Previous month:
December 2009
Next month:
February 2010

January 2010

Ten Economics Pieces Worth Reading: January 17, 2010

1) Ezra Klein: America spends way, way, way more on health care:

It's hard to constantly come up with new ways to say "America spends way, way, way, way, way more than any other country on health care." But we do! Just look at the National Geographic graph above, which puts per-person spending on one side of the chart and average life expectancy on the other. Or consider this: If we spent what Canada spends per person, our deficit problem would go away entirely. And Canada's per-person average is in a country where everybody is fully covered and so has full access to care. America's is in a country with 47 million uninsured, and so many people skimp on needed care. So the comparison is actually unfair to Canada. David Leonhardt has another way of making the point. We don't have a government-run system. But our system is so expensive that our government's partial role is pricier than the whole of government-run systems.... This is serious pitchforks-and-torches stuff, if only people really understood it. I continue to believe, however, that the improbable size of the disparity is a barrier to understanding. People just don't believe these numbers. America may not be the best, but we're not supposed to be the worst by such a large margin. If we just spent 15% more than everyone else, people might be more willing to listen.

Ezra Klein - America spends way, way, way more on health care

2) Ryan Avent on Eugene Fama: Really tough times for Chicago:

This is truly remarkable. A bubble is an unsustainable increase in prices relative to underlying fundamentals. These fundamentals are more or less observable; those who called the housing bubble did so based on historically anomalous increases in the ratio of home prices to rents and incomes. And many people did correctly identify the bubble years before it imploded, including writers at The Economist who were worrying about rapid home price increases while the American economy was still limping out of the 2001 recession. This is the reality that Mr Fama seems unwilling to confront. How unwilling?

3) Alan S. Blinder: When Greed Is Not Good:

I'm worried. The financial services industry, once so frightened that it scurried under the government's protective skirts, is now rediscovering the virtues of laissez faire and the joys of mammoth pay checks. Wall Street has mounted ferocious lobbying campaigns against virtually every meaningful aspect of reform, and their efforts seem to be paying off. Yes, the House passed a good bill. Yet it would have been even better but for several changes Financial Services Committee Chairman Barney Frank (D., Mass.) had to make to get it through the House. Though the populist political pot was boiling, lobbyists earned their keep. I expect they'll earn more... a once-in-a-lifetime opportunity to build a sturdier and safer financial system is slipping away. Let's remember what happened to health-care reform (a success story!) as it meandered toward 60 votes in the Senate. The world's greatest deliberative body turned into a bizarre bazaar in which senators took turns holding the bill hostage to their pet cause (or favorite state). With zero Republican support, every one of the 60 members of the Democratic caucus held an effective veto—and several used it. If financial reform receives the same treatment, we are in deep trouble, both politically and substantively...

4) Paul Krugman Defends Barack Obama: Talk Is Cheap — And Irrelevant:

So there appears to be a spreading piece of conventional wisdom saying that instead of trying to pass health care reform, Obama should have “focused on the economy”. I’m with Kevin Drum: I have no idea what this is supposed to mean. It would be one thing if pundits were saying that Obama should have passed a bigger stimulus plan and nationalized some banks. But if that’s what they mean, they should be saying that. And that then raises two questions: could the stimulus have been made larger, politically? (I say yes, but many disagree). And if so, why would that have conflicted with health reform later in the year?

Anyway, I’m quite sure that Charlie Cook and the like aren’t actually quarreling about macroeconomic policy. What they mean by “focusing on the economy” is, almost surely, talking about it — you know, just like the way to fight terrorism is to talk a lot about terrorism. And why on earth does anyone think this would have helped? I guarantee you, more speeches on the economy would not have produced more job growth. Would they have made the public feel better about 10 percent unemployment? (Hey, Obama’s plan may not be working, but he sure sounds like he’s trying!)

Obama’s problem isn’t that he tried to do too many things; it’s certainly not a lack of focus. You can argue — I do argue, and did at the time — that he settled for too weak an economic plan in the first few weeks of his administration. But did any of the pundits now criticizing his lack of focus on the economy ever say anything like that? No.

5) Ricardo J. Caballero: The “Other” Imbalance and the Financial Crisis:

One of the main economic villains before the crisis was the presence of large “global imbalances.” The concern was that the U.S. would experience a sudden stop of capital flows, which would unavoidably drag the world economy into a deep recession. However, when the crisis finally did come, the mechanism did not at all resemble the feared sudden stop. Quite the opposite, during the crisis net capital inflows to the U.S. were a stabilizing rather than a destabilizing source. I argue instead that the root imbalance was of a different kind: The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the U.S. financial system and its incentives (and this was facilitated by regulatory mistakes). The crisis itself was the result of the negative feedback loop between the initial tremors in the financial industry created to bridge the safe‐assets gap and the panic associated with the chaotic unraveling of this complex industry. Essentially, the financial sector was able to create “safe” assets from the securitization of lower quality ones, but at the cost of exposing the economy to a systemic panic. The long run solution to this structural problem requires that governments around the world explicitly absorb a larger share of the systemic risk. The options range from surplus countries becoming willing to demand risky assets (rather than AAA bonds), to private‐public solutions where asset‐producer countries preserve the good parts of the securitization industry while removing the systemic risk from the banks’ balance sheets. The fee structure for this service can incorporate all kind of too‐big‐ or too‐interconnected‐to‐fail considerations.

6) Dani Rodrik: Will China Rule the World:

Today, [China] is a remarkable economic power: the world’s manufacturing workshop, its foremost financier, a leading investor across the globe from Africa to Latin America, and, increasingly, a major source of research and development. The Chinese government sits atop an astonishing level of foreign reserves – greater than $2 trillion.... China is still a poor country... incomes have... still stand at between one-seventh and one-eighth the levels in the United States – lower than in Turkey or Colombia and not much higher than in El Salvador or Egypt.... [Will] China... replace the US as the world’s hegemon, the global economy’s rule setter and enforcer.... Martin Jacques is unequivocal: if you think China will be integrated smoothly into a liberal, capitalist, and democratic world system, Jacques argues, you are in for a big surprise. Not only is China the next economic superpower, but the world order that it will construct will look very different from what we have had under American leadership....

China’s stability hinges critically on its government’s ability to deliver steady economic gains to the vast majority of the population. China is the only country in the world where anything less than 8% growth year after year is believed to be dangerous because it would unleash social unrest.... The authoritarian nature of the political regime is at the core of this fragility. It allows only repression when the government faces protests and opposition outside the established channels. The trouble is that it will become increasingly difficult for China to maintain the kind of growth that it has experienced in recent years. China’s growth currently relies on an undervalued currency and a huge trade surplus. This is unsustainable, and sooner or later it will precipitate a major confrontation with the US (and Europe). There are no easy ways out of this dilemma. China will likely have to settle for lower growth...

7) Kevin Drum: Climate Change's Low-Hanging Fruit:

Some energy efficiency measures have a net cost and require fairly careful analysis to decide if they're worthwhile. Those things are shown on the right side of the chart. But there are lots of efficiency measures that not only reduce greenhouse gas emissions but produce net cost savings at the same time. These are the low-hanging fruit of climate change, otherwise known as "no-brainers." There are tremendous savings out there for the taking.

But there's still opposition to this idea. A couple of weeks ago Ted Gayer of the Brookings Institution wrote that McKinsey's conclusion "violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits." But firms and consumers do pass up opportunities to save money. Maybe it's through ignorance, maybe through laziness, maybe because of financing limitations. But there's plainly friction in the real world that doesn't always show up in simple Econ 101 models. A few days ago Brad Plumer linked to a Wall Street Journal report about an energy efficiency consultant, EnerNOC, that audited Morgan Stanley's New York headquarters and immediately saved them a bundle of money...

8) Ryan Avent: China as hegemon:

I also think it's far too easy to oversell China as the next superpower. Obviously, a developed nation with 1.3 billion people will wield immense economic, military, and cultural power. At the same time, it will be difficult for China to be clearly dominant. India, growing rapidly and with a billion people of its own, is practically next door. North America and Europe combined have over 800 million people (excluding Russia and Mexico), and it will be a long time before per capita output in China rivals that in North America and Europe. Asia has over 1 billion people in countries other than China and India. Latin America will likely continue to become richer and more influential over the next century, and so on.

The thing about "western" hegemony over the last century is that North America and Europe had a relative monopoly over developed nation status. China won't be so lucky; at best it will be first among peers. It therefore seems unlikely that China will be an overwhelming net exporter of ideology or culture, no matter how rich its economy grows.

9) STUPIDEST THING I HAVE READ TODAY: Tim Pawlenty. No, I am not going to link. I am going to outsource to Stan Collender: Tim Pawlenty Embarrases Himself On The Budget:

The Daily Caller... today includes a piece by Minnesota Governor and potential Republican presidential candidate Tim Pawlenty that shows he's not ready for prime time.... Pawlenty complains about federal spending and then says that federal cuts to Medicaid will make the budget problems in states like his worse.... Pawlenty complains about federal spending without referencing any of the other federal dollars his own state gets.  This includes the emergency funds Washington provided and he accepted with open arms when the I-35W bridge collapsed in 2007. He complains about federal spending being too high last year but then endorses a  amendment to the U.S. Constitution that would allow a balanced budget amendment to be suspended in times of national emergency... like the recession that existed last year....

