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

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 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.

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.

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?

"Anyone Telling You Uncertainty About Climate Change Is a Reason for Inaction Is Either a Fool or a Scoundrel"

There is one set of circumstances in which uncertainty is a reason for inaction: (a) the measures you would take would be expensive, (b) the measures you would take will be irreversible, and (c) you will get a lot of new information soon to help you judge the situation better.

That set of circumstances does not apply here.

Mark Kleiman:

Precaution, uncertainty, insurance, and morality: [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. Assume some climate model predicts that... temperature would rise 3° C by 2100. If the model were very accurate and precise, that might be 3°± 1°. If the mechanisms involved remain obscure and the data unclear--as is the case today – that might be 3°± 5°.... Given how bad a 3° increase would likely be, if we knew for sure that would be the outcome in the face of inaction there would be a strong agument for making big and expensive policy changes to prevent it from happening. And if we knew that for sure, it would be very hard politically to argue against doing something about the problem. By contrast, 3°± 5° means that proponents of inaction get to say “We’re not even sure there’s any problem at all.” That makes the political case for action much weaker. But it makes the logical case for action much stronger....

[A]n 8° C average temperature increase... rendering much of the tropics virtually uninhabitable and, quite plausibly, hitting various triggers for positive-feedback effects such as the melting of the polar ice caps, which would reduce the amount of solar energy reflected back into space, and the melting of the Siberian permafrost, which would release a huge amount of methane, a potent greenhouse gas.  (Most systems are more stable in the face of small changes than they are in the face of large changes.)  Thus a primary increase of 8° might really mean an increase even larger than that: an increase that might not be reversible even if greenhouse-gas emissions were then sharply curtailed. That would be the kind of disaster to which some version of the precautionary principle reasonably applies....

Ordinarily, it is the proponents of action who bear the burden of persuasion.  But in this case political inaction means, in effect, licensing a massive gamble.... [N]one of the arguments for the freedom of economic activity appl[y]... there is simply no “invisible hand” mechanism that directs private action in such a situation in the direction of the public interest.

The willingness of some politicians and pundits to bet the planet on the claim that climate scientists are talking through their hats, which involves the larger claim that they have managed to assemble an enormous conspiracy to perpetrate a hoax, calls either their intelligence or their morals into serious question.  And that goes for the journalists and media moguls who treat their ravings as if they represented simply one side in a reasonable argument.

If anyone tries to tell you that uncertainty about climate change is a reason for inaction, he’s either a fool or a scoundrel. Probably a bit of both.

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...

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 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...

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.

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

---

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!

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.

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.

---

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.

CBO Fiscal Policy Multipliers

From: http://cbo.gov/ftpdocs/106xx/doc10682/11-30-ARRA.pdf

Yes, the ARRA Is Working: CBO Agrees

The fact that the ARRA was not big enough to put the unemployment rate on a downward trajectory is unfortunate. But now CBO joins in with its assessment that it is indeed working.

Menzie Chinn writes:

Econbrowser: CBO's Assessment of ARRA's Impact on Q3 Output and Employment: From CBO's just released Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output as of September 2009 :

...Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO's judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of ARRA.

In other words, the continued deterioration of the economy through the first few months after the passage of ARRA was not due to the stimulus package; rather underlying conditions had deteriorated, and the economy would have been in a worse state in the absence of the package.... For GDP, the... CEA report's model based approach indicates 3.1 and 3.6 ppts increment (SAAR) in Q2 and Q3, implying 1.66% higher GDP. The midpoint of the CBO range is 2.2 ppts. What about employment? CEA estimated 1.16 million cumulative jobs, by Q3. CBO estimates a range of 0.6-1.6, with midpoint at 1.1 million....

The report also includes a tactfully worded assessment of fully intertemporally-optimizing general equilibrium models, and their usefulness for real world analyses of monetary and fiscal policies in the short run.

Although some analysts favor the rigor of that approach to modeling behavior, other analysts view the assumptions underlying households' and businesses' decisionmaking in those models to be unrealistic and leading to unrealistic predictions. In particular, this type of model generally assumes that people are fully rational and forward-looking, basing their current decisions on a full lifetime plan. The forward-looking assumption implies that people expect to eventually pay for any increased government spending or reduced revenues in the form of future tax increases and that they incorporate those expected payments -- even if far in the future -- into their current spending plans. Thus, they are assumed to reduce their consumption when government spending rises, because their lifetime income has fallen by the amount of the eventual taxes. For the same reason, cash transfer payments and tax refunds have little or no effect on current consumption in such models. People in the models generally also have full access to credit markets, so they can borrow to maintain their consumption when faced with a temporary loss of income. This class of models does not typically incorporate involuntary unemployment: People can work as many hours as they choose at the wage rate determined by the market. Finally, in these models, monetary policy usually follows a fixed rule by which increased output or inflation implies higher real interest rates. [Emphases added]

This is a very clear exposition of CBO's analysis. Those who understood this post will find it very useful. Those unpersuaded by models should look elsewhere for succor.

Deficit-Neutral Stimulus

EPI's American Jobs Plan:

• Strengthen the safety net"

  • unemployment compensation
  • COBRA health coverage
  • nutrition assistance)

• Fiscal relief to state and local governments

• Investments in transportation and schools

• Direct creation of public service jobs

• A new job creation tax credit.

"The American Jobs Plan... will create at least 4.6 million jobs in the first year, at a total first-year gross cost of roughly $400 billion. This entire cost can be recouped within 10 years by enacting a financial transactions tax (FTT), which would take effect three years after enactment... a highly progressive way to raise revenue by imposing a small tax on the sale of stocks and other financial products..."

At this point, anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all. And EPI's ways of spending money are much better than anything the Senate is likely to come up with by itself.

The problem with an FTT, of course, is that it needs to be applied everywhere in the world all at once--or midtown Manhattan simply moves to Canary Wharf

What Does the Obama Administration Think that It Is Doing?

Lizardbreath:

Unfogged: "Black Jail" In Afghanistan: We're apparently still holding prisoners incommunicado at Bagram for weeks at a time without access to the Red Cross. There's no possible excuse for this -- it's not as if there's domestic political pressure that makes abiding by international law and norms of civilized behavior in this regard particularly difficult. No part of the public who would think of this as being soft on terrorists is paying enough attention to make it an issue. I would really like to be making excuses for the Obama administration as generally well intentioned on this sort of human rights issue, but I have no idea at all of how one could possibly justify this sort of thing...

As far as our grand strategy goes, this is a big mistake...

Jawboning on Mortgage Refinancing...

Lee Ohanian of UCLA would say that this program ought to be really, really effective. I, by contrast, have very serious doubts.

Peter Goodman:

Treasury to Pressure Mortgage Companies to Cut Payments]: The Obama administration on Monday plans to announce a campaign to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence mounts that a $75 billion taxpayer-financed effort aimed at stemming foreclosures is foundering. “The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.” Even as lenders have in recent months accelerated the pace at which they are reducing mortgage payments for borrowers, a vast majority of loans modified through the program remain in a trial stage lasting up to five months, and only a tiny fraction have been made permanent.

Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments. “They’re not getting a penny from the federal government until they move forward,” Mr. Barr said...

Why Are Good Macro Policies Political Losers?

First of all, three points to serve as background:

• From the day after the collapse of Lehman Brothers, the policies followed by the U.S. Treasury and the U.S. Federal Reserve and the U.S. administrations have been very helpful. They have been good ones. The alternative--standing back and watching the markets deal with the situation--would have gotten us a much higher unemployment rate than we have now. Credit easing by the Fed and support of the banking system by the Fed and the Treasury have significantly helped the economy: have kept things from getting much worse.

• The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Each extra percentage point of unemployment lasting for two years costs us $400 billion. A recession twice as deep as the one we have had would have cost us as a country some $2 trillion--and cost the world as a whole four times as much. In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans--and tens of millions outside the United States--at risk.

• The Obama administration's fiscal boost program has also significantly helped the economy: aid to impacted states has been a big win, the jury is still out on the effect of the tax cuts in the stimulus, and the flow of government spending on a whole variety of relatively useful causes is in train and is boosting production and employment in the same way that everyone's boost to spending boosts production and employment. And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes would be enough to finance the fiscal boost program at current interest rates, and for that cost American taxpayers will get an extra $1 trillion of produced goods and services and employment will be higher by about ten million job-years.

The big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale--that we ought to have done more.

Yet these policies appear, somehow, to be political losers in Washington right now: nobody is proposing to do more along the same lines. This is strange: usually when something works the natural impulse is to do it again.

So we have a big puzzle: Just what is going on in America? Good policies that are working to boost production and employment without causing inflation ought to be politically popular, right?

I think two different things are going on--one with respect to the Obama fiscal boost that is the ARRA, and a second with respect to the TARP and related banking-sector support policies.

With respect to the ARRA--the stimulus package, the Obama fiscal boost--it seems to me that what is going on on the American right is simply (a) an outbreak of extraordinary intellectual and political dishonesty that (b) the press refuses to see.

For two and a half centuries economists have believed that the flow of spending in an economy goes up whenever groups of people decide to spend more. Sometimes and to some degree these increases show up as increases in prices and sometimes and to some degree as increases in production and employment. Sometimes these increases come because there is more spendable cash in the economy and sometimes because changes in opportunity cost make people want to spend the cash they have more rapidly. But always it has been that spending goes up whenever groups decide to spend more--and the government's decisions to spend more are as good as anybody else's, as good as the decisions of the mortgage companies and new homebuyers to spend more buying new houses during the housing bubble of the mid-2000s or of the princes of Silicon Valley to spend more building new companies during the dot-com bubble of the late-1990s.

Chicago economists' arguments that fiscal stimulus can't work are at best incoherent and usually simply wrong. Republican politicians' arguments that fiscal stimulus isn't working are simply ripped out of the Newt Gingrich playbook: lie all the time. Remember that back in 1993 when the Democrats' analyses led them to seek to reduce the deficit and spend less--well, back then the Republicans said that would destroy the economy too. And they were very wrong. But how many media stories about Republican claims make even a small attempt to evaluate them?

A stronger--but not much stronger--argument is that the ARRA is boosting employment and production, but at too great a long-run cost because it has produced too large a boost in America's national debt. If interest rates on U.S. Treasury securities were high and rising rapidly as the debt grew, I would agree with this argument. But that is not the case. Interest rates on U.S. Treasury securities are very low. They are not rising. The argument that the economy has too much debt--that the market does not want more debt--is belied by every single Treasury auction at which the market gobbles up huge new tranches of U.S. Treasury debt at high prices. What the market is telling us is that while the economy has too much private debt--prices of corporate bonds are low, and firms find financing expensive--the economy has too little public U.S. government debt, which everyone wants to hold. Those who claim that we have a debt problem, and you can't cure a debt problem with more debt suppress--sometimes deliberately--that since the start of the financial crisis private debt and U.S. Treasury debt have been very different animals, moving in different directions and behaving in very different ways.

That’s what is going on on the fiscal policy side—with the stimulus package. But what is going on on the banking policy side—with the TARP and its siblings? That I need to think more about...

America Needs a New Constitutional Convention

Mark Schmitt blames Bob Dole for destroying America's system of government.

I think he is right.

What Are the Central Bankers Thinking?

Ryan Avent calls for Ben Bernanke's head:

The threatened Fed: There is ample reason to feel that the recovery might be weak and jobless. Fed projections basically reflect this. The Federal Open Market Committee generally expects growth for the American economy in the neighbourhood of 2.5% to 3.5% in 2010, with the unemployment rate holding between 9.3% and 9.7%. Expectations for growth in 2011 and 2012 are higher, ranging roughly from 3% to 5%, and the FOMC believes that the unemployment rate might possibly fall as low as 6.8% by the end of 2012. That's five years after the onset of the recession.... Core inflation is forecast to reach no higher than 1.7%, even into 2012.

