, and his opponent Alf Landon, eight. When Roosevelt ran for the unprecedented third term, unemployment was 14.6 per cent. He carried thirty-eight states; Wendell Willkie carried ten.

When Menand says unemployment was 16.9 and 14.6 percent when FDR ran for reëlection, he is counting federal relief workers as unemployed. According to the economist who constructed the series Menand is using, people working for the WPA were morally the same as concentration camp workers in Germany in the 1930s. If Menand realized that, the puzzle would go away: FDR and his New Deal were popular because they gave people jobs and sparked a rapid recovery.

Department of "Huh!?!?!?!?": Fiscal Policy Economists Look at Prices as Well as Quantities Edition

In my email inbox:

The latest from Rehn… Hat-tip to Ambrose of the Torygraf: Ambrose:

While the tone is changing, there is no sign yet of a retreat from fiscal belt-tightening:

Given that average debt exceeds 90pc of GDP in the EU, I don’t think there’s any room for manoeuvre to leave the path of budgetary consolidation

said EU economics chief Olli Rehn.

“We won’t solve our growth problems by piling new debt on top of our old debt,” he said. Defying his critics, Mr Rehn said John Maynard Keynes himself would not be a Keynesian today’s circumstances.

Economists believe that the market will tell you when things are expensive. It is expensive to issue government debt when nobody wants to hold it--when the expected real interest rate on government debt is high. Right now the expected deal interest rate on the government debt of credit worthy sovereigns like Japan, Britain, Germany, and the U.S. is extraordinarily low.

If you want to argue that the current interest rates on 10-year and 30-year bonds are fake--that they do not reflect marginal social values--then make that argument.

DO NOT PRETEND THAT MARKET SIGNALS ARE FLASHING "RED" ON ADDITIONAL GOVERNMENT DEBT ISSUE OVER AND ABOVE WHAT IS FORECAST IN THE BASELINE! THEY ARE NOT!!!!

Paul Krugman: Contractionary Policy Is Contractionary

Paul Krugman:

Disastrous Predictions and Predictable Disasters: Joe Weisenthal is wrong. He writes that the unfolding economic disaster in Europe is what everyone predicted. Not so. It’s what he predicted, it’s what I predicted, but it’s not at all what many people were predicting. And the people who got it completely wrong happen to be the people still running European economic policy. As Jonathan Portes points out, it is now more than two years since Olli Rehn declared that

Europe’s recovery in the real economy has taken hold and is becoming self-sustaining.

Rehn is still in place at the European Commission, and is still telling us that austerity will work any day now. And he’s not alone. The economics team at the OECD that told us in May 2010 not just that Europe needed fiscal austerity, but that the Fed needed to raise rates 350 basis points by the end of the year to head off inflation is still issuing reports. And then there’s Cameron/Osborne.

Readers sometimes complain about my frequent references to the things my friends and I got right, and others got wrong. But look, it’s not ego (or anyway it’s not just ego). Predictions are how you judge between models. If the world delivers results that are very much at odds with what your framework says should have happened, you’re supposed to reconsider your framework — as I did, for example, after I was wrong about interest rates in 2003.

And the fact is that a more or less Keynesian framework — a framework that says that austerity in a depressed economy is a terrible idea — has yielded pretty good predictions through the crisis, while the anti-Keynesian stories that became the conventional wisdom in Brussels and Frankfurt have delivered an awesome record of predictive failure.

Yet European leaders seem determined to learn nothing, which makes this more than a tragedy; it’s an outrage.

American Conservatism’s Crisis of Ideas: Project Syndicate Monarchy, Patriarchy, Orthodoxy Weblogging

Let me note three things:

1. Most of what I have to say is highly, highly derivative from Mike Konczal and Mark Schmitt (and others);
2. The problem is not just that today's crop of AEI-conservative ideas is not politically sustainable, but that it is simply wrong--Cahn and Carbone's Red Families, Blue Families has convinced me that contra Murray America's (Blue) families are actually in pretty good shape (Red families that try to keep their daughters ignorant about family planning not so much), my take on Eberstadt is coming out in Democracy Journal later this month; and
3. Arthur Brooks seems to me at bottom simply lamenting that Democratic policies work and make people's lives better--that Republicans are losing their campaign to try to make America a worse-off place does not strike me as a minus.

And we are live at Project Syndicate:

American Conservatism’s Crisis of Ideas: BERKELEY – On the back left corner of my desk right now are three recent books: Arthur Brooks’ The Battle, Charles Murray’s Coming Apart, and Nicholas Eberstadt’s A Nation of Takers. Together, they constitute an important intellectual movement, which also happens to be a large part of the reason that American conservatism today has little that is constructive to say about managing the economy – and little purchase on the center of the American electorate.

But let’s back up historically, to the founding of what we might call modern conservatism in early nineteenth-century Britain and France. There were some – Frédéric Bastiat and Jean-Baptiste Say come to mind – who believed that government should put the unemployed to work building infrastructure when markets or production were temporarily disrupted. But they were balanced by those like Nassau Senior, who spoke out against even famine relief: Although a million people would die in the Irish Potato Famine, “that would scarcely be enough.”

The main thrust of early conservatism was root-and-branch opposition to every form of social insurance: make the poor richer, and they would become more fertile. As a result, farm sizes would drop (as land was divided among ever more children), labor productivity would fall, and the poor would become even poorer. Social insurance was not just pointless; it was counterproductive.