But the real indication that Pawlenty and the federal budget don't mix is this paragraph: "Balancing the budget will require some tough decisions. Congress must reduce discretionary spending in real terms, with exceptions for key programs such as military, veterans, and public safety. The Congress must also reject costly new spending initiatives, like new health care entitlements." Someone needs to tell Pawlenty that discretionary spending except for "military, veterans, and public safety" is less than $400 billion a year.  A real reduction of, say 10 percent (a ridiculous amount but use it for simplicity sake) would save a little more than $40 billion from the baseline and that doesn't come close to doing what needs to be done. 

In addition, rejecting "costly new spending initiatives" isn't the same as paying for the old ones...

10) HOISTED FROM THE ARCHIVES: Notes: World-Famous Psychologist Arianne Emory on Human Genetic Diversity:

C.J. Cherryh (1988), Cyteen (New York: Warner Books: 0446671274): "Dispersion is absolutely essential, but so are adequately diverse genepools.... We do not create Thetas because we want cheap labor. We create Thetas because they are an essential and important part of human alternatives. The ThR-23 hand-eye coordination, for instance, is exceptional. Their psychset lets them operate very well in environments in which... geniuses would assuredly fail. They are tough, ser, in ways I find thoroughly admirable, and I recommend you, if you ever find yourself in a difficult [wilderness] situation... hope your companion is a ThR... who will survive, ser, to perpetuate his type, even if you do not..."

links for 2010-01-17

  • Yes, you can stop emailing me now to tell me about the systematic hacking attacks on that appear intended to provide agencies of the Chinese government with access to the email of dissidents. You don't even need to tell me about the US State Department response. Finally, you really don't need to remind me that there's a book out there called "Halting State" that (cough) predicted something not dissimilar (cough) to this. Game over: "Halting State" is history. (I just hope they haven't caught up with "Rule 34" ...)

How Scared of the Future Should Macroeconomists Be?

Olivier Coibion and Yuriy Gorodnichenko, drawing on the very nice Coibion and Gorodnichenko (2009) (forthcoming AER), have a well-argued piece in VoxEU making the strong case that the "Great Moderation" that began around 1985 is not, in fact, over--but instead that "the current recession, while clearly severe by historical standards, does not imply a return to the levels of volatility observed in the 1970s. Most likely, the current episode will be remembered as a violent storm in otherwise temperate times...":

Does the Great Recession really mean the end of the Great Moderation?

I think that the right answer to this question is not "no" but "maybe"--or, rather, that the right answer to that question depends on whether you think that it is volatility in real GDP growth or volatility in employment changes that ought to be primary in our thinking about the business cycle.

If GDP is our focus, Coibion and Gorodnichenko look to be correct.

If employment is our focus, they may not be.

The way I like to look at it starts by taking four-quarter changes in real GDP, detrended by average growth, and squaring them to get:

Microsoft Excel

After 1985, the variance of four-quarter detrended real GDP changes is dominated by the current episode--with the early 1990s and the early 2000s recessions playing distinctly secondary roles, and no noticeable variability outside. Before 1985 the big recessions and recoverie--1974-6 and 1979-84--contribute the most variance, but there are lots of other peaks almost as large, and almost all the time there are noticeable jitters in real GDP growth. And the current spike in GDP volatility is the tallest since the Korean War.

When we smooth this graph out--taking five or ten year moving-averages of the variance--we get the standard "great moderation" graphs:

Microsoft Excel

Microsoft Excel

The "Great Moderation" is indeed the most obvious and significant feature of the graph, with the second most obvious being the recent rise in volatility. But it is a fact that the spike of last year is now receding. The fact that the spike of last year is now receding, the expectation that we will return to what has been normal over the past twenty years at least most of the time, and the hope that we won't see similar such spikes again are the three things that drive Coibion and Gorodnichenko's relative confidence, or perhaps hope, that the "Great Moderation" is still alive (albeit not terribly well).

However, things look different if we move from output space to employment space, and take a look at twelve-month changes in the employment to population ratio:

Microsoft Excel

Microsoft Excel

Microsoft Excel

The NBER recessions-plus-v-shaped-recoveries stand out on the employment-to-population ratio graph in a way that they do not on the real GDP graph--which is at least one piece of evidence that our worries about volatility are more closely tied to employment and unemployment than to production (at least if you think that the NBER Business Cycle Dating Committee knows what it is doing at some level), how strong a piece of evidence I do not know.

The current spike in employment-to-population ratio volatility is well outside what we would otherwise have expected since the Korean War. It dwarfs the other post-1960 volatility spikes in a way that the GDP volatility spike does not. The analogues of the "Great Moderation" graphs for the employment-to-population ratio show a recent return to more than pre-moderation levels of volatility (in the case of five year averages) and to pre-moderation levels (in the case of ten year averages)--and even in the absence of additional macroeconomic shocks the moving average volatility is going to stay at its elevated level for five or ten years, respectively.

The size of the recent spike creates another worry. Plotting five- or ten-year moving averages of volatility and taking changes in that level as some sort of indicator of structural change was unexceptionable up until 2007. It seemed to capture a real difference in the wiggliness of the time series, and to be a good way to present the reason that we economists spoke of a "Great Moderation."

But if episodes like 2008-2009 are in the post-1985 stochastic process—as they surely are, since we are in the middle of one—there is now little warrant for taking a five-year or a ten-year moving average and thinking that it tells us much about the structure of volatility. And our time-series statistical methods are likely to be outmatched when they are confronted with a series that, post-1985, has little more than one huge honking spike to it.

So I am more fearful of the future (and of the present) than Coibion and Gorodnichenko...

Clarida, Richard, Jordi Galí, and Mark Gertler (2000), “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory.” Quarterly Journal of Economics, 115(1): 147-180.

Lubik, Thomas A. and Frank Schorfheide (2004), “Testing for Indeterminacy: An Application to U.S. Monetary Policy.” American Economic Review, 94(1): 190-217.

Boivin, Jean and Marc Giannoni (2006), “Has Monetary Policy Become More Effective?” Review of Economics and Statistics, 88(3): 445-462.

Coibion, Olivier and Yuriy Gorodnichenko (2009), "Does the Great Recession Really Mean the End of the Great Moderation?" VoxEU (Jan 16)

Coibion, Olivier and Yuriy Gorodnichenko (2009), “Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation,” American Economic Review

20100116 great moderation ep.xls
20100116 great moderation gdp.xlsx

How Scared Should Macroeconomists Be of the Future.pdf


Microsoft Excel

Resizing an Excel graph inside a three-page word document should not lock up Microsoft Word for a minute and while Microsoft Word uses 96% of the CPU and Excel uses an additional 13%...

Does This Mean That Our Drought Is Over?

In the inbox:

Currently, the strong El Nino is reaching its peak in the Eastern Pacific, and now finally appears to be exerting an influence on our weather. The strong jet has been apparent for quite some time out over the open water, but the persistent block had prevented it from reaching the coast. Now that the block has dissolved completely, a 200+ kt [this means approximately 230 miles per hour] jet is barreling towards us. Multiple large and powerful storm systems are expected to slam into CA from the west and northwest over the coming two weeks, all riding this extremely powerful jet stream directly into the state.

The jet will itself provide tremendous dynamic lift, in addition to directing numerous disturbances right at the state and supplying them with an ample oceanic moisture source. The jet will be at quite a low latitude over much of the Pacific, so these storms will be quite cold, at least initially. Very heavy rainfall and strong to potentially very strong winds will impact the lower elevations beginning late Sunday and continuing through at least the following Sunday.. This will be the case for the entire state, from (and south of) the Mexican border all the way up to Oregon. Above 3000-4000 feet, precipitation will be all snow, and since temperatures will be unusually cold for a precipitation event of this magnitude, a truly prodigious amount of snowfall is likely to occur in the mountains, possibly measured in the tens of feet in the Sierra after it’s all said and done.

But there’s a big and rather threatening caveat to that (discussed below). Individual storm events are going to be hard to time for at least few more days, since this jet is just about as powerful as they come (on this planet, anyway). Between this Sunday and the following Sunday, I expect categorical statewide rainfall totals in excess of 3-4 inches. That is likely to be a huge underestimate for most areas. Much of NorCal is likely to see 5-10 inches in the lowlands, with 10-20 inches in orographically-favored areas. Most of SoCal will see 3-6 inches at lower elevations, with perhaps triple that amount in favored areas.

This is where things get even more interesting, though. The models are virtually unanimous in “reloading” the powerful jet stream and forming an additional persistent kink 2000-3000 miles to our southwest after next Sunday. This is a truly ominous pattern, because it implies the potential for a strong Pineapple-type connection to develop. Indeed, the 12z GFS now shows copious warm rains falling between days 12 and 16 across the entire state. Normally, such as scenario out beyond day seven would be dubious at best. Since the models are in such truly remarkable agreement, however, and because of the extremely high potential impact of such an event, it’s worth mentioning now. Since there will be a massive volume of freshly-fallen snow (even at relatively low elevations between 3000-5000 feet), even a moderately warm storm event would cause very serious flooding. This situation will have to monitored closely. Even if the tropical connection does not develop, expected rains in the coming 7-10 days will likely be sufficient to cause flooding in and of themselves (even in spite of dry antecedent conditions).

In addition to very heavy precipitation, powerful winds may result from very steep pressure gradients associated with the large and deep low pressure centers expected to begin approaching the coast by early next week. Though it’s not clear at the moment just how powerful these winds may be, there is certainly the potential for a widespread damaging wind event at some point, and the high Sierra peaks are likely to see gusts in the 100-200 mph range (since the 200kt jet at 200-300 mb will essentially run directly into the mountains at some point). The details of this will have to be hashed out as the event(s) draw closer.

