## Intellectual Garbage Cleanup (Joe Klein Edition)

Why oh why can't we have a better press corps? Joe Klein writes:

Op-Ed Pages and Lying: Several years ago, the first New York Times ombudsman, Dan Okrent, created a stir by pointing out factual errors in the columns of Paul Krugman...

This is a piece of intellectual garbage blowing past in front of my nose. I will pick it up.

It is true that Danny Okrent shot his reputation in the head in his final column by claiming that:

13 Things I Meant to Write About but Never Did: Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers.... I didn't give Krugman... the chance to respond before writing the last two paragraphs. I decided to impersonate an opinion columnist...

and then proving unable to back it up. Indeed, in his book Okrent wrote:

On my way out the door, Krugman and I went at each other.... I'm willing to grant that Krugman (and the legions of supporters arrayed behind him) may have gotten the best of me on a few specifics; I was never better than a B student in economics...

and in fact explicitly denied Joe Klein's characterization:

[I] did not say that [Paul Krugman] lied, or that he made numbers up, or even that he was inaccurate...

As Paul Krugman wrote at the time:

Paul Krugman-Daniel Okrent Debate: Mr. Okrent’s claim that I engaged in “blending, without explanation, numbers from the household survey and the establishment survey.... Some people play games by mixing and matching numbers from the two surveys, and Mr. Okrent has apparently spent the past year firmly believing (without having checked with me) that I did the same.... But I didn’t. All the numbers in my 5/25/04 column came from the establishment survey. Moreover, I not only played fair with my readers, I urged them to check....

In correspondence with Mr. Okrent, I pointed out that his specific attacks — especially the blatantly wrong characterization of my 5/25/04 column — were unfair. I asked him to do what he would have expected me to do, and admit that he had been in error. He refused. Let me repeat that Mr. Okrent never raised these issues as public editor. He now says that he didn’t because he “experienced your best-defense-is-a-good-offense approach, and found it futile to deal with it”...

Okrent at the time replied:

Daniel Okrent: For a man who makes his living offering strong opinions, Paul Krugman seems peculiarly reluctant to grant the same privilege to others. And for a man who leads with his chin twice a week, he acts awfully surprised when someone takes a pop at it.... I laid off for so long because I also believe that columnists are entitled by their mandate to engage in the unfair use of statistics, the misleading representation of opposing positions, and the conscious withholding of contrary data.... The mixing of household and establishment numbers in his 5/25/04 column: Missing from the BLS chart he cites is any number that even resembles the 140,000 new jobs each month needed to keep up with the growing population a statistic he cites in the column, and upon which he seems to have based some of his computations. To my knowledge, that number only appeared in the household survey...

Which left all of us at the time bemused because the "140,000" number appears neither in the household survey nor in the establishment survey: it is a rule of thumb used to relate the two.

And what do I find this morning but a graph from Calculated Risk on the relationship between the household survey measure of unemployment and the establishment survey measure of employment, this:

See that point where the dotted line crosses the x-axis at a quarterly change in net jobs of 0.33%? That's a one-month growth in net jobs of 0.11%. Payroll employment is now 131 million. 0.11% of 131 million is 144,000--that is Paul's 140,000 number. Paul's was not an attempt to take some numbers from one survey and some from another to make a political position look good, but rather to do the reverse: to combine the numbers from two different surveys in a consistent and coherent way.

So why spend time on ancient history? Well, just because the Calculated Risk graph floated up in one window while the Joe Klein column floated up in another. And my mother taught me that when a piece of garbage blows by in front of your nose, you pick it up and put it in the trash can.

And, yes, I did give Joe Klein an opportunity to correct before writing this.

## Why Oh Why Can't We Have a Better Press Corps? Economist Edition: Denial Is Not Just a River in Egypt...

A very odd note from the Economist's Free Exchange:

Henry Paulson's crisis | Free exchange | Economist.com: More interesting to me is the way that [Henry Paulson] an extremely accomplished and powerful individual--CEO of the great vampire squid before taking the helm of the American economy... boggle[s] at the Washington's political game in tones befitting a liberal blogger:

When it came to Washington, Paulson found he had much to learn. “It’s directionally the same, but the extent of it is very different,” he would tell me. “Here’s what I mean: I found that at Goldman Sachs, to be effective as a leader, you had to build consensus when you’re managing smart people who’ve got other alternatives.… I’m in that situation today to a much greater extent than I ever was at Goldman Sachs, because the people I’m trying to bring together are truly independent. Oftentimes, they may even agree [with me] in private, but because of their constituencies or because of their parties or because of their committee chairmen or because of what the American people think, you know, won’t agree in public. So I have to get used to people saying, ‘Boy, that’s reasonable—I really think a trade agreement with Colombia is great, but I can’t be for it.’ ” Repeatedly, phone conversations with members of Congress would go as follows. Paulson would ask, What do you think we should do?, and the reply would come: “Exactly what you’re doing. If you need my vote to get it done, I’ll vote with you, but, fortunately, you don’t, and I can take a pass.”

Paulson was appalled by the two-facedness of some members of Congress. “And they say—they’re calling—‘Oh, sorry to do that,’ ‘I hate to do it,’ ‘We’re so glad you’re here,’ ‘There’s such a burden on you,’ ‘Thank you for being here. Don’t worry. We’ll get this done. We’ll work this through.’ And then, up there … my God!” It took a year to get acclimated, “because I didn’t understand the system.”

And the Economist writes of Paulson's:

interesting political commentary, in particular the kind words he has for Democrats and the comparatively rough treatment of Republicans. The secretary speaks very highly of Nancy Pelosi, Timothy Geithner, and Barney Frank, while generally bemoaning the actions of the Republican congressional caucuses and the Bush White House...

There is a big reality disconnect going on here in the Economist's brain, I think. People from outside Washington who arrive and look around--hell, people inside Washington who don't belong to the media-lobbying complex--take a look at Washington and decide that the politicians who run the Republican Party are:

• cowardly,
• corrupt,
• and cynical,
• when they are not simply bats--- insane.

But when somebody says this--as Henry Paulson said to Todd Purdham--the Economist starts sneering: "tones befitting a liberal blogger." It's not clear why: is it that everybody already knows this except for "political innocent[s]" who are worth sneering at? But that cannot be, can it? I mean, the Economist never lays it out for its readers so they can learn what "everybody already knows," does it?

I would note that the Economist's failings are several orders of magnitude more elevated than are the failings of the Washington Post--where they can't even get he said-she said stenography right--or the New York Times--which begs to be played by PR firms...

## Five from Wonkette...

The first four:

• Town Halls Are Almost Over! Must Show More Racism Videos, Before It’s Too Late…: Here we are in Norwalk, Connecticut, for this latest August Racism Movie. Rep. Jim Himes was giving a health care town hall Wednesday night to a slightly more “pro-reform” crowd of dirty fucking hippies. Of course, the “anti-reform” folks were louder and constantly shouting mean things without permission to speak. This is the pretty standard scenario by now — a national town hall equilibrium of sorts, arrived at just as the summer nears its close. BUT HERE IS A NEW TWIST: some Peruvian-born bishop now living in Stamford asks Himes his question in Spanish, because Himes speaks Spanish! This is when the DEAFENING RACISM kicks in. Enjoy!...

• Famous Failure To Run George W. Bush’s Think Tank: “WASHINGTON – Former President George W. Bush took a step closer Thursday to establishing an ‘action-oriented think tank’ alongside his future presidential library by naming James K. Glassman, the longtime journalist and former administration official, as its founding executive director.” This post is complete.

• Wonkette: SHE REALLY REALLY WANTS TO BE PRESIDENT: [We're out of absurd descriptions for her] Michele Bachmann unintentionally revealed yesterday, while yelling about Democrats, that she thinks about running for president 24/7: “They want to make sure no women, no woman becomes president before a Democrat woman and so they’re doing everything they can to, I think, sabotage women like Sarah Palin, perhaps women like myself, or similarly situated women, to make sure that we don’t have a prominent national voice.” Hey, Michele, GOD WILL DECIDE which lady gets to be lady-president first, so stop bothering him and be patient okay?

• Elected Official Has Civil Discussion With Constituents About Current Legislative Affairs: This one goes out to all the readers with attention spans, because what we’ve got here is an informative ten-minute video about public policy. There must be at least three or four humans out there who… like to learn about policies before making up their minds on them?? It’s a gamble. But what a lovely video! Some teabaggers in Minnesota were apparently seeking to “ambush” Al Franken at a Minnesota fair recently, probably assuming he would just shout liberal rape jokes back at them, because HE WAS A COMEDIAN, AND NOW HE’S A SENATOR?? WACKY. But the confrontation goes much differently, and America is saved forever.

But the fifth is the greatest of all time:

Joshua Goldberg Wants To Have His Say!: Joshua actually wrote to Wonkette.... Joshua Goldberg, ex-fishmonger, would like to set the record straight.... 'By the way, “power to the purple people!” I don’t know what was going on with the color balance with the camera but it bothers me more than it does your readers. It seems that it is the only thing they want to speak of. I have had much worse insults thrown at me so keep it coming if it makes you feel better.'

## I Will Genuinely Be Surprised If the Washington Post Makes It Through Obama's First Term

Why oh why can't we have a better press corps? The Washington Post can't even do he said-she said journamalistic stenography anymore...

Shorter Washington Post Ombudsman Andrew Alexander:

BillEPilgrim, via Duncan Black: The Washington Post writer was worried about offending right wing conservatives, and hoped to avoid getting hate mail from them.

Pilgrim goes on:

Over and over, the Washington Post seems concerned with bending over backwards to avoid offending the small percentage of extreme right wing letter writers who deluge it with letters. Maybe this can serve as a wake up call. Offending bigoted, extreme right wing readers is not the worst thing that can happen. The Post's obsession with avoiding angry responses from Rush Limbaugh and Glenn Beck devotees has become, well, obsessive...

Indeed. Here is how Andrew Alexander begins his piece:

Andrew Alexander - Profile on Anti-Gay-Marriage Activist Provokes Wrath: The Post recently featured a story by reporter Monica Hesse that ran on the front of the Style section while she was on vacation. The day before returning, she logged on to check e-mails -- and wept. She was buried by an avalanche of messages angrily attacking her lengthy Aug. 28 profile of Brian Brown, executive director of the National Organization for Marriage (NOM), the group leading the fight against legalization of same-sex marriage. Hesse was stunned. She had expected to hear from anti-gay-marriage conservatives who might view the story as "snide"...

