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January 2009

Christie Romer Is Confirmed

And so is now allowed to speak as CEA chair about House Republican claims that their stimulus is better:

CEA Director Romer’s view is that the House analysis is absolutely incorrect. The CEA estimates that the Republican plan would create only 1.7 million jobs, compared to 4.2 million for the Democratic plan.

Question: The House claims that based on the research of CEA Chair Christy Romer, their plan would create 6.2 million jobs. Isn’t that a more effective way of jumpstarting the economy?

Answer: The Republican House analysis is flat wrong in its claim that the House Republican stimulus is more effective. No matter what your analytical assumptions, as long as they are consistent the plan the President supports would result in substantially greater job creation than the House Republican plan.

Independent groups that have analyzed the President’s plan -- from Macroeconomic Advisors to former McCain advisor Mark Zandi -- have confirmed that the President’s plan will create between 3 - 4 million jobs--twice the number of the House plan. The President supports takes a broad, comprehensive approach. It includes substantial tax cuts – many of which mirror the provisions in the House Republican plan. But it also includes new spending programs that many economists across the spectrum believe will help create jobs and give our economy a kickstart right now.

Question: But doesn’t Dr. Romer’s research show that the economic impact of tax cuts is higher than even the Administration is assuming?

Answer: Dr. Romer’s research suggests that all types of fiscal stimulus, both spending and tax cuts, might well have a larger impact than is typically assumed and is assumed in the CEA's analysis. It would be great if that were so. It would mean more job creation and more economic activity -- which is exactly what we need right now. The Administration has based its analyses on more modest assumptions that are in line with those several independent forecasters – Republican and Democrat alike.

We should have an open discussion about these analytical issues.

We cannot afford to play political games with apples-to-oranges comparisons. Such political gamesw distract our attention from the magnitude of the substantive task at hand.

Keep those White House talking points coming!

Washington Post Crashed-and-Burneded Watch: David Ignatius Edition

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

The Curious Capitalist: I don't mean to single out David Ignatius, whose failure to keep Israeli President Peres from vastly exceeding his allotted time apparently incensed the Turkish prime minister..... The prominence and self-importance of many of the speakers here, coupled with a certain cultural sensitivity... keep[s] moderators from exercising the discipline often needed to make discussions work. So it was refreshing this afternoon to watch the BBC's Nik Gowing make no attempt to avoid obnoxiousness in a made-for-TV discussion about financial crisis and regulation...

That there are other moderators (few, in my experience) at Davos who don't do their jobs is no reason for David Ignatius not to do his job and so create an international diplomatic incident.

Some bare minimal competence would be nice...

Department of "Huh?"

Megan McArdle writes:

All you have to do is believe . . . - Megan McArdle: The real question, I think, is how close the permanent income hypothesis is to being true.   The basic idea is that people are forward looking, and they try to smooth their consumption over time.  So if you give them a "temporary tax cut", they save most of it, knowing that eventually they will have to give the money back. But of course, this should also be true of "temporary government spending"--if people think the money won't be there next year, they'll salt as much of the money away as possible.  This is a topic very underexplored in the various estimates of the stimulus multiplier...

No it isn't. This is a topic that economists have been exploring for fifty-five years. It is a topic that has been very thoroughly explored in all of the estimates of multipliers.

Prospects for Peaceful Coexistence Are Slim...

But we will make one last effort: a set of admonitions to the small furry and feathery woodland creatures:

  1. To a small member of class mammalia: The blue reflector embedded in Lucas Ct. is there so that the fire truck can find where the fire hydrant is in the dark. It is not a suitable place for defecation. We know you are there. You do not need to leave additional "messages." Lucas Ct. is also used by a teenager next door with a license. Being squashed while defecating at midnight by a monkey-driven vehicle is not a dignified way to die.

  2. To another small member of class mammalia: The sewer cover embedded in Lucas Ct. is there in case we have a public-health emergency. It is not a suitable place for defecation. See (1).

  3. To a skunk: Spraying the BBQ is not good for either of us. We win when we use the BBQ. You win too--in grease and food scraps. If you spray the BBQ, we are less likely to use the BBQ. Capisce?

  4. To yet another small member of class mammalia: When I leave my hiking boots outside because they are muddy it does not thereby make them a fit receptacle for substances that even a small concern for the delicacy of my gentle readers prohibits me from mentioning.

  5. To sundry members of class aves, a subcategory of suborder theropoda, a subcategory of order dinosauria, a subcategory of class reptilia (what can I say? Linneaus did not get it right): You have your oak trees. We have our house. If you do not respect the border, we have our vergeltungswaffen--terror weapons: dinner plate-sized robot spiders that drop from the sky. Be warned.

  6. To sundry members of class aves, a subcategory of suborder theropoda, a subcategory of order dinosauria, a subcategory of class reptilia (what can I say? Linneaus did not get it right): Just because you are turkeys does not give you the right to perch on top of the Prius and defecate there.

  7. To yet another small member of class mammalia: Biting the house every four inches so that your needle-like teeth punch holes in it is annoying. There is a reliable source of year-round water 100 yards north north east at the spring in the blackberry thicket.

How They Used to Write...

William Cobbett (1834), Paper Against Gold, or, The History and the Mystery of the Bank of England (John Doyle:

The time has come, [my] doctrines have been verified, the sufferings [of the people] have taken place; and, therefore, here is the book. The scoffings, the scornings, the abuse, the reviling, the horrible calumnies and the base persecutions which this book and other efforts of a similar kind brought upon me, and the briefest notice of each instance of which would fill fifty volumes more bulky than this, are now amply avenged by the joy that I feel at that which I know behold, and which can no longer be hidden from even the blindest and most besotted of the people...

The Panic of 1825

The Bank of England's policy. From Walter Bagehot (1873), Lombard Street, p. 73:

Jeremiah Harman: We lent [cash] by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power...

Washington Post Crashed-and-Burninated Watch (Juan Williams Edition)

Stanley asks:

Unfogged: Has Juan Williams always s-----? I have a vague inclination towards a partial recollection of him as not s------. But I have not any source for that inclination nor for the recollection...

The answer is "yes": Juan Williams has always s-----:

Thomas Defender Apologizes: A Washington Post reporter who wrote a widely quoted column criticizing the accusations of sexual harassment against Judge Clarence Thomas has been disciplined by the newspaper for his own conduct toward female colleagues and has apologized to the staff, The Post reported today. The 37-year-old journalist, Juan Williams, said in an open letter to The Post's newsroom on Friday that his conduct had been "wrong" and "inappropriate." Several female employees had complained that Mr. Williams had harassed them with sexually explicit and hostile comments, and the newspaper investigated those complaints.

The newspaper's executive editor, Leonard Downie Jr., also issued a letter to the staff. "The complaints were found to be serious," it said, "and, as Juan acknowledges, he was disciplined for his conduct and intends to apologize to women he offended." Neither The Post's account nor the two letters it quoted described the nature of the discipline. The Post had earlier said that the outcome of personnel inquiries should remain confidential. But on Friday about 50 female employees met with Mr. Downie and told him they objected to the paper's refusal to disclose the resolution of the investigation involving Mr. Williams, which had begun in early October. The letters from Mr. Williams and Mr. Downie were posted several hours later...

The Future of the Republican Party

The RNC Chair looks to be either Michael Steele or Katon Dawson: the Black candidate vs. the Racial Backlash Candidate...