In short, the next 2-3 weeks (at least) are likely to be more active across California than any other 2-3 week period in recent memory. The potential exists for a dangerous flood scenario to arise at some point during this interval, especially with the possibility of a heavy rain-on-snow event during late week 2. In some parts of Southern California, a whole season’s worth of rain could fall over the course of 5-10 days. This is likely to be a rather memorable event. Stay tuned.

Glenn Greenwald Gets the Jon Gruber Story Wrong

I think Glenn Greenwald frames this wrong:

Glenn Greenwald: Gruber was receiving large, undisclosed payments from the Obama administration at exactly the time when the Obama White House (and Gruber himself) were holding him out as an "objective" expert endorsing various parts of the President's health care plan.  Consistent with Sunstein's view that certain actions may be wrong when done by Bad People but acceptable when done by those who are "well intentioned" and trying to "improve social welfare," I noted that many Democrats who strenuously objected to non-disclosure scandals during the Bush years have been minimizing the conduct at issue in the Gruber matter, and cited Paul Krugman as an example.  Krugman responded last night on his blog, and I want to discuss a few of the points he makes because I think they have significance beyond the Gruber issue...

Jon Gruber is not a "consultant" or "strategist" who gets bribed by a political party or a government. Jon Gruber is, instead, an MIT health economics professor whom HHS hired to run a whole bunch of people whose job it was to mirror CBO--to carry out the analytical work on health proposals to tell HHS in advance what CBO was likely to say would be the budgetary implications of different pieces of health care. Gruber is best in the business at this: if you asked me what Doug Elmendorf and his team at CBO were likely to think, and if I couldn't reach Elmendorf, I would ask Gruber. It was a very good thing that HHS hired Gruber to run a team to do this.

Unlike you standard "consultant" or "pundit" or "strategist"--who will turn on a dime and spin as you wish him to if you sign him up for the team and pay him in six figures--Jon Gruber has said nothing this past year about health care reform that he was not already saying in 2008, and 2007, and 2006. Nothing. Nothing at all.

Where Glenn Greenwald does have a legitimate beef is in the idea that Jon Gruber was in any sense new to health care--that he took a look at the plan, did a fresh zero-based analysis, and concluded he liked it. Of course Jon Gruber liked it. It was very close to the Romney Massachusetts health care plan. And Jon Gruber was the architect of the Romney plan.

The way Jon should have been introduced over the past year was as "Massachusetts Romney plan architect..."

Of course, it was no secret that he was the "Massachusetts Romney plan architect..." It's just that the press didn't bother to identify him as such, for reasons I don't understand.

But the idea that there is a "nondisclosure" scandal here? Nope. The only thing relevant that wasn't well known was Jon's status as Massachusetts Romney plan architect. And that was certainly disclosed and disclosed and disclosed and disclosed.

Ten Economics Pieces Worth Reading: January 16, 2010

1) James Heckman: Robert Lucas, Milton Friedman, and Empirical-Mindedness:

When Bob Lucas was writing that the Great Depression was people taking extended vacations—refusing to take available jobs at low wages—there was another Chicago economist, Albert Rees, who was writing in the Chicago Journal saying, No, wait a minute. There is a lot of evidence that this is not true.

Milton Friedman—he was a macro theorist, but he was less driven by theory and by the desire to construct a single overarching theory than by attempting to answer empirical questions. Again, if you read his empirical books they are full of empirical data. That side of his legacy was neglected, I think.

When Friedman died, a couple of years ago, we had a symposium for the alumni devoted to the Friedman legacy. I was talking about the permanent income hypothesis; Lucas was talking about rational expectations. We have some bright alums. One woman got up and said, “Look at the evidence on 401k plans and how people misuse them, or don’t use them. Are you really saying that people look ahead and plan ahead rationally?” And Lucas said, “Yes, that’s what the theory of rational expectations says, and that’s part of Friedman’s legacy.” I said, “No, it isn’t. He was much more empirically minded than that.” People took one part of his legacy and forgot the rest. They moved too far away from the data.

2) Andrew Harless: Inflation Targets and Financial Crises:

There are basically four ways to deal with the possibility of severe financial crises.... cross your fingers [and] hope... insure and regulate your economy heavily... have your central bank monitor the fragility of general financial conditions and “take away the punch bowl” when it thinks conditions are in danger of becoming too fragile.... have your central bank target an inflation rate that is high enough to give it a lot of room to respond to a crisis (or an incipient crisis) by cutting interest rates far below the inflation rate.

For most of the past 20 years, the first approach – supported by a liberal dose of optimism that was buttressed (in the US, anyhow) by the experience of several financial crises with only mild consequences – was in favor. It’s suddenly unpopular.... The order of the day seems to be some combination of the second and third.... The only conservative approach to the possibility of financial crises – the only approach that minimizes the damage without relying on authorities to behave better or more presciently than they normally do behave – is the last of the four I mentioned: inflation...

3) Mark Thoma: Should the Fed Have a Large Role in Bank Regulation?:

I know you are tired of hearing me make this point, and that many of you disagree, but maybe you'll be convinced by Paul Volcker? Should the fire code designers, inspectors, and enforcers be part of the fire department, or housed in a separate, independent agency? Does, for example, the knowledge inspectors gain about the risks of fire in various buildings along with knowledge about the nature of those risks (e.g. of spreading to particular adjacent buildings) help firefighters plan a more effective response if a fire does break out? Conversely, does the knowledge that firefighters have help the inspectors to know what to regulate and what to look for during inspections? Are there economies of scale from consolidation, e.g. if we want experts on how fires spread from building to building present among both inspectors and firefighters, is it most efficient and effective to concentrate this expertise in a single agency?

4) Doug Henwood: That consumption binge? It’s mostly health care:

Everyone knows that American consumers have been on a binge for the last ten or twenty years. Data connoisseurs could even tell you that the consumption share of GDP rose from an average of 64% in the 1980s to 70% in 2007–8. But while the numbers are accurate, they’re not really telling the story of a binge. Much of the rise has come from spending on health care, not flat-screen TVs. Sad to say, LBO was among the many who made the binge argument. We should have known better. Sorry.

Graphed nearby is a history of the consumption share of GDP, with and without health care spending.... Note the relative flatness of the “ex-medical care” line—its recent level is actually below 1960’s—compared with the relentless ascent of the “total” line.... [A]t the end of 1978, consumption was 61.5% of GDP; in the second quarter of 2008, it had risen to 70.3%, or 8.8 points. Well over half that increase, 5.0 points, came from spending on medical care. The share of GDP devoted to spending on goods actually fell by 4.7 points over that 30-year period. The pattern is preserved if you start the clock in 1997.... Medical spending accounted for almost a third of that rise between 1997 and 2008. Energy accounted for another third. Spending on goods accounted for just... 0.1 point. In other words, the familiar story that Americans went hogwild buying all kinds of stuff is wrong...

5) Tim Duy's Fed Watch: It's Not About Interest Rates Yet:

The underlying pace of growth is in doubt.  To be sure, manufacturing is getting a boost from inventory correction and pent up demand; the upward trend in industrial production, ISM, capacity utilization, and new order for nondefense, nonair capital goods all look solid. But households are financially hobbled, and net import growth remains lacking.  All told, the net impact is to stem the pace of job losses and, if temporary help is an indication, set the stage for actual gains in nonfarm payrolls in the months ahead.  But a rapid reversal of the dreary employment setting looks elusive, especially given the likelihood that growth slows as government stimulus wanes in the second half of 2010.   Loose cannons like Hoenig aside, all of this should keep monetary policymakers on hold, not pushing to actively contract the Fed's balance.  Further expansion of asset purchases is not out of the cards, as Bullard makes clear.  But the bar to additional purchases looks high; the Fed will wait to see how actively evolves before taking that road. 

6) Ezra Klein: The (mostly) unchanged excise tax:

[R]epresentatives of the labor movement triumphantly announced the details of their excise tax deal, and I'll list them in a moment. Before I do, however, here's the bottom line: The excise tax is virtually unchanged. The major elements of the excise tax are, first, the threshold at which plans begin getting taxed, and second, how quickly that threshold grows. In the Senate bill, the tax begins on family plans costing $23,000 a year, and that sum grows at the rate of inflation in the Consumer Price Index plus one percentage point (so if inflation that year was 3.3 percent, the threshold would grow by 4.3 percent). In the excise tax deal announced today, the threshold becomes $24,000, and the growth rate is exactly the same. The basics of the tax are virtually unchanged.... [I]nsofar as the prospects for long-term cost control go, the excise tax works the same way it did in the Senate bill, applying to virtually all the plans it applied to in the Senate bill, and growing at the same rate -- which is slower than the rate of medical costs -- as it did in the Senate bill...


[T]he corporatism on display in Washington is itself a symptom of a broader social illness that I noted above, a democracy that is pitched precariously on the tipping point of oligarchy. In an oligarchy, the only way to get change is to convince the oligarchs that it is in their interest--and increasingly, that's the only kind of change we can get. In 1911 the German democratic socialist Robert Michels... "The Iron Law of Oligarchy." In order for any kind of party or, indeed, any institution with a democratic base to exist, it must have an organization that delegates tasks. As this bureaucratic structure develops, it invests a small group of people with enough power that they can then subvert the very mechanisms by which they can be held to account.... "It is organization which gives birth to the domination of the elected over the electors," he wrote, "of the mandataries over the mandators, of the delegates over the delegators. Who says organization, says oligarchy."