And then, of course, Andrew Alexander becomes incoherent:

Profile on Anti-Gay-Marriage Activist Provokes Wrath: I agree that the story fell short, but not because [Monica] Hesse was naïve or lacked journalistic diligence.... [T]hree things -- a storytelling concept, a writing technique and a bad headline -- combined to ignite reader reaction as vitriolic as any I've experienced in my seven months as ombudsman. Hesse's profile began:

The nightmares of gay marriage supporters are the Pat Robertsons of the world. The James Dobsons, the John Hagees -- the people who specialize in whipping crowds into frothy frenzies, who say things like Katrina was caused by the gays. The gay marriage supporters have not met Brian Brown. They should. He might be more worth knowing about...

Brown... [is] civil, "instantly likable" and a "thoughtful talker." Brown is effective because "he is pleasantly, ruthlessly sane." Hesse said she decided to let Brown tell his story, as opposed to extensively quoting what others say about him. Her editors didn't object to the concept. Having Brown's story told in his "voice," Hesse reasoned, would allow readers to best assess his arguments....

"In a profile piece, for a controversial figure like that... there should certainly be the other side of it," said Fred Karger, head of a group called Californians Against Hate. In retrospect, Style editor Lynn Medford agrees. "The lesson is to always, in some way, represent the other side," she said. Karger, who has fought with Brown over same-sex marriage in California, said, "He is just as shrill, just as anti-gay as any of the leading gay-bashers" have been over the years.

Compounding the story's problems were passages like: "He takes nothing personally. He means nothing personal. He is never accusatory or belittling." These types of unattributed characterizations are not uncommon in feature writing. But many readers thought Hesse was offering her opinion of who Brown is, as opposed to portraying how he comes across.

Finally, the headline: "Opposing Gay Unions With Sanity & a Smile." To many readers, The Post was saying Brown's views are sane...

## Hoisted from Comments: Allan H. Meltzer, Lehman, and AIG

Allan H. Meltzer Stops Being an Economist and Becomes a... I Am Not Sure What...: Not widely noted is the way Meltzer switched positions on the Lehman non-bailout. At the time, he appeared (in his News Hour interview) to compare it favorably to the AIG rescue:

I would say we ought to look at Lehman Brothers. They let Lehman Brothers fail. Within a few days, just a few days, Barclays was there buying up some of Lehman's assets...

A year later, though, in his WSJ piece, he has all the wisdom of hindsight:

After 30 years of bailing out almost all large financial firms, the Fed made the horrendous mistake of changing its policy in the midst of a recession... Allowing Lehman to fail without warning is one of the worst blunders in Federal Reserve history...

It is true: Allan Meltzer is one of those least qualified to criticize Ben Bernanke and company. He was out there in the summer and fall of 2008, yammering away on what he now claims was the side of the bad guys...

## New York Times Crashed-and-Burned-and-Smoking Watch (Kevin Sack Edition)

Kevin Sack of the New York Times emails:

Sorry, I guess I didn't get the directive saying we should only report the views of electoral winners. Sometimes the commissariat loses my email address.

Kevin Sack

The context is his very bad New York Times A1 story of August 29.

Dr. Steve B.:

NY Times Gets Played: ThinkProgress has connected the specific dots between AHIP and their corporate lobbyist friends and the various channels and front groups and astroturfing that have been getting all the attention for the past several months. Much of it is connected to the corporate consulting firm "Democracy Data & Communications." ... [T]he same day as the ThinkProgress piece, which pointed out that even the Wall Street Journal had already previously reported that the insurance industry had actively mobilized 50,000 of it employees to work against health reform, we get a pathetic sob sister whine of what sounds like a public relations planted script in the sometimes not terrible NY Times.... [Insurance e]mployees are being upset that they are being made out to be villains, just because they are choosing not only to engage in murder by spreadsheet, but to go out of their way to defend it against the barest minimum of civilized reform. Apparently Kevin Sack can't tell when he is being played by an organzied PR campaign...

Kevin Sack did indeed get very badly played and spun by Humana. Here is his lead:

Dealing With Being the Health Care ‘Villains’: Max Shireman says that when he looks in the mirror he does not see the monster the politicians have made him out to be. Sure, he could stand to lose a few pounds. And there was that speeding ticket last year for going 40 in a 30-mile-an-hour zone. But in his mind, he is just “a hard-working guy,” the son of an autoworker, who put himself through college, bought a house in the suburbs and occasionally volunteers at a local hospice. His indulgences, he said, are limited to sampling local microbrews and watching “Top Chef” with his wife. “I’m certainly not villainous or immoral in any way, shape or form,” said Mr. Shireman, 40, a project manager for Humana, the country’s fourth-largest health insurer.

So Mr. Shireman does not like it one bit when he hears President Obama declare that Americans “are being held hostage by health insurance companies.” Or when the House speaker, Nancy Pelosi of California, characterizes insurers as “villains” who have “been immoral all along.” In interviews this week at Humana’s headquarters in downtown Louisville, where the company was founded in 1961, employees offered suggestions about why their industry has come in for such heavy treatment. Some said they were paying a price for what Ms. Pelosi has called a “shock and awe” campaign by the industry against Democratic proposals to create a new government insurance plan, which would compete with commercial insurers...

Kevin: all we are asking of you is that you try to do your job. At the moment, you are not. If you don't try to do your job, there is no reason for us to read you--or for anybody to pay you.

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

## Republican Members of Congress Cannot Find Their ****** with A Map and Two Flashlights Department...

Republicans Flummox Matthew Yglesias, who finds that he cannot retain information about how... dumb and inconsistent they are:

Matthew Yglesias: Republicans Against Medicare: I knew that despite their recent posturing as the Party of Medicare, most Republicans actually hate Medicare. But I hadn’t realized they’d gone on record with this so recently...

And he refers us to Steve Benen:

The Washington Monthly: [D]id Republicans vote to "end," "abolish," and "kill" Medicare?.... In April, 137 Republicans voted in support of a GOP alternative budget... [which] called for "replacing the traditional Medicare program with subsidies to help retirees enroll in private health care plans." The AP noted at the time that Republican leaders were "clearly nervous that votes in favor of the GOP alternative have exposed their members to political danger."... The more Republicans press Dems on Medicare, the more we're likely to hear about the fact that a majority of the House Republican Caucus voted this year to kill Medicare as we know it,

And Matthew is fluxxomed some more:

[T]o pile ironies onto ironies, providing subsidies to help people enroll in (regulated) private health care plans is the core element of the Obama’s administration’s plan for people under the age of 65. When applied to people 65 and older, subsidized, regulated, private health insurance is considered such a right-wing position that many Republican members of congress won’t vote for it. But when applied to people aged 64 and younger, it’s socialism.

But will Republican members of congress find themselves paying any kind of a price for their rhetorical inconsistencies? Don't hold your breath.

## The Future of Macro: Barry Eichengreen's Take

Barry Eichengreen:

The Last Temptation of Risk: We thought that monetary policy had tamed the business cycle. We thought that because changes in central-bank policies had delivered low and stable inflation, the volatility of the pre-1985 years had been consigned to the dustbin of history.... We thought that financial institutions and markets had come to be self-regulating—that investors could be left largely if not wholly to their own devices. Above all we thought that we had learned how to prevent the kind of financial calamity that struck the world in 1929.

We now know that much of what we thought was true was not.... The question is how we could have been so misguided.... [T]he problem lay not so much with the poverty of the underlying theory as with selective reading of it—a selective reading shaped by the social milieu. That social milieu encouraged financial decision makers to cherry-pick the theories that supported excessive risk taking. It discouraged whistle-blowing, not just by risk-management officers in large financial institutions, but also by the economists.... [S]cholarship that warned of potential disaster was ignored. And the result was global economic calamity on a scale not seen for four generations.

SO WHERE were the intellectual agenda setters when the crisis was building?... For economists in business schools the answer is straightforward. Business schools see themselves as suppliers of inputs to business.... J. P. Morgan makes clear the kind of financial engineers it requires, and business schools deem to provide. In the wake of the 1987 stock-market crash, Morgan’s chairman, Dennis Weatherstone, started calling for a daily “4:15 Report” summarizing how much his firm would lose if tomorrow turned out to be a bad day.... Value at Risk, as that number and the process for calculating it came to be known, quickly gained a place in the business-school curriculum.... Getting the machine to spit out a headline number for Value at Risk was straightforward. But deciding what to put into the model was another matter.... Value at Risk, like dynamite, can be a powerful tool when in the right hands. Placed in the wrong hands—well, you know. These simple models should have been regarded as no more than starting points for serious thinking. Instead, those responsible for making key decisions, institutional investors and their regulators alike, took them literally....

For some years those who relied on these artificial constructs were not caught out. Episodes of high volatility, like the 1987 stock-market crash, still loomed large in the data set to which the model was fit. They served to highlight the potential for big shocks and cautioned against aggressive investment strategies.... WITH TIME, however, memories of the 1987 crash faded. In the data used by the financial engineers, the crash became only one observation among many generated in the course of the Great Moderation.... Meanwhile, deregulation was on the march.... [W]here the accelerating pace of change should have prompted more caution, the routinization of risk management encouraged precisely the opposite....

[W]here were the business-school professors while these events were unfolding? Answer: they were writing textbooks about Value at Risk.... Business schools are rated by business publications and compete for students on the basis of their record of placing graduates.... But what of doctoral programs in economics (like the one in which I teach)?... [T]heir faculties do not object to the occasional high-paying consulting gig.... Generous speaker’s fees were thus available to those prepared to drink the Kool-Aid... there was nonetheless a subconscious tendency to embrace the arguments of one’s more “successful” colleagues in a discipline where money, in this case earned through speaking engagements and consultancies, is the common denominator of success.

Those who predicted the housing slump eventually became famous, of course. Princeton University Press now takes out space ads in general-interest publications prominently displaying the sober visage of Yale University economics professor Robert Shiller, the maven of the housing crash.... But such fame comes only after the fact. The more housing prices rose and the longer predictions of their decline looked to be wrong, the lonelier the intellectual nonconformists became....

WHY BELABOR these points? Because it was not that economic theory had nothing to say about the kinds of structural weaknesses and conflicts of interest that paved the way to our current catastrophe... agency theory... compensation practices in the financial sector as encouraging short-termism and excessive risk taking and heightening conflicts of interest.... A Nobel Prize for work on this topic was awarded to Leonid Hurwicz, Eric Maskin and Roger Myerson in 2007... information economics.... George Akerlof, Michael Spence and Joseph Stiglitz were awarded the Nobel Prize for their work on it in 2001. Here again the potential problems of an inadequately regulated financial system would have been quite clear had anyone bothered to look.... [B]ehavioral finance... this small step in the direction of realism can transform one’s view of financial markets... herd behavior, where everyone follows the crowd, giving rise to bubbles, panics and crashes. Economists have succeeded in building elegant mathematical models of decision making under these conditions and in showing how such behavior can give rise to extreme instability. It should not be a surprise that people like the aforementioned George Akerlof and Robert Shiller are among the leaders in this field.