The proper policy was to teach people to venerate the royal throne (so that they would respect property), the paternal hearth (so that they would not marry imprudently young), and the religious altar (so that they would fear pre-marital sex). Then, perhaps, with women chaste for half or more of their childbearing years, the surplus population would diminish and conditions for the poor would be as good as they could be.

Did Ben Bernanke Just Say He Agrees with DeLong and Summers (2012)?

If, as we argued, under current circumstances, fiscal expansion is self-financing, then austerity makes the debt burden worse. It looks like that is what Bernanke said yesterday…

John Cassidy:

Ben Bernanke Lectures Congress on Austerity Economics: “Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. “Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”

Wednesday Hoisted from the Archives from Four Years Ago: Stimulus Ostriches

Brad DeLong : Stimulus Ostriches: BERKELEY - Of all the strange things that have happened this winter, perhaps the strangest has been the emergence of large-scale Republican Party opposition to the Obama administration's effort to keep American unemployment from jumping to 10% or higher. There is no doubt that had John McCain won the presidential election last November, a very similar deficit-spending stimulus package to the Obama plan - perhaps with more tax cuts and fewer spending increases would have moved through Congress with unanimous Republican support.

As N. Gregory Mankiw said of a stimulus package back in 2003, when he was President George W. Bush's chief economic advisor, this is not rocket science. Deficit spending in a recession, he said, "help[s] maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: you can find it in all of the leading textbooks..."

I can understand (though I disagree with) opponents of the stimulus plan who believe that the situation is not that dire; that the government spending will be slow and wasteful (whereas properly targeted tax cuts would provide a more effective stimulus); and thus that it would have been better to defeat Obama's stimulus bill and try again in a couple of months.

I can also understand (though I disagree with) opponents who believe that the short-run stimulus effect of the plan will be small, while America's weak fiscal position implies a large long-run drag on the economy from the costs of servicing the resulting debt.

Yes, We May Well Have a Double Dip This Year. Why Do You Ask?

I cannot find anybody now forecasting that the employment-to-population ratio will be higher in a year than it is today…

Binyamin Applebaum:

As Budget Cuts Loom, Austerity Kills Off Government Jobs: The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war. The reductions are designed to be indiscriminate, cutting everything from air traffic control to nursery schools. And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years…. Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

And it happened at exactly the wrong time to cut back on government employment--at a time when the government needed to be spending more employing more people, not fewer.

Tuesday Ten Years Ago on the Internet: Ken Rogoff: The IMF Strikes Back

The IMF Strikes Back, By Kenneth Rogoff, Economic Counsellor and Director, Research Department, IMF 2003:

Vitriol against the IMF, including personal attacks on the competence and integrity of its staff, has transcended into an art form in recent years. One bestselling author labels all new fund recruits as "third-rate," implies that management is on the take, and discusses the IMF's role in the Asian financial crisis of the late 1990s in the same breath as Nazi Germany and the Holocaust. Even more sober and balanced critics of the institution—such as Washington Post writer Paul Blustein, whose excellent inside account of the Asian financial crisis, The Chastening, should be required reading for prospective fund economists (and their spouses)—find themselves choosing titles that invoke the devil. Really, doesn't The Chastening sound like a sequel to 1970s horror flicks such as The Exorcist or The Omen? Perhaps this race to the bottom is a natural outcome of market forces. After all, in a world of 24-hour business news, there is a huge return to being introduced as "the leading critic of the IMF."

Economists Looking Under the Lamppost for Fiscal Doomsday

Ryan Avent:

Debt crises: On predicting fiscal doomsday | The Economist: IT SURE seems like high public debt levels ought to represent a looming economic problem…

They do--but there are other, more serious economic problems we have now, to which government deficits can be an answer.\

Ryan goes on:

Why, then, is it so difficult to demonstrate, conclusively, that they are?… A new paper illustrates the trouble economists have when they try to show that debt is scary…. David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin conclude that "countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of… tipping-point dynamics". But their work is remarkably unpersuasive…. The regression covers 20 countries for years t = 2000 − 2011 for a total of 240 observations…. [I]f the country’s primary deficit increases by 1% of GDP (causing both gross and net debt to increase by one percentage point relative to GDP), the borrowing cost would increase by...4.5 basis points…. In choosing to study advanced economies, the authors specifically note the problem of "original sin" in studies of emerging markets—that countries which borrow in foreign currencies are subject to different debt dynamics—only to then use a sample in which most of the chosen economies are unable to print their own money. With that understood, the possibilities of spurious findings are clear…. [S]everal of the sampled economies did experience soaring debts and skyrocketing borrowing costs. Troublingly… yields reversed after the ECB effectively broke the link between banking system solvency and sovereign obligations, even though total debt stocks have continued to grow…. [T]he largest increases [in debt-to-GDP] occurred (in order) in Ireland, Greece, Spain, Japan, Portugal, Britain, and America. Yields over that time frame soared in Ireland, Greece, Spain, and Portugal, of course. But they fell, sharply, in Japan, Britain, and America. We can draw a lot of important macroeconomic lessons from the sample the authors consider, but I'm not sure that the universal danger of a debt stock above 80% of GDP is one of the top ones.

That is, I think, the takeaway.