Michels recognized the challenge his work presented to his comrades on the left and viewed the task of democratic socialists as a kind of noble, endless, Sisyphean endeavor.... What the country needs more than higher growth and lower unemployment, greater income equality, a new energy economy and drastically reduced carbon emissions is a redistribution of power, a society-wide epidemic of re-democratization. The crucial moments of American reform and progress have achieved this: from the direct election of senators to the National Labor Relations Act, from the breakup of the trusts to the end of Jim Crow.

So in this new year, while the White House focuses on playing within the existing rules, it's our job as citizens and activists to press constantly for changes to those rules: public financing, an end to the filibuster, the breakup of the banks, legalization for undocumented workers and the passage of the Employee Free Choice Act, to name just a few of the measures that would alter the balance of power and expand the frontiers of the possible.

If I had to bet, I'd say that not of one of these will be won this year. The White House won't be of much help...

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Matthew Yglesias: Identity Politics for White People:

Sarah Palin delves into America’s racial conflicts: "And that double standard is—and that hypocrisy is another reason why so many Americans are quite disgusted with the political games that are played, not only on both sides of the aisle, but in this case, on the left wing, what they are playing with this game of racism and kind of letting Harry Reid’s comments slide, but having crucified Trent Lott for essentially along the same lines..." I think this right here shows why it’ll be a generation or two before you see a substantial number of black people voting for the Republican Party. Here’s Palin talking about an issue which is either a pointless partisan sideshow, or else a serious complaint about race in America. But the complaint she offers isn’t a complaint on behalf of African-Americans. It’s a complaint offered on behalf of white southern racists. It’s not that it would be unfair to black people for Reid to remain majority leader rather the problem is that it would be unfair to Trent Lott. And surely it’s no surprise that white southern conservatives seem much more likely than actual black people to be making these kind of demands. The idea that white people might want to show some deference to African-Americans’ views of who is and is not their enemy and what is and is not offensive to them is inimical to the conservative project’s determination to zealous advocacy on behalf of the interests of white people.

9) STUPIDEST THING I HAVE READ TODAY: Casey Mulligan yet again. I won't link. I will outsource to Menzie Chinn: What Are Current Small Business Credit Conditions, Really?:

Casey Mulligan titles a post "Credit Study by the Federal Reserve Says No Crunch," citing a Macroblog post. But he neglects to mention that the survey is "A small business snapshot from the Southeast". In contrast, a nation-wide NFIB survey summarizes conditions thusly:

Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15 percent reported loans harder to get than in their last attempt, unchanged from November. Still that is not nearly as severe as the financial distress reported in the pre-1983 period. Twenty-four months of recession have sapped the financial strength of many small firms. Thirty-three (33) percent reported regular borrowing, fairly typical of post- 1983 and unchanged from November. Eight percent of all owners reported that their borrowing needs were not satisfied, down two points from November. The remaining 92 percent of all owners either obtained the credit they wanted or were not interested in borrowing. Only 4 percent of the owners reported "finance" as their #1 business problem (down 1 point). Pre-1983, as many as 37 percent cited financing and interest rates as their top problem. The percent of owners reporting higher interest rates on their most recent loan was seven percent, while three percent reported lower rates. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be "harder" to arrange financing).

For those who have short memories, pre-1983 incorporates back-to-back recessions...

10) HOISTED FROM THE ARCHIVES: October 2003: Cyber-Stalking Paul Krugman:

These days people like David Warsh, who used to write about how the New York Times's editors needed to hold Paul Krugman to "elementary standards of courtesy and fair play," now write that Krugman "turned out to be absolutely right [on the California electricity mess]. The industry’s conduct was the real story in California— 'looting' behavior every bit as shocking... as that of many bankers in the... American savings and loan crisis... And Krugman played the key role in alerting the rest of the world..." So it seems like it's time for an update on Paul Krugman's principal cyber-stalker caballeros. How are they doing[?]...

Andrew Sullivan appears to be continuing his cyber-stalk, and attempted trashing, Paul Krugman. But the stalking and trashing is absolutely pitiful--he's clearly just going through the motions. Here are the last four examples: "October 16, 2003: BAD DAY FOR KRUGMAN: More people are getting jobs..." "September 30, 2003: FINALLY, DIVERSITY: At the NYT, David Brooks writes about Paul Krugman..." "September 30, 2003: And since I'm not part of the Krugmanian Bush-Is-Hitler/Nixon/Saddam crowd, I'll leave the hyper-ventilating to Josh Marshall until we know more..." "September 30, 2003: Jeffrey Sachs , formerly sane Columbia University professor, joining the Krugman wing of the Democrats..."

Note that Sullivan has absolutely no complaints to make about Paul Krugman's writings--how could he? Does he want to argue that the Bush administration was clear and straight with America on the reasons it went into Iraq? That Bush economic policy would not be better if it had been made by bonobos? That Bush social policy is a light unto the nations? So he adopts a bizarre rhetorical strategy--that to call someone a "Krugman" is to call them something bad...


As if I don't already have enough procrastinatory time sinks in my life...

I have been playing with wikispaces as I get ready to teach Econ 210a--the one-semester survey of economic history for first-year Ph.D. students in economics.

Anybody else teaching an analogous course who wants to play with


drop me a line, and I'll add you to the set of contributors...

Administrivia: Econ 210a, Spring 2010

Economics 210a is required for first-year Ph.D. students in Economics here at Berkeley. The course introduces selected themes from the economic history literature but does not claim to present a narrative account of world economic history. Emphasis is placed on the uses of economic theory, and on the insights (if any) a knowledge of history can give to the practicing economist.

Requirements are: (i) doing the reading, (ii) attending the class, (iii) talking in class, and (iv) writing the papers. When the course goes well, it is primarily discussion; when the course goes badly, it is primarily lecture. Because discussion will focus on the issues raised, resolved, and left unanswered by the assigned readings, readings should be completed before class.

Grades will be based 40 percent on one to two-page memos due before each class meeting, 20 percent on class participation, and 40 percent on the research paper. Two- page memos cannot be exhaustive, nor can they provide definitive answers. But they can explain why the question asked is important, summarize how at least some of the articles assigned for the upcoming class approach it, and provide a provisional assessment of conclusions.

Your research paper is due on Wednesday, May 12th (that is, exactly one week after the last class meeting). The paper should provide new information or evidence on a topic in economic history. It should not simply summarize an existing literature. The writing and submission process requires that you meet two benchmarks. You should discuss your paper topic during office hours during the first half of the semester, and then submit a brief paper prospectus prior to the commencement of spring break. Your prospectus should motivate the topic (explain why it is important), state your hypothesis (or question), and describe the historical materials that you will use to analyze it. The grade you receive on your paper will depend also on the quality of the prospectus and on your meeting these two benchmarks.

This paper should go beyond summarizing or synthesizing a literature: students should use the tools of economic theory and empirical analysis to pose and answer an historical question. The paper must have historical substance. The paper may cover almost any topic in economic history. You are not limited to the material covered in 210a. The only requirement is that the topic must genuinely involve the past. Comparisons of past and current events are certainly fine, but studies of developments solely after 1973 are not. Aim at a length of 5 to 10 pages or so for the prospectus, and more for the final paper. A final paper less than 15 pages tends to make your instructor suspicious, while a final paper more than 25 pages tends to make your instructor cranky.

Coming up with a promising paper topic is part of this exercise. Your entire graduate career (indeed, for most of you, your entire career) will center around identifying interesting questions to be answered. Successful papers in the past have generally come out of a comment on or an extension of an interesting paper assigned in this course (or one not assigned in this course); a comparison of some past episode with present; the finding of an interesting dataset; a new test of an old debate; or some historical natural experiment.

Readings are available on the web. Access to readings available through Jstor and other proprietary sources may require you to log on through a university-recognized computer and/or enter your Calnet ID.

Syllabus: Econ 210a, Spring 2010

Jan 20: Introduction: Why Are We Here?

Assignments and notes at:

Jan 27: One Economics or Many?

Assignments and notes at:

Feb 3: The Malthusian Economy

Assignments and notes at:


Feb 10: Industrious Revolutions

Assignments and notes at:

Feb 17: Industrial Revolutions

Assignments and notes at:

Feb 24: Globalizations

Mar 3: Divergences

Mar 10: WWI and the Great Depression

Mar 17: WWII and the Thirty Glorious Years

Mar 19: Paper prospectus due, 5 PM

Mar 31: The Forward March of Social Democracy Halted?

Apr 7: China Stands Up

Apr 14: Lombard Street, 1825-1914

April 21: Macroeconomics to 2007

Apr 28: The Panic of 2007-2010

May 5: Reflections

May 12: Paper due, 5 PM

Economics Learning Goals: CT2: Apply economic analysis to evaluate specific policy proposals. CT3: Compare two or more arguments that have different conclusions to a specific issue or problem. CT4: Understand the role of assumptions in arguments. QT1: Understand how to use empirical evidence to evaluate an economic argument. PS1: Solve problems that have clear solutions. PS2: Propose solutions for problems that do not have clear answers, and indicate under what conditions they may be viable solutions. CS1: Communicate effectively in written, spoken, and graphical form about specific economic issues. CS2: Formulate a well-organized written argument that states assumptions and hypotheses, which are supported by evidence. LL3: Understand and evaluate current economic events and new economic ideas.

links for 2010-01-15

  • Economists have a singular method of procedure. There are only two kinds of institutions for them, artificial and natural. The institutions of feudalism are artificial institutions, those of the bourgeoisie are natural institutions. In this, they resemble the theologians, who likewise establish two kinds of religion. Every religion which is not theirs is an invention of men, while their own is an emanation from God. When the economists say that present-day relations – the relations of bourgeois production – are natural, they imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. These relations therefore are themselves natural laws independent of the influence of time. They are eternal laws which must always govern society. Thus, there has been history, but there is no longer any. There has been history, since there were the institutions of feudalism, and in these institutions of feudalism we find quite diffe

Yet More Corruption at the University of Chicago...

