J. Bradford DeLong's Grasping Reality with All Eight Tentacles

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)

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Download now or preview on posterous

Reed College Public Policy.doc (3307 KB)

Download pdf: 20091107 reed slides.pdf

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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?

We Are Hiding in Our Burrows Right Now...

Andrew Samwick is shrill:

A Question for Peggy Noonan: When Did Our Callous Childhood Begin: A friend pointed me to this column by Peggy Noonan in last week's WSJ, "We're Governed by Callous Children." I think she is right in her main point about a disheartened leadership class in business and a mindless leadership class in government. 

But she makes the same mistake that other Republican commentators make when they criticize our current leadership.  Specifically, she does not come out forthrightly to identify the one characteristic that separates adults from children: children don't have to balance their budgets, but adults do.  As much as she may admire Reagan, it was his administration that began our 30-year fascination with outsized deficits.  (The deficit mentality nearly went away with Clinton but came back with a vengeance with his successor.)

We will not get out of our current predicament until we face up to the reality that we cannot continue to spend more than we earn (or in the government's case, tax), and that the limits on spending ought to come naturally precisely because we observe not just the benefits but the costs in real time. 

I think that what has people disheartened is that there is almost no one in Washington -- not even an identifiable faction of one of the two main parties -- who is willing to act on this fact.  So people expect the so-called solutions to make the underlying problems worse.  To suggest that callousness or mindlessness (her words) are features of only the current administration and Congressional leadership is ridiculous.

Hey, this is America.  If you don't like the current leaders, we can always get some new ones.  Is it too early to start the "Bruce Bartlett in 2012" campaign?

Let me assure Andrew that the Rubin wing of the Democratic Party is still out there. My view is that making a noise right now is highly counterproductive--that for the next two years or so we need bigger government deficits, not smaller ones.

But watch for us to come out of our burrows when the unemployment rate falls below 7.5%...

Not Disraeli's Two Nations, But Two Nations Nevertheless...

And the really scary one controls today's Republican Party: the curse of Richard Nixon (and Barry Goldwater) in action.

Matthew Yglesias writes:

Matthew Yglesias: White Men Are Not Very Progressive: A nice map from dreaminonempty at Open Left illustrates the vote share won among white men in the 2008 presidential election:

I would say that another message is that progressive politics is badly disadvantaged by a situation in which the overwhelming majorities of political leaders and prominent media figures are white men. There are plenty of white men with progressive views, but in general the majority of white men are not progressive and the majority of progressives are not white men. Drawing from the relatively small pool of white male progressives means drawing from a shallow talent pool.

Long-Term Unemployment Turns into Structural Unemployment

Mark Thoma makes a graph: those who have been unemployed for more than six months divided by the civilian noninstitutional population 16 and over:

It's very scary: long-term unemployment has a way of turning into structural unemployment...

In Which Jared Bernstein Does a Bad, Bad Thing...

He talks about the federal budgetary impact of the stimulus program as if it were its net "cost." It isn't.

Of course, the misinformation starts with ABC's Jake Tapper:

$160,000 Per Stimulus Job? White House Calls That 'Calculator Abuse': Posting its results late this afternoon at Recovery.gov, the White House claimed 640,329 jobs have been created or saved because of the $159 billion in stimulus funds allocated as of Sept. 30.... Ed DeSeve, senior advisor to the president for Recovery Act implementation, said he'd been "scrubbing" the job estimates so much since they came it at the beginning of the month that he now has "dishpan hands and my fingers are worn to the nub."...

The White House argues that the actual job number is actually larger than 640,000 -- closer to 1 million jobs when one factors in stimulus jobs added in October and, more importantly, jobs created indirectly, such as "the waitress who's still on the job," Vice President Biden said today.

So let's see. Assuming their number is right -- 160 billion divided by 1 million. Does that mean the stimulus costs taxpayers $160,000 per job? Jared Bernstein, chief economist and senior economic advisor to the vice president, called that "calculator abuse." He said the cost per job was actually $92,000 -- but acknowledged that estimate is for the whole stimulus package as of the end of 2010...

Jared fell into a trap. The right way to do the accounting is, for each extra year of employment we get:

-$92,000	Direct federal cost
+$27,000	Extra federal and state revenue
$0	Extra costs of debt financing
$110,000	Value of goods and services produced
-$18,000	Discount because we are buying different goods and services than we would ideally, or buying them at a different time
$50,000	Value of having a job to the person who gets one--these aren't people who are indifferent between going to work and getting their head together, after all
+$77,000	Net Benefit to Economy

It's OK to talk about the federal budgetary impact of the stimulus program per job as a "cost" when you are talking to economists who understand the issues.

It is not OK when you are talking to Jake Tapper, who is playing a game of "gotcha."

The right way to do it is, as the table above suggests:

1. The federal government spends $92,000 and increases its deficit by that much--that's a cost.
2. Federal, state, and local governments collect an extra $27,000 in taxes--that's a benefit.
3. There are--given that we are in a liquidity trap--no additional costs of financing the rest of the government's debt imposed by this increase. Investors are not skittish and do not need to be bribed to hold extra government debt in their portfolios by the government offering to pay them higher interest rates. Instead, investors are desperate right now for more Treasury bonds to hold in their portfolios.
4. The extra people put to work produce $110,000 of useful stuff--that's a benefit.
5. However, because we are pulling forward spending from the future into the present--spending the $92,000 now rather than in the future--we are buying stuff too soon, and because the government is all thumbs we are to some degree buying less valuable stuff than we woul ordinarily by buying. Figure a 20% discount--that's an $18,000 cost.
6. The people who get the jobs are really happy--it's not as though they are indifferent between working this year and taking time off to get their head together, after all. Not having a job this year greatly harms their quality of life.

Net impact: +$77,000 for each employment-year rescued.

We should be doing more of this right now.

Why shouldn't we be doing more deficit spending all the time? Usually because of (6): when the economy is in its normal state, the marginal worker is somebody who doesn't value having a job all that much--the (6) number is usually on the order of $10,000 rather than $50,000, and so isn't worth the -$18,000 cost of having the government actually do the buying. Plus there is (3): (3)--the crowding-out term--can be quite substantial.

But it isn't now.

In Which the Financial Times Echoes St. Augustine of Hippo

"Give us fiscal continence--but not yet." That's a very good line. I am going to steal it.

You know, Warren Buffett and company could choose to make the Washington Post as informative and as witty as the Financial Times tomorrow--if they cared to. Both may die in the coming crash of the newspaper industry. But we all should really be doing everything we can to make sure that the FT and its culture survive: it is a global treasure.[1]

The FT:

US engine revs up: his spending spree is brittler than one would like. The durable goods spurt--even as disposable incomes fell--was powered by a car scrappage scheme that borrowed GDP from the future more than anything else. With motor vehicles excluded, output grew by only 1.9 per cent. Up to half of that in turn consisted of businesses rebuilding depleted inventories – a sign of optimism, but also, like cash-for-clunkers, a one-off boost to output that will not persist.

Which is why government action remains crucial to nurse this economy back to health. The administration is a good third of the way through a stimulus package that is indispensable to prevent growth from slowing down again. Federal spending rose briskly; now is not the time to cut this stimulus short.

Moreover, cash-strapped state and local governments are the dark spot in this improving picture: their spending was the only GDP component that went into decline. Congress would do well to consider using its ability to borrow cheaply to assist capitols and town halls banned from engaging in deficit spending on their own.

A credible plan for deficit-cutting is urgently needed; its implementation is not. Those who think deficit spending a sin may pray for government continence – but not yet.

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[1] And that the *Washington Post dies quickly: it is not.

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UPDATE: Paul Krugman and St. Augustine, 20 months ago:

St. Augustine and macroeconomic policy: I’ve had a few comments on my post about defining the macroeconomic problem, in which I say that the US economy is unbalanced, with too much consumption and too large a trade deficit, and that

the goal of monetary and fiscal policy should be to bridge the gap — to sustain spending until a falling trade deficit comes to the rescue, and to hasten the rise in net exports.

The objections run along these lines: since consumption has to come down, we should do nothing to delay the adjustment.

My answer, basically, is St. Augustine’s prayer:

Grant me chastity and continence, but not yet.

Ideally, we want the fall in consumption spending to move no faster than the rise in net exports caused by a weak dollar — if consumption falls too fast, we’ll have a deep recession.

Now, we can’t expect perfect timing, and my guess is that at least a moderate recession is already baked in. But we can try to make this less painful.

The Booth Auditorium Global Unemployment Webcast Is Live...

Download Movie: 20091028_BCLBE_GlobalUnemployment

The Booth Auditorium says:

Berkeley Law - Global Financial & Economic Crisis Series: Global Unemployment: Despite recent upticks in the economy, the U.S. and worldwide employment picture continues to be bleak. Are we facing a “jobless recovery?” Did the international economic collapse in 2008-09 alter the labor market permanently? What employment patterns and prospects should we expect as global markets and economies recover? Join a panel of distinguished UC Berkeley scholars who will answer these questions, explore the role of international organizations such as the G20 in addressing them, and offer proposals to prevent protectionism and promote a global solution.

Please Join Us
WEDNESDAY OCTOBER 28TH, 2009
12:30 - 1:45 PM
BOOTH AUDITORIUM
BERKELEY SCHOOL OF LAW
 

A panel discussion featuring:

• John Quigley, Goldman School of Public Policy
• J. Bradford DeLong, Department of Economics
• David Card, Department of Economics
• Andrew Rose, Haas Business School

Unemployment Panel (10.28.2009 01-00-27 PM).mp3

Download 20091028 delong.booth.unemployment

Mark Thoma on the Need for More Economic Stimulus

He writes:

Economist's View: "The Weakest Recovery in Modern Memory"?: Output is not expected to return to potential until well into 2012. Now recall the long delay between the end of the last two recessions and the peak in the unemployment rate.... To be fully effective, plans for additional stimulus should have been in place long ago. However, given how long the recovery is expected to take, it's not too late to do more if we get started right away. But the political climate makes it highly unlikely that labor markets and the economy will get the help that they need.

The New York Times Editorial Board Understands Macro

Unlike vote 60--or even vote 50--in the senate, and unlike every single congressional republican, they have a clue:

The Case for More Stimulus: Corporate profitability has been boosted by job cuts, pay cuts and a drive to restock depleted inventories. Immense federal stimulus has jolted the economy. But what happens when those measures run their course? The economy is going to need more government support, or it is bound to be very weak for a very long time — and vulnerable to a relapse into recession. Unemployment is expected to worsen well into next year, exceeding 10 percent. Foreclosures are expected to rise, which will push home values down further. Hundreds of small and midsize banks are likely to fail in coming years. State and local governments face budget shortfalls in 2010 that are as bad or worse than this year’s.

Yet Washington is not providing a coherent plan for effective stimulus.... Congressional Republicans say continued economic weakness is proof that February’s stimulus package failed. Lawmakers in both parties fret that large budget deficits preclude more stimulus.... Both arguments are wrong.... [T]he immediate need for stimulus trumps the longer-term need for deficit reduction....

Congress and the administration should agree on ways to ease the dire financial condition of the states. Most important is continued aid for state Medicaid programs, which would ensure vital services, support jobs and free up money for other needs. Governors will begin to prepare their new budgets in early 2010, and those budgets will be in effect for a year, starting in July....

Without another round of effective stimulus, the worst recession in modern memory will likely become — at best — the weakest recovery in modern memory. Another boost to federal spending that is targeted and timely should not be too much for politicians to deliver.

Global Unemployment: A Panel Discussion

An event:

Berkeley Law - Global Financial & Economic Crisis Series: Global Unemployment:

WEDNESDAY OCTOBER 28TH, 2009; 12:30 - 1:45 PM; BOOTH AUDITORIUM; BERKELEY SCHOOL OF LAW   A panel discussion featuring:

• John Quigley, Goldman School of Public Policy
• J. Bradford DeLong, Department of Economics
• David Card, Department of Economics
• Andrew Rose, Haas Business School

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Now what was the Booth Auditorium called the last time I was in it? And where is it?

Washington Post Crashed-and-Burned-and-Smoking Watch (Yes, Another Fred Hiatt Edition)

OMB Director Peter Orszag has had enough of the misinformation being pushed by the Washington Post.

Peter:

Peter Orszag: Fred Hiatt... writing... that the two biggest steps that can be taken to reduce the rate of health care cost growth--changes in health care’s tax treatment and an independent Medicare commission--are missing.  I agree with Hiatt on the potential substantial benefits in terms of cost containment from these two changes. But a note... the Senate Finance Committee bill includes both of these measures... creates an excise tax on insurance companies offering high-premium plans--which would create a strong incentive for more efficient plans that would help reduce the growth of premiums... establishes a Medicare commission--which would develop and submit proposals to Congress aimed at extending the solvency of Medicare, slowing Medicare cost growth, and improving the quality of care delivered to Medicare beneficiaries.   If [Fred Hiatt's] concern is that these two provisions would not survive the rest of the congressional process, then [Fred Hiatt should] say that--rather than suggesting that they aren’t already reflected in legislation.   Moreover, as I blogged a couple of weeks ago, the Senate Finance Committee’s bill is not the only measure that includes important cost constraining provisions... that experts from across the spectrum agree will help transform health care... penalties for hospitals with high, preventable 30-day readmission rates... encouraging the establishment of accountable care organizations... bundled payments for high-cost, chronic conditions....   Hiatt writes that "no one knows for sure how to control costs." True, we have never transformed the health sector before, and it is therefore difficult to quantify precisely how these steps will work together to promote quality and reduce cost growth. But it is wrong to conclude that these steps--even the ones beyond the excise tax on high-cost plans and the Medicare commission--are merely hypothetical pie in the sky.