Joe Weisenthal: To Save The British Economy, David Cameron Will Have To Do The Hardest Thing For Any Politician To Do

Joe Weisenthal:

To Save The British Economy, David Cameron Will Have To Do The Hardest Thing For Any Politician To Do: [I]t is a good time to take stock of the situation in the UK, which has not only been downgraded, it's also on the verge of a triple dip recession. When David Cameron came to power he won praise for pursuing an austerity agenda (unlike Obama) but it's flopped….

@barnejek….

I would like to thank the British government for conducting a massive social experiment, which will be used in decades to come as a proof that a tight fiscal/loose monetary policy mix does not work in an environment of a liquidity trap. We sort of knew that from the theory anyway but now we have plenty of data to base that on.

This idea that Britain has conducted a huge social experiment is not spoken loudly, since it's insensitive, but it's one that economists have talked about. People like that Britain has blown its recovery, because it shows that the theory behind austerity is bunk….

[H]e goes on to argue that the only hope now is that Britain take a "stop loss" on its austerity agenda, and spend more.

I do believe that Britain has finally cornered itself into a situation where there is overwhelming evidence that Mr Osborne should really start spending. He should also assume that Mr Carney will not let that spending lead to appreciation of Real Effective Exchange Rate (a bit more on that mechanism in one of my previous posts entitled “Be careful what you target or am I in the right church?“). That is to say that the Bank of England will keep nominal and real rates very low. In my opinion this is the only rational way of the situation that we’re currently in. Then again, I am assuming the impossible here, i.e. that the politicians know what the stop-loss is….

In the wake of a debt downgrade, David Cameron must spend more money. This is incredibly difficult, since prima facie, it would fly in the face of the downgrade. And more importantly, it would basically require him (and his finance minister George Osborne) to admit that they were totally wrong since the crisis. That's the really hard part. Perhaps even impossible. But that's what it will take.

Why Oh Why Can't We Have a Better Press Corps?: Bob Woodward of the Washington Post Writes Fishwrap Edition

Ezra Klein:

On the sequester, the American people ‘moved the goalposts’: I don’t agree with my colleague Bob Woodward, who says the Obama administration is “moving the goalposts” when they insist on a sequester replacement that includes revenues…. [I]n 2011… everyone was perfectly clear that Democrats were going to pursue tax increases in any sequester replacement, and Republicans were going to oppose tax increases in any sequester replacement. What no one knew was who would win….

The sequester was a punt. The point was to give both sides a face-saving way to raise the debt ceiling…. The hope was that… something would… change… the supercommittee…[would come] to a deal… [or] the 2012 election [would resolve things]….

[In 2012] the American people voted for the guy who wants to cut the deficit by increasing taxes…. They also voted for a Senate that would cut the deficit by increasing taxes. And then they voted for a House that would cut the deficit by increasing taxes, though due to the quirks of congressional districts, they didn’t get one….

[T]he goalposts in American politics aren’t set in backroom deals between politicians. They’re set in elections. And in the 2012 election, the American people were very clear on where they wanted the goalposts moved to.

Ezra Klein Smacks Down David Brooks: "Centrism" Weblogging

Unbelievable:

David Brooks: In my ideal world, the Obama administration would do something Clintonesque… a budget policy… like… Robert Rubin… and if the Republicans rejected that, moderates like me would say that’s awful…

Ezra Klein: I’ve read Robert Rubin’s tax plan. He wants $1.8 trillion in new revenues. The White House… is down to $1.2 trillion…. [T]he White House’s offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts…

At this point David Brooks has a choice: he can say "I am an idiot who does not know what I am talking about"; or he can change the subject.

Guess what he does?

David Brooks: My first reaction is I’m not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn’t do enough on entitlements…

If I were running the New York Times, I would look at this and immediately say: We need to get Brooks out of our pages yesterday if not before, and we need an Ezra Klein of our own very badly.

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

Paul Krugman: Paul De Grauwe and the Rehn of Terror

Paul Krugman: Paul De Grauwe and the Rehn of Terror:

Nobody has taught me as much about the euro crisis as Paul De Grauwe… self-fulfilling debt panics in countries that no longer have their own currencies. Now… De Grauwe and Li show is that the rush to austerity in Europe largely reflected the surge in sovereign debt spreads after Greece got in trouble; the bigger the spread, the harsher the austerity. But it turned out that the spreads didn’t reflect underlying fiscal fundamentals… [as shown by] spectacular decline in spreads once the ECB… remov[ed] fears of a self-fulfilling liquidity crisis. Meanwhile, all that austerity has taken a terrible toll….

They also show that countries pursuing austerity have by and large seen their debt positions worsen. But take heart. Olli Rehn of the European Commission, last heard declaring that the big problem with austerity isn’t that it doesn’t work, it’s the fact that economists keep publishing studies showing that it doesn’t work, says that the only thing we have to fear is fear itself:

Mr. Rehn insisted that Europe’s belt-tightening policies were working and would lay the groundwork for a recovery…. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation,” he said in the statement.

Well, that’s all right, then.

Atrios on the Federal Reserve's Bill Poole

Eschaton: Bill Poole:

He'd gone full wingnut (on economics) when I was his TA, so this isn't really new to me...

