## More Central Bank Independence: The Fed in a Corner?

Tim Duy thinks that the Federal Reserve has backed itself into a corner. He is right that the Fed because it was independent was in a "better position to raise regulatory and supervisory roadblocks during the debt build-up compared to other, more politically susceptible agencies." But at the time the Federal Reserve did not see itself as in a much better position. As one extremely senior member of the FOMC told me in 2005: "We stand up and say: "We don't care that you lenders want to issue this mortgage and you homebuyers want to sign it, we won't let you!' and how long do we last in front of Congress?" And he calls for the Federal Reserve to declare war on all too-big-to-fail financial institutions.

I think Tim is broadly right. This was, in fact, the reason that I was calling for at least partial nationalization and the government's taking of proper equity stakes in the banks last fall. The worst outcome would have been not trying or failing to rescue the banking system. But rescuing the banking system in a way that leaves the public believing that bankers have profited and taxpayers lost--as the public now does--is also a bad place to be.

Tim Duy writes:

## The Biggest Entitlement Spending Cut in History--and "Deficit Hawks" Are Running Away from It - Health-care reform's grand bargain

It's buried in the health care bill. We think it has teeth--and the Congressional Budget Office agrees:

Ezra Klein - Health-care reform's grand bargain: This is how health-care reform controls costs. It is, at its base, a grand bargain: The coverage expansion gets liberals to agree to, and even advocate for, cost controls they would never otherwise consider. A 6 percent growth target? A super-MedPAC -- now called the Independent Medicare Advisory Board -- that reforms Medicare to save money and whose recommendations are fast-tracked and protected from the filibuster? Hundreds of pages of changes to payment rates and experiments in value-based purchasing and coordinated care efforts? This stuff is very, very real, and it goes into effect very quickly. You may think it's impossible for Congress to cut costs in Medicare and the government will just go bankrupt, but even you'd have to admit that this is what it would look like if the government was cutting costs in Medicare.

If this piece of the bill was passed on its own, it would be the most important cost control bill ever considered by the United States Congress. But you could never have passed it on its own. You needed the coverage to make the grand bargain work. Republicans like to call this bill a trillion-dollar experiment to expand the health-care system, and in some ways, it is. But it's also a multitrillion-dollar experiment to cut costs in the health-care system, and it deserves credit for that, and support from fiscal conservatives. It's easy to talk about cutting costs, but this is the chance for people to actually do it.

So why aren't the world's deficit hawks--the Blue Dogs, the (honest) Republican legislators who care about the country, the Concord Coalition, et cetera, et cetera--all out there hosanna-ing about the health care reform bill?

In the case of the (honest) Republican legislators who care about the country, they probably are--but it is hard to observe an empty set. But the rest? Where are they

## What Should We Be Doing to the Federal Reserve?

Free Exchange muses on central bank independence.

I haven't done a nose count on the FOMC. But it is pretty clear that right now it has too many inflation hawks on it and not enough unemployment hawks. The only saving grace is that other central banks are worse--some much worse.

In the 1970s the American Congress learned that it did not want to exercise oversight over the Federal Reserve--that opining and trying to influence was a political loser, because mistakes would be made and if you had pushed for the policies that produced them you took part of the blame.

Now it looks as though the Congress may be shifting its ground...

Free Exchange:

A big Fed mess: ALAN BLINDER opens a new Washington Post column with what I believe is the conventional wisdom:

The Federal Reserve's performance in this long-running financial and economic crisis deserves separate grades. For the early crisis period, from the summer of 2007 until a few weeks after the Lehman Brothers failure in mid-September 2008, the Fed's response was uneven. I would question several decisions. But the Fed deserves extremely high marks for its work since then. It has hit the bull's-eye regularly under very trying circumstances.

In academia and in the financial markets, the overwhelming attitude is: Hurrah, and thank goodness, for Ben Bernanke, who gets kudos for his boldness, creativity and smarts.  This is what economists seem to believe—that the Fed totally blew it where the housing bubble and oversight of financial markets, pre-crisis, were concerned, but in terms of shepherding the financial system through the crisis, and the economy through recession, Mr Bernanke and company have done a bang up job. But that doesn't really seem to be true. Any world in which the Fed is twiddling its thumbs while prices are flat-to-falling and unemployment is above 10% is not one where Fed policy is "hit[ting] the bull's-eye"....

An independent central bank is crucial. Political control of monetary policy must inevitably lead to accelerating inflation and long-run economic instability. But at the moment, the American economy could use an increase in expected inflation. And a real threat to Fed independence would almost certainly deliver it, either because markets would anticipate increased political influence on monetary policy ever after, or because the Fed would seek to fend off pressure from Congress by easing further, which amounts to the same thing. But we don't actually want there to be a real threat to Fed independence, because that way uncontrolled inflation lies.

How does one try to influence the Fed while simultaneously keeping it independent?... [I]t does no good for prominent, respected economists to continue heaping praise on a Fed that failed in its mission before the crisis and which is failing in its mission now. Because as unpleasant as the prospect of Congressional intervention in monetary policy is, two more years of high unemployment might well lead to far worse.

## "There Are... 1.1 Million More Jobs Out There... than Would Have Been Without the Stimulus"

Steve Benen:

The Washington Monthly: Republican critics of the economic recovery efforts, when they're not taking credit for the money that's benefiting their state/district, take it as a given that the stimulus "failed." For the right, it's a foregone conclusion, hardly worth discussing anymore. The New York Times reminds us today that "dispassionate analysts" agree that a fair look at the stimulus package shows that it may be "messy" but it's also "working."

Jackie Calmes and Michael Cooper: The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama's promise to "save or create" about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers. "It was worth doing -- it's made a difference," said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass. Mr. Gault added: "I don't think it's right to look at it by saying, 'Well, the economy is still doing extremely badly, therefore the stimulus didn't work.' I'm afraid the answer is, yes, we did badly but we would have done even worse without the stimulus."

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years -- longer for major construction -- considering the probable length of the "jobless recovery" under way as wary employers hold off on new hiring.