Josh Marshall:

Talking Points Memo | Clarity: o we've just had a third vote in the RNC chairmanship race. It's still pretty scattered. But Michael Steele has moved into a clearer lead. But there's also been movement in the direction of South Carolina party chair Katon Dawson. In other words, we might be moving more clearly toward a black candidate vs. racial backlash candidate race in the race to steer the Republican party out of the 19th century. Needless to say, Dawson's move may be gaining from the withdrawal of former Tennessee GOP chair Chip Saltsman, whose main selling point was sending out racist parody songs as party gifts.


Something to try this fall with Economics 115: Twentieth Century Economic History:

iClicker Mainsite > Home: We know you have choices when choosing a classroom response system, and picking the right system can feel daunting. So why has i>clicker been adopted by thousands of faculty and used by more than 500,000 students in less than two years? We asked our customers, and their feedback is consistent: With i>clicker, it’s all about your teaching. You don’t have to worry - or even think - about the technology. There is almost no learning curve - you can be up and running in front of hundreds or even thousands of students in a matter of minutes. And our system is exceptionally reliable with a defective rate of .0007%...

In Which We Love Some But Not All Stimulus Spending Skeptics...

Arnold Kling feels lonely and unloved:

I'm feeling somewhat lonely these days. My understanding of macroeconomics is closer to that of Paul Krugman, Mark Thoma, and Brad DeLong than it is to that of Robert Barro, John Cochrane, or Eugene Fama. And yet I am a stimulus skeptic...

It's fine to be a stimulus skeptic! But stimulus skeptics need to be stimulus skeptics for reasons that are (a) theoretically coherent and (b) empirically relevant. To be a stimulus skeptic because you fear that the bill that emerges from congress will have a very low bang-for-buck, or fear that the long-run drag from amortizing the extra debt will cost us more than we gain from the short-run fiscal boost.

But it's not fine to be a stimulus skeptic for reasons that are empirically irrelevant or theoretically incoherent. Specifically, you cannot say:

  • "I am a stimulus skeptic because the savings-investment national income equation guarantees that fiscal policy cannot boost employment and production--not even if there are lots of unemployed resources in the economy." The savings-investment equation is an accounting identity: it has no implications whatsoever for whether fiscal policy is effective or ineffective. None.

  • "I am a stimulus skeptic because the money multiplier and the velocity of money are both fixed, so total nominal spending is a constant times the government-created outside money stock of currency and reserve deposits--except in the extraordinary case when banks or households are pathologically sitting on cash." But in normal times the money multiplier is definitely not a constant--it is interest elastic (see Milton Friedman and Anna J. Schwartz, Monetary History of the United States). And in normal times the velocity of money is not a constant either--it is also interest elastic (see Milton Friedman, ed., Studies in the Quantity Theory of Money).

The depressing thing is the number and credentials of the stimulus skeptics who are making arguments that are either theoretically incoherent or empirically irrelevant. The claim that the savings-investment identity prohibited fiscal policy from having any impact whatsoever was the infamous British "Treasury View" of the interwar period, and was dealt with and rejected then--when Milton Friedman writes about his framework for monetary analysis in the 1950s, 1960s, and 1970s, he rejects the theoretical argument that fiscal policy must be ineffective as strongly as Jim Tobin does. And he goes to great pains to emphasize that the claim that the velocity of money is constant in normal times is not true and is not part of his monetarism. And nobody has ever argued that the money multiplier is a constant. That fiscal policy can affect employment and output when the economy has substantial unemployed resources was--I thought--well-settled by the 1950s. Which is why it is depressing to see economists like Fama, Lucas, Cochrane, and Mankiw saying "no."

And the truly depressing thing is that smart people like Neil Sinhabababu look at this mishegas and, understandably, write:

EzraKlein Archive | The American Prospect: So I'm just Joe Philosophy Professor watching Krugman & DeLong vs. the Chicago Schoolmen about whether we need fiscal stimulus, with Nobel Prize winning economists* on either side. And I'm thinking: How many fields are there in which a big practical question pops up and the Nobel-level guys are on opposite sides yelling at each other?... [I]t isn't a question that should be sitting at the far cutting edge of research, like how many dimensions your string theory needs to have. The raison d'etre of the discipline is to deal with stuff like this.

I'm not saying that individual economists are sleeping on the job -- there are legitimate reasons why this is difficult stuff to do. We have a vanishingly small amount of historical data to work with, and economists can't go into the lab, start depressions in twenty Erlenmeyer flasks, and dump in different stimulus packages to see what works. But that in itself is a reason to be wary of math-heavy, evidence-light economic models and the pronouncements that they produce. (Big philosophers famously disagree about all sorts of stuff. But we have an excuse -- often when we all agree on something, it stops being an area of philosophy...)

I had thought that the questions of whether the "Treasury View" was correct, whether the money multiplier was a constant, and whether the velocity of money was constant in normal times had been settled and were no longer live parts of economics. But here we are...

"Buy American": A Very Bad Move in the Stimulus Package

In addition to being bad economics, demonstrating in his first month that the Obama Administration's word is not good--that it will keep treaties only when it feels like doing so--would be a very bad start for the foreign policy of the Obama administration. Pacta sunt servanda.

John Ibbitson:

Global trade wars or voter revolt? Let Obama's difficult decisions begin: he toxic "buy American" provisions in the economic stimulus package currently before the Senate pose a crucial test for Barack Obama's young administration. To prevent a cascade of tariff protection that would ultimately hurt his own workers and his own country's economy, Mr. Obama must find some way to strip the protectionist clauses that infect the American Recovery and Reinvestment Act. Yet, politically, that might be impossible....

"Buy American" violates the North American free-trade agreement, but Mr. Obama has vowed to renegotiate or, failing that, rip up NAFTA, so has little stake in coming to its defence. And he would be overriding protectionist provisions put in the bill by his own Democratic Party.

The President has said the time has come to make "difficult decisions." This is one of them. Even economists who strongly support the stimulus package are dismayed by the protectionist measures contained within it. "It looks like a very bad thing in the bill," said economist Brad DeLong, who worked on trade issues in the Clinton administration and teaches at University of California, Berkeley. "Pressure from the Canadian government saying, 'Do you really want to do this?' is important." Canadian officials have, in fact, been working behind the scenes to keep protectionist measures out of the economic stimulus package. But they failed to stop the House version of the bill from including a provision banning the use of anything other than American-made iron and steel in projects funded by the stimulus package...

If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers.

Could Obama add a signing statement to the stimulus bill stating that the "Buy American" provisions conflict with our NAFTA and WTO treaty obligations and hence are void? I am not a trade lawyer, but my suspicion is no: neither NAFTA nor the WTO are self-executing, so any actions they call for or block are supposed to be implemented through duly passed acts of congress. Of course, NAFTA and the WTO are also treaties that are supposed to be kept.

If Obama did declare the "Buy America" provisions null and void in a signing statement, people could sue in U.S. courts to carry them out--and IMHO likely win. Then foreign governments could take the case to the NAFTA and WTO dispute-resolution forums--and IMHO certainly win. Better to strip the provisions from the bill now, or in conference.

A Message for Senator Nelson: Remember the Fate of Senator Sasser

Matt Corley:

Think Progress: Nelson ‘Undecided’ On Recovery Plan: ‘I Don’t Even Know How Many Democrats Will Vote For It As It Stands’: On Wednesday, when the House voted 244 - 188 to approve the American Recovery and Reinvestment Act, 11 Democrats joined with the entire Republican caucus in voting against the bill. Now, as the stimulus debate moves to the Senate, it appears that some Democratic senators are challenging the Obama administration’s stimulus plans as well.