Brad DeLong : Wednesday Hoisted from the Archives from Four Years Ago: Technological Regress in the Thinking of Federal Reserve Bank President William Poole: When I knew William Poole in the 1980s, it was very clear that he was not a devotee of the Treasury View--that he believed and understood that the interest elasticity of money demand was not zero, and hence that expansionary fiscal policy could spur production and employment. Now he appears to have forgotten what he once knew, and retreated to the position R.G. Hawtrey assumed at the request of his then-political masters in 1926.

Sigh. 82 years of progress in monetary economics thrown away:

William Poole: The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.... [G]overnment spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

Poole is predicting a large and rapid rise in Treasury interest rates in the future, as the spending from the fiscal boost package hits the economy. Excuse me, Poole was predicting a large and rapid rise in Treasury interest rates in the past as markets realized that the Obama bill was going to get through congress. Yet the failure of his prediction has not fazed him at all...

Wednesday Hoisted from the Archives from Four Years Ago: Technological Regress in the Thinking of Federal Reserve Bank President William Poole

Four years ago: Brad DeLong : Technological Regress in the Thinking of William Poole:

When I knew William Poole in the 1980s, it was very clear that he was not a devotee of the Treasury View--that he believed and understood that the interest elasticity of money demand was not zero, and hence that expansionary fiscal policy could spur production and employment. Now he appears to have forgotten what he once knew, and retreated to the position R.G. Hawtrey assumed at the request of his then-political masters in 1926.

Sigh. 82 years of progress in monetary economics thrown away:

William Poole: The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.... [G]overnment spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

Poole is predicting a large and rapid rise in Treasury interest rates in the future, as the spending from the fiscal boost package hits the economy. Excuse me, Poole was predicting a large and rapid rise in Treasury interest rates in the past as markets realized that the Obama bill was going to get through congress. Yet the failure of his prediction has not fazed him at all...

Mike Beggs: "On the Point at Issue, [DeLong] Was Right": Yet More Fama's Fallacy Freshman Macroeconomic Mistakes Weblogging

I see that today, in the Journal of Australian Political Economy, Mike Beggs has taken his 2011 Jacobin essay up to the top of the Temple of Huitzilpochtil, ripped its heart out with an obsidian knife, and left it dead on the ground. The most important paragraph--and my favorite paragraph--is missing. The paragraph reads, as Beggs evaluates my critique of David Harvey's word-salad:

[O]n the point at issue, [whether boosting government spending would boost employment, DeLong] was right – it is a question of interest rates, not of the number of bonds that can be sold. When Harvey went on to clarify his argument, it was only with some casual empiricism of his own. He noted that he was hardly the only one to be making the argument that East Asian central banks could stop collecting US Treasuries, so that “the track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).” This was an argument you could read in mainstream business pages; there was nothing particularly Marxist about it. Now that we are more than a couple of years down the track, DeLong still looks right: the yields on long-term Treasury bonds are, as I write in July 2011, about the same as they were in February 2009, when the exchange took place. The limits to stimulus have been political, not financial.

With that paragraph in place, Beggs's argument that David Harvey and others should abandon their Zombie Marx was powerful and compelling: Beggs argued--correctly!--that their obedience to Zombie Marx led them to say things that were wrong, silly, and eminently mockable by people like me.

With that paragraph gone, the heart is missing from Beggs's essay. Beggs's argument that David Harvey and others should abandon their Zombie Marx is now--what? It is aesthetic--that Beggs's is "a more elegant treatment of relative prices"--and careerist--"I have discussed aspects of how this integration could take place, through an engagement with the Keynesian concept of liquidity preference and particularly post-Keynesian structuralist versions of it (Beggs, 2011: chapters 3, 10)"--and thus much, much weaker.

Thus these edits strike me as a big mistake on Beggs's part: to argue that people should change how they think to avoid saying things that are wrong is praiseworthy, to argue that people should change how they think because Beggs thinks that his way is prettier and because it would boost Beggs's citation count has much less point…

Crowding-in and Rapid Growth in the 1990s: Dean Baker Gets One Wrong, I Think

Dean Baker writes:

Can We Cut the Crap on Robert Rubin and Deficit Reduction?: Ezra Klei… feed[s] this myth when he tells us of the great virtue of deficit reduction in the Clinton years.

Back in the 1990s, we knew why we feared deficits. They raised interest rates and “crowded out” private borrowing. This wasn’t an abstract concern. In 1991, the interest rate on 10-year Treasurys was 7.86 percent. That meant the interest rate for private borrowing was, for the most part, much higher, choking off investment and economic growth. Enter Clintonomics. The theory was simple: Bring down deficits, and you’d bring down interest rates. Bring down interest rates, and you’d make it easier for the private sector to invest and grow. Make it easier for the private sector to invest and grow, and the economy would boom. The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. 'The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,' Treasury Secretary Robert Rubin said in 1998.

Okay, fans of intro economics know that it is the real interest -- the difference between the nominal interest rate and the inflation rate -- that matters for investment, not the nominal interest rate. The inflation rate in the first half of 1991 was over 5.0 percent. This means that the real interest rate -- the rate that all economists understand is relevant for growth -- around 2.5 percent… [in] the last half year of the Clinton administration (and not some cherry picked low-point) the interest rate on 10-year Treasury bonds averaged around 5.7 percent. The inflation rate for the second half of 2000 averaged around 3.5 percent. This gives us a a real interest rate of 2.2 percent (5.7 percent minus 3.5 percent equals 2.2 percent). So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity?