Obviously, a bigger investment would have meant a bigger return. The $787 billion package would have been more ambitious if the Senate operated on majority rule, and even White House economists have conceded that the stimulus bill should have been larger to accommodate the size of the hole in the economy. That aid to states had to be curtailed to bring on GOP votes continues to undermine the effectiveness of the strategy. But on the whole, we're talking about a recovery package that saved us from a wholesale economic collapse. Conservative Republicans -- who've been wrong about every major economic challenge of the last generation -- who whine bitterly about the stimulus are, as is usually the case, misguided. Mark Zandi, chief economist of Moody's Economy.com and an occasional adviser to [John McCain and other] lawmakers from both parties, added, "[T]he stimulus is doing what it was supposed to do -- it is contributing to ending the recession." Zandi added that without the recovery bill, the "G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus." Left unsaid is what the economic consequences would have been if we'd listened to congressional Republicans -- 95% of whom voted for a truly insane five-year spending freeze at the height of the downturn. Politically, however, the stimulus has proven problematic -- much of the public is convinced it didn't work, since the economy is still struggling. The more effort the White House invests in explaining reality, the better. ## James Fallows Is Really Shrill! (Why Oh Why Can't We Have a Better Press Corps? Edition) He watches the U.S. press corps cover Obama's trip to Asia, and judges it: Manufactured failure #2: the press, Obama, Asia: I wasn't in touch with Howard French or Tish Durkin (to say nothing of Amb. Jon Huntsman) before we all expressed the same amazed and negative reaction at the way our colleagues had missed the main point of what just happened in America's relations with a very important part of the world. We're all familiar with one "crisis of the press," the business collapse. This is a different kind of crisis, though it makes the business crisis worse: the distortion of reality by compressing every complex issue into the narrative of the DC-based "horse race." As you can tell, this really bothers me... ## links for 2009-11-21 • This paper provides the first credible evidence on the economic value of the certification of green buildings-- value derived from impersonal market transactions rather thanengineering estimates. For some 10,000 subject and control buildings, we match publicly available information on the addresses of Energy Star and LEED-rated office buildings to the characteristics of these buildings, their rental rates and selling prices. We find that buildings with a green rating command rental rates that are roughly three percent higher per square foot than otherwise identical buildings - controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher - above six percent. Selling prices of green buildings are higher by about 16 percent. For the Energy-Star-certified buildings in this sample, we subsequently obtained detailed estimates of site and source energy usage from the U.S. Environmental Protection Agency. Our analysis e • Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks. ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged. No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed... ## Look at the Laptops... Microsoft runs a Windows Mobile event: Not quite you expect to see at Redmond, is it? ## Naughty, Naughty, Peter Orszag... Peter Orszag writes: STATEMENT OF ADMINISTRATION POLICY: H.R. 3961 — Medicare Physician Payment Reform Act of 2009 (Rep. Dingell, D-Michigan, and 6 cosponsors): The Administration strongly supports House passage of H.R. 3961, the Medicare Physician Payment Reform Act of 2009, and appreciates congressional efforts to ensure that Medicare beneficiaries and TRICARE patients continue to have access to care and their physician of choice. In his FY 2010 Budget, the President recognized the need for comprehensive reform for the Medicare physician payment system. The Administration believes Medicare and the country need to move toward a system in which doctors receive better incentives to provide their patients with higher quality and more efficient care. H.R. 3961 takes additional steps to reform Medicare physician payments. The Administration is pleased that the bill would eliminate the steep payment cut scheduled for 2010. A cut of this magnitude could reduce access to physicians for Medicare beneficiaries throughout the country. The Administration also supports the provisions that provide a boost to primary care providers by increasing payments for evaluation and management services, such as office visits. H.R. 3961 would also create incentives for broader reforms for Medicare physician payments by encouraging the formation of accountable care organizations, in which groups of providers are jointly responsible for the quality and cost of health care services for beneficiaries with chronic conditions. The Administration remains committed to working with the Congress to achieve comprehensive reforms to Medicare physician payments that will enhance efficient and high-quality care for beneficiaries and protect their choice of physicians. H.R. 3961 is an important step forward in comprehensively reforming the way Medicare pays physicians to provide the very best care to the Nation’s Medicare beneficiaries and the Administration urges the Congress to pass this legislation. The key, of course, is that although "the bill would eliminate the steep [Medicare physician] payment cut scheduled for 2010" it contains no provisions to pay for that elimination. If Peter and company want me to use a baseline that assumes that PAYGO will hold, they need to at least whine and whimper at bills that break it. Just saying... ## The Financial Times Has Nine Times the Quality of U.S. Newspapers So says John Judis. He does, however, tell one thing that I think is a lie: that the New York Times and the Washington Post "have their strengths in foreign news." In my opinion, the two of them together don't have "strengths." Rather, they collectively have one strength: Anthony Shadeed. Otherwise--well, what's new to me in them has a less than 50-50 chance of being true, and what's true in them has a less than 50-50 chance of being news to me. But the rest of it is good. John Judis: Obama In Seoul: My Problem With Foreign News: [T]his morning... I tried to read the stories about Barack Obama’s visit to Seoul, South Korea... the Washington Post, The New York Times (on-line), and The Financial Times. They each have their strengths in foreign news, but I prefer The Financial Times. And this morning was a good illustration why.... Both the Post and the Times focus not on South Korea per se, but on Obama’s taking a “stern tone” toward North Korea in his discussions with the South Koreans. The Post suggests that the two sides have agreed to a “new approach,” which will reject “endless, inconclusive disarmament negotiations” with the North. OK, pardon me if I yawn. Haven’t I read this story about forty-two times since 1995 or so? Having read the two stories I came away with exactly nothing.... [T]he Financial Times... Christian Oliver and Edward Luce... about one-third the size of the other pieces. The headline reads, “Seoul trades on better ties with Beijing than Washington.” Hmm. That’s interesting.... Now here are the opening paragraphs: When George Bush senior visited Seoul as US president 20 years ago, things were simple – the US was the undisputed main ally and trade partner. Astonishingly, there was only one weekly flight from South Korea to China, the communist foe. Barack Obama on Wednesday visits a South Korea where the US is no longer the only show in town. China is now the main trade partner, with 642 flights each week. While the US is still the chief political ally, Mr. Obama’s cheery soundbites on Korean issues are not convincing Seoul that Washington is dedicating enough thought to the peninsula. One flight versus 642 flights – that’s a small detail that tells a large story about South Korea and China. And what of the rest of the story? In the other newspapers, I learned that the U.S. is going to “satisfy” the demand of the North to send a “high-level” envoy by dispatching Stephen Bosworth to Pyongyang. But in the Financial Times, I learn that China is sending its premier Wen Jiabao and that diplomats in Seoul are not convinced that Bosworth, “a part-time diplomat, keeping a university teaching job in the US,” is the “right man for the job.” Hmm. Interesting. There’s more, too, about Obama making trade promises to South Korea that Congress is unlikely to let him keep. All in all, you get in one-third the length three times more interesting information than in the Times and Post articles, and it’s epitomized in the lead paragraphs comparing the number of flights that now run weekly between China and South Korea. Why oh why can't we have a better press corps? ## The Puzzles of American Political Economy Today Three points to serve as background: First of all, from the day after the collapse of Lehman Brothers, the policies followed by the U.S. Treasury and the U.S. Federal Reserve and the U.S. administrations have been very helpful. They have been good ones. The alternative--standing back and watching the markets deal with the situation--would have gotten us a much higher unemployment rate than we have now. Credit easing by the Fed and support of the banking system by the Fed and the Treasury have significantly helped the economy: have kept things from getting much worse. Second, the fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Each extra percentage point of unemployment lasting for two years costs us$400 billion. A recession twice as deep as the one we have had would have cost us as a country some $2 trillion--and cost the world as a whole four times as much. In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans--and tens of millions outside the United States--at risk. Third, the Obama administration's fiscal boost program has also significantly helped the economy: aid to impacted states has been a big win, the jury is still out on the effect of the tax cuts in the stimulus, and the flow of government spending on a whole variety of relatively useful causes is in train and is boosting production and employment in the same way that everyone's boost to spending boosts production and employment. And the cost of carrying the extra debt incurred is extraordinarily low:$12 billion a year of extra taxes would be enough to finance the fiscal boost program at current interest rates, and for that cost American taxpayers will get an extra $1 trillion of produced goods and services and employment will be higher by about ten million job-years. Thus the big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale--that we ought to have done more. Yet these policies appear, somehow, to be political losers in Washington right now: nobody is proposing to do more along the same lines. This is strange: usually when something works the natural impulse is to do it again. So what is going on? ## What the U.S. Long Bond Market Is Telling Us... Paul Krugman reads the tea leaves in what looks like the best piece of economic analysis I have read this month. When we do the things we do well, this is the kind of thing we do: Interest rates: the phantom menace: From various bat squeaks I’ve put together a view of what I think lies behind the surprising — and damaging — deficit squeamishness of the Obama administration. So here’s what I think they’re thinking.... On the face of it, there’s no reason to be worried about interest rates on US debt. Despite large deficits, the Federal government is able to borrow cheaply.... Underlying these low rates is, in turn, the fact that overall borrowing by the nonfinancial sector hasn’t risen: the surge in government borrowing has in fact, less than offset a plunge in private borrowing. So what’s the problem? Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade... driv[ing] rates way up, even though this possibility doesn’t seem to be priced in by the market. What’s wrong with this picture? First of all, what would things look like if the debt situation were perfectly OK? The answer, it seems to me, is that it would look just like what we’re seeing.... [T]he private sector is hurting, it’s spooked, and it’s looking for safety. So it’s piling into “cash”, which really means short-term debt.... Meanwhile, the public sector is sustaining demand with deficit spending.... [S]omeone has to be bridging the gap between the short-term assets the public wants to hold and the long-term debt the government wants to issue; call it a carry trade if you like, but it’s a normal and necessary thing. Now, you could and should be worried if this thing looked like a great bubble — if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent in the mid-2000s, when the economy was driven by an unsustainable housing boom. Now we face the prospect of a prolonged period of near-zero short-term rates... which should mean substantially lower long rates.... And if we’re facing a Japanese-type lost decade, which seems all too possible, long rates are in fact still unreasonably high. Still, what about the possibility of a squeeze, in which rising rates for whatever reason produce a vicious circle of collapsing balance sheets among the carry traders, higher rates, and so on? Well, we’ve seen enough of that sort of thing not to dismiss the possibility. But if it does happen, it’s a financial system problem — not a deficit problem. It would basically be saying not that the government is borrowing too much, but that the people conveying funds from savers, who want short-term assets, to the government, which borrows long, are undercapitalized. And the remedy should be financial, not fiscal. Have the Fed buy more long-term debt; or let the government issue more short-term debt. Whatever you do, don’t undermine recovery by calling off jobs creation. The point is that it’s crazy to let the rescue of the economy be held hostage to what is, if it’s an issue at all, a technical matter of maturity mismatch. And again, it’s not clear that it even is an issue.... I just don’t think the inner circle gets how much danger we’re in from another vicious circle, one that’s real, not hypothetical. The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale. I am not sure Paul is correct when he says that the possible underlying problem is merely "a technical matter of maturity mismatch." The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are because long Treasuries right now are held by (a) price-insensitive actors like the PBoC and (b) highly-leveraged risk lovers borrowing at close to zero and collecting coupons as they try to pick up nickles in front of the steamroller. And to the extent that the prices at which businesses can borrow are set by a market that keys off the Treasury market, an unwinding of this "carry trade"--if it really exists--could produce bizarre outcomes. Bear in mind that this whole story requires that the demand curve slope the wrong way for a while--that if the prices for Treasury bonds fall carry traders lose their shirts and exit the market, and so a small fall in Treasury bond prices turns into a crash until someone else steps in to hold the stock... This is something to think really hard about.... ## links for 2009-11-20 ## Basic Background Deficit Math Annual change in the U.S. federal debt-to-GDP ratio, and presidential term averages: ###### Source: CBO Current-Law Baseline Ford had bad luck--his presidency coincided with a down phase of the business cycle. But other than Ford, the contrast between the Democrats and the old-style Republicans (Eisenhower and Nixon) on the one hand and the new-style Republicans on the other is quite striking. Also worth noting is that after this recession is over we do not have a pre-2020 deficit problem--if output grows as projected, and if congress sticks to PAYGO, both of which are very big ifs. ## An Issue I Have Never Understood... Spencer Ackerman asks a question: Oh, So That’s the Fifth Category of Detentions: As Marc [Ambinder] writes, that sounds a lot like the administration will just simply hold them in legal limbo, as per the so-called “Fifth Category” of detentions outlined by President Obama in his May speech at the National Archives. Adam Serwer wrote a great piece on how that category of detainees has roiled the civil liberties community. Now, the Obama administration has subsequently stated that it’s not going to seek any additional authority from Congress for such preventive detention. But that doesn’t solve the problem of what becomes of those detainees. Will the courts ultimately decide that the administration doesn’t, in fact, have the power to hold them without charge? And where will they be held if Guantanamo is to close? After all, if they’re moved into the United States, the courts will almost certainly exercise jurisdiction over them... The clean and normal thing to do would be for President Obama to use the Constitutional procedure for dealing with things like this: the president should ask congress to use its Art. I §9 ¶2 power to suspend, for these 75 detainees, for the years 2010-2011, the privilege of the writ of habeas corpus (including other restrictions on extra-legal process detainment), on the grounds that September 11, 2001 opened a case of "rebellion or invasion" in which "the public safety... require[s suspension.]" We have Constitutional procedures, set out by the founders, for dealing with situations like this. Why aren't we using them? ## In Which I Agree with Free Exchange... Who writes: Out of running room: I THINK Brad DeLong misread this post of mine from yesterday as a shot at him. It wasn't. I agree with him that the constraints which seem to be draping themselves across American policy options are worrisome. I was more focused on those who seized on his earlier post, on how the whole AIG mess has likely soured the American public on big interventions, as a reason to refight old battles about the coddling of banksters. Those responses struck me as off base and unhelpful.... I have been trying, over the past few weeks, to argue that the Fed has been derelict in its duties. As Mr DeLong says in a different post: Quantitative easing--pouring a whole bunch of cash in the system with the idea of never reversing the money stock expansion could boost spending and employment considerably by creating expectations of inflation and so reducing the spread--but the Federal Reserve is not going there, and regards the idea with horror, shock, and shame... This seems to be true. At the same time, I think it will probably be easier to sway Fed officials (who are more likely to be impressed by economic arguments) than it will be to convince Congress to pass any kind of fiscal package large enough to have an effect despite the too-tight nature of monetary policy. I don't like where the American economy is one bit. I think that the Fed is ignoring the political economy effects of its stance, and is therefore settling on an inappropriate policy. I hope that changes. But I don't think drawing and quartering Lloyd Blankfein or Hank Greenberg will do any of us much good... I do wonder how much good would be done if the FOMC were simply to stand up and announce that they were raising their long-term GDP-deflator inflation target from 2% to 3%. It might do a lot of good. And it is certainly something the Fed could do without cracking its credibility as committed to low inflation. But they won't. We would need a very different FOMC than the one we have to consider such a move. ## links for 2009-11-19 ## Free Exchange Seems Somewhat... Snittish... With respect to its: "That's the nature of many of these interventions—we all live to whine another day..."... For the record, I wrote my piece not to "get a lot of links" but because I was trying to think through what the U.S. government could do over the next two years or so while the economy is flat on its back if it was hit by another big negative shock--as it is every 40 years or so. And I was coming up empty: credit easing does little; quantitative easing would require the resignation of the Fed governors and bank presidents; fiscal policy is out because of worries about the deficit; and banking policy is out because senators won't get out in front because everybody is making money off the TARP except for the government. So what could we do? We might have to do something, after all, Odds 5%. It (they?) writes: Hindsight is occasionally blurry: BRAD DELONG got himself a lot of links yesterday by writing that efforts to save the banking industry last fall, by eroding public trust in government, increased the odds of a replay of the Great Depression from virtually nothing to 5%.... One side of this discussion is whether the government was actually able to handle things differently.... Economics of Contempt says no. I'm sympathetic to Mr Contempt's view, but I also think... the government could have come with something if it had wanted to. And I agree with Felix Salmon.... "[Y]es, given a bit more aggression and foresight, the Fed could have tried to cram down a haircut onto AIG’s counterparties. But at the time, no one was particularly interested in being harsh to the global financial sector; instead, they were trying to rescue it..." Perhaps Mr DeLong is right, and America now faces a 5% probability of Depression. On the other hand, if you swapped out the folks who were in charge last fall with a group inclined to drive a hard bargain with the banks, you might find yourself in a world in which the Fed and the Treasury fail to convince markets that they'll do whatever they have to do save the financial system, in which a nasty cycle of deleveraging continues to drive important institutions into the ground, and in which the odds of Depression rise to 5%, or higher. That's the nature of many of these interventions—we all live to whine another day... Ummm... With respect to Felix, the key issue is not making AIG creditors take a haircut but rather making them share the upside with the government--as Chrysler shared the upside with the government with its loan guarantee program, as Al Gore was able to stand up there at the VP debate in 1996 and say that the U.S. had made money out of its bailout of Mexico. If Free Exchange wants to ignore the fact that we are now out of macroeconomic running room, they are of course free to do so. But it might be more constructive for Free Exchange to help me think how we can get some of that running room back. We might need it. We might need it real bad. ## Fiscal Expansion That Is Deficit Neutral in the Long Run Mark Thoma is alarmed by our president: Economist's View: Obama's Wrong-Headed Thinking on the Deficit: Edward Harrison catches this quote from Obama.... Obama warned the United States' climbing national debt could drag the country into a "double-dip recession," though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate. "There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett. "I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession." I hope his economic advisers set him straight, though I suppose there's a chance that this nonsense is coming from them. We needed a larger stimulus package to begin with, and the economy could still use more help, labor markets in particular. Let's hope that this doesn't turn into a call to actually start balancing the budget before the economy has fully recovered as that would increase the chances of the double dip recession that he is so worried about (something we should have learned from the 1937-38 experience where an attempt to balance the budget prematurely plunged the economy back into recession)... One way to interpret this--which may or may not be wrong--is that right now we are really and truly fracked beyond previous imagining. Let's go back to the old ca. 1960 standard macroeconomic diagram, with the interest rate on the vertical axis and the economy's level of spending on the horizontal axis. We then have: • A red curve the IS curve, which tells us what the economy's (real) spending level is--the sum of household spending on consumption, business spending on investment, net exports, all functions of this real interest rate, plus government purchases) as a function of the current value of the (real, long-term, risky) interest rate (and also of lots of other stuff that affects the position of the curve)... • A blue curve, the LM curve, which tells us what the (short-term safe nominal) interest rate is as a function of the (nominal) spending level that is consistent with households' and businesses' being willing to hold the economy's current money stock... • A double-headed orange arrow, the spread, the difference between the short-term safe nomina interest rate and the long-term risky real interest rate--the difference between the two being the sum of a term premium, an expected inflation rate, and a risk and default premium... In this framework, the problem with credit easing--the central bank increasing the money supply now and moving the blue curve to the right without changing expectations of what the money stock will be in the long-term future--is that the curve has flat because cash and short-term Treasury bonds are close substitutes, so you expand the money supply by a lot while doing little to boost spending and employment and land yourself with the problem of unwinding the money stock increase in the future in a way that does not hurt spending and employment when you do so: (Quantitative easing--pouring a whole bunch of cash in the system with the idea of never reversing the money stock expansion could boost spending and employment considerably by creating expectations of inflation and so reducing the spread--but the Federal Reserve is not going there, and regards the idea with horror, shock, and shame.) In this framework, banking policy--recapitalizing banks further and issuing government guarantees to shrink the spread--boosts spending and employment even when, as now, cash and short-term Treasuries are close substitutes. The problem with banking policy today is that no member of congress of either party of any political persuasion wants to get out in front supporting it. In this framework, the problem with fiscal expansion--the government purchasing a bunch more things right now and so shifting the red curve to the right--is that it boosts the supply of government bonds in the future and so may raise the double-headed orange arrow that is the spread, getting you absolutely nowhere: So what can we do? Looks like we are well and truly fracked. Well. maybe not. My position on further fiscal expansion is twofold: • The claim that further government purchases would widen the spread might be true. It might now. Let's try it and see. The debt held by the public on Monday was$7,632,033,766,420.46. The debt held by the public a year and a half ago was $5,218,570,776,014.84. We have managed to boost the debt held by the public by$2,413,462,990,405.62 in eighteen months without materially moving the term premium significantly. (The risk premium has moved--there is a financial crisis on, after all.) So let's try it and find out.