Moreover, what is true of investors can also be true of regulators, for whom information is similarly costly to acquire and who will similarly be tempted to follow convention—even when that convention allows excessive risk taking by the regulated.... And what is true of investors and regulators, introspection suggests, can also be true of academics....

What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises.... Rather, the problem was a partial and blinkered reading of that literature....

WITH THE pressure of social conformity being so powerful, are we economists doomed to repeat past mistakes?... Maybe so. But... there is at least one reason for hope.... [T]he IT revolution has altered the lay of the intellectual land.... [I]t is now empirically oriented graduate students who are the hot property when top doctoral programs seek to hire new faculty. Not surprisingly, the best students have responded....

In contrast, the twenty-first century will be the age of inductive economics, when empiricists hold sway and advice is grounded in concrete observation of markets and their inhabitants. Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.

Should this reassure us that we can avoid another crisis? Alas, there is no such certainty. The only way of being certain that one will not fall down the stairs is to not get out of bed. But at least economists, having observed the history of accidents, will no longer recommend removing the handrail.

## The State of Macro Today

Paul Krugman's summary:

How Did Economists Get It So Wrong?: [R]ereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems. And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?

The state of macro, in short, is not good. So where does the profession go from here?...

Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.

There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have.... Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”...

The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.

I would add that there has always been another macro separate from the universities--the macro of the economic forecasters and of the central banks, which has, I think, been in a relatively healthy state for quite a while...

## Tyler Cowen's Ultimate Milton Friedman Post

Tyler writes:

Marginal Revolution: What did Milton Friedman favor?: Responding to my initial post, David Henderson gets himself into a bit of trouble when he writes:

He's [Tyler] correct that Friedman wanted the Fed to increase the money supply. I don't think I'm pretending when I say that I don't think Friedman advocated bailing out banks during the Depression. As I think Friedman would have, last fall I advocated an increase in the money supply while opposing a bailout. Those two, contra Cowen, are separable.

When it comes to 1929-1931, Friedman favored the Fed a) buying up a lot more bonds, and b) serving as a lender of last resort to failing banks. They are separable but Friedman favored both.

In the Monetary History, Friedman and Schwartz approvingly quote Walter Bagehot about the need to do whatever is required, however bold or desperate, to stop a banking panic.  Part of the passage runs like this:

The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. “We lent it,” said Mr. Harman [one of the Bank’s more senior directors] on behalf of the Bank of England, “by every possible means and in modes we have never adopted before;...

Here is Charles Goodhart quoting Friedman on why the Fed should have been a lender of last resort to troubled banks.  Or see p.269 of the Monetary History, where Friedman and Schwartz explain how it was too difficult for banks to borrow from the Fed at favorable rates in the early 1930s.  Or read this Friedman interview.

In the comments Bruce Bartlett, channeling Friedman, responded:

There's no way the Fed could have expanded the money supply in the early 1930s without bailing out the banks. How do you think the money supply declined in the first place? It's because banks failed and their deposits disappeared. To keep those deposits from disappearing in an era before deposit insurance would have required keeping bankrupt banks afloat.

Friedman's model was not one of allowing a boost in currency to substitute for the broader monetary aggregates.  An article in The Freeman is clear, if perhaps even a bit exaggerated:

Friedman and Schwartz argued that all this was due to the Fed’s failure to carry out its assigned role as the lender of last resort.

You might try to draw a distinction between "lender of last resort" and "bailout" but Bernanke's emergency lending is usually considered part of the bailout package.  No one is suggesting Friedman would have favored each and every part of the bailouts that we have seen.  The point is that Friedman favored some bailouts in the past and probably would have favored some this time around as well.  You don't have to think he would have voted for the first Paulson proposal.

Oddly, Henderson in his post takes offense because I suggest that libertarians try to run away from the idea that Friedman favored Fed action beyond simple monetary policy.  Henderson then tries to run away from the idea that... Friedman favored Fed action beyond simple monetary policy.

I now recall that a related point was made by Paul Krugman, although I find that piece problematic in some other ways.

Here are a few sounder history of thought claims:

1. Friedman and Schwartz argued that if the Fed had been more on the ball with monetary policy earlier on, the lender of last resort actions would not have been needed. That is distinct from opposing such actions in the time of necessity, when necessity comes.

2. At times Friedman suggested that the rise of deposit insurance limited the importance of the lender of last resort role.  (How he would have thought about rescuing the shadow banking system is an interesting question.)  A related issue hovers here, namely whether support for deposit insurance constitutes support for bailouts.  It seems to me it does, though my original point does not rely on this judgment.

3. Friedman thought that "simple" monetary policy, combined with "simple" Fed lending would go pretty far in stopping a banking panic, yet this view was not borne out in the very recent crisis.  In any case it's wrong to conclude that Friedman was necessarily opposed to more vigorous action, if such action would turn out to be needed.  If you read Friedman as a whole his focus is not on drawing particular lines to circumscribe Fed action, but rather doing whatever is needed to keep the banking system up and running.

One problem is that "Friedman" is underspecified. There are many Friedmans, including:

1. The Keynesian Friedman of "A Framework for Monetary Analysis"
2. The incredibly rigid financial regulatory straightjacket Friedman of "A Program for Monetary Stability"
3. The pro-bailout Friedman of "The Great Contraction"
4. The late Friedman who concluded that money stock-targeting had not lived up to expectations.
5. The early Friedman who believed that keeping the nominal money stock on a smooth growth path would eliminate any possibility for large disturbances in velocity.

These guys are not all consistent, not all the time.

## Krugman, Fox, McCain, Prescott, and Company

Justin Fox:

Paul Krugman tells how economists got it all wrong: the one big issue I have with the piece is that, while economists certainly got lots of things wrong before the crisis (as did almost all of us), many members of the profession have acquitted themselves pretty well since things turned really ugly last year. Krugman goes on and on about the "freshwater" economists (at the Universities of Chicago, Rochester and Minnesota) and their crazy ideas about perfect markets. But what's telling is that the hardcore freshwaterites have had almost no impact on economic policy for the past year—neither in the Bush months or the Obama ones. Sure, Nobelist Ed Prescott, a former freshwater economist who now teaches in Phoenix and thus should probably be described as a no-water economist, made the statement that:

"I don't know why Obama said all economists agree on [the need for a stimulus bill]," Prescott said. "They don't. If you go down to the third-tier schools, yes, but they're not the people advancing the science."

Unless you believe that pretty much anyplace other than Arizona State University is a third-tier school, this is patently untrue, evidence of the extreme isolation of the remaining true believers in rational expectations and real business cycles and other such elegant but profoundly unhelpful macroeconomic theories developed since the 1960s. Even some of the true believers seem far more aware than Prescott that the past year's events have challenged their theories—as the University of Chicago's Robert Lucas told me last fall, "everyone is a Keynesian in a foxhole." Among economists with actual influence on policy over the past year—Philip Swagel in the Paulson Treasury, Larry Summers and Christina Romer and Austan Goolsbee and etc. in the current White House—there's been a great willingness to experiment and accept that markets don't always deliver optimal results. The result: an economic recovery that seems to be gaining strength. So don't totally count the economists out...

Four remarks:

(1) In context Lucas's "everyone is a Keynesian in a foxhole" is not an endorsement of the position and an admission that he holds it, but instead much closer to a denunciation of economists for their intellectual weakness in reaching for Keynesian remedies:

Well I guess everyone is a Keynesian in a foxhole, but I don't think we are there yet. Explicitly temporary tax cuts do nothing: people just bank them. Supply side tax cuts are fine with me, but they take time to work and at some point we need the revenue to run the government. I feel the current situation requires a lender of last resort but not a fine tuner.

As, indeed, was clear when Lucas made his big denunciation of Christy Romer (and by implication Summers, and Orszag, and Elmendorf, and Bernanke, and Swagel, and so on) for what I can only characterize as "corruption":

Why a Second Look Matters: The Moody's model that Christina Romer -- here's what I think happened.  It's her first day on the job and somebody says, you've got to come up with a solution to this -- in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they're kind of -- I don't know.  So I don't think anyone really believes.  These models have never been discussed or debated in a way that that say -- Ellen McGrattan was talking about the way economists use models this morning.  These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that's not what that paper does.  I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons...

Note what Lucas does not say: He does not say that Christy Romer has a different reading of the evidence than he has. He does not say that Christy Romer has a different assessment of policy risks than he has. He does not say that Christy Romer has a different tolerance of policy risks than he has. He says that she is providing a "very naked rationalization" for economic policies that Obama decided upon for completely non-technocratic political reasons.

Now this is complete garbage. Christy Romer does have a very different view--she would call her view an evidence-based view--of what fiscal policy does in conditions of extremely low interest rates than Robert Lucas does.

(2) Unfortunately for us these are not fringe figures. To an outsider to academic economics like Justin Fox they may appear to be embarrassing madmen in the attic--and to the extent that that becomes the conventional wisdom then I think the good guys will have won this one. But inside the profession that is not the case.

Robert Lucas is a Nobel Prize winner and the head of the still-dominant school of business-cycle analysis when he claims that Christy Romer (and by implication Ben Bernanke, and Doug Elmendorf, etc.) is providing "very naked rationalization[s]" for politically motivated policies. John Taylor is a former Undersecretary of the Treasury for International Affairs when he claims that forecasters like Mark Zandi and Larry Meyer who find the stimulus to be being somewhat effective are just "repeating what they said in January" because they "haven't looked at the numbers." Edward Prescott is a Nobel Prize winner and head of the second-plae school of business-cycle analysis when he claims that supporters of current economic policies "are not the people advancing the science."

Eugene Fama is the head of the dominant school in finance and perennially on the Nobel Prize short list and he claims that the existence of the savings-investment identity makes it logically impossible for the government to boost the economy via spending--an analytical error that we here at Berkeley teach our freshman not to do for it is, as Paul Krugman calls it, "the most basic fallac[y] in economics--interpreting an accounting identity as a behavioral relationship." John Cochrane is the smartest analyst of aggregate asset prices I know, and yet he too commits fallacies that I had thought were dead since the 1920s when he writes that "every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”

Luigi Zingales is one of the smartest young Chicago economists I know of, and yet demonstrates that he has not thought about general equilibrium in even the most cursory sense--has not thought how you analyze a system in which you have to keep straight the three commodities of cash, financial assets, and goods--when he writes that "if a nuclear bomb had destroyed all roads... [would] we [then claim] that to alleviate the economic impact... we should invest in banks[?]... [I]f the problem is the roads, you want to rebuild roads.... And if the problem is the financial sector, you want to fix this and not build roads."

