## Economic Policy Institute (September 30, 2009): Generating A Robust Recovery

Economic Policy Institute: Generating A Robust Recovery (Rosa DeLauro, Geoffrey Garin, J. Bradford DeLong, John Irons, Paul Krugman, Steven Pearlstein) * Biographies of Speakers * Policy for a Strong Recovery by J. Bradford DeLong * Presentation Slides * Presentation Transcript * Simple Fiscal Arithmetic ----

## People Are Comparing the Quotes They Gave Ryan Lizza...

... for his forthcoming New Yorker profile of Larry Summers. So far nobody thinks they said anything that would sound really bad out of it's full context.

## Economic History and Modern Macro: What Happened?

Economic History and the Recession

If you ask a modern economic historian—like, say, me—if I know why the world is currently in the grips of a financial crisis and a deep downturn, I will say that I do know and I will give you this answer:

This is the latest episode in a long history of similar episodes of bubble—crash—crisis—recession, episodes that date back at least to the canal bubble of the early 1820s, the 1825-6 failure of Pole, Thornton, and company, and the subsequent first industrial recession in Britain. We have seen this process at work in many other historical episodes as well—1870, 1890, 1929, and 2000, for example. For some reason asset prices get way out of whack and rise to unsustainable levels. Sometimes the culprit is lousy internal controls in financial firms that overreward subordinates for taking risk; sometimes it is government guarantees; sometimes it is the selection of the market as a long run of good fortune leaves the financial market dominated by cockeyed unrealistic overoptimists.

Then the crash comes. And when the crash comes the risk tolerance of the market collapses: everybody knows that there are immense unrealized losses in financial assets and nobody is sure that they know where they are. The crash is followed by a flight to safety. The flight to safety is followed by a steep fall in the velocity of money as investors everywhere hoard cash. And the fall in monetary velocity brings on a recession.

I will not say that this is the pattern of all recessions: it isn’t. But I will say that this is the pattern of this recessions—that we have been here before.

Macroeconomic Theory and the Recession

If you ask the same question of a modern macroeconomist—like, say, the extremely sharp Narayana Kocherlakota of the University of Minnesota—you will find that he says that he does not know:

Why do we have business cycles? Why do asset prices move around so much?... [M]acroeconomics has little to offer by way of answer to these questions...

He will say that there are models that attribute economic downturns to various causes:

[M]ost models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities)...

That is, downturns are either the result of a great forgetting of technological and organizational knowledge, a great vacation as workers develop a sudden extra taste for leisure, or a great rusting as the speed with which oxygen in the air corrodes speeds up and so reduces the value of large things made out of metal.

But he will say that all these strike him as implausible just-so stories that do not illuminate: not to be taken seriously:

The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic.... None of these disturbances seem compelling, to put it mildly...

And so nobody really believes them:

Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables...

Just What Is Going on Here?

First, it does not seem to me that it is the case that nobody really believes these just-so stories. Ed Prescott of Arizona State University really does believe that large-scale recessions are caused by economy-wide episodes of the forgetting of the technological and organizational knowledge that underpins total factor productivity—with the exception of episodes like the Great Depression, which Prescott says was caused by the extraordinary pro-labor pro-union policies of Herbert Hoover that pushed real wages far above equilibrium values. Casey Mulligan of the University of Chicago really does appear to believe that large falls in the employment-to- population ratio are best seen as “great vacations”—and as the side-effects of destructive government policies like those in place today, which are leading workers to quit their jobs so they can get higher government subsidies to refinance their mortgages. (I know; I find it incredible too.) Things that strike Kocherlakota as “patently unrealistic” are not viewed as such by many of his modern macroeconomic peers and colleagues. Why not? Why do they find these just-so stories satisfactory?

Second, whether modern macroeconomics attributes our current difficulties either to causes that I agree with Kocherlakota are “patently unrealistic” or simply confesses ignorance, why do they have such a different view than we economic historians do? Whether they have rejected our interpretations and understandings or simply have built up or failed to build up their own in ignorance of what we have done, why have they not taken and used our work?

The second question is particularly disturbing to me. There is, after all, no place for economic theory of any flavor to come from than from economic history. Someone observes some instructive case or some anecdotal or empirical regularity, says “this is interesting; let's build a model of this,” and economic theory is off and running. Theory is crystalized history—it can be nothing more. After the initial crystalization it does develop on its own according to its own intellectual imperatives and processes, true, but the seed is still there. What happened to the seed?

This situation is personally and professionally dismaying. I do not say that the macroeconomic model-building of the past generation has been pointless. I don’t think that it has been pointless. But I do think that the assembled modern macroeconomists need to be rounded up, on pain of loss of tenure, and sent to a year-long boot camp with the assembled monetary historians of the world as their drill sergeants. They need to listen to and learn from Dick Sylla about Cornelius Buller’s bank rescue of 1825 and Charlie Calomiris about the Overend, Gurney crisis and Michael Bordo about the first bankruptcy of Baring brothers and Barry Eichengreen and Christy Romer and Ben Bernanke about the Great Depression.

If modern macreconomics does not reconnect—if they do not realize just what their theories are crystallized out of, and what the point of the enterprise is—then they will indeed wither and die.

## Monetary Policy, Fiscal Policy, Capital Markets Policy

Paul Krugman is three doors down the hall right now, but I am going to talk to him through the magic of the internet rather than mosying down:

Does unconventional monetary policy solve the zero bound problem?: Some comments on my post on the true cost of fiscal stimulus argue that the zero lower bound aka liquidity trap isn’t really binding, because the Fed is using other measures to expand the economy. A few commenters imply that I haven’t been paying attention.

Well, yes I’m aware that BB is doing a bunch of unconventional stuff. But the available — albeit thin — evidence is that it takes a huge expansion of the Fed’s balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn’t willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it “should” be given, say, a Taylor rule. Which means that the zero bound is still binding, which means that right now we’re very much still in liquidity trap territory. I would put it someehat differently. There's fiscal policy--using the government to expand output holding the risky long-term real interest rate that governs business investment and household borrowing decisions constant. There's monetary policy---using open-market operations to boost or retard the economy holding the short-term safe nominal interest rate constant. And then there is capital markets policy: operating on the wedge between the risky long-term real interest rate and the short-term safe nominal interest rate. If you set up those three boxes, then a huge number of things fall under the rubric of "capital markets policy"--banking recapitalization. loan guarantees, nationalizations, bank rescues, asset purchases, and the sending of signals that alter the expected rate of future inflation. You can call Federal Reserve policies aimed at the sending of signals that alter the expected rate of future inflation "monetary policy" if you want, but then you lose analytical clarity--because the way such policies work (if they work) is not the "normal" way that "normal" monetary policy works. Normal monetary policy works by shifting the private sector's asset holdings toward assets that people spend more readily and rapidly, thus boosting spending. Quantitative easing at the zero bound does not do that: it simply exchanges one zero-yield government asset for another. What is does do is to change bond prices, rather by raising the safe short-term nominal interest rate and thus giving people an incentive to spend the money they already have more quickly. ## Generating a Robust Recovery Economic Policy Institute: Generating a Robust Recovery September 30, 2009: 2:00 PM - 4:30 PM Officially, the Great Recession may be coming to an end, but it will leave in its wake historically high unemployment and a host of other serious economic problems. How will policy-makers promote a robust, employment-led recovery that will lay the foundation for strong, long-term growth? Meeting this challenge requires both the will to continue investing in families hard hit by the recession despite growing budget deficits and the skill in crafting the right mix of policies to ensure that this recovery - unlike the last one - will bring significant numbers of new jobs and rising living standards along with it. Please join the Economic Policy Institute for a discussion of these issues with noted experts in this exciting forum. Registration begins at 1:30 p.m. Coffee and snacks will be provided. Location: Economic Policy Institute, 1333 H Street NW, Suite 300 East Tower, Washington DC (Near McPherson Square Metro (Orange/Blue lines) and Metro Center (Red line)) Keynote speakers: • Rep. Rosa DeLauro, Congresswoman, 3rd District of Connecticut • Geoffrey Garin, President, Hart Reasearch Associates Panelists: • J. Bradford DeLong, Professor, UC Berkeley; Research Associate, National Bureau of Economic Research • John Irons, Research and Policy Director, Economic Policy Institute • Paul Krugman, Columnist, New York Times; Professor, Princeton University and Nobel Laureate Moderator: • Steven Pearlstein, Business Columnist, The Washington Post Register for this event: This event is at capacity and will not accept additional guests. ## Macroeconomic Policy for a Stronger Recovery J. Bradford DeLong Professor of Economics, U.C. Berkeley Research Associate, NBER September 30, 2009 A Little Background About a year and a half ago—in the days after the forced merger of Bear Stearns into J.P. MorganChase, say—there was a near consensus of economists that an additional dose of expansionary fiscal policy was unlikely to be necessary. The Congress had passed a first round of tax cut-based stimulus, the impact of which in the summer of 2008 is clearly visible in disposable personal income and perhaps visible in the tracks of estimated monthly real GDP. The near-consensus belief back then, however, was that that was the only expansionary discretionary fiscal policy move that was appropriate. With the Bear Stearns forced merger it appeared that the Federal Reserve and the Treasury had settled on a policy: they would punish as severely as they could the shareholders of and the managers at institutions too-big-to-fail that required rescue, but that they would insulate bondholders and counterparties. The incentives to avoid bankruptcy would thus be concentrated on those who actually had power to do something to manage organizational risk. As for the rest—well, the markets interpreted the forced merger as the Federal Reserve guaranteeing and making riskless essentially all the unsecured debt of all the large commercial and investment banks in the country. Figure 1: (Nominal) Disposable Personal Income Figure 2: Monthly Real GDP Estimates from Macroeconomic Advisors The resulting “approaching liquidity tsunami,” as more than one senior policymaker described it to me, meant that the risk of a deep recession was very low—or so the situation looked in the spring of 2008. Late 2008’s Need for Expansionary Fiscal Policy By the late summer of 2008 things looked significantly different. The tax-based expansionary fiscal policy of early 2008 had had less than the desired effect—perhaps it had prevented a decline in the economy and kept things marching in place, but it effect was not overwhelming and not entirely obvious. It was clear that the formal announcement that the economy had fallen into recession was only a matter of time. By August 2008 Lawrence Summers was writing of a gap between actual and sustainable production of$300 billion at an annual rate, forecasting that that gap was likely to more than double over the following year, and predicting sustained weakness thereafter—“unemployment peaked nearly two years after the end of the last recession, output and employment are likely to remain below their potential levels for several years in the best of circumstances…” in a time when “the remaining scope for monetary policy to stimulate the US economy is surely very limited…”[1] Take an initial output gap growing from $300 to$600 billion over the first year and then declining to zero over the next three and you have a cumulative output gap of $1,350 billion in a situation in which monetary policy on it own can do little to correct it. Suppose that a prudent use of fiscal policy would be to enlarge the government’s budget deficits by a third of the forecast output gap, and you have an estimate of the appropriate size of expansionary fiscal policy as the situation looked in August 2008:$450 billion in cumulative deficit spending spread out over the next four years.

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

If $450 billion was the appropriate size of a short-term deficit-spending program for the$1,350 billion cumulative output gap anticipated as of August 2008, then simple extrapolation suggests that the appropriate size of the boost to short-term deficit spending as of February 2009 was $1.8 trillion (over three to four years). What we got was a cumulative number of$600 billion—roughly 1/3 aid to states, 1/3 tax cuts (in a good-faith effort by the Obama administration to propose a bipartisan plan that legislators of both parties could sign on to), and 1/3 infrastructure and other direct government purchases intended not so much to slow the decline as rather to boost the recovery. We also got an extension of the AMT and other measures that no economist I have talked to believes are properly counted as part of an effective fiscal boost under any currently-live theory of how the economy works. Figure an increase in deficits of $200 billion per year spread out over the next three years. At the technocratic level, the disproportion between the size of the response and the magnitude of the need is obvious. Today’s Arguments Against More Fiscal Expansion Now if you go outside and, addressing the air, ask why it is that we did not pass a larger short-term deficit-spending fiscal boost program of$1.2 or $1.8 trillion last January and February and why we are not acting to boost it now, I hear four different answers coming back on the wind: 1. This was the most that the Obama administration could get sixty senators to vote for—and with a Senate that, in Majority Leader Harry Reid’s words, takes forty-eight hours to flush the toilet it needs to spend its time on legislative initiatives that might pass, rather than on those that certainly will not. 2. Further expansionary fiscal policy would be counterproductive in this current situation because of the long-run U.S. budgetary and global balance-of-payments imbalances. More short-run deficit spending would require the U.S. to issue more debt which would cause a sharp spike in U.S. long-term interest and a flight from the dollar that would generate a much bigger crisis and deeper depression—as Austria’s issuance of huge amounts of additional debt in 1931 set off the wave of crises that turned the recession of 1929-1931 in Europe into the European half of the Great Depression. 3. Further expansionary fiscal policy would be counterproductive because it never works—because it is theoretically impossible for it to work—because it is a “fairy tale.” 4. The ARRA is only one of a large number of initiatives to stimulate the economy outside of the normal open-market operations monetary expansion framework. When you include the likely effects of all of the acronyms—TARP, PPIP, MMIFL, TALF, CPLF, TAC, etc.—you find that even though there is only$600 billion of cumulative expansionary fiscal policy, there is much more in terms of total non-standard-monetary stabilization policy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Should We Do Now?