John Cassidy asks Eugene Fama what he thinks of Paul Krugman's and Larry Summers's arguments that government intervention in finance at the end of 2008 prevented a very deep depression indeed. And Fama says that he does not think about them at all:

Interview with Eugene Fama: Rational Irrationality : The New Yorker:

Cassidy: So you don’t accept the view... [of] Paul Krugman, Larry Summers, and others... that the government prevented a catastrophe?

Fama:Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)

Cassidy: And Larry Summers?

Fama: What other position could he take and still have a job? And he likes the job...

This I-don't-have-to-deal-with-their-arguments-because-they-are-corrupt-and-do-not-believe-what-they-are-saying is remarkably common among University of Chicago economists.

We also see it in Richard Posner's claim that Larry Summers and Paul Krugman and Christina Romer are corrupt--are saying things they do not believe:

Richard A. Posner's Ethical Lapses: this raises the question of the ethical responsibility of academic economists... Romer (and Krugman, and Lawrence Summers, and many others)... either to adhere to academic standards... or to make clear to the public that they are on holiday from those standards... [in] what they say in their public-intellectual or governmental careers...:

We see it in Robert Lucas's claim that Christina Romer is corrupt--is saying things that she does not believe:

Krugman, Fox, McCain, Prescott, and Company: Lucas: 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...

Fama or Lucas or Posner could never have said any of those things if they had bothered to spend fifteen minutes talking to any one of Romer or Krugman or Summers about the issues. They would have learned that Krugman and Romer and Summers say what they believe and believe what they say.

Stupidest men alive...

Five Economics Pieces Worth Reading: January 14, 2010

1) Robert Solow: Hedging America:

I wish [Cassidy] had asked himself an additional question. Why, in the marketplace (sic!) of ideas, have the evangelists for the unrestricted market attracted so much attention and the “realists” so little? He argues, fairly convincingly, that the truth does not lie predominantly on that side of the issue. So is it that believers always make more effective advocates than skeptics do? Are we for some reason more receptive to simple answers than to complex ones? Is it that, in the nature of the case, there is more money backing one side than the other? Perhaps the long postwar prosperity provided good growing conditions for conservative political and economic ideology. If so, it will be interesting to see if the current recession and financial meltdown leave traces in the course of serious economics...

2) Kathy Ruffing, Kris Cox and James R. Horney: The Right Target: Stabilize the Federal Debt:

A stable debt-to-GDP ratio should be the goal for achieving fiscal sustainability. The “fiscal gap” — defined here as the average amount of program reductions or revenue increases that would be needed every year over the next four decades to stabilize the debt at its 2010 level as a share of the economy — equals 4.9 percent of projected GDP. That is a very large amount. To eliminate that gap would require a 28 percent increase in tax revenues or a 22 percent reduction in program (non-interest) expenditures over the entire 40-year period from now to 2050 (or, more realistically, a combination of tax increases and spending cuts).

It is, of course, both unrealistic and unnecessary to solve the next four decades’ problem all at once. But policymakers should act soon to start stabilizing the debt as a share of the economy in the medium term (i.e., over the next decade). The longer they wait after the economy has recovered, the more painful and severe the budget and tax policy changes ultimately will need to be.

3) BEST NON-ECONOMICS THING I HAVE READ TODAY: James Fallows: The Google news: China enters its Bush-Cheney era:

In terms of information flow into China, this decision probably makes no real difference.... Anybody inside China who really wants to get to Google... can still do so easily, by using a proxy server.... For the vast majority of Chinese users, it's not worth going to that cost or bother, since so much material is still available in Chinese from authorized sites.... In terms of the next stage of China's emergence as a power and dealings with the United States, this event has the potential to make a great deal of difference -- in a negative way, for China. I think of this as the beginning of China's Bush-Cheney era. To put it in perspective:

I have long argued that China's relations with the U.S. are overall positive for both sides... that China is a still-poor, highly-diverse and individualistic country whose development need not "threaten" anyone else and should be encouraged. I still believe all of that.

But... a difficult and unpleasant stage of China-U.S. and China-world relations lies ahead. This is so on the economic front.... It may prove to be so on the environmental front -- that is what the argument over China's role in Copenhagen is about. It is increasingly so on the political-liberties front, as witness Vaclav Havel's denunciation of the recent 11-year prison sentence for the man who is in many ways his Chinese counterpart, Liu Xiaobo. And if... Google has... concluded that, in effect, it must break diplomatic relations with China because its policies are too repressive and intrusive to make peace with, that is a significant judgment.

Everything in the paragraph above has the similarity of being based directly or indirectly on recent Chinese government decisions...

4) STUPIDEST THING I HAVE READ TODAY: Eugene Fama, as interviewed by John Cassidy:

C: Is it not true that in the credit markets people were getting loans, especially home loans, which they shouldn’t have been getting?

F: That was government policy; that was not a failure of the market. The government decided that it wanted to expand home ownership. Fannie Mae and Freddie Mac were instructed to buy lower grade mortgages.

C: But Fannie and Freddie’s purchases of subprime mortgages were pretty small compared to the market as a whole, perhaps twenty or thirty per cent.

F: (Laughs) Well, what does it take?

C: Wasn’t the subprime mortgage bond business overwhelmingly a private sector phenomenon involving Wall Street firms, other U.S. financial firms, and European banks?

F: Well, (it’s easy) to say after the fact that things were wrong. But at the time those buying them didn’t think they were wrong. It isn’t as if they were naïve investors, or anything. They were all the big institutions—not just in the United States, but around the world. What they got wrong, and I don’t know how they could have got it right, was that there was a decline in house prices around the world, not just in the U.S. You can blame subprime mortgages, but if you want to explain the decline in real estate prices you have to explain why they declined in places that didn’t have subprime mortgages. It was a global phenomenon. Now, it took subprime down with it, but it took a lot of stuff down with it.

[The pivot from "the government made unwise loans..." to "nobody could have known..." is truly breathtaking.]

5) HOISTED FROM THE ARCHIVES: Economics of Contempt (July 2008): The Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble:

The housing bubble has precipitated a severe, and possibly catastprophic, economic crisis, so I thought it would be useful to put together a list of pundits and experts who were dead-wrong on the housing bubble. They were the enablers, and deserve to be held accountable.... Many of the names on the list won't shock anyone, I'm sure. And FWIW, a few of the pundits seemed to deny the existence of the housing bubble simply because Paul Krugman argued that there was a housing bubble, and they absolutely hate Krugman. Unfortunately (for our economy), Krugman was right—again. The list is a work in progress (though I've been reasonably thorough in my research), so feel free to suggest other people who should go on the list. So without further ado, here's the list:

  1. Alan Reynolds, Cato Institute
  2. Kevin Hassett, American Enterprise Institute
  3. James K. Glassman, American Enterprise Institute:
  4. Jude Wanniski, journalist/supply-sider:
  5. Jerry Bowyer, author of The Bush Boom:
  6. Nicolas P. Restinas, director, Harvard Joint Center for Housing Studies:
  7. Jim Cramer, host of CNBC's "Mad Money":
  8. Christopher Flanagan, head of ABS research, J.P. Morgan:
  9. Neil Barsky, Alson Capital Partners, LLC:
  10. Chris Mayer, professor of real estate, Columbia Business School, and Todd Sinai, professor of real estate, Wharton School:
  11. Jonathan McCarthy, senior economist, New York Fed, and Richard W. Peach, vice president, New York Fed:
  12. David Malpass, chief economist, Bear Stearns:
  13. Steve Forbes, CEO, Forbes, Inc.:
  14. Brian S. Wesbury, chief investment strategist, Claymore Advisors:
  15. Noel Sheppard, economist, Business & Media Institute:
  16. Carl Steidtmann, chief economist, Deloitte Research:
  17. John K. McIlwain, senior resident fellow for housing, Urban Land Institute:
  18. Margaret Hwang Smith, professor of economics, Pomona College, and Gary Smith, professor of economics, Pomona College:
  19. Charles Himmelberg, economist, New York Fed (with Columbia professor Chris Mayer and Wharton professor Todd Sinai—see #10, above):
  20. Jim Jubak, investing columnist, MSN Money:
  21. James F. Smith, director, Center for Business Forecasting:
  22. Kathryn Jean Lopez, editor, National Review Online:
  23. Samuel Lieber, president, Alpine Woods Capital Investors:
  24. Mark Vitner, senior economist, Wachovia:
  25. George Karvel, professor of real estate, St. Thomas University

links for 2010-01-14

The Russians (Were) Coming

Matthew Yglesias on bizarre thoughts from Bryan Caplan:

Matthew Yglesias: Overestimating the USSR: I’m apparently new to the fact that for a long time a number of well-known economics textbooks featured the idea that the Soviet economy was likely to soon overtake the American one....

Something that I think is revealing about the mindset of economists is that [Bryan] Caplan refers to the view that the Soviet economy’s growth prospects were bright as “pro-Soviet” and talks about the possibility of left-wing ideology tilting one’s assessments of the Soviet economy in this direction. If you look at the issue through an international relations lens, or through a focus on US domestic politics, you’ll get a different picture. The main political tendency inclined to overestimate Soviet economy performance was Cold War hawks who spent much of the sixties, all of the seventies, and some of the eighties warning that America was at risk of becoming the “number two” country in the world. A minority of the hawks, like Senator Scoop Jackson, also had left-wing views about economic policy, but the majority were inclined to right-wing views. And now we have Frank Gaffney wanting to do it again on the threat of Islamic fundamentalism. I bring this up because conservative faith in the workability of the Soviet economic model reached its apogee in the late seventies during the “Team B” exercise when a bunch of neocons teamed up with congress to produce alternate reports suggesting that official US government accounts were massively underestimating Soviet capabilities. This was basically the same as the mucking with intelligence that this same crew did with regard to Iraq.

