Brad DeLong's Egregious Moderation

David Wessel: Geithner Made Simple

Geithner Made Simple - Real Time Economics - WSJ: Brad DeLong, a Berkeley economist and prolific blogger who worked in the Clinton Treasury, takes a stab at explaining the latest chapter in Treasury Secretary Tim Geithner’s plan to rescue the banks: He describe it as “a trillion-dollar operation by which the U.S. acts as the world’s largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off–in either case at an immense profit.”

For more, see http://delong.typepad.com/sdj/2009/03/the-geithner-plan-faq.html

–David Wessel

John Cochrane: Keynesian Principles

Economist Debates: Keynesian principles: [M]odern economics gives very little reason to believe that fiscal stimulus will do much to raise output or lower unemployment. How can borrowing money from A and giving it to B do anything? Every dollar that B spends is a dollar that A does not spend. The basic Keynesian analysis of this question is simply wrong. Professional economists abandoned it 30 years ago when Bob Lucas, Tom Sargent and Ed Prescott pointed out its logical inconsistencies.... New Keynesian economics produces an interesting analysis of monetary policy focused on interest rate rules, not a resurrection of fiscal stimulus....

Robert Barro's Ricardian equivalence theorem was one nail in the coffin. This theorem says that stimulus cannot work because people know their taxes must rise in the future. Now, one can argue with that result. Perhaps more people ignore the fact that taxes will go up than overestimate those tax increases. But once enlightened, we cannot ignore this central question. We cannot return to mechanically adding up today's consumption, investment and export demands, and prescribe the government demand necessary to attain some desired level of output. Every economist now knows that to get stimulus to work, at a minimum, government must fool people into forgetting about future taxes, an issue Keynes and Keynesians never thought of. It also raises the fascinating question of why our Keynesian government is so loudly announcing large and distortionary tax increases if it wants stimulus to work.   There is little empirical evidence to suggest that stimulus will work either. Empirical work without a plausible mechanism is always suspect, and work here suffers desperately from the correlation problem. Quack medicine seems to work, because people take it when they are sick. We do know three things. First, countries that borrow a lot and spend a lot do not grow quickly. Second, we have had credit crunches periodically for centuries, and most have passed quickly without stimulus. Whether the long duration of the great depression was caused or helped by stimulus is still hotly debated. Third, many crises have been precipitated by too much government borrowing.

Neither fiscal stimulus nor conventional monetary policy (exchanging government debt for more cash) diagnoses or addresses the central problem: frozen credit markets. Policy needs first of all to focus on the credit crunch. Rebuilding credit markets does not lend itself to quick fixes that sound sexy in a short op-ed or a speech, but that is the problem, so that is what we should focus on fixing.

The government can also help by not causing more harm. The credit markets are partly paralysed by the fear of what great plan will come next. Why buy bank stock knowing that the next rescue plan will surely wipe you out, and all the legal rights that defend the value of your investment could easily be trampled on? And the government needs to keep its fiscal powder dry. When the crisis passes, our governments will have to try to soak up vast quantities of debt without causing inflation. The more debt there is, the harder that will be.

Of course we are not all Keynesians now. Economics is, or at least tries to be, a science, not a religion. Economic understanding does not lie in a return to eternal verities written down in long , convoluted old books, or in the wisdom of fondly remembered sages, whether Keynes, Friedman or even Smith himself. Economics is a live and active discipline, and it is no disrespect to Keynes to say that we have learned a lot in 70 years. Let us stop talking about labels and appealing to long dead authorities. Let us instead apply the best of modern economics to talk about what has a chance of working in the present situation and why.

Frank Pasquale: Geithner's Bailout Blunder

Balkinization: It appears that the Dodd-Geithner drama over who bears the blame for the AIG bonuses has been resolved: Geithner's fessed up. As I noted during a past bailout blunder, Treasury's increasingly incompetent handling of troubled financial institutions reminds me of Scott Veitch's fascinating book Law and Irresponsibility. Veitch shows how law, commonly billed as a method of forcing individuals to take responsibility for their actions, too often diffuses, obfuscates, or short circuits legitimate methods of assigning credit and blame. As one reviewer puts it, "the legal regime itself is effective in generating conditions of extreme harm while creating a circumstance where there is almost no responsibility attributed to any party, including a state level actor."