• This is an opportunity. We really need to reduce the deficit after 2030. We really need to have more government purchases now. So raise spending now, and raise taxes and impose spending caps starting in 2013 so that by the end of the 20-year budget window the projected debt is unchanged. Thus we move the red line without increasing the spread: there's now increased supply of bonds in the long term to push up the interest rate on them. And we solve both our current near-depression problem and our post-2030 structural deficit problem.

## Can We Please Have a Very Different Republican Party?

Justin Elliot of TPM on the Republican Party's Official Newspaper:

Wash Times Editor: I Was Forced To Attend A Moon Church Mass Wedding: Washington Times editorial page editor Richard Miniter is filing a complaint with the Equal Employment Opportunity Commission against the paper today, alleging discrimination based on age, disability, and religion -- being forced to attend a Unification Church mass wedding -- and he will ask the government to enjoin the Times' assets, his lawyer tells TPM....

Larry Klayman, Miniter's attorney, tells TPM. "What we're seeking to do is to freeze everything right now...."

A spokesman for the Times did not immediately respond to a call seeking comment.

A former Wall Street Journal editorial page writer and author of multiple books, Miniter was hired as editorial page editor and vice president of opinion at the Times in March. The article announcing his hire described it as "the latest of a series of dramatic moves to boost the newspaper's global impact." Besides the mass wedding charge, Klayman alleges Miniter and other employees who were over 40 were victims of age discrimination. Finally, he claims Miniter was forced to work when he was having severe heart problems. During a health scare earlier this year, Miniter was brought out of the newsroom on a stretcher, newsroom sources say.

All of these allegations will be included in the EEOC complaint, Klayman says. He adds that there is a dispute over Miniter's employment status at the paper, and the paper is improperly continuing to use his name on its masthead...