The Washington Post reported this morning that Sen. Ben Nelson (D-NE) “remains undecided about the bill“:

Sen. Ben Nelson (D-Neb.), who remains undecided about the bill, said he opposes money going to research projects at the National Institutes of Health and about $13 billion for Pell grants that help students pay for college. Nelson says the measures are worthy but do not belong in legislation designed to stimulate the economy.

Despite what Nelson says, both increased NIH funding and money for Pell grants are actually a wise use of stimulus dollars.

Senators from traditionally Republican states have more, not less, of a stake in Barack Obama's presidency being perceived as a success in the fall of 2012.

Any Lessons for the Stimulus from World War II?

Paul Krugman pounds his head against the wall:

Spending in wartime: One of the small compensating benefits of the economic crisis is that people have suddenly realized that economic history is relevant. Unfortunately, some of the attempts to use that history are spectacularly off-base — such as the attempts by conservative economists to use experience during World War II to argue that the multiplier on government spending is low. I’ve written about this here and here. But I thought a bit more data might be instructive. You see, Robert Barro made much of the fact that private spending actually went down during World War II — which he took as evidence of “crowding out”. But what types of private spending fell, and why?...

[S]pending on new homes and cars before, during, and after the war years. Both basically collapsed. Why? The answer is that (1) There were draconian building restrictions in effect — in fact, the end of those restrictions helped set off the postwar housing boom, and (2) new cars weren’t being produced, because the factories were making tanks instead (and if you did manage to acquire a car somehow, gasoline was rationed).

Why anyone thinks that private spending during those years is a model for what will happen as a result of fiscal stimulus now is beyond me.

We Are Live at The Week: Our Economic Appetite

Our economic appetite - THE WEEK:

Nearly eighty years ago, John Maynard Keynes did the math on economic growth and concluded that within a few generations—by the time his peers' great-grandchildren came of age in, say, the 2000's—the persistent economic problem of too-scarce resources and too-few goods would no longer bedevil a substantial portion of humanity. He was right—even in the midst of our current hard times, he is right.

The current recession may turn into a small depression, and may push global living standards down by five percent for one or two or (we hope not) five years, but that does not erase the gulf between those of us in the globe's middle and upper classes and all human existence prior to the Industrial Revolution. We have reached the frontier of mass material comfort—where we have enough food that we are not painfully hungry, enough clothing that we are not shiveringly cold, enough shelter that we are not distressingly wet, even enough entertainment that we are not bored. We—at least those lucky enough to be in the global middle and upper classes who still cluster around the North Atlantic—have lots and lots of stuff. Our machines and factories have given us the power to get more and more stuff by getting more and more stuff—a self-perpetuating cycle of consumption.

Our goods are not only plentiful but cheap. I am a book addict. Yet even I am fighting hard to spend as great a share of my income on books as Adam Smith did in his day. Back on March 9, 1776 Adam Smith's Inquiry into the Nature and Causes of the Wealth of Nations went on sale for the price of 1.8 pounds sterling at a time when the median family made perhaps 30 pounds a year. That one book (admittedly a big book and an expensive one) cost six percent of the median family's annual income. In the United States today, median family income is $50,000 a year and Smith's Wealth of Nations costs $7.95 at Amazon (in the Bantam Classics edition). The 18th Century British family could buy 17 copies of the Wealth of Nations out of its annual income. The American family in 2009 can buy 6,000 copies: a multiplication factor of 350.

Books are not an exceptional category. Today, buttermilk-fried petrale sole with pickled vegetables and parsley mayonnaise, served at Chez Panisse Café, costs the same share of a day-laborer's earnings as the raw ingredients for two big bowls of oatmeal did in the 18th Century. Then there are all the commodities we consume that were essentially priceless in the past. If in 1786 you had wanted to listen to Mozart's The Marriage of Figaro in your house, you probably had to be the Holy Roman Emperor, Archduke of Austria, with a theater in your house—the Palace of Laxenberg. Today, the DVD costs $17.99 at (The multiplication factor for enjoying The Marriage of Figaro in your home is effectively infinite for those not named Josef von Habsburg.)

Today we still spend about one dollar in five on food—down from the half of income that Americans spent in 1776. The share hasn't fallen more because some of us buy buttermilk-fried petrale sole with pickled vegetables and parsley mayonnaise cooked, served, and cleaned up by others rather than (or in addition to) oats in the gunnysack. One reason is that the oats-for-five-meals-out-of-six-diet of 18th Century Scots was monotonous, and we are glad to escape it. Another is we play status games: oats taste worse when you know somebody else is tasting petrale sole and, conversely, the fish tastes better to those of us with money and luck enough to dine at Chez Panisse.

Keynes thought that by today we would have reached a realm of plenty where "We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin."

But no dice. I look around, and all I can say is: not yet, not for a long time to come, and perhaps never. I'm convinced that everyone I know can easily imagine how to spend up to three times their current income usefully and productively. (It is only beyond three times your current spending that people judge others' spending as absurd and wasteful.) And everybody I know finds it very difficult to imagine how people can survive on less than one-third of what they spend—never mind that all of our pre-industrial ancestors did so all the time. There is a point at which we say "enough!" to more oat porridge. But all evidence suggests Keynes was wrong: We are simply not built to ever say "enough!" to stuff in general.

More Head-Wall Pounding...

Paul Krugman:

The Sorrow and the Pity (wonkish): Eugene Fama, completely not getting it. Proposition 2 is wrong, because savings is an endogenous variable, not a fixed quantity. This has become truly painful to watch.

Here's Fama:

Bailouts and Stimulus Plans - Addendum 1/28/09 - Fama/French Forum: Again, here is my argument in three sentences.

  1. Bailouts and stimulus plans must be financed.
  2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
  3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

It is scary that nobody has pointed out to Fama the implications of his argument. For one thing, it means that money printing cannot boost spending either--for a dollar bill is nothing if it is not a particular kind of "additional government debt." And private-sector decisions to boost spending on high-tech or houses cannot boost total spending either--because private investment spending must also be financed, and must also by Fama's logic crowd out other expenditures.

A Public Appeal to Ross Douthat

Will you please stop putting some of your best work in National Review! Think of the children!

Good News For Narnia - Ross Douthat: As I put it in my NR review:

The movie plays up ... every tension it finds in Lewis's novel, and invents several more, creating rivalries (between Peter and Caspian), generating romances (between Susan and Caspian), adding battles (particularly a long set piece in the movie's middle, in which the Old Narnians launch a raid on Miraz's castle), and doubling down on the political intrigue in the Telmarine court. For the most part, the additions serve their purpose, transmuting a somewhat slight children's adventure into a gripping medieval war picture: Braveheart with more magic, or Tolkien with talking squirrels.

But this achievement comes with a price-namely, the evisceration of Lewis's major theme. If The Lion, the Witch and the Wardrobe is a story about rebirth and renewal-Aslan resurrected, and spring cracking the ice of an enchanted winter-then Prince Caspian is fundamentally a story about re-enchantment, and the glorious return of the supernatural forces that the Telmarines have repressed. Little of this survives in Adamson's adaptation; it's been pruned away to make room for battles and arguments and longing glances and one-liners. The book's climax, in which the trees and rivers come to life and a wild pagan rout overruns the sterile secularism of Telmarine society, is reduced to a brief battlefield intervention that rips off not one but two scenes in Lord of the Rings. Aslan, too, is reduced to a walk-on role, sweeping in once the body count has climbed and the CGI budget been exhausted to roar a halt to the proceedings. He murmurs about faith, in the voice of Liam Neeson, but he feels less a Christ figure than a strikingly flimsy plot device: Leo ex machina.