The actual inflation rate in 1991 was 5%/year, but the expected inflation rate over the next decade was more like 3%/year. We are not talking about an 0.3 percentage-point decline in real interest rates, but rather about a 2.3 percentage-point decline in real interest rates. Moreover, back in 1992 when we unwound the yield curve and projected interest rates in the future we saw nominal interest rates has highly likely to rise unless the deficit was substantially reduced. The 2000 we were looking forward at had forecast nominal interest rates of not 7.86%/year but 10%/year or so--a real interest rate of 7%/year.

The counterfactual for 2010 is thus different not by 0.3 percentage-points but by 4.8 percentage-points. That is a much bigger deal.

How big a deal? Enough to boost the growth rate of potential output by between 0.5 and 1.0 percentage points per year, in my estimation…

Brownback's Kansas: Good Example or Horrible Warning?

No More Mister Nice Blog:

Brownback's Kansas: Good Example or Horrible Warning?: I've told you, and others have told you, that cutting or eliminating state income taxes (which tend to be somewhat progressive) is all the rage among GOP governors, as is raising sales taxes (which fall disproportionately on the poor, the lower middle class, and the middle class, because the more of your paycheck you have to spend to live, the more they get to tax you). Bobby Jindal is a big fan of this approach (he wants to eliminate all income and corporate taxes in Louisiana) -- and you know he wants to be president.

So it's not a surprise to read what I'm reading in The Wall Street Journal this morning: that Republicans -- bizarrely -- think this approach could win them the White House four years from now.

Mark Thoma Sends Us to Jonathan Chait: Scarborough and Friends 'Bug-Eyed, Table-Pounding Terror'

Mark Thoma:

After two relatively wonky posts, let's turn to Jon Chait for a bit of (serious) fun:

Scarborough and Friends Trying to Make ‘Debt Deniers’ Happen, by Jonathan Chait: The deficit scold cause has suffered significant intellectual erosion…. In the short run, the interest rate spike they keep insisting will happen keeps not happening. In the long run, the health-care-cost inflation that is at the root of the long-term fiscal predicament is growing markedly less dire. The case for prudent fiscal adjustment remains strong, but the case for bug-eyed, table-pounding terror is growing increasingly ridiculous. But bug-eyed, table-pounding terror is the stock-in-trade of the fiscal scold movement. And so they are striking back by labeling anybody with a calmer view of the deficit as a “debt denier.” Joe Scarborough… has a new op-ed in Politico brandishing the epithet….

Monday Hoisted from Comments: On Gene Steuerle's 2005 Social Security Reform Plan

Robert Waldmann:

Gene Steurle's article is excellent policy analysis but, as noted by Lancelot, DOA politically. Steurle writes from the point of view of a social planner with a budget contstraint. Policy is made by politicians under political constraints. I don't think that cutting middle class benefits is a way to have more money to help the poor. I tihnk that politicians can aid the poor only by linking aid to the poor to middle class benefits (I recall a heated discussion with you about this in the greenhouse cafe in the science center some decades ago).

A tinhat paranoid view is that somewhere there is a right of center advocate of directing benifits towards the poor who is just trying to trick progressives into implementing a good policy which is politically doomed so as to get to no social welfare state at all.

Now if you want to help the poor more someone has to lose. You can try to soak the middle class and you will get nowhere. If you try to soak the rich, there will be no problem.

John Cogan, Tobias Cwik, John Taylor, and Volker Wieland's Reputational Bet on Fiscal Policy Is Due, and They Are Bankrupt

Brad DeLong, May 1, 2009, twenty one and a half months ago: "I think the odds are one-in-three that in two years we wish we would have done more [than the Recovery Act], and that the odds are close to zero that in two years we wish we would have done less."

---

Fiscal Stimulus Effects

**J. Bradford DeLong
University of California at Berkeley and NBER
brad.delong@gmail.com
http://delong.typepad.com/
+1 925 708 0467

May 1, 2009

In March I got a note from Ward Hanson asking me to come down here to Stanford and talk about:

the impact of the Stimulus Bill on jobs creation... the contrast between the Romer/Bernstein estimates of the benefits of the stimulus plan versus... Cogan, Taylor et al. that estimate/argue that there will be very little benefit.... I've got agreement from the "Taylor group" to present, as well as Martin Giles of the Economist Magazine to serve as a moderator...

So I said yes. And Tuesday afternoon I sat down to reread Romer and Bernstein (2009), which I had read before, and Cogan, Cwik, Taylor, and Wieland (2009), which I had not, and I ran into a problem. On page 2 Cogan et al. write that their Figure 1 shows how Romer and Bernstein think government spending affects the economy along with:

exactly the same policy change... in another study... by one of us [John Taylor]... the results are vastly different.... [T]he Romer-Bernstein estimates apparently fail a simple robustness test, being far different from existing published results of another model...

This surprised me. I had talked to Christy. I had talked to Jared. I knew that their intention had been to pull standard models off the shelf and use them.

So I dug—and found that Cogan et al.’s claim of “exactly the same policy change” was simply wrong. Romer-Bernstein model an increase in government spending with the Federal Reserve expanding and keeping on expanding the money supply in order to keep the short-term Treasury Bill interest rate the same. Taylor (1993) models an increase in government spending with the Federal Reserve contracting the real money supply to push the short-term Treasury Bill interest rate up over time as unemployment falls and inflation creeps up. There is no “robustness” problem with Romer-Bernstein at all: the results are different because the policy changes are different.