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

The "Two Nations" Outlook: Real GDP and Unemployment

From Christy Romer's JEC testimony:

My hunch is that both real GDP growth and unemployment are likely to be somewhat higher than today's blue-chip forecast predicts.

Two nations; between whom there is no intercourse and no sympathy; who are as ignorant of each other's habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws...

Wall Street Journal Crashed-and-Burned-and-Smoking Watch (Jonathan Weisman Edition)

Who else? Jonathan Weisman:

Romer Predicts High Jobless Rate Through Election Year: The Romer testimony appears to be a shift toward the negative for the administration. On Tuesday, White House economist Jared Bernstein took a more upbeat position in a talk before the New America Foundation. While he called the lack of job creation “the most important challenge we face,” his speech emphasized progress made, not stagnation ahead. “I think we have to give the Recovery Act some props,” he said. “In the second quarter, the average monthly change in jobs was about 170,000 less bad than the baseline forecast. For the third quarter, the actual was about 270,000 better than the baseline. That’s about 1 million jobs saved or created so far”...

From the Christy Romer testimony that Jonathan Weisman was, ahem, "covering":

What kept the economy from heading into a second Great Depression in 2008 and 2009 was the strong and timely policy response.... A key piece... was the American Recovery and Reinvestment Act... $787 billion...to counteract the shortfall in aggregate demand... the boldest countercyclical fiscal action in American history.... [Our] estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter.... [A]s of August, the ARRA had raised employment relative to the baseline by between 600,000 and 1.5 million jobs...

Add up Jared's monthly numbers and you get the midpoint of Christy's range.

You know, if you are going to say: "X said something different from Y. X said Z." Then--unless you want everyone to conclude that you are a liar or an idiot--you check to make sure that Y said something different from Z. It's not a hard principle to grasp. It's not hard to do.

Is it too much to ask Rupert Murdoch's Wall Street Journal to have reporters who actually listen to what people say and read the texts they are handed? Apparently.

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

Six Issues for a Panel...

Twenty years ago--with the end of the Cold War--American policy got dammed up:

• It was clear we needed to do something to balance the long-term social-insurance spending promises both parties were making with the long-term tax base, and we haven't.

• It was clear--first for national-security and domestic-congestion reasons, and then for global-warming reasons as well--that we needed to start imposing Pigovian taxes on coal and oil-driven energy use, and we haven't.

• It was clear that we needed to reform America's health care financing system, and we haven't.

• It was clear that America, as the globe's sole hyperpower, had a unique opportunity to build a world in which we could live very comfortably and peacefully once we were no longer a hyperpower or even a superpower but instead only one (if we are lucky) of several great powers--and we haven't.

To this in the past three years we have added:

• A recognition that the "Greenspanist" bet--deregulate finance, rely on financial company shareholders via corporate control to limit moral hazard, and bet that the Federal Reserve can lean up after any elephants that stampede through--was wrong. We need to restructure financial regulation--and we haven't.

• A recognition that the "central problem of macroeconomics" has not in fact been solved. We need to solve it--both in the short run of recovery from this recession, and in the long run of creating a world that is net, whether through global imbalances or other factors, as vulnerable to episodes like this as our world turns out to be.

About these six issues, two questions:

• Which of these six policy issues will--as many of them have been doing--continue to drift, and what damage will drifting do?

• Which of these six policy issues will the Obama administration actually be able to address--and what will be the consequences for the world of how it addresses them?

Two Nations

For the rich:

• Expected real GDP growth at 3.5% per year or so for the year of so we can foresee...

For the poor:

• An unemployment rate stuck near 10% for the next year...

From Benjamin Disraeli, Sybil:

Disraeli: "It is a community of purpose that constitutes society," continued the younger stranger; "without that, men may be drawn into contiguity, but they still continue virtually isolated."

"And is that their condition in cities?"

"It is their condition everywhere; but in cities that condition is aggravated. A density of population implies a severer struggle for existence, and a consequent repulsion of elements brought into too close contact. In great cities men are brought together by the desire of gain. They are not in a state of co-operation, but of isolation, as to the making of fortunes; and for all the rest they are careless of neighbours. Christianity teaches us to love our neighbour as yurself; modern society acknowledges no neighbour."

"Well, we live in strange times," said Egremont, struck by the observation of his companion, and relieving a perplexed spirit by an ordinary exclamation, which often denotes that the mind is more stirring than it cares to acknowledge, or at the moment is capable to express.

"When the infant begins to walk, it also thinks that it lives in strange times," said his companion.

"Your inference?" asked Egremont.

"That society, still in its infancy, is beginning to feel its way."

"This is a new reign," said Egremont, "perhaps it is a new era."

"I think so," said the younger stranger.

"I hope so," said the elder one.

"Well, society may be in its infancy," said Egremont slightly smiling; "but, say what you like, our Queen reigns over the greatest nation that ever existed."

"Which nation?" asked the younger stranger, "for she reigns over two."

The stranger paused; Egremont was silent, but looked inquiringly.

"Yes," resumed the younger stranger after a moment's interval. "Two nations; between whom there is no intercourse and no sympathy; who are as ignorant of each other's habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws."

"You speak of--" said Egremont, hesitatingly.

"THE RICH AND THE POOR."

Alan Blinder Approves of President Obama on Economics

Alan writes:

A Report Card on President Obama’s Progress: The president’s critics complain that his only real accomplishment is the $787 billion stimulus bill--which they deride, somewhat contradictorily, as either budget-busting, ineffective or both. But is that all there is? I think not.

STOPPING THE SLIDE Let’s remember that the new president was dealt a dreadful hand on Inauguration Day--including a shattered financial system and a national economy teetering on the brink of disaster. The administration’s chief accomplishment to date surely is devising and executing--with huge assists from the Federal Reserve — a comprehensive program to pull us back from the abyss. The stimulus was just one component.... Job No. 1 — stopping the train wreck — appears to have been done rather well.

ENACTING THE STIMULUS PACKAGE The much-maligned fiscal stimulus has been criticized from both the left (as too small) and from the right (as too big, especially the spending parts). My own judgment is that both its magnitude and composition were reasonable, though not perfect. But bills that navigate the multiple hazards of the Congressional sausage grinder must be graded on the curve.... Give it a B or B+.

RESCUING THE BANKS.... When the Treasury secretary finally did release his plan, in stages, he wisely resisted the siren songs coming from both the left (“nationalize the banks”) and the right (“let ’em fail”), opting instead for the high-risk “stress tests” of 19 big financial institutions. Today, all 19 are alive and breathing. None have been nationalized.... So give the bank rescue plan an A–. The minus comes from being too soft on many banks and bankers, who failed us and then benefited from public largess.

REDUCING FORECLOSURES.... C.

TRYING FOR REGULATORY REFORM While it is still only a set of proposals, not laws, the Treasury worked at breakneck speed.... At this point, we can’t even guess what may pass. So give this policy an “incomplete,” noting, however, that the first draft shows promise....

[O]n the crucial macroeconomic and banking issues, we must conclude that “Saturday Night Live” got it quite wrong: Mr. Obama’s accomplishments in just nine months are palpable and were very much needed...

From my perspective, two big parts are missing:

• No strategy to get unemployment down to no more than 8% by the end of next year.

• No reform of financial industry compensation to make it incentive compatible.

This second may turn out to be a fatal mistake. Wall Street is now paying out huge cash bonuses when it should be giving its high flyers long-term stakes in the firms that they work for. This creates incentives for traders that may produce another big crisis five years down the road. And this makes it impossible for the federal government to commit more money to supporting the financial sector in the short run. That is a bad thing: there is about one chance in ten that things will turn down sharply, and that we will really want to provide more support to the financial sector. And now--because we did not reform financial compensation over the past year--we will not be able to do so if we need to.

*Sigh* Last Post on Superfreakonomics, I Promise

Sigh.

So I finally got a copy of chapter 5 of Superfreakonomics.

In the abstract I really like the idea of cheap geoengineering solutions to global warming. My personal favorite is a giant parasol 18,000 miles in diameter at L1 to absorb and then reradiate a chunk of sunlight in other bands. But I have never been able to find anyone here at Berkeley who (a) knows what they are talking about, and (b) agrees with Levitt and Dubner that we know that Al Gore efficiency-and-conservation solutions are much less cost-effective than Mt. Pinatubo geoengineering solutions in dealing with global warming. That NASA and Energy and OSTP should be working on and funding research into the possibilities of geoengineering is something everybody I talk to agrees with. But nobody I talk to agrees with Levitt and Dubner that efficiency-and-conservation efforts are futile, and that we should shut them down to bet all our chips on geoengineering.

It really does look to me like Levitt and Dubner:

• went to Myhrvold's Intellectual Ventures.
• got wowed.
• excitedly wrote up what they heard.
• and then failed to do their intellectual due diligence about what they were told there.

Thus I have a little unsolicited advice for Levitt and Dubner. If I were them, I would abjectly apologize. And I would then start editing the chapter thus:

1. pp. 165-6: Change to no longer put "global cooling" in the 1970s and "global warming" today in parallel: The scientists in the 1970s who were worried about global cooling had neither the quantative evidence, the climate models, the understanding of forcing processes, or the peer-reviewed consensus that analysis of global warming has today. Placing the two in parallel is simply wrong.

2. pp. 165-6: Change to remove false claim that the quotes from Newsweek were the words of "scientists."

3. pp. 165-6: Change to remove false claim that Newsweek was accurately citing the 1975 NAS Study--which says not that the globe is likely to cool but instead that we don't know enough about climate to forecast trends, and tht we need to do more research.

4. p. 167: Change to make explicit the claim that switching to an all-vegetarian diet reduces your carbon footprint by about the same order of magnitude as does switching to a hybrid car. But do not say that cars and trucks do not "contribute an ungodly share of greenhouse gases." They do--it's just that human meat-intensive agriculture contributes and ungodly share as well.

5. p. 168: Change to make the point that the fact that our estimates of climate effects are imprecise is not an argument for doing less or waiting to offset global warming--it is an argument for doing more and doing more now. Uncertainty is not our friend at all

6. p. 169: Change. Currently massively confused about Marty Weitzman's work. Marty focuses on the chance and valuation of catastrophe. He concludes that a version of the precautionary principle is appropriate: when distributions have fatter tails than log normal--which Marty thinks they do--the right policies are those that minimize the possibiliity of catastrophe. Which means starting to act now.

7. p. 170: Change to no longer imply that James Lovelock has some special role or authority in climate analysis or climate policy.

8. p. 170: Change to debunk rather than approve of British conservative Boris Johnson's claim. Johnson's statement is simply wrong. It is not the case that "the fear of climate change is like a religion in this vital sense, that it is veiled in mystery, and you can never tell whether your acts of propitiation or atonement have been in any way successful." We can measure greenhouse gas concentrations in the atmosphere, solar radiative forcings, and temperatures. We can tell whether acts of propitiation and atonement are working.

9. p. 171: Change the highly misleading: "When Al Gore urges the citizenry to sacrifice... the agnostics grumble that human activity accounts for just 2 percent of global carbon-dioxide emissions, with the remainder generated by natural processes like plant decay..." that 98% of carbon emissions are part of an ongoing biological cycle is not an argument supporting an "agnostic" position. And Levitt and Dubner should not hve claimed that it is.

10. p. 171: Change highly misleading paragraph to stress that what is relevant is not the stock but the flow: not that human activity accounts for 2% of the flow but rather that but for industrial emissions one-third (and growing) of the stock of greenhouse gases would simply not be there today.

11. p. 173: Change to no longer dismiss out-of-hand global agreement on climate policy. Dubner and Levitt currently write: "when it comes to actually solving climate change externalities through taxes, all we can say is good luck.... [G]reenhouse gases do not adhere to national boundaries.... Nor does one nation have the right to tell another what to do." But if the big four--U.S., EU, China, and India--of 2050 do agree, they then have the cultural, economic, and diplomatic power to coerce the rest of the world. Reaching global agreement is a very reasonable prospect.

12. pp. 177-181: Change to tone down the puff piece on Myhrvold and Intellectual Ventures--the subsequent pages contain a lot of clues that Myhrvold and company really don't know very much about what they are talking about.

13. p. 182: Change to debunk rather than approve of quote from Wood: "Everybody turns their knobs... so they aren't the outlier, because the outlying model is going to have difficulty getting funded..." Alternatively, back this claim up with some real evidence that it is so. (The climate modelers who I talk to say that it is not.)

14. p. 182: Change to debunk rather than approve of quote from Wood: "current climate models 'do not know how to handle water vapor and various types of clouds'..." Current climate models may not handle water vapor and clouds especially well, but they do handle them.

15. p. 182: Also, change to reinforce point that uncertainty in climate models is not an argument for doing less now but rather an argument to do more.

16. p. 183: Change to debunk rather than approve of quote from Myhrvold: "most of the global warming over the past few decades... might actually be due to good environmental stewardship." It's not.

17. p. 183: Change to remove false claim that worldwide particulate pollution is shrinking rather than growing. It is still growing rather than shrinking and so still cooling the earth more with each passing year--it's only in the clean North Atlantic that heavy particulates been shrinking.

18. p. 183: Change to rephrase: "Nor does atmospheric carbon dioxide necessarily warm the earth"--other things equal, it certainly does.

19, p. 184: Change to remove false claim: "Yet [Ken Caldeira's] research tells him that carbon dioxide is not the right villain in this fight."

1. p. 186: Change to debunk rather than approve of false quote from Wood: "most authoritative literature on the subject suggests a [sea level] rise of about one and a half feet by 2100."

2. p. 186: Remove false claim: "a most surprising environmental scourge: trees." Distinguish between (a) tropical trees, (b) temperate trees, and (c) boreal trees in regions where there is a great deal of snow cover.