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

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

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

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

Figure 4: Past and Projected Employment-Population Ratio

What kind of action, however?

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

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

(2) An expansion not in length but in flow of the current fiscal boost package: last January a number of us were saying that an $800 billion cumulative fiscal boost was OK—but that there also ought to be a trigger in the budget resolution so that if unemployment rose near 10% the fall reconciliation bill could be used to top off the program. That didn’t happen. It ought to have happened. It would be nice to make it happen—and there is a deal to be struck with more deficit spending in the short-term and tax-increase or spending-cut triggers in the long term should the deficit not return to sustainable levels after the recession passes. (3) Less obvious would be measures to aid useful deficit spending in other levels of government. During this recession the states have, as Paul Krugman puts it, turned into fifty little (and not so little) Herbert Hoovers. The obvious policy to enable states that want to avoid counterproductive budget-cutting in this recession to do so is: • Have the federal government support the prices of deficit-spending bonds issued by state governments that also put credible and automatic amortization plans in place. This support could be provided either at the level of the Treasury—with the Treasury Department approving state fiscal policies as sustainable in the long term and thus qualifying for loan guarantees—or at the level of the Federal Reserve—with the Federal Reserve offering to support the prices of state deficit-spending bonds that come attached to legislated sustainable state-level fiscal policies. (4) Also a possibility: bringing forward long-term investments that we ought to be making over the next generation. The people I talk to at Berkeley who actually know what they are talking about say that over the past decade and a half since the Senate rejected Al Gore’s BTU tax the 3 degree Fahrenheit warmer world in 2150 has probably slipped out of our grasp, and that the good possibility going forward is a 7 degree Fahrenheit warmer world in 2150. To get there the U.S. has to lead—take the first steps—and then work hard to pull the rest of the world along to an appropriate global warming policy. The best way to get there would be a carbon tax. A somewhat worse way would be a cap-and-trade system that grandfathers in many current highly inefficient uses of open carbon cycle energy. A still worse way would be for the EPA to start regulating greenhouse gases as pollutants. We would like to use the effective carrot of the market rather than the stick of command-and-control regulation, but the Senate may keep us from doing so. In that case—if we aren’t providing the incentives for businesses and people to make the investments in closed-carbon cycle and other green energy technologies through a carbon tax or a cap-and-trade system—then the government will need to make those investments or provide separate incentive programs to induce people to make them. How big?$5,000 per household in commercial, industrial, and residential cost-effective energy investments does not seem out of line. (We’ve done $20,000 over the past five years in our house and are getting 6% per year at current PG&E electricity prices.) And that would be$500 billion nationwide.

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

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

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

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

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

## Cost of Expansionary Fiscal Policy?

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

Paul Krugman:

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

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

Here’s why: first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt. But that’s not the whole story. Crowding in raises future GDP — which raises future tax revenues... [and] offsets... some of the burden of debt service.... And that, in turn, means that penny-pinching on stimulus is deeply, destructively foolish. ## Forecasting Friday's Payroll Employment Number Juli Morris writes: WANTED Hiring Demand Indicators: WANTED Technologies forecasts that Nonfarm Employment Payroll will drop by 167,000 in September. Last month the BLS reported a decline of 216,000 nonfarm workers. Several factors contribute to this negative outlook, although we do expect a "relative improvement" in job losses of almost 50,000 compared to last month's report. • There were 32,000 fewer new Unemployment Insurance Claims in the 4 weeks preceding September 12th than in the 4 weeks preceding August 12th. (Nonfarm Employment is counted on the 12th day of each month). • Hiring Demand has remained almost unchanged on a seasonally adjusted basis compared to last month. There hasn't been a surge in new online job ads that would lead us to believe a strong hiring trend is underway that could reverse employment losses. • Job losses, according to the August Employment Situation, have "moderated, [...] although job losses continued in many of the major industry sectors". In other words, job losses continue, but there has been a slow down in these losses. Update: The consensus estimate from Thomson/Reuters predicts a decline of 170,000 jobs for September. ## Ryan Avent Does the Intellectual Trash Pickup: Contraception, Population, and Innovation Update In the British Medical Journal, Lord Michael Jay and Professor Michael Marmot pleaded that the girls of sub-Saharan Africa get access to school and the women of sub-Saharan Africa get access to contraception: Health and climate change: The threat to health is especially evident in poorest countries, particularly in sub-Saharan Africa, as the recent Lancet and University College London report shows. These countries are struggling to meet the Millennium Development Goals. Their poverty and lack of resources, infrastructure, and often governance, greatly increase their vulnerability to the effects of climate change. Warmer climate can lead to drought, pressure on resources (particularly water), migration, and conflict. The conflict in Darfur is as much about pressure on resources as the desert encroaches as about the internal politics of Sudan. And the implications for the health of local populations are acute: on the spread and changing patterns of disease, notably water borne diseases from inadequate and unclean supplies; on maternal and child mortality as basic health services collapse; and on malnutrition where food is scarce. And population stabilisation will not be achieved if, for want of resources, girls are not educated and contraceptives are unavailable... In the New York Times, Casey Mulligan took aim at Jay and Marmot. He said that the "population control" they advocate would be a bad thing: The More the Merrier: Population Growth Promotes Innovation: A recent study reiterated the conclusion that population growth ought to be controlled in order to combat global warming, and other world problems. I beg to differ... Why? Because, Mulligan said, a higher population in sub-Saharan Africa would increase the global rate of technological progress: The authors... exaggerated the benefits of population control... ignore some of the significant economic benefits of large populations.... [T]echnology itself depends on population. Especially important among the sources of technical progress--discoveries--are trial and error, and incentives. Reasonable people can disagree about the relative importance of these two, but both are stimulated by population... This seemed to Ryan Avent (and to many others as well) to be one of the silliest arguments against women having options for education and contraception ever made. And he said so. Now Casey Mulligan whines: Supply and Demand (in that order): Say It Enough, and It Becomes Truth: I write "The authors of studies like these have exaggerated the benefits of population control, because they ignore some of the significant economic benefits of large populations." Within hours it is claimed that I wrote "we shouldn't improve education and access to contraception in developing nations"! Shortly thereafter, it is repeated that I said that "we shouldn't improve education and access to contraception in developing nations." Obviously, it is too risky to rebut me directly--ie, take the position that it is OK to ignore some of the significant economic benefits of large populations. But why not just ignore my point rather than fabricating something to discredit? And Ryan takes out the trash: The benefits of "population control": LAST week, Casey Mulligan wrote what I considered to be a very strange post. In it, he mentioned people who have lately been arguing that making educational opportunities and contraception available to poor women would do a lot of good, before going on to note that controlling population might slow innovation. To me, this read a lot like Mr Mulligan was saying that we shoudn't be anxious to provide poor women with educational opportunities and contraception. He now says that that's not what he was saying. To which I say: if you say so. I'll let readers make up their own minds. But Mr Mulligan goes on to write: Obviously, it is too risky to rebut me directly -- ie, take the position that it is OK to ignore some of the significant economic benefits of large populations. But why not just ignore my point rather than fabricating something to discredit? He accuses me of ignoring his point (or are you actually saying something else, Mr Mulligan?), when in that same post linked above I wrote: Mr Mulligan has taken a rather know-nothing view of population growth. In developed countries, the demographic transition (where declines in death rates are ultimately followed by declines in birth rates) was associated with increased investments in human capital for women and children. Family planning allowed women to participate in the workforce and increased household incomes, while smaller families sizes enabled parents to invest more in a child's education, better preparing them for skilled work later in life. In other words, offering women in developing nations better educational opportunities and access to contraception is the right thing to do, and it contributes to growth in the supply of skilled workers, including those most likely to enter technological fields and contribute to innovation. Mr Mulligan's suggestion, by contrast, seems to be that women should continue to struggle to limit family size, leaving developing nations with large populations of poor, uneducated youths, unable to do much in the way of skilled work, and unable to offer much of a domestic market, such as might act as an incentive to entrepreneurs and innovators. It would seem that Mr Mulligan ignored my point, which was that giving women the ability to control family planning decisions allows both women and children to increase their levels of human capital, thereby increasing innovation and societal wealth. As evidence for this, I would cite the real world, where countries that have completed the demographic transition tend to generate much, much more innovation than countries which have not. So there you have it—one big reason it is ok to be in favour of giving poor households the ability to choose family size, and one more instance in which Casey Mulligan is dead wrong. Thank you, Ryan. ## links for 2009-09-29 • Roman Polanski instructed her to get into a jacuzzi naked, refused to take her home when she begged to go, began kissing her even though she said no and asked him to stop; performed cunnilingus on her as she said no and asked him to stop; put his penis in her vagina as she said no and asked him to stop; asked if he could penetrate her anally, to which she replied, "No," then went ahead and did it anyway, until he had an orgasm. • Keep in mind that Polanski has admitted to drugging and anally raping a 13-year-old girl. Jean Valjean stole a loaf of bread to feed his starving nephew. But yeah Patrick, I can totally see the moral equivalency you're going for there. • The Conservative hegemony does not spring from any huge growth in the Conservative vote. A divided opposition has granted it by default. There has arisen no new social base for the Conservative Party.... [T]here has been no ideological sea-change.... Support for the NHS is undiminished, as it is for the collective provision of education.... Tax-cutting is a Chancellor’s conjuring-trick... the electorate... have a preference for maintaining the decencies of the welfare state.... [I]nefficiencies in the public sector are tolerated less willingly by voters. But overall it is... fairness, neighbourliness, an economy run in a broadly-defined public interest – that is more in tune with that of the electorate.... Mrs Thatcher holds power in spite of Thatcherism and not because of it. And have the uncertainties and iniquities of Thatcherism been justified by the attainment of an economic miracle? Certainly one has been claimed... • This is a perfect example of a misleading metaphor. No one today would want to live in a house from 100 years ago... nor do we want to give up our laptops. Because most of our financial products were around 100 years ago, we must be missing out on all sorts of potential improvements. But nowhere does Shiller show – or even argue – that there is some underlying feature of financial products that makes them like technological products in this respect.... The point of our Democracy article was to argue that there is in fact no equivalent for financial products, because financial innovation is fundamentally different from technological innovation. You may not agree with us, but at least we argued the case, instead of relying on a metaphor... • I decided just to boost this comment I made in the thread below.... So where I’m going with this is, that f---ing s---ed and was a terrible experience for me, and Dr. Kealy is a f---ing a--hat who is even now making the lives of his attractive female students needlessly miserable.... Just adding, it was particularly irritating about the grade, because I really did deserve an A+ in that class, but it was impossible to know whether my grade was influenced by my breasts..... I doggedly went on earning the same grade in other classes.... But the tarnish never really went away. And all of this fell under the look but don’t touch rubric, while still being humiliating and awful.... [T]here’s a reason all those annoying strident feminists go on about how the personal is the political. Kealy doesn’t know the personal histories of the female students he’s ogling. And they deserve to be treated like human beings, not fresh-faced dollies to use as mental props during masturbation. • Well, honestly, I wasn’t hoping to provoke responses like “this article is bullshit.”... Mostly, I was hoping to hear things like “you’ve overlooked the influence of cultural studies on X,” or “here at the University of Z we have a cultural studies program that does Y,” so that the collective response would actually help to change the public image of cultural studies in the US (and yes, before anyone else steps up to remind me that I am overlooking Latin American, Asian, and Australian cultural studies, I deliberately focused on the situation of cultural studies in the US). Because I really do believe that that public image is pretty bad ## Schools on a Quarter System Do Start Late, Don't They? Mark Thoma: Here We Go Again...: Teaching starts tomorrow. I thought I'd be used to it by now, but after all these years it still makes me really nervous. ## Washington Post Company Crashed-and-Burned-and-Smoking Watch Why oh why can't we have a better press corps? Eric Boehlert: Newsweek's Howard Fineman: Obama thinks he's all that: This must be one of the stranger White House critiques I've read in quite a while...: Obama can seem a mite too impressed with his own aura, as if his presence on the stage is the Answer. There is, at times, a self-referential (even self-reverential) tone in his big speeches. They are heavily salted with the words "I" and "my." (He used the former 11 times in the first few paragraphs of his address to the U.N. last week.) Obama is a historic figure, but that is the beginning, not the end, of the story. Does Obama constantly refer to himself as an historic figure? Not that I can tell. But maybe Fineman's hearing something else from Obama. As for Obama's speech to the U.N., which Fineman claimed was way too self-referential, let's take a quick look at the text: I come before you humbled by the responsibility that the American people have placed upon me, mindful of the enormous challenges of our moment in history, and determined to act boldly and collectively on behalf of justice and prosperity at home and abroad. I have been in office for just nine months -- though some days it seems a lot longer. I am well aware of the expectations that accompany my presidency around the world. These expectations are not about me. Rather, they are rooted, I believe, in a discontent with a status quo that has allowed us to be increasingly defined by our differences, and outpaced by our problems. Yeah, Obama just needs to get over himself. And Atrios: Every Time I Try To Get Out... : I really was going to try to avoid Polanski blogging, but then Richard Cohen referred to drugging and raping a 13 year old over clear objections as her being "seduced." What is wrong with these people? Let me be clear: there is grave moral fault attached to everybody who pays the Washington Post company a cent for any purpose whatsoever. It would be a better world if it never printed another word. ## A Warmer Planet At caffeine this morning: "So I take it a 2C warmer world is now out of reach? That the best we can hope for now is to stabilize the planet 5C warmer?" "No. You are alarmist. We might be able to hold the average global temperature rise to 4C..." Sixteen years since I watched Democratic senators now long gone from the Senate kill Al Gore's BTU tax... Paul Krugman: Cassandras of Climate: Every once in a while I feel despair over the fate of the planet. If you’ve been following climate science, you know what I mean: the sense that we’re hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it. And here’s the thing: I’m not engaging in hyperbole. These days, dire warnings aren’t the delusional raving of cranks. They’re what come out of the most widely respected climate models, devised by the leading researchers. The prognosis for the planet has gotten much, much worse in just the last few years. What’s driving this new pessimism? Partly it’s the fact that some predicted changes, like a decline in Arctic Sea ice, are happening much faster than expected. Partly it’s growing evidence that feedback loops amplifying the effects of man-made greenhouse gas emissions are stronger than previously realized. For example, it has long been understood that global warming will cause the tundra to thaw, releasing carbon dioxide, which will cause even more warming, but new research shows far more carbon locked in the permafrost than previously thought, which means a much bigger feedback effect. The result of all this is that climate scientists have, en masse, become Cassandras — gifted with the ability to prophesy future disasters, but cursed with the inability to get anyone to believe them.... [I]f you live in, say, Los Angeles, and liked those pictures of red skies and choking dust in Sydney, Australia, last week, no need to travel. They’ll be coming your way in the not-too-distant future. Now, at this point I have to make the obligatory disclaimer that no individual weather event can be attributed to global warming. The point, however, is that climate change will make events like that Australian dust storm much more common. In a rational world, then, the looming climate disaster would be our dominant political and policy concern. But it manifestly isn’t. Why not?... [T]he larger reason we’re ignoring climate change is that Al Gore was right: This truth is just too inconvenient. Responding to climate change with the vigor that the threat deserves would not, contrary to legend, be devastating for the economy as a whole. But it would shuffle the economic deck.... Nor is it just a matter of vested interests. It’s also a matter of vested ideas.... So here we are, with the greatest challenge facing mankind on the back burner, at best, as a policy issue. I’m not, by the way, saying that the Obama administration was wrong to push health care first. It was necessary to show voters a tangible achievement before next November. But climate change legislation had better be next. And as I pointed out in my last column, we can afford to do this. Even as climate modelers have been reaching consensus on the view that the threat is worse than we realized, economic modelers have been reaching consensus on the view that the costs of emission control are lower than many feared. So the time for action is now. O.K., strictly speaking it’s long past. But better late than never. ## The Late Richard Nixon on the Late William Safire: "An Exceptional Jew" PRESIDENT NIXON: All right. I want a look at any sensitive areas around where Jews are involved, Bob. See, the Jews are all through the government, and we have got to get in those areas. We're got to get a man in charge who is not Jewish to control the Jewish... do you understand? CHIEF OF STAFF H.R. HALDEMAN: I sure do. NIXON: The government is full of Jews. HALDEMAN: I sure do. NIXON: Second, most Jews are disloyal. You know what I mean? You have a--you have a Garment and a Kissinger and, frankly, a Safire, and, by God, they're exceptions. But, Bob, generally speaking, you can't trust the bastards. They turn on you. Correct? Am I wrong or right? Let the record show that William Safire spent the last 35 years of his life being loyal to his longtime boss Richard Nixon: trying not so much to build Richard Nixon up but to tear everyone else he thought he could--Bert Lance, Jimmy Carter, Nancy Reagan, George H.W. Bush, Bill Clinton--down to Nixon's level... ## On the Analysis of "Degraded" Popular Cultural Forms Crypto asks Michael Berube: Would your argument be different at all if you'd turned to the place of cultural studies in feminism? And Michael Berube replies: FWhat's the Matter With Cultural Studies?: Re: Knock, knock: Good question -- the answer would be, basically, yes and no. In The Left At War, I do mount a defense of feminists' work in cultural studies in the 80s and early 90s. Here's a snippet: The 1980s witnessed an extraordinary profusion of serious academic books on degraded popular cultural forms: the romance novel, the soap opera, the slasher film, and, of course, the most degraded form of them all, pornography. In each case, the argument was made that the close analysis of these forms was important not because the forms themselves were as aesthetically satisfying as The Tempest or as intellectually complex as Paradise Lost, but because they offered representations of the world, however phantasmic, that attracted millions of people; therefore, so the argument went, it was only reasonable to try to discover and come to terms with the thoughts and impressions of the people who devoted significant portions of their lives to romances or soaps or slash films– or even porn. Following the publication of Stuart Hall’s groundbreaking “Encoding / Decoding” essay and David Morley’s The Nationwide Audience in the U.K., and Tania Modleski’s Loving with a Vengeance and Janice Radway’s Reading the Romance in the U.S., many cultural studies theorists embarked on a kind of mass-media “ethnography” in which they sought the opinions of soap fans, romance readers, and TV viewers in order to try to understand how mass-cultural phenomena were actually “consumed” and understood by mass-cultural audiences. [Footnote here to Modleski, Radway, Carol Clover, Linda Williams, and Laura Kipnis] It is difficult to overstate the amount of derision with which this project met, inside academe and out. When senior (male) scholars weren’t sputtering over what they considered books that should have been published as articles in High Times, mainstream (mostly male) journalists were guffawing at the idea that things like soap operas and romances merited a moment’s thought. [Footnote here to William Kerrigan writing, "People got tenure for writing about the imperialist fantasies of Marvel Comics or the gender rules in Harlequin Romances -- ideas that might have made decent articles for High Times but, driven by theory, got seriously out of hand." I just couldn't make that shit up.] That derision helped to reinforce cultural studies theorists’ initial point– namely, that certain mass cultural forms, and their audiences, are widely considered utterly unworthy of serious attention. But unfortunately, it also confirmed cultural studies theorists’ convictions that they were doing something Deeply Important, something that would shake academe and mainstream journalism and culture to their very foundations. The problem with those convictions of the theorist’s importance, in turn, is part of the larger problem of studying mass culture from a left perspective that looks especially for moments of dissidence or subversion: for if there’s one thing mass culture produces aplenty, it’s moments of “dissidence” and “subversion” that are nothing but. And just as skateboarding and “slash” fanzines aren’t really a threat to global capitalism in the end, so too, the academic study of skate punks and “slash” fans doesn’t really amount to much of a challenge to the established order– save for the established order in a handful of academic disciplines whose established order changes once or twice a decade anyway. ...which, I think, gets back to your original question. --MB ## links for 2009-09-28 ## Are Chicago Economics Nobel-Prize Winners von Neumann-Morgenstern Agents? Something old. On March 30, 2009 Tom Keene of Bloomberg's "On the Economy" interviewed Robert Lucas and Edward Prescott. There is one really interesting juxtaposition from Lucas's part of the interview: LUCAS: Our economy’s got a remarkable ability to return to its long term growth trend. And for most of the depressions we’ve had or recessions, the return has been quick. Two or three, four years... [...] LUCAS: [T]here is no question that fear is what this liquidity crisis is. I mean the reason I got into money [with my portfolio] is that