But the minutes reflect no inclination to do anything more than what has already been put in motion. Indeed, participants remain very concerned about how they'll pull back on their various interventions.... [I]t's hard to know quite what to say. There was some interesting writing last week on the subject of Fed independence and whether or not the central bank could actually generate some inflation, if it wanted to.... [T]he FOMC believes that it probably could... yet it will not, despite its own forecasts indicating that full employment—the maintenance of which is one of the Fed's primary goals—isn't likely to return for at least the next three years.

I noted last week that political control of monetary policy would inevitably lead to accelerating inflation. Central bankers seem to have warped this truth into its mistaken corollary—that price stability means never doing what political actors want, even if what they want is actually what's best. But now the Fed finds itself in a real bind. If it continues ignoring unemployment, then it may face angry legislators determined to rein in the central bank. If it agrees that taking more steps to try and engineer some inflation is a good idea, it may well be perceived to have given in to political pressure.

Another way to put this is to note that there's no avoiding the threat to Fed independence here; there is no safe path to protection of the sanctity of monetary policymaking. Given that, the best thing for the politicians to do may well be to try and put the central bank in a position where it feels confident enough to do the job it's actually supposed to do. And I think that means new blood. Replacing Mr Bernanke with someone publicly committed to focusing on all aspects of the central bank's mission...

Me? I can't see anyone I trust to better analyze central banking issues than Ben Bernanke. I would settle for the Federal Reserve's adoption of a formal 3% per year GDP deflator inflation target. Just saying.

Debts and Deficits: Martin Wolf Is Right

In general, Martin Wolf is right. Paul Krugman too. And when they explicitly degree they are superright and you can take that to the bank.

Today Martin Wolf has, as usual, very smart things to say about the deficit and the debt:

Give us fiscal austerity, but not quite yet: While the increase in the debt ratio is very large in both [Britain and the U.S.], the levels expected to be reached by 2014 are not historically exceptional, particularly for the UK.... [T]hose past record levels did not create insuperable problems. In the 19th century, both countries grew out of their debt satisfactorily, with price stability. In the second half of the 20th century, they did so again, though inflation then helped.

This is not surprising. Assume that the real rate of interest is 2.5 per cent. Then the servicing costs, in real terms, of a debt burden of 100 per cent of GDP is just 2.5 per cent of GDP – almost a bagatelle. Assume, too, that the trend rate of growth equals the real interest rate (a not unreasonable assumption). Then the requirement for debt stability is a balanced primary budget (that is, before interest payments). Again, this is hardly crippling.

So what is the problem? It is that people may lose confidence that the governments will ultimately bring deficits under control.... [C]utting peacetime deficits is hard: every pound or dollar comes with a lobby group attached. Merely promising to cut deficits lacks plausibility....

Yet even if the fiscal rope is not infinitely long, slashing deficits now would be wrong. It is extremely likely this would tip economies back into recessions, as happened in Japan in the 1990s. Furthermore, the results would also probably include expansion of quantitative and credit easing by central banks. Yet those policies, too, risk undermining credibility....

So what should be done? I agree fully with the remark by Dominique Strauss-Kahn, managing director of the IMF, in London this week that “it is still too early for a general exit” from accommodative policies.... What is needed, instead, are credible fiscal institutions and a road map for tightening that will be implemented, automatically, as and when (but only as and when) the private sector’s spending recovers.... There are losses to be shared, much of which will fall on public spending, taxation, or both. Once it becomes evident that neither of these countries can rise to the challenge, fiscal crises are inevitable. It would only be a question of when.

Britain is in slightly worse shape. But if the United States (a) sticks to PAYGO, and (b) successfully reforms health and bends the curve, it could spend as much as it wanted on fiscal stimulus without worries.

Did Ezra Klein Just Say that Tim Geithner Should Be Pitched Over the Side?

Ezra Klein:

Ezra Klein: Noam Scheiber defends Timothy Geithner against those demanding his resignation. Scheiber is right on the merits, I think, but the politics matter. Whether Geithner did his best against a bad hand, he created a public relations disaster by bailing out Wall Street and returning it to wild profitability without doing something, anything, to satiate the public's desire for retribution against the guys who almost ruined the economy. The downside of not denying the public a piece of Wall Street's scalp is that vulnerable members of Congress now have little chance but to demand Geithner's.

And this isn't just Geithner's problem, incidentally. It's true for the whole administration. The bailouts were necessary, but they were also understandably unpopular, and there's been virtually nothing done to balance the scales. No windfall profits tax, or transaction tax. No breaking up big banks, or capping salaries across the board. Financial regulation has been sold as a constructive discussion with the banks rather than a punitive measure to prevent future wrongdoing. The absurd result is that Republicans are playing the populist card (while quietly blocking financial regulation) and frustrated congresspeople are turning on the administration, because the administration has kept them from turning on the banks.

The right response to the financial crisis and to extremely high paychecks for actions of dubious social utility is:

• to bail bankers into the risks they make their firms assume--to mandate Silicon Valley compensation schemes.
• to impose high capital requirements--and to smoothly and swiftly shut down organizations that fail to meet them immediately.
• to establish progressive income and wealth taxes.

Delivering Tim Geithner's head to congress does none of those things. And it weakens the administration: Geithner is where he is because for thirty years everyone who has dealt with Tim (except when he is paying his self-employment taxes) has found that when Tim is on your side, you tend to win. He is very good at a huge number of dimensions of this, where "this" is the business of government.

The administration, the country, and the world face lots of challenges right now. And weakening it does not seem to me to be smart.

Everyone Working for the Washington Post Should Hide Their Head in Shame

UPDATE: Yes! Another source of misinformation gone!!

A correspondent sends me a link to Robert Macmillan, Washington Post closing remaining U.S. bureaus.

Thank you, God...

---

And the thing should be shut down immediately. Just saying.

Howard Gleckman on George "It's My Business to Lie as Much as Possible" Will:

TaxVox: the Tax Policy Center blog :: Off to the Big House: Penalizing Non-Buyers of Health Insurance:

“Democrats health bills depend on forcing individuals to buy insurance or face severe fines or imprisonment.”

George Will, Nov, 19, 2009

Before we spin off into a Thanksgiving reprise of last summer’s death panel lunacy, let’s be clear. Nothing in Will’s statement is true.... if you don’t get coverage, you pay. But “severe fines,” as Will claims? Hardly. Under the Senate bill, someone who refuses to buy would pay an initial annual penalty of $95. Will probably spends more than that for one of his bow ties.  And imprisonment? Give me a break. There is no such penalty in either bill. The  argument, as I understand it, is that those who don’t buy insurance and refuse to pay the fine could be charged with criminal violation of the tax laws.... Some of the tax cheats recently caught up in the UBS scandal got a few months for failing to pay millions of dollars in back taxes, but I have never heard of anyone being sent up the river for failing to pay $95 in taxes. More likely, the IRS would garnish their wages for the 95 bucks. Not exactly hard time in the big house. In truth, the problem is not that the penalty is too harsh. It is that it is much too weak...

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

The Peculiar Puzzle of Blanche Lincoln and Carl Hulse

Matthew Yglesias writes:

Matthew Yglesias: Blanche Lincoln, Racing Horse: Blanche Lincoln has emerged as one of the pivotal votes in the US Senate debate about health care reform. So an article about her and her role in the debate seems like a smart thing for a newspaper to run. Which makes Spencer Ackerman’s tweet quite apropos: “Hey let’s say that I didn’t pay any attn to HC yesterday. Shouldn’t this piece [by Carl Hulse in the New York Times tell me why Lincoln opposes the bill?” Exactly. It’s striking to me how little scrutiny the stated views of public option opponents tend to get....

The situation is even weirder, for, as Ivan Volsky points out:

Blanche Lincoln’s Website Still Says She Supports The Public Option

This leads to the question: just what in the Holy Name of the One Who Is does Carl Hulse think that he is doing?

Carl Hulse: Blanche Lincoln, Clout Rising, Cements Role at Heart of Health Debate: No sooner had Senator Blanche Lincoln promised to deliver one crucial vote in support of a health care overhaul than she threatened to withhold the next one... keep her squarely at the center of the increasingly contentious health care fight.... Mrs. Lincoln, Democrat of Arkansas, said that more than $3 million in health care advocacy advertisements aimed at her had already been broadcast in Arkansas. But she insisted Saturday that her position on health care would not be shaped by political considerations. “I’m thinking about the 450,000 Arkansans who have no health insurance,” she said as she lent her support to an initial procedural step in the most closely watched floor speech of the day. “I’m not thinking about my re-election, the legacy of a president or whether Democrats or Republicans are going to be able to claim victory in winning this debate.”

Yet the political implications are inescapable.... The health care fight has come at a time when Mrs. Lincoln’s influence is increasing in the Senate. A committee shuffle after the death of Senator Edward M. Kennedy elevated her to chairwoman of the Agriculture Committee.... Some Democrats and other observers say they believe Mrs. Lincoln can make a case that her central role in the debate is a positive development in a state where people lack health insurance at a higher rate than the national average. The Democrats’ bill would offer subsidies to low- and moderate-income people to help them buy insurance.... Mrs. Lincoln has to juggle their interests with those of business leaders and others in Arkansas opposed to the measure. She said it was her constituents’ views and needs — not the contents of political commercials — that would determine her position. “My first loyalties are with the people of Arkansas,” she said. “Not insurance companies, the health care industry or my political party.”

The only explanation is that Carl Hulse thinks that it would be really embarrassing if he were to ask Senator Lincoln questions like: "Why do you think the health care bill as a whole would be good for the people of Arkansas?" and "Why do you think the public option would be bad for the people of Arkansas?"

And unless the New York Times has reporters who will ask such questions, there is no point to having a New York Times.

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

Good News for Health Care Reform...

But bad news for the American press. Ezra Klein and Stan Collender pile on to David Broder. Each day the Washington Post publishes David Broder is another day of humiliation for serious journalists working for the Post, for Newsweek, etc.--and also a day of humiliation for all those working for Stanley Kaplan Test Prep.

Stan Collender:

What Is David Broder Thinking?: David Broder has a column in today's The Washington Post that I find close to incomprehensible.  First he says that the Congressional Budget Office's substantive, detailed analysis shows that the bill proposed by Senate Majority Leader Harry Reid (D-NV) will reduce the deficit. 

(Note to David: CBO does not give its "blessing" to legislation; all it does is score the bill.)

Second, he says that the CBO scoring that shows the bill reducing the deficit compared to existing law is not as valuable as polls that show that Americans don't believe it.  And he says that the polls are somehow more correct than CBO even though one group actually analyzed the bill while the other got its almost certainly less-than-complete-and accurate information from someone else. Third, Broder says "every expert I have talked to says that the public has it right. These bills, as they stand, are budget-busters." 

(Question: David...Did you talk to the current director of the Congressional Budget Office who actually did the analysis rather than a former CBO director who didn't?)

Ezra Klein, who also writes for The Washington Post, also takes Broder to task for making other similarly inconsistent claims.  You also have to like Ezra's take on the strange view of deficit hawks towards health care:

I'm confused by the budget hawks who that take the line: "This bill needs to cut the deficit, and I don't believe Democrats will cut the deficit, but since the actual provisions of the bill unambiguously cut the deficit, then I guess Congress won't stick to it."

And here is Ezra Klein, trying to repair some of the damage:

Ezra Klein: You can't cut the deficit without a bill that cuts the deficit: David Broder has a column today expressing skepticism that health-care reform will really cut the deficit. But he doesn't provide much evidence for the charge.

The specific budget gimmick mentioned in the column is that Reid has delayed the subsidies "from mid-2013 to January 2014 -- long after taxes and fees levied by the bill would have begun." But not that long. The excise tax, for instance, begins in 2013. More to the point, it's not clear what Broder's complaint is. Reid delayed the implementation of the subsidies in order to ensure the bill's deficit neutrality in the first 10 years, which is what Broder wants. Why attack him for it? Then we get this:

There is plenty in the CBO report to suggest that the promised budget savings may not materialize. If you read deep enough, you will find that under the Senate bill, "federal outlays for health care would increase during the 2010-2019 period" -- not decline. The gross increase would be almost $1 trillion -- $848 billion, to be exact, mainly to subsidize the uninsured. The net increase would be $160 billion.