## Why the Universe Looks the Way it Does...

It's not Boltzmann's Brain:

It's Boltzmann's Bang:

Sean Carroll

Edge: WHY DOES THE UNVIERSE LOOK THE WAY IT DOES: A Conversation With Sean Carroll: I read papers by Huw Price, who is a philosopher in Australia... who... said that cosmologists are completely fooling themselves about the entropy of the universe. They are letting their models assume that the early universe had a low entropy.... But there is no such asymmetry built into the laws of physics. The laws of physics at a deep level treat the past and the future the same. But the universe doesn't treat the past and the future the same. One way of thinking about it is, if you were out in space floating around, there would be no preferred notion of up or down, left or right. There is no preferred direction in space. Here on earth, there is a preferred notion of up or down because there is the earth beneath us. There is this dramatic physical object that creates a directionality to space.... Likewise, if you were in a completely empty universe, there would be no notion of past and future.... The reason we find a direction in time here in this room or in the kitchen when you scramble an egg or mix milk into coffee is... because we live in the aftermath of some influential event, and that event is the Big Bang. The Big Bang set all of the clocks in the world. When we go down to how we evolve, why we are born and then die, and never in the opposite order, why we remember what happened yesterday and we don't remember what is going to happen tomorrow, all of these manifestations of the difference between the past and the future are all coming from the same source. That source is the low entropy of the Big Bang.

This is something that was touched on way back in the 19th century when the giants of thermodynamics like Boltzmann and Maxwell were trying to figure out how entropy works.... Boltzmann... was stuck on this question of why was the entropy low to begin with.... Boltzmann invented the idea of a multiverse, the anthropic principle where things were different in some regions of the universe than in others and that we lived in an unrepresentative part of it. But he never really quite settled on what he thought was the right answer.... We know very well how to explain that I remember yesterday and not tomorrow, but only if we assume that we start the universe in a low entropy state.

I like to say that observational cosmology is the cheapest possible science to go into. Every time you put milk into your coffee and watch it mix and realize that you can't unmix that milk from your coffee, you are learning something profound about the Big Bang, about conditions in the very, very early universe. This is just a giant clue that the real universe has given to us to how the fundamental laws of physics work. We don't yet know how to put that clue to work. We don't know the answer to the who done it, who is the guilty party, why the universe is like that. But taking this question seriously is a huge step forward in trying to understand how the universe that we see around us directly fits into a much bigger picture.

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

Shut 'em both down now. Please. The stupid--it BURNS!!!!

Duncan Black:

Eschaton: Slutty Schoolgirl? Really? I thought the Newsweek cover was obviously a poor choice even if right wingers were getting a bit overwrought in their criticisms. But they also include a slutty Palin schoolgirl doll? What the fuck? Of the CNN piece Digby talks about, Wolf Blitzer twittered:

CNN Jessica Yellin did a very good report in SitRoom on Sarah Palin and her sexuality -- the fact that she's good looking. Did you see it?

Sweet Jeebus.

Julie Millican:

Newsweek should worry more about how to solve its problem with sexism: There are a lot of legitimate reasons to criticize Sarah Palin, her new book, and her policies, but... Newsweek's November 23 issue... on its cover a photo of Palin in short running shorts and a fitted top... this photograph may have been completely appropriate for the cover of the magazine for which the picture was apparently intended, Runners World. But Newsweek is... certainly not reporting on Palin's exercise habits. Like her or not, Palin is a former governor and vice presidential candidate. She deserves the same respect every single one of her male counterparts receives when they are featured on the cover of the magazine. I must have missed the cover of Vice President Joe Biden in short shorts or of Mitt Romney in a bathing suit.

Newsweek's sexist treatment of Palin doesn't get any better... illustrating Christopher Hitchens' piece on "Palin's base appeal"... Sarah Palin-as-a-slutty-schoolgirl doll.... What kind of message is the magazine trying to send here?

This is just the latest in a pattern of the media's sexist coverage of female politicians...

Digby:

Hullabaloo: I'm honestly at a loss for words about [CNN]. How many ways can one short segment be offensive? First of all, it was very thoughtful of Yellin to agree that other female politicians "don't act like men" even though they have "played the old pantsuit rules" of the workplace and don't "embrace their femininity." (This means, evidently, that they keep their "femininity under wraps" by not showing off their "gams.")

However, Yellin might have considered that most professional women have enough problems getting people to listen to what they say rather than staring at their legs, so they don't find it all that useful to show them off. Even Palin, before she became a celebrity, said that she wore those glasses and put her hair in a bun so people wouldn't obsess over her looks. It's hard to believe that someone like Jessica Yellin would be so dismissive of women's difficulties... but then she's a television personality, not a serious professional, and for women in show business being sexy is paramount. I guess this makes sense for her.

But there's another dimension here. Most of the women she names as being frumpy, sexless and "unfeminine" are quite a bit older than Palin. They have ascended to the heights they have in middle age, after putting in many years working their way up the ladder. In their 50s and 60s most of these women are not going to don short shorts... they are selling their brains, experience, wisdom, hearts and commitment, which are really hard to market in a pair of Daisy Dukes.... Perhaps the gasbags and newsreaders in the infotainment complex find that distasteful or boring, but the women at least should probably think twice about perpetuating these stereotypes...

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

## We Write Letters on Health Care Cost Control to Ezekiel Emmanuel...

Ezekiel is doing the Lord's work on health care reform at OMB. His judgment is good. He is worth supporting--joggling his elbow is really not helpful given that he has the point on these sets of issues.

But I feel anxious--I don't think I can quite sign on with a good conscience to the whole thing. So I am signing on with a slightly, slightly bad conscience...

Dear Mr Emmanuel:

Any chance we could get "#1 Deficit Neutrality. Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the ten-year budget window, and deficit-reducing thereafter..." changed?

As it stands, it seems to me that this point is not true. Deficit neutrality as CBO scores it over the next ten years is not very important from a public policy standpoint. And what is important is that it be likely to actually be deficit-reducing and substantially deficit-reducing after 2030 by putting us on a sensible cost- and spending-control path--rather than that CBO score it as deficit-reducing after 2030.

And a tax on employer-sponsored health plans is only worth doing in the context of universal or near-universal coverage--in the absence of a mandate or near-equivalent, the risks of producing an adverse-selection meltdown make me nervous.

The rest is fine.

If it's too late to negotiate changes, I will, however, sign on anyway...

Yours,

The context is:

Apologies for the mass email, but we are operating on an extremely tight political timeline. Some key cost control measures are under threat and might very well not be included in the Senate’s health reform bill. We are asking the country’s leading economists to sign onto a letter to Sen. Reid endorsing 4 key measures as essential to a fiscally responsible health reform bill....

Deficit neutrality. Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the 10-year budget window, and deficit reducing thereafter. Of course, covering tens of millions of currently uninsured people will increase spending. But the draft health reform legislation contains offsetting savings sufficient to cover those costs and the seeds of further reforms that will lower the growth of spending. Deficit neutrality over the first decade means that, even during the start-up period, the legislation will not add to our deficits. In the second decade and beyond, the legislation should reduce deficits.