3. p. 186: Remove false claim that the earth has been cooling "over the past several years."

4. p. 187: Claim that "coal is so cheap that trying to generate electricity without it would be economic suicide" needs much, much more backing-up: I can't see how it could possibly be true.

5. p. 187: Remove false claim: "A lot of things that people say would be a good thing probably aren't.... As an example he points to solar cells..."

6. p. 187: Claim that "The energy consumed by building the thousands of new solar plants necessary to replace coal-buring and other power plants would create a huge long-term 'warming debt'"--I cannot see how this could possibly be true. The overwhelming majority of power plants that are going to be in operation have not been built yet, and buildind closed-carbon-cycle or non-carbon plants is not much more expensive than building open-carbon-cycle ones.

7. p. 188: Remove false claim that "Myhrvold... has probably thought about such [ecological disaster] scenarios in greater scientific detail than any climate doomsayer."

That is as far as I have gotten...

Nine Months into the Obama Administration: A Look

Glenn Greenwald issues marching orders:

How to avoid the GOP's mistakes during the Bush years?: The Atlantic's Marc Ambinder makes the following observation: "From day one of his administration, the left has held Barack Obama's feet to the fire way more than the right ever did to George W. Bush..." Is there any doubt that this is accurate?  I can't imagine how there could be.  And is there anyone who believes that this is a bad thing?  

It's worth remembering how the GOP and the Right treated Bush and the role they played in his presidency.... The Right's leading commentators saw their role as defending the Bush administration no matter what it did, rather than expressing their honest opinions.... Personalized hagiographies were churned out glorifying the President in borderline-religious tones. Conservative groups devoted themselves to blind defense of the White House.... Conservatives who criticized Bush were deemed the enemy and were excommunicated.... Those who, in general, criticized the President too harshly were deemed unpatriotic, standing with Terrorists, and suffering from personalized and emotional hatred (Bush Derangement Syndrome)....

One need only look at the entrenched rot that is now the conservative movement and the Republican Party to see what happens when that mentality prevails, when internal dissent is treated as blasphemy and well-intentioned critics are deemed suspect and even harmful to The Cause...

We hear and obey.

On my issues:

(1) The Obama administration argued in December and January that it should seek a consensus position on dealing with the financial crisis and recession rather than push for first-best policies--larger short-term deficit spending, more money for banking recapitalization, more stringent regulation of and control of financial services (especially much more aggressive regulation of executive compensation to make every thirty-five year old a risk manager who prospered only in the long run, only if the firm's strategies proved profitable over several cycles, and only if the firms never blew up).

This was a mistake: the 80-20 votes in the Senate and the 390-40 votes in the House for "national unity" economic policies did not materialize, and we are left with insufficient regulation of the financial system to protect the consumer and guard against the next crisis, and with too-small a stabilization policy that threatens now to give us 10% unemployment as far as the eye can see.

(2) The Obama administration started by proposing a cap-and-trade environmental policy with current greenhouse polluters grandfathered in--and with the political dynamic such that, as with the AMT and the R&D tax credit, the grandfathering will be extended year-by-year forever as legislators find one-year-at-a-time extensions to be an extraordinarily good tool for raising campaign contributions from corporate PACs.

This was a mistake. The administration should have started with the right first-best policy: a carbon tax with the revenues dedicated to paying people's FICA contributions. Then, if necessary, it could have let itself be negotiated down to cap-and-trade with some--not 100%--grandfathering.

(3) I simply do not know what the Obama administration's desired health-care reform bill looks like, or what steps the Obama administration is taking to make the congressional reform process reach a good end, or what the economic theory is that suggests that these particular reforms are the right thing to do. I am scared of guaranteed issue and community rating without a real mandate to curb adverse selection and a strong public option as a safety valve. I am very scared of a congress that seems to, with every day, seek to bend the curve of health care costs upward by prohibiting things like comparative effectiveness research. And I am very, very scared of a mandate without an adequate subsidy pool.

I want to see real white papers from the administration explaining why whatever is going to emerge from the congress is a good thing--and why it is the best thing that we could have gotten out of congress this year or next year.

(4) Tim Geithner should have gone to the wall for the requirement that [banks offer "plain vanilla" mortgages and credit cards. The Democratic Party should not be in the business of encouraging banks and other financial service companies into making money by tricking households into bearing risks that they do not understand. And he certainly should not say that he is "supportive of the changes." If he really is, he is in the wrong job. If he is merely grudgingly willing to accept the changes, he should say that instead. The Treasury Secretary's credibility is, after all, his onlly asset.

(5) Nor has the Obama administration yet gone to the wall for long-run fiscal discipline: by now we ought to have standby tax increases or spending cuts written into the law for the out-years a decade or more from now to reassure everyone that the American government does understand and take seriously what the long-run trends--the aging of America and medical-care cost growth--mean for public finances

Don't get me wrong: My complaint is not that the Obama administration has not been liberal enough. My complaint is that the Obama administration, so far, has not been devoted enough to good policy--to the good technocratic policies of what I used to see as the bipartisan center--and has been unwilling to use any leverage at all against a congress that is underbriefed, unfocused, and easily captured by special interests. You can only use such leverage if you have a moment arm--allow daylight to open up between the President's position and the position of the marginal senator, and say that the President's policies are those he and has staff have concluded after sober reflection are best for the nation but that he will take what he can get from congress.

Yes, We Can--Afford More Short-Run Deficit Spending, That Is

We are live at The Week: We Can Afford More Short-Run Deficit Spending:

This is an exceptional time—a time in which many of the normal rules of the Dismal Science don't apply because, as Paul Krugman puts it, "depression economics" is in the driver's seat. The normal benefits and costs of government borrow-and-spend policies are overturned for now—and for as long as the crisis of high unemployment lasts.

Yet I find that many people do not understand why arguments that make perfect sense in normal times do not apply today. Let's run through the arithmetic—first in normal times, and then in a financial crisis like this one.

In normal times, a boost to government purchases:

• Produces a limited increase in production and employment;
• Creates a substantial increase in national debt;
• And requires that this new debt be financed at a sizeable interest rate.

Consequently, only government spending initiatives that promise a high value for the dollar are worth undertaking. Consider a $100 billion boost to government purchases. In a normal year, the Federal Reserve will worry about inflation, and raise interest rates somewhat to offset the inflationary impact of the fiscal boost. The multiplier effect of the purchases will therefore be something like 0.4—we will spend $100 billion on government purchases and gain perhaps $40 billion in extra production and associated employment out of it. Those who earn that extra $40 billion will pay taxes—perhaps $16 billion. So the net impact on government debt is this: by spending an extra $100 billion we will have added some $84 billion to the national debt.

That debt must then be amortized. At a five-percent-per-year long-run real rate of interest on government bonds, amortizing that debt will cost Americans $4.2 billion a year.

But wait—there is more. The Federal Reserve's compensatory increase in interest rates will also reduce investment. Because of the $100 billion in government purchases, perhaps $60 billion of private investment that would have been made won't be made—it will be crowded out. As a result of the lower capital stock, some $6 billion a year of income that would have been earned won't be.

Thus the net cost will be a reduction in Americans' disposable incomes of $10.2 billion per year.

That is not an attractive bargain: to purchase $40 billion of extra production now at the expense of a reduction in incomes of $10.2 billion in every year in the future. That is a usurious real interest rate of 25.5 percent. No sane economist would recommend a policy with such costs and benefits.

But how different everything looks in those rare times—like now—when depression economics applies!

First, more government spending will not lead the Federal Reserve to raise interest rates to fight inflation; the Federal Reserve has pushed interest rates to the floor right now and wishes it could push them lower still—perhaps another 5 percent into negative terrain. Given that, the multiplier on government spending is not 0.4, but more like 1.5. In other words, we do not get $40 billion of additional production and employment for $100 billion in government spending: We get $150 billion.

How? The federal government spends money to buy something it would not otherwise have purchased, thereby taking that product out of business inventories. Typically, businesses would respond by saying, "Our goods are flying off the shelves; we should raise our prices." As businesses raise their prices, (most of) what the federal government bought would be offset by a decline in private purchases because private buyers, confronting increased prices, decide to hold off on purchases.

But, again, now is not normal. Now, businesses respond to the federal government's purchases by saying, "Demand for our goods is greater than we thought; we don't need to fire as many people." The workers who they don't fire retain incomes they would not otherwise have had, and so they are a bit freer with their spending than they would be otherwise. Add up the extra spending by the federal government, and the extra spending by people who would have been fired but for the spending by the federal government, apply the appropriate offsets, and you wind up with a multiplier that most forecasters—by which I mean people who actually make their livings selling forecasts to businesses—think is probably around 1.5. Thus we get $1.50 of economy-wide spending for each $1 of stuff bought by the federal government.

Second, that boost to production creates a substantial reflow in taxes that makes the spending program lunch not free, but cheaper; $150 billion of added production leads to $60 billion of additional tax revenue, leading to only $40 billion in increased debt.

Third, depression economics means not only that there is no offsetting Federal Reserve interest rate increase, but also that the government can borrow at uniquely favorable terms: 2 percent per year in real terms for the next 30 years. Amortizing the $40 billion of additional government debt requires only $800 million a year in additional interest payments and taxes.

Fourth, the absence of interest rate increases means that there is no crowding-out of private investment. Private-sector incomes down the road are unchanged—or increased.

So the net cost of gaining $150 billion in increased production and incomes this year is $800 million a year going forward. It's not a free lunch—they take away my union card as an economist if I start claiming that things are free lunches—but it is a very cheap lunch: like getting a 2 lb. lobster with all the trimmings for $1.95.

Clearly, a second round of stimulus right now would be a very good deal for the American economy. But how big should the fiscal boost be?

Given the arithmetic, it is a no-brainer that we should be doing an extra $100 billion in stimulus. In fact, it is a no-brainer that we should be doing several $100-billion tranches.

How many? Well, the arithmetic holds until:

• Further tranches of additional deficit spending stoke inflation and lead the Federal Reserve to offset their impact on production and employment;
• Further tranches lead to a deterioration in the long-term corporate bond market and crowd-out private investment;
• Further tranches undermine confidence in U.S. long-term public finances and must be financed at higher Treasury interest rates.

Last December, Lawrence Summers and the rest of Obama's incoming National Economic Council feared that increasing the size of the stimulus program from $800 billion to $1.2 trillion would bring the above factors into play. It is now reasonably clear that they were overly pessimistic about the effects of additional short-term government spending, in large part because they were overly optimistic about the state of the economy.

So how much should the government spend? I would favor starting with $100 billion next month, and continuing with an additional $100 billion every month thereafter. Meantime, we should keep an eye on the bond market and inflation forecasts. As long as the terms on which the U.S. government can borrow are exceptionally advantageous, and the unemployment rate remains exceptionally high, the benefits of government spending will continue to be exceptionally large.

What an "Advisor" Is

Glenn Greenwald writes:

Gay issues, the "fringe left" and the liberal veal pen: Thousands of Americans marched in Washington yesterday to demand a fulfillment of Obama's long-stated and oft-repeated commitments on issues of gay equality, in what the NYT calls "the largest demonstration for gay rights here in nearly a decade."  That protest was preceded the day before by a virtual consensus 0f gay rights activists expressing extreme disappointment and frustration with Obama's speech to the Human Rights Campaign on Saturday night, where he merely repeated the same pledges he's been making for two years with no added specificity or time commitment.

About those protests -- and Democratic and progressive criticisms of Obama generally -- NBC's John Harwood "reported" the following last night:

Sure but if you look at the polling, Barack Obama is doing well with 90% or more of Democrats so the White House views this opposition as really part of the "internet left fringe" Lester.  And for a sign of how seriously the White House does or doesn’t take this opposition, one adviser told me today those bloggers need to take off their pajamas, get dressed and realize that governing a closely divided country is complicated and difficult.

In the updates to her post about all of this last night, Pam Spaulding notes with exasperation the excuses and denials flying around everywhere, with all sorts of people expressing doubt that anyone in the Obama White House could possibly be capable of such an ugly sentiment, particularly in light of the President's eloquent, on-the-record commitment to gay equality (other than marriage).  As is true for all instances of reckless and petty uses of anonymity like this, it's impossible to know how reflective it is of administration sentiment generally -- was this a senior White House official or some obscure low-level aide?...

Well, almost surely neither. A senior White House official would be called "a senior White House official." An obscure low-level aide would be called "a White House official."

Someone who doesn't actually have a job in the administration, but gets to go into the EEOB once a week or so to whine and otherwise holds court at Caribou Coffee at 17th and Pennsylvania is an "advisor."

In highlighting this quote, Harwood is trying to start a fight--not to inform anybody about anything.

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

Department of "Huh?" (Did Barack Obama and Paul Krugman Run Over David Warsh's Dog? Edition)

Ooo boy. David Warsh:

It is last year’s solo prize in economics to Paul Krugman, of Princeton University and The New York Times, which poses the more interesting question. Are Scandinavians getting carried away with the US elections? Not that Krugman didn’t deserve a Nobel soon for his work on the “new” economics of trade--or a half-portion of the prize, anyway.

For there were several other ways to make an award for the work on trade, most obviously jointly to Elhanan Helpman, of Harvard University, who teamed up with Krugman for a few crucial years in the early 1980s to overcome resistance to what were then regarded as thoroughly unorthodox ideas. Their 1985 monograph, Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition and the International Economy, firmly established the new understanding of the strategic basis of much international trade, all but replacing a doctrine of natural “comparative advantage” that dated back 165 years to David Ricardo. Lost in the shuffle, too, was Avinash Dixit, of Princeton University. It was Dixit, who, with co-author Joseph Stigliz (an earlier Nobel laureate, in 2001, for his work on winnowing information), developed the model of product diversity and monopolistic competition with which Krugman and Helpman quickly made their point--whereupon the Dixit-Stiglitz model became the workhorse by which several other major fields were similarly transformed. Wilfred Ethier, of the University of Pennsylvania, lost out on a plausible claim as well, as noted here last year. By giving the prize to Krugman alone, the Royal Swedish Academy of Sciences may have given a mistaken impression of his importance as a contributor to this tapestry, relative to the others...