Economists who used PPP and production functions to predict that the Soviet Union would outstrip the United States did so through the following chain of reasoning:

  • Start with your production function: output Y as a function of technological and organizational competence A, capital K, and labor L: Y = AKαL1-α

  • The level of technological and organizational competence in the Soviet Union is lower than in the United States--centrally planned economies are inefficient, you know--but there is no strong tendency for the proportional gap in A between the US and the USSR to widen: A in the USSR will stay roughly the same fraction of A in the United States.

  • However, because the Soviet Union is a totalitarian state it is very good at squashing consumption--at reducing consumption C as a proportion of output Y to some near-subsistence minimum, and in channelling the extra savings into boosting the capital stock.

  • Thus in the long run even though the USSR has a lower A than the US does, it will have a much higher K.

  • And that much higher K will ultimately give it a larger economy: in the end quantity has a quality all its own.

Calling this argument "pro-Soviet"--as Bryan Caplan does--is simply wrong. It is, as Yglesias notes, at bottom a very right-wing argument.

Pete Davis Writes About the Bernanke Confirmation Jitters

Peter Davis:

Bernanke Confirmation Jitters | Capital Gains and Games: Ben Bernanke will be confirmed by the Senate for a second term as Fed Chair, but the market is already jittery that it won’t happen by the end of his term at midnight, January 31. That has set off quite a behind-the-scenes debate whether Fed Vice Chair Don Kohn would take over temporarily until the Senate voted.... The confusion over Bernanke’s continuation as Fed Chair arose on December 17, 2009, when Senate Banking Chair Chris Dodd (D-CT) had this exchange with Senator Jim Bunning (R-KY) toward the end of the Committee meeting which voted 16-7 to nominate Ben Bernanke for another term as Fed Chair: BUNNING: Briefly. It's my understanding that what you have said about Chairman Bernanke after the 30th of January is incorrect. DODD: Well, I'll defer to staff. I raised the question, I was told that was the issue, that he could be a member of the board, but could not serve as chair of the Federal Reserve. BUNNING: Temporarily appointed as chair? DODD: The vice chair would serve. Bunning remembered, as does the market, that Alan Greenspan served as "Chairman Pro Tempore" beyond the expiration of his term from March 3, 1996 to June 20, 1996. The Fed web site also shows Marriner S. Eccles served from February 3, 1948 to April 15, 1948 after the expiration of his term.  In neither case did the Vice Chair step in.    Fed and congressional attorneys are still debating this...

Back in 1995 I understand the issue to be that:

  • the Fed lawyers rely on the language in the Federal Reserve Act that "members of the Board shall continue to serve until their successors are appointed and have qualified," reading it to apply to status as chair as well as to membership itself.

  • the administration lawyers rely on the Administrative Procedure Act and the president's power to designate a chair from among the members of the board of an administrative agency is one is not otherwise provided for.

I thought, howevber, that both agreed that the vice chair chairs meetings only in the physical absence of the chair.

However, when the spring of 1996 rolled around it appears that the Federal Reserve Board elected Alan Greenspan to be chair just after his term expired.

I expect, if Bernanke is not confirmed for another term by the end of January, that the Federal Reserve will issue a press release saying that the board has elected him to continue as chair until he or a successor has qualified by being confirmed by the senate, and the White House will issue a press release saying that as the office of chair is vacant the president has appointed Ben Bernanke to be interim chair.

Whose press release is correct is then non-justiciable...

Department of "Huh?" (AP Stimulus Watch Crashed-and-Burned)

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

The Associated Press yesterday:

Unemployment Unchanged by Projects: An Associated Press analysis of stimulus spending found that it didn't matter if a lot of money was spent on highways or none at all: Local unemployment rates rose and fell regardless. And the stimulus spending only barely helped the beleaguered construction industry, the analysis showed.... AP's analysis, which was reviewed by independent economists at five universities, showed the strategy of pumping transportation money into counties hasn't affected local unemployment rates so far. ''There seems to me to be very little evidence that it's making a difference,'' said Todd Steen, an economics professor at Hope College in Michigan who reviewed the AP analysis. And there's concern about relying on transportation spending a second time. ''My bottom line is, I'd be skeptical about putting too much more money into a second stimulus until we've seen broader effects from the first stimulus,'' said Aaron Jackson, a Bentley University economist who also reviewed AP's analysis.

For the analysis, the AP reviewed Transportation Department data on more than $21 billion in stimulus projects in every state and Washington, D.C., and the Labor Department's monthly unemployment data to assess the effects of road and bridge spending on local unemployment and construction employment. The analysis did not try to measure results of the broader aid that also was in the first stimulus such as tax cuts, unemployment benefits or money for states...

The Associated Press today:

Matt Apuzzo, at the AP, to Tyler Cowen: I'm happy to provide you the sources of our data and walk you through the statistical tests we conducted. Nothing we did is a secret, but there's no actual "study" to provide you, like there is in academia...

Tyler Cowen writes:

Marginal Revolution: The AP critique of the stimulus: I would like to see a copy of the study...

I would like to see a copy of the "analysis" as well.

My guess is that the "analysis" is rigged in advance to find nothing: $20 billion in a $15 trillion economy is 0.1%; that we don't measure unemployment in individual counties well enough to pick up an 0.1% shift in the county unemployment rate; that a substantial fraction of highway workers on projects in Alameda County live in Solana, a substantial fraction of highway workers on projects in Solano County live in Contra Costa, and that a substantial fraction of highway workers on projects in Contra Costa County live in Alameda; that AP's economists should have told it so--and that the BLS would certainly have told AP so.

But there are no signs anywhere that AP talked to the people in the BLS who know the data...

Transportation Secretary LaHood:

AP Misses the Transportation Stimulus Jobs Forest for the Trees: According to AP's analysis, "a surge in spending on roads and bridges has only barely helped the beleaguered construction industry." That's what my math teachers used to call comparing "apples and oranges." Referring to the "construction industry" when transportation stimulus spending is only designed to help the transportation construction industry... highway and road construction... totals about 258,000 jobs out of... 132 million jobs... [nd] transportation stimulus dollars make up only 7% of that nearly $800 billion package.

But, when we drill down to the transportation construction industry, the most appropriate basis for analysis, we find Recovery Act spending making a real difference... highway and street construction spending in November was 5.7% higher than it was in November a year ago, and other public transportation construction spending was up 18.8% from a year ago... [even though] states, counties, and municipalities have all cut their transportation construction budgets drastically...

For Whom the Bell Tolls, or, Francisco Franco Is Alive and Well and Living in Sarah Palin's Brain...

Michael Tomasky:

"Yo te quiero, o ma corazon...": ...the Halperin-Heilemann book... section about Sarah P.'s tutorials on history, because this idea had bubbled up on cable since Monday that she didn't know exactly what World War I and World War II were... this seemed a reach even to me... the passage in question describes an effort by certain campaign staffers to learn the gal some history. They walked her through the basics, including the two world wars. But the book doesn't say that she didn't know what they were (it also doesn't say that she did, so the question remains open).

But here's the interesting thing. The book says that the tutorial --delivered by two neocon stalwarts -- started with...not the first war, not the second, but the Spanish Civil War. The what? That's a really odd place of privilege for a war that the United States wasn't even involved in, except for the freelance Lincoln Brigades. I'm fairly snooty, I admit, about wanting a president who knows his or her history. But even I would say that lack of knowledge about the Spanish Civil War isn't something I'd consider disqualifying.

What can this mean? My guess is that the Spanish Civil War must obviously occupy some place of pride and prominence in the neocon psyche. The good fascist war, one might say. Or maybe it's more McCain specific: McCain's most beloved book is For Whom the Bell Tolls, his beau ideal Robert Jordan. But the implication of this would be that these two neocons gave Palin a lesson that tilted in support of the cause of the socialists and communists, which seems unlikely.

H & H didn't remark on this, but if their account is accurate, it's kind of amazing. Perhaps you can offer other interpretations.

Ten Economics Pieces Worth Reading: January 13, 2010

1) Mike Konczal on the Chicago School:

I have to beg, as someone whose replicated many Fama/French papers, keeps the factors bookmarked, and even started drafting the why Fama should get the Nobel article when it seemed likely it would go to finance this year, that Eugene Fama stops talking about macroeconomics. He makes all academic finance people look like they don’t know what they are talking about, and finance has enough headaches with the credibility of their theories (to put it gently) than trying to take on Macro people with the Treasury View...

2) Ryan Avent: The futility of cross-country comparisons:

JIM MANZI has touched off a debate on the economic dynamism of America versus that of "social democratic" Europe with an essay in National Affairs. Much of the initial response to Mr Manzi focused on his abuse and misuse of statistics in making (or failing to make) his case.... I don't know that the debate is all that helpful. Northwest Europe is, for all intents and purposes, every bit as rich as America. Greg Mankiw puts up a list of European countries which have smaller GDP per capita (in PPP terms) than America, but he conveniently leaves out those (Norway, Ireland, the Netherlands, Switzerland) with per capita levels above or just under America's. Growth rates have been almost identical. Some have noted that America's figures are distorted by massive immigration of low-wage workers, which is true. On the other hand, the focus on per capita figures obscures the extent to which wealth in America is more concentrated than in Europe. Europe also manages to generate its wealth with far lower levels of energy use and carbon emissions.