(3) These are not dumb people. But these are people for whom whole blocks of what used to be called "economics"--the monetary history of the nineteenth and the first half of the twentieth centuries, the "lowbrow" theories of 1920-1980 from Fisher, Wicksell, Keynes, and Hicks through Metzler, Tobin, and Friedman--are taboo. They would be demonstrating to their peers that they were not serious highbrow economists if they consulted them, and so when they have to deal as they have in the past two years with Fisher-Wicksell-Hicks issues they approach them with great ignorance and get them wrong.

(4) Were it not for the Republican Party, this would not matter very much. The failure of high brow macro to have anything to say about our current situation--where is the misperception of relative prices that has given us 10% unemployment with both firms and workers being happy with the situation? Where is the technology shock that has pushed aggregate production relative to trend down by 8%--would lead their colleagues in other subdisciplines to draw the natural conclusions, cut back on hiring domestic macroeconomists, and hire more international finance specialists (where the analytical culture is, I think, healthy), microeconomists, historians, and institutionalists instead. The big problem is the interaction of the guys in the attic on the one hand and the Repubican Party on the other.

Had John McCain won the presidential election of 2008, at the start of 2009 he would have in all likelihood proposed a trillion dollar fiscal stimulus bill--3/4 tax cuts and 1/4 aid to states--and he might have picked Tim Geithner for his Treasury Secretary. Democrats would have called for fewer tax cuts, more state aid, and some government infrastructure spending initiatives in the fiscal policy mix, but the need for the government to cushion the recession would have brought them into line. When Obama took office he bid $800 billion for his fiscal stimulus bill--about 1/3 spending, about 1/3 aid to states, about 1/3 tax cuts--thinking that would be a plan that would win broad bipartisan assent. And he was wrong. The Republicans decided to follow the Gingrich strategy: try as hard as they could to make the Democratic president appear a failure by blocking all his initiatives. But you can't block an initiative without a story for why it is bad for the country. And that, all of a sudden, makes the madmen in the attic the favored economic advisors of the Republican Party. This is, I think, very dangerous. The Republicans will win elections in the future. And when they do will we want Ed Prescott to be running economic policy? ## I See One-Third of a Great Depression... By the employment-to-population ratio metric, the recession is now twice as deep as any post-1960 recession. At 59.2%, the employment-to-population ratio stands 4.1 percentage points below its December 2006 cyclical high--and 5.5 percentage points below its April 2000 alltime high. We are at 1/3 of a Great Depression right now, and are going to go higher. And there is this: ## New York Times Crashed-and-Burned-and-Smoking Watch Why oh why can't we have a better press corps? I realize that nobody is listening over there at the New York Times, but everytime somebody smart and honest like Menzie Chinn is forced to waste time doing intellectual garbage pickup because you cannot be bothered to exercise any quality control, your chances of surviving the next decade drop. Outsourced to Menzie Chinn: Econbrowser: State and Local Employment and Spending Trends: In a recent Economix post, Casey Mulligan asserts that aid to the states and localities is unwarranted given that state and local government employment is doing just fine. His graph highlighting cumulative gains/losses ends in January 2009.... I'm willing to say public policy types [in late 2008] were able to see the handwriting on the wall, note that in the future that state and local tax revenues would decline, and in the absence of countervailing action, would have to cut employment deeply.... [S]tate and local real spending on goods and services was tanking in 2008Q4 and 2009Q1. It picked up in 2009Q2; most reasonable people agree that in the absence of the transfers to the states, spending would have been lower. ## links for 2009-09-05 ## Bush 36,000?! Nay! Bush 36,000,000!!!! Matthew Yglesias: Bush 36,000: I, for one, cannot think of a better man to serve as custodian of the Bush legacy: Former President George W. Bush took a step closer Thursday to establishing an “action-oriented think tank” alongside his future presidential library by naming James K. Glassman, the longtime journalist and former administration official, as its founding executive director. Mr. Glassman, who served in the Bush administration as chairman of the Broadcasting Board of Governors and later undersecretary of state for public diplomacy and public affairs, will be charged with building a public policy institute intended to advance some of the issues that Mr. Bush embraced as president. Glassman is, of course, better known to bloggers who like to make fun of know-nothing conservatives as the author of the late nineties bestseller Dow 36,000. I think that’s the kind of detachment from reality you need to dedicate your life to bolstering the reputation of the Bush administration. It's true, we have had fun with James Glassman and his coauthor Kevin Hassett for quite a while--so much so that the last time I was supposed to be in the same room as Hassett (at Stanford), he said he would flee the jurisdiction if I showed up. I cannot think of a president save perhaps James Buchanan for whom James K. Glassman would be a more fitting executive director. And I cannot think of a job for which James K. Glassman is better suited: • Dow 36000 Once Again: I see that James Glassman and Kevin Hassett are writing in the Wall Street Journal today, lying about what their Dow 36000 book says. There are two different Dow 36000 books that they could have written.... The second book would say: "THE DOW SHOULD BE WORTH 36000 NOW!! THE DOW WILL BE WORTH 36000 SOON!! IF YOU DON'T BUY STOCKS NOW, YOU ARE MISSING THE ALMOST-CERTAIN OPPORTUNITY TO TRIPLE YOUR MONEY OVER THE NEXT SEVERAL YEARS!!" Which book did they write?... • I'll Stop Calling This Crew "Orwellian" When They Stop Using 1984 as an Operations Manual: James Glassman? Back in 1998, 1999, and 2000--as the dot-com bubble approached, reached, and receded from its peak--James Glassman and Kevin Hassett were telling the investors of America to buy, buy, buy more, more, more stocks in their book Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market.... [Glassman and Hassett predict] stock returns [will in the long run be] the same 2.9% above inflation as Treasury bond returns. That forecast of stock returns all by itself makes it impossible for Glassman to [truthfully] support Bush's plan for Social Security privatization.... [T]he Bush administration says that under its plan you only win from private accounts if the stocks and bonds in your private account make more than 3% per year... • More Glassman and Hassett Blogging: Ah. I had forgotten that the Atlantic Monthly--failing to consult with anybody knowledgeable... or half knowledgeable... or quarter knowledgeable...--gave James Glassman and Kevin Hassett their first platform for "Dow 36000".... J.E. emails: "Although he seems to regret it now, Glassman got fairly specific with a stock market prediction back in 2000. He pledged to donate$1000 to charity if the Dow was less than 23,000 in January 2010, and said that his coauthor Hassett would do the same..."

• And Today's Winners of the Mendacity Sweepstakes Are...: The authors of Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market pretend, once again, that their book did not say what it said: "TCS: Tech Central Station - DOW 36,000: Five years ago, economist Kevin Hassett and I wrote a book called Dow 36,000. Maybe you have heard of it. The book made the bestseller lists and won accolades from, among others, the current chairman of the president's Council of Economic Advisors. For some, however, the book became an object of derision because -- just in case you haven't noticed -- the Dow hasn't actually risen to 36,000 yet.... Dow 36,000 was not a prognostication. Sure, the Dow will hit 36,000 and probably, eventually, 360,000. But I don't know exactly when, and I don't believe investing is a game of forecasting what's going to happen tomorrow or next year..." However, those of us unlucky enough to own Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market can go to our bookshelves, pull it down, and read that "the Dow should rise to 36000 immediately"--i.e., in October, 1999. But Hassett and Glassman say, they are going to be cautious and conservative. They are not going to forecast that the Dow will rise to 36000 tomorrow, but instead they "believe the rise will take some time, perhaps three to five years..." (p. 18). However, they acknowledge that they might be wrong: the rise might come much quicker. As they go on to say later on the book, the fact that Glassman and Hassett "conservatively" don't expect the rise of the Dow to 36000 to occur for three to five years--i.e., until 2002 or 2004--does not mean that investors should delay. Investors should "seize the opportunity now [i.e., in 1999] to profit from the rise in the Dow to 36000 (p. 125)." On pages 18 and 19 of the book they go so far as to sneer at one of their American Enterprise Institute colleagues--someone who told them back in 1998 what Glassman is saying now. For when one AEI colleague heard their title, he gave a cynical laugh and said, "As long as you don't say when [the Dow will reach 36000], I suppose it is all right." Glassman and Hassett's response was: "we aren't laughing. The case is compelling.... 36000 is a fair value for the Dow today... stocks should rise to such heights very quickly. As you read on, you will... learn to invest in ways that take advantage of a remarkable time in financial history...." [And] we haven't even gotten into the fact that Glassman and Hassett got their math wrong. As the Economist's Clive Crook told them in May 1998, the 36000 number was "wrong, plain wrong.... Your reasons for believing that the Dow should be at 36,000 are wrong in the same way that it's wrong to say two plus two equals five.... Using your own method, provided only that you put the right variable into the formula, the market is about fairly valued." Note how they don't mention the subtitle--it would make the falsity of the claim that "Dow 36000 was not a prognostication" too obvious.

And the Economist, March 6, 2009:

How's that working out for you?: THE Washington Post has an interview with James Glassman, co-author of Dow 36,000 (with Kevin Hassett), up on its website today. In 1999, the year of the book's publication, the Dow's lowest point was just north of 9,100 points. For those who aren't aware, the Dow's current price is just north of 6,700. A snippet:

[B]ased on our calculations, we believed that stocks would rise to roughly 36,000. We said in the book that it is impossible to predict how long it will take for the market to recognize that Dow 36,000 is perfectly reasonable, but then, of course, we did take a guess.

You said three to five years.

Obviously that hasn't happened. I think the question investors are facing now is, "is history a guide?" In "Dow 36,000" we looked at history in, I think, a completely reasonable way and said a) you ought to be in the stock market b) stocks are very much undervalued...

Do you still think it will hit 36,000?

I have no doubt about that. I think that is absolutely true. But I'm not going to tell you what date.

Aw, c'mon. Tell us the date!

## Deficit Spending and the Recovery: Talking Points for KQED Forum Morning Appearance, September 4, 2009, 9 AM PDT, 88.5FM, San Francisco

### Deficit Spending and the Recovery: Talking Points for KQED Forum Morning Appearance, September 4, 2009, 9 AM PDT, 88.5FM, San Francisco

http://www.kqed.org/epArchive/R909040900

Audio File: 20090904_DeLong_Taylor_Graybell_KQED_Forum

It truly is remarkable: the Republican-leaning economists who make a living by selling their analyses of the economy to manufacturing firms that need information about demand and to financial firms that need information about industry profits are overwhelmingly assessing that the Obama short-run deficit-spending program has been and is being and will be effective--they are seeing the same 0.5 within-quarter fiscal multiplier and the same 3% boost to the second-quarter growth rate that everybody else is seeing. It's only (a) the true ideologues and (b) those who have decided to make their living by pleasing Republican politicians who are saying that the stimulus is ineffective...