As the bailout unfolds, phobia about "nationalization of the banks" results in a regime where no one appears to be in effective control of the situation. The "sanctity of contracts" becomes a catch-all shibboleth for rewarding even the most revolting greed. Late-night legislative sausage-making, dubious in even the best of circumstances, becomes a Ring of Gyges for passionately intense lobbyists. Everyone from Obama to Dodd to Shelby to Boehner can rail against the bonuses, while happily taking contributions from the Wall Street worthies they're unable or unwilling to hold accountable.

The outrage over the AIG bonuses is rooted in legitimate worry about a hapless, drifting state. The rage may eventually be quelled by sober economic analysis of the "real value" of executives and traders. But Americans now have a sick feeling that even after the repudiation of the most fatcat-friendly regime in our history, "Change We Can Believe In" has turned into continuity we can't stand. Consider Senator Ron Wyden's comment on the Dodd-Geithner contretemps:

"I pulled out all the stops," Wyden [said], "to convince the president's economic team that [an anti-bonus amendment] was vital to the White House for two reasons: 1) the president had spoken out against bonuses; 2) fury about bonuses would kneecap confidence in the president's entire economic policy." But no one inside the president's economic team was in favor of it. As Wyden put it: "If the White House economic team had made it clear that this was important, this provision would never have been removed. I don't believe the president has been well-served on the bonus issue by his economic team."

A couple months ago, I thought that President Obama's strategic decision to defer to "safe hands" like Geithner and Summers on macroeconomic matters was wise. I even held out hope that the government would use some of its leverage over the banks to induce them to invest in our future--projects such as green energy, universal broadband, and health information technology that will be perennially neglected by investors obsessed with quarterly earnings.

But these hopes are fading as a neo-feudal reality begins to emerge...

John Holbo: Jonah Goldberg Asks A Question — Crooked Timber

Jonah Goldberg Asks A Question — Crooked Timber: by JOHN HOLBO on MARCH 20, 2009

When the Bush administration advocated abstinence and the like on the international stage, it was seen as an example of Bush pushing a parochial agenda. But when Western cosmopolitanism is championed on the world stage, it’s progress. What am I missing? (link)

Goldberg is missing the possibility that liberals might believe that Bush was pushing a parochial agenda while at the same time believing that their own proposals would constitute progress. In short, liberals believe Bush was heading in the wrong direction, whereas a liberal proposal would head us in a better direction. In shorter: liberals think Bush was wrong, they are right. In shortest: liberals believe their beliefs. This is what Goldberg is missing.

To put it another way, when he says “it just seems to me that there’s no real standard here,” he’s missing the possibility of classical liberalism, broadly speaking. (Given that Goldberg claims to believe in classical liberalism, his failure to consider that any standard could possibly occupy the intellectual space occupied by the standards of classical liberalism is … an impressive feat of doxastic auto-evacuation. It doesn’t occur to him to believe what he believes, apparently.)

Goldberg is missing that it is possible to believe things without necessarily wanting to impose those beliefs on others (for reasons of prudence, or principle, or a bit of both). He also misses that one can take tolerance (non-coercion) to be a virtue (in principle, and as pragmatically warranted by circumstances) without believing that, in fact, no beliefs are better, more warranted than others. Finally, he seems to be missing the possibility that one might believe that coercion is warranted in some cases, but impermissible (or imprudent) in other sorts of cases.

If Goldberg is not missing absolutely all of this, then I fail to see what other thing he could be missing, leading to his sincere puzzlement. I am at a total and complete loss. Really. I’m drawing a blank.

Ryan Grim: GOP Opposes Pay Limits On Bailed-Out Bankers

GOP Opposes Pay Limits On Bailed-Out Bankers: Wall Street bankers, with their $18 billion in bonuses, private jets and gaudy conferences, are causing headaches for the GOP. President Obama has proposed capping compensation for executives at banks that take taxpayer bailout money at $500,000. Republicans hate the idea -- a position puts them uncomfortably on the side of people currently about as popular as child-porn producers and subprime mortgage brokers.