Huh? The net increase of $160 billion in the first 10 years is part of CBO's analysis, not a caveat to it. It doesn't mean the bill doesn't cut the deficit, it just means that overall spending is larger before you add revenues into the equation. Moreover, the CBO continues: "during the decade following the 10-year budget window, the increases and decreases in the federal budgetary commitment to health care stemming from this legislation would roughly balance out."

In other words, the revenue and the savings grow more quickly than the costs. Extend that line out further and, yes, federal spending on health care falls as a result of this bill. In other words, the bill satisfies Broder's conditions. But he doesn't come out and say that.

Instead, he pivots to the now-traditional argument that Congress won't be able to stick to the savings and revenue measures in this bill. That, however, is another way of saying that Congress can't cut health-care costs and the American government will go bankrupt. For one thing, that's not a very good reason not to at least try and avert that outcome. But if Broder's position is that we face certain fiscal collapse, then the only real question is whether we would prefer that 30 million Americans had insurance in the meantime, or went uninsured over that period.

More broadly, I'm confused by the budget hawks who that take the line: "This bill needs to cut the deficit, and I don't believe Democrats will cut the deficit, but since the actual provisions of the bill unambiguously cut the deficit, then I guess Congress won't stick to it."

People who want to cut the deficit should support this bill, and support its implementation. The alternative is no bill that cuts the deficit, and thus no hope of cutting the deficit.

A good piece, by contrast, comes from Ron Brownstein:

A Milestone In the Health Care Journey: Jonathan Gruber... likes what he sees in the Reid proposal. Actually he likes it a lot. "I'm sort of a known skeptic on this stuff," Gruber told me. "My summary is it's really hard to figure out how to bend the cost curve, but I can't think of a thing to try that they didn't try. They really make the best effort anyone has ever made. Everything is in here....I can't think of anything I'd do that they are not doing in the bill. You couldn't have done better than they are doing." Gruber may be especially effusive. But the Senate blueprint, which faces its first votes tonight, also is winning praise from other leading health reformers like Mark McClellan, the former director of the Center for Medicare and Medicaid Services under George W. Bush and Len Nichols, health policy director at the centrist New America Foundation. "The bottom line," Nichols says, "is the legislation is sending a signal that business as usual [in the medical system] is going to end."...

[The bill includes] just about all the systemic reforms analysts from the center to the left have identified as the most promising strategies for changing the economic incentives in the medical system.... Most of the other big ideas for controlling costs (such as medical malpractice reform) tend to draw support primarily among Republicans. And since virtually, if not literally, none of them plan to support the final health care bill under any circumstances, the package isn't likely to reflect much of their thinking. In their November 17 letter to Obama, the group of economists led by Dr. Alan Garber of Stanford University, identified four pillars of fiscally-responsible health care reform.... As OMB Director Peter Orszag noted in an interview, the Reid bill met all those tests.... McClellan, the former Bush official and current director of the Engleberg Center for Health Care Reform at the Brookings Institution, was one of the economists who signed the November letter. McClellan has some very practical ideas for improving the Reid bill (more on those below), but generally he echoes Orszag's assessment of it. "It has got all four of those elements in it," McClellan said in an interview. "They kept a lot of the key elements of the Finance bill that I like. It would be good if more could be done, but this is the right direction to go."...

On delivery reform... a series of measures to change the way providers are paid for delivering care to Medicare recipients; the hope was that once Medicare instituted these reforms, private insurers would also adopt many of them. "The goal here is that the things we do in Medicare will translate over into the private sector, and there is quite a bit of historical precedence for that," said one Democratic aide involved in drafting the package... hospitals under current law must report on their performance in treating patients... under the bill, their Medicare payments, for the first time, would be affected by their ranking on those reports. Hospitals would also be penalized if they readmit too many patients after surgery or allow too many to acquire infections while in the hospital.... The other set of Baucus proposals were intended to promote more coordination among providers.... Finally, the Reid bill maintains the two powerful institutions the Finance legislation proposed to promote these reforms and develop new ones. The one that's attracted the most attention is an independent "Medicare Advisory Board."... a Center for Medicare and Medicaid Innovation in the Health and Human Services Department.... No one can say for certain that these initiatives will improve efficiency enough to slow the growth in health care spending.... "CBO is there to score savings for which we have a high degree of confidence that they will materialize," says Reischauer, now president of the Urban Institute. "There are many promising approaches [in these reform ideas] but you...can't deposit them in the bank." In the long run, Reischauer says, it's likely "that maybe half of them, or a third of them, will prove to be successful. But that would be very important."...

Even if Obama signs into law a final bill embodying all these reform proposals, many skeptics wonder if they can bend, much less break, the seemingly inexorable increase in health care spending. Reischauer understands that skepticism, but isn't able to entirely suppress a kernel of optimism that this latest reform agenda may prove more effective than its predecessors. "One never knows whether we're turning the corner or if this is just playing the same old game for another inning," he says. "But I sense there's something different out there. I think the medical profession and its leaders have read the handwriting on the wall and are trying to evolve." If so, the ideas the Senate will begin voting on tonight could mark a milestone in that journey.

The People Who Sell Their Forecasts to Paying Clients Believe the Stimulus Is Working

Only those who make their nut one way or the other by pleasing Republicans claim that it isn't. Jackie Calmes and Michael Cooper are on the case:

Jackie Calmes and Michael Cooper: Now that unemployment has topped 10 percent, some liberal-leaning economists see confirmation of their warnings that the $787 billion stimulus package President Obama signed into law last February was way too small. The economy needs a second big infusion, they say. No, some conservative-leaning economists counter, we were right: The package has been wasteful, ineffectual and even harmful to the extent that it adds to the nation’s debt and crowds out private-sector borrowing.

These long-running arguments have flared now that the White House and Congressional leaders are talking about a new “jobs bill.” But with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working. The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would...

In Which Dean Baker Is Unhappy with the New York Times's Edmund Andrews

Dean Baker:

In Just a Decade the U.S. Interest Burden Could Be as High as It Was in 1992!!!!!!!:

That might not sound scary to most people, but this was the punch line of a front page NYT news story.... The fourth paragraph asserts that:

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

No, this is wrong.... [N]o evidence [is] presented in this article that the rise in interest rates will place the U.S. government in a situation where it will be unable to pay its bills.... [N]o one cited in this article makes such a claim.

The article is also completely unbalanced...

It is too bad. The three things people need to know about the deficit are:

• In the long term--after 2020--we get health care spending under control or else.
• In the medium term--between 2012 and 2020--we don't have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn't.
• In the short term--between now and 2012--our problem is not that our deficit is too large but that it is too small.

And Edmund Andrews's piece doesn't help people learn any of those three.

More Central Bank Independence: The Fed in a Corner?

Tim Duy thinks that the Federal Reserve has backed itself into a corner. He is right that the Fed because it was independent was in a "better position to raise regulatory and supervisory roadblocks during the debt build-up compared to other, more politically susceptible agencies." But at the time the Federal Reserve did not see itself as in a much better position. As one extremely senior member of the FOMC told me in 2005: "We stand up and say: "We don't care that you lenders want to issue this mortgage and you homebuyers want to sign it, we won't let you!' and how long do we last in front of Congress?" And he calls for the Federal Reserve to declare war on all too-big-to-fail financial institutions.

I think Tim is broadly right. This was, in fact, the reason that I was calling for at least partial nationalization and the government's taking of proper equity stakes in the banks last fall. The worst outcome would have been not trying or failing to rescue the banking system. But rescuing the banking system in a way that leaves the public believing that bankers have profited and taxpayers lost--as the public now does--is also a bad place to be.

Tim Duy writes:

It's buried in the health care bill. We think it has teeth--and the Congressional Budget Office agrees:

Ezra Klein - Health-care reform's grand bargain: This is how health-care reform controls costs. It is, at its base, a grand bargain: The coverage expansion gets liberals to agree to, and even advocate for, cost controls they would never otherwise consider. A 6 percent growth target? A super-MedPAC -- now called the Independent Medicare Advisory Board -- that reforms Medicare to save money and whose recommendations are fast-tracked and protected from the filibuster? Hundreds of pages of changes to payment rates and experiments in value-based purchasing and coordinated care efforts? This stuff is very, very real, and it goes into effect very quickly. You may think it's impossible for Congress to cut costs in Medicare and the government will just go bankrupt, but even you'd have to admit that this is what it would look like if the government was cutting costs in Medicare.

If this piece of the bill was passed on its own, it would be the most important cost control bill ever considered by the United States Congress. But you could never have passed it on its own. You needed the coverage to make the grand bargain work. Republicans like to call this bill a trillion-dollar experiment to expand the health-care system, and in some ways, it is. But it's also a multitrillion-dollar experiment to cut costs in the health-care system, and it deserves credit for that, and support from fiscal conservatives. It's easy to talk about cutting costs, but this is the chance for people to actually do it.

So why aren't the world's deficit hawks--the Blue Dogs, the (honest) Republican legislators who care about the country, the Concord Coalition, et cetera, et cetera--all out there hosanna-ing about the health care reform bill?

In the case of the (honest) Republican legislators who care about the country, they probably are--but it is hard to observe an empty set. But the rest? Where are they

Steve Benen:

The Washington Monthly: Republican critics of the economic recovery efforts, when they're not taking credit for the money that's benefiting their state/district, take it as a given that the stimulus "failed." For the right, it's a foregone conclusion, hardly worth discussing anymore. The New York Times reminds us today that "dispassionate analysts" agree that a fair look at the stimulus package shows that it may be "messy" but it's also "working."

Jackie Calmes and Michael Cooper: The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama's promise to "save or create" about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers. "It was worth doing -- it's made a difference," said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass. Mr. Gault added: "I don't think it's right to look at it by saying, 'Well, the economy is still doing extremely badly, therefore the stimulus didn't work.' I'm afraid the answer is, yes, we did badly but we would have done even worse without the stimulus."

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years -- longer for major construction -- considering the probable length of the "jobless recovery" under way as wary employers hold off on new hiring.

Obviously, a bigger investment would have meant a bigger return. The $787 billion package would have been more ambitious if the Senate operated on majority rule, and even White House economists have conceded that the stimulus bill should have been larger to accommodate the size of the hole in the economy. That aid to states had to be curtailed to bring on GOP votes continues to undermine the effectiveness of the strategy. But on the whole, we're talking about a recovery package that saved us from a wholesale economic collapse. Conservative Republicans -- who've been wrong about every major economic challenge of the last generation -- who whine bitterly about the stimulus are, as is usually the case, misguided.

Mark Zandi, chief economist of Moody's Economy.com and an occasional adviser to [John McCain and other] lawmakers from both parties, added, "[T]he stimulus is doing what it was supposed to do -- it is contributing to ending the recession." Zandi added that without the recovery bill, the "G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus."

Left unsaid is what the economic consequences would have been if we'd listened to congressional Republicans -- 95% of whom voted for a truly insane five-year spending freeze at the height of the downturn.

Politically, however, the stimulus has proven problematic -- much of the public is convinced it didn't work, since the economy is still struggling. The more effort the White House invests in explaining reality, the better.

Peter Orszag writes:

STATEMENT OF ADMINISTRATION POLICY: H.R. 3961 — Medicare Physician Payment Reform Act of 2009 (Rep. Dingell, D-Michigan, and 6 cosponsors):

The Administration strongly supports House passage of H.R. 3961, the Medicare Physician Payment Reform Act of 2009, and appreciates congressional efforts to ensure that Medicare beneficiaries and TRICARE patients continue to have access to care and their physician of choice. In his FY 2010 Budget, the President recognized the need for comprehensive reform for the Medicare physician payment system. The Administration believes Medicare and the country need to move toward a system in which doctors receive better incentives to provide their patients with higher quality and more efficient care.