• -216,000 is a bad number. But it is a lot better than than -714,000 monthly numbers that greeted the Obama administration when it took office--it's less than 1/3 as bad.

• I went surfing on the internet this morning and found John Taylor [1] in 2003 as Undersecretary of the Treasury talking then about how Bush's deficit-spending plan would in the short run "creat[e]... more jobs... encourage [businesses] to invest... elimination of the double tax on dividends will... encourage investment and job creation.... The expansion of the child tax credit and the extension of the 10 percent income tax to more taxpayers are examples of how the tax cuts apply to all income tax payers..." The stuff about how deficit spending helps in the short run--"sustain[s] the recovery" was the phrase Taylor used--makes a lot of sense. Can I have the John Taylor from 2003 here to debate?

• I should note that the parts of Taylor's 2003 speech that talk about how Bush's tax cuts and deficits are good for the economy in the long-run are politically-motivated bull. Destabilizing a government's finances so that everybody knows that taxes must go up or there must be a lot of inflation but no one is sure how or when is a very bad thing for a government to do. Deficit spending gives the economy a short-term boost when it needs it--like most of us need that one cup of coffee perks you up in the morning. But it's not a good idea to drink 24 cups a day, even if Starbucks will sell you the iced drink of your choice after 2 PM for only $2. • It's a fact that the economists who make a living by selling their analyses of the economy to manufacturing firms that need information about demand and to financial firms that need information about profits are overwhelmingly assessing that the Obama short-run deficit-spending program has been and is being and will be effective. It's only those economists who make a living by pleasing Republican politicians who are skeptical. • OECD yesterday reevaluated the state of the world economy and upped its assessments of the situation in those countries that did fiscal stimulus packages relative to those that did not. • Deficit spending gives the economy a short-term boost when it needs it. It's not health to rely on it all the time. One cup of coffee perks you up in the morning when you nee it. 24 cups of coffee a day gives you a stroke. But that 24 cups of coffee a day gives you a stroke doesn't mean that you shouldn't drink that first cup that makes you awake and alert enough to be coherent on KQED. • Claims that deficit spending doesn't work in the short run hinge on either (i) rapidly rising inflation so that increased spending doesn't mean increased production--we don't have rising inflation--or (ii) rapidly rising interest rates so that the rise in government spending is offset by falling private investment. We don't have rising interest rates. • If in response to the Obama fiscal boost the Federal Reserve were about to raise interest rates and so reduce investment, it would say so. It doesn't. Ben Bernanke says that the stimulus is effective: "[CBO] estimates of the effects of the stimulus package on real GDP and employment... appropriately reflect... uncertainties.... [B]y the end of 2010... boost the level of real GDP between about 1 percent and a little more than 3 percent and [boost] the level of employment by between roughly 1 million and 3-1/2 million jobs..." If the Obama stimulus were not effective, it would be because Ben Bernanke at the Federal Reserve was taking steps to neutralize it. He isn't. • You know, I know John McCain's three senior economic advisors--Mark Zandi, Douglas Holtz-Eakin, and Kevin Hassett. Had McCain won, there would have been a McCain short-run deficit-spending plan and Taylor would be here talking about how great it was and how much it had boosted employment. And I--I would not be here because I would have told KQED yesterday that the program was far from optimal but was effective, and they would have gone hunting for some moonbat to give "the opposing point of view." • Consider Mark Zandi: Mark Zandi was one of John McCain's most senior economic advisors last fall. Mark Zandi's estimates of stimulus spend-out are that it amounted to$89 billion as of the end of June--$2 billion in February,$7 billion in March, $13 billion in April,$32 billion in May, and $35 billion in June; with (so far) about 60% of the spend-out coming in the form of tax cuts and about 40% in the form of aid to states (with a trivial amount in direct federal government spending).[2] In Zandi's assessment: “Early results suggest the stimulus is performing close to expectations.” The economy is not performing close to expectations as of last December, but the Obama deficit spending plan is. • Three tranches to the plan: tax cuts, aid to states, infrastructure spending: • Tax cuts hit immediately but help short-term employment only to the extent that they are spent rather than saved. So far we really don't know--although there is suggesting cross-country and cross-state evidence suggesting that a considerable portion is being spent. • Aid to states is clearly a big win: it has helped states maintain spending and cut less. One big worry was that in this recession we would see it snowball as Fifty Little Herbert Hoovers started firing people left and right, and as they lost their incomes they would stop spending and those they bought from would lose their jobs, etc. That's happening. It would have been nice to have much more aid to states. But what we are doing is working. • Infrastructure comes later--so far only trivial amounts of direct federal spending. We will see. No reason to think it's going to be ineffective. • Mark Zandi, a former senior McCain advisor and as good an economic forecaster as you, thinks that the stimulus package boosted the rate of GDP growth by 3% in the spring and by another 4% this summer--meaning that the$80 billion in stimulus spending in this third quarter of 2009 is boosting production and incomes by $65 billion. Because the$80 billion is being used to buy useful goods and services that in normal times have a value of about $60 billion, the stimulus package looks like a clear win: The government is losing$20 billion by being a hurried and hasty shopper, but we as a country are gaining $65 billion in incomes and production. That is a benefit-cost ratio better than 3 to 1. • This is an old, old argument. Back in the Great Depression, Joseph Schumpeter--who was certainly no Democrat, not with a big "D" and not with a little "D"--argued that the economy was then undergoing a "healthy cold douche" and that there was "a presumption against" the government lifting a finger via expansionary monetary policy or New Deals or deficit-spending fiscal boosts to try to keep things from getting worse. John Maynard Keynes disagreed, writing then that: "Some austere and puritanical souls regard [the Depression] both as an inevitable and a desirable nemesis on so much 'overexpansion,' as they call it. ... It would, they feel, be a victory for the mammon of unrighteousness if ... prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right.... I do not take this view.... And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity." I think Keynes was a smart guy: right then, and right now. • I was looking at the latest CBO "Economic and Budget Outlook."[4] What I took away from it was three things: • We have a huge problem after 2030 or so no matter what as the Baby Boomers retire--not because they are drawing Social Security but because CBO projects that private-sector health costs will continue to explode and Medicare as currently constituted pays doctors what the private sector does. We cannot afford that without raising everybody's federal taxes by 25%. • We have no problem until 2030 if congress sticks to its PAYGO budget rules. • We have a substantial problem starting in 2012 or so when the economy gets back to full employment if congress doesn't stick to its PAYGO rules. And you can tell that the CBO is not optimistic--the only time that congress stuck to PAYGO was when Clinton was president and made sticking to PAYGO a priority. [1] John B. Taylor, Undersecretary of the Treasury for International Affairs: John B. Taylor Remarks before the Brazil-U.S. Business Council: President Bush['s]... recently announced program of tax cuts has the goal of raising economic growth, sustaining the recovery... creating more jobs... in the short run.... [M]ore generous expensing provisions for small businesses would encourage them to invest in the technology and other equipment they need to expand and create jobs.... [T]he elimination of the double tax on dividends will... encourage investment and job creation.... The expansion of the child tax credit and the extension of the 10 percent income tax to more taxpayers are examples of how the tax cuts apply to all income tax payers... [2] Mark Zandi: [3] Christina Romer: [4] CBO: ### Notes: http://www.kqed.org/radio/programs/forum/ "So who else do you have on the show?" "John Taylor from Stanford and Michael Graybell from ProPublica. No alien lizard people this time!" KQED misunderstands me: my point last September is that it makes more sense to put someone on who wants to warn us about the threat of the Alien Lizard People from North Polar Jupiter than to put someone on from the Club for Growth. Alien Lizard People are more entertaining than the Club for Growth. And they are equally informative. John Taylor is behaving badly: claiming that Mark Zandi's and Larry Meyer's and Doug Elmendorf's assessments that the stimulus package is working are simply repeats of things they said last January and that they "haven't looked at the numbers"... Contrast between Taylor 2009 and Taylor 2004 on short-run effects of fiscal policy is quite remarkable... ProPublica guy thinks his job is looking for "gotcha" stories about stimulus money going for "lion cages at the National Zoo." Not the best focus if you are in the inform-America business, I must say... ## Alien Lizard People on the Radio: KQED 88.5 Forum Update... http://www.kqed.org/radio/programs/forum/ "So who else do you have on the show?" "John Taylor from Stanford and Michael Graybell from ProPublica. No alien lizard people this time!" KQED misunderstands me: my point last September is that it makes more sense to put someone on who wants to warn us about the threat of the Alien Lizard People from North Polar Jupiter than to put someone on from the Club for Growth. Alien Lizard People are more entertaining than the Club for Growth. And they are equally informative. It truly is remarkable: the Republican-leaning economists who make a living by selling their analyses of the economy to manufacturing firms that need information about demand and to financial firms that need information about industry profits are overwhelmingly assessing that the Obama short-run deficit-spending program has been and is being and will be effective--they are seeing the same 0.5 within-quarter fiscal multiplier and the same 3% boost to the second-quarter growth rate that everybody else is seeing. It's only (a) the true ideologues and (b) those who have decided to make their living by pleasing Republican politicians who are saying that the stimulus is ineffective... John Taylor is behaving badly: claiming that Mark Zandi's and Larry Meyer's and Doug Elmendorf's assessments that the stimulus package is working are simply repeats of things they said last January and that they "haven't looked at the numbers"... Contrast between Taylor 2009 and Taylor 2004 on short-run effects of fiscal policy is quite remarkable... ProPublica guy thinks his job is looking for "gotcha" stories about stimulus money going for "lion cages at the National Zoo." Not the best focus... ## Hoisted from the Archives: Cranks and Charlatans: Stephen Moore and the Club for Growth Cranks and Charlatans: Archive Entry From Brad DeLong's Webjournal: One of my very worst book-purchase investments is looking me in the face from the fourth middle shelf right now: a yellow-covered book called It's Getting Better All the Time: 100 Greatest Trends of the Last Hundred Years (Washington, D.C.: Cato Institute). I bought it because I saw the late Julian Simon's name on the cover: it is "co-authored" by Julian Simon and Stephen Moore--although I cannot believe that Julian Simon had much to do with the manuscript. It is a very, very bad book. It is a not very bad book because its thesis is wrong--I agree with the thesis, which is that in almost every respect things are a lot better today than they were 100 years ago. It is a very bad book because I cannot trust a word, a paragraph in it. Every time I read a sentence, everty time I read a page, I have to step back and think, "Is this yet another place where Stephen Moore is trying to make me into a fool?" Last year I opened it at random, and found myself on pages 58-59: Pages 58-59: Moore is telling us the extent of economic growth over the past century. He tells us that total GDP is "the broadest measure of a nation's overall economic performance" and that it has multiplied more than twentyfold over the past century. But is total GDP a good measure of overall economic performance? No. A country where population quadrupled and living standards halved would see its total GDP double. A much better measure of total economic performance is GDP per capita, which tells us much, much more about living standards and productivity levels. GDP per capita has multiplied more than sixfold over the century: economic growth has been very impressive. But, Moore seems to think, why tell my readers about the more than sixfold amplification of the right measure of prosperity when I can tell them about the more than twentyfold amplification of another (but wrong) measure? Pages 60-61: nothing wrong here... Pages 62-63: Very strange. There is a "graph" of median family income year-by-year since 1947. But the graph plots no median family income series I have ever seen before. Certainly it is not the case that the years 1989-1994 are the only years since 1947 in which median family income has declined... Pages 64-65: Oh, this is an absolute beauty! "The Millionaire Next Door... less than 5000 Americans, or less than 0.1 percent of households, were millionaires in 1900.... Today there are almost 8 million millionaire households in the United States [or 7.7% of households." The problem is that a dollar back in 1900 had about 20 times the purchasing power of a dollar today. If you want to answer the question "How many people today are as wealthy as a 1900-millionaire?" you need to look at the people today with wealth more than$20 million--about 0.4% of households.