Excise tax on high-cost insurance plans. The Senate Finance Committee’s bill includes an excise tax on high-cost health insurance plans. Like any tax, the excise tax will raise federal revenues, but it has additional advantages that are essential. The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers. Medicare Commission. Rising Medicare expenditures pose one of the most difficult fiscal challenges facing the federal government. Medicare is technically complex and the benefits it underwrites are of critical importance to tens of millions of elderly and disabled Americans. We believe that a commission of technical experts should be empowered to suggest changes in Medicare to improve the quality and value of services. In particular, such a commission should be charged with developing and suggesting to Congress plans to extend the solvency of the Medicare program and improve the quality of care delivered to Medicare beneficiaries. Creating such a commission will make sure that reforming the health care system does not end with this legislation, but continues in the future decades with new efforts to improve quality and contain costs. Delivery system reforms. Successful reform will improve the care that individual patients receive by rewarding health care professionals for providing better care, not just more care. Studies have shown that hundreds of billions of dollars are spent on care that does nothing to improve health outcomes. This is largely a consequence of the distorted incentives associated with paying for volume rather than quality. Health care reform must take steps to change the way providers care for patients, to reward care that is better coordinated and meets the needs of each patient. In particular, the legislation should include additional funding for research into what tests and treatments work and which ones do not. It must also provide incentives for physicians and hospitals to focus on quality, such as bundled payments and accountable care organizations, as well as penalties for unnecessary re-admissions and health-facility acquired infections. Aggressive pilot projects should be rapidly introduced and evaluated, with the best strategies adopted quickly, and throughout the health care system... ## Chance of Great Depression Now 5%... For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it--that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy--a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments. We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible. So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do? Hugh Son of Bloomberg: Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: n American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for$62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost -- they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.

Timothy Geithner, now Treasury secretary, was among officials who took over negotiations with the banks from AIG in November 2008. Lawmakers including Representative Darrell Issa have said the September 2008 AIG rescue was a “backdoor bailout” for banks that received billions in payments. The Fed contacted eight of AIG’s biggest counterparties by telephone last year to negotiate discounts, Barofsky said. While UBS AG, the Zurich-based bank, was willing to make a 2 percent concession, the Fed decided that all counterparties would receive full payment, he said.

‘Misuse’ of Power

In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks that the Fed doesn’t regulate, the Fed said. Andrew Williams, a Treasury spokesman, said in an e-mail statement that Barofsky’s report:

overlooks the central lesson learned from the unprecedented steps taken to support AIG. The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution...

## Proposed Class Topics: DRAFT: Econ 210a, Spring 2010, U.C. Berkeley

INTRODUCTION TO ECONOMIC HISTORY FOR FIRST-YEAR ECONOMICS GRADUATE STUDENTS

#### Class Topics:

Jan 20: Modes of Production

Jan 27: Malthus and the Demographic Transition

Feb 3: Industrious Revolutions

Feb 10: Trade, Law, and State

Feb 17: Industrial Revolutions

Feb 24: Globalizations

Mar 3: Differentiated and Uneven Development

Mar 17: WWI and the Great Depression

Mar 31: WWII and the Thirty Glorious Years

Apr 7: The Great Divergence

Apr 14: The Forward March of Social Democracy Halted?

Apr 21: China Stands Up

Apr 28: Neoliberalism and Its Discontents

May 5: Conclusion

## "But That Political Economy Trick Never Works!": A Dispatch from Chavez's Venezuela

In my email inbox, from "A Leftist":

I asked Xcdv Umesnagos about the power outages [in Venezuela] reported by Simon Romero of the NY TIMES. His reply:

Romero is a fool but the NYT is more so for keeping on a guy who just rewrites the articles in oppo papers.

That said, there definitely is a electricity crisis, short and medium term. Short reflects in part the very heavy reliance upon hydro-electric power which doesn't look so great when climate change and el nino mean the rainy season is cancelled. [In Caracas, water is being rationed one day a week for different parts now.]

Medium term because demand is rising very rapidly both because of new projects propelled by the state and because rising income for the poor has unleashed a mad consumption splurge--tvs. air conditioning in every room, etc... and because generation and distribution networks have fallen well behind [firstly because state ones were run to the ground in anticipation of privatisation and secondly because private distribution ones were doing so well that they saw no need to invest in new facilities].

The crisis, though, reflects the idiocy of the state managers who just pushed pawns while the workers kept shouting a crisis is coming. That's the situation still--- the privates were taken over by the state a little while back but still have their separate boards and the mgrs from the multinationals. The crisis forced Chavez in a few weeks to create a new ministry of electricity [union had demanded this for several years] and to call upon the minister to meet with the workers; so far, the minister keeps meeting with the suits and the workers are pissed.

You're getting this almost from the horse's mouth as I participated in a meeting yesterday with the electrical workers and reps from other unions. Ie., I've got lots of inside dope.

Electricity shortages in a country whose sole export is energy are truly a miraculous thing. It takes a very special government to produce them.

## "Criticizing the Health Care Bill for Not Doing Enough on Cost Control Is Like Criticizing the Yankees for Not Winning the Super Bowl..."

Ezra Klein talks to Jon Gruber:

Does health-care reform do enough on cost control?: My view is, even if the bill did no cost control it would be an incredible thing for this country. But politically, it sets the stage for cost control in two senses. First, it puts in place all the things we can do now. It does comparative effectiveness and pilots and all the rest. But second, once you get coverage off the table, the conversation gets more focused on cost control.... [I]n Massachusetts... Health Care for All... realized that they would lose all this coverage they'd gained if it didn't control costs. So they got behind real cost-control measures. A global budget, even. People say you can't do coverage without cost control. I think it's the opposite. You can't do cost control before coverage. We would do a huge amount for the cause of cost control just by covering people....

One of my frustrations with the cost-control discussion is that people set this up like a choice between this bill and a bill with more cost control. In reality, it seems more like a choice between this bill and nothing. And this bill does a lot more cost control than nothing.... Do you know Pascal's wager? Why not believe in God? I think of health-care reform similarly. We don't know if we'll really bend the cost curve. But if we do this and we don't do anything, we still go bankrupt in 100 years. We don't lose much. But if we do it and it works, then it's a savior.

It also moves the conversation on cost control.... It does real things... then it does real things to make cost control more politically viable.... To kill this bill for not doing enough on cost control would be like criticizing the Yankees for not winning the Super Bowl. They won the World Series! They did what they could do!

## Grandmothers Raising Grandchildren

http://grgahero.org is 49 Luo grandmothers and great-grandmothers raising 150 AIDS-orphaned grandchildren and great-grandchildren in Ahero, Kenya. They sell their baskets to buy animals, schoolbooks, and extra food through this one-woman zero-overhead NGO.

  <p style="font-size: 10px;">  <a href="http://posterous.com">Posted via web</a>   from <a href="http://delong.posterous.com/grandmothers-raising-grandchildren">delong's posterous</a>  </p>


Today, November 15 only, Ann Marie and I are matching basket purposes.

If you want a hand woven basket or simply to spend $30 that would otherwise go to your surplus on their substance, please buy. And we extend a special invitation to those who want to do the right thing for the wrong reason--who want to boast about how generous they are, or feel the warm glow of knowing that they are good people, or who simply think they need to buy advocates before the Judgment Throne: your deeds are as valuable and precious as all others. UPDATE: Well, that's a fair number of baskets--51,$1775 worth...