You could also add Maury Obstfeld my next-door office neighbor--who I would certainly rank as contributing more to the development of trade economics than the average member of Helpman, Dixit, and Ethier. Jagdish Bhagwati certainly deserves a share of a trade albeit not of a new trade prize.

But as to whether Paul is primus--take a look at Krugman's cv, "“Increasing Returns, Monopolistic Competition, and International Trade” (1979), “Scale Economies, Product Differentiation, and the Pattern of Trade” (1980), “Intraindustry Specialization and the Gains from Trade” (1981), “New Theories of Trade Among Industrial Countries” (1983), “Trade in Differentiated Products and the Political Economy of Trade Liberalization” (1982), “Import Protection as Export Promotion: International Competition in the Presence of Oligopoly and Economies of Scale” (1984), and "Increasing Returns and the Theory of International Trade" (1988) are certainly enough of a grand slam to justify a Nobel Prize for Paul Krugman.

Nobody disputes that.

Which is why Warsh turns to disputing the value of the literature:

Most significantly, in giving the prize to Krugman in 2008, the Swedish Academy vaulted the work on international trade over developments in several others fields that, in any coherent account, was done earlier: in the economics of organizations, the organization of industries, measurement economics, public finance, auction theory, market design, environmental economics and the significance of entrepreneurs to economic growth, to mention only some of the areas that have seen significant gains in recent decades...

To which one can only say: "Huh? Did Paul Krugman run over David Warsh's dog?"

But wait! There's more! David Warsh also writes:

Economic Principals » Blog Archive » Get a Grip on It: The Nobel Prize is among the world’s most successful brands. Since 1901, the program has enabled Scandinavians to have a resonant voice in world affairs despite their relative isolation in northern latitudes. They’ve done it by taking great pains to be convincing. The science prizes created a master narrative for one of the great stories of the age. The prizes for literature and peace, while more controversial, carry considerable cultural and moral weight. The problem with giving this year’s Nobel Peace Prize to President Barack Obama is obvious, at least when viewed from the perspective of American politics. So far he’s done little more than get elected...

David seems not to understand that, from the Scandinavian point of view, that is not a problem at all. By getting elected to replace George W. Bush Barack Hussein Obama has, Scandinavians think, done more to advance the cause of world peace than anybody else.

I find it sobering that the Scandinavians think that. I find it even more sobering to think that they have reasons to think that.

The award of the Peace Prize to Barack Hussein Obama is a message from the Scandinavians to all of us Americans--including David Warsh. I think he would be well-advised to listen, rather than covering his ears with his hands and saying: "na-na-na-I-can't-hear-you!"

Ezra Klein on Health Care: The Insurance Industry's Deceptive Report

Ezra Klein:

Ezra Klein: The Insurance Industry's Deceptive Report: In the hallowed tradition of the tobacco and energy industries, the health insurance industry has commissioned a report (pdf) projecting doom and despair for those who seek to reform its business practices. The report was farmed out to the consultancy PricewaterhouseCoopers, which has something of a history with this sort of thing: In the early-'90s, the tobacco industry commissioned PWC to estimate the economic devastation that would result from a tax on tobacco. The report was later analyzed by the Arthur Andersen Economic Consulting group, which concluded that "the cumulative effect of PW’s methods... is to produce patently unreliable results." It's perhaps no surprise that the patently unreliable results were all in the tobacco industry's favor. He who pays the piper names the tune, and all that.

All that makes it a bit hard to respond to this analysis. Seriously engaging with its methodology probably gives it more credit than it deserves, making this seem like an argument between two opposing sides as opposed to a predictable industry hit job. But totally ignoring its claims means some of them might live unchallenged. So rather than a full tour through the "analysis," here are a couple of its more representative moments. A footnote -- how come the good stuff is always in the footnotes? -- on page E-2 of the report sort of gives away the game. It reads: "Impact assumes payment of tax on high- value plans, full cost-shifting of cuts to public programs, and full passthrough of new industry taxes." That's written to obscure, but what it means is that the report assumes no behavioral changes in response to new policies.... Economists think that the tax on high-cost health-care plans will lead employers and consumers to demand cheaper plans that do more to control costs. In fact, PWC expects that, too. They just don't build it into their estimate. On Page 6, they say, "Although we expect employers to respond to the tax by restructuring their benefits to avoid it, we demonstrate the impact assuming it is employed." That's a bit like saying although I expect to eat doughnuts this morning, I will instruct my scale to act as if I had abstained.

Or take the assumption of "full cost-shifting of cuts to public programs." What that means, essentially, is that health-care spending is considered a constant, and every dollar that a public program cuts from its payments to hospitals is a dollar the private health-care industry has to add to its reimbursements to hospitals. Have you ever heard of that before, in any industry? If Blockbuster decides to cut costs to consumers by negotiating lower payments to movie studios, does Netflix send out a sorrowful e-mail explaining that it will have to increase its membership fee because it now needs to make higher payments to movie studios?...

[T]he PWC's report doesn't offer much in the way of trustworthy policy analysis, it is an interesting looking at the changing politics of the issue. In short, the insurance industry is getting scared...

Washington Post Crashed-and-Burned-and-Smoking Watch

You know, Ceci Connolly of the Washington Post could actually try to do her job if she wanted to.

Today Ceci Connolly of the Washington Post carries a lot of water for the lobbyists. What she writes:

Insurance Group Says Health Bill Will Mean Higher Premiums: After months of collaboration on President Obama's attempt to overhaul the nation's health-care system, the insurance industry plans to strike out against the effort on Monday with a report warning that the typical family premium in 2019 could cost $4,000 more than projected.

The critique, coming one day before a critical Senate committee vote on the legislation, sparked a sharp response from the Obama administration. It also signaled an end to the fragile detente between two central players in this year's health-care reform drama.

Industry officials said they intend to circulate the report prepared by PricewaterhouseCoopers on Capitol Hill and promote it in new advertisements. That could complicate Democratic hopes for action on the legislation this week.

Administration officials, who spent much of the spring and summer wooing the insurers, questioned the timing and authorship of the report, which was paid for by America's Health Insurance Plans (AHIP), an industry trade group...

A correspondent emails me what Ceci Connolly does not write:

In the early 1990s, Price Waterhouse did similar handiwork on behalf of Big Tobacco, serving up allegedly hard data to bolster arguments that a new excise tax on tobacco (a proposed mechanism to fund Clintoncare) would destroy hundreds of thousands of good American jobs. Dire predictions. But a subsequent review of Price Waterhouse’s methods by an independent team at Arthur Andersen revealed that Price Waterhouse’s “grossly exaggerated” and “one-sided analyses” were so “flawed” as to produce “patently unreliable results.”

http://legacy.library.ucsf.edu/tid/qat76d00

Some quotes: “The PW Report relied on methods and assumptions that create false and misleading results.” “There are serious methodological problems and errors of omission (one-sided analyses likely to lead to misinterpretation) in... the PW Report.” “The PW Report... attributes 161,601 mining and construction jobs to the tobacco industry. This is approximately equal to the entire employment of the coal mining industry.” “These and other serious flaws in the Price Waterhouse Report and the Tobacco Institute Estimates build upon one-another in a cumulative fashion to present grossly exaggerated and misleading estimates.” “The cumulative effect of PW’s methods... is to produce patently unreliable results."

Jon Gruber of MIT's first reaction to AHIP/PWC is: "highly implausible."

Why oh why can't we have a better press corps? Shut the Washington Post down by 2012

A Weaker Dollar Is in America's--and the World's--Long Run Interest

Helps reduce those global imbalances, y'know. Jus' sayin:

UPDATE:China Yuan Ends Up; FX Interventions In Asia Cap Gains: China's yuan ended slightly higher against the dollar Friday, the first day of trading after the National Day holiday, taking its cue from the U.S. unit's broad weakness on global markets in the past week. However, dollar purchases by Asian central banks as they sought to limit strength in their own currencies curbed the yuan's gains....

During China's holiday, the dollar fell sharply against other currencies due to an expected interest rate hike by Australia's central bank, rising gold prices and better-than-expected economic data globally.... The dollar recovered some of its recent losses against other currencies in Asia on Friday after Federal Reserve Chairman Ben Bernanke reiterated the U.S. will need to raise interest rates once the recovery takes hold.... "China's central bank continued to rein in the yuan's rise against the dollar through the central parity rate, so traders didn't sell the dollar aggressively during the session," said a Shanghai-based trader at a foreign bank. The People's Bank of China set the dollar-yuan central parity rate at 6.8270 Friday, down from 6.8290 on Sept. 30. "The dollar's decline against the yuan was also capped by Asian central banks' foreign-exchange intervention to prop up the U.S. unit," said another Shanghai-based trader at a European bank....

Offshore, one-year dollar-yuan nondeliverable forwards were at 6.6791/6.6831, down from 6.6970/6.7020 on Sept. 30.

Rose Yu contributed to this article

Dave Weigel FTW for All Time!

Twitter:

Twitter / daveweigel: BREAKING: Obama named God Emperor of Dune. Sandworm transformation in rose garden 8:30 am tomorrow...

Our Health Care Problems

Buce writes:

Underbelly: Feldstein on Health Care: Martin Feldstein offers the best possible two-paragraph summary of the health care problem:

The American health-care system suffers from three serious problems: Health-care costs are rising much faster than our incomes. More than 15 percent of the population has neither private nor public insurance. And the high cost of health are can lead to personal bankruptcy, even for families that do have health insurance.

These faults persist despite annual federal government spending of more than $700 billion for Medicare and Medicaid as well as a federal tax subsidy of more than $220 billion for the purchase of employer-provided private health insurance.

Feldstein writes:

Martin Feldstein - A Better Way to Health Reform - washingtonpost.com: Let's scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.

Specifically, the government would give each individual or family a voucher that would permit taxpayers to buy a policy from a private insurer that would pay all allowable health costs in excess of 15 percent of the family's income. A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family's health bills in excess of $7,500 a year.

The family could give this $3,500 voucher to any insurance company or health maintenance organization, including the provider of the individual's current employer-based insurance plan. Some families would choose the simple option of paying out of pocket for the care up to that 15 percent threshold. Others would want to reduce the maximum potential out-of-pocket cost to less than 15 percent of income and would pay a premium to the insurance company to expand their coverage. Some families might want to use the voucher to pay for membership in a health maintenance organization. Each option would provide a discipline on demand that would help to limit the rise in health-care costs...

There are two problems with Marty's plan. First--this "15% of family income" business: the voucher buys a policy which is a lot more costly to the insurance company if you are poor than if you are rich, and that creates yet another adverse selection weak point in the system.

Second, people are really lousy consumers of medical services when they have to spend their own nickel. Why, just this morning Anthem Blue Cross waived the copays on all flu shots. That's not something you would want to do if people were anything more than jumped-up monkeys with brains designed to figure out whether the fruit is ripe..

A Word from Our President...

Barack Hussein Obama:

Good morning. Well, this is not how I expected to wake up this morning. After I received the news, Malia walked in and said, "Daddy, you won the Nobel Peace Prize, and it is Bo's birthday!" And then Sasha added, "Plus, we have a three-day weekend coming up." So it's good to have kids to keep things in perspective.

I am both surprised and deeply humbled by the decision of the Nobel Committee. Let me be clear: I do not view it as a recognition of my own accomplishments, but rather as an affirmation of American leadership on behalf of aspirations held by people in all nations.

To be honest, I do not feel that I deserve to be in the company of so many of the transformative figures who've been honored by this prize -- men and women who've inspired me and inspired the entire world through their courageous pursuit of peace.

But I also know that this prize reflects the kind of world that those men and women, and all Americans, want to build -- a world that gives life to the promise of our founding documents. And I know that throughout history, the Nobel Peace Prize has not just been used to honor specific achievement; it's also been used as a means to give momentum to a set of causes. And that is why I will accept this award as a call to action -- a call for all nations to confront the common challenges of the 21st century.

These challenges can't be met by any one leader or any one nation. And that's why my administration has worked to establish a new era of engagement in which all nations must take responsibility for the world we seek. We cannot tolerate a world in which nuclear weapons spread to more nations and in which the terror of a nuclear holocaust endangers more people. And that's why we've begun to take concrete steps to pursue a world without nuclear weapons, because all nations have the right to pursue peaceful nuclear power, but all nations have the responsibility to demonstrate their peaceful intentions.

• We cannot accept the growing threat posed by climate change, which could forever damage the world that we pass on to our children -- sowing conflict and famine; destroying coastlines and emptying cities. And that's why all nations must now accept their share of responsibility for transforming the way that we use energy.

• We can't allow the differences between peoples to define the way that we see one another, and that's why we must pursue a new beginning among people of different faiths and races and religions; one based upon mutual interest and mutual respect.

• And we must all do our part to resolve those conflicts that have caused so much pain and hardship over so many years, and that effort must include an unwavering commitment that finally realizes that the rights of all Israelis and Palestinians to live in peace and security in nations of their own.

• We can't accept a world in which more people are denied opportunity and dignity that all people yearn for -- the ability to get an education and make a decent living; the security that you won't have to live in fear of disease or violence without hope for the future.