Now it's not that Moore is confused about the statistics: he knows the difference between nominal dollar amounts and inflation-adjusted real income and wealth figures as well as I do. It's just that he would rather give you the (phony) number that an American today is 77 times more likely than an American in 1900 to be a "millionaire" than the (real) number that an American today is 5 times more likely than an American in 1900 to have the purchasing power of a 1900-era-millionaire. He wants to confuse you: to leave you with a false and exaggerated picture of the pace of economic growth.

Note that in all four of these cases starting on pages 58-59 the basic point Moore wants to make is true: America is much richer and there are many more millionaires now than in 1900, median family income has risen steeply over time, the U.S. edge over other countries in productivity has grown, and American economic growth in the twentieth century has been amazing and remarkable. He can tell his story, and he can tell it straight and strong, without resorting to false, erroneous, or misleading calculations at all. But only one of the four examples headlines the right numbers. Moore simply cannot resist painting the lily, cannot resist making things "clearer than truth," regards as a victory each casual reader whom he can make think that economic growth has been even faster than it has been. The result is that I cannot believe--and you should not believe--a single word he writes without carefully, carefully checking it.

## Berkeley's bSpace Content Management System WROSE THAN HILTER!!1!!11! Update

An email from the Deputy Chief Information Officer:

I understand that the current outage is difficult and I regret any inconvenience or problems we have caused. IST has been working directly with supporting vendors since the outage began. The short version is that a large file system (around 1TB) became corrupted and could no longer be accessed. How this happened is not known as it is not supposed to be possible. We responded by deploying a replacement file system and have been building a copy of the data from backups, but the size makes restoration time consuming.

These problems, while they negatively impact bSpace, have taken place entirely in IST facilities and areas of responsibility. Unfortunately, the negative impact that our storage outage created for bSpace is ultimately transferred to its community. I apologize for this outage and I assure you it is receiving our highest priority.

I do understand that making cloud services work is really, really hard. R/W file systems become corrupted in what appears to be normal use. Even write-once-to-archive file systems become corrupted in what appears to be normal use (although that, I must admit, I have a harder time understanding). The question is: is running a cloud system within Berkeley's scope of comparative advantage? Make yourself or buy from outside?

## New York Times Crashed-and-Burned-and-Smoking Watch (Jim Rutenberg Edition)

Starting with the headline, paragraphs 1 through 9 of Jim Rutenberg's article are opinions-on-shape-of-earth-differ garbage. He waits until paragraph 10 to tell his readers the truth about Betsy McCaughey. Starting at paragraph 10, however, the article becomes good for a few paragraphs:

McCaughey, Unlikely Critic of Obama’s Health Care Plan: She incorrectly stated in July that a Democratic bill in the House would mandate “people in Medicare have a required counseling session that will tell them how to end their life sooner,” drawing a “Pants on Fire” rating from the Politifact fact-checking Web site; her false assertion that the presidential health adviser Dr. Ezekiel J. Emanuel believes “medical care should be reserved for the nondisabled” helped form the basis for former Gov. Sarah Palin’s discredited warning that Mr. Obama would create “death panels” to decide who is “worthy of health care.” Far from isolating her, it has all seemed to raise her profile to levels not seen since she left office, making her a regular guest on cable, radio and even last month, on “The Daily Show” on Comedy Central. (The host, Jon Stewart, said he found her analysis “hyperbolic and in some cases dangerous.”)...

Before Rutenberg remembers that he is a coward and wimps out again:

[H]er criticisms are reminiscent of a trademark style of argument that, while effective in grabbing attention on national issues, frequently comes into dispute as out of bounds. “Sometimes, I think she is on to something,” said Ann Northrop, a longtime activist on AIDS and gay and lesbian issues who has been friends with Ms. McCaughey, her political near-opposite, since they were freshman roommates at Vassar. “Other times, I think she is 100 miles out to sea.... I have absolute, complete faith in her sincerity. When something like this comes up,” Betsy, for better or for worse, feels like she has a responsibility to look at the bill in detail because she feels — rightly so — that so few people do.” And so it was that Ms. McCaughey, who earned a doctorate in constitutional history at Columbia University, in 1994 wrote a scathing critique in The New Republic of President Bill Clinton’s plan while a scholar at the Manhattan Institute. The piece, credited with helping to kill the plan, won a National Magazine Award. It also won the attention of Mr. Pataki, who tapped her to run as his lieutenant governor.

"style of argument that... frequently comes into dispute as out of bounds"? How about, Mr. Rutenberg, changing that to "style of argument in which she tells lots of lies"? Like this one:

[McCaughey's] assertion that “[Clinton's] law will prevent you from going outside the system to buy basic health coverage you think is better,” though the House bill specifically stated it would not prohibit “an individual from purchasing any health care services...”

## -216,000 Payroll Number for August

Not a good number. But not an unexpedtedly bad number either...

## Ah! The Old Dead Power Socket in the Lecture Socket Trick...

... It will not stop us1 We are invincible!

## Health Care Reform: Memories of 1994

The Week: After President Clinton's 43 percent plurality victory in the presidential election of 1992, I worked as a spear carrier in the U.S. Treasury Department under Secretary Lloyd Bentsen. The plurality view in the Treasury Department throughout 1993 and up through the middle of 1994 regarding the health-care reform situation had six analytical pieces:

(1) There were not even 50 votes available in the U.S. Senate for any health-care reform bill sponsored by President Clinton. It did not matter what the bill included or how good the policy might be, because key Democratic senators placed a higher priority on teaching the hick from Arkansas that he was not their boss; they were determined to vote against it. Thus even though the Democrats had a majority in the Senate, they could not pass Clinton's bill—whatever it was—even if the Republicans did not filibuster it.

(2) There were, on the other hand, 80 votes in the Senate for any health-care reform bill that would be blessed by Republican Senate leader Robert Dole.

(3) Dole was not a cruel or cynical or amoral man, and really did want to make the country a better place.

(4) Dole—with his own long-standing health problems stemming from his World War II injuries—was keenly aware of the importance of health care.

(5) Dole was smart: He understood how the American health-care financing system was broken and how much public good would be achieved by fixing it.

(6) Dole and Bentsen, who had represented Texas in the Senate before becoming Treasury chief, had worked well together throughout the mid- and late-1980s and into the 1990s trying to repair the damage done to America's budget by the supply-siders. (Dole, remember, was the guy who told this joke: "The bad news is that a bus went over the cliff. The good news is that it was loaded with supply-side economists.")

Therefore, we in the Treasury thought that sometime—probably in the second quarter of 1994—Bentsen's personal policy staff would start feeling out Dole's personal policy staff on the issue. Then President Clinton would invite Sen. Dole to a private Oval Office meeting, after which Clinton would tell the cameras that the health-care legislative process had gotten bogged down and that he was seeking Sen. Dole's wise counsel to break the logjam.

Dole would then announce the Dole Compromise. This would provide the nation with desperately needed health-care reform. And it would provide Sen. Dole with a capstone achievement to a senate career that had been too often misspent spinning his wheels and backtracking.

As we all know, that scenario never happened. The Republican congressional delegation believed that President Clinton was in some sense illegitimate—Mr. 43%—having been elected only because Ross Perot hated George H.W. Bush and sabotaged his reelection. It was their business, they thought, to make Clinton's presidency appear a failure. And Sen. Dole, they said, needed to understand that his path to the Republican nomination and the White House lay not in sharing credit with Clinton for health-care reform but instead in advancing the Republican project of making Clinton's presidency appear a failure by blocking every single White House initiative they could.

In the medium run this was a disaster for Robert Dole: He got the Republican nomination in 1996 but no presidential term, no capstone legislative achievement, and a retirement spent keenly and bitterly aware that he had opened the door to a group of Republican barons—Gingrich and company—whom he liked even less than he liked supply-side economists.

And it was a disaster for the Democratic congressional barons, as well: Yes, they proved that the hick from Arkansas did not run Washington. But they all lost their committee chairmanships after the 1994 midterm election and many of those in Republican-leaning states lost their seats. When the president of your party is unpopular, your chances for reelection decline—even if you have spent most of your time blocking his legislative initiatives.

The really interesting question is: What are America's senators now thinking, in the privacy of their vacation retreats or in the pandemonium of "town halls," about this ancient history? I have drawn what I think are appropriate lessons from it. First, Democratic senators do themselves no good either in the next world or in this  when they block sensible initiatives from Democratic presidents. (But what lessons are Democrats Landrieu, Nelson, and Lincoln drawing?) Second, Republican senators do themselves no good either in this world or in the next when they block sensible initiatives from Democratic presidents. (But what lessons are Republicans Grassley, Voinovich, and Hatch drawing?)

## People Who Are Not Economists II

Joining Allan Meltzer in the set of people who say they are but are not--who don't think or reason or use evidence like economists--is Richard Vedder.

David Leonhardt:

Myth-Busting: The Value of College: Over at The Choice blog, Rebecca R. Ruiz describes a recent National Public radio segment called “Is a College Education Worth the Debt?” In the segment, Richard Vedder, a professor of economics at Ohio University, argued that the country suffers from an oversupply of college graduates. “We are starting to graduate, I don’t want to say too many students, but it’s becoming more and more difficult for new college graduates to get jobs, independent of the recession,” Mr. Vedder said.

You hear this line of argument fairly often. But it flies in the face of an overwhelming amount of evidence... the gap between the pay of college graduates and everyone else has reached an all-time high.... That’s evidence of an undersupply of college graduates.... If more people were graduating from college, as the economists Claudia Goldin and Lawrence Katz explained in an important recent book, income inequality would not be nearly as high as it is...