The Full Fiscal Offset Principle (Away from the Zero Lower Bound, That Is): Or, Why One Would Expect the Multiplier to Be Zero Away from the ZLB Weblogging

In trotting around the country giving versions of DeLong and Summers (2012), “Fiscal Policy in a Depressed Economy”, I have found that a point that seemed completely obvious to us is not obvious at all to many.

Here is the point: an optimizing central bank that cares only about inflation and unemployment because it does not find itself at the zero nominal lower bound and does not fear engaging in nonstandard monetary policy will engage in full fiscal offset: it will take care to make sure that if fiscal policy becomes more stimulative then it will make monetary policy less stimulative by the same amount.

Here is the argument:

What Planet Does EC Vice President Olli Rehn Live on?

You can't make this stuff up. "Of course everyone agreed back in 2009-10 that fiscal multipliers were not negative but were large when interest rates were low and the economy was overleveraged", says Olli Rehn http://ec.europa.eu/commission_2010-2014/rehn/documents/cab20130213_en.pdf:

"We Would Have Gotten Away with Austerity--If Not for Those Meddlesome Economists!" -- European Commission Vice President Olli Rehn

European Commission Vice President Olli Rehn complain that Olivier Blanchard killed the Confidence Fairy. No Scooby Snacks for you, Professor Blanchard!

Jonathan Portes: Not the Treasury view...: I pointed out late last year that European Commission Vice President Olli Rehn has been predicting for at least two years that, thanks to the excellent policies recommended by the Commission and the European Central Bank, economic recovery in the crisis economies of the eurozone is imminent.  However… he's tried a different tack. Blame the economists…. Rehn… says:

I would like to make a few points about a debate which has not been helpful and which has risked to erode the confidence we have painstakingly built up over the last years in late night meetings. I refer to the debate about fiscal multipliers, ie the marginal impact that a change in fiscal policy has on economic growth.  The debate in general has not brought us much new insight.

Much of the rest of the letter is devoted to Mr Rehn's (and presumably the Commission's economists) attempt to debunk the findings of IMF Chief Economist Olivier Blanchard, who found, to no-one's great surprise, that the adverse impacts of fiscal consolidation were indeed much greater than that forecast by the Fund or the Commission.

The Republican Clown Show Continues: No, These People Should Not Run Our Economy Weblogging

Paul Krugman on the marconomics of Marco Rubio:

More Marcoeconomics: No, that’s not a misspelling of “macroeconomics”. Matt O’Brien beats me to it: Marco Rubio’s SOTU response also included a shout-out to Say’s Law:

Every dollar our government borrows is money that isn’t being invested to create jobs. And the uncertainty created by the debt is one reason why many businesses aren’t hiring.

I know where he gets this stuff: it’s what the Heritage Foundation guys were saying four years ago.

The Long-Run Cost of the Economic Downturn: Gloomy News About Economic Growth

I have been staring at a very gloomy graph--at the Congressional Budget Office's forecasts of "potential output", of what the economy can produce without starting to "overheat" and putting upward pressure on inflation:

Looking at this graph tells me that:

• Real GDP fell relative to potential output by 8% in 2008-2009…
• Real has stayed 8% below its previous growth path ever since…
• The CBO is now forecasting that real GDP will return to potential output as of the end of 2017…
• The CBO is now forecasting that, come the end of 2017, the economy's full-employment productive potential will be 8% below what CBO was forecasting in 2007…

Wednesday Hoisted from the Archives from Four Years Ago: Clive Crook Seems to Have It Slightly Off... Weblogging

Of all the weird things to happen over the past decade, one of the weirdest has been Clive Crook's transformation into the anti-Ezra Klein: someone who uses his knowledge of policy to cloud and confuse. More and more we find Clive Crook taking refuge in the position that:

• Barack Obama's policies are by and large sensible and centrist--in many cases, a bit right of center.
• The Republicans are blocking sensible and centrist policies--even those that are right of center, even Bill Clinton's tax policy, George H.W. Bush's foreign policy, John McCain's climate policy, Mitt Romney's health-care policy, and Ronald Reagan's immigration policy--because they want to make Barack Obama's presidency appear to be and be a failure.
• Barack Obama has been unable to overwhelm Republican obstruction, and has had substantial but limited success in implementing policies that are by and large sensible and centrist.
• It's Barack Obama's fault that the Republicans are being obstructionist. I don't like him.

This is not reality-based discourse here. The text makes no sense. What is the subtext that does?

---

From four years ago: Brad DeLong : Clive Crook Seems to Have It Slightly Off...: The thoughtful and intelligent Clive Crook writes:

Obama’s lonely quest for consensus: For all its flaws, the stimulus bill that Congress passed last week and President Barack Obama will sign on Tuesday is better than no bill, and better than further delay. Action is already months late, held up by the election and the protracted White House transition...

Action is already months late, but not because of the election and the White House transition. The deal of an immediate stimulus--60% spending, 40% tax cuts, all focused on bang-for-buck--was there to be made the first Wednesday in November, and was offered. The Republicans decided... to oppose it. Action is delayed, yes, but not delayed by the institutional calendar--delayed by the Republican Party.