H.R. 3961 takes additional steps to reform Medicare physician payments. The Administration is pleased that the bill would eliminate the steep payment cut scheduled for 2010. A cut of this magnitude could reduce access to physicians for Medicare beneficiaries throughout the country. The Administration also supports the provisions that provide a boost to primary care providers by increasing payments for evaluation and management services, such as office visits. H.R. 3961 would also create incentives for broader reforms for Medicare physician payments by encouraging the formation of accountable care organizations, in which groups of providers are jointly responsible for the quality and cost of health care services for beneficiaries with chronic conditions. The Administration remains committed to working with the Congress to achieve comprehensive reforms to Medicare physician payments that will enhance efficient and high-quality care for beneficiaries and protect their choice of physicians. H.R. 3961 is an important step forward in comprehensively reforming the way Medicare pays physicians to provide the very best care to the Nation’s Medicare beneficiaries and the Administration urges the Congress to pass this legislation.

The key, of course, is that although "the bill would eliminate the steep [Medicare physician] payment cut scheduled for 2010" it contains no provisions to pay for that elimination.

If Peter and company want me to use a baseline that assumes that PAYGO will hold, they need to at least whine and whimper at bills that break it.

Just saying...

Three points to serve as background:

First of all, from the day after the collapse of Lehman Brothers, the policies followed by the U.S. Treasury and the U.S. Federal Reserve and the U.S. administrations have been very helpful. They have been good ones. The alternative--standing back and watching the markets deal with the situation--would have gotten us a much higher unemployment rate than we have now. Credit easing by the Fed and support of the banking system by the Fed and the Treasury have significantly helped the economy: have kept things from getting much worse.

Second, the fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Each extra percentage point of unemployment lasting for two years costs us $400 billion. A recession twice as deep as the one we have had would have cost us as a country some $2 trillion--and cost the world as a whole four times as much. In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans--and tens of millions outside the United States--at risk.

Third, the Obama administration's fiscal boost program has also significantly helped the economy: aid to impacted states has been a big win, the jury is still out on the effect of the tax cuts in the stimulus, and the flow of government spending on a whole variety of relatively useful causes is in train and is boosting production and employment in the same way that everyone's boost to spending boosts production and employment. And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes would be enough to finance the fiscal boost program at current interest rates, and for that cost American taxpayers will get an extra $1 trillion of produced goods and services and employment will be higher by about ten million job-years.

Thus the big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale--that we ought to have done more.

Yet these policies appear, somehow, to be political losers in Washington right now: nobody is proposing to do more along the same lines. This is strange: usually when something works the natural impulse is to do it again.

So what is going on?

Paul Krugman reads the tea leaves in what looks like the best piece of economic analysis I have read this month. When we do the things we do well, this is the kind of thing we do:

Interest rates: the phantom menace: From various bat squeaks I’ve put together a view of what I think lies behind the surprising — and damaging — deficit squeamishness of the Obama administration. So here’s what I think they’re thinking.... On the face of it, there’s no reason to be worried about interest rates on US debt. Despite large deficits, the Federal government is able to borrow cheaply.... Underlying these low rates is, in turn, the fact that overall borrowing by the nonfinancial sector hasn’t risen: the surge in government borrowing has in fact, less than offset a plunge in private borrowing.

So what’s the problem? Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade... driv[ing] rates way up, even though this possibility doesn’t seem to be priced in by the market.

What’s wrong with this picture?

First of all, what would things look like if the debt situation were perfectly OK? The answer, it seems to me, is that it would look just like what we’re seeing.... [T]he private sector is hurting, it’s spooked, and it’s looking for safety. So it’s piling into “cash”, which really means short-term debt.... Meanwhile, the public sector is sustaining demand with deficit spending.... [S]omeone has to be bridging the gap between the short-term assets the public wants to hold and the long-term debt the government wants to issue; call it a carry trade if you like, but it’s a normal and necessary thing. Now, you could and should be worried if this thing looked like a great bubble — if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent in the mid-2000s, when the economy was driven by an unsustainable housing boom. Now we face the prospect of a prolonged period of near-zero short-term rates... which should mean substantially lower long rates.... And if we’re facing a Japanese-type lost decade, which seems all too possible, long rates are in fact still unreasonably high.

Still, what about the possibility of a squeeze, in which rising rates for whatever reason produce a vicious circle of collapsing balance sheets among the carry traders, higher rates, and so on? Well, we’ve seen enough of that sort of thing not to dismiss the possibility. But if it does happen, it’s a financial system problem — not a deficit problem. It would basically be saying not that the government is borrowing too much, but that the people conveying funds from savers, who want short-term assets, to the government, which borrows long, are undercapitalized. And the remedy should be financial, not fiscal. Have the Fed buy more long-term debt; or let the government issue more short-term debt. Whatever you do, don’t undermine recovery by calling off jobs creation.

The point is that it’s crazy to let the rescue of the economy be held hostage to what is, if it’s an issue at all, a technical matter of maturity mismatch. And again, it’s not clear that it even is an issue....

I just don’t think the inner circle gets how much danger we’re in from another vicious circle, one that’s real, not hypothetical. The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

I am not sure Paul is correct when he says that the possible underlying problem is merely "a technical matter of maturity mismatch." The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are because long Treasuries right now are held by (a) price-insensitive actors like the PBoC and (b) highly-leveraged risk lovers borrowing at close to zero and collecting coupons as they try to pick up nickles in front of the steamroller. And to the extent that the prices at which businesses can borrow are set by a market that keys off the Treasury market, an unwinding of this "carry trade"--if it really exists--could produce bizarre outcomes.

Bear in mind that this whole story requires that the demand curve slope the wrong way for a while--that if the prices for Treasury bonds fall carry traders lose their shirts and exit the market, and so a small fall in Treasury bond prices turns into a crash until someone else steps in to hold the stock...

This is something to think really hard about....

Annual change in the U.S. federal debt-to-GDP ratio, and presidential term averages:

Source: CBO Current-Law Baseline

Ford had bad luck--his presidency coincided with a down phase of the business cycle. But other than Ford, the contrast between the Democrats and the old-style Republicans (Eisenhower and Nixon) on the one hand and the new-style Republicans on the other is quite striking.

Also worth noting is that after this recession is over we do not have a pre-2020 deficit problem--if output grows as projected, and if congress sticks to PAYGO, both of which are very big ifs.

Spencer Ackerman asks a question:

Oh, So That’s the Fifth Category of Detentions: As Marc [Ambinder] writes, that sounds a lot like the administration will just simply hold them in legal limbo, as per the so-called “Fifth Category” of detentions outlined by President Obama in his May speech at the National Archives. Adam Serwer wrote a great piece on how that category of detainees has roiled the civil liberties community. Now, the Obama administration has subsequently stated that it’s not going to seek any additional authority from Congress for such preventive detention. But that doesn’t solve the problem of what becomes of those detainees. Will the courts ultimately decide that the administration doesn’t, in fact, have the power to hold them without charge? And where will they be held if Guantanamo is to close? After all, if they’re moved into the United States, the courts will almost certainly exercise jurisdiction over them...

The clean and normal thing to do would be for President Obama to use the Constitutional procedure for dealing with things like this: the president should ask congress to use its Art. I §9 ¶2 power to suspend, for these 75 detainees, for the years 2010-2011, the privilege of the writ of habeas corpus (including other restrictions on extra-legal process detainment), on the grounds that September 11, 2001 opened a case of "rebellion or invasion" in which "the public safety... require[s suspension.]"

We have Constitutional procedures, set out by the founders, for dealing with situations like this. Why aren't we using them?

With respect to its: "That's the nature of many of these interventions—we all live to whine another day..."...

For the record, I wrote my piece not to "get a lot of links" but because I was trying to think through what the U.S. government could do over the next two years or so while the economy is flat on its back if it was hit by another big negative shock--as it is every 40 years or so. And I was coming up empty: credit easing does little; quantitative easing would require the resignation of the Fed governors and bank presidents; fiscal policy is out because of worries about the deficit; and banking policy is out because senators won't get out in front because everybody is making money off the TARP except for the government.

So what could we do? We might have to do something, after all, Odds 5%.

It (they?) writes:

Hindsight is occasionally blurry: BRAD DELONG got himself a lot of links yesterday by writing that efforts to save the banking industry last fall, by eroding public trust in government, increased the odds of a replay of the Great Depression from virtually nothing to 5%.... One side of this discussion is whether the government was actually able to handle things differently.... Economics of Contempt says no. I'm sympathetic to Mr Contempt's view, but I also think... the government could have come with something if it had wanted to. And I agree with Felix Salmon.... "[Y]es, given a bit more aggression and foresight, the Fed could have tried to cram down a haircut onto AIG’s counterparties. But at the time, no one was particularly interested in being harsh to the global financial sector; instead, they were trying to rescue it..."

Perhaps Mr DeLong is right, and America now faces a 5% probability of Depression. On the other hand, if you swapped out the folks who were in charge last fall with a group inclined to drive a hard bargain with the banks, you might find yourself in a world in which the Fed and the Treasury fail to convince markets that they'll do whatever they have to do save the financial system, in which a nasty cycle of deleveraging continues to drive important institutions into the ground, and in which the odds of Depression rise to 5%, or higher.

That's the nature of many of these interventions—we all live to whine another day...

Ummm... With respect to Felix, the key issue is not making AIG creditors take a haircut but rather making them share the upside with the government--as Chrysler shared the upside with the government with its loan guarantee program, as Al Gore was able to stand up there at the VP debate in 1996 and say that the U.S. had made money out of its bailout of Mexico.

If Free Exchange wants to ignore the fact that we are now out of macroeconomic running room, they are of course free to do so. But it might be more constructive for Free Exchange to help me think how we can get some of that running room back. We might need it. We might need it real bad.

Mark Thoma is alarmed by our president:

Economist's View: Obama's Wrong-Headed Thinking on the Deficit: Edward Harrison catches this quote from Obama....

Obama warned the United States' climbing national debt could drag the country into a "double-dip recession," though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate. "There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett. "I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

I hope his economic advisers set him straight, though I suppose there's a chance that this nonsense is coming from them. We needed a larger stimulus package to begin with, and the economy could still use more help, labor markets in particular. Let's hope that this doesn't turn into a call to actually start balancing the budget before the economy has fully recovered as that would increase the chances of the double dip recession that he is so worried about (something we should have learned from the 1937-38 experience where an attempt to balance the budget prematurely plunged the economy back into recession)...

One way to interpret this--which may or may not be wrong--is that right now we are really and truly fracked beyond previous imagining. Let's go back to the old ca. 1960 standard macroeconomic diagram, with the interest rate on the vertical axis and the economy's level of spending on the horizontal axis. We then have:

• A red curve the IS curve, which tells us what the economy's (real) spending level is--the sum of household spending on consumption, business spending on investment, net exports, all functions of this real interest rate, plus government purchases) as a function of the current value of the (real, long-term, risky) interest rate (and also of lots of other stuff that affects the position of the curve)...

• A blue curve, the LM curve, which tells us what the (short-term safe nominal) interest rate is as a function of the (nominal) spending level that is consistent with households' and businesses' being willing to hold the economy's current money stock...

• A double-headed orange arrow, the spread, the difference between the short-term safe nomina interest rate and the long-term risky real interest rate--the difference between the two being the sum of a term premium, an expected inflation rate, and a risk and default premium...

In this framework, the problem with credit easing--the central bank increasing the money supply now and moving the blue curve to the right without changing expectations of what the money stock will be in the long-term future--is that the curve has flat because cash and short-term Treasury bonds are close substitutes, so you expand the money supply by a lot while doing little to boost spending and employment and land yourself with the problem of unwinding the money stock increase in the future in a way that does not hurt spending and employment when you do so:

(Quantitative easing--pouring a whole bunch of cash in the system with the idea of never reversing the money stock expansion could boost spending and employment considerably by creating expectations of inflation and so reducing the spread--but the Federal Reserve is not going there, and regards the idea with horror, shock, and shame.)