I got afraid to leave my pension fund in other securities. So I’m sitting there with a portfolio full of zero-yield stuff just because I’m afraid to do anything else. I think there are millions of people like me. KEENE: What will be the signal for Robert Lucas to go back into the markets...? LUCAS: I don’t know. Robert Rubin made a joke about that in the first session today. Nobody knows... Let's parse this. First, Robert Lucas says that it is highly likely--certainly his median forecast--that the U.S. economy will be back to normal in three or four years, with a normal level of unemployment, a normal share of profits in national income, and a normal level of dividends and capital gains. This presumably means that stock prices will also be back to normal--a normal multiple of a ten-year moving average of lagged earnings, for example. That means a year-2013 S&P of 2000 or so, compared to its current value of 1044 or its 2009 low of 667. Investing in the S&P 500 for a four-year horizon now is risky, certainly, but the expected return is high. And holding your money in cash is not all that safe either: most of the scenarios I can envision in which the S&P 500 is at a real value in 2013 corresponding to today's 667 are scenarios in which inflation has eaten away most of the value of cash. So what is Robert Lucas doing holding his entire portfolio in cash? Has risk suddenly increased to an extraordinary extent to force the equity share of his portfolio down from 70% to 0% while his expected four-year return on equities over Treasuries has gone from 2.5% or so to 20%? Has his personal tolerance for risk suddenly collapsed to such an extent because he has become a complete coward? Or does he no longer believe his forecast that the U.S. economy is highly likely to be back to normal in four years? Or is he simply not a von Neumann-Morgenstern agent, and moreover lacks any desire to behave as if he were one? No von Neumann-Morgenstern agent faced with such returns would hold his entire TIAA-CREF portfolio in cash. Not a one. Now let me back up a little to Lucas's attack on Robert Shiller and George Akerlof, and their book Animal Spirits: LUCAS: I just don’t get it. I mean look at the Black_Scholes formula. People come up with a formula for pricing options, just out of purely mathematical reasoning, and then it turns out it fits certain data amazingly well. And it’s been incredibly useful to people. Now it’s not useful for everything, but for what it does it’s a huge advance in human knowledge. Now what’s the behavioral finance contribution? They reinforce the idea of skepticism. Well, skepticism, it’s easy to be a skeptic. What’s harder is to tell somebody how to do something they didn’t know how to do yesterday. That’s what Black and Scholes did... Lucas seems to miss the entire big point. Black-Scholes tells you how to do things only if the trades of the non-von Neumann-Morgenstern agents in the economy--that's you, Bob--cancel each other out. If they don't cancel each other out--if there are, as you say, "millions of people like me," then a whole bunch of banks running off of Black-Scholes and similar models without taking account of your existence are going to create a hell of a lot of systemic risk, and then 10% unemployment. ## Do Chicago Economics Nobel-Prize Winners Live in the Consensus Reality? Something old. On March 30, 2009 Tom Keene of Bloomberg's "On the Economy" interviewed Robert Lucas and Edward Prescott. Ed Prescott's part of the interview is much, much stranger than Robert Lucas. In the part I want to highlight, Prescott starts out with an apparent belief that after 1984 the Federal Reserve stopped trying to stabilize the economy: PRESCOTT: I don’t see the mechanism for money [to affect the economy].... [O]nce the Fed stopped trying to stabilize the economy, the economy got a lot more stable... Where this comes from I cannot imagine. It certainly doesn't describe anything the Federal Reserve has done over the past quarter century. And it gets more bizarre. Prescott says that the financial crisis did not affect the economy: PRESCOTT: I think the financial crisis has been greatly overstated as a problem... [it] has had virtually no consequences for the real economy... What did affect the economy was big bad government scaring people for no reason: PRESCOTT: [P]eople got scared.... The press scared people. People running for office scared people. Bernanke scared people; Paulson scared people.... [P]eople began not to know what was going to happen. Then they stopped investing--by investing, I mean getting a new car or fixing up your house. And that led to the economy--it was depressed a bit that fourth quarter of last year... Depressed "a bit"? Yes, a bit--and only a bit: PRESCOTT: The growth rate from 4th quarter 2007 to 4th quarter of 2008, that includes that bad quarter, was 1%.... And if that fourth quarter was a normal quarter, it would have been almost up to trend... If only the Federal Reserve and the Treasury had let the economy alone maybe the fourth quarter would have been a normal quarter, Prescott says: [With] benign neglect the economy would have come roaring back quite quickly... And if the economy does not come roaring back with a very strong recovery now, Prescott knows what to blame: big government scaring people again. He simply does not live in the consensus reality with the rest of us. Ah, well: at least the reality he lives in is a happier place then this one. ## Was Irving Kristol Skeptical of Evolution? We will never know whether he was skeptical of evolution or merely thought that a world in which he claimed to be skeptical of evolution was one in which Republicans would have a greater chance of winning electoral victories. Jeffrey Shallit: Recursivity: Irving Kristol and Evolution: Kristol wrote a piece for the September 30 1986 New York Times about evolution. Here are a few excerpts: Practically all biologists, when they engage in scientific discourse, assume that the earth's species were not created by divine command. As scientists, they could not make any other assumption. But they agree on little else - a fact which our textbooks are careful to ignore, lest it give encouragement to the religious. There is no doubt that most of our textbooks are still written as participants in the "warfare" between science and religion that is our heritage from the 19th century. And there is also little doubt that it is this pseudo-scientific dogmatism that has provoked the current religious reaction... Though this theory [the neo-Darwinian synthesis] is usually taught as an established scientific truth, it is nothing of the sort. It has too many lacunae. Theological evidence does not provide us with the spectrum of intermediate species we would expect. Moreover, laboratory experiments reveal how close to impossible it is for one species to evolve into another, even allowing for selective breeding and some genetic mutation. There is unquestionably evolution within species: every animal breeder is engaged in exemplifying this enterprise. But the gradual transformation of the population of one species into another is a biological hypothesis, not a biological fact. Moreover, today a significant minority of distinguished biologists and geneticists find this hypothesis incredible and insist that evolution must have proceeded by "quantum jumps," caused by radical genetic mutation. This copes with some of the problems generated by neo-Darwinist orthodoxy, but only to create others. We just don't know of any such "quantum jumps" that create new species, since most genetic mutations work against the survival of the individual. So this is another hypothesis - no less plausible than the orthodox view, but still speculative. And there are other speculations about evolution, some by Nobel prize-winning geneticists, that border on the bizarre - for example, that life on earth was produced by spermatozoa from outer space. In addition, many younger biologists (the so-called "cladists") are persuaded that the differences among species - including those that seem to be closely related -are such as to make the very concept of evolution questionable. So "evolution" is no simple established scientific orthodoxy, and to teach it as such is an exercise in dogmatism... I imagine we'll be seeing some biographies of Kristol coming out. I can only hope that any honest biographer will make space to assess Kristol's ignorance of biology and his arrogance in thinking that he understood it better than professional biologists. ## Lizardbreath: The Shameful Obama Administration I did not work to elect Barack Hussein Obama so that his Justice Department could do things like this: Lizardbreath: US District Judge Colleen Kottar-Kelly just ordered the release (don't get excited, it's not going to happen unless the Justice Department decides not to appeal) of Fouad al-Rubiah, one of the prisoners at Guantanamo. Read the opinion -- there are a lot of redactions, so you can't get the details, but we took a middleaged aircraft engineer who flew to Afghanistan for charitable purposes a short while before 9/11, cobbled together some insane story out of interrogations from unreliable informants, and tortured him into confessing to it. If I follow the course of events correctly through all the redactions, we then continued to torture him because the story we told him to confess to didn't make any sense. And now we've asked a judge to keep him imprisoned on the basis of the confessions that the US interrogators found unbelievable. Particularly grotesque was this quote from al-Rubiah, explaining one of the arguments interrogators used to convince him to confess: In about August 2004, shortly before my CSRT hearing [an administrative review of Al Rabiah's detention], my interrogators told me the CSRT was just a show that would allow the United States to 'save face.' My interrogators told me no one leaves Guantanamo innocent, and told me I would be sent home to Kuwait if I 'admitted' some of the false things I had said in my interrogations. The interrogators also told me that I would never go home if I denied these things, because the United States government would never admit I had been wrongly held. In case anyone was wondering, the hearing that Judge Kottar-Kelly is referring to in the opinion, in which the Justice Department took those irresponsible and indefensible positions, took place in August '09. On Obama's watch. This has to change somehow. Afterthought: Remember, the fact that this case made it to a habeas hearing means that it's one of the US Government's strongest cases -- they've let some people go, and are dragging their feet even harder on other cases. This evidentiary pile of garbage was pretty close to the best we've got against any of the detainees. Who've been imprisoned and tortured for better than seven years now. ## links for 2009-09-27 ## Cultural Studies Food Fight! The Cultural Studies Graduate Group, UC Davis picks a fight with Michael Berube: A Note from the Unicorns: A Cultural Studies PhD Program responds to Michael Berube: As students and faculty in one of the only PhD-granting cultural studies programs in the nation, we are prompted to respond to Michael Bérubé’s recent opinion piece, “What’s the Matter with Cultural Studies?” Located in the University of California system where we face dramatic program cutbacks, faculty and staff furloughs, a 40% tuition increase, and a general hiring freeze, and we know firsthand how the trend toward privatization systematically devalues scholarship that critiques profit rather than produces it and threatens the future of programs like ours. The timing of an attack (couched as a lament) on something Bérubé calls “Cultural Studies” couldn’t be worse–our graduating PhD’s face not only hiring freezes but skepticism. A PhD in cultural studies: what can you do with that? Bérubé described the effect of cultural studies in higher education in the United States as equivalent to the “carbon footprint of a unicorn.” We disagree. On the one hand, we want to highlight the dangerous ways in which Bérubé’s critique obscures the more pressing issues facing scholars working in cultural studies. On the other hand, we hardly recognize the field described at some length in Bérubé’s piece and that cannot pass without comment. Through claims unsupported by evidence beyond the anecdotal, Bérubé sketches out a caricature of a field as opposed to a set of dynamic, complex intellectual and institutional practices... I don't know which is more disturbing: 1. That the level of reading in the Cultural Studies Graduate Group, UC Davis is so low that they interpret Michael Berube's genuine ritual lament as some sort of concern-troll attack. 2. That the level of social, political, and cultural analysis carried out by the Cultural Studies Graduate Group, UC Davis is so low that they think now is a good time to pick a fight with Michael Berube, in all likelihood one of their few potential allies anywhere on the globe.[1] 3. That the Cultural Studies Graduate Group, UC Davis thinks that it ought to have a "party line"--rather than being composed of a number of different intellectuals who think somewhat differently--that is in some sense expressive of the positions of and in some sense binding on all members of the Cultural Studies Graduate Group, UC Davis--as though they were some sort of a "party of a new type." 4. That nine people[1] feel able to speak for the students, faculty, and staff of the Cultural Studies Graduate Group, UC Davis--and to do so without providing the rest of us with any clue as to how it is that all of the students, faculty and staff of the Cultural Studies Graduate Group, UC Davis authorized them to speak in their name. Michael Berube is gentle in response--considering that his normal rhetorical mode is: Fraudulent journalist, c’est moi: Professor Carby has indeed re-set the bar at the next level, and perhaps in another decade or so I will learn that my little New Yorker essay was the journalistic equivalent of distributing smallpox-infested blankets to the editors of Phylon and The Crisis. Only worse, for being totally unselfconscious. Here he merely points out: Things I did not know: Actually, if you’re in one of the nation’s only Ph.D.-granting departments in cultural studies, then you’re really kind of making my point that “in most universities, cultural studies has no home at all..." And No, this isn’t right. Here’s what I actually wrote: “The situation is even bleaker if you ask about cultural studies’ impact on psychology, economics, political science, or international relations, because you might as well be asking about the carbon footprint of unicorns.” So it’s great to hear from the unicorns, but (a) I’m sorry they missed this point and (b) I wish them all the luck in the world with making some inroads into departments of psychology, economics, political science, and international relations. Because I wish cultural studies had some impact on those fields. Indeed, it might serve as a nice rebuttal of my point if UC-Davis’s program had even a single faculty member (in a group of more than 80) from psychology, economics, political science, or international relations. But it doesn’t.... And: When I wrote, “I’m not saying that it has had no impact,” I meant, more or less, that it has had some impact... And: OK, now back to those dire financial conditions.... I am indeed privileged—absurdly so. Every day, I say to Moloch, “mighty and powerful Moloch, I can’t believe I have this job.” But despite that, cultural studies has no institutional home at Penn State. And when I wrote that neoliberalism "has dominated the political and economic landscape for 30 years, and its effects on higher education are palpable, baleful, and undeniable—the corporatization of administration and research, the withdrawal of state financing for public universities, the enrichment of the student-loan industry" I actually thought I was calling attention to larger institutional structures and the undermining of the public education mandate.... Anyway, it’s good to hear that UC Davis has a vibrant cultural studies program that draws on 24 different departments, and I wish it—and all its students—well. [1] Were Mark Yudoff to ask me, for example, I would have no hesitation in recommending that Cultural Studies at U.C. Davis be defunded--and the money transferred to U.C. Davis's fine History and Economics departments. And I am somebody who has occasionally openly avowed that I am a pupil of that mighty thinker Michel Foucault. [2] Toby Beauchamp, Abbie Boggs, Marisol Cortez, Cathy Hannabach, Caren Kaplan, Liz Montegary, Magali Rabasa, Ami Sommariva, and Eric Smoodin. ## On the End of Roman Agricultural Slavery and the Coming of the Barbarians... Jonathan Jarrett: I should have read this the moment I bought it, II « A Corner of Tenth-Century Europe: The second article in this book I’m reading, not counting the introduction and the mises-au-point that Michael McCormick supplies for each section, is as I said by Joachim Henning and it’s a bit less limpid. The argument is basically that finds of slave-chains match up with settlement patterns to suggest that: 1. The Romans didn’t allow Germanic-style village farmstead sort of affairs with individual enclosures, but the barbarians on their borders farmed like that normally 2. Once the Germans are on the inside Merovingian Francia is full of that sort of settlement, agricultural slavery inside the old imperial limes is basically over and slavery becomes something you only see on the military frontier 3. Under the Carolingians however some of the Roman unification of settlements into grand estates resumes and this is bad for the economy What we have here is basically two patterns, of slave-chain finds and of settlement nucleation, on which is being hung an awful lot, as well as some problematic stuff about the spread of the heavy plough that I thought we’d got over by now. An awful lot is hanging from those chains but they self-evidently don’t reliably index the whole slavery complex; they only show that someone had to be constrained. These could be military captives, their absence still wouldn’t prove that the people who worked an estate weren’t bound to it by fear, threat and the law. Then, an awful lot hangs from the belief that the evidence shows that bipartite estates were less efficient agriculturally than decentralised farming because of the need for coercion. Philosophically this seems likely to be right, and one could cite the collective farms of the Soviet Union as well as studies of plantation slavery in the USA to show that people work harder when they work for themselves (and Henning has a nice example to counter Chris Wickham’s belief that where there are no lords the peasants eat more and work less).2 All the same, there is an issue here: we are asked to believe that the Carolingian nobility, or the US planters, must have been status-hungry megalomaniacs, otherwise they’d have realised that ’slavery does not pay’.3 But think about it: the question is not about how much their estates produced, at least in the Frankish case, it’s about how much of that production they could appropriate. If labour on your estate is 10% less effective for being combined and worked as a demesne compared to hutted coloni working their own plots, but you can get 5% more labour out of the slaves for having them right there and that also means you can impose renders with 7% greater efficiency (or other made-up figures that would work, if these don’t), then you as lord are in profit and it does make economic sense. But Henning has a basic ’slavery is bad mkay’ assumption here that makes it difficult for him to see this. I mean, I agree with that statement, but the estate managers in any of those periods obviously didn’t hold that conviction, that doesn’t make them stupid. And then it doesn’t help that, as Angeliki Laiou points out in the response at the end of the section, that the slave-chain finds for the Carolingian period don’t occur in the areas where there were bipartite estates.4 That is, unlike the Roman slave estates apparently the Carolingian ones didn’t use chain-gangs but got their labour more willingly. So, er, hang on, where did that paradigm go? There are some points here but they aren’t all the ones the author feels that he’s made. On the whole what I take from this is that being part of the Roman fiscal complex tended to produce a different kind of estate organisation, and that the Carolingians also did some of that. I take with more salt the idea that the Carolingian period might have been less well off than the Merovingian period, and if I accept it I would again want to blame the weather for most of that and wonder if the conversion to bipartite estates in places where that can be done isn’t more of a response, both to diminishing yields and also to newly huge scales of estate ownership.5 (In other words, Chris’s ‘aristocrats make complexity’ argument tied up with my own macro-economic ones.) I don’t think slave-chains prove what Henning thinks they do, though the distribution is interesting (if, as he admits, potentially faulty).6 But most of all I wonder whether the horse of cause is not before the cart of effect here. Even if we accept the correlations Henning proposes, correlation is not causation, and the causation is still to be sorted out I think. ## The Moon is a Not-So-Harsh Mistress Matt Springer: The Moon is a Not-So-Harsh Mistress : Built on Facts: Astronomers and space exploration enthusiasts around the web are expressing lots of enthusiasm for the discovery of water on the moon by the Indian Chandrayaan-1 orbiter. Long story short (Ethan has a good version of the long story), the probe discovered relatively large quantities of water frozen throughout the lunar soil just below the surface. It's not just at the bottom of craters in the polar regions, but instead seems to be quite widespread. So is the beyond-the-Van-Allen Belt problem solved yet? Can we start our lunar colonies now? ## Why Health Care Reform Needs a Strong Public Plan: It Saves Lots of Money Ezra Klein: Ezra Klein - CBO: A Strong Public Plan Saves Lots of Money: According to Congress Daily, the CBO says attaching the public plan to Medicare rates will save even more money than originally thought: In a bid to wrangle concessions from the Blue Dog Coalition on healthcare reform, House leaders Thursday released CBO estimates for liberals' preferred version of the public option that show$85 billion more in savings than for the version the Blue Dogs prefer. Rep. Stephanie Herseth Sandlin, D-S.D., a Blue Dog co-chair, said any possible new momentum toward a public option tethered to Medicare rates is, in part, "because of the cost issue" and the updated CBO score.