## Winston Churchill Liveblogs World War II: November 13, 1939

November 13, 1939:

On Friday, November 13, my relations with Mr. Chamberlain had so far ripened that he and Mrs. Chamberlain came to dine with us at Admiralty House, where we had a comfortable ﬁat in the attics. We were a party of four. Although we had been colleagues under Mr. Baldwin for ﬁve years, my wife and I had never met the Chamberlains in such Circumstances before. by happy chance I turned the conversation on to his life in the bahamas, and I was delighted to ﬁnd my guest expand in personal reminiscence to a degree I had not noticed before.

He told us the whole story, of which I knew only the barest outline, of his six years' struggle to grow sisal on a barren West Indian islet near Nassau. His father, the great "Joe", was ﬁrmly convinced that here was an opportunity at once to develop an Empire industry and fortify the family formes. His father and Austen had summoned him in 1890 from Birmingham to Canada, where they had long examined ! the project. About forty miles from Nassau in the Caribbean Gulf there was a small desert island, aimost uninhabited, where the soil was reported to be suitable for growing sisal. After careful reconnaissance by his two sons, Mr. Joseph Chamberlain had acquired a tract on the island of Andros, and assigned the capital required to develop it. All that remained was to grow the sisal. Austen was dedicated to the House of Commons. The task therefore fell to Neville.

Not only in filial duty but with conviction and alacrity he obeyed, and the next five years of his life were spent in trying to grow sisal in this lonely spot, swept by hurricanes from time to time, living nearly naked, struggling with labor difficulties and every other kind of obstacle, and with the town of Nassau as the only gleam of civilisation. He had insisted, he told us, on months' leave in England each year. He built a small harbour and landing-stage and a short railroad or tramway. He used all the processes of fertilisation which were judged suitable to the soil and generally led a completely primitive, open-air existence. But no sisal! Or at any rate no sisal that would face the market.

At the end of ﬁve years he was convinced that the plan could not succeed. He came home and faced his formidable parent, who was by no means contented with the result. I gathered that in the family the feeling was that though they loved him dearly they were sorry to have lost £50,000

I was fascinated by the way Mr. Chamberlain warmed as he talked, and by the talk itself, which was one of gallant endeavour. I thought to myself, "What a pity Hitler did not know when he met this sober English politician with his umbrella at Berchtesgaden, Godesberg, and Munich that he was actually talking to a hard-bitten pioneer from the outer marches of the British Empire!" This was really the only intimate social conversation that I can remember with Neville Chamberlain amid all the business we did together over nearly twenty years.

During dinner the war went on and things happened. With the soup an ofﬁcer came up from the War Room below to report that a U-boat had been sunk. With the sweet he came again and reported that a second U-boat had been sunk; and just before the ladies left the dining-room he came a third time reporting that a third U-boat had been sunk. Nothing like this had ever happened before in a single day, and it was more than a year before such a record was repeated. As the ladies left us, Mrs. Chamberlain, with a naive and charming glance, said to me, "Did you arrange all this on purpose?" I assured her that if she would come again we would produce a similar result.

## Duty, Honor, Country

I just don't understand why people think John McCain is in any sense a patriot. I just don't.

Ta-Nehisi Coates:

A Really Small Human Being - Ta-Nehisi Coates: Sarah Palin on why she's still in 10th grade, or rather gave Katie Couric an interview:

The A.P. says that in the book, Mrs. Palin also accuses the McCain campaign of keeping her away from reporters, which fed a perception that she was ignoring the media. She writes that she sat down with Katie Couric in part because she felt sorry for her, after Nicolle Wallace, a McCain aide, said Ms. Couric suffered from low self-esteem.

I still think the greatest charge against John McCain is that, in his world, Palin could have been president. A man who claims to put "Country First" was actually willing to put that country in Sarah Palin's hands. It's still incredibly shocking.

## Economist Mom Hopes That the Obama Administration Is Thinking Sensibly About the Medium Run Deficit

Even though they are not yet talking sensibly--like about the need for sticking to PAYGO over the medium run.

Economist Mom:

Peter Orszag on the Tough Specifics of Deficit Reduction: The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning.  He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook (emphasis added):

“On the one hand, [you have] the GDP gap, the gap between how much the economy is producing and how much it could produce, and, on the other hand, these deficits,” he says. “If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night.”

Sometime around 2011 to 2013, “that’s where we’re going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy,” he says. “We’re working through [this], and we haven’t made final decisions on the best path to walk down from where we are now to where we need to get.”

Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits.  Here’s a little hint (emphasis added):

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren’t paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

“So, the point being, we inherited a big hole,” Orszag says.

Sounds like not paying for the 2001 and 2003 tax cuts was a bad idea, and that the current revenue system is not keeping up with our spending needs (even ongoing, not just the temporarily high spending needs associated with stimulus).  It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.  I’d like to suggest that “fundamental tax reform” ought to mean more than deciding which parts of the Bush tax cuts should get extended.

And as Peter points out:

“The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it,” Orszag says. “There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down.”

Well, I think the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).  It’s the reason, by the way, why Concord’s online budget challenge (based on CBO’s “Budget Options”) seems lopsided in favor of tax increases over entitlement cuts:  because the fiscally-irresponsible policies of the Bush Administration that the Obama Administration now blames for the awful budget outlook were lopsided on the tax-cut side.  It’s not that CBO or Concord prefers raising taxes to cutting spending.  It’s that that’s where the biggest levers are to significantly change the budget outlook anytime soon–meaning right after the economy is strong again, maybe in 2011-13, like Peter says.

## Macroeconomic Scholasticism

Brother Joseph Gagnon makes a few points:

The Liquidity Trap Does Not Make Monetary Policy Ineffective: With short-term risk-free interest rates essentially at zero in the major developed economies, conventional monetary policy is in a liquidity trap. As a number of commentators have observed, printing zero-interest-rate money to buy zero-interest-rate assets has no real economic effect because the assets are near-perfect substitutes for money. But does that mean that central banks have lost their power? Jim Hamilton asserts that central bank purchases of other assets, with positive yields, can always create inflation, though he is silent as to whether they can affect output....

In recent months, central banks have purchased large quantities of longer-term assets. These purchases appear to have been effective at pushing down longer-term interest rates, which should stimulate economic activity. For example, the Federal Reserve (Fed) has purchased large quantities of longer-term agency-backed securities and Treasury bonds.... Fed communications about such purchases had substantial effects on a range of long-term interest rates, including on assets that were not included in the purchase program, such as interest rate swaps and corporate bonds.

Since March 19, the Fed has not made any substantive changes to its planned purchases of longer-term assets. Over this period, the 10-year Treasury yield has risen about 75 basis points and the corporate yield has fallen about 200 basis points, reflecting a relaxation of the extreme financial strains and flight-to-quality that characterized the first few months of this year. Conventional fixed mortgage rates, a key target of the Fed's policy easing, have changed little on balance since late March.

Paul Krugman has argued that potential gains and losses when long-term interest rates move make a policy of purchasing such bonds especially risky, and that fiscal stimulus is a safer bet. However, central banks, including the Fed, have always held risky assets, including long-term bonds, foreign exchange reserves, loans to private banks, and even equities. In many cases, such assets comprise the bulk of the central bank's portfolio.