And even as we strive to seek a world in which conflicts are resolved peacefully and prosperity is widely shared, we have to confront the world as we know it today. I am the Commander-in-Chief of a country that's responsible for ending a war and working in another theater to confront a ruthless adversary that directly threatens the American people and our allies. I'm also aware that we are dealing with the impact of a global economic crisis that has left millions of Americans looking for work. These are concerns that I confront every day on behalf of the American people.

Some of the work confronting us will not be completed during my presidency. Some, like the elimination of nuclear weapons, may not be completed in my lifetime. But I know these challenges can be met so long as it's recognized that they will not be met by one person or one nation alone. This award is not simply about the efforts of my administration -- it's about the courageous efforts of people around the world.

And that's why this award must be shared with everyone who strives for justice and dignity -- for the young woman who marches silently in the streets on behalf of her right to be heard even in the face of beatings and bullets; for the leader imprisoned in her own home because she refuses to abandon her commitment to democracy; for the soldier who sacrificed through tour after tour of duty on behalf of someone half a world away; and for all those men and women across the world who sacrifice their safety and their freedom and sometime their lives for the cause of peace.

That has always been the cause of America. That's why the world has always looked to America. And that's why I believe America will continue to lead.

Thank you very much.

Macro Advisers Forecast: Second Half Real GDP Growth at 3.4%

3.1% for the third quarter, 3.6% for the fourth quarter.

That is all.

The State of Economics in the 2000s Analogized...

chunkyreesewitherspoonlookalike@gmail.com emails:

I've been watching the freshwater/saltwater economics wars with a kind of horrified fascination -- something like the way I feel on those rare occasions when I watch train wreck TV (Hoarders and the like.) One of the things I keep wondering is: how on earth did this happen? How did large chunk of the economics profession come so completely unmoored that Larry Summers could say "There are idiots", and have that be a useful response to anything? How did it come about that Richard Posner could write this:

The dominant conception of economics today, and one that has guided my own academic work in the economics of law, is that economics is the study of rational choice. People are assumed to make rational decisions across the entire range of human choice, including but not limited to market transactions, by employing a form (usually truncated and informal) of cost-benefit analysis. The older view was that economics is the study of the economy, employing whatever assumptions seem realistic and whatever analytical methods come to hand.

as though economics could just stop being "the study of the economy" using whatever methods seem useful and appropriate?

Plainly there has to be an intellectual explanation for this, which people like Paul Krugman have addressed. But I think there also has to be an explanation in terms of the sociology of academic disciplines. And in that light, it seems to me that if I were a journalist, I'd consider writing a piece comparing freshwater economics to the other major recent case in which an academic discipline went completely off the rails, namely English departments' swing into postmodernism in the '80s and early '90s. Offhand, there seem to be some real similarities, e.g.:

1. In both cases, the people involved maintained, credibly, that you couldn't really assess the work in question without putting a lot of effort into understanding it.
2. In both cases, that required mastering difficult stuff. (In econ, all the math and models; in pomo lit stuff, mastering the literally incomprehensible language in which a lot of that stuff was written.)
3. In both cases, that deterred a lot of people on the outside who were generally puzzled and skeptical, but didn't want to spend years getting into a position in which they could credibly say: yes, this is, in fact, nuts.
4. So in both cases practitioners were largely insulated from criticism they had to take seriously.

Relatedly, in both cases it took shocks from the outside to expose the problems in this (in the case of English, things like the Sokal hoax; in the case of econ, the near-collapse of the global economy.)

Both cases involved a lot of arrogance, and a generally dismissive attitude towards other approaches. Since, in both cases, practitioners were able to seize significant amounts of control over a discipline before their approach crashed and burned, this did real damage to the disciplines in question (leading to, e.g., large chunks of previous disciplinary history being forgotten.)

Both cases involved significant political motivation.

Of course, it's possible that I only think this would be fun to write, and/or read, because it would tweak the Chicago economists to be compared to pomo English professors. ;)

Former Republican Majority Leader Bob Dole Speaks on Health Care Reform

Sam Stein:

Bob Dole: Health Care Will Pass, GOP Should Get On Board: Former Senate Majority Leader Bob Dole (R-Kans.) told a group of local Kansas reporters on Wednesday, that opposition to the president's health care package had been driven by knee-jerk partisanship and urged Congressional Republicans to get on board a version of reform.

The 1996 Republican presidential candidate also predicted, following a speech at a health care reform summit in Kansas, that "there will be a signing ceremony" for a reform bill sometime this year or early in 2010.

But the comments that seem likely to create the most ripples were those that dealt with congressional opposition to the White House. Dole, according to reports, framed the pushback to Barack Obama's reform agenda as almost perfunctory in nature.

"Sometimes people fight you just to fight you," he said, according to The Kansas City Star. "They don't want Reagan to get it, they don't want Obama to get it, so we've got to kill it...

"Health care is one of those things," he added. "Now we've got to do something"...

What's with this "we"? He could have done something--fifteen years ago--all by himself...

What a sorry hollow shell of a human being...

Risk Adjustment Mechanisms in Market-Based Health Reform

Andrew Samwick writes:

Risk Adjustment Mechanisms, Again | Capital Gains and Games: I read this article by Reed Abelson in The New York Times, and I give him one thumb up and one thumb down.  He is correct that the media as a whole, reflecting the larger health care reform debate, has ignored the essential question that he poses in the title of the article, "Health Insurance Exchanges: Will They Work?"  But the article ignores the key dimension along which we need them to work -- establishing a risk-adjustment mechanism for all health plans in a given geographical area so that insurers are protected from adverse selection.

This is not some obscure detail -- the risk-adjustment mechanism is the key to getting a private market to function properly.  In the current system, a potential competitor to existing insurance companies faces the risk that the small piece of the population it can compete away from established insurers will have characteristics that make them more expensive to cover.  This is the classic problem of adverse selection.  Given this risk, we have less competition among health insurers.  Without competition, existing insurers get large market shares (which helps them to some extent on the adverse selection problem).  Because they are big, they have more market power than we would like.  They also don't look to serve smaller groups or individuals to the extent we would like. 

Mandatory participation in the risk-adjustment mechanism should be required for any health insurance plan.  If the Health Insurance Exchange is the means by which that happens, then I'm all for it.

I agree with Andrew that private market-based health insurance systems cannot function well without effective risk-adjustment mechanisms.

The thing that frightens me is that I am not sure how I would go about designing a system with an effective risk-adjustment mechanism. The private market might meltdown under the pressure of guaranteed issue and community rating even with mandated purchase. Which is one reason to want a public plan there to backstop it if it does.

Jeebus! Health care-reform scares me...

Rolling Sisyphus's Boulder Uphill a Little...

Atrios watches:

Eschaton: If only they'd listened to the DFHs to begin with. At least the Obama people are now musing out loud about further don't-call-it-a-stimulus stimulus measures.

It would be very nice to pass something through the congress this month...

Ryan Lizza, Dean Baker, and the "Worst Fears" of Advocates of More Expansionary Fiscal Policy

Dean Baker complains about Ryan Lizza:

New Yorker Rewrites Economic History/a>: We get no mention of the stock bubble when the piece extols the wonders of the economy in the Clinton years. Nor do we get any mention of the over-valued dollar, a direct outcome of the Rubin-Summers management of the East Asian financial crisis. The collapse of the stock bubble in 2000-2002, coupled with the over-valuation of the dollar, created the serious downturn from which the housing bubble arose. Summers role in ignoring financial bubbles and touting financial deregulation gives him a good share of the credit for the current crisis.

Finally, we are told in conclusion that: "So far, none of the worst fears of those who believed that the stimulus was too small or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized." Sorry, but this is wrong, big time. The worst fears of some of us who said that the stimulus was too small were that we would be sitting around with 10 percent unemployment for a long period of time and that stimulus would be discredited. That pretty well describes the world we live in, even that may not be the case in New Yorker land...

Now, now, Dean. Expansionary. is not discredited--in large part because we have been loudly yelling for nine months now that it looked too small to do the job properly.

And Ryan Lizza is careful: he does not say "none of the fears of those who believed that the stimulus was too small have materialized"; he says "none of the worst fears of those who believed that the stimulus was too small... have materialized." Our worst fears were that right now the unemployment rate would be screaming upwards toward fifteen percent. And it hasn't even breached twelve yet.

Some Non-Crazy Non-America Hating Republicans...

Back in 1993, as we all know, Newt Gingrich convinced the Republican Party that hating America--trying above all to keep Democratic administration proposals to make America a better place from passing--was the road to political power.

Republican legislators are still followign his example.

Steve Benen and Karen Tumulty note the exitence of other Republicans:

The Washington Monthly: REPUBLICANS FOR REFORM.... It's an extremely small group, but Time's Karen Tumulty notes the GOP contingent that likes what Democrats are up to on health care reform.

Okay, maybe it's not enough to call a groundswell. But after former Majority Leader Bill Frist told me last Friday that he would end up voting for the bill were he still in Congress (with some caveats about the shortcomings of the legislative language as it now stands), we've heard from some other GOP voices in support of the basic contours of Barack Obama's health care reform effort: Bush Administration HHS Secretary Tommy Thompson, New York City Mayor Michael Bloomberg (who ran as a Republican, but who is now an independent)* and Mark McClellan, who ran both the Food and Drug Administration and the Medicare and Medicaid programs under George W. Bush....

It's probably worth noting that former Republican Senate Majority Leaders Howard Baker and Bob Dole have also "endorsed the sorts of reforms President Obama and his allies are pushing."... It reminds me a bit of the presidential campaign when a wide variety of Republicans -- including Ronald Reagan's national security advisor, solicitor general, and White House chief of staff -- endorsed Obama. It undermined GOP arguments that the Democrat was some kind of dangerous radical -- if he were a liberal extremist, why were so many prominent Republicans supporting him? The same is true here. If health care reform is such a radical idea, why are relatively high profile non-Democrats endorsing the effort?

Update: As I was hitting "publish," an email arrived in my inbox: "Schwarzenegger Endorses Obama Health Care Effort." The list, in other words, is growing.

Senate Finance Committee and Health Care Reform

Ezra Klein:

Ezra Klein: Handicapping the Finance Committee Vote: The Finance Committee will vote on health-care.... Jon Cohn runs down the five senators his sources tell him could swing: Bill Nelson, Blanche Lincoln, Jay Rockefeller, Ron Wyden and Olympia Snowe. Ceci Connolly, in a nice overview piece, notes that Rockefeller and Wyden have been very public in refusing to pledge support for the bill.

From what I hear, there are no real swing votes. There are senators who, for tactical or political reasons, might vote against the bill. But the people I talk to don't believe there is a single Democrat on the committee who would actually imperil the legislation's chances. Anyone whose vote is needed will vote for the bill.

But if the bill is going to pass comfortably, you might see Snowe withhold her vote to strengthen her negotiating position on the floor of the Senate, or Lincoln hold back because she's worried about her political standing in Arkansas, or Wyden hold back because he's genuinely unimpressed with the legislation and infuriated at how he's been treated.

But the bill will pass, and easily. That means health-care reform will have passed all five relevant committees, and is moving toward the floor of the House and the Senate, and after that, the president's desk.

The Political Economy of the Obama Administration

Paul Krugman:

The story of the stimulus: Christy Romer’s math looked similar to mine: even given what we knew last December, the straight economics said that we should have a stimulus much bigger than the Obama administration’s initial proposal. And given what happened to that proposal in the Senate — we actually ended up with only about $600 billion of actual stimulus — what we eventually got was half of what seemed appropriate in December. And the actual news on the economy since then has been worse than was expected back then, so that the stimulus now looks way short of what we need.

Maybe that was all that could have been done, politically. But it does not sound, from the Lizza article, as if either the economic team or the political team thought much about the risks of finding themselves where we are now — with the economy still failing to deliver job growth despite the stimulus — even though those risks were completely apparent at the time.

One missing part of the story is why Senators Nelson and Collins and Snowe and Voinovich and Lincoln and company could not have been educated then--and why they cannot be educated now to vote for good policies.

A second missing part of the story is why the TARP money has not had a greater effect on production and employment. It has had a substantial effect on interest rate spreads, bank balance sheets, and even asset prices--but the recovery of private-sector investment spending which is the desired payoff has not come.

---

UPDATE: Matthew Yglesias asks an important, related question:

Matthew Yglesias: Accepting the Loss: The more we learn about how we wound up with a too-small stimulus, the more I wonder about the slightly odd aversion of American presidents to accepting legislative defeats. After all, in our system of government it’s just a fact: you can only enact the legislation that congress is prepared to enact. Given that we don’t expect presidents to have views that are identical to those of the median legislator, and especially given the rise of the de facto supermajority rule in the Senate, it should be expected that the policy preferences of the White House will substantially diverge from those of the pivotal members of congress.

So would it be so terrible for the President to just say, “I’m glad congress passed this bill and I’m signing it because I think it would help the economy, but the considered judgment of the Council on Economic Advisers and the rest of the staff is that we could use hundreds of billions of dollars of stimulus over and above what Ben Nelson and Susan Collins were prepared to vote for”?

Why is it felt necessary for the president to pretend to believe that what congress will pass is the same as what the country needs? It seems to me to create a weird confusion about who’s responsible for what. We’ve got Paul Krugman blogging about “Obama’s Anzio” instead of “Kent Conrad’s Anzio” or whatever. It’s just not the case that the White House gets to make domestic policy unilaterally.

There appear to be two reasons:

1. The White House fears that Kent Conrad will be mad if it says "the bill is not ideal because of Senator Conrad" and will be less likely to play ball in the future. The White House believes that it has to say that "Senator Conrad's amendments improved the bill" and pretend that they did so.

2. The White House fears that the press will jump on a president whom it decides "cannot dominate congress" and paint him as weak--and that that will make him even weaker than he already is.