Supply and demand! Provide a stable environment within which private businesses can make decisions! Compensate for externalities!

It really isn't hard to be an economist. Not hard at all...

## Ken Rogoff May Be Right to Fear

If global investors lose confidence in governments tomorrow, then we have a huge crisis--and they are right to lose confidence. If global investors do not lose confidence, then we are fine--and those crying "the sky is falling" are wrong and will lose money--as long as we don't let fear of a loss of confidence panic us into prematurely cutting the government deficits that are maintaining demand.

The right policy, therefore, is (a) big deficits now, and (b) big automatic tax increases enacted now to take effect in the future if we then fail to grow our way out of the debt.

But are we smart enough to enact such policies? Certainly not with today's Republican Party.

Ken Rogoff:

From Financial Crisis to Debt Crisis?: Everyone from the Queen of England to laid-off Detroit autoworkers wants to know why more experts did not see the financial crisis coming. It is an awkward question. How can policymakers be so certain that financial catastrophe won't soon recur when they seemed to have no idea that such a crisis would happen in the first place? The answer is not very reassuring. Essentially, there is still a risk that the financial crisis is simply hibernating as it slowly morphs into a government debt crisis.

For better or for worse, the reason most investors are now much more confident than they were a few months ago is that governments around the world have cast a vast safety net under much of the financial system. At the same time, they have propped up economies by running massive deficits, while central banks have cut interest rates nearly to zero. But can blanket government largesse be the final answer? Government backstops work because taxpayers have deep pockets, but no pocket is bottomless. And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable.

If the trajectory is unsustainable, how long can debt keep piling up? We don't know. Academic economists have developed useful tools to predict which economies are most vulnerable to a financial crisis. But, although we can identify vulnerabilities, getting the timing right is virtually impossible. Our models show that even an economy that is massively overleveraged can, in theory, plod along for years, even many decades, before crashing and burning. It all boils down to confidence and coordination of expectations, which depend, in turn, on the vagaries of human nature. Thus, we can tell which countries are most vulnerable, but specifying exactly where and when crises will erupt is next to impossible....

Unfortunately, we live in a world where the political and regulatory system is often very weak and shortsighted.... For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.... The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.

## Where Does Macroeconomics Go From Here?

Paul Krugman has questions:

How Did Economists Get it So Wrong?: Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Fresh water economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.

But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever. Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.

During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero. But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction....

This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.

Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown. And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)

Meanwhile, saltwater economists... were shocked to realize that freshwater economists hadn’t been listening.... Freshwater economists [like Lucas, Prescott, Fama, Cochrane, Mulligan, Zingales, Boldrin, etc.] who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who... were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound. And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.

And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments.... Chicago’s Casey Mulligan.... Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.” Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?

The state of macro, in short, is not good. So where does the profession go from here?...

I remember October of 1987. We--that is me, Andrei Shleifer, Larry Summers, and Robert Waldmann--had what we regarded as a very nice paper about the instability of irrational agents' beliefs as itself a powerful barrier to arbitrage. We then watched the stock market crash by 25% in one day. And we thought that we had won the argument: that the efficient market hypothesis couldn't come back from a 25% market collapse on a day when absolutely nothing fundamental happened.

But then we were told that something fundamental had happened: there had been a sudden shock to the required expected rate of return on equities and the market had reacted efficiently to that shock. However, when I tried to process this, I could not understand it other than as an assertion that the market had gone down for no reason and would eventually recover--but that this was not a problem because it was consistent with the efficient market hypothesis...

## Which Economists Got it So Wrong?

I remember 2004-2006 being years in which sensible economists made good arguments--or arguments that seemed to me to be good at the time--that we should not worry about a recession brought on by the collapse of a housing bubble. As I recall, there were six of them:

• Any subprime housing bubble is much smaller than the dot-com bubble was.
• Americans will keep paying their mortgages even though their houses are a little bit underwater.
• Banks will be forgiving in a mortgage crisis because it is very bad to have an interest in a house that will stay vacant for any considerable period of time.
• Wall Street firms originating mortgage-backed securities this decade are like the venture capital firms of last decade--they follow the originate-and-distribute model, and the unwinding of the dot-com bubble did not create systemic risk
• In fact, we have had six potential financial crises since Alan Greenspan became Chair of the Fed--1987, 1990, 1994, 1997, 1998, 2000--and all six were nipped in the bud because the Federal Reserve has the tools and the will to stabilize the system because it can create unlimited amounts of what are the safe assets in the global economy.
• The potential crisis to worry about is the dollar crisis--because that is a crisis that the Federal Reserve cannot fix, for once the dollar becomes risky its power drains away. We should be worring about that.

Paul Krugman has a very different view:

How Did Economists Get it So Wrong?: In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted...” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains. Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they... were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.” Indeed, home buyers generally do carefully compare... the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s [Larry Summers's] ketchup economics [point], again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right....

## The Republican Party Badly Needs to Clean Its House (Godwin's Law Violation If-You-Really-Don't-Want-War-with-Poland-than-Simply-Don't-Attack-Poland-Edition)

My Lords, Ladies, and Gentlemen: May I present the winner of the Republican primary in New Hampshire, Assistant to President Ronald Reagan, and stalwart Republican since his days in the Nixon administration smearing Democrats as Communists, Pat Buchanan. Here he is, you see, doing the full neo-nazi: Hitler, you see, was misunderstood--and "never wanted war with Poland":

70 Years After—Did Hitler Really Want War?: On Sept. 1, 1939, 70 years ago, the German Army crossed the Polish frontier. On Sept. 3, Britain declared war. Six years later, 50 million Christians and Jews had perished. Britain was broken and bankrupt, Germany a smoldering ruin. Europe had served as the site of the most murderous combat known to man, and civilians had suffered worse horrors than the soldiers. By May 1945, Red Army hordes occupied all the great capitals of Central Europe: Vienna, Prague, Budapest, Berlin. A hundred million Christians were under the heel of the most barbarous tyranny in history: the Bolshevik regime of the greatest terrorist of them all, Joseph Stalin.

What cause could justify such sacrifices?

The German-Polish war had come out of a quarrel over a town the size of Ocean City, Md., in summer. Danzig, 95 percent German, had been severed from Germany at Versailles in violation of Woodrow Wilson's principle of self-determination. Even British leaders thought Danzig should be returned. Why did Warsaw not negotiate with Berlin, which was hinting at an offer of compensatory territory in Slovakia? Because the Poles had a war guarantee from Britain that, should Germany attack, Britain and her empire would come to Poland's rescue. But why would Britain hand an unsolicited war guarantee to a junta of Polish colonels, giving them the power to drag Britain into a second war with the most powerful nation in Europe? Was Danzig worth a war? Unlike the 7 million Hong Kongese whom the British surrendered to Beijing, who didn't want to go, the Danzigers were clamoring to return to Germany. Comes the response: The war guarantee was not about Danzig, or even about Poland. It was about the moral and strategic imperative "to stop Hitler" after he showed, by tearing up the Munich pact and Czechoslovakia with it, that he was out to conquer the world. And this Nazi beast could not be allowed to do that.

If true, a fair point. Americans, after all, were prepared to use atom bombs to keep the Red Army from the Channel. But where is the evidence that Adolf Hitler, whose victims as of March 1939 were a fraction of Gen. Pinochet's, or Fidel Castro's, was out to conquer the world? After Munich in 1938, Czechoslovakia did indeed crumble and come apart. Yet consider what became of its parts. The Sudeten Germans were returned to German rule, as they wished. Poland had annexed the tiny disputed region of Teschen, where thousands of Poles lived. Hungary's ancestral lands in the south of Slovakia had been returned to her. The Slovaks had their full independence guaranteed by Germany. As for the Czechs, they came to Berlin for the same deal as the Slovaks, but Hitler insisted they accept a protectorate.

Now one may despise what was done, but how did this partition of Czechoslovakia manifest a Hitlerian drive for world conquest? Comes the reply: If Britain had not given the war guarantee and gone to war, after Czechoslovakia would have come Poland's turn, then Russia's, then France's, then Britain's, then the United States. We would all be speaking German now.

But if Hitler was out to conquer the world—Britain, Africa, the Middle East, the United States, Canada, South America, India, Asia, Australia—why did he spend three years building that hugely expensive Siegfried Line to protect Germany from France? Why did he start the war with no surface fleet, no troop transports and only 29 oceangoing submarines? How do you conquer the world with a navy that can't get out of the Baltic Sea? If Hitler wanted the world, why did he not build strategic bombers, instead of two-engine Dorniers and Heinkels that could not even reach Britain from Germany? Why did he let the British army go at Dunkirk? Why did he offer the British peace, twice, after Poland fell, and again after France fell? Why, when Paris fell, did Hitler not demand the French fleet, as the Allies demanded and got the Kaiser's fleet? Why did he not demand bases in French-controlled Syria to attack Suez? Why did he beg Benito Mussolini not to attack Greece?

Because Hitler wanted to end the war in 1940, almost two years before the trains began to roll to the camps. Hitler had never wanted war with Poland, but an alliance with Poland such as he had with Francisco Franco's Spain, Mussolini's Italy, Miklos Horthy's Hungary and Father Jozef Tiso's Slovakia.

Indeed, why would he want war when, by 1939, he was surrounded by allied, friendly or neutral neighbors, save France. And he had written off Alsace, because reconquering Alsace meant war with France, and that meant war with Britain, whose empire he admired and whom he had always sought as an ally. As of March 1939, Hitler did not even have a border with Russia. How then could he invade Russia? Winston Churchill was right when he called it "The Unnecessary War"—the war that may yet prove the mortal blow to our civilization.

If you don't want war with Poland, bozo, it's easy not to have one: if you don't want war with Poland, simply don't attack Poland.

Hell. It's not the full neo-Nazi. It's the full Nazi!

You want to know where donations would do the most good--what institutions of higher education are doing the most and would do the most with marginal dollars? I think the Washington Monthly has it about right:

Washington Monthly: Below are the Washington Monthly's 2009 national university college rankings. We rate schools based on their contribution to the public good in three broad categories: Social Mobility (recruiting and graduating low-income students), Research (producing cutting-edge scholarship and PhDs), and Service (encouraging students to give something back to their country)...

## Burgess: Seven Men at Daybreak

Alan Burgess, Seven Men at Daybreak: The Assassination of Heydrich, Hitler's Human Butcher

## Brown and Linden: Chips and Change

Clair Brown and Greg Linden (2009), Chips and Change: How Crisis Reshapes the Semiconductor Industry (Cambridge: MIT Press: 9780262013468).