The bad news for Narniaphiles is that this may be the only way that C. S. Lewis can plausibly be adapted, given the economics (and biases) of contemporary Hollywood-with the metaphysics downplayed and the Generic Epic elements accentuated, the better to justify the price tag that comes attached to any fantasy film ... But judging from Caspian's middling box-office showing to date, it might be worth considering something different for Voyage of the Dawn Treader and (one hopes) its sequels: half the budget, perhaps, and a little more fidelity to the elements of theme and plot that make Narnia something more than an entertaining but two-dimensional imitation of Tolkien's Middle Earth.

Don't Bet on It Ross...

Ross Douthat writes:

Perspective - Ross Douthat: But the most pressing issue, it seems to me, is whether we've reached - or will reach - a point at which all our abundance cushions us against the political consequences of suddenly-diminished expectations. In 1932 or so, the West's porridge-eating past wasn't nearly as far in the rearview mirror as it is today, but a Brad DeLong of the Great Depression could still have marshaled all sorts of statistics to prove that even amid economic crisis, your average Westerner was in vastly better shape than his pre-industrial forefathers.

Indeed, John Maynard Keynes did--that was his essay on "Economic Possibilities for Our Grandchildren"...

Ross continues:

Yet that underlying reality didn't save Europe from a [Great Depression] decade in which democratic capitalism was thought to be discredited, and the whole edifice of modern civilization was very nearly torn apart. Hopefully the world - not only DeLong's North Atlantic cluster, but the developing powers as well - has grown rich enough and stable enough that something like that simply couldn't happen again, no matter how hard the fall and how deep the depression. Hopefully.

Don't bet on it, Ross.

The Withdrawal of the Tenured Berkeley Faculty from the Undergraduate Teaching Program Continues...

UPDATE: Let me stress: we are teaching undergraduates less because we are each teaching graduate students more, and we are each teaching graduate students more because there are fewer of us: we are down Yingyi Qian, Chad Jones, Chang-Tai Hsieh, George Akerlof (retired), David Romer, Christie Romer, Paul Ruud, and are about to be down Raj Chetty--but we as a department don't have their salaries to spend and only have permission to conduct one search...

I'm finding myself very busy this semester. But not with undergraduate courses with two-digit numbers or three-digit numbers beginning with "1". Lots of stuff to do with the graduate students, and too few faculty members:

  • Econ 210b: Financial Crises in Historical Perspective: M 12, Evans 39
  • Econ 298: History-Macro Dissertation Writers Lunch: M 12:30, Evans 601
  • Econ 202b: Macroeconomic Policy Lecture: Spring 2009: TTh 11, Cory 247
  • Econ 210a: Introduction to Economic History Lecture: Spring 2009: W 12, Evans 608-7
  • Econ 237: Macroeconomics Seminar: Th 2, Evans 597
  • Econ 235: Financial Economics Seminar: Th 4, Haas C210
  • Econ 211: Economic History Seminar: M 2, Evans 597
  • Office Hours: W10-12, 2-3 in 601 Evans, and by appointment (email [email protected] or call 925 708 0467)

  • Dueling Multipliers

    House Republicans are on TV being very cute--alleging that the source for their claim that their alternative stimulus of permanent tax cuts would create 6.2 million jobs is the Romer & Romer paper on fiscal policy.

    Hmmm... I get 4 million in the short run using the Romer & Romer multiplier estimate, falling over time and becoming substantially negative after five years as the national debt climbs rapidly.

    I wonder what hack they have cooking their numbers.

    And on the basis of the Romer and Romer multipliers, the Obama fiscal boost plan would create 8.7 million jobs...

    Financial Crises in Historical Perspective

    Financial Crises in Historical Perspective
    Economics 210B
    Barry Eichengreen
    Spring 2009
    Department of Economics
    Monday 12:00-2:00 p.m.
    University of California, Berkeley
    39 Evans Hall

    Topic 1: Financial Crises--Overview
    Topic 2: Bank Runs
    Topic 3: Asset Prices and Financial Crises
    Topic 4: Globalization and Financial Crises
    Topic 5: International Contagion
    Topic 6: The East Asian Crisis of 1997-98
    Topic 7: The 2008 Credit Crisis
    Topic 8: Crisis Resolution

    Ummm... Are There No Copyeditors?

    Laura Meckler writes:

    Washington Wire - Women's Groups Protest Dropping Contraceptives Provision in Stimulus: Women’s and reproductive rights groups expressed dismay Tuesday after the White House and congressional Democrats agreed to drop a provision from the economic stimulus package that would have made it easier for states to expand coverage of contraceptives through their Medicaid programs.

    The measure had become a target of GOP attacks, such as this one from House Minority Leader John Boehner of Ohio “How you can spend hundreds of millions of dollars on contraceptives? How does that stimulate the economy?” he said last week. His argument is part of a Republican hammering that too much in the bill will not serve to aid the economy.

    Supporters of the measure point to an estimate by the Congressional Budget Office that, by the third year of implementation, the measure would actually save $100 billion per year by preventing some pregnancies and avoiding the Medicaid cost of delivering and then caring for these babies...

    Surely this is $100 million a year? I mean, $100 billion a year is $1,333 in reduced Medicaid costs for every post-menarche pre-menopause woman in the United States...


    Europe-Asia Trade in 1800

    In 1800 your average European spends a week's wages on imports from Asia--and gets a teabag a week. That's $1000 as a share of income today--$2 a teabag...

    Are We Frauds?

    Both Jan de Vries and I have just admitted that we have neither read Jean Bodin's Responses to the Paradoxes of M. de Malestroict. Nor has either of us read Malestroict.

    We have, however, read commentaries on both...

    News Flash: Michael Novak of AEI Says That Married Couples Who Use Contraception Are as Bad as... Gay Marriage!!

    Yep. Let me turn the microphone over to Steve Benen:

    The Washington Monthly: LAPSING INTO PAGANISM.... The National Review's Michael Novak assesses Barack Obama's first six days in office, and is concerned about the implications of the president's decisions.

    From these announcements we learn that President Obama recognizes no difference between the Jewish-Christian covenant between a woman and a man (a covenant that they will have and nurture children, if they are so blessed), and a civil contract between two persons of any sex, in order to set up a household of affection and sexual favors. This is a relapse into paganism.

    Got that? Because the president believes in treating people equally, he's not just wrong, he's leading the nation towards paganism. Isaac Chotiner notes, "The real surprise here, at least for those of us who have long followed Novak's career, is his apparent belief that America had not 'relapsed' into paganism a long time ago. Who knew that he had previously been so sanguine?" Indeed, while Novak's argument is mind-numbing on its face, I'm also struck by his use of the word "relapse." The new president, after just six days in the Oval Office, and years after he expressed his support for legal recognition of gay couples, has brought on a "relapse into paganism."

    As Damon Linker put it, "I'd heard Obama was a talented politician, but this is truly impressive. Just think of all that we pagan-Americans will be able to accomplish over the next four years!" I'll be especially curious to see if this becomes a new trend for far-right rhetoric. Last month, WorldNetDaily ran a piece equating liberalism with "Baal worship." Now, we're sliding into "paganism." I can't wait to see what we'll be called next.

    Why oh why can't we have better right-wing thinktanks?

    New York Times Crashed-and-Burned Watch (David Brooks Edition)

    How long before David Brooks writes: "Republicans have to prove the hard way that they are going to be pragmatic and evidence-based. That means that they cannot sweep the CBO study of the likely efficacy of the Obama fiscal boost under the rug simply because its findings are inconvenient"?