The original House bill required the public plan to pay providers 5 percent more than Medicare reimbursement rates. But as part of a package of concessions to Blue Dogs, the House Energy and Commerce Committee accepted an amendment that requires the HHS Secretary to negotiate rates with providers. That version of the plan will save only $25 billion. In total, a public plan based on Medicare rates would save$110 billion over 10 years. That is $20 billion more than earlier estimates, a spokesman for House Speaker Pelosi said. In other words, the conservatives want to spend$85 billion more than the liberals do. Moreover, the CBO is estimating savings to the government. That is to say, the $85 billion reflects reduced federal spending on subsidies because premiums in the public plan will be lower. Savings to individuals and businesses paying lower premiums will be much larger than$85 billion, and politically, much more important. Meanwhile, a new New York Times poll shows that the public option is stil la god 20 percent more popular than health-care reform in general.

## Republicans: To the Manor Born

Paul Campos:

CAMPOS: America, after all, is a meritocracy, not an aristocracy. We have no princes of the royal blood, and whatever position a person enjoys in life must be earned. This, indeed, is the basis for one of the most common criticisms of affirmative action.... On the other hand, you have the career of William Kristol. Kristol, the son of neo-conservative doyen Irving Kristol, was just fired by The New York Times.... Nothing illustrated Kristol's influence and importance better than the Times' decision to add him to their Op-Ed page. As his previous stint at Time magazine had already demonstrated, Kristol was a horrible columnist. His writing was boring, he made a lot of factual errors and his point of view was invariably about as surprising as that of a member of Stalin's Politburo. His work was, in the cruel but fair judgment of Salon's Glenn Greenwald, "sloppy, error-plagued and incomparably hackish."

So how did he end up with such a sweet gig? (Especially given that the Times already employed an incomparably more talented conservative columnist in the person of David Brooks.) The answer goes back to Farley's observation about the extreme nepotism of the contemporary right-wing media machine. Kristol may be an utter mediocrity, but he's an extraordinarily well-connected utter mediocrity.... Which brings me to this charming vignette, courtesy of blog commenter Harry Hopkins:

I remember back in the late 1990s, when Ira Katznelson, an eminent political scientist at Columbia, came to deliver a guest lecture. Prof. Katznelson described a lunch he had with Irving Kristol during the first Bush administration.

The talk turned to William Kristol, then Dan Quayle's chief of staff, and how he got his start in politics. Irving recalled how he talked to his friend Harvey Mansfield at Harvard, who secured William a place there as both an undergrad and graduate student; how he talked to Pat Moynihan, then Nixon's domestic policy adviser, and got William an internship at the White House; how he talked to friends at the RNC [Republican National Committee] and secured a job for William after he got his Harvard Ph.D.; and how he arranged with still more friends for William to teach at Penn and the Kennedy School of Government.

With that, Prof. Katznelson recalled, he then asked Irving what he thought of affirmative action. 'I oppose it,' Irving replied. 'It subverts meritocracy.'

Many Republicans today have a different take on the desirability of meritocracy.

Ross Douthat:

Great Power, Great Responsibility: The mistakes that our elites made... also have their roots in flaws that I think are somewhat more particular to this [meritocratic] elite... like an overweening faith in technology's capacity to master contingency, a widespread assumption that the future doesn't have much to learn from the past, and above all a peculiar combination of smartest-guys-in-the-room entitlement (don't worry, we deserve to be moving millions of dollars around on the basis of totally speculative models, because we got really high SAT scores) and ferocious, grasping competitiveness (because making ten million dollars isn't enough if somebody else from your Ivy League class is making more!). It's a combination, at its worst, that marries the kind of vaulting, religion-of-success ambitions (and attendant status anxieties) that you'd expect from a self-made man to the obnoxious entitlement you'd expect from a to-the-manor-born elite--without the sense of proportion and limits, of the possibility of tragedy and the inevitability of human fallibility, that a real self-made man would presumably gain from starting life at the bottom... and without, as well, the sense of history, duty, self-restraint, noblesse oblige and so forth that the old aristocrats were supposed to aspire to...

Noah Millman:

Re-Entering the Palin-Drome: Meritocracy, in practice, means the selection of the “best and the brightest”... by means of testing and scholastic hoop-jumping.... he big problems I have with meritocracy include: that it tells the chosen they are better than other people (in some objective sense), which is an anti-democratic ethos; that it very consciously separates our elite from the people, which isn’t healthy for democracy either; that it separates the elite from “real life” in a way that ill-prepares them for the reality that will inevitably smack them in the head one way or other; and that it selects for particular personality types that, while useful in an elite, need to be balanced with other personality types...

## Greg Mankiw and Company Do Good on Cap-and-Trade (from 2004)

The George W. Bush Administration's CEA's official analysuis of the issues:

The main problem with an emission fee is that it is difficult to know beforehand what fee level will achieve the desired amount of pollution reduction. A cap-and-trade regulation addresses this issue and provides market incentives to reduce emissions in a cost-effective way. Such regulations "cap" the amount of allowable emissions and require that a firm own a permit for each unit of pollution emitted in a given period (for example, a year). This permit effectively establishes a legal property right for the air affected by the pollution, so that any emissions must be paid for by the firm. The government allocates the pollution permits to the emission sources and then allows the sources to buy and sell permits from each other.

Under a cap-and-trade system, a source with a high cost of reducing an additional unit of emissions would be willing to purchase a permit from a source with a lower marginal abatement cost. With a well-functioning market for the permits, sources will trade permits until the price for the permits equals the marginal abatement cost. As with the emission fee, the marginal abatement costs will be equal across sources, leading to a cost-effective result. The cap-and-trade system also provides an incentive to reduce emissions because each unit of emissions reduction saves the source the price of another permit. This regulation sends a market signal that there is a price for emissions and any innovative means of reducing emissions will save firms from paying the price. The cap-and-trade system therefore achieves the target level of pollution reduction at the lowest cost.

One consideration for a cap-and-trade system is how to allocate the permits initially. A cap-and-trade system that allocates the permits based on historic emissions or other firm characteristics, known as grandfathering, in essence gives away a valuable asset--the permits. A grandfathering system could establish a barrier to entry for new firms because any new entrant would have to purchase permits from existing firms.

One way to avoid these problems is to auction the permits at some regular interval to the highest bidders. Firms with higher marginal abatement costs would bid more for permits than those that can achieve less-costly emissions reductions. While auctioning the permits would result in lower profits for the regulated firms (compared to giving away the permits), it would not affect the firms' output decisions. Grandfathering versus auctioning the permits is primarily a question of distribution, not efficiency--it is a question of whether a public asset should be given to firms for free or sold as a means of generating public revenues.

A notable example of a cap-and-trade system is the sulfur dioxide (SO2) trading program created under Title IV of the Clean Air Act Amendments of 1990. The program set a goal of reducing emissions by 10 million tons from the 1980 level by 2010. This was to be accomplished in two phases. The first phase, which began in 1995, initially capped the SO2 emissions at 263 individual units which were owned by 110 electric utility power plants in 21 eastern and midwestern states. These plants, which were primarily coal-fired, emitted the greatest amounts of pollution among power plants in these regions. From 1995 to 2000, an additional 182 units were allowed into the program. The second phase, which began in 2000, further decreased the annual emissions of SO2 and required all large fossil fuel-fired power plants in the contiguous 48 states and the District of Columbia to hold permits to cover their emissions.

In both phases, power plants could purchase permits from other power plants in order to meet their emissions coverage. The program also allowed plants to carry over (or bank) unused permits to use in later years, which gives firms even greater flexibility in achieving long-term pollution reduction. In contrast to a command-and-control system, this cap-and-trade system allows plants that find it costly to reduce their SO2 emissions to purchase credits from plants that can reduce SO2 at lower cost.

Evidence indicates that such cost-saving trades did indeed take place as firms took advantage of the system's inherent flexibility (Chart 9-4). Each bar in the following chart represents the emissions rate each plant achieved after trading permits in 1997. The superimposed line in the figure shows the level of emissions each plant would have had to achieve in the absence of trading. Bars below the line indicate plants that reduced their emissions by more than the required amount and sold their excess permits or banked them. Bars above the line indicate plants that purchased permits or used previously banked permits to avoid costly abatement. The figure shows that almost every plant took advantage of the flexibility of the system, suggesting that plant-level costs of reducing SO2 emissions vary greatly.

The trading program has achieved its pollution-reduction goals at great cost savings. By the end of the first phase, emission reductions were almost 30 percent below the required level. The flexibility of this approach has been estimated to provide cost savings of approximately $0.9 billion to$1.8 billion a year compared to costs under a command-and-control regulatory alternative; other tradable-permit markets have had significant cost savings as well (Table 9-1).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

As mentioned previously, one problem with emission fees is that it is difficult to know beforehand at what level to set the fee to achieve the desired pollution reduction. This might require periodic adjustments of the fee level, and such adjustments would introduce uncertainty that could interfere with firms' planning decisions. The emissions fee does, however, allow the government to set with certainty the marginal cost of emissions reduction. For each emission fee there is a corresponding allocation of permits that would achieve the same results; however, it is difficult to know beforehand what the market price for permits will be once trading actually takes place.

One way to reconcile these issues is to offer a cap-and-trade system with a safety valve. The safety valve sets a maximum price for a permit, which guarantees that the price of reducing emissions does not exceed the expected benefits. The regulatory agency issues and sells extra permits on request from any firm at this fixed safety valve price, thus guaranteeing that the market permit price does not exceed this level. A cap-and-trade program with a safety valve achieves the target level of emission reductions in a cost-effective manner, while protecting the regulated firms against unexpected short-term price increases in emissions reduction.