Ideally, you'd want to control for a range of other factors. Hours worked and externalities are certainly two factors that should be considered. Geography may also be hugely important. While the European and American markets are of similar magnitudes, the American market is far more unified than the European market, allowing for greater interstate trade and specialisation. And then you'd also want to think about whether it's the social democratic part of the European economic model that inhibits growth, or something else entirely. Perhaps it's not the social safety net, or higher tax rates, that constrain growth, but instead the more rigid labour markets, or industrial interventions.

It seems to me that it's difficult to impossible to conclude, based on a detailed survey of Western Europe, that social democracy is fundamentally unable to produce American levels of wealth. At the same time, it's very easy to identify policy choices made within Europe, or America, that do constrain growth and mobility. Why focus the debate on sweeping and misleading generalisations across policies, when you can take things on a policy by policy basis, and have quite a specific and effective discussion?

3) Simon Johnson: Bank Tax Arrives:

The Obama administration tipped its hand today – they are planning a new tax of some form on the banking sector.  But the details are deliberately left vague – perhaps “not completely decided” would be a better description. The NYT’s Room for Debate is running some reactions and suggestions.  The administration is finally getting a small part of its act together – unfortunately too late to make a difference for the current round of bonuses. We know there is a G20 process underway looking at ways to measure “excess bank profits” and, with American leadership, this could lead towards a more reasonable tax system for finance.  In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks. 

4) Reuven Glick and Kevin J. Lansing: Global Household Leverage, House Prices, and Consumption:

Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.

5) Greg Sargent: Poll: More Think Health Care Reform Isn’t Ambitious Enough:

Could Obama’s dip to new lows on health care be driven partly by the fact that the reform proposal isn’t ambitious enough? The internals of the new CBS poll suggest that this could be the case: They show that more people think reform doesn’t go far enough in multiple ways than think it goes too far. The CBS poll finds that Obama’s approval rating on health care has dipped to 36%. But the poll also asked whether people think the reform proposal, in various ways, goes too far, is about right, or doesn’t go far enough.... In every one of those polled — covering Americans, controlling costs, and regulating insurance companies — more think the bill doesn’t go far enough. To be sure, Americans seem close to evenly divided on the question of whether the proposal goes too far or not far enough. But the latter category outnumbers the former, suggesting that the desire that reform be more ambitious is a key factor driving dissatisfaction with Obama — even though that possibility is rarely discussed by the big news orgs or by top-shelf pundits.

6) Pual Krugman: Learning From Europe:

As health care reform nears the finish line, there is much wailing and rending of garments among conservatives. And I’m not just talking about the tea partiers. Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy. And everyone knows that Europe has lost all its economic dynamism. Strange to say, however, what everyone knows isn’t true. Europe has its economic troubles; who doesn’t? But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. Actually, Europe’s economic success should be obvious even without statistics. For those Americans who have visited Paris: did it look poor and backward? What about Frankfurt or London? You should always bear in mind that when the question is which to believe — official economic statistics or your own lying eyes — the eyes have it. In any case, the statistics confirm what the eyes see....

The point isn’t that Europe is utopia.... But taking the longer view, the European economy works; it grows; it’s as dynamic, all in all, as our own. So why do we get such a different picture from many pundits? Because according to the prevailing economic dogma in this country — and I’m talking here about many Democrats as well as essentially all Republicans — European-style social democracy should be an utter disaster... while reports of Europe’s economic demise are greatly exaggerated, reports of its high taxes and generous benefits aren’t. Taxes in major European nations range from 36 to 44 percent of G.D.P., compared with 28 in the United States. Universal health care is, well, universal. Social expenditure is vastly higher than it is here. So if there were anything to the economic assumptions that dominate U.S. public discussion — above all, the belief that even modestly higher taxes on the rich and benefits for the less well off would drastically undermine incentives to work, invest and innovate — Europe would be the stagnant, decaying economy of legend. But it isn’t.

Europe is often held up as a cautionary tale, a demonstration that if you try to make the economy less brutal, to take better care of your fellow citizens when they’re down on their luck, you end up killing economic progress. But what European experience actually demonstrates is the opposite: social justice and progress can go hand in hand.

7) Mike Konczal on the Chicago School:

I do want to point out this section about Raghuram Rajan (whose Saving Capitalism from the Capitalists is a book that I enjoyed and is relevant today). It’s pretty interesting: "In a new book he is working on, entitled “Fault Lines,” Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans. (Notwithstanding the government’s involvement, this is ultimately a traditional Chicago argument: in response to changing economic circumstances, the free market provided financial products that people wanted.) The side effects of unrestrained credit growth turned out to be devastating-a possibility that most economists had failed to consider." I didn’t expect to read that line of thought from Rajan. I’ve talked about this before, both housing equity as the new social contract, as well as the way excessive debt smoothed out the high-risk income-trapped structure of current families. Rather than focusing on how nice of a refrigerator the poorest can buy, it might be worthwhile to look at how inequality has played out in the middle-and-working classes here (which ultimately effects mobility among the poorest too). I’m curious as to the drivers he finds between inequality and a middle-and-working-class squeeze. Spending on housing and education are the obvious ones. As I eventually want to work on a “yes, we really do need to worry about inequality” piece, I’m really interested in seeing what Rajan finds; his book is out in June.

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Fareed Zakaria: Don't panic. Fear is al-Qaeda's real goal.:

Terrorism is an unusual military tactic in that it depends on the response of the onlookers. If we are not terrorized, then the attack didn't work. Alas, this one worked very well. The attempted bombing says more about al-Qaeda's weakened state than its strength. In the eight years before Sept. 11, al-Qaeda was able to launch large-scale terrorist attacks on several continents. It targeted important symbols of American power -- embassies in Africa; a naval destroyer, the USS Cole; and, of course, the World Trade Center. The operations were complex.... On Christmas an al-Qaeda affiliate launched an operation using one person, with no special target, and a failed technique tried eight years ago.... But al-Qaeda succeeded in its real aim, which was to throw the American system into turmoil. That's why the terror group proudly boasted about the success of its mission.... Overreacting to terrorist attacks plays into al-Qaeda's hands. It also provokes responses that are likely to be large-scale, expensive, ineffective and possibly counterproductive...

9) WORST THING I HAVE NOT READ TODAY : Felix Salmon writes: Matt Stevens unloads on Donald Luskin." I'm not going to read Luskin. I'm not even going to read Stevens--the danger is just too great...

10) HOISTED FROM THE ARCHIVES: DeLoong (June 2006): Judd Gregg Tries to Revive Gramm-Rudman:

The problem with Judd Gregg's proposal is that Gramm-Rudman didn't work when we tried it in the 1980s. It, I think, made matters worse--members of congress became more eager to vote for budget-busting measures when they could claim that Gramm-Rudman placed a cap on the total deficit, and then the congress was unwilling to apply the cap medicine when the dose turned out to be unexpectedly high, and so the process died. The Budget Enforcement Act framework seemed to work much better in the 1990s than Gramm-Rudman worked in the 1980s.

links for 2010-01-13

In Which I Count Things...

I am in the Wall Street Journal:

Economists’ Views on Interest Rates, Housing Bubble: Economists’ Views on Interest Rates, Housing Bubble - Real Time Economics - WSJ: The Wall Street Journal surveyed economists who are part of the National Bureau of Economic Research’s Monetary Policy Program and asked them whether low interest rates caused the housing bubble. Here is a sampling of their responses, which represents their views and not the NBER....

BRAD DELONG, BERKELEY PROFESSOR: If you believe that the Fed kept the fed funds rate 2% below its proper Taylor-rule value for 3 years, that has a 6% impact on the price of a long-duration asset like housing. Even with a lot of positive-feedback trading built in, that’s not enough to create a big bubble. And it wasn’t the bubble’s collapse that caused the current depression--2000-2001 saw a bigger bubble collapse, and no depression.

This is another one of those in which I have to conclude that either I am deranged, or other economics professors like Bordo and Goodfriend are. I believe that prices overreact--that a fall in interest rates that ought to generate a 1% appreciation might generate a 3% one. But even so excessively-relaxed monetary policy relative to any Taylor rule standard looks much too small to generate the housing bubble.

At least Steinsson, Richardson, Kuttner, and House are deranged along with me. That's good company...

The Most Important Question Is: Who Is Kikuchiyo?

We are live at The Week:

The Week Magazine - News reviews and opinion, arts, entertainment & political cartoons: In Akira Kurosawa's "The Seven Samurai," seven (surprise!) samurai led by Kambei, who says he has "never won a battle," defend a village and its farmers against raiding bandits. At the end of the movie the bandits have fled, the villagers are safe and prosperous, and Kambei tells the other two survivors as they look at the graves of their four slain friends: "Again we are defeated. It is the farmers who have won. Not us."

For the past fourteen months, the Obama administration has been trying to defend the economy against the forces of depression. Now, the unemployment rate is 10 percent and (we hope) not headed higher, and real GDP looks to be growing at 3 percent per year. Is this victory or defeat?

In June 2007, the S&P Composite sold for an index value of 1500. A ten-year, 5 percent coupon $1000 U.S. Treasury bond sold for $990. In March 2009, the S&P Composite U.S. stock index sold for an index value of 800; had there been any newly-issued ten-year 5 percent coupon $1000 U.S. Treasury bonds at that time, they would have sold for $1170. If we do the bond versus stock math for that 21-month period, we find investors in long Treasuries gained 23 percent in real terms, while investors in diversified equities lost 45 percent in real terms.