    Any bets on how long it will take him? Anyone? Anyone? Bueller?

    Matthew Yglesias:

    Conservatives Prepare to Abandon Newfound Love for CBO: The Congressional Budget Office produces a lot of sober-minded, sensible, reality-based policy analysis. Consequently, 99 days out of a 100 conservatives ignore what it says. For the past week, however, there’s been a CBO report that says liberal stimulus plans are likely to be ineffective, so suddenly the right-wing’s decided it loves the CBO. And with the minor problem that the report they’ve been touting doesn’t exist, it’s been a charming love affair. But late yesterday out came the real CBO analysis largely supporting the efficacy of the recovery plan. And now there’s this:

    The nation’s current recession is likely to be the longest since World War II, and by some measures could be the worst since the Great Depression, a new Congressional Budget Office forecast said Tuesday.

    Without a major economic stimulus plan, “the shortfall in the nation’s output relative to its potential would be the largest — in terms of both length and depth — since the Depression of the 1930s,” said new CBO Director Douglas Elmendorf in testimony prepared for the House Budget Committee.

    The analysis is sure to add important momentum to the effort to enact an $825 billion stimulus by mid-February.

    Last week, referring to the non-existent report, David Brooks wrote that Obama’s “going to have to prove the hard way that he meant what he said about being pragmatic and evidence-based. That means he won’t sweep a C.B.O. study under the rug simply because the findings are inconvenient.” My guess is that few conservative legislators and no conservative New York Times columnists will wind up meeting the Brooks Test in this regard.

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

    Supply Curves Slope Up. Demand Curves Slope Down

    Supply Curves Slope Up. Demand Curves Slope Down:

    There is one huge argument against the claim that the crash in the mortgage market was in some sense the fault of excessively risky lending by the GSEs Fannie Mae and Freddie Mac which pulled the private sector along behind them: it is that Fannie Mae and Freddie Mac lost market share as all the loans that have now gone bad were made.


    As Milton Friedman always used to say: supply curves slope up, and demand curves slope down. If something is due to a change in supply that causes movement along the demand curve, price will go down and quantity will go up. If something is due to a change in demand that causes movement along a supply curve, price will go down and quantity will go down.

    Between 2001 and 2006 the "price" at which Fannie Mae and Freddie Mac sold mortgages--the terms they set--certainly went down. But did the quantity go up? No: Fannie Mae and Freddie Mac together had made a much smaller share of mortgages in 2006 than in 2001: 37% as opposed to 48%. Price went down, and quantity went down.

    This means that the dominant feature of the mortgage market in the 2000s was not an expansion of supply by Fannie Mae and Freddie Mac pushing their implicit government guarantee past the limits of prudence, but was a reduction in demand for Fannie Mae and Freddie Mac's products as private-sector mortgage lenders aggressively pursued and took away their markets.

    At least, this is the dominant feature if you follow Milton Friedman and believe that typically supply curves slope up and demand curves slope down.

    DeLong Smackdown Watch (Slope-of-the-LM-Curve Edition)

    A correspondent critiques my overexcited critique of John Cochrane:

    I read your blog post today on John Cochrane’s new article, and I think you are misreading him.... Look at the first paragraph in the section entitled “A monetary argument for fiscal stimulus.” In the end, John concedes that, in principle, fiscal stimulus can help by, among other things, increasing the velocity of money (though he doesn’t use that terminology). He only argues that it very unlikely to be done in such a way that it would work, and that there are huge risks associated with doing it wrong.

    He also disputes the notion that monetary policy can’t help when short-term interest rates are zero by proposing that the Fed buy corporate debt and sell Treasuries.

    I would be interested to see how you respond to his actual arguments, rather than the straw man argument that he himself sets up and knocks down...


    With respect, I still don't think you are disagreeing with him in this regard. "People pathologically sitting on cash" is just another way of saying the velocity of money is lower than what it needs to be to have full employment. What else could it possibly mean? If demand for cash and cash equivalents is abnormally high, then money is going to be sitting idle in demand deposits and t-bills and not moving around in transactions...

    The passage at issue is:

    Cochrane: A monetary argument for fiscal stimulus, logically consistent but unpersuasive: My first fallacy was “where does the money come from?” Well, suppose the Government could borrow money from people or banks who are pathologically sitting on cash, but are willing to take Treasury debt instead. Suppose the government could direct that money to people who are willing to keep spending it on consumption or lend it to companies who will spend it on investment goods. Then overall demand for goods and services could increase, as overall demand for money decreases. This is the argument for fiscal stimulus because “the banks are sitting on reserves and won’t lend them out” or “liquidity trap.”

    In this analysis, fiscal stimulus a roundabout way of avoiding monetary policy. If money demand increases dramatically but money supply does not, we get a recession and deflation. If we want to hold two months of purchases as money rather than one months’s worth, and if the government does not increase the money supply, then the price of goods and services must fall until the money we do have covers two months of expenditure. People try to get more money by spending less on goods and services, so until prices fall, we get a recession. This is a common and sensible analysis of the early stages of the great depression. Demand for money skyrocketed, but the Fed was unwilling or, under the Gold standard, unable, to increase supply.

    This is not a convincing analysis of the present situation however...

    I think it depends on how you interpret Cochrane's "pathologically:"

    If you want to say that people or banks are "pathologically sitting on cash" most of the time, so that most of the time an increase in the short safe nominal interest rate will increase the economy's inside money supply (without any action by Federal Reserve) and also increase the economy's velocity of inside money, then my correspondent is right.

    If you want to say that the state of things in which people are "pathologically sitting on cash" is unusual, exceptional, and, indeed, pathological--defined as "extreme, excessive, and markedly abnormal"--than I am right.

    There also is, I think, a failure to divide up the world in the same way. I distinguish between policies of:

    1. Pure inflation--the government prints up a lot of money and spends it to expand the outside monetary base and the total nominal value of outstanding assets to drive the price level up and induce a flight from nominal assets to real commodities.

    2. Monetary stimulus--the central bank buys short-term safe government bonds for cash.

    3. Credit stimulus--the central bank or the finance ministry do other things to increase the capitalization or otherwise improve the functioning of financial intermediaries or to reduce the amount or improve the characteristics of the credit-market assets that the private sector must hold.

    4. Fiscal policy--the government borrows and spends.

    I think I know how to analyze (1), (2), and (4). I think we shouldn't do (1) (at least not yet). I think we have done (2) and can't do any more of it and expect it to have any effect. I think we should do (3) and (4) in some linear combination--but I have a hard time thinking about (3) because I am Bear of Little Brain.

    Cochrane doesn't seem to cut the world up this way. He seems to believe, or perhaps to be very close to believing, that anything that affects any of (a) the outside monetary base, (b) the money multiplier, or (c) the velocity of inside money is "monetary policy"--in which case it is tautologically true that only monetary policy affects spending, but I don't find that terribly useful.

    What Are Chicago's Economists Thinking?

    I am watching Eugene Fama, Robert Lucas, and now John Cochrane stagger around assuring everyone that fiscal policy cannot boost employment and production--no matter how high the unemployment rate and how much unused capacity there is--as a matter of "just accounting" that "does not need a complex argument about 'crowding out'":

    John Cochrane: Most fiscal stimulus arguments suffer from three basic fallacies. First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending.  Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both.  This is just accounting, and does not need a complex argument about “crowding out”...