A good definition of expansionary monetary policy is the printing of money to purchase financial assets. Expansionary fiscal policy is the selling of financial assets to purchase goods and services, to cut taxes, or to increase transfers. On these definitions, both monetary and fiscal policy can be effective when short-term interest rates are zero.

I would prefer to divide the policy universe into four categories:

• Monetary policy is the purchase or sale of Treasury bills for cash.
• Fiscal policy is the selling of bonds by the government to cover a deficit.
• Quantitative easing policy is the altering of market expectations of the long-run path of the money stock.
• Banking policy is the altering of the quantity, duration, or riskiness of the assets (other than Treasury bills) held by the private sector.

I think this provides the cleanest and closest to orthogonal basis for discussing macroeconomic policy.

But others may agree. This is a discussion for us Schoolmen and Schoolladies, and us Schoolmen and Schoolladies only...

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

Michael Fletcher and Neil Irwin are an embarrassment to the Washington Post.

Think of that.

Let's turn the mike over to Tim Fernholz:

TAPPED Archive | The American Prospect: President Obama has announced his intention to hold a Jobs Summit at the White House, reacting to the high unemployment rate and increasing dissatisfaction with his economic policies. Sure, fine, get the folks together, hopefully some actual results will come out of it. But reading the Washington Post story about it almost made me spit out my coffee:

Going out 30 years to collect a nominal yield of 4.47% with no inflation protection is taking huge faith that the return will compare favorably to other asset classes with the backdrop of the current impact of a weaker US$, higher gold, rising inflation expectations and worsening government finances. The long bond is lower following the auction but was on the weak side just ahead of it. Nevertheless, people do. Trained professionals buy 30-year Treasury bonds. They do it every day. ## Politico Crashed-and-Burned-and-Smoking Watch Yet another journamalistic enterprise that we would all be better off without, and that in a just world would dry up and blow away immediately. Menzie Chinn has the mike: Econbrowser: Politico Does Economic Analysis...: Be afraid; be very afraid. From "'Created or saved' doesn't add up", by Joseph Lawler: ...[t]he "created or saved" numbers are meaningless. The administration purposefully devised the metric to be nebulous. Without a counterfactual, showing the trend of unemployment in the absence of the stimulus, it is impossible to know how many jobs the stimulus saved. But this is completely counter to what I learned in economics, and how, for instance, the CBO conducts analysis. I assume Mr. Lawler doesn't dispute the impartiality of the CBO (but who knows?). Here's the way real macroeconomists conduct analysis: As the President has discussed, analysis done within the Administration has shown how his tax cuts have substantially offset the series of adverse shocks that have been buffeting the economy. Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP would have been about 2 percent lower in the middle of 2003. About 1.5 million fewer people would have jobs today. The job market is not what we would like it to be right now, but it would have been worse without the Administration's actions. One can view the short-run effects of these tax cuts from a classic Keynesian perspective. The tax cuts let people keep more of the money they earned. This supported consumption and thus helped maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks. The writer is Greg Mankiw, discussing in 2007 a particular fiscal measure, namely the 2003 tax cuts.... I know counterfactuals and math are hard to fit on a bumper sticker. But one would hope that in an 800-plus word essay on economics (even if in Politico), some economic content could be included... ## Econ 115 Amazon Associates Fees Party: December 1, 2 PM As I said, I have collected$500 this semester in Amazon referral fees for books assigned in this course, and it seems appropriate to give this back.

Therefore Tuesday December 1 at 2 PM, after lecture, we are going to have an Econ 115 reception outside the classroom--either in the Bank of America Forum inside, or outside in the courtyard, depending...

## Midterm Cancellation and Paper Assignment: Econ 115, Fall 2009

I really do not want to give up November 19 as a lecture day--and bitter experience has taught me that an afternoon lecture on the Tuesday before Thanksgiving, the 24th, simply does not work.

Therefore: the midterm scheduled for November 19 is cancelled.

In its place is substituted:

Due Friday December 11, 5 PM: 2500 words. Take one of your short papers for this course--I hope the one you liked most--and expand it and its argument to about 2500 words.

This assignment substitutes for the November 19 midterm in all respects.

## Politics and the Federal Deficit Mess

David Wessel reports:

The Federal Deficit Mess in a Single Sentence: Douglas Elmendorf, the director of the Congressional Budget Office, gave a speech the other day at the Association for Public Policy Analysis and Management. In it, he nicely summarized the federal government’s long-term fiscal problem in one sentence:

The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those service...

Every thing else is detail.

One of the key details, I think, is that there are now three factions in American politics:

1. Democrats who think that spending should be higher than today's tax level affords--but who think that resolving the gap is the Republicans' problem.

2. Republicans who think that taxes should be lower than today's and projected future spending requires--but who think that resolving the gap is the Democrats' problem.

3. Democrats who think that spending should be higher than today's tax level affords and who think that resolving the gap is everybody's problem.

Missing are (4), the Republicans who think that taxes should be lower than today's and projected future spending requires, and who think that resolving the gap is everybody's problem. I used to think there were such Republicans--Bob Dole, Pete Domenici, Warren Rudman, Phil Gramm, Gregg Judd. But a Berkeley colleague put me straight:

Domenici talks a very good game about fiscal prudence and stability--boy does he talk a very good game--but when the chips are down he does what the Republican Senate leadership wants him to do, and he does it all the time.

You can watch Keith Hennessey freak out over this absence, spinning like mad in an extraordinarily unconvincing way, here:

The inherited deficits fallacy: Director Orszag is correct that neither the Medicare drug benefit nor the tax cuts were offset with other spending cuts or tax increases. He fails to tell you that in 2003 Congressional Democrats wanted to spend more on Medicare drugs.... He fails to tell you that President Obama did not propose means-testing the drug benefit.... He also fails to tell you that President Obama’s budget proposes to continue \$3.2 trillion of the 2001 and 2003 tax cuts and the AMT patches.... Director Orszag is picking and choosing particular policies to try to assign blame.  How much of future deficits are because future Medicare spending was not offset when Medicare was enacted in 1965? This is closely related to the PAYGO myth the Administration is trying to popularize....

Republicans, including President Bush, generally try to offset proposed mandatory spending increases with spending cuts.... This was violated for the Medicare drug benefit.... President Bush developed a proposal to package the Medicare drug benefit with dramatic changes to restructure fee-for-service Medicare and make it compete with private health plans on a level playing field. This proposal would have more than offset the increased spending from the drug benefit.  House Republican Leaders (in 2003) rejected these reforms and insisted on just doing the drug benefit because AARP and Congressional Democrats opposed the reforms...

The "Republicans, including President Bush, generally try to offset proposed mandatory spending increases with spending cuts..." is, as best as I can see, either a brazen lie, a sign that Keith Hennessey has lost all contact with our reality, or a sign that he is indeed a visitor from a parallel universe in which Larry Summers still has a beard.

Hennessey wishes that he lived in a world in which there were Republicans of group (4).

But that world isn't this one.

I urge him to (i) either come across the aisle and join us Democrats in group (3) (God knows we need help), or (ii) turn all his energies not to defending the really-existing Republicans of (2) by fighting with Peter Orszag but instead to trying to destroy them. Unless and until he limits their influence, the Republican ticket is simply not something that anybody who knows the federal budget numbers can with honor vote for...