Why these two reasons apply I leave to our national psychoanalysts...

The $600B Stimulus Program: How We Got Here

How we wound up with a cumulative $600 billion over three years in expansionary fiscal policy.

Ryan Lizza:

Larry Summers and the White House economic team:December 16, 2008... Obama’s top advisers gathered.... Obama... Biden; Summers; Rahm Emanuel, the chief of staff; David Axelrod, Obama’s senior adviser; Timothy Geithner, the Treasury Secretary; Christina Romer, the chair of the Council of Economic Advisers; Peter Orszag, the budget director; Jared Bernstein, Biden’s top economic adviser; and several more. Others, like Lee Sachs, a former Bear Stearns executive and Clinton Treasury official, who was an expert on the financial crisis and who later joined Geithner at Treasury, were brought in via teleconference. Summers led the meeting like an orchestra conductor....

[N]obody’s task was more important than Romer’s. She had drafted a crucial section of the memo which included an economic forecast and projections about the impact of a fiscal stimulus.... Romer was entering government for the first time. “I’m the quintessential outsider here,” she told me. But she was a “giant supporter of the President, probably since 2004.” She said, “On a bad day, my husband would find me at home clicking on the Democratic Convention speech, saying, ‘I want this man to be President.’ ” At the December meeting, it was Romer’s job to explain just how bad the economy was likely to get. “David Axelrod said we have to have a ‘holy-shit moment,’” she began. “Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.” She gave a short tutorial about what happens to an economy during a depression.... The purpose of a stimulus is to fill the hole left during a recession by the difference between the economy’s potential and what it’s actually producing—what economists call the “output gap.” She explained the impact of different types of stimulus, giving a lesson on “fiscal multipliers”--the term economists use to describe the economic impact of every dollar of stimulus.... Axelrod told me, “The basic message was that, if we didn’t act quickly to replace the output we were losing, unemployment could skyrocket.” Romer mentioned that employers had dropped more than half a million workers from the payrolls in November, the biggest cut in more than three decades. “The conditions are grim, and deteriorating rapidly,” she told the President.

The most important question facing Obama that day was how large the stimulus should be.... A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010.... Romer’s analysis... suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

There were sound arguments why the $1.2-trillion figure was too high.... Emanuel and the legislative-affairs team thought that it would be impossible to move.... Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.... If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”... Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend.... Summers... believed... that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit... have an unwelcome effect on the [long term] bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option....

Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars...

Well, the final legislation was for $600B in stimulus over three years--2009, 2919, and 2011--over which we thought in December the counterfactual no-stimulus output gap would be $2.5T and now think it likely to be above $4T...

Emanuel's argument that congress would choke and puke on a larger package was a real worry, Orszag's argument that the government cannot effectively boost spending too far too fast was a real worry, and Summers's argument that too large a deficit will crack the dollar's status as safe asset in the global economy and produce a spike in long-term interest rates that will partially neutralize the stimulus was a real worry--it is, after all, what happened to Austria in 1931 when the government ran deficits to support the Credit-Anstalt. But from today's perspective it looks as though the points made by Summers and Orszag are weaker than we all thought last December.

The point made by Emmanuel, however, still appears to be very strong: even though Obama bid $800B, all he got in February was $600B--even though the argument that the situation had deteriorated substantially further since mid-December was made and was made strongly.

Paul Krugman: Too-Small a Stimulus

Paul Krugman resurrects what he said last January:

Paul Krugman: Stimulus arithmetic (wonkish but important): January 2009 : Bit by bit we’re getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus....

[Y]ou have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point. Now, what we’re hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.

How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective. In particular, letting businesses get refunds on past taxes based on current losses, which is reportedly a key feature of the plan, looks an awful lot like a lump-sum transfer with no incentive effects.

Let’s be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.... Suppose that we’re looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats. I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

And comments today

Paul Krugman: October 2009: I went back to my first blog post — January 6, 2009 — worrying that the Obama economic plan was too cautious.... Alas, I didn’t have it wrong — except that unemployment will, if we’re lucky, peak around 10 percent, not 9. There was a lot of talk about health care being Obama’s Waterloo. It won’t, I think and hope. But stimulus is starting to look like Obama’s Anzio... [Obama has] got[ten] himself into terrible trouble by being too cautious.

Another Bad Employment Report (I-Wish-We-Had-a-Ripcord-to-Pull Department)

The adult civilian employment-to-population ratio drops below 59% to 58.8%, down from a December 2006 peak of 63.4% (and an April 2000 peak of 64.7%):

God! I really wish that I were not so smart!

Brad DeLong, March 25, 2009:

The Stimulus Package Looks a Lot Smaller Now...: We are going to need a bigger one in September, which means it has to be put into the budget resolution now...

Well, we didn't. And now when it would be very nice to have a very large state aid program ready to be dropped into the fall reconciliation bill--and when it would be very nice to have a government-paid health corps starting up now as part of health care reform--we don't.

And:

Generating a Robust Recovery: Suppose that a prudent use of fiscal policy would be to enlarge the government’s budget deficits by a third of the forecast output gap, and you have an estimate of the appropriate size of expansionary fiscal policy as the situation looked in August 2008: $450 billion in cumulative deficit spending spread out over the next four years. Then came... Fannie Mae and Freddie Mac... Lehman Brothers... AIG... the recession problem was at least twice as bad as it had looked in August, and over the next four and a half months until the February 17, 2009 signing of the ARRA the magnitude of the likely cumulative output gap doubled again.... If $450 billion was the appropriate size of a short-term deficit-spending program for the $1,350 billion cumulative output gap anticipated as of August 2008, then simple extrapolation suggests that the appropriate size of the boost to short-term deficit spending as of February 2009 was $1.8 trillion (over three to four years).

What we got was a cumulative number of $600 billion—roughly 1/3 aid to states, 1/3 tax cuts (in a good-faith effort by the Obama administration to propose a bipartisan plan that legislators of both parties could sign on to), and 1/3 infrastructure and other direct government purchases intended not so much to slow the decline as rather to boost the recovery.... At the technocratic level, the disproportion between the size of the response and the magnitude of the need is obvious.

More commentary:

What Larry Mishel said:

The... employment decline, down 263,000, is still far below the awful hemorrhaging in the winter months.... The revisions announced to last March’s employment level—payroll employment was an astounding 824,000... shows the huge hole we have been thrown into. That, of course, can't be blamed on Obama!...

[T]he drop in the labor force of 571,000 is the only reason that unemployment didn’t exceed 10.0% [last] month.... Also amazing is that the nation’s labor force—those employed or seeking work-declined by 615,000, or 0.4% over the last twelve months when normally we would expect it to rise by at least 1%...

What Dean Baker said:

The loss of 263,000 payroll jobs, coupled with a 0.1 hour decline in the average workweek, pushed the index of aggregate hours to 98.5, slightly below the 98.6 level in December of 1998. Hours worked have now declined by 8.6 percent from the pre-recession peak. In the 1981-81 recession the decline from peak to trough was 5.8 percent. The loss of jobs also pushed the unemployment rate to 9.8 percent....

The government sector lost 53,000 jobs in September... at the state and local level... 47,000... lost jobs.... The construction sector continued its rapid pace of job loss, shedding 64,000 jobs in September.... Manufacturing lost another 51,000 jobs.... Wage growth continues to weaken with wages rising at just a 1.7 percent nominal rate over the last quarter, almost certainly less than the rate of inflation.

The Bureau of Labor Statistics (BLS) reported its preliminary benchmark revisions to the establishment survey data... employment in March of 2009 was 824,000 lower than originally reported with private sector employment 855,000 lower. This extraordinarily large downward revision is not surprising... the imputation for new firms not included in the survey was consistently larger than the imputation from the prior year when the economy was still growing.... [T]he economy has lost 8,029,000 [payroll] jobs in the downturn....

[A] turnaround in the labor market is not imminent. Continuing losses of jobs and declines in hours, coupled with stagnant or declining real wages, means that workers’ purchasing power is still falling. There are no further tax breaks scheduled to boost demand and state and local governments are cutting back and raising taxes to address budget shortfalls. The future is not good.

Kristin Winkler Krapja:

New orders for manufactured goods declined 0.8% in August...

Alan Rappeport:

US unemployment rate hits 9.8%: The US unemployment rate climbed to a fresh 26-year high of 9.8 per cent in September, as the pain of recession continues to linger on the shoulders of American workers in spite of aggressive measures to stimulate the economy. Official figures on Friday showed that non-farm payrolls dropped by 263,000, making it the 21st consecutive month that the US economy has shed jobs. The data were worse than even the most grim expectations, as economists predicted a 175,000 drop in payrolls, and followed a decline of a revised 201,000 jobs in August when the unemployment rate was 9.7 per cent. “It is clear that the labour market is still very weak,” said Paul Dales, US economist at Capital Economics. “The last time one in ten members of the labour force were out of work was in 1983.”...

The US unemployment rate has more than doubled in the past two years and the number of people without jobs has risen by 7.6m to 15.1m since the recession began in December 2007.... In September, hourly earnings ticked up by a penny to $18.67, but the average work week, a closely watched measure that signals future hiring, slid back to 33 hours. This remains close to a record low and economists suggest that an expansion in working hours will have to come before new hiring begins. “Hourly earnings are soft, reinforcing a view that the short term problem is disinflation not inflation, and does not support a consumer spending rebound,” said Alan Ruskin, a strategist at RBS Greenwich Capital.

The labour department figures come as analysts project that the US economy grew at an adjusted annual rate of 3 per cent in the just completed third quarter. Fears abound, however, over a “jobless recovery”, where companies that have become acclimated to operating with fewer workers are slow to begin rehiring and where employment lags the rest of the economy. Ben Bernanke, chairman of the Federal Reserve, said on Thursday that even if the economy expands at a rate of 3 per cent, that will not be enough to chip away at the unemployment rate, which is expected to rise above 10 per cent before falling back next year. Mr Bernanke has pointed to rising levels of long-term unemployment – of six months or more – as another looming risk to the labour force, as workers begin to see their skills erode. In September, 5.4m Americans had been unemployed for more than six months, representing 35.6 per cent of those who were unemployed....

Other indicators have added to the argument that unemployment will remain stubbornly high. New jobless claims have been mounting at a clip of around 500,000 a week, the rebound in manufacturing activity appears to be sputtering and the latest Conference Board survey found that more people feel like jobs are hard to get...

The U-6 underemployment rate--"total unemployed, plus all marginally-attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally-attached workers--is 17.0%.

Generating a Robust Recovery

Economic Policy Institute: Generating a Robust Recovery

September 30, 2009: 2:00 PM - 4:30 PM

Officially, the Great Recession may be coming to an end, but it will leave in its wake historically high unemployment and a host of other serious economic problems. How will policy-makers promote a robust, employment-led recovery that will lay the foundation for strong, long-term growth?  Meeting this challenge requires both the will to continue investing in families hard hit by the recession despite growing budget deficits and the skill in crafting the right mix of policies to ensure that this recovery - unlike the last one - will bring significant numbers of new jobs and rising living standards along with it.

  Please join the Economic Policy Institute for a discussion of these issues with noted experts in this exciting forum.

Registration begins at 1:30 p.m. Coffee and snacks will be provided.

Location: Economic Policy Institute, 1333 H Street NW, Suite 300 East Tower, Washington DC (Near McPherson Square Metro (Orange/Blue lines) and Metro Center (Red line))

Keynote speakers:

• Rep. Rosa DeLauro, Congresswoman, 3rd District of Connecticut
• Geoffrey Garin, President, Hart Reasearch Associates

Panelists:

• J. Bradford DeLong, Professor, UC Berkeley; Research Associate, National Bureau of Economic Research
• John Irons, Research and Policy Director, Economic Policy Institute
• Paul Krugman, Columnist, New York Times; Professor, Princeton University and Nobel Laureate

Moderator:

• Steven Pearlstein, Business Columnist, The Washington Post

Register for this event: This event is at capacity and will not accept additional guests.

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Macroeconomic Policy for a Stronger Recovery

J. Bradford DeLong
Professor of Economics, U.C. Berkeley
Research Associate, NBER

September 30, 2009

A Little Background

About a year and a half ago—in the days after the forced merger of Bear Stearns into J.P. MorganChase, say—there was a near consensus of economists that an additional dose of expansionary fiscal policy was unlikely to be necessary. The Congress had passed a first round of tax cut-based stimulus, the impact of which in the summer of 2008 is clearly visible in disposable personal income and perhaps visible in the tracks of estimated monthly real GDP. The near-consensus belief back then, however, was that that was the only expansionary discretionary fiscal policy move that was appropriate.

With the Bear Stearns forced merger it appeared that the Federal Reserve and the Treasury had settled on a policy: they would punish as severely as they could the shareholders of and the managers at institutions too-big-to-fail that required rescue, but that they would insulate bondholders and counterparties. The incentives to avoid bankruptcy would thus be concentrated on those who actually had power to do something to manage organizational risk. As for the rest—well, the markets interpreted the forced merger as the Federal Reserve guaranteeing and making riskless essentially all the unsecured debt of all the large commercial and investment banks in the country.

Figure 1: (Nominal) Disposable Personal Income

Figure 2: Monthly Real GDP Estimates from Macroeconomic Advisors

The resulting “approaching liquidity tsunami,” as more than one senior policymaker described it to me, meant that the risk of a deep recession was very low—or so the situation looked in the spring of 2008.

Late 2008’s Need for Expansionary Fiscal Policy

By the late summer of 2008 things looked significantly different. The tax-based expansionary fiscal policy of early 2008 had had less than the desired effect—perhaps it had prevented a decline in the economy and kept things marching in place, but it effect was not overwhelming and not entirely obvious. It was clear that the formal announcement that the economy had fallen into recession was only a matter of time.