    Cochrane is at least superior to the other two, in that he does concede that there is an (unlikely and inapplicable) case in which fiscal policy might have some impact--if people are acting "pathologically":

    [S]uppose... people or banks... are pathologically sitting on cash.... Suppose the government could direct that money to people who are willing to keep spending it.... This is not a convincing analysis of the present situation however...

    And I can barely believe my eyes.

    Paul Krugman provide me with welcome assurance that I have not gone crazy:

    A Dark Age of Macroeconomics: Brad DeLong is upset about the stuff coming out of Chicago these days — and understandably so. First Eugene Fama, now John Cochrane, have made the claim that debt-financed government spending necessarily crowds out an equal amount of private spending, even if the economy is depressed — and they claim this not as an empirical result, not as the prediction of some model, but as the ineluctable implication of an accounting identity. There has been a tendency, on the part of other economists, to try to provide cover — to claim that Fama and Cochrane said something more sophisticated than they did. But if you read the original essays, there’s no ambiguity — it’s pure Say’s Law, pure “Treasury view”, in each case....

    What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line. It’s like the fact that the capital account and the current account of the balance of payment have to sum to zero: that’s true, but it does not mean that an increase in capital inflows magically translates into a trade deficit, without anything else changing (what John Williamson used to call the doctrine of immaculate transfer). A capital inflow produces a trade deficit by causing the exchange rate to appreciate, the price level to rise, or some other change in the real economy that affects trade flows.

    Similarly, after a change in desired savings or investment something happens to make the accounting identity hold. And if interest rates are fixed, what happens is that GDP changes to make S and I equal. That’s actually the point of one of the ways multiplier analysis is often presented to freshmen.... [S]avings plus taxes equal investment plus government spending, the accounting identity that both Fama and Cochrane think vitiates fiscal policy — but it doesn’t. An increase in G doesn’t reduce I one for one, it increases GDP, which leads to higher S and T.... [Y]ou don’t have to accept this model as a picture of how the world works. But you do have to accept that it shows the fallacy of arguing that the savings-investment identity proves anything about the effectiveness of fiscal policy.

    So how is it possible that distinguished professors believe otherwise? The answer, I think, is that we’re living in a Dark Age of macroeconomics. Remember, what defined the Dark Ages wasn’t the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed. And that’s what seems to have happened to macroeconomics in much of the economics profession. The knowledge that S=I doesn’t imply the Treasury view — the general understanding that macroeconomics is more than supply and demand plus the quantity equation — somehow got lost in much of the profession. I’m tempted to go on and say something about being overrun by barbarians in the grip of an obscurantist faith, but I guess I won’t. Oh wait, I guess I just did.

    And at least some of the lurkers agree with me in email:

    [H]ow spectacularly wrong they are... not in a clever or subtle way, but in a "let me put this on an Econ 1 final and ask freshmen to explain what's wrong here" sort of way.... You and I are out for a stroll, with no plans to buy anything. We walk by a barbershop, and I notice that there's no wait for a haircut. Having no money, I borrow some from you, write you an IOU, and go get my haircut, during which time no other customers have to wait. According to Cochrane, it's not merely the case that this couldn't happen in some models (models where the barber, having no customers, cuts prices -- or goes home to mow the lawn -- or models where you don't carry idle cash around), but that as a matter of accounting, this can't happen...

    If I thought I had found an error (or a crucial unstated assumption that no one had noticed) in the work of Keynes, Hicks, Samuelson, Modigliani, Patinkin, Metzler, Tobin, ... who were not only spectacularly smart but also in many cases (Patinkin, Metzler, Tobin, ...) thought really hard about the asset market... my reaction would be, "I better figure out what my mistake is," not "I better tell the world about this right away"...

    Milton Friedman disagreed with James Tobin about the relative effectiveness of monetary and fiscal policy in "normal" times. I agree with Friedman (and disagree with Tobin) about the relative effectiveness of monetary and fiscal policy in "normal" times. But Friedman thought Tobin was worth debating--Friedman did not have the stupids to claim that Tobin was completely wrong as a matter of "just accounting."

    Bishop Williamson's View: A Sound of Music Is too Pro-Liberty and too Anti-Nazi

    Yep. Here he is:

    Society Saint Pius X - Bishop Williamson's Letters: Firstly, Julie Andrews is nice (of course), but she is too high-spirited to be a nun.... [O]nce inside the door she gives a dazzling demonstration of the superiority of liberty and equality over stuffy old Austrian ways! Immediately undermining - in front of the children - the Captain's tyrannical discipline over them, she proceeds to win their hearts (of course) by a combination of being their friend, taking their side, making them sing and have fun, all this without a trace of motherliness and all the time looking as cute as a kitten. She even looks cute when she prays, in fact who would not pray when it makes you look so specially cute?.... But enter now the villains!... villain of villains, a - a - a NAZI! (Original sin? - never heard of it! Isn't all sin Nazi sin?)...

    No, this is not from The Onion...

    Time to Bang My Head Against the Wall Some More (Pre-Elementary Monetary Economics Department)

    Oh boy. John Cochrane does not know something that David Hume did--that the velocity of monetary circulation is an economic variable rather than a technological constant. Cochrane:

    Fiscal Fallacies: First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending.  Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

    Let us take this slowly.

    Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.

    Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.

    In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.

    In a second scenario Beverly says to Alice: "I have a house. Why don't you build a deck--I will pay you $500 after the work is done. Here is the contract." Alice takes the contract and goes to Carol. She shows the contract to Carol and says: "See. I will be good for the debt. Cook me meals so I will have the strength to build the deck--here's another contract in which I promise to pay you $500 within 90 days if you cook for me." Carol agrees.

    Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.

    Alice then asks Beverly for payment. Beverly says: "Wait a minute." She goes to Carol and says: "Here is the the $500 cash I owe you." Beverly pays the money to Carol. Beverly then says: "But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?" Carol says: "Sure." Beverly files an amended deed showing Carol's mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.

    The net result? (a) Alice who would otherwise have been idle has been employed--has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed--has traded her labor for a secured lien on Beverly's house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.

    Alice has more income and consumption expenditure than if she hadn't taken Beverly's job offer. Carol has more income and saving than if she hadn't cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.

    A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.

    John Cochrane would say that this is impossible. John Cochrane would say:

    [I]f money is not going to be printed, it has to come from somewhere. If Beverly borrows a dollar from Carol, that is a dollar that Carol does not spend, or does not lend to Deborah to spend on new investment. Every dollar of increased Beverly spending must correspond to one less dollar of Carol or Deborah spending.  Alice's job created by Beverly spending is offset by a job lost from the decline in Carol or Deborah spending. We can build decks instead of fountains, but Beverly stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

    John Cochrane is wrong.

    You sometimes see this mistake in freshmen students in Economics 1, students who do not fully understand either the circular flow of economic activity or what a credit economy is. They think--like Cochrane--that the flow of spending must be constant unless somebody "prints money" because, you see, you need "money" in order to buy things.

    The premise is true--you do need "money" to buy things--but the conclusion is false: the flow of spending is not necessarily constant. In the world in which Beverly does not hire Alice but instead pays the $500 directly to Carol, that $500 turns over only once--its velocity of circulation is equal to one. In the world in which Beverly does hire Alice, the velocity of circulation of the $500 is four--it goes from Beverly to Carol, from Carol to Beverly, from Beverly to Alice, and from Alice to Carol.

    Cochrane's mistake--an elementary, freshman mistake--is because he has not thought enough about how a credit economy works to recognize that the velocity of circulation can be an economic variable and is not necessarily a technological constant. And as the velocity of circulation varies, the amount of the flow of spending varies as well: it is now longer the case that if Beverly borrows a dollar from Carol that is a dollar that Carol does not spend.

    Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant.

    I do want to pound my head against the wall.

    I do not know what else to do...

    People of Ohio! Please Don't Elect Rob Portman to the Senate

    Senate Guru writes:

    Senate Guru:: OH-Sen: Rob Portman, "A Bush Guy": epublican Senate candidate two-time George W. Bush appointee Rob Portman will no doubt spend the entirety of his Senate campaign running away from George W. Bush and his record.  However, that will be awfully difficult given that Portman served as George W. Bush's Trade Representative (May 17, 2005 - May 29, 2006) and Office of Management and Budget Director (May 29, 2006 - June 19, 2007), two key roles on George W. Bush's economic team.  Nevertheless, Portman is trying to run from Bush and has been called out for it...


    The Scorecard: 2008 Congressional campaign news and analysis: s the liberal Buckeye State Blog points out, Ohio Republican Rob Portman’s Senate campaign biography  avoids mentioning President Bush by name when describing his work in the President’s Cabinet. But he has no such qualms mentioning the first President Bush by name, where he served as Associate White House Counsel before his Congressional stint. Coincidence?

    --Josh Kraushaar

    Now service in the George W. Bush administration does not automatically disqualify one for further high office--there are people who have served in the Bush administration and have emerged with strengthened reputations, aren't there?

    But Rob Portman was both the least effective USTR in history and the worst OMB Director in history--worse even than his predecessor, Mitch Daniels.

    An Era of Phoning in Misinformation Comes to an End...

    Danny Shea writes:

    Bill Kristol's New York Times Column Ends: The speculation as to whether Bill Kristol will continue his career as a New York Times columnist can end. Buried at the end of his column Monday is this announcement:

    This is William Kristol's last column.

    But where is the public apology? Where are the editorial resignations? Where is the ombudsman's review of how the horrible decision to hire him was made? Where is the three-page spread correcting all the misrepresentations he has made over the past year? Where is the pledge that in the future the New York Times will warrant that it will only publish those who are trying to inform rather than mislead its readership?

    Bad Faith Economics

    Paul Krugman:

    Bad Faith Economics: As the debate over President Obama’s economic stimulus plan gets under way, one thing is certain: many of the plan’s opponents aren’t arguing in good faith.... John Boehner, the House minority leader, has already made headlines with one such shot: looking at an $825 billion plan to rebuild infrastructure, sustain essential services and more, he derided a minor provision that would expand Medicaid family-planning services — and called it a plan to “spend hundreds of millions of dollars on contraceptives.”...

    [T]he bogus talking point that the Obama plan will cost $275,000 per job created.... It’s as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)...

    Next, write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.... [N]obody really believes that a dollar of tax cuts is always better than a dollar of public spending....

    Finally, ignore anyone who tries to make something of the fact that the new administration’s chief economic adviser has in the past favored monetary policy over fiscal policy as a response to recessions.... [T]hat might be the best option right now, if it were available. But it isn’t, because we’re in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero. That’s why we’re talking about large-scale fiscal stimulus: it’s what’s left in the policy arsenal now that the Fed has shot its bolt. Anyone who cites old arguments against fiscal stimulus without mentioning that either doesn’t know much about the subject — and therefore has no business weighing in on the debate — or is being deliberately obtuse.

    New York TImes Crashed-and-Burned Watch (This Week in Journamalism Department)

    Everybody who still subscribes to the New York Times, please listen! Think of what they are doing: they are still paying your money to Ben Stein.

    Outsourced to Andrew Leonard:

    Ben Stein: Please eat your hat: Over the weekend, reader David Ricketts suggested that I ask Ben Stein, the comedian economist who inexplicably has a column in the New York Times, to eat his hat. Since I am in a generous mood on this Inauguration Day, I will do just that.

    For reasons that probably should not be delved into deeply, Ricketts spent the weekend rereading a Ben Stein column from Dec. 2, 2007, "The Long and Short of It at Goldman Sachs." At the time, Felix Salmon, Dean Baker, and Yves Smith all conducted exhilarating displays of Stein-demolition, so it might seem like I am coming late to the party.

    But some bad columns only ripen to their true fullness of wrongheadedness after the slow passage of time. And so it is with Stein. Never mind the ostensible thesis of the column -- that Goldman Sachs runs the universe and was pushing dire forecasts of the economic future to boost their own trades. Heck, if any Wall Street institution did run the universe, Goldman Sachs would be the most likely suspect, so I have no particular problem with that conspiracy theory, provided it is properly argued.

    The fun part in looking back at this column is watching Stein scoff at the deeply bearish pronouncements of Goldman Sachs' chief economist, Jan Hatzius. This is the kind of scoffing that does not benefit from hindsight.

    First, Stein summarizes a recent paper by Hatzius.

    Dr. Hatzius, who has a Ph.D. in economics from "Oggsford," as they put it in "The Great Gatsby," used a combination of theory, data, guesswork, extrapolation and what he recalls as history to reach the point that when highly leveraged institutions like banks lost money on subprime, they would cut back on lending to keep their capital ratios sound -- and this would slow the economy.

    This would occur, he said, if the value of the assets that banks hold plunges so steeply that they have to consume their own capital to patch up losses. With those funds used to plug holes, banks' reserves drop further. To keep reserves in accordance with regulatory requirements, banks then have to rein in lending. What all of this means -- or so the argument goes -- is that losses in subprime and elsewhere that are taken at banks ultimately boomerang back, in a highly multiplied and negative way, onto our economy.

    I think we can all agree that, yes, this is exactly what actually turned out to happen. Hatzius nailed it. But Stein didn't see it that way.

    As I interpret it, Dr. Hatzius was saying that the financial system would possibly not be able to adjust to a level of financial losses that are large on an absolute scale but small compared with aggregate credit or the gross domestic product. He is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter -- an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.

    In other words, with the greatest possible respect to Dr. Hatzius, his paper is not really what I would call a serious overview of the situation. It is more a call to be afraid and cautious based on general principles that he embraces and not on the lessons of history.

    To be fair, the vast majority of economists failed to predict how the housing bust/subprime meltdown would set off a cascade that incited the worst economic crisis since the Great Depression. But I dare say few got it wrong with such a tour-de-force of willful arrogance as Ben Stein.

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

    The New York Times Should Be Deeply, Deeply Embarrassed by Itself. But It, Somehow, Isn't

    Outsourced to Hilzoy:

    The Washington Monthly: Dear Ben Stein ...

    Ben Stein has a truly unbelievable column in today's NYT (h/t). You should stop reading this post right now, and after you've made sure that you won't get Diet Coke all over the keyboard once you start laughing, click through and read it.

    For those of you who didn't take my advice: he starts by telling us a tale of woe. A woman he knows has an interest-only mortgage on a house that was worth $2.7 million when she paid for it, and costs her about $12,000 a month. She gets $20,000 a month in child support and alimony, half of which will stop this summer.

    "She has a wealthy beau who pays her credit card bills and other incidentals, but she is thinking of telling him she is through with him. She has no savings and has refinanced her home repeatedly, always adding to indebtedness and then putting the money into a shop she owns that has never come close to earning a dime. Now she is up all night worrying about money. "Terrified," as she put it. She wanted me to tell her what to do.

    Ben Stein has, he says, known this woman since she was a teenager. The time for financial advice was a long, long time ago, before the housing market went down and her chances to sell at a profit shrank dramatically, before the economy tanked and her prospects for gainful employment went glimmering. On the other hand, it's not entirely clear that someone who has, apparently, lived her whole life on someone else's dime, without asking herself whether this arrangement was sustainable until quite recently, would have listened.