In this framework, banking policy--recapitalizing banks further and issuing government guarantees to shrink the spread--boosts spending and employment even when, as now, cash and short-term Treasuries are close substitutes. The problem with banking policy today is that no member of congress of either party of any political persuasion wants to get out in front supporting it.

In this framework, the problem with fiscal expansion--the government purchasing a bunch more things right now and so shifting the red curve to the right--is that it boosts the supply of government bonds in the future and so may raise the double-headed orange arrow that is the spread, getting you absolutely nowhere:

So what can we do? Looks like we are well and truly fracked.

Well. maybe not. My position on further fiscal expansion is twofold:

• The claim that further government purchases would widen the spread might be true. It might now. Let's try it and see. The debt held by the public on Monday was $7,632,033,766,420.46. The debt held by the public a year and a half ago was $5,218,570,776,014.84. We have managed to boost the debt held by the public by $2,413,462,990,405.62 in eighteen months without materially moving the term premium significantly. (The risk premium has moved--there is a financial crisis on, after all.) So let's try it and find out.

• This is an opportunity. We really need to reduce the deficit after 2030. We really need to have more government purchases now. So raise spending now, and raise taxes and impose spending caps starting in 2013 so that by the end of the 20-year budget window the projected debt is unchanged. Thus we move the red line without increasing the spread: there's now increased supply of bonds in the long term to push up the interest rate on them. And we solve both our current near-depression problem and our post-2030 structural deficit problem.

Ezekiel is doing the Lord's work on health care reform at OMB. His judgment is good. He is worth supporting--joggling his elbow is really not helpful given that he has the point on these sets of issues.

But I feel anxious--I don't think I can quite sign on with a good conscience to the whole thing. So I am signing on with a slightly, slightly bad conscience...

Dear Mr Emmanuel:

Any chance we could get "#1 Deficit Neutrality. Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the ten-year budget window, and deficit-reducing thereafter..." changed?

As it stands, it seems to me that this point is not true. Deficit neutrality as CBO scores it over the next ten years is not very important from a public policy standpoint. And what is important is that it be likely to actually be deficit-reducing and substantially deficit-reducing after 2030 by putting us on a sensible cost- and spending-control path--rather than that CBO score it as deficit-reducing after 2030.

And a tax on employer-sponsored health plans is only worth doing in the context of universal or near-universal coverage--in the absence of a mandate or near-equivalent, the risks of producing an adverse-selection meltdown make me nervous.

The rest is fine.

If it's too late to negotiate changes, I will, however, sign on anyway...

Yours,

Brad DeLong

The context is:

Apologies for the mass email, but we are operating on an extremely tight political timeline. Some key cost control measures are under threat and might very well not be included in the Senate’s health reform bill. We are asking the country’s leading economists to sign onto a letter to Sen. Reid endorsing 4 key measures as essential to a fiscally responsible health reform bill....

Deficit neutrality. Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the 10-year budget window, and deficit reducing thereafter. Of course, covering tens of millions of currently uninsured people will increase spending. But the draft health reform legislation contains offsetting savings sufficient to cover those costs and the seeds of further reforms that will lower the growth of spending. Deficit neutrality over the first decade means that, even during the start-up period, the legislation will not add to our deficits. In the second decade and beyond, the legislation should reduce deficits.

Excise tax on high-cost insurance plans. The Senate Finance Committee’s bill includes an excise tax on high-cost health insurance plans. Like any tax, the excise tax will raise federal revenues, but it has additional advantages that are essential. The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers.

Medicare Commission. Rising Medicare expenditures pose one of the most difficult fiscal challenges facing the federal government. Medicare is technically complex and the benefits it underwrites are of critical importance to tens of millions of elderly and disabled Americans. We believe that a commission of technical experts should be empowered to suggest changes in Medicare to improve the quality and value of services. In particular, such a commission should be charged with developing and suggesting to Congress plans to extend the solvency of the Medicare program and improve the quality of care delivered to Medicare beneficiaries. Creating such a commission will make sure that reforming the health care system does not end with this legislation, but continues in the future decades with new efforts to improve quality and contain costs.

Delivery system reforms. Successful reform will improve the care that individual patients receive by rewarding health care professionals for providing better care, not just more care. Studies have shown that hundreds of billions of dollars are spent on care that does nothing to improve health outcomes. This is largely a consequence of the distorted incentives associated with paying for volume rather than quality. Health care reform must take steps to change the way providers care for patients, to reward care that is better coordinated and meets the needs of each patient. In particular, the legislation should include additional funding for research into what tests and treatments work and which ones do not. It must also provide incentives for physicians and hospitals to focus on quality, such as bundled payments and accountable care organizations, as well as penalties for unnecessary re-admissions and health-facility acquired infections. Aggressive pilot projects should be rapidly introduced and evaluated, with the best strategies adopted quickly, and throughout the health care system...

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it--that we know what to do and how to do it and will do it if things turn south.

I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy--a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it.

We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.

We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible.

So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?

Hugh Son of Bloomberg:

Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: n American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for $62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost -- they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.

Timothy Geithner, now Treasury secretary, was among officials who took over negotiations with the banks from AIG in November 2008. Lawmakers including Representative Darrell Issa have said the September 2008 AIG rescue was a “backdoor bailout” for banks that received billions in payments. The Fed contacted eight of AIG’s biggest counterparties by telephone last year to negotiate discounts, Barofsky said. While UBS AG, the Zurich-based bank, was willing to make a 2 percent concession, the Fed decided that all counterparties would receive full payment, he said.

‘Misuse’ of Power

In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks that the Fed doesn’t regulate, the Fed said. Andrew Williams, a Treasury spokesman, said in an e-mail statement that Barofsky’s report:

overlooks the central lesson learned from the unprecedented steps taken to support AIG. The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution...

Ezra Klein talks to Jon Gruber:

Does health-care reform do enough on cost control?: My view is, even if the bill did no cost control it would be an incredible thing for this country. But politically, it sets the stage for cost control in two senses. First, it puts in place all the things we can do now. It does comparative effectiveness and pilots and all the rest. But second, once you get coverage off the table, the conversation gets more focused on cost control.... [I]n Massachusetts... Health Care for All... realized that they would lose all this coverage they'd gained if it didn't control costs. So they got behind real cost-control measures. A global budget, even. People say you can't do coverage without cost control. I think it's the opposite. You can't do cost control before coverage. We would do a huge amount for the cause of cost control just by covering people....

One of my frustrations with the cost-control discussion is that people set this up like a choice between this bill and a bill with more cost control. In reality, it seems more like a choice between this bill and nothing. And this bill does a lot more cost control than nothing.... Do you know Pascal's wager? Why not believe in God? I think of health-care reform similarly. We don't know if we'll really bend the cost curve. But if we do this and we don't do anything, we still go bankrupt in 100 years. We don't lose much. But if we do it and it works, then it's a savior.

It also moves the conversation on cost control.... It does real things... then it does real things to make cost control more politically viable.... To kill this bill for not doing enough on cost control would be like criticizing the Yankees for not winning the Super Bowl. They won the World Series! They did what they could do!

Even though they are not yet talking sensibly--like about the need for sticking to PAYGO over the medium run.

Economist Mom:

Peter Orszag on the Tough Specifics of Deficit Reduction: The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning.  He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook (emphasis added):

“On the one hand, [you have] the GDP gap, the gap between how much the economy is producing and how much it could produce, and, on the other hand, these deficits,” he says. “If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night.”

Sometime around 2011 to 2013, “that’s where we’re going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy,” he says. “We’re working through [this], and we haven’t made final decisions on the best path to walk down from where we are now to where we need to get.”

Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits.  Here’s a little hint (emphasis added):

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren’t paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

“So, the point being, we inherited a big hole,” Orszag says.

Sounds like not paying for the 2001 and 2003 tax cuts was a bad idea, and that the current revenue system is not keeping up with our spending needs (even ongoing, not just the temporarily high spending needs associated with stimulus).  It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.  I’d like to suggest that “fundamental tax reform” ought to mean more than deciding which parts of the Bush tax cuts should get extended.

And as Peter points out:

“The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it,” Orszag says. “There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down.”

Well, I think the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).  It’s the reason, by the way, why Concord’s online budget challenge (based on CBO’s “Budget Options”) seems lopsided in favor of tax increases over entitlement cuts:  because the fiscally-irresponsible policies of the Bush Administration that the Obama Administration now blames for the awful budget outlook were lopsided on the tax-cut side.  It’s not that CBO or Concord prefers raising taxes to cutting spending.  It’s that that’s where the biggest levers are to significantly change the budget outlook anytime soon–meaning right after the economy is strong again, maybe in 2011-13, like Peter says.

• In the short term, we don't have a deficit problem: as long as unemployment remains highly elevated--certainly as long as the unemployment rate stays above 7%--and as long as interest rates on U.S. Treasuries stay low a bigger federal deficit is a feature not a bug: our short-term deficit problem (and the short term lasts for most of Obama's remaining term) is that the deficit is too small, not too big.

• In the long term, our deficit problem is a federal government health spending problem. Unless medical care cost growth is brought under control--and here the drivers are not factors specific to government programs, for private-sector medical expenditures are exploding at least as rapidly as Medicare and Medicaid--then excess medical cost growth will lead the federal government health programs to first devour the rest of the social insurance state in the years after 2020 and then devour themselves.

• In the medium term between 2012 and 2020 we are, current projections tell us, on a sustainable budget path--with a budget deficit "no larger than the average of the past thirty years," as the Bush administration flacks used to tell us--with a stable debt-to-GDP ratio as long as output does not grow more slowly than projected and as long as congress observes PAYGO: as long as congress pays for whatever policy changes it makes.

Doug Elmendorf's worry--the thing that makes him pay attention not to the solid medium-term sustainable-deficit lines in the graph above but to the dotted medium-term unsustainable-deficit lines in the graph above--is that congress will not pay for the policy changes it enacts.

So now let's turn the microphone over to Matthew Yglesias:

The Surprisingly Easy Medium-Term Budget Fix: The dashed lines, however, represent a “current policy” scenario in which we assume that some of the Bush tax cuts will be extended and also that the AMT threshold will continue to be pushed up. Those are reasonable assumptions.... Elmendorf, in other words, isn’t wrong to worry about that.

But... this nuance is lost on the man in the street. The problem... isn’t... that we’re driving toward the edge of the cliff. The problem is... congress seems overwhelmingly likely to steer us [over the cliff].... It’s absurd for [congressional] politicians to be... engaged in highly public deficit hand-wringing...

while not admitting that they could solve the problem by simply saying no.

Senator Evan Bayh and others sound a lot like they are saying: "The President needs to do something to keep us from voting the way we have decided to vote!!"

That's just sad.

Just say "PAYGO," starting in fiscal 2012. That's all that it will (probably) take for the medium term...

Josh Micah Marshall:

The Paranoid Style: There are many ways in which the political moment (hyper-polarizing) and the technological moment (Twitter, instant news cycles) creates a self-perpetuating arms race of hyperbole. On the other hand, some of these new publishing and communications systems do allow us to get a view into where the head of a big chunk of the country is at.

To that end, we've got the story of the Colorado state senator who represents the hyper-conservative Colorado Springs compared Obama to the al Qaeda terrorists who took over Flight 93 on 9/11 and real patriotic Republican Americans to the passengers who had to retake control of the plane.

On the one hand, this is textbook feverish, eliminationist incitement. On the other hand, I think back to how paranoid and in the thrall of their own victimization these folks were a few years ago when they ran the entire country. So I'm not sure we should be surprised that they go totally crazy when they're largely shut out of power in the country at the national level.

Probably it's just that I have been reading too much about Mussolini's Italy.

But reading Paul Krugman this morning on the Republican Party's "sorcerer's apprentice" act made me think that we are a lot closer to Weimar America than I ever thought I would be...