Janet Yellen Points Out That the Federal Reserve Has Had No Help in Stemming the Depression

Jared Bernstein writes:

Janet Yellen Speaks, Makes Critical Points, and Presents a Graph I Shoulda Made: I’ll have more to say about this remarkable speech given yesterday by Fed Vice Chair Janet Yellen (getting ready to go on NOW with Alex Wagner on MSNBC).  Well—remarkable in the sense that it’s brimming with common sense that is far too uncommon these days.

Read this now and study this chart, one I’m kicking myself for not making.

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

Paul Krugman:

Hearsay Economics: Jonathan Chait is boggled by Joe Scarborough…. What’s really striking is Scarborough’s certainty that we’re experiencing “explosive” spending growth, which is very much not the case. How do JoScar and others like him come by such misconceptions? Well, I’ve gradually come to the realization that most of the commentariat doesn’t do what, say Martin Wolf or I do — grub around in published data, read reports, and all that. Instead, they rely on what they heard somebody say the facts are; hearsay economics…. And where do the reputable people get their information? Why, it’s what they heard somebody in their circle say. It’s hearsay economics all the way down…. It may seem hard to believe that this sort of petty small-group sociology exerts a vast influence on actual policy, and that it is actually responsible for millions of lost jobs. But the more I look at it, the more that seems to be right.

Larry Summers: U.S. Must Do More than Focus on Deficit

I would say not "do more" but "do different": the U.S. has been focusing on the deficit since the end of 2009, and all that has gotten us has been a jobless recovery. Were we to focus on employment and growth, we would be highly likely to make more progress on reducing the future burden of the debt than when we focus on the deficit--that is, indeed, the message of the arithmetic underlying DeLong and Summers (2012).

Arithmetic, by the way, that I do not believe has been challenged by anybody--save for Marty Feldstein when he raised the possibility that maybe a deeper recession now does not retard but speeds the growth of potential output.

Larry's point about housing finance is, I think, key: Fannie Mae and Freddie Mac have made a lot of money over the years because of their government guarantee; in an environment where private-sector risk-tolerance is still abnormally low, they need to pay the government back by taking on more risk and so boosting the economy. In the mid-2000s we had many too many privately-held subprime housing loans held by undercapitalized private banks. But right now what we really need are a lot more subprime housing loans held or guaranteed by the government and the GSEs.

Larry Summers:

Paul Krugman: The Japan Story

The Japan Story:

Dean Baker is annoyed at Robert Samuelson, not for the first time, and with reason. The idea of invoking Japan, of all places, to justify fears that stimulus leads to inflation or asset bubbles is just bizarre….

[W]hat remains true is that Japan has run budget deficits for many years while delivering what appears on the surface to be very disappointing economic performance. What’s the story there?… First, you should never make comments on Japanese growth or lack thereof without taking demography into account…. [T]here were two long periods of depressed output relative to trend, one in the mid-1990s and another, much worse, between 1997 and 2007. And one other thing: Japanese monetary policy was still up against the zero lower bound in 2007, leaving it no room to counter the Great Recession, and hence leaving Japan open to a deep slump when exports plunged.

So how do we think about this problem? Here’s my take. Japan has pretty much spent the past 20 years in a liquidity trap… the amount that people would want to save at full employment exceeds the amount they would be willing to invest, also at full employment…. A debt overhang from the 1980s bubble surely started the process; but surely it’s reasonable to suggest that the demography also contributes…. What you need in this situation is a negative real interest rate — which means that you need some expected inflation, because nominal rates face the zero lower bound. But Japanese policy has never sought to achieve this. Deficit spending has put part, but only part, of the excess desired private saving to work; this has mitigated the slump, but not produced a booming economy….

Japan’s experience is perfectly consistent with an IS-LM type story, with nothing in there to suggest that fiscal stimulus has somehow backfired; stimulus has done exactly what you’d expect given its limited size and the refusal to take the opportunity to break out of the liquidity trap.

What Abenomics seems to be is an attempt, finally, to do what should have been done long ago: combine temporary fiscal stimulus with a real effort to move inflation up.

Oh, and what about the US relevance? We are, for the time being, in the same situation…. [B]ecause we don’t share Japan’s demographic challenge, our liquidity trap is probably temporary… so… fiscal stimulus is much more likely to serve as a bridge to a revived era of normal macroeconomics. That said, I welcome efforts by the Fed to modestly raise inflation expectations, and would like to see more. So, is Japan a cautionary tale? Yes, but not the tale everyone tells. Its performance isn’t that bad given the shortage of Japanese; and it’s a tale of fiscal and monetary policy that have been too cautious, not of stimulus that failed.

Matthew Yglesias: Fear Not Borrowing Costs! Instead, Fear Not Borrowing Costs! (I.e.: Do not fear the costs of borrowing, fear the costs of not borrowing)

Matthew Yglesias:

Rising Japanese interest rates: The case for complacency: Get your economy out of the ditch, and borrowing costs will rise [because growth prospects rise]. That means you have to stop wasting money on low-value spending initiatives and make sure your taxes are high enough to cover the bills for the high-value ones. But that's not a "dark side" of economic recovery, that's just what economic recovery is. It's a situation in which private actors want to invest their money in private business undertakings, such that low-value public sector spending is wasteful.