## The President's [Bush's] Cap-and-Trade Program

An example of a well-designed incentive-based regulatory approach is the President's Clear Skies proposal for reducing emissions of sulfur dioxide, nitrogen oxides, and mercury from electric utility generators by approximately 70 percent by 2018. Clear Skies would cost-effectively reduce emissions by establishing a cap-and-trade system for each of the three pollutants. The EPA has estimated the benefits of the Clear Skies Act at $113 billion annually by 2020, compared with$6 billion in projected annual costs. These include $110 billion in annual health benefits (including the prevention of 14,100 premature deaths and 30,000 hospitalizations and emergency room visits) and$3 billion in annual benefits from increased visibility at national parks. Under the existing Clean Air Act, the EPA issues national air-quality standards for certain pollutants, including particulate matter and ozone. The EPA projects that compared with existing programs, the Clear Skies Act would lead 35 additional eastern U.S. counties to meet the particulate matter standard by 2020, leaving only eight counties not meeting the standard. The EPA expects that the remaining counties not meeting the standards would move closer to achieving them due to the Clear Skies Act.

To mitigate the effects of market shocks that potentially affect the costs of emissions reduction, Clear Skies would establish a safety valve price for permits of each pollutant. It would also provide regulatory certainty by achieving the reductions of all three pollutants in two phases. Firms would therefore plan their reductions of the three pollutants together and over the long term. Indeed, because the Clear Skies plan allows the banking of permits for future use, it provides an incentive for firms to achieve reductions quickly. Additionally, Clear Skies would provide revenue for the government because it phases in an auction system for the permits.

Clear Skies demonstrates the lessons learned from past regulatory experiences: instead of imposing an inflexible, command-and-control regulation to achieve emissions reduction, it offers a market-based, cost-effective, cap-and-trade program to achieve large reductions in emissions from electric utility generators.

## Conclusion

Economic growth and environmental improvements are at times incorrectly seen as competing aims. Increased economic production can indeed lead to greater environmental degradation. However, an increase in economic resources provides more options (most notably, technological advancements) for addressing environmental problems. Moreover, a growing economy can also lead to increased demand for environmental improvements. It is therefore important to weigh the direct environmental benefits of a regulation against its economic costs. The goal should be to maximize the net benefits to society, while also giving due consideration to distributional issues. Maximizing net benefits is best achieved in a free-market setting unless there are spillover costs to third parties.

Spillover costs are best addressed by establishing property rights that will lead the affected parties to negotiate a mutually-beneficial outcome. If the costs of such negotiations are prohibitive, however, government should respond carefully and always keep in mind the possible government spillover costs. To make effective regulations, the government must first assess the environmental problems using sound, unbiased estimates of the hazards and then craft incentive-based regulations to address them. Such regulations can address the spillover costs of environmental problems at lower costs to society than the traditional command-and-control regulatory methods. These principles, and the lessons learned from our past regulatory experiences, as described throughout this chapter, should guide our future regulatory endeavors to achieve environmental improvements coupled with economic growth and efficiency.

## Multipliers: The Very Sharp Greg Ip Gets One Wrong

In the Economist, he writes:

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

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

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

## The Washington Post Crashed-and-Burned-and-Smoking Watch - Hate in the Media

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

You couldn't construct a more stupid argument than the one Michael Gersen writes and Fred Hiatt prints today if you tried. Here's Ezra Klein:

"User-driven content on the Internet often consists of bullying, conspiracy theories and racial prejudice," writes Gerson, which is interesting, as I thought it consisted of porn and teenagers holding party cups. "The absolute freedom of the medium paradoxically encourages authoritarian impulses to intimidate and silence others," he continues.... Gerson's examples... come from comment threads, which... disproves his thesis...

Four years guys, until the end of Stanley Kaplan Misinformation Daily. Four years.

Outsourced to Ezra Klein:

Ezra Klein - Hate in the Media: “In the course of a few years," writes Michael Gerson, "a fringe party was able to define a national community by scapegoating internal enemies; elevate a single, messianic leader; and keep the public docile with hatred while the state committed unprecedented crimes. The adaptive use of new technology was central to this achievement."

That party? The Nazis. That technology? Talk radio. But Gerson's subject is not talk radio or the Nazis, but the vast expanses of the Internet. "User-driven content on the Internet often consists of bullying, conspiracy theories and racial prejudice," writes Gerson, which is interesting, as I thought it consisted of porn and teenagers holding party cups. "The absolute freedom of the medium paradoxically encourages authoritarian impulses to intimidate and silence others," he continues....

Gerson's examples, in fact, come from comment threads, which... disproves his thesis. But there is a major medium where the hateful voices sit firmly in control of the content, and it's the same medium that begins Gerson's remarks: talk radio. And, to a lesser extent, cable news. That's where society's most hateful conspiracy theories sit and fester, where its most explosive lies are recounted and amplified, where its least responsible elites have control of the means of production. I don't worry about jewhater429, the 97th entrant in a comment thread. I worry about Beck and Limbaugh and Savage.

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

From Josh Micah Marshall:

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

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

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

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

And a little Senate math:

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

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

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

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

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

Jes' sayin'...

## Hoisted from Comments: More on A Jury of Prosecutors Would Hang John Yoo High

From Pete:

Hoisted from Comments: A Jury of Prosecutors Would Hang John Yoo High: Seems like a trial would likely turn up much more evidence than we have now. The bigger story is how the memos came to be written, rather than what's in them. Failing to cite and distinguish Youngstown is an obvious tell, for lawyers, but perhaps not for 12 members of the public, as Joe S observes. But there is probably a lot of good information that would be found, which could be convincing for 12 citizens, if there were a real investigation into how Yoo came to be the source of these memos. Did the AG or other of Yoo's superiors know and approve of the request for the memos? Did the VP's office go straight to Yoo knowing that he would give them the cover they wanted? (Circumstances seem to suggest so.) Did someone in VP's office go to Yoo knowing that the torture and extraordinary abuse had already started (so, at least as to whoever was in the know there - VP, Addington, folks at CIA, etc.), they can't rely in "good faith" on an opinion they also know to be tainted? Did Yoo somehow know it had already started, which may have influenced his opinion?

A trial or Congressional hearings may be too much to hope for. Berkeley, though, could do us all and itself a favor. Examining and having a public discussion about what Yoo did, and the ethics of it, would serve the purpose of an educational institution like Berkeley, far more than stretching the rationale of "academic freedom" to the point of harming it. Brad offered a good way to do this months ago, have an inquiry through the academic senate, but maybe deans are too conflict averse? I bet if it were Michael Vick whose tenure was at stake, he would have been booted long ago - who could stand to have someone like that walking their halls, sharing the faculty lounge?. But support torture of humans at the behest of powerful people...?

Berkeley Law School Dean Chris Edley appears to have ruled out an inquiry and public discussion on the part of the Law School on the theory that it would have an unwarranted "chilling effect" on academic freedom...

## Second-Best Punchbowlism

A central bank staffer writes:

I enjoyed your macro lecture on recent macro thought. I suppose on this typology I have evolved from a Greenspanist with Producerist sympathies to a Producerist with vestigial Greenspanist sympathies. But there's a possibility you pass over. If effective regulation won't be forthcoming--whether due to regulatory capture or because financial innovation has outpaced the political system's willingness to extend regulators' reach--the central bank might have to tighten into the bubble. I call that Second-Best Punchbowlism...

This seems to me to be exactly right.

It is, I think, dead-on as an estimate of what is likely to happen. Central banks would prefer an effective system of regulation, but due to capture of legislatures by the baning sector they are unlikely to get it. Thus they are going to be driven to be always wondering whether they should be putting extra downward pressure on asset prices--with implications for employment and possibly growth.

The fact that "Punchbowlism" can be implemented by central banks by themselves makes it the default option.

## Hoisted from Comments: A Jury of Prosecutors Would Hang John Yoo High

Interesting that there would be no reasonable doubt here...

Joe S.:

What Do We Do About John Yoo?: Although I find most of Brad's arguments about Yoo's culpability persuasive, I'm not sure a jury would. But it's worth a try.

The most jury-friendly of these arguments, in my estimation, is the Youngstown Sheet & Tube argument. This argument would go that Yoo is a co-conspirator (torture and maybe murder) unless he was providing good-faith legal advice. I think that most courts would agree with this. The chief issue for the jury, then, is whether Yoo's advice was tendered in good faith. (The other issue for the jury is whether Yoo was aware of the consequences of his opinion.) The omission of Youngstown Sheet & Tube is the strongest argument against good faith, for exactly the reasons Brad adduced.

I've discussed this with my prosecutor buddies--the consensus seems to be that a jury of lawyers would hang Yoo high, but probably not 12 folk off the street. It's always hard to peek inside a person's head, especially when the external act (writing a memo, in this case) is facially innocent. And Yoo would get excellent defense counsel.

The lawyers I have talked to--let me put it this way, I have not yet found a lawyer who ever took Con Law who does not take the omission of any attempt to distinguish Youngstown from the Bush situation as a smoking gun.

Another thought: it is almost surely better for Berkeley to act against Yoo than for the Justice Department to do so--for the Justice Department to do so would be to take a step in the direction that led Caesar to lead his army across the Rubicon. To know that you may be unable to return to your tenured job if you are too corrupt in government service is a sanction that may influence behavior but will not increase the likelihood of a coup. To know that you may be sent to jail might have other consequences at some time in the future...

## The Intellectual Collapse of the Chicago School Yet Again...

The Economist's Free Exchange gets medieval on Casey Mulligan:

Give women choices: Mr Mulligan seems to be arguing that we shouldn't improve education and access to contraception in developing nations, where population is growing most rapidly, because that would limit population growth, which drives technological development. This is, in a word, offensive. I have no idea why any economist would feel good advocating for measures that deny women the opportunity to get an education, work, and use family planning to take control of important life decisions.

Secondly, Mr Mulligan has taken a rather know-nothing view of population growth.... [T]he demographic transition (where declines in death rates are ultimately followed by declines in birth rates) was associated with increased investments in human capital for women and children. Family planning allowed women to participate in the workforce and increased household incomes, while smaller families sizes enabled parents to invest more in a child's education, better preparing them for skilled work later in life.... [O]ffering women in developing nations better educational opportunities and access to contraception... contributes to growth in the supply of skilled workers, including those most likely to enter technological fields and contribute to innovation. Mr Mulligan's suggestion, by contrast, seems to be that women should continue to struggle to limit family size, leaving developing nations with large populations of poor, uneducated youths, unable to do much in the way of skilled work, and unable to offer much of a domestic market, such as might act as an incentive to entrepreneurs and innovators.

There is no reason for governments to try and limit fertility below levels desired by parents. There is every reason to work to extend the same family planning options developed nation households enjoy to those living in poor countries.

This is extraordinarily embarrassing for both the University of Chicago and the New York Times. Both ought to be doing a lot better.