Senate Minority Whip Jon Kyl (R-AZ) blamed the "tone deaf" bankers for creating the political environment that allows Obama to call for a cap. "Because of their excesses, very bad things begin to happen, like the United States government telling a company what it can pay its employees. That's not a good thing in America," Kyl told the Huffington Post. "What executives have done is troubling, but it's equally troubling to have government telling shareholders how much they can pay the executives," said Sen. Mel Martinez (R-FL).

Sen. James Inhofe (R-OK) said that he is "one of the chief defenders of Obama on the Republican side" for the president's efforts to reach across the aisle. But, said Inhofe, "as I was listening to him make those statements I thought, is this still America? Do we really tell people how to run [a business], and who to pay and how much to pay?" Democrats argue that banks that take government money must accept any rules the government decides to send with it. Massachusetts Sen. John Kerry and Rep. Barney Frank are both working on legislation that would complement Obama's attempt to get a handle on executive compensation.

It's not a novel concept, and it's one the GOP supports -- when applied to welfare recipients, at least. "We demand that welfare recipients do an honest day's work for their checks. And now, since President Obama laid down the law Wednesday, we demand that the guys who ran our banking system into the ground abide by our pay scales in return for our bailing them out," writes Harold Meyerson in a column Friday. After all, what's the moral distinction between welfare recipients and the wizards of Wall Street, other than that the welfare recipients aren't the ones responsible for tanking the global economy?"

Welfare reform that passed in the 1990s created the program called Temporary Assistance for Needy Families (TANF). The government intervenes intimately into the lives of TANF recipients, requiring drug testing, time spent doing government approved activities and near-constant documentation of continuing compliance. The intervention is justified by reference to the payments being made. One House Democratic aide quipped that bankers should be required to jump through some of the same hoops that welfare recipients are, beyond a simple salary cap. He suggested making bankers fulfill a strict work requirement and submit a time sheet, signed by a supervisor -- perhaps the Board of Directors -- in 15-minute intervals, proving that they worked 40 hours each week. Only certain activities would count, as is the case with TANF recipients. "That three hour jet ride to get to the meeting in Chicago doesn't count. Reading the Wall Street Journal is also not a countable activity. If they fail to do this once, you cut them off of TARP funds. If they fudge the time sheet, you charge them with TARP fraud and make them pay back any government money they've received," the aide joked. "I'm sensing a legislative opportunity."

Sen. Sam Brownback (R-KS), though, said the underlying reasoning has merit. What applies to welfare recipients ought to also apply to corporate welfare recipients, he said. "I think it does apply to that," he said. "People are livid about these big bonuses and if the groups want to take government money it seems they should be able to have some limits on these bonuses." "If they don't need it, don't want it, fine. Don't take it," the Kansas Republican added.

Other Republicans disagreed. "It's still government running business," Inhofe said. "It's a leap, because the executive at the bank is a free agent who can leave the bank and go to work someplace else," said Sen. Bob Bennett (R-UT) of the welfare comparison. "You run the risk of having a brain drain at the bank of their top talent." Bennett said, "Some of the things some of these bank executives have been doing demonstrates they have a tin ear. At the same time, I'm generally troubled by wage and price control, no matter how logical it may appear."

The objection to the government intervention in salaries is rooted in the Republican belief that government is inherently ineffective. "If Congress can run a financial institution, it belies everything I've seen in this body. Government does not do a good job running private institutions," said Sen. Kit Bond (R-MO). Sen. Tom Coburn (R-OK) agreed: "If we do such a good job of running the federal government, what business do we have telling them how to run the banks?"

The GOP is also concerned that setting compensation limits could put the country on the road to serfdom. "This is just a symptom of what happens when the government intervenes and we start controlling all aspects of the economy. This is just the first piece," said Sen. Jim DeMint (R-SC). "If you accept the fact that the government should be setting pay scales in America, then it's hard not to go after these exorbitant salaries. But I think it's a sad day in America when the government starts setting pay, no matter how outlandish they are." "What are we going to do next?" wondered Martinez. "Tell a company if they get TARP money where there offices should be? They should be renting maybe from an abandoned federal building?"