The Austerians' Practice of Dumbing Down the Debate Over Fiscal Policy: The-Gloves-Are-Off-Yes-I'm-Looking-at-You-Rudy-Penner Weblogging

The way to analyze whether, at the margin, it is raising or lowering government spending that is better for the economy right now is to do a benefit-cost analysis.

Following DeLong and Summers (2012), let the parameters for an economy at the zero lower bound of nominal interest rates and with anchored inflation expectations be:

• μ, the multiplier—and a depressed-economy zero-lower-bound multiplier, not a monetary- offset multiplier;
• η, the hysteresis coefficient: the shadow cast on potential output by today’s downturn;
• τ, the marginal tax-and-transfer share: 1/3;
• ξ, the deadweight loss from having to raise a dollar of extra tax revenue to service the debt;
• r, the real government borrowing rate (and the social rate of time discount); and
• g, the growth rate of potential GDP: 2.5%/year

Then for each extra dollar of government spending today the present value of total economic output now and in the future changes by:

μ(1+η(1+ξτ)/(r-g))-ξ(1-μτ)

Now:

• Diamond and Saez and Romer and Romer have an estimate of the deadweight losses from having to raise taxes: ξ=0.25
• Auerbach and Gorodnichenko have an estimate of the zero lower bound multiplier: μ=2.5
• Oulton and Sebastiá-Barriel have an estimate of the hysteresis shadow: η=0.2

Make the short-sighted, biased, and in fact crazy assumption that Oulton and Sebastiá-Barriel are wrong--that the hysteresis shadow η is not 0.2 but zero--that no matter how deep the current downturn is there is no effect on the long-run growth of the economy’s productive potential. Then our benefit-cost expression becomes:

μ - ξ(1-μτ)

And each extra dollar of government spending now does not reduce but increases the present value of economic output now and in the future as long as:

ξ_η=0 < 14.925

Having to raise a dollar of extra tax revenue to amortize debt must reduce economic output by $15--not the $0.25 of Diamond and Saez or Romer and Romer or even the $3 if we were at the top of the Laffer Curve, but by $15, in order for further fiscal expansion right now to be a bad deal.

Suppose we make the additional short-sighted, biased, and in fact crazy assumption that the multiplier μ at the zero lower bound is not 2.5 but rather 1. Then our cost benefit expression becomes:

1 - ξ(1-τ)

Then each extra dollar of government spending now does not reduce but increases the present value of economic output now and in the future as long as:

ξ_η=0,μ=1 < 1.5

With these numbers, why are we in favor of expansionary fiscal policy only at the zero lower bound and not at all times? Because when the economy is away from the zero lower bound and when inflation expectations are potentially unanchored, the central bank is focused--for good reasons--on achieving its inflation target, which means that it acts to offset effects of changes in government spending on demand, which means that away from the zero lower bound μ=0.

And when μ=0 our cost-benefit expression is the very simple:

-ξ

There are then no special macroeconomic benefits to government spending, which should then be set at its optimal keel according to classical microeconomic principles.

And if you return from some imaginary planet in which a downturn does not cast a shadow on the growth of the economy’s productive potential, the case for more aggressive fiscal spending policy to hasten the return to full employment as long as the economy is at the zero lower bound on short-term nominal interest rates is even stronger.

Now you may not like Larry’s and my benefit-cost analysis. But, if you want to contribute constructively to the debate, I think you need to say why you do not like it and present an alternative benefit-cost analysis of your own that reaches a different conclusion.

Yes, I'm looking at you, Rudy Penner:

The Risks of Dumbing Down Fiscal Goals: In one of the more dangerous fiscal developments of recent months, some on the left are defining successful deficit reduction as merely stabilizing the federal debt [to GDP]…. While there is no magic target, this one is far too modest…. Richard Kogan… Martin Wolf… make the case…. [But] I would think the left would back more aggressive deficit reduction, if only to lower the risk of a sovereign debt crisis.  It is, after all, the poor who are being most devastated by high unemployment in Ireland, Portugal, Spain and Greece…. Sovereign debt crises occur at all manner of debt-GDP ratios and are impossible to predict, but it is hard to believe that a higher ratio does not increase the risk to some degree. It is sobering to note that in 2008, just before their crises, the net debt to GDP ratio in Spain was less than 31 percent and in Ireland less than 25 percent.

Rudy Penner used to be better than this.

The Rudy Penner I used to know would say that the Irish, Portuguese, Spanish, and Greek crises were the result of their joining a currency union that was not an optimum currency area. He would say that countries in such a situation cannot afford to have even a small national debt. And he would say that the U.S. is not Greece, that claims that the U.S. is like Greece are at the least disingenuous, and that the Greek experience tells us nothing about risks for large countries that operate reserve currencies.

The Rudy Penner I used to know would, if he thought that fiscal policy needed to be more contractionary right now, present a benefit-cost analysis showing that the short-term benefits from boosting output in the near future were outweighed by the long-term risks of the effect of increasing short-term fiscal stimulus on the debt.

Where is that Rudy Penner?

Radio archives

Doug Henwood Radio Archives: January 3, 2013:

Brad DeLong on fiscal follies (apologies for the wretched audio quality—damn cell phones)

Seth Ackerman on a possible socialism

bcg.perspectives: Brad DeLong on Debt and the Global Economy

bcg.perspectives - Brad DeLong on Debt and the Global Economy