At this point there are only two moral courses of action open to Republicans:

1. Abandon the party and try to marginalize it as a whole.
2. Split the party, and so try to lift the curse of Richard Nixon.

Paul:

What all this shows is that the G.O.P. has been taken over by the people it used to exploit.

The state of mind visible at recent right-wing demonstrations is nothing new. Back in 1964 the historian Richard Hofstadter published an essay titled, “The Paranoid Style in American Politics,” which reads as if it were based on today’s headlines: Americans on the far right, he wrote, feel that “America has been largely taken away from them and their kind, though they are determined to try to repossess it and to prevent the final destructive act of subversion.” Sound familiar?

But while the paranoid style isn’t new, its role within the G.O.P. is.

When Hofstadter wrote, the right wing felt dispossessed because it was rejected by both major parties. That changed with the rise of Ronald Reagan: Republican politicians began to win elections in part by catering to the passions of the angry right.

Until recently, however, that catering mostly took the form of empty symbolism. Once elections were won, the issues that fired up the base almost always took a back seat to the economic concerns of the elite. Thus in 2004 George W. Bush ran on antiterrorism and “values,” only to announce, as soon as the election was behind him, that his first priority was changing Social Security.

But something snapped last year.

Conservatives had long believed that history was on their side, so the G.O.P. establishment could, in effect, urge hard-right activists to wait just a little longer: once the party consolidated its hold on power, they’d get what they wanted. After the Democratic sweep, however, extremists could no longer be fobbed off with promises of future glory.

Furthermore, the loss of both Congress and the White House left a power vacuum in a party accustomed to top-down management. At this point Newt Gingrich is what passes for a sober, reasonable elder statesman of the G.O.P. And he has no authority: Republican voters ignored his call to support a relatively moderate, electable candidate in New York’s special Congressional election.

Real power in the party rests, instead, with the likes of Rush Limbaugh, Glenn Beck and Sarah Palin (who at this point is more a media figure than a conventional politician). Because these people aren’t interested in actually governing, they feed the base’s frenzy instead of trying to curb or channel it. So all the old restraints are gone.

In the short run, this may help Democrats, as it did in that New York race. But maybe not: elections aren’t necessarily won by the candidate with the most rational argument. They’re often determined, instead, by events and economic conditions...

Audio: Reed Public Policy Lecture (11.07.2009 03-14-36 PM)

---

Download now or preview on posterous

Reed College Public Policy.doc (3307 KB)

Download pdf: 20091107 reed slides.pdf

---

---

Posted via email from http://braddelong.posterous.com/reed-college-public-policy-lecture-todays-fin at Brad DeLong's Scrapbook

The Bureau of Labor Statistics reports:

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000).... Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.

Among the major worker groups, the unemployment rates for adult men (10.7 per- cent) and whites (9.5 percent) rose in October. The jobless rates for adult women (8.1 percent), teenagers (27.6 percent), blacks (15.7 percent), and Hispanics (13.1 percent) were little changed over the month. The unemployment rate for Asians was 7.5 percent, not seasonally adjusted.

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed over the month at 5.6 million. In October, 35.6 percent of unemployed persons were jobless for 27 weeks or more. (See table A-9.)

The civilian labor force participation rate was little changed over the month at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent...

If you had told everyone last election day what would happen, economically, in 2009, what policies would they have adopted then to stem this disaster?

And why aren't we implementing those policies now?

The Biggest Entitlement Spending Cut in History--and "Deficit Hawks" Are Running Away from It - Health-care reform's grand bargain

It's buried in the health care bill. We think it has teeth--and the Congressional Budget Office agrees:

Ezra Klein - Health-care reform's grand bargain: This is how health-care reform controls costs. It is, at its base, a grand bargain: The coverage expansion gets liberals to agree to, and even advocate for, cost controls they would never otherwise consider. A 6 percent growth target? A super-MedPAC -- now called the Independent Medicare Advisory Board -- that reforms Medicare to save money and whose recommendations are fast-tracked and protected from the filibuster? Hundreds of pages of changes to payment rates and experiments in value-based purchasing and coordinated care efforts? This stuff is very, very real, and it goes into effect very quickly. You may think it's impossible for Congress to cut costs in Medicare and the government will just go bankrupt, but even you'd have to admit that this is what it would look like if the government was cutting costs in Medicare.

If this piece of the bill was passed on its own, it would be the most important cost control bill ever considered by the United States Congress. But you could never have passed it on its own. You needed the coverage to make the grand bargain work. Republicans like to call this bill a trillion-dollar experiment to expand the health-care system, and in some ways, it is. But it's also a multitrillion-dollar experiment to cut costs in the health-care system, and it deserves credit for that, and support from fiscal conservatives. It's easy to talk about cutting costs, but this is the chance for people to actually do it.

So why aren't the world's deficit hawks--the Blue Dogs, the (honest) Republican legislators who care about the country, the Concord Coalition, et cetera, et cetera--all out there hosanna-ing about the health care reform bill?

In the case of the (honest) Republican legislators who care about the country, they probably are--but it is hard to observe an empty set. But the rest? Where are they

"There Are... 1.1 Million More Jobs Out There... than Would Have Been Without the Stimulus"

Steve Benen:

The Washington Monthly: Republican critics of the economic recovery efforts, when they're not taking credit for the money that's benefiting their state/district, take it as a given that the stimulus "failed." For the right, it's a foregone conclusion, hardly worth discussing anymore. The New York Times reminds us today that "dispassionate analysts" agree that a fair look at the stimulus package shows that it may be "messy" but it's also "working."

Jackie Calmes and Michael Cooper: The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama's promise to "save or create" about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers. "It was worth doing -- it's made a difference," said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass. Mr. Gault added: "I don't think it's right to look at it by saying, 'Well, the economy is still doing extremely badly, therefore the stimulus didn't work.' I'm afraid the answer is, yes, we did badly but we would have done even worse without the stimulus."

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years -- longer for major construction -- considering the probable length of the "jobless recovery" under way as wary employers hold off on new hiring.

Obviously, a bigger investment would have meant a bigger return. The $787 billion package would have been more ambitious if the Senate operated on majority rule, and even White House economists have conceded that the stimulus bill should have been larger to accommodate the size of the hole in the economy. That aid to states had to be curtailed to bring on GOP votes continues to undermine the effectiveness of the strategy. But on the whole, we're talking about a recovery package that saved us from a wholesale economic collapse. Conservative Republicans -- who've been wrong about every major economic challenge of the last generation -- who whine bitterly about the stimulus are, as is usually the case, misguided.

Mark Zandi, chief economist of Moody's Economy.com and an occasional adviser to [John McCain and other] lawmakers from both parties, added, "[T]he stimulus is doing what it was supposed to do -- it is contributing to ending the recession." Zandi added that without the recovery bill, the "G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus."

Left unsaid is what the economic consequences would have been if we'd listened to congressional Republicans -- 95% of whom voted for a truly insane five-year spending freeze at the height of the downturn.

Politically, however, the stimulus has proven problematic -- much of the public is convinced it didn't work, since the economy is still struggling. The more effort the White House invests in explaining reality, the better.

Naughty, Naughty, Peter Orszag...

Peter Orszag writes:

STATEMENT OF ADMINISTRATION POLICY: H.R. 3961 — Medicare Physician Payment Reform Act of 2009 (Rep. Dingell, D-Michigan, and 6 cosponsors):

The Administration strongly supports House passage of H.R. 3961, the Medicare Physician Payment Reform Act of 2009, and appreciates congressional efforts to ensure that Medicare beneficiaries and TRICARE patients continue to have access to care and their physician of choice. In his FY 2010 Budget, the President recognized the need for comprehensive reform for the Medicare physician payment system. The Administration believes Medicare and the country need to move toward a system in which doctors receive better incentives to provide their patients with higher quality and more efficient care.

H.R. 3961 takes additional steps to reform Medicare physician payments. The Administration is pleased that the bill would eliminate the steep payment cut scheduled for 2010. A cut of this magnitude could reduce access to physicians for Medicare beneficiaries throughout the country. The Administration also supports the provisions that provide a boost to primary care providers by increasing payments for evaluation and management services, such as office visits. H.R. 3961 would also create incentives for broader reforms for Medicare physician payments by encouraging the formation of accountable care organizations, in which groups of providers are jointly responsible for the quality and cost of health care services for beneficiaries with chronic conditions. The Administration remains committed to working with the Congress to achieve comprehensive reforms to Medicare physician payments that will enhance efficient and high-quality care for beneficiaries and protect their choice of physicians. H.R. 3961 is an important step forward in comprehensively reforming the way Medicare pays physicians to provide the very best care to the Nation’s Medicare beneficiaries and the Administration urges the Congress to pass this legislation.

The key, of course, is that although "the bill would eliminate the steep [Medicare physician] payment cut scheduled for 2010" it contains no provisions to pay for that elimination.

If Peter and company want me to use a baseline that assumes that PAYGO will hold, they need to at least whine and whimper at bills that break it.

Just saying...

The Puzzles of American Political Economy Today

Three points to serve as background:

First of all, from the day after the collapse of Lehman Brothers, the policies followed by the U.S. Treasury and the U.S. Federal Reserve and the U.S. administrations have been very helpful. They have been good ones. The alternative--standing back and watching the markets deal with the situation--would have gotten us a much higher unemployment rate than we have now. Credit easing by the Fed and support of the banking system by the Fed and the Treasury have significantly helped the economy: have kept things from getting much worse.

Second, the fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Each extra percentage point of unemployment lasting for two years costs us $400 billion. A recession twice as deep as the one we have had would have cost us as a country some $2 trillion--and cost the world as a whole four times as much. In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans--and tens of millions outside the United States--at risk.

Third, the Obama administration's fiscal boost program has also significantly helped the economy: aid to impacted states has been a big win, the jury is still out on the effect of the tax cuts in the stimulus, and the flow of government spending on a whole variety of relatively useful causes is in train and is boosting production and employment in the same way that everyone's boost to spending boosts production and employment. And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes would be enough to finance the fiscal boost program at current interest rates, and for that cost American taxpayers will get an extra $1 trillion of produced goods and services and employment will be higher by about ten million job-years.

Thus the big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale--that we ought to have done more.

Yet these policies appear, somehow, to be political losers in Washington right now: nobody is proposing to do more along the same lines. This is strange: usually when something works the natural impulse is to do it again.

So what is going on?

What the U.S. Long Bond Market Is Telling Us...

Paul Krugman reads the tea leaves in what looks like the best piece of economic analysis I have read this month. When we do the things we do well, this is the kind of thing we do:

Interest rates: the phantom menace: From various bat squeaks I’ve put together a view of what I think lies behind the surprising — and damaging — deficit squeamishness of the Obama administration. So here’s what I think they’re thinking.... On the face of it, there’s no reason to be worried about interest rates on US debt. Despite large deficits, the Federal government is able to borrow cheaply.... Underlying these low rates is, in turn, the fact that overall borrowing by the nonfinancial sector hasn’t risen: the surge in government borrowing has in fact, less than offset a plunge in private borrowing.

So what’s the problem? Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade... driv[ing] rates way up, even though this possibility doesn’t seem to be priced in by the market.

What’s wrong with this picture?

First of all, what would things look like if the debt situation were perfectly OK? The answer, it seems to me, is that it would look just like what we’re seeing.... [T]he private sector is hurting, it’s spooked, and it’s looking for safety. So it’s piling into “cash”, which really means short-term debt.... Meanwhile, the public sector is sustaining demand with deficit spending.... [S]omeone has to be bridging the gap between the short-term assets the public wants to hold and the long-term debt the government wants to issue; call it a carry trade if you like, but it’s a normal and necessary thing. Now, you could and should be worried if this thing looked like a great bubble — if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent in the mid-2000s, when the economy was driven by an unsustainable housing boom. Now we face the prospect of a prolonged period of near-zero short-term rates... which should mean substantially lower long rates.... And if we’re facing a Japanese-type lost decade, which seems all too possible, long rates are in fact still unreasonably high.