Minority Leader Mitch McConnell (R-KY) and and Sen. John McCain (R-AZ) may have had the savviest responses to the tricky political question. McConnell didn't acknowledge that he'd been asked the query; he walked on to the Senate floor instead of answering. McCain declined to comment. Opposition isn't uniform. Beyond Brownback, other Republican senators spoken to for this article, including Sens. Coburn, Richard Lugar (R-IN) and Orrin Hatch (R-UT), expressed some support for a government effort to control the salaries of executives of banks that take bailout money. At least one Republican has thought about the plan and come around to it. "In theory, I don't like it. I just don't like the government telling private industry how to run their businesses," said Sen. John Thune (R-SD) when first asked about it. About fifteen minutes later, Thune had changed his mind. "You know what? I think I'm for that," he said of Obama's plan. "I don't disagree with what he's doing."

Matthew Yglesias: More Journamalism Jackson Diehl and “Allowing”

Matthew Yglesias: Jackson Diehl and “Allowing”: People usually attribute the badness of The Washington Post’s editorial page content to Fred Hiatt, since he’s the man in charge, but judging by this column, Hiatt’s number two man probably lacks the intelligence required to dress himself in the morning so it must be hard out there for the boss. Diehl’s theme is that Obama is just like Bush. And his evidence is that if you, like Diehl, don’t have a functioning central nervous system or any understanding of public policy issues, then things that normal people recognize as different are actually the same. You can go elsewhere (Steve Benen, etc.) for critiques of most of Diehl’s main points, but I thought this particular twitch showed just how pathetic this column was:

We know from the Clinton administration that any attempt to create a national health-care system will touch off an enormous domestic battle, inside and outside Congress. If anything, Obama has raised the stakes by proposing no funding source other than higher taxes on wealthy Americans, allowing Republicans to raise the cries of “socialism” and “class warfare.”

The problem with Obama’s health care plan is not the plan. Nor is it the proposed source of funding for the plan. Rather, it’s that the choice of proposed funding source, though Diehl doesn’t object to it on the merits, will “allow” Republicans to oppose it on the grounds of “socialism” and “class warfare.” Really? Obama should have somehow denied them permission to criticize his plan? His plan is not, after all, “socialism” and yet failure to propose socialism has not prevented Republicans from raising the cry of “socialism.” Nor has the fact that it’s not a proposal to tax small businesses prevented Republicans from raising the cry that Obama is raising taxes on small businesses. Surely it’s the responsibility of Obama’s opponents to avoid responding to his initiatives in a hysterical manner. And if Jackson Diehl doesn’t like the hysteria, he should consider blaming the hysterics.

Chris Blattman: Why oh why can't we have a better press corps (Africa edition)

Chris Blattman's Blog: Why oh why can't we have a better press corps (Africa edition): Earlier this month, Slate's Jack Schafer wrote a hagiographic piece in praise of Jeffrey Gettleman, the New York Times bureau chief for East Africa. The Africanists are not pleased.... I hate going negative, but I'm going to side with the Africanists on this one. Not all Gettleman's articles induce cringes, but a good number do. It's like he's trying for all the cliches.

The factual errors don't help. I recall one description of the Lord Resistance Army as a "drugged-out street gang living in the jungle." One can quibble with smaller details (there is no jungle in northern Uganda, let alone streets) but more importantly, this is a spiritual rebel force with strict codes of conduct, and drugs are unimaginable. This is no gang of willing thugs, but a disciplined force formed by fear and abduction. It would be like calling Colombia's FARC a bunch of right-wing ideologues in the coastal plains. Unimaginable. This is Africa's longest-running rebel group, not a new kid on the block, and one expects more from the nation's most venerable newspaper.

The contrast is sharp with superb reporting by the Times' Lydia Polgreen (West Africa bureau chief), or the roving Gregg Zachary. But the chain's only as strong as it's blah blah blah, and, tragically, the Times is no longer a place to go for reliable reporting south of the Sahara.

Scott Lemieux: Lawyers, Guns and Money: Leave the People Who Destroyed the World Economy Aloooooonnnnnne

Lawyers, Guns and Money: Leave the People Who Destroyed the World Economy Aloooooonnnnnne: Ezra notes that "it's really worth distinguishing what are two separate arguments. The first is that we can't claw back the bonuses. That's what outside counsel told AIG Chairman Edward Liddy (Liddy was appointed by the government in 2008 and will not receive any bonuses) but legal experts don't think it's true. If the government is sufficiently interested in pulling back the funds, it can do so. The second is that we shouldn't claw back the bonuses. That's what's animating Liddy's argument that "we cannot attract or retain the best and brightest talent" if the government is mucking with their compensation packages." In addition to this, I can imagine a hard-headed pragmatic argument that it would cost the taxpayers more to rescind the bonuses than it would cost to keep them and the people who sold the world for magic beans would get most of their money anyway.