• Do you find yourself considering the financial crisis and thinking “well, neoclassical economists have certainly come through this one with their reputations enhanced! Anyone with a world-class heterodox economics department should certainly be thinking about closing it down right now, there’s no interest in that sort of thing!”. Well, if you do, then you’re almost certainly working as an administrator at Notre Dame University.... I mean, what the byOurLady heck do they think they are playing at. Back in April 2008, the decision to place clear fresh water between the nice professional efficient market types in the “Economics and Econometrics” department, and the dirty f**king hippies in “Economics and Policy Analysis” might have made some sort of sense, in that... it would have improved students’ chances of getting into prestigious economics graduate programs where they could write “counterintuitive” and “fascinating” job market papers about penalty shootouts and speed-dating...
• The front page of Friday’s WSJ was not its finest hour. Along the top was the headline “Bankers Face Sweeping Curbs on Pay” — something which occasioned Justin Fox to note that “in the pre-Murdoch era that would have been a 600-word story on page A24, headlined ‘Fed Mulls Pay Guidelines’.” Underneath that headline was the biggest front-page story: “U.S. Missile U-Turn Roils Allies”. Except there was nothing in the story to indicate that any allies were roiled at all. The online story now has the headline “Allies React to U.S. Missile U-Turn”, along with a formal correction of the old headline. Dean Starkman wants to know “whether this is part of a larger story”: of course it is. The WSJ is now being edited by a man who cut his teeth in the fiercely competitive Australian and UK markets, where front-page stories drive newsstand sales and newsstand sales drive profits. Sweeping curbs on pay and roiled allies make for great headlines, and mean that readers are that much more likely to s
• Some economists at the University of Chicago reeeeaaaally didn't like Paul Krugman's article about the state of macroeconomics. Big surprise, I know. Still, it was interesting to hear first-hand how aggrieved people felt (not any of the U of C economists mentioned in this post, I should add).
• In many cases, Republican lawmakers asked Democratic leaders to make specific concessions on health care reform. When Dems like Max Baucus agreed, the GOP balked anyway. But there are other areas in which Democrats simply embrace policy ideas endorsed, or even created by, the right. For quite a while, conservatives liked the idea of giving an Independent Medicare Advisory Council more power to determine what the program should pay for. It's a straightforward, money-saving measure. When the Obama administration agreed, Republicans decided they didn't like their own idea anymore.
• Akerlof and Shiller ask, “Why did most of us utterly fail to foresee the current economic crisis?”, and their answer is that we failed to take animal spirits into account. My own response is: “What do you mean ‘we’, white man?” Lots of us were uneasy about the twenty-year boom/crash cycle we found ourselves stuck in, but few of us are economists. Lots of people also tried to tell the economists that their models were dangerously unrealistic, but economists were securely protected by tenure and were being rewarded very well by the malefactors who controlled the economy, so why should they care what anyone else said? Economists are smarter than anyone know tons and tons of math, you know.
• I’ve long been struck by Ralph Nader’s imperious view of politics.... [N]ow he’s out with a “novel” that apparently argues that a small posse of enlightened plutocrats will save us. Citizens’ groups aren’t up to the task... Only enlightened businesspeople, working from inside (with the assistance of a perky parrot), can.... So the problem... is simply scale (small good, big bad) and temperament (replace the evil bizpeople with the good ones). He seems to have no idea that competition and profit maximization make people, who may be perfectly warm and lovely in their private lives, do monstrous things.... Of course, as Liza Featherstone pointed out long ago, when faced with a union organizing campaign in crunchy Vermont, B&J fought it as roughly as any thuggish Southern mill owner would. “It’s business, man!,” as Liza’s title explained.... Ralph did pretty much the same thing when faced with organizing campaigns in a couple of his own shops, Multinational Monitor and Public Citizen...
• [T]he Fed... welcome[s] anything that strengthens the balance sheets of banks.... Nor is the central bank in any rush to begin pulling back from its current policies.... But the lesson I prefer to focus on is the one from this decade, which is that central bankers ignore financial bubbles at their peril... the Fed can no longer think of its job solely in terms of the trade-off between inflation and unemployment. Nor should it become complacent about restrained consumer prices while ignoring rapidly rising prices for financial assets. As Alan Greenspan discovered, it is also a mistake for central bankers to assume that they can quickly sop up excess liquidity whenever they decide the moment is right. Alan Blinder... may be right when he says it's too early for the Fed to begin raising interest rates.... But it is certainly not too early for the Fed, at the conclusion of its meeting Wednesday, to warn...that its current policies cannot, and will not, continue indefinitely...
• Yes. By the way, another name which comes to mind in this conversation, another fellow I also knew and a remarkable character named Nick Sibley, of the pioneering Hong Kong investment bank Jardine Fleming, formed as a joint venture by Jardine Matthiesson and the British merchant Bank Robert Fleming.... They were the pioneers in China. In Hong Kong, they were kings. Sibley was the public face of Jardine Fleming. He once said that giving liquidity to bankers is like giving a barrel of beer to a drunk. You know exactly what is going to happen. You just don't know which wall he is going to choose...
• This post generated some interesting comments. Here is one interchange: "Give over. Cuba in 1957 was a developed narcostate. When you compare it with Italy and Spain, are you really suggesting that Italy and Spain would have developed to where they are today if their only industries had been basic agriculture, plus the provision of cocaine and casino services to Germany and France?" Posted by: dsquared on May 14, 2003 11:15 PM. "Well Monte Carlo hasn’t done too badly, D^2. But I suppose it doesn’t have the agriculture." Posted by: Matthew on May 15, 2003 04:40 AM
• Brad confesses the reason for his lapsed Greenspanism. I hadn't seen the explanation that he opposed tight regulation of finance, because he thought the purpose of structured finance was to trick people into bearing more risk that they want to bear and that this is a good thing, since people are irrationally unwilling to bear risk. Oh my not just Greenspanian but a Straussian believer in <strike>noble</strike> <b>welfare enhancing</b> lies. I might have found the argument convincing in 2006, so I'm glad I didn't read it...
• The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession. Here we examine three claims about the way the financial crisis is affecting the economy as a whole and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds between households and corporate businesses. Conventional analyses of the financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing. Moreover, we argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this incr

## What Do We Do About John Yoo?

We are live at The Week:

The Week Magazine - News reviews and opinion, arts, entertainment & political cartoons: The faculty at the University of California at Berkeley does not know what to think or say or do about our colleague, Berkeley law school professor John Yoo. Universities like ours pride themselves on a commitment to academic freedom. But we also stress our devotion to the rule of law and the primacy of human rights. And therein lies the conflict that roils the Berkeley campus.

We are not altogether certain of what Yoo did as a lawyer in the Bush Justice Department. We know that he wrote the now-infamous memos providing legal justification for torture. But some suspect that what actually transpired may have been even more disreputable; otherwise, Yoo would have spilled the beans by now in order to salvage his reputation. Or so the theory goes. We will probably never know the full truth; the law school dean, Chris Edley, has ruled that any inquiry into what Yoo said, thought, and did while he worked for the Bush administration would have an unacceptable "chilling effect" on academic freedom.

Unfortunately, that does not resolve our problem with the rule of law/human rights part of the equation.

It appears that what happened is this: The Bush White House directed the U.S. armed forces and the CIA to torture people we had captured, some of whom were terrorists, some of whom saw themselves as lawfully fighting a just war against invaders, and some of whom were innocents in the wrong place at the wrong time, people whose names had been screamed out by others on the rack or had been sold to the CIA by local enemies or opportunists.

When the CIA and armed forces interrogators and lawyers resisted this demand, Vice President Richard Cheney's staff went to Yoo at the Justice Department's Office of Legal Counsel and asked him to write a memorandum stating that the tortures they envisioned were perfectly legal. Cheney and company then went back to the armed forces and the CIA: Here is a letter from the Justice Department stating that this is all perfectly legal, they said. There is no way that anything bad will happen to you if you obey the president's orders. You have a get-out-of-jail-free card.

Without John Yoo or his colleague Jay Bybee (or somebody else willing to write a similar memo) the torture would not have gone forward, and the United States would not have sustained the enormous damage that was inflicted on it.

Lawyer acquaintances have told me that Yoo's torture memos contain clues that they were not intended as serious legal opinions. One such clue is the complete disregard of legal precedent. In navigating through the law, you basically have the following options: You can say that the current circumstance is sufficiently like a previous case the Supreme Court has decided that that precedent rules. You can say that the present situation really has no precedent, so the court would reach an entirely new decision. Or you can say that, while there is a precedent for the situation, that precedent is wrong and should be overturned. There is no fourth option.

Yoo's memos concern presidential powers in a time of war. One famous precedent with which any lawyer would have to grapple is the Supreme Court's decision in Youngstown, concerning President Truman's seizure of the country's steel mills to keep them rolling during the Korean War. The Supreme Court ruled his action unconstitutional. The Youngstown case set out the Supreme Court's judgment as to how far the president's inherent powers go in a wartime emergency and to what degree those powers are subject to congressional authority.

In his memos, however, Yoo never mentioned Youngstown—either to distinguish it as sufficiently different that the decision does not control, or to argue that it was wrongly decided and should be overturned. This, the lawyers say, is compelling evidence that Yoo was acting not so much as a lawyer but as a political hatchet man.

However, most of my colleagues say that just because John Yoo did a bad thing while working for the Bush administration doesn't mean the university has cause to censure or dismiss him. We believe in academic freedom, they say, that professors have the right to say what they think and believe without fear of sanction—as long as they act in good faith.

Along similar lines, National Journal reporter Stuart Taylor writes that we should all stop harassing Yoo because we cannot prove that he did not act in good faith. And Sandy Levinson of the University of Texas Law School puts forward an alternative defense: that Yoo, like Truman administration Secretary of State Dean Acheson, was "present at the creation" of a new world in which old rules of executive power simply did not apply. Levinson, Taylor, and many others assert that Yoo merely wrote what he believed, setting out his understanding that the law affords the president untrammeled powers in his role as commander in chief of the armed forces.

But in The Rule of Law in the Wake of Clinton, a book published in 2000 by the libertarian Cato Institute, John Yoo took an entirely different view of "The Imperial Presidency Abroad," as his contribution was titled.

Yoo wrote: "President Clinton has exercised the powers of the imperial presidency to the upmost ... [and] undermine[d] notions of democratic accountability and respect for the rule of law ... ."

It's a provocative claim, especially coming from Yoo. How does he claim that Clinton did so? By using his powers as commander in chief to place American troops under the command of British NATO generals. "War power questions to one side, President Clinton's military adventures raise a second legal and constitutional difficulty—their unprecedented reliance on multilateral cooperation," Yoo writes. "That position has serious constitutional and policy defects .... [T]he Constitution nowhere permits the president ... to delegate federal power completely outside of the national government."

Yoo's Bush-era writings support presidential powers so wide-ranging that the president can order the torture of captives regardless of what treaties the U.S. has signed or what laws the U.S. Congress has passed. Yet we are expected to accept that Yoo previously believed that the president's power as commander in chief is so puny and circumscribed that he cannot lawfully put American troops under the command of allies?

Dwight D. Eisenhower—not the commander in chief but merely the theater commander—in December 1944 placed the U.S. First Army under the command of British Field Marshal Montgomery. President Wilson put the army of Gen. Pershing under the command of French Field Marshal Foch. Commander in chief George Washington put American troops under the command of Jean-Baptiste Donatien de Vimeur and Marie-Joseph Paul Yves Roch Gilbert du Motier. And let's not talk about the command authority over the Continental Army exercised by Friedrich Wilhelm Ludolf Gerhard Augustin von Steuben at Valley Forge.

So what does John Yoo believe? In the summer of 2000, when Republicans were condemning President Clinton for overreaching his powers as commander in chief, Yoo seemed to have been very happy to cook the dish. I suspect that had Al Gore been president from 2001 to 2009, Yoo's "The Imperial President Abroad" would have been the theme of subsequent Yoo articles, each arguing that President Gore had exceeded his powers.

Some Yoo defenders no doubt believe that 9/11 changed everything. I don't think it did. But if 9/11 altered the landscape so thoroughly that our old laws are no longer adequate for the new era, then we need to change our laws. We can revoke our adherence to the Geneva Conventions. We can withdraw from the U.N. Convention Against Torture. We can amend Article I so the president can suspend habeas corpus whenever he wishes. And we can remove the requirement that the federal government detain suspects only with probable cause.

Yoo didn't argue that we needed to change our laws and Constitution—he just argued that the old ones meant something completely different than what the Supreme Court held in Youngstown.

As for the argument that what Yoo authorized was not really a regime of torture, the last I heard, more than 50 detainees died under it. It may no longer matter to the deceased whether or not John Yoo acted in good faith. But here at Berkeley, we'd still like to know.

## What It Means to Predict a Financial Crisis

Let us give Alex Tabarrok the microphone:

Marginal Revolution: What it means to predict a crisis: Some economists are trying to get macroeconomics off the hook by arguing that by their very nature crises are unpredictable.  Thus David Levine aggressively argues that "our models don't just fail to predict the timing of financial crises - they say that we cannot."

There are three problems with this argument.  First, it assumes what is it at question - namely whether what Levine calls "our models" are good models.  Perhaps behavioral models could better predict the timing of financial crises.  I will not push this argument but I do believe that current events call for a greater than normal willingness to think beyond the confines of the models that one defends.

Second, it's not true that "our models" tell us that we can never predict a financial crisis.  In some cases, our models predict the exact moment that a crisis will occur and these models are perfectly consistent with, indeed require, rational expectations.  It is perhaps no accident that Paul Krugman has specialized in these types of models.

Third, the word timing is misleading.  Let's accept that a crisis cannot be predicted to the day or even to the year.  Nevertheless, it is perfectly reasonably and fully consistent with rational expectations to predict an increased probability of a crisis.