    Then there's Ben Stein's son:

    My handsome son, age 21, a student, has just married a lovely young woman, 20. You may have seen on television the pudgy, aging face of their sole means of support. (...)

    I wish I could teach that work ethic to those close to me. I wish I could teach them that money is a scarce good, worth fighting for and protecting. But I very much fear that my son, more up-to-date than I am in almost every way, is more of a modern-day American than I am. To hustle and scuffle for a deal is something he cannot even imagine. To not be able to eat at any restaurant he feels like eating at is just not on his wavelength. Of course, thatâ's my fault. (I have learned that everything bad that happens anywhere is my fault.) And I hope to be able to leave him well enough provided for to ease his eventual transition into some form of self-sufficiency.

    Ben: your friend has already made enough disastrous choices that she probably has few options that do not involve selling most of her worldly goods. But your son is a different story. Supporting him while he's a student is fine. Supporting him in such a way that "to not be able to eat at any restaurant he feels like eating at is just not on his wavelength" is a different story. That's not necessary, and it's no favor at all to your son.

    I know whereof I speak. When I was a kid, I had no conception of money at all. It did not occur to me until some time in junior high that people took jobs for any reason other than because working was interesting, and because one should try to be of some use to the world. It never really occurred to me to wonder how my parents came to have a house, or clothes, or the money they gave me for my allowance.

    However, I did know one thing: that to rely on my parents for things I could do myself, let alone to simply expect the world to somehow produce whatever I wanted, was somehow shameful. I was aware that there were kids who were spoiled -- I even knew some -- but I never particularly wanted to be one of them, however much I might have wanted this or that particular toy. It wasn't that I looked down on them or disliked them. It was that I was puzzled by something like their lack of self-respect. (This is, of course, how I put it now. Back then I would not have been able to say what bothered me about them. But something always did, and it wasn't something bad about them; more something sad.)

    This way of thinking has always served me well. Where, I wonder, could I possibly have gotten it? Might there have been some, well, some adults who were in a position to have influenced my thinking when I was a child, and who might have given me this idea? Like, maybe, I don't know, my parents?

    I don't want to say that everything is all Ben Stein's fault. His son is an adult, and adults are responsible for their actions. I do, however, think that saying "I wish I could teach that work ethic to those close to me" about your own children is a bit peculiar. Some people do manage to teach their children about the importance of fending for themselves. Luckily for me.

    However, what's done is done. If I were Ben Stein, I think I'd revisit the nature of my support for my son. If the idea that he might not be able to eat out wherever he wants any time is alien to him, he either has very, very, very simple tastes or is getting way too much money. That should stop. Moreover, if I were backing any of my son's credit cards, or in any other way enabling him to rack up debt rather than living on a budget, I would stop that as well. I'd also figure out what I was prepared to do for him once he graduated, and make that very, very clear well in advance. Then I would stick to it. And "what I was prepared to do" would not be "support him and his wife indefinitely."

    Of course, this is a lot easier if you've already taught your kids that self-respect requires self-reliance. In that case, given a modicum of luck, any arguments you have about money will go like this:

    Parent: Wait, why didn't you tell me you needed money?

    Kid: Um, er ... (shuffles feet and looks at floor.)

    However, better late than never. You will be doing your son a favor. You'll know you're on your way if, the next time you write a sentence like "The age when money was a free good, available in unlimited quantities just for signing a note, may well be over", he looks at you, rolls his eyes, and says: "Money was free? Really? When exactly was that, Dad?"

    And if, on reading a column like this one, your son asks you why you're focussing on someone who managed to get deep in debt while living in a $2.7 million dollar house and getting $240,000 a year in alimony and child support, and not on people who are poor or middle-class, then you can rest easy and congratulate yourself on a job well done.

    The New York Times: why does it exist?

    Best Anti-Stimulus Argument: from Kevin Murphy

    Matthew Yglesias agrees that Kevin Murphy gives the:

    Best Anti-Stimulus Argument I’ve Seen: Kevin Murphy’s slides here. I think he overstates the deadweight loss effect and is working with the wrong conception of “efficiency” for these purposes when he claims that government is inefficient, so the odds of a stimulus being successful therefore aren’t as bad as he indicates. And this doesn’t change the fact that I haven’t heard any better ideas than doing a big stimulus. But this is a sobering reminder that a big stimulus doesn’t guarantee success—very hard work needs to be done on making sure that stimulus funds target genuinely idle resources rather than diverting non-idle resources while leaving the idle ones as idle as ever.

    Here is Kevin:

    Evaluating the Fiscal Stimulus

    Kevin M. Murphy
    January 16, 2009

    A Framework for Thinking about the Stimulus Package

    • Let G = increase in government spending
    • 1-α= value of a dollar of government spending (α measures the inefficiency of government)
    • Let f equal the fraction of the output produced using “idle” resources
    • Let λ be the relative value of “idle” resources
    • Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending

    When Will the Stimulus Add Value?

    • The net gain is the value of the output produced less the costs of the inputs and the deadweight loss

    • In terms of the previous notation we have: Net Gain = (1-α)G –[(1-f)G + λfG] –dG

    • Net gain = (f(1-λ) –α–d)G
    • A positive net gain requires that: f(1-λ) > α+d
    • Difference of opinion comes from different assumptions about f, λ, α, and d

    My View * α likely to be large * Government in general is inefficient * The need to act quickly will make it more inefficient * The desire to spend a lot in a short period of time will make it more inefficient * Trying to be both stimulus and investment will make it even more inefficient * 1-f likely to be positive and may be large * With a large fraction of resources employed (roughly 93%) much will be drawn from other activities rather than “idle” resources * Ricardian equivalence implies that people will save to pay for future taxes reducing private spending * λ is non-zero and likely to be substantial * People place positive value on their time * Unemployed resources produce value through relocation (e.g. mobility & job search) * d is likely to be significant * Wide range of estimates of d * Estimates based on the analysis of taxable income imply d≈0.8 * With these parameters the stimulus package is likely to be a bad idea

    As I read it, Kevin thinks α = 1/2, f = 1/2, λ = 1/2, d = 0.8, and gets 0.25 > 1.3. I would say that α = 0 (increasing income inequality and starvation of the non-health non-military public sector over the past generation have left a bunch of low hanging fruit), f = 1.5 (there are multipliers out there, and markets work if there is sufficient demand: as long as there are idle resources people will use them first as long as demand is available), λ = 1/5 (the cyclically unemployed are not having much fun), and d = 1/3. So I get 1.2 > 0.33.

    More interesting, I think, is that there is an unemployment rate at which Kevin Murphy's priors would switch and he would become a stimulus advocate. What is it?

    The Bush Administration: Worse than I Could Imagine


    The Washington Monthly: Hmm. Incoming officials say there are no files. Some Bush administration ex-officials agree, but others say that there are files, and that the Obama administration is just making excuses. Who is right?

    As it happens, a couple of weeks ago, I wrote that deciding what to do with individual detainees at Guantanamo "will require going through all their files and evaluating the evidence against them". About an hour later, a commenter at Obsidian Wings who is in a position to know, and who is, in my experience, absolutely trustworthy, replied:

    There aren't files. No one believes this at first, and it takes a long time to accept it, but really, that's it: no files. There are databases that can be searched . . .

    It takes, well, a special kind of administration to detain people for years on end without bothering to assemble case files on them. I'm just glad they're finally gone.