Still, what about the possibility of a squeeze, in which rising rates for whatever reason produce a vicious circle of collapsing balance sheets among the carry traders, higher rates, and so on? Well, we’ve seen enough of that sort of thing not to dismiss the possibility. But if it does happen, it’s a financial system problem — not a deficit problem. It would basically be saying not that the government is borrowing too much, but that the people conveying funds from savers, who want short-term assets, to the government, which borrows long, are undercapitalized. And the remedy should be financial, not fiscal. Have the Fed buy more long-term debt; or let the government issue more short-term debt. Whatever you do, don’t undermine recovery by calling off jobs creation.

The point is that it’s crazy to let the rescue of the economy be held hostage to what is, if it’s an issue at all, a technical matter of maturity mismatch. And again, it’s not clear that it even is an issue....

I just don’t think the inner circle gets how much danger we’re in from another vicious circle, one that’s real, not hypothetical. The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

I am not sure Paul is correct when he says that the possible underlying problem is merely "a technical matter of maturity mismatch." The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are because long Treasuries right now are held by (a) price-insensitive actors like the PBoC and (b) highly-leveraged risk lovers borrowing at close to zero and collecting coupons as they try to pick up nickles in front of the steamroller. And to the extent that the prices at which businesses can borrow are set by a market that keys off the Treasury market, an unwinding of this "carry trade"--if it really exists--could produce bizarre outcomes.

Bear in mind that this whole story requires that the demand curve slope the wrong way for a while--that if the prices for Treasury bonds fall carry traders lose their shirts and exit the market, and so a small fall in Treasury bond prices turns into a crash until someone else steps in to hold the stock...

This is something to think really hard about....

Basic Background Deficit Math

Annual change in the U.S. federal debt-to-GDP ratio, and presidential term averages:

Source: CBO Current-Law Baseline

Ford had bad luck--his presidency coincided with a down phase of the business cycle. But other than Ford, the contrast between the Democrats and the old-style Republicans (Eisenhower and Nixon) on the one hand and the new-style Republicans on the other is quite striking.

Also worth noting is that after this recession is over we do not have a pre-2020 deficit problem--if output grows as projected, and if congress sticks to PAYGO, both of which are very big ifs.

An Issue I Have Never Understood...

Spencer Ackerman asks a question:

Oh, So That’s the Fifth Category of Detentions: As Marc [Ambinder] writes, that sounds a lot like the administration will just simply hold them in legal limbo, as per the so-called “Fifth Category” of detentions outlined by President Obama in his May speech at the National Archives. Adam Serwer wrote a great piece on how that category of detainees has roiled the civil liberties community. Now, the Obama administration has subsequently stated that it’s not going to seek any additional authority from Congress for such preventive detention. But that doesn’t solve the problem of what becomes of those detainees. Will the courts ultimately decide that the administration doesn’t, in fact, have the power to hold them without charge? And where will they be held if Guantanamo is to close? After all, if they’re moved into the United States, the courts will almost certainly exercise jurisdiction over them...

The clean and normal thing to do would be for President Obama to use the Constitutional procedure for dealing with things like this: the president should ask congress to use its Art. I §9 ¶2 power to suspend, for these 75 detainees, for the years 2010-2011, the privilege of the writ of habeas corpus (including other restrictions on extra-legal process detainment), on the grounds that September 11, 2001 opened a case of "rebellion or invasion" in which "the public safety... require[s suspension.]"

We have Constitutional procedures, set out by the founders, for dealing with situations like this. Why aren't we using them?

Free Exchange Seems Somewhat... Snittish...

With respect to its: "That's the nature of many of these interventions—we all live to whine another day..."...

For the record, I wrote my piece not to "get a lot of links" but because I was trying to think through what the U.S. government could do over the next two years or so while the economy is flat on its back if it was hit by another big negative shock--as it is every 40 years or so. And I was coming up empty: credit easing does little; quantitative easing would require the resignation of the Fed governors and bank presidents; fiscal policy is out because of worries about the deficit; and banking policy is out because senators won't get out in front because everybody is making money off the TARP except for the government.

So what could we do? We might have to do something, after all, Odds 5%.

It (they?) writes:

Hindsight is occasionally blurry: BRAD DELONG got himself a lot of links yesterday by writing that efforts to save the banking industry last fall, by eroding public trust in government, increased the odds of a replay of the Great Depression from virtually nothing to 5%.... One side of this discussion is whether the government was actually able to handle things differently.... Economics of Contempt says no. I'm sympathetic to Mr Contempt's view, but I also think... the government could have come with something if it had wanted to. And I agree with Felix Salmon.... "[Y]es, given a bit more aggression and foresight, the Fed could have tried to cram down a haircut onto AIG’s counterparties. But at the time, no one was particularly interested in being harsh to the global financial sector; instead, they were trying to rescue it..."

Perhaps Mr DeLong is right, and America now faces a 5% probability of Depression. On the other hand, if you swapped out the folks who were in charge last fall with a group inclined to drive a hard bargain with the banks, you might find yourself in a world in which the Fed and the Treasury fail to convince markets that they'll do whatever they have to do save the financial system, in which a nasty cycle of deleveraging continues to drive important institutions into the ground, and in which the odds of Depression rise to 5%, or higher.

That's the nature of many of these interventions—we all live to whine another day...

Ummm... With respect to Felix, the key issue is not making AIG creditors take a haircut but rather making them share the upside with the government--as Chrysler shared the upside with the government with its loan guarantee program, as Al Gore was able to stand up there at the VP debate in 1996 and say that the U.S. had made money out of its bailout of Mexico.

If Free Exchange wants to ignore the fact that we are now out of macroeconomic running room, they are of course free to do so. But it might be more constructive for Free Exchange to help me think how we can get some of that running room back. We might need it. We might need it real bad.

Fiscal Expansion That Is Deficit Neutral in the Long Run

Mark Thoma is alarmed by our president:

Economist's View: Obama's Wrong-Headed Thinking on the Deficit: Edward Harrison catches this quote from Obama....

Obama warned the United States' climbing national debt could drag the country into a "double-dip recession," though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate. "There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett. "I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

I hope his economic advisers set him straight, though I suppose there's a chance that this nonsense is coming from them. We needed a larger stimulus package to begin with, and the economy could still use more help, labor markets in particular. Let's hope that this doesn't turn into a call to actually start balancing the budget before the economy has fully recovered as that would increase the chances of the double dip recession that he is so worried about (something we should have learned from the 1937-38 experience where an attempt to balance the budget prematurely plunged the economy back into recession)...

One way to interpret this--which may or may not be wrong--is that right now we are really and truly fracked beyond previous imagining. Let's go back to the old ca. 1960 standard macroeconomic diagram, with the interest rate on the vertical axis and the economy's level of spending on the horizontal axis. We then have:

• A red curve the IS curve, which tells us what the economy's (real) spending level is--the sum of household spending on consumption, business spending on investment, net exports, all functions of this real interest rate, plus government purchases) as a function of the current value of the (real, long-term, risky) interest rate (and also of lots of other stuff that affects the position of the curve)...

• A blue curve, the LM curve, which tells us what the (short-term safe nominal) interest rate is as a function of the (nominal) spending level that is consistent with households' and businesses' being willing to hold the economy's current money stock...

• A double-headed orange arrow, the spread, the difference between the short-term safe nomina interest rate and the long-term risky real interest rate--the difference between the two being the sum of a term premium, an expected inflation rate, and a risk and default premium...

In this framework, the problem with credit easing--the central bank increasing the money supply now and moving the blue curve to the right without changing expectations of what the money stock will be in the long-term future--is that the curve has flat because cash and short-term Treasury bonds are close substitutes, so you expand the money supply by a lot while doing little to boost spending and employment and land yourself with the problem of unwinding the money stock increase in the future in a way that does not hurt spending and employment when you do so:

(Quantitative easing--pouring a whole bunch of cash in the system with the idea of never reversing the money stock expansion could boost spending and employment considerably by creating expectations of inflation and so reducing the spread--but the Federal Reserve is not going there, and regards the idea with horror, shock, and shame.)

In this framework, banking policy--recapitalizing banks further and issuing government guarantees to shrink the spread--boosts spending and employment even when, as now, cash and short-term Treasuries are close substitutes. The problem with banking policy today is that no member of congress of either party of any political persuasion wants to get out in front supporting it.

In this framework, the problem with fiscal expansion--the government purchasing a bunch more things right now and so shifting the red curve to the right--is that it boosts the supply of government bonds in the future and so may raise the double-headed orange arrow that is the spread, getting you absolutely nowhere:

So what can we do? Looks like we are well and truly fracked.

Well. maybe not. My position on further fiscal expansion is twofold:

• The claim that further government purchases would widen the spread might be true. It might now. Let's try it and see. The debt held by the public on Monday was $7,632,033,766,420.46. The debt held by the public a year and a half ago was $5,218,570,776,014.84. We have managed to boost the debt held by the public by $2,413,462,990,405.62 in eighteen months without materially moving the term premium significantly. (The risk premium has moved--there is a financial crisis on, after all.) So let's try it and find out.

• This is an opportunity. We really need to reduce the deficit after 2030. We really need to have more government purchases now. So raise spending now, and raise taxes and impose spending caps starting in 2013 so that by the end of the 20-year budget window the projected debt is unchanged. Thus we move the red line without increasing the spread: there's now increased supply of bonds in the long term to push up the interest rate on them. And we solve both our current near-depression problem and our post-2030 structural deficit problem.

We Write Letters on Health Care Cost Control to Ezekiel Emmanuel...

Ezekiel is doing the Lord's work on health care reform at OMB. His judgment is good. He is worth supporting--joggling his elbow is really not helpful given that he has the point on these sets of issues.

But I feel anxious--I don't think I can quite sign on with a good conscience to the whole thing. So I am signing on with a slightly, slightly bad conscience...

Dear Mr Emmanuel:

Any chance we could get "#1 Deficit Neutrality. Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the ten-year budget window, and deficit-reducing thereafter..." changed?

As it stands, it seems to me that this point is not true. Deficit neutrality as CBO scores it over the next ten years is not very important from a public policy standpoint. And what is important is that it be likely to actually be deficit-reducing and substantially deficit-reducing after 2030 by putting us on a sensible cost- and spending-control path--rather than that CBO score it as deficit-reducing after 2030.

And a tax on employer-sponsored health plans is only worth doing in the context of universal or near-universal coverage--in the absence of a mandate or near-equivalent, the risks of producing an adverse-selection meltdown make me nervous.

The rest is fine.

If it's too late to negotiate changes, I will, however, sign on anyway...

Yours,

Brad DeLong

The context is:

Apologies for the mass email, but we are operating on an extremely tight political timeline. Some key cost control measures are under threat and might very well not be included in the Senate’s health reform bill. We are asking the country’s leading economists to sign onto a letter to Sen. Reid endorsing 4 key measures as essential to a fiscally responsible health reform bill....

Deficit neutrality. Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the 10-year budget window, and deficit reducing thereafter. Of course, covering tens of millions of currently uninsured people will increase spending. But the draft health reform legislation contains offsetting savings sufficient to cover those costs and the seeds of further reforms that will lower the growth of spending. Deficit neutrality over the first decade means that, even during the start-up period, the legislation will not add to our deficits. In the second decade and beyond, the legislation should reduce deficits.

Excise tax on high-cost insurance plans. The Senate Finance Committee’s bill includes an excise tax on high-cost health insurance plans. Like any tax, the excise tax will raise federal revenues, but it has additional advantages that are essential. The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers.

Medicare Commission. Rising Medicare expenditures pose one of the most difficult fiscal challenges facing the federal government. Medicare is technically complex and the benefits it underwrites are of critical importance to tens of millions of elderly and disabled Americans. We believe that a commission of technical experts should be empowered to suggest changes in Medicare to improve the quality and value of services. In particular, such a commission should be charged with developing and suggesting to Congress plans to extend the solvency of the Medicare program and improve the quality of care delivered to Medicare beneficiaries. Creating such a commission will make sure that reforming the health care system does not end with this legislation, but continues in the future decades with new efforts to improve quality and contain costs.