If you play Russian Roulette with 1 bullet and 100 chambers in your pistol, I can't predict when the crisis will occur.  If you play with 10 bullets, I still can't predict when the crisis will occur but I can say with certainty that the risk has increased by a factor of ten.  Analogously, nothing in modern economics makes it theoretically impossible to forecast that greater leverage and higher than normal price to rental rates, to name just two possibilities, increase the probability of crisis.  Nor does modern theory make it theoretically impossible to forecast that conditions are such that if a crisis does occur it will be a big one.

All of this is true even in the context of stock markets.  Efficient markets theory implies that any two stocks will have similar risk-adjusted returns; it does not imply that the risk of bankruptcy is the same for any two firms.  It is perfectly reasonable to say that Google revenues are going to have to increase at a historically unprecedented rate or the stock will plummet.  It is even consistent with efficient markets theory to predict that the probability of Google stock falling is much greater than the probability of it rising (but if it rises it will rise very far, very fast).

Thus the "we could not have predicted the crisis even in theory" argument is a weak defense--even with rational-actor, rational-expectations models there are plenty of senses in which economists could have better predicted the crisis and, although this is yet to be seen, perhaps they could and will do even better with other sorts of models.

## What a Rainy-Day Fund Is for...

Can I change Matthew Yglesias's degree from "philosophy" to "economics"?

Matthew Yglesias: What to Do With a Surplus: When thinking about neo-Hooverite thinking in modern macroeconomics it’s striking to me how much anti-stimulus sentiment seems to appeal to a kind of lazy moralism about debt. There’s a sense that going into debt is irresponsible, that irresponsible behavior led to the crisis, so more government borrowing can only make things worse. Michael Boldrin says “People are worried about the future and are sensibly reducing their spending. Does this imply the government should step in and do the spending for them? Put that way, the idea seems like a non-starter.”

But wouldn’t it “seem” like much less of a “non-starter” if the United States were China or Norway and had spent the previous decade running budget surpluses and racking up some stockpile of cash? Imagine if a recession struck, with tons of people thrown out of jobs, and the US government was sitting there on a giant rainy day fund. At the same time, thanks to the recession tax revenues are down. But federal spending on certain mandatory social welfare programs goes up. Fortunately, the giant rainy day fund is more than ample to cover the ensuing deficit. Would it really seem like a non-starter to spend down the rainy day fund in order to cover the gap? I don’t think it would. On the contrary, what would look like a non-starter would be not paying people the benefits promised in legislation. What would look like a non-starter would be raising taxes in the middle of a recession when the government was already sitting on a pile of money....

[I]n economic terms, there’s really very little difference between spending down a reserve of accumulated cash and in taking advantage of an opportunity to borrow at an extremely low interest rate. If the quantity of the borrowing becomes so large that it’s driving up interest rates, then the situation really is different. But I think all stimulus advocates acknowledge that. And if interest rates aren’t moving, then nothing magical happens when the rainy day fund goes from $5 to$-5 and nothing about the lack of fiscal prudence of the Bush administration changes the fact that it would be perverse for the federal government to respond to a recession with pro-cyclical fiscal policies.

## Presidents Should Take Organizartional Advice from Bruce Bartlett

George W. Bush is Mr. What-Not-to-Do...

Bruce Bartlett says: don't treat your speechwriters like c---:

Bush from the Inside: how different the Bush White House was from the Reagan White House where I worked. Reagan's WH was a model of thoroughness, adherence to proper procedure, and respect for the office of the president.  Bush's WH seems amazingly slipshod, showing total disregard for all of the things that were important to Reagan in terms of how his administration functioned. On the first point, I was struck by this paragraph as the author discusses his first session with Bush reviewing a draft speech he had written:

The president's editing sessions went like this: he talked, you listened and scribbled furiously whatever he said. On occasion, he might ask a question. But usually he wasn't too interested in the answer. Sometimes in the middle of your explaining something, if he felt he wasn't getting what he wanted, he'd interrupt and say, 'Okay, here's what we need to do.' This wasn't a process that encouraged dialogue or pushback on an important point. This was George W. decisively telling you what he wanted to say, and you writing it down. Got it?"

The problem with such a bullying method is that the president isn't just some guy expressing a personal opinion when he speaks. If he were, then it would be perfectly appropriate for him to demand that his speechwriters wrote whatever he damn well told them to say.  But the president of the United States speaks not just for himself, not just for his administration, but for the country as a whole. His words carry weight. Consequently, it is appalling to see him treating those words in such a cavalier manner.

Ronald Reagan, of course, was a trained actor, accustomed to reading dialogue written for him by others. Consequently, he had respect for those who wrote the words he spoke. Reagan was a great writer himself and would often edit his speeches. But he did it privately with an editing pen and usually for style, not substance.  I think every Reagan speechwriter had enormous respect for Reagan's contributions to his own speeches and, in turn, he respected his speechwriters and didn't treat them like manual laborers, as Bush seems to have done...

Bruce Bartlett says: let your president say what he means:

More Latimer on Bush: When I worked at the White House when we would run into resistance... from the bureaucracy... [and] from Reagan's own appointees, not all of whom shared his ideology.... [I] was extremely valuable to point to a clear statement by the president--not a press release or a government report--stating his position on some issue. It allowed those of us trying to implement his agenda to speak with authority.... It's too bad that Bush pissed away this resource by treating the radio addresses as chores rather than opportunities.

Those interested in the issue of cap-and-trade may be interested to know that Bush endorsed this policy in a speech (p. 198). But no one knows this because the speechwriters intentionally obfuscated Bush's endorsement by refusing to use the words cap-and-trade....

Bruce Bartlett says: don't hire kiss-up kick-down subordinates:

On page 212 we learn that Dan Bartlett (no relation) a senior White House staffer took credit with the president for an idea Latimer had come up with. The picture of Bartlett Latimer presents confirms what I have heard from other White House staffers--he was utterly incompetent but had a knack for getting along with Bush, which was enough to relentlessly push him up the ladder of success from Bush go-fer to one of the most important officials in government. Latimer says there was a whole group of such people in the White House: "These were mostly well-meaning people who rose to the very top because they were likable, not supremely qualified." That's an understatement.... In the end, Latimer concludes that Bush was never the conservative Latimer thought he was. Bush was just going through the motions to get conservative support and get elected...

Bruce Bartlett says: if you don't want to make policy, don't become president--play peanuckle instead:

Remembering the DiIulio Memo: In my earlier post I referenced a memo written by John DiIulio... http://www.esquire.com/features/dilulio Here are a couple of quotes....

Besides the tax cut, which was cut-and-dried during the campaign, and the education bill, which was really a Ted Kennedy bill, the administration has not done much, either in absolute terms or in comparison to previous administrations.... There is a virtual absence as yet of any policy accomplishments that might, to a fair-minded nonpartisan, count as the flesh on the bones of so-called compassionate conservatism....

They [the White House staff] could stand to find ways of inserting more serious policy fiber into the West Wing diet.... They are almost to an individual nice people, and there are among them several extremely gifted persons who do indeed know--and care--a great deal about actual policy-making, administrative reform, and so forth. But they have been, for whatever reasons, organized in ways that make it hard for policy-minded staff, including colleagues (even secretaries) of cabinet agencies, to get much West Wing traction, or even get a nontrivial hearing.

In eight months, I heard many, many staff discussions, but not three meaningful, substantive policy discussions. There were no actual policy white papers on domestic issues. There were, truth be told, only a couple of people in the West Wing who worried at all about policy substance and analysis, and they were even more overworked than the stereotypical, nonstop, 20-hour-a-day White House staff. This gave rise to what you might call Mayberry Machiavellis — staff, senior and junior, who consistently talked and acted as if the height of political sophistication consisted in reducing every issue to its simplest, black-and-white terms for public consumption, then steering legislative initiatives or policy proposals as far right as possible. These folks have their predecessors in previous administrations (left and right, Democrat and Republican), but, in the Bush administration, they were particularly unfettered.

## The Torture Memos: A Very Good Catch by Marc Ambinder

Marc writes:

Another Justification For Holder's Torture Re-Examination: One of the main lines of argument cited by the seven former CIA directors in urging President Obama to reverse his attorney general's decision to review CIA interrogations is that career lawyers at the Department of Justice had already reviewed those same files.... But the Justice Department's response to these claims contains a buried piece of information: "Given the recommendation from the Office of Professional Responsibility as well as other available information, he believed the appropriate course of action was to ask John Durham to conduct a preliminary review..."

For the uninitiated, this means that the preliminary report sent to Holder by the Office of Professional Responsibility on the torture-related lawyering of the Bush-era DOJ political appointees--a report prepared by career prosecutors--recommended that the cases deemed closed during the Bush administration be re-examined.

Holder is following the advice of his in-house 'internal affairs' shop... and didn't simply make the decision after reviewing the files himself.

• Download now or preview on posterous 20090921 hg lecture 2.pdf (114 KB) ...
• European leaders are certainly right to be disturbed by the apparently poor legislative prospects for cap and trade in the United States. And of course nobody in the world wants to move forward without American leadership. But to blame the problem on a lack of “political will” strikes me as quite misleading. The House of Representatives has, after all, passed a pretty ambitious climate change bill with the support of the President of the United States. The difference between the U.S. and Europe in this regard isn’t fundamentally that we lack the will, it’s that the same amount of will gets more done in Europe than it does in the United States where you nowadays need 60 votes in an unrepresentative and largely ineffectual but hyper-empowered upper house of the legislature in order to pass bills. Where will does come into play is that the leadership of the Democratic Party does seem extremely reluctant to use the tools at their disposal—reconciliation and the “nuclear option”—to lower s

## Economics 115: Fall 2009: First Midterm Exam

Answers to no more than two significant figures. No calculators allowed.

PART 1 (25 MINUTES): Identifications

For each of the ten events, tell us (a) when it happened (within a ten year window) and (b) what its relevance is to a course in twentieth century economic history:

1. Launching of first Five Year Plan in the Soviet Union
2. Wall Street stock market crash; start of the Great Depression
3. Gandhi's “Salt March”
4. “The End of the Beginning”: Battles of Midway, Guadalcanal, El Alamein, “Operation Torch”, and—most of all--”Operation Uranus”: Stalingrad
5. George Marshall proposes the “Marshall Plan”
6. Treaty of Rome creates the European Economic Community of “the six”
7. The “Southern Expedition” of Deng Xiaoping
8. Margaret Thatcher becomes Prime Minister of Great Britain
9. William Jennings Bryan [D] loses U.S. election to William McKinley [R]
10. Start of Mexican Revolution

PART 2 (25 MINUTES): Short Answers

Write a paragraph or two about the importance of each of the following five economic forces in understanding the economic history of the world before 1914:

1. Malthusian population pressure
2. Falling trans-oceanic transportation costs
3. The abundance of very cheap easily mined coal near navigable waterways in Great Britain
4. European nationalism
5. Increasing income inequality

No calculators allowed, You won’t need them. All you will need is simple arithmetic (the ability to multiply things by two, and to divide) and the rule of 72—the fact that a quantity growing at 1% per year doubles in 72 years, a quantity growing at 2% per year doubles in 36 years, a quantity growing at 0.5% per year doubles in 144 years, et cetera, a quantity growing at 1% per year grows by 41.41% in 36 years, etc…

PART 3 (25 MINUTES): Calculations

Consider the 144 years between 1866 and 2010…

1. World population grew from about 1.1 billion to 6.4 billion. About how many doublings did population undergo? What is the average growth rate of world population over those 144 years?
2. World total real GDP (on one somewhat arbitrary set of assumptions, at least) grew from $875 billion of today’s dollars in 1866 to$56 trillion of today’s dollars today. What was the average growth rate of world total real GDP over those 144 years?
3. If world total real GDP growth continues to grow at its average 1866-2010 rate, what will world total real GDP (in today’s dollars) be in 2155? Do you think this is possible? Reasonable? Absurd? Why?
4. By contrast, total world GDP (on one somewhat arbitrary set of assumptions, at least) grew from $437.5 billion of today’s dollars in 1794 to$875 billion of today’s dollars in 1866. Suppose total world real GDP growth had continued at its 1794-1866 pace from 1866-2010. What would total world real GDP be today?

## Lunchtime University of Scranton Blogging

Praising Gillian Tett's Fool's Gold...