What's amazing about Ruth Marcus's column is that it's primarily motivated not by potentially defensible 1) and 3) but the utterly indefensible moralistic version of #2. She starts off sounding like she's making argument #3: "in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would." I would need some evidence for this, but maybe. But she then continues, and essentially argues that the idiots are morally entitled to received performance bonuses for ghastly performance and retention bonuses even if many of them leave:

The worst malefactors at AIG are gone. The new top management isn't taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective.

Oh my, people responsible for losing a billion dollars a week and largely responsible for plunging the world into economic chaos are receiving a somewhat lower astronomical level of compensation -- only a Millionaire Pundit Values Fred Hiatt minion could cry a river of tears over that one. The rest of her argument collapses on itself. If they were responsible for the massive losses they obviously don't deserve the money. If none of the remaining people are among "the worst malefactors" -- if they were just functionaries carrying out tasks conceived by others -- how indispensable can they possibly be? And most remarkably, Marcus seems to place no weight on the fact that the people who made the company insolvent wouldn't be receiving one thin dime if the market were being allowed to operate and the company deservedly went out of business.

But here's where it gets really bad:

But, you ask, what about autoworkers who are being squeezed to renegotiate their contracts? Those renegotiations mostly involve the future terms of employment, though, it is true, they also could affect retiree health benefits. If an autoworker doesn't want to show up on the assembly line under the terms of a new deal, he or she doesn't have to.

The "true" qualification gives away the show. So, if I understand correctly, the agreed-upon non-salaried compensation of white collar workers is absolutely sacrosanct, while that of blue-collar workers can be casually dispensed with. And if blue collar workers don't like re-written contracts they know where the door is, but if white collar workers who are either inconsequential or responsible for turning a profitable multinational corporation into a zombie wealth-destroyer threaten to leave into a horrible labor market -- heavens to Betsy, let's find a few more million to keep them aboard! Perhaps we can take it from the health benefits of retired manual laborers!

Jonathan Cohn: Stayin' Alive: The inside story of health care reform's near-death experience

Stayin' Alive: In early January, most of Barack Obama's senior staff assembled with the president-elect for a meeting inside a windowless, eighth-floor office at the transition headquarters in Washington. It was a pivotal moment in Obama's transformation from candidate to commander-in-chief. Obama's advisers had taken all of his campaign pledges, factored in his promise to reduce the deficit, and put together a provisional blueprint for governing. For the first time, Obama would get a sense of how his proposals fit together in the real world.

Obama sat in the middle of a rectangular table with the budget projections in front of him. He said he was mostly happy with what his advisers had produced. Investments in energy and education, plus real progress on reducing the deficit--it was all in there, Obama noted. But then the president-elect turned to his one major concern: a key item that was not, in his opinion, sufficiently funded. "Here's my guidance to you," one participant recalls Obama saying to the group. "Protect health care"...

Neil Sinhababu: Why Are Headlines Left To Editors?

Donkeylicious: Why Are Headlines Left To Editors?: Here's T.A. Frank pointing out that he didn't write the bombastic headline for his article in the Guardian -- it's "The failed presidency of Barack Obama." And here's Michael Calderone at Brad DeLong's blog saying that "JournoList: Inside the echo chamber" wasn't his idea.

I've always thought it kind of weird that editors, not writers, generally write the headlines for articles. Headlines make a huge difference in how readers understand articles, especially if they're voracious speed-reading bloggers. It's unfortunate that they're controlled by people who usually understand the substance of the article in less depth than the writer, who haven't spent as much time thinking out clever and relevant turns of phrase, whose perspectives on the article are more likely to be idiosyncratic, and whose names don't appear on the final product.

I've heard people say that headlines are seen as a device to advertise the story -- that's what you use to pull readers in, so it should be in the hands of someone who specializes in evaluating reader-pulling phrases rather than the person who produced the content. But if that's what we're going for, we might as well randomly headline foreign policy articles "Lohan, Ronson Capture Osama" or "Obama Confirms Threesome With Olsen Twins" and have done with it.