Delivery system reforms. Successful reform will improve the care that individual patients receive by rewarding health care professionals for providing better care, not just more care. Studies have shown that hundreds of billions of dollars are spent on care that does nothing to improve health outcomes. This is largely a consequence of the distorted incentives associated with paying for volume rather than quality. Health care reform must take steps to change the way providers care for patients, to reward care that is better coordinated and meets the needs of each patient. In particular, the legislation should include additional funding for research into what tests and treatments work and which ones do not. It must also provide incentives for physicians and hospitals to focus on quality, such as bundled payments and accountable care organizations, as well as penalties for unnecessary re-admissions and health-facility acquired infections. Aggressive pilot projects should be rapidly introduced and evaluated, with the best strategies adopted quickly, and throughout the health care system...

Chance of Great Depression Now 5%...

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it--that we know what to do and how to do it and will do it if things turn south.

I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy--a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it.

We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.

We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible.

So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?

Hugh Son of Bloomberg:

Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: n American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for $62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost -- they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.

Timothy Geithner, now Treasury secretary, was among officials who took over negotiations with the banks from AIG in November 2008. Lawmakers including Representative Darrell Issa have said the September 2008 AIG rescue was a “backdoor bailout” for banks that received billions in payments. The Fed contacted eight of AIG’s biggest counterparties by telephone last year to negotiate discounts, Barofsky said. While UBS AG, the Zurich-based bank, was willing to make a 2 percent concession, the Fed decided that all counterparties would receive full payment, he said.

‘Misuse’ of Power

In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks that the Fed doesn’t regulate, the Fed said. Andrew Williams, a Treasury spokesman, said in an e-mail statement that Barofsky’s report:

overlooks the central lesson learned from the unprecedented steps taken to support AIG. The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution...

"Criticizing the Health Care Bill for Not Doing Enough on Cost Control Is Like Criticizing the Yankees for Not Winning the Super Bowl..."

Ezra Klein talks to Jon Gruber:

Does health-care reform do enough on cost control?: My view is, even if the bill did no cost control it would be an incredible thing for this country. But politically, it sets the stage for cost control in two senses. First, it puts in place all the things we can do now. It does comparative effectiveness and pilots and all the rest. But second, once you get coverage off the table, the conversation gets more focused on cost control.... [I]n Massachusetts... Health Care for All... realized that they would lose all this coverage they'd gained if it didn't control costs. So they got behind real cost-control measures. A global budget, even. People say you can't do coverage without cost control. I think it's the opposite. You can't do cost control before coverage. We would do a huge amount for the cause of cost control just by covering people....

One of my frustrations with the cost-control discussion is that people set this up like a choice between this bill and a bill with more cost control. In reality, it seems more like a choice between this bill and nothing. And this bill does a lot more cost control than nothing.... Do you know Pascal's wager? Why not believe in God? I think of health-care reform similarly. We don't know if we'll really bend the cost curve. But if we do this and we don't do anything, we still go bankrupt in 100 years. We don't lose much. But if we do it and it works, then it's a savior.

It also moves the conversation on cost control.... It does real things... then it does real things to make cost control more politically viable.... To kill this bill for not doing enough on cost control would be like criticizing the Yankees for not winning the Super Bowl. They won the World Series! They did what they could do!

Economist Mom Hopes That the Obama Administration Is Thinking Sensibly About the Medium Run Deficit

Even though they are not yet talking sensibly--like about the need for sticking to PAYGO over the medium run.

Economist Mom:

Peter Orszag on the Tough Specifics of Deficit Reduction: The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning.  He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook (emphasis added):

“On the one hand, [you have] the GDP gap, the gap between how much the economy is producing and how much it could produce, and, on the other hand, these deficits,” he says. “If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night.”

Sometime around 2011 to 2013, “that’s where we’re going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy,” he says. “We’re working through [this], and we haven’t made final decisions on the best path to walk down from where we are now to where we need to get.”

Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits.  Here’s a little hint (emphasis added):

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren’t paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

“So, the point being, we inherited a big hole,” Orszag says.

Sounds like not paying for the 2001 and 2003 tax cuts was a bad idea, and that the current revenue system is not keeping up with our spending needs (even ongoing, not just the temporarily high spending needs associated with stimulus).  It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.  I’d like to suggest that “fundamental tax reform” ought to mean more than deciding which parts of the Bush tax cuts should get extended.

And as Peter points out:

“The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it,” Orszag says. “There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down.”

Well, I think the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).  It’s the reason, by the way, why Concord’s online budget challenge (based on CBO’s “Budget Options”) seems lopsided in favor of tax increases over entitlement cuts:  because the fiscally-irresponsible policies of the Bush Administration that the Obama Administration now blames for the awful budget outlook were lopsided on the tax-cut side.  It’s not that CBO or Concord prefers raising taxes to cutting spending.  It’s that that’s where the biggest levers are to significantly change the budget outlook anytime soon–meaning right after the economy is strong again, maybe in 2011-13, like Peter says.

The Cretinism of Parliaments, U.S. Congress Class...

• In the short term, we don't have a deficit problem: as long as unemployment remains highly elevated--certainly as long as the unemployment rate stays above 7%--and as long as interest rates on U.S. Treasuries stay low a bigger federal deficit is a feature not a bug: our short-term deficit problem (and the short term lasts for most of Obama's remaining term) is that the deficit is too small, not too big.

• In the long term, our deficit problem is a federal government health spending problem. Unless medical care cost growth is brought under control--and here the drivers are not factors specific to government programs, for private-sector medical expenditures are exploding at least as rapidly as Medicare and Medicaid--then excess medical cost growth will lead the federal government health programs to first devour the rest of the social insurance state in the years after 2020 and then devour themselves.

• In the medium term between 2012 and 2020 we are, current projections tell us, on a sustainable budget path--with a budget deficit "no larger than the average of the past thirty years," as the Bush administration flacks used to tell us--with a stable debt-to-GDP ratio as long as output does not grow more slowly than projected and as long as congress observes PAYGO: as long as congress pays for whatever policy changes it makes.

Doug Elmendorf's worry--the thing that makes him pay attention not to the solid medium-term sustainable-deficit lines in the graph above but to the dotted medium-term unsustainable-deficit lines in the graph above--is that congress will not pay for the policy changes it enacts.

So now let's turn the microphone over to Matthew Yglesias:

The Surprisingly Easy Medium-Term Budget Fix: The dashed lines, however, represent a “current policy” scenario in which we assume that some of the Bush tax cuts will be extended and also that the AMT threshold will continue to be pushed up. Those are reasonable assumptions.... Elmendorf, in other words, isn’t wrong to worry about that.

But... this nuance is lost on the man in the street. The problem... isn’t... that we’re driving toward the edge of the cliff. The problem is... congress seems overwhelmingly likely to steer us [over the cliff].... It’s absurd for [congressional] politicians to be... engaged in highly public deficit hand-wringing...

while not admitting that they could solve the problem by simply saying no.

Senator Evan Bayh and others sound a lot like they are saying: "The President needs to do something to keep us from voting the way we have decided to vote!!"

That's just sad.

Just say "PAYGO," starting in fiscal 2012. That's all that it will (probably) take for the medium term...

The Paranoid Style in the Republican Party...

Josh Micah Marshall:

The Paranoid Style: There are many ways in which the political moment (hyper-polarizing) and the technological moment (Twitter, instant news cycles) creates a self-perpetuating arms race of hyperbole. On the other hand, some of these new publishing and communications systems do allow us to get a view into where the head of a big chunk of the country is at.

To that end, we've got the story of the Colorado state senator who represents the hyper-conservative Colorado Springs compared Obama to the al Qaeda terrorists who took over Flight 93 on 9/11 and real patriotic Republican Americans to the passengers who had to retake control of the plane.

On the one hand, this is textbook feverish, eliminationist incitement. On the other hand, I think back to how paranoid and in the thrall of their own victimization these folks were a few years ago when they ran the entire country. So I'm not sure we should be surprised that they go totally crazy when they're largely shut out of power in the country at the national level.

Warning! Godwin's Law Violation Ahead!!

Probably it's just that I have been reading too much about Mussolini's Italy.

But reading Paul Krugman this morning on the Republican Party's "sorcerer's apprentice" act made me think that we are a lot closer to Weimar America than I ever thought I would be...

At this point there are only two moral courses of action open to Republicans:

1. Abandon the party and try to marginalize it as a whole.
2. Split the party, and so try to lift the curse of Richard Nixon.

Paul:

What all this shows is that the G.O.P. has been taken over by the people it used to exploit.

The state of mind visible at recent right-wing demonstrations is nothing new. Back in 1964 the historian Richard Hofstadter published an essay titled, “The Paranoid Style in American Politics,” which reads as if it were based on today’s headlines: Americans on the far right, he wrote, feel that “America has been largely taken away from them and their kind, though they are determined to try to repossess it and to prevent the final destructive act of subversion.” Sound familiar?

But while the paranoid style isn’t new, its role within the G.O.P. is.

When Hofstadter wrote, the right wing felt dispossessed because it was rejected by both major parties. That changed with the rise of Ronald Reagan: Republican politicians began to win elections in part by catering to the passions of the angry right.

Until recently, however, that catering mostly took the form of empty symbolism. Once elections were won, the issues that fired up the base almost always took a back seat to the economic concerns of the elite. Thus in 2004 George W. Bush ran on antiterrorism and “values,” only to announce, as soon as the election was behind him, that his first priority was changing Social Security.

But something snapped last year.

Conservatives had long believed that history was on their side, so the G.O.P. establishment could, in effect, urge hard-right activists to wait just a little longer: once the party consolidated its hold on power, they’d get what they wanted. After the Democratic sweep, however, extremists could no longer be fobbed off with promises of future glory.

Furthermore, the loss of both Congress and the White House left a power vacuum in a party accustomed to top-down management. At this point Newt Gingrich is what passes for a sober, reasonable elder statesman of the G.O.P. And he has no authority: Republican voters ignored his call to support a relatively moderate, electable candidate in New York’s special Congressional election.

Real power in the party rests, instead, with the likes of Rush Limbaugh, Glenn Beck and Sarah Palin (who at this point is more a media figure than a conventional politician). Because these people aren’t interested in actually governing, they feed the base’s frenzy instead of trying to curb or channel it. So all the old restraints are gone.

In the short run, this may help Democrats, as it did in that New York race. But maybe not: elections aren’t necessarily won by the candidate with the most rational argument. They’re often determined, instead, by events and economic conditions...

Reed College Public Policy Lecture: Today's Financial Crisis in a Historical Mirror (November 7, 2009)

Audio: Reed Public Policy Lecture (11.07.2009 03-14-36 PM)

---

Download now or preview on posterous

Reed College Public Policy.doc (3307 KB)

Download pdf: 20091107 reed slides.pdf

---

---

Posted via email from http://braddelong.posterous.com/reed-college-public-policy-lecture-todays-fin at Brad DeLong's Scrapbook

Another Bad Employment Report

The Bureau of Labor Statistics reports:

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000).... Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.

Among the major worker groups, the unemployment rates for adult men (10.7 per- cent) and whites (9.5 percent) rose in October. The jobless rates for adult women (8.1 percent), teenagers (27.6 percent), blacks (15.7 percent), and Hispanics (13.1 percent) were little changed over the month. The unemployment rate for Asians was 7.5 percent, not seasonally adjusted.

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed over the month at 5.6 million. In October, 35.6 percent of unemployed persons were jobless for 27 weeks or more. (See table A-9.)

The civilian labor force participation rate was little changed over the month at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent...

If you had told everyone last election day what would happen, economically, in 2009, what policies would they have adopted then to stem this disaster?

And why aren't we implementing those policies now?