By August 2008 Lawrence Summers was writing of a gap between actual and sustainable production of $300 billion at an annual rate, forecasting that that gap was likely to more than double over the following year, and predicting sustained weakness thereafter—“unemployment peaked nearly two years after the end of the last recession, output and employment are likely to remain below their potential levels for several years in the best of circumstances…” in a time when “the remaining scope for monetary policy to stimulate the US economy is surely very limited…”[1] Take an initial output gap growing from $300 to $600 billion over the first year and then declining to zero over the next three and you have a cumulative output gap of $1,350 billion in a situation in which monetary policy on it own can do little to correct it. Suppose that a prudent use of fiscal policy would be to enlarge the government’s budget deficits by a third of the forecast output gap, and you have an estimate of the appropriate size of expansionary fiscal policy as the situation looked in August 2008: $450 billion in cumulative deficit spending spread out over the next four years.

Then came the nationalization of Fannie Mae and Freddie Mac on September 7, 2008; the bankruptcy of Lehman Brothers on September 15, 2008; and the nationalization of AIG on September 22, 2008. In the aftermath it was immediately clear that the recession problem was at least twice as bad as it had looked in August, and over the next four and a half months until the February 17, 2009 signing of the ARRA the magnitude of the likely cumulative output gap doubled again as the magnitude of the financial crisis’s impact on the real economy became clear.

If $450 billion was the appropriate size of a short-term deficit-spending program for the $1,350 billion cumulative output gap anticipated as of August 2008, then simple extrapolation suggests that the appropriate size of the boost to short-term deficit spending as of February 2009 was $1.8 trillion (over three to four years).

What we got was a cumulative number of $600 billion—roughly 1/3 aid to states, 1/3 tax cuts (in a good-faith effort by the Obama administration to propose a bipartisan plan that legislators of both parties could sign on to), and 1/3 infrastructure and other direct government purchases intended not so much to slow the decline as rather to boost the recovery. We also got an extension of the AMT and other measures that no economist I have talked to believes are properly counted as part of an effective fiscal boost under any currently-live theory of how the economy works. Figure an increase in deficits of $200 billion per year spread out over the next three years. At the technocratic level, the disproportion between the size of the response and the magnitude of the need is obvious.

Today’s Arguments Against More Fiscal Expansion

Now if you go outside and, addressing the air, ask why it is that we did not pass a larger short-term deficit-spending fiscal boost program of $1.2 or $1.8 trillion last January and February and why we are not acting to boost it now, I hear four different answers coming back on the wind:

1. This was the most that the Obama administration could get sixty senators to vote for—and with a Senate that, in Majority Leader Harry Reid’s words, takes forty-eight hours to flush the toilet it needs to spend its time on legislative initiatives that might pass, rather than on those that certainly will not.

2. Further expansionary fiscal policy would be counterproductive in this current situation because of the long-run U.S. budgetary and global balance-of-payments imbalances. More short-run deficit spending would require the U.S. to issue more debt which would cause a sharp spike in U.S. long-term interest and a flight from the dollar that would generate a much bigger crisis and deeper depression—as Austria’s issuance of huge amounts of additional debt in 1931 set off the wave of crises that turned the recession of 1929-1931 in Europe into the European half of the Great Depression.

3. Further expansionary fiscal policy would be counterproductive because it never works—because it is theoretically impossible for it to work—because it is a “fairy tale.”

4. The ARRA is only one of a large number of initiatives to stimulate the economy outside of the normal open-market operations monetary expansion framework. When you include the likely effects of all of the acronyms—TARP, PPIP, MMIFL, TALF, CPLF, TAC, etc.—you find that even though there is only $600 billion of cumulative expansionary fiscal policy, there is much more in terms of total non-standard-monetary stabilization policy.

Argument #1 I will pass over. I understand why Rhode Island and Delaware have as many senators as New York or Florida or Texas or California: it seemed a reasonable price to pay back in 1787 to keep not just Montreal but also Providence and Wilmington from becoming British imperial fortresses and bases on the North American continent. I understand that a “cooling” chamber might wish to have an effective supermajority requirement. I don’t understand why in a good system it takes the votes of 60% of senators rather than of senators representing 60% of the people to actually get an up-or-down vote. But that is not my area.

Argument #2 is, I think, a genuine thing to fear. But if that fear were to cease being a nameless dread and instead take a shape and a name, the first sign would be an unwillingness on the part of global investors to hold U.S. Treasury debt. But right now the U.S. government can borrow for ten years at 3.34% in nominal dollars—much less than the projected growth rate of nominal GDP over the next decade at between 5% and 6% a year. The time since the summer of 2007 has seen a collapse in the value of private securities and a substantial elevation in the price of U.S. government securities. The first rule of the market is that the market’s prices are there to signal what things are more valuable and that we should make more of. Right now the market is sending us a very strong signal that it really wants us to make more U.S. Treasury debt—to undertake more short-term deficit spending. And when argument 2 ceases being a nameless dread but takes form and shape in an upward trend in interest rates on long-term U.S. Treasuries, I will be the first to say that the global bond market is cutting off our running room for more expansionary fiscal policy. Right now, however, it is not.

Argument #3—that there is some deep principle in economic theory somewhere that says something that prevents debt-financed government spending from boosting employment and output—is an argument that, by this stage, I can do nothing but laugh at. When the venture capitalists of Silicon Valley decided to give their money to high-tech engineers in the 1990s so they could spend it trying to figure out how to make money off of the internet, employment and production rose (even though few of them figured out how to do so). When the financial engineers of Countrywide in the 2000s decided to give investors’ money to construction companies to build more houses, employment and production rose (even though the promises to investors of healthy returns with little risk were wrong). Milton Friedman’s quantity-theory-of-money monetarism says that the reason open-market operations that expand the money stock boost spending and employment is because once people have more money in their pockets they step up their spending. Boosts to employment and production come when any group with substantial money in an economy decides to boost its rate of spending—and, at this level, the government’s money is as good as anybody else’s.

And when I try to read the arguments of those making Argument #3, my head explodes. The kindest thing I can say is that they must not have spent even half an hour thinking about the issues. John Cochrane of the University of Chicago writes that models in which fiscal policy affects anything are logically inconsistent because they require that people’s plans of how much to spend exceed what their incomes actually turn out to be. But Chicago models of an earlier generation like Milton Friedman’s are full of situations in which planned expenditure is greater than or less than income as people try to run down or build up their cash balances. Eugene Fama of the University of Chicago writes that any increase in government purchases must be automatically offset by an equal decrease in business investment or household consumption spending—a conclusion that had eluded every other monetary economist since the 1910s, and a conclusion which would make not just fiscal policy but monetary policy impotent.[2]

At this stage all I can do is two things. First, I can gesture at the Republican office holders and policy advisors of last year—at the Doug Holtz-Eakins, the Mark Zandis, the Phil Swagels and the others who are now saying that you should be “skeptical” of “anyone who tells you [expansionary fiscal policy] has had no impact.” Second, I can point out that had John McCain won the 2008 presidential election the Republican administration would have no more hesitation in proposing expansionary fiscal policy than they did in 2008, 2003, and 2001, and that the only reason the views on macroeconomics of Cochrane, Fama and company are now getting a hearing as Republican witnesses in congressional hearings is that Republican legislators need some form of ideological cover for their just-say-no-to-everything-whether-it-is-good-for-the-country-or-not legislative strategy.

Argument #4—that the asset purchase, asset guarantee, and bank recapitalization policies are about to have a big effect and boost the recovery—is one that I really wish were true, but I just don’t see evidence of it, at least not right now. Yes, spreads have narrowed. But asset values are still low: the S&P 500 stands about where it did early last October, after Lehman, after AIG. The banking-sector policies were supposed to boost the confidence and the risk tolerance of the private market in order to get the engine of private sector lending and borrowing and spending rolling again. Things are much better than they were at the start of March 2009, it is true. But as measured by the mark of asset prices, they are no better than they were in October 2008.

And it is by asset prices that the banking-sector support policies should be judged. The right way to look at monetary and financial policy is that it has, ever since 1825, been focused on manipulating asset prices: the central bank buys and sells and guarantees and regulates and subsidizes and nationalizes with an eye toward pushing the prices of financial assets to levels where businesses seeking to raise capital to build capacity and households seeking to spend out of wealth together can issue new assets and so access enough money to push their spending to a level that gets the economy to full employment, or at least out of depression. The policies are always sold as opaque technocratic adjustments to the “money stock” or to a “federal funds interest rate” that real people do not see and is of concern only to bankers. But the policies are and always have been truly aimed at manipulating asset prices. We may believe in a market economy. But since 1825 we have also believed that asset prices are too important to be left to the market to determine when their free market levels produced either depression unemployment or runaway inflation.

Thus the thing to focus on is that the prices of risky financial assets are very low—not as low as they were last March, when the S&P 500 kissed a level of 667, but still very low. Why are they so low? The answer is that the risk tolerance of the private market has collapsed. For example, consider what the University of Chicago’s Nobel Prize-winning economist Bob Lucas told Tom Keene of Bloomberg last March 30—that he was 100% in cash:

LUCAS: [T]here is no question that fear is what this liquidity crisis is. I mean the reason I got into money [with my portfolio] is that I got afraid to leave my pension fund in other securities. So I’m sitting there with a portfolio full of zero-yield stuff just because I’m afraid to do anything else. I think there are millions of people like me.

KEENE: What will be the signal for Robert Lucas to go back into the markets...?

LUCAS: I don’t know. Robert Rubin made a joke about that in the first session today. Nobody knows...

Now let’s pick on Lucas because he is not here to defend himself, Earlier in the interview, he had told Tom Keene:

LUCAS: Our economy’s got a remarkable ability to return to its long term growth trend. And for most of the depressions we’ve had or recessions, the return has been quick. Two or three, four years...

Lucas says that it is highly likely that the U.S. economy will be back to normal in three or four years, with a normal level of unemployment, a normal share of profits in national income—and a normal level of dividends and capital gains. This presumably means that stock prices will also be back to a normal multiple of long-run earnings, which means a year-2015 S&P of 2000 or so, compared to its current value of 1044 or its 2009 low of 667. Investing in the S&P 500 for a four-year horizon now is risky, certainly, but the expected return is high: 15% per year, if you believe Lucas’s forecast. And holding your money in cash is not all that safe either: the scenarios I can envision in which the S&P 500 is at a real value in 2015 corresponding to the value that 667 buys today are scenarios in which inflation has eaten away most of the value of cash.

So what is Lucas doing holding his portfolio in cash? Has risk suddenly increased to an extraordinary extent to force the equity share of his portfolio down from 70% to 0% in spite of the huge jump in expected six-year returns? Has his personal tolerance for risk suddenly collapsed? No. He is irrationally panicked. And, as he says, there are millions like him. Until they recover from their panic, even a perfectly constructed banking and financial system will not produce the asset prices needed for private investment spending to drive us to full employment.[3]

Thus the banking-sector support policies have not been a bust—they have surely kept things from getting much worse. But they have not done much if anything that promises to close the output gap.

What Should We Do Now?

The argument that more expansionary fiscal policies should not be tried because it is theoretically impossible for them to work fails. The argument that more expansionary fiscal policies should not be tried because the unstable nature of global imbalances and U.S. long-run fiscal deficits has us teetering on the edge of a Credit Anstalt-like currency crisis disaster fails. The argument that banking policies have been successful enough that we do not need more expansionary fiscal policy fails.

Figure 3: Troika Forecast of the Unemployment Rate as of August 2009

The Congressional Budget Office currently forecasts that the unemployment rate will average 10.2% in 2010, 9.1% in 2011, and 7.7% in 2012 before returning to its normal range with an average of 5.1% in 2013. The administration’s Troika forecast is very similar. Things will almost surely be either significantly better or significantly worse than the forecast—it is a forecast, after all—but the right thing to do is to plan as if the forecast will come true, and then adjust later.

If you are happy with that forecast and think that it is appropriate for the U.S. economy over the next four years, then no further support for the recovery appears needed at this time. If you are unhappy with that forecast, then additional federal government action is definitely advisable.

Figure 4: Past and Projected Employment-Population Ratio

What kind of action, however?

The obvious would be additional short-term deficit spending on the federal level:

(1) Triggers to extend the existing expansionary fiscal policy measures should the unemployment rate not decline rapidly: since we remember the history of the 1937-1938 episode, we are hopefully not condemned to repeat it.

(2) An expansion not in length but in flow of the current fiscal boost package: last January a number of us were saying that an $800 billion cumulative fiscal boost was OK—but that there also ought to be a trigger in the budget resolution so that if unemployment rose near 10% the fall reconciliation bill could be used to top off the program. That didn’t happen. It ought to have happened. It would be nice to make it happen—and there is a deal to be struck with more deficit spending in the short-term and tax-increase or spending-cut triggers in the long term should the deficit not return to sustainable levels after the recession passes.

(3) Less obvious would be measures to aid useful deficit spending in other levels of government. During this recession the states have, as Paul Krugman puts it, turned into fifty little (and not so little) Herbert Hoovers. The obvious policy to enable states that want to avoid counterproductive budget-cutting in this recession to do so is:

• Have the federal government support the prices of deficit-spending bonds issued by state governments that also put credible and automatic amortization plans in place.

This support could be provided either at the level of the Treasury—with the Treasury Department approving state fiscal policies as sustainable in the long term and thus qualifying for loan guarantees—or at the level of the Federal Reserve—with the Federal Reserve offering to support the prices of state deficit-spending bonds that come attached to legislated sustainable state-level fiscal policies.