## Deborah Solomon on the Stimulus Package

She writes:

U.S. Economy Gets Lift From Stimulus: WASHINGTON -- Government efforts to funnel hundreds of billions of dollars into the U.S. economy appear to be helping the U.S. climb out of the worst recession in decades.... Some economists argue that efforts such as the Federal Reserve's aggressive buying of Treasury debt and mortgage-backed securities, as well as government efforts to shore up banks, are providing a bigger boost than the administration's $787 billion stimulus package.... "There's a method to the madness. We're getting out of this," said Brian Bethune, chief U.S. financial economist at IHS Global Insight. Much of the stimulus spending is just beginning to trickle through the economy, with spending expected to peak sometime later this year or in early 2010. The government has funneled about$60 billion of the $288 billion in promised tax cuts to U.S. households, while about$84 billion of the $499 billion in spending has been paid. About$200 billion has been promised to certain projects, such as infrastructure and energy projects.... Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action.

Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate. The impact in the second quarter, calculated by analyzing how the extra funds flowing into the economy boost consumption, investment and spending, helped slow the rate of decline and will lay the groundwork for positive growth in the third quarter -- something that seemed almost implausible just a few months ago. Some economists say the 1% contraction in the second quarter would have been far worse, possibly as much as 3.2%, if not for the stimulus.

For the third quarter, economists at Goldman Sachs & Co. predict the U.S. economy will grow by 3.3%. "Without that extra stimulus, we would be somewhere around zero," said Jan Hatzius, chief U.S. economist for Goldman...

## Must-Read of the Day: Eastern Europe 1992-2002 in Lights

From Economist Free Exchange:

Pictures of the day | Free exchange | Economist.com: OVER at Vox, J. Vernon Henderson, Adam Storeygard, and David N. Weil write that images of the earth at night can be used to refine GDP data for places that stuffer from poor on the ground data collection. The secret is in the lights.... What you're looking at there is a slice of central and eastern Europe. On the left side of both images is Poland and portions of Slovakia and Hungary. From the middle to the right of the images you have Belarus, Ukraine, and Moldova. And what you can observe is the significant difference in the economic fortunes of former Soviet bloc economies in the decade after the dissolution of the USSR. The western side gets much brighter, and the east, dimmer, reflecting the problematic transitions in eastern Europe.

## More on http://newmajority.com...

Chunkyreesewitherspoonlookalike@gmail.com emails, apropos of David Frum's http://newmajority.com:

New Majority is interesting. Frum's basic idea, however, appears to be that if conservatives become a bit less insane on domestic issues this opens up running room to become more insane on national security issues. His project is similar to that of Ross Douthat's who seeks to make the GOP more reasonable on economics and national security issues in order to make it even less reasonable on gender issues.

I applaud these efforts to open the closed circle of conservativism.

Neither of their visions is appealing to me. It is, however, helpful to have people around stirring the pot.

Maybe someday someone will hit upon the idea of being more reasonable across the board.

## Current Guess: Seasonally-Adjusted August Payroll Employment 300,000 Less than July

Greg Robb:

U.S. Aug. ADP employment down 298,000: WASHINGTON (MarketWatch) - Companies in the U.S. private sector shed 298,000 jobs in August, according to the ADP employment report released Wednesday. The report comes two days before the Labor Department reports on nonfarm payroll growth for August. The decline in employment was more than the consensus forecast of Wall Street economists of a decline of 250,000 in nonfarm payroll in August, which also includes the government sector. The August ADP fits with the trend of "less bad" economic data. Employment losses are diminishing but are likely to persist for several more months, according to Joel Prakken, chairman of Macroeconomic Advisers LLC that prepares the report.

## This Is Not Your Father's Recession; This Is Michael Kalecki's Recession

Productivity in the nonfarm business sector rose at a 6.6% annual rate in the second quarter of 2009, according to the revised release.

• The prize for the weakest argument ever against a single strong bank regulator goes to Sheila Bair, with her tired and utterly inappropriate metaphor that “we can’t put all our eggs in one basket”. To the contrary, we have to put all our regulatory eggs in one basket, because otherwise the phenomenon of regulatory arbitrage will simply result in a race to the least-safe basket, as well as competition between regulators to see who can be most accommodating to banks. The most corrosive aspect of the US regulatory infrastructure to date has been the ability of financial institutions to go regulator-shopping: that must be stopped. And the only way to stop it, in a world where AIG can end up being regulated by the Office of Thrift Supervision, is to have just the one regulator.
• May I state that I personally will not be happy until everything in the country – every road, building and airport, every bridge and dog park – is named after The Troops? Or, failing that, Ronald Reagan. You may think that we already live in a country where everything is “Veterans Memorial” This or “American Legion” that, but we have not begun to express adequate appreciation for our armed forces, clandestine services and military contractors. I think we should start by renaming Joe Klein as Armed Forces Triple Canopy Memorial Oh Dark Thirty Klein. Glenn Greenwald will be Flag Day COIN Enhanced Interrogation Greenwald. It is a little-known fact that IOZ’s real name is Ronald Forward Operating Base Reagan Military Roethlisberger, so that’s one. This blog’s name shall immediately and henceforth be “Pentagon Yay!
• GOP Chairman Michael Steele, summoning up the fake earnestness of a vacuum cleaner salesman, is back to defending Medicare and scaring the elderly. Weigel says "it's running in Florida and 'select national cable networks.'" In another context the ad could be run, almost verbatim, by a Democrat. It's surreal witnessing how unprincipled the national GOP has become, opposing a sensible cut to Medicare Advantage. There are plenty of legitimate arguments to make against the health care bill, but this sort of rhetoric makes the inevitable eventual reforms of Medicare tougher. Steele also repeats the ceaselessly debunked end-of-life care lie:
• His name is Farouk al-Kasim, an Iraqi oil technocrat, married to a Norwegian he had met while studying in London. They had three children, but the youngest had cerebral palsy and needed medical care he would not get at home. So they came back to Norway. I won't repeat the rest of Martin Sandbu's fine story, except to make it clear tht al-Kasim appears to have played a central role both in the technical and in the institutional/political part of the Norwegian story. The FT headline writer calls him "The Iraqi who saved Norway from oil," which is certainly hyperbole, but if he didn't do the job single-anded, still Sandbu makes it clear that he played an important role in making it happen. Great reading, highly recommended.

## No Jews Need Apply...

...to edit National Review.

Wow! How did I miss this? Jeet Heer sends me to:

Sam Tanenhaus: Athwart History: How William F. Buckley turned against the war--and his own movement:To this day, Buckley's politics are grounded less in democratic values--"Democracy just doesn't work, much of the time," he observed in a 2004 column--than in the twin virtues of Catholicism and capitalism.... Gradually, [National Review] became less Catholic than "Christian." But that was the limit of Buckley's ecumenicalism. In 1997, when he was scouring the ranks of talented younger conservatives to find a new editor for National Review, Buckley eliminated one prospect, his one time protege David Brooks, a rising star at The Weekly Standard. In a memo to board members, Buckley reported that he had discussed Brooks with NR alum George Will: "I said that I thought it would be wrong for the next editor to be other than a believing Christian. He agreed and added that the next editor should not be a Canadian"--a possible reference to conservative writer David Frum...

"Possible" reference? To whom else might it possibly refer?

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

## Allan H. Meltzer Stops Being an Economist and Becomes a... I Am Not Sure What...

And becomes a... what? I am not sure. Economics calls for setting prices equal to marginal social values via property rights, subsidies, and taxes. Economics calls for providing a stable framework via a smooth growth path of nominal demand within which private-sector agents can plan production and consumption.

I don't know what discipline Meltzer wants to join, but if he rejects those two goals he is certoinly nothing that I can recognize.

It starts badly, with what I can only call disingenuity:

Allan H. Meltzer: What Happened to the ‘Depression’?: Day after day, economists, politicians and journalists repeat the trope that the current recession is the worst since the Great Depression. Repetition may reinforce belief, but the comparison is greatly overstated and highly misleading. Anyone who knows even a bit about the Great Depression knows that this is false...

I haven't heard anybody say that this recession is as bad as the Great Depression. And this recession is the worst since the Great Depression. So I am at sea here--an at-seaness reinforced by Meltzer's refusal to name a single name among the "opinion leaders":

So why do many opinion makers insist on inaccurate and frightening analogies that overstate the severity of present conditions?... First, there is a strong political motivation to make this recession out to be worse than it actually is. The Obama administration wanted to make it appear as though it saved us from an incipient disaster.... Many others repeated the administration's hyperbolic claims.... Then there are economists who would like to see government take a larger role in the economy. They've chosen to use the recession as a pretext for arguing for this change.

Finally in paragraph 8 names emerge: Paul Krugman and IMF Chief Economist Olivier Blanchard are attacked for advocating "more government spending" even though "the recession... [will] end before much of the... spending takes hold." Now Allan Meltzer knows, and I know, and I know that Alan Meltzer knows that fiscal and monetary measures to boost and stabilize nominal demand back to its normal growth path is appropriate not just before the recession ends but as long as unemployment is elevated. I can only read this as an attempt to, as Cicero boasted, throw dust in the audience's eyes:

New York Times columnist Paul Krugman and the International Monetary Fund repeatedly proclaimed that more government spending was a necessity. Most economists now believe that the recession is expected to end before much of the government spending takes hold...

Then the list of villains grows to include:

Keynesian economists... [who] fail to recognize the powerful regenerative forces of the market... [t]he financial press... [t]he Federal Reserve['s]... Keynesian viewpoint... unprecedented monetary stimulus...

Since a "Keynesian viewpoint" is, in Meltzer's universe bad, I take him to be opposed to Federal Reserve monetary stimulus as well as to Obama administration fiscal stimulus.

This is the full Herbert Hoover we have here.

Yet Meltzer's opposition to fiscal and monetary stabilization measures does not spring from his expectation that the economy to rapidly recover to normal. In spite of the powerful regenerative foreces of the market:

My best guess is that the recovery will be a bumpy ride along a low-growth path. Recovery will be helped by lots of monetary stimulus and low inventories. Some calendar quarters will see healthy growth, but trend growth will be low...

Which would seem to indicate that the regenerative forces are not all that powerful, and that we need more measures--either fiscal or monetary--to stabilize nominal demand back on its proper track, no? But Meltzer says no:

Many pundits argue that we need another stimulus package. I disagree. The proper response now is to repeal what remains of the misguided stimulus and avoid the cap-and-trade program...

So we should not only follow the full Herbert Hoover and not use government policy levers to stabilize the path of nominal demand, we should also let environmental externalities go uncompensated for? This makes no sense. Economics calls for setting prices equal to marginal social values via property rights, subsidies, and taxes. Economics calls for providing a stable framework via a smooth growth path of nominal demand within which private-sector agents can plan production and consumption.

I am sorry, but this is not economics. I don't know what it is. I would welcome suggestions...