(4) Also a possibility: bringing forward long-term investments that we ought to be making over the next generation. The people I talk to at Berkeley who actually know what they are talking about say that over the past decade and a half since the Senate rejected Al Gore’s BTU tax the 3 degree Fahrenheit warmer world in 2150 has probably slipped out of our grasp, and that the good possibility going forward is a 7 degree Fahrenheit warmer world in 2150. To get there the U.S. has to lead—take the first steps—and then work hard to pull the rest of the world along to an appropriate global warming policy.

The best way to get there would be a carbon tax. A somewhat worse way would be a cap-and-trade system that grandfathers in many current highly inefficient uses of open carbon cycle energy. A still worse way would be for the EPA to start regulating greenhouse gases as pollutants. We would like to use the effective carrot of the market rather than the stick of command-and-control regulation, but the Senate may keep us from doing so.

In that case—if we aren’t providing the incentives for businesses and people to make the investments in closed-carbon cycle and other green energy technologies through a carbon tax or a cap-and-trade system—then the government will need to make those investments or provide separate incentive programs to induce people to make them. How big? $5,000 per household in commercial, industrial, and residential cost-effective energy investments does not seem out of line. (We’ve done $20,000 over the past five years in our house and are getting 6% per year at current PG&E electricity prices.) And that would be $500 billion nationwide.

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[1] Lawrence Summers (2008), “The Big Freeze, Part IV: A U.S. Recovery,” Financial Times (August 6, 2008) http://tinyurl.com/dl20090927a.

[2] Note that neither Cochrane nor Fama are the right-wing fringe of the economics profession right now. The right wing fringe is composed of the supporters of Ed Prescott, Ed Prescott who used to teach at the University of Chicago before moving to Arizona State. He says that Fama’s conclusion that monetary policy does not affect output is in fact correct: in his view the Great Depression was not caused, as Milton Friedman thought, by the bank failure-induced collapse of the money stock but by Herbert Hoover’s “anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted… [which] created a great depression.” Chicago economists of an earlier generation, like Jacob Viner, had no doubt at all in the correctness of their policy advice: that the Great Depression had been caused by unbalanced monetary deflation and needed to be cured by expansionary monetary and fiscal policy.

[3] An aside. Lucas’s irrational panic—and his observation that there are millions of investors like him—makes the part of his interview with Tom Keene in which he attacks Robert Shiller and George Akerlof and their book Animal Spirits quite puzzling. Here is what Lucas says:

I just don’t get it. I mean look at the Black_Scholes formula. People come up with a formula for pricing options, just out of purely mathematical reasoning, and then it turns out it fits certain data amazingly well. And it’s been incredibly useful to people. Now it’s not useful for everything, but for what it does it’s a huge advance in human knowledge. Now what’s the behavioral finance contribution? They reinforce the idea of skepticism. Well, skepticism, it’s easy to be a skeptic. What’s harder is to tell somebody how to do something they didn’t know how to do yesterday. That’s what Black and Scholes did...

Lucas seems to miss the entire big point. Black-Scholes tells you how to do things only if the trades of the non-von Neumann-Morgenstern agents in the economy—that's him—cancel each other out. If they don't cancel each other out—if there are, as Lucas says, “millions of people like me,” then a whole bunch of banks running off of Black-Scholes and similar models create a lot of systemic risk, and then 10% unemployment. That’s the problem Akerlof and Shiller are trying to grapple with.

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Open publication - Free publishing - More macroeconomics

Cost of Expansionary Fiscal Policy?

In a liquidity trap, it is very low relative to its benefits--the deadweight loss from the extra future taxation needed to amortize the extra debt is the cost, and the benefits are large and immediate.

Paul Krugman:

The true fiscal cost of stimulus : As I get ready for the CAP and EPI events, I’ve been thinking more about the issue of crowding in. (See also Mark Thoma.) And I’m coming more and more to the conclusion that the public debate over fiscal stimulus, which views it as an agonizing tradeoff between possible benefits now and certain costs later, is wildly off base. Just to be clear, we’re talking about fiscal stimulus in a liquidity trap — that is, under conditions in which conventional monetary policy has lost traction, in which the Fed would set interest rates much lower if it could. Under more normal conditions the conventional view of stimulus is more or less right. But we’re in liquidity-trap conditions now, and will be for a long time if official projections are at all right. So what does that imply?

First of all, as I and others have pointed out, fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it. And yes, there’s some evidence to that effect beyond the procyclical behavior of investment.... Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Here’s why: first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt. But that’s not the whole story. Crowding in raises future GDP — which raises future tax revenues... [and] offsets... some of the burden of debt service....

And that, in turn, means that penny-pinching on stimulus is deeply, destructively foolish.

A Warmer Planet

At caffeine this morning: "So I take it a 2C warmer world is now out of reach? That the best we can hope for now is to stabilize the planet 5C warmer?" "No. You are alarmist. We might be able to hold the average global temperature rise to 4C..."

Sixteen years since I watched Democratic senators now long gone from the Senate kill Al Gore's BTU tax...

Paul Krugman:

Cassandras of Climate: Every once in a while I feel despair over the fate of the planet. If you’ve been following climate science, you know what I mean: the sense that we’re hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it. And here’s the thing: I’m not engaging in hyperbole. These days, dire warnings aren’t the delusional raving of cranks. They’re what come out of the most widely respected climate models, devised by the leading researchers. The prognosis for the planet has gotten much, much worse in just the last few years.

What’s driving this new pessimism? Partly it’s the fact that some predicted changes, like a decline in Arctic Sea ice, are happening much faster than expected. Partly it’s growing evidence that feedback loops amplifying the effects of man-made greenhouse gas emissions are stronger than previously realized. For example, it has long been understood that global warming will cause the tundra to thaw, releasing carbon dioxide, which will cause even more warming, but new research shows far more carbon locked in the permafrost than previously thought, which means a much bigger feedback effect. The result of all this is that climate scientists have, en masse, become Cassandras — gifted with the ability to prophesy future disasters, but cursed with the inability to get anyone to believe them....

[I]f you live in, say, Los Angeles, and liked those pictures of red skies and choking dust in Sydney, Australia, last week, no need to travel. They’ll be coming your way in the not-too-distant future. Now, at this point I have to make the obligatory disclaimer that no individual weather event can be attributed to global warming. The point, however, is that climate change will make events like that Australian dust storm much more common. In a rational world, then, the looming climate disaster would be our dominant political and policy concern. But it manifestly isn’t. Why not?...

[T]he larger reason we’re ignoring climate change is that Al Gore was right: This truth is just too inconvenient. Responding to climate change with the vigor that the threat deserves would not, contrary to legend, be devastating for the economy as a whole. But it would shuffle the economic deck.... Nor is it just a matter of vested interests. It’s also a matter of vested ideas.... So here we are, with the greatest challenge facing mankind on the back burner, at best, as a policy issue. I’m not, by the way, saying that the Obama administration was wrong to push health care first. It was necessary to show voters a tangible achievement before next November. But climate change legislation had better be next.

And as I pointed out in my last column, we can afford to do this. Even as climate modelers have been reaching consensus on the view that the threat is worse than we realized, economic modelers have been reaching consensus on the view that the costs of emission control are lower than many feared. So the time for action is now. O.K., strictly speaking it’s long past. But better late than never.

Lizardbreath: The Shameful Obama Administration

I did not work to elect Barack Hussein Obama so that his Justice Department could do things like this:

Lizardbreath: US District Judge Colleen Kottar-Kelly just ordered the release (don't get excited, it's not going to happen unless the Justice Department decides not to appeal) of Fouad al-Rubiah, one of the prisoners at Guantanamo. Read the opinion -- there are a lot of redactions, so you can't get the details, but we took a middleaged aircraft engineer who flew to Afghanistan for charitable purposes a short while before 9/11, cobbled together some insane story out of interrogations from unreliable informants, and tortured him into confessing to it. If I follow the course of events correctly through all the redactions, we then continued to torture him because the story we told him to confess to didn't make any sense. And now we've asked a judge to keep him imprisoned on the basis of the confessions that the US interrogators found unbelievable.

Particularly grotesque was this quote from al-Rubiah, explaining one of the arguments interrogators used to convince him to confess:

In about August 2004, shortly before my CSRT hearing [an administrative review of Al Rabiah's detention], my interrogators told me the CSRT was just a show that would allow the United States to 'save face.' My interrogators told me no one leaves Guantanamo innocent, and told me I would be sent home to Kuwait if I 'admitted' some of the false things I had said in my interrogations. The interrogators also told me that I would never go home if I denied these things, because the United States government would never admit I had been wrongly held.

In case anyone was wondering, the hearing that Judge Kottar-Kelly is referring to in the opinion, in which the Justice Department took those irresponsible and indefensible positions, took place in August '09. On Obama's watch. This has to change somehow.

Afterthought: Remember, the fact that this case made it to a habeas hearing means that it's one of the US Government's strongest cases -- they've let some people go, and are dragging their feet even harder on other cases. This evidentiary pile of garbage was pretty close to the best we've got against any of the detainees. Who've been imprisoned and tortured for better than seven years now.

Why Health Care Reform Needs a Strong Public Plan: It Saves Lots of Money

Ezra Klein:

Ezra Klein - CBO: A Strong Public Plan Saves Lots of Money: According to Congress Daily, the CBO says attaching the public plan to Medicare rates will save even more money than originally thought:

In a bid to wrangle concessions from the Blue Dog Coalition on healthcare reform, House leaders Thursday released CBO estimates for liberals' preferred version of the public option that show $85 billion more in savings than for the version the Blue Dogs prefer. Rep. Stephanie Herseth Sandlin, D-S.D., a Blue Dog co-chair, said any possible new momentum toward a public option tethered to Medicare rates is, in part, "because of the cost issue" and the updated CBO score.

The original House bill required the public plan to pay providers 5 percent more than Medicare reimbursement rates. But as part of a package of concessions to Blue Dogs, the House Energy and Commerce Committee accepted an amendment that requires the HHS Secretary to negotiate rates with providers. That version of the plan will save only $25 billion. In total, a public plan based on Medicare rates would save $110 billion over 10 years. That is $20 billion more than earlier estimates, a spokesman for House Speaker Pelosi said.

In other words, the conservatives want to spend $85 billion more than the liberals do. Moreover, the CBO is estimating savings to the government. That is to say, the $85 billion reflects reduced federal spending on subsidies because premiums in the public plan will be lower. Savings to individuals and businesses paying lower premiums will be much larger than $85 billion, and politically, much more important. Meanwhile, a new New York Times poll shows that the public option is stil la god 20 percent more popular than health-care reform in general.

Multipliers: The Very Sharp Greg Ip Gets One Wrong

In the Economist, he writes:

Much ado about multipliers: Different assumptions about the impact of higher government borrowing on interest rates and private spending explain wild variations in the estimates of multipliers from today’s stimulus spending. Economists in the Obama administration, who assume that the federal funds rate stays constant for a four-year period, expect a multiplier of 1.6 for government purchases and 1.0 for tax cuts from America’s fiscal stimulus. An alternative assessment by John Cogan, Tobias Cwik, John Taylor and Volker Wieland uses models in which interest rates and taxes rise more quickly in response to higher public borrowing. Their multipliers are much smaller. They think America’s stimulus will boost GDP by only one-sixth as much as the Obama team expects. When forward-looking models disagree so dramatically, careful analysis of previous fiscal stimuli ought to help settle the debate...

No analysis of previous fiscal stimuli will settle the debate. The multiplier--if the Federal Reserve keeps the federal funds rate pegged near zero--is 1.6. If the Federal Reserve decides that that fiscal stimulus is leading to a danger of rising inflation, it will raise interest rates to offset the effect of increased spending. To say that the multiplier is only 1/6 as large in Cogan, Cwik, Taylor, and Wieland is misleading: depending on what assumptions you make about Federal Reserve behavior, the "multiplier" they calculate would vary between 1.6 and 0.

The best way to phrase it is that the multiplier is 1.6--unless fiscal stimulus leads the Federal Reserve to fear inflation, in which case it will take action to cut the multiplier down to whatever value it wishes. The decisive point is that if the Federal Reserve doesn't take action to cut the multiplier below 1.6, we will really wish we had undertaken an even bigger fiscal stimulus. And if the Federal Reserve does take action to cut it down, we won't be too upset at having (temporarily) cut taxes, raised transfers to states, and spent some money on infrastructure.

Republicans: Not Just the Stupid Party, the Really Stupid Party...

In the Senate this morning:

Twitter / The Wonk Room:

Kyl: "I don't need maternity care" in my benefits package.

Stabenow: "I think your mom probably did."

The Public Option in Health Care Reform, and a Little Senate Math

From Josh Micah Marshall:

So Off Message : From the new Times/CBS poll out this evening ...

Would you favor or oppose the government offering everyone a government administered health insurance plan -- something like the Medicare coverage that people 65 and older get -- that would compete with private health insurance plans?

Favor 65%... Oppose 26%...

Interestingly, according to the poll, support for a public option has jumped 5 points since late August and opposition to it has dropped 8 points.

And a little Senate math:

• The forty-two most Democratic Democrats--up through Bill Nelson, say--together represent 52.4% of the country...

• The fifty most Democratic Democrats--up through Claire McCaskill--account for 59.8%% of the country's population...

• If cloture required only that Senators representing 60% of the population vote to close off debate, then the Democrats could get votes with the fifty-one most Democratic senators--up through Baucus...

• The sixty Democrats represent 64.3% of the population...

If I were Barbara Boxer, I would get together with Kay Bailey Hutchinson, John Cornyn, Chuck Schumer, Kirsten Gillibrand, Bill Nelson, George LeMieux, and Dianne Feinstein and say that their Issue Number One was changing cloture so that the bar is senators representing 60% of the population rather than 60% of the senators.

Jes' sayin'...