Only a small part of the 45 percent loss by equity holders was due to the expectation of a continued recession. When the crisis started, the stock market’s annual dividend yield was 3 percent. At that yield, 3 percent of the long-run value of stocks comes from next year’s dividend and 97 percent from the dividends in subsequent years; 85 percent of the value comes from dividends more than five years in the future; 70 percent (actually 75 percent—compound interest kicks in) of the value of stocks comes from the dividends that are expected to be paid more than a decade down the road.

Given the effects on corporate profits, only 8 percent of the 45 percent fall in warranted S&P Composite value can be attributed to the recession. The other 37 percent—like the 23 percent cumulative real return on long Treasuries—was part of an enormous shift in the risk tolerance of the market. During this unprecedented flight to safety, the prices of all assets perceived as risky—including the stock market—fell, and the prices of those assets perceived as safe—Treasuries—rose.

These large movements in asset prices matter very much to the Princes of Wall Street and Canary Wharf, and to those of us with 401(k)s who want someday to retire. But they also matter a great deal to the country at large. Our financial markets are a large-scale, parallel-processing, distributed computational network that tells the real economy what kinds of organizations should be expanded (or shrunk) and what kinds of investments should be made (or avoided). We are fortunate to have financial markets performing this crucial task rather than, say, the investment directorate of the late and unlamented GOSPLAN Soviet central planning committee.

But even the distributed model has some authoritarian quirks. Over the 21 months from June 2007 to March 2009, the financial markets sent the real economy stronger and stronger signals that all risky investments should be avoided and all risky organizations should be shut-down or shrunk. And because employing people to make or do something is inevitably somewhat risky, many of these firms responded to the collapse of risk tolerance by firing employees. As a result, we now have an employment-to-population ratio in the U.S. of 58.2 percent, down from 63.0 percent in June 2007, and an unemployment rate that has risen from 4.6 percent in June 2007 to 10.0 percent.

Since at least 1825—when the canal speculation bubble collapsed in Britain and the Bank of England intervened at the request of a Prime Minister who did not want rioting and rock-throwing mobs of newly-unemployed in the streets—there has been a standard drill for government action when the risk tolerance of financial markets collapses. The problem is that industry and enterprise cannot go forward because finance is unwilling to hold their (inevitably risky) debts on terms that make industry and enterprise profitable. (Finance is unwilling because everybody is trying to sell their risky assets and scramble to move their portfolio into a fixed supply of safe assets.)

The solution is for the government to satisfy this demand by expanding the supply of assets widely regarded as safe in one of two ways: fiscal policy (i.e., by having the government issue a lot of relatively safe government bonds and spend that money hiring people to do something useful); and monetary policy (i.e., by having the central bank buy risky assets and pay for them with the ultimate safe asset: cash).

The problem with fiscal policy is that a fiscal boost to employment and production is not free: Interest must be paid to carry the government debt issued and taxes must be raised to amortize it, and both act as a drag on the economy. In addition, ramping up government spending entails settling for sub-optimal value in return for the rapid injection of stimulus. There is art to the formula, as much as science. If you issue too much debt you can crack the Treasury bond’s status as the safe asset in the economy. As a consequence, you will have not increased but rather reduced the supply of safe assets for financial markets to hold.

The problem with monetary policy is analogous: Creating too much cash can crack confidence in the central bank’s commitment to price stability, making cash an unsafe asset. There is only so much the central bank can do to increase the supply of safe assets by buying up the relatively low risk volume of Treasury bonds. If the central bank buys up private assets for cash—well, then we have transferred a great deal of economic control over the firms in which the Federal Reserve has invested to the Fed’s staff, which is better than turning it over to the investment directorate of GOSPLAN but still not ideal. In the process, the central bank boosts the profits of many of the financiers who created the problem in the first place, thereby creating the incentive to make the next speculative wave even worse.

The alternative, of course, is to do nothing and wait for the system to cure itself. We tried that once and only once, back when Herbert Hoover followed the advice of his Treasury Secretary Andrew Mellon, whom he later claimed had said that “even a panic is not altogether a bad thing”: the result was “the Great Depression.”

It first became clear in June 2007 that lots of mortgage-backed securities were a lot riskier than the rating agencies had deceived themselves into believing, and that lots of banks that were supposed to be following a regime of originate-and-distribute were instead following a program of originate-and-hold. Because the “hold” in this case referred to enormously risky securities being held in the banks’ portfolios, the banks themselves were much riskier institutions than almost anyone had imagined.

Since then, the assembled technocrats of governments and central banks (with some “assistance” from elected politicians) have been trying to carry out the right kind of fiscal policy (but not too much) to cushion the fall in employment without leaving the economy staggering under the burden of an inordinate government debt load, and to carryout the right kind of monetary policy (but not too much) to cushion the fall in employment without baking another round of destructive 1970s-era inflation into the cake. This task is difficult and fraught: it is no accident that, to my eye at least, both Ben Bernanke and Tim Geithner look a decade older today than they looked at the start of 2007. I personally think that they are underestimating the benefits and overestimating the risks of doing more in the way of fiscal and monetary policy. But I also know that there is at best one chance in ten that I would be a better Treasury Secretary than Tim Geithner and a better Federal Reserve Chair than Ben Bernanke.

I’m betting that the risk tolerance of financial markets will recover, but will do so slowly and gradually. Imagine two years of 3 percent annual world growth and only very slow declines in unemployment before the economic recovery-to-be hits its stride. Should we regard this as a victory?

I would say yes. Why? Because the magnitude of the financial shocks was greater than that initiating the Great Depression, yet the damage to the real economy is, proportionally, less than one-third as great. That is a victory.

Defeat came earlier – in the form of bankers who were so eager to keep dancing while the music played that they had no clue that their subordinates had shifted to an originate-and-hold rather than an originate-and-distribute model for risky securities, or that the system of incentives they had constructed induced their subordinates not to hold an appropriate fraction of capital in safe assets but rather in assets merely rated safe.

Given the severity of that earlier defeat, I think that we are all in all rather lucky.

links for 2010-01-12

Ten Economics Pieces Worth Reading: January 12, 2010

1) Paul Krugman: Too big to fail fail?:

I have a quite different problem with the idea that breaking up big banks is the key to reform: I don’t think it would work. My basic view is that banking, left to its own devices, inherently poses risks of destabilizing runs; I’m a Diamond-Dybvig guy. To contain banking crises, the government ends up stepping in to protect bank creditors. This in turn means that you have to regulate banks in normal times, both to reduce the need for rescues and to limit the moral hazard posed by the rescues when they happen. And here’s the key point: it’s not at all clear that the size of individual banks makes much difference to this argument. It’s true that the big losses in mortgage-backed securities seem to have been concentrated at the big financial institutions. But the losses on commercial real estate, which look likely to be even worse per dollar lent, have been largely among smaller banks. Remember, the great bank runs of the early 1930s began with a run on the Bank of the United States, which was only the 28th largest bank in the country at the time.

The point is that breaking up the big players is neither necessary nor sufficient to protect us against financial crises. That’s why my focus is on reducing leverage.

2) Ryan Avent: The futility of cross-country comparisons:

JIM MANZI has touched off a debate on the economic dynamism of America versus that of "social democratic" Europe with an essay in National Affairs. Much of the initial response to Mr Manzi focused on his abuse and misuse of statistics in making (or failing to make) his case.... I don't know that the debate is all that helpful. Northwest Europe is, for all intents and purposes, every bit as rich as America. Greg Mankiw puts up a list of European countries which have smaller GDP per capita (in PPP terms) than America, but he conveniently leaves out those (Norway, Ireland, the Netherlands, Switzerland) with per capita levels above or just under America's. Growth rates have been almost identical. Some have noted that America's figures are distorted by massive immigration of low-wage workers, which is true. On the other hand, the focus on per capita figures obscures the extent to which wealth in America is more concentrated than in Europe. Europe also manages to generate its wealth with far lower levels of energy use and carbon emissions.

Ideally, you'd want to control for a range of other factors. Hours worked and externalities are certainly two factors that should be considered. Geography may also be hugely important. While the European and American markets are of similar magnitudes, the American market is far more unified than the European market, allowing for greater interstate trade and specialisation. And then you'd also want to think about whether it's the social democratic part of the European economic model that inhibits growth, or something else entirely. Perhaps it's not the social safety net, or higher tax rates, that constrain growth, but instead the more rigid labour markets, or industrial interventions.

It seems to me that it's difficult to impossible to conclude, based on a detailed survey of Western Europe, that social democracy is fundamentally unable to produce American levels of wealth. At the same time, it's very easy to identify policy choices made within Europe, or America, that do constrain growth and mobility. Why focus the debate on sweeping and misleading generalisations across policies, when you can take things on a policy by policy basis, and have quite a specific and effective discussion?

3) Mark Thoma: Conservatives Play Pin the Fail on the Donkey's Fannie:

Richard Green notes another case of conservatives trying to support their ideological preconceptions using evidence that doesn't withstand closer examination. The larger goal here is to pin the blame for the housing crisis on the government, to avoid further regulation of the financial industry, and to reinforce their faith in free markets. The intent is also to pin the blame on Democrats and deflect blame away from deregulation supported by Republicans which, in the view of free market ideologues, could not have been responsible for the crisis:

The biggest stretch I have yet seen for blaming Fannie for the world's problem, by Richard Green: Micky Kaus, who seems to have trouble sleeping at night for fear that some below median income person somewhere might actually benefit from government, attacks Jim Johnson, former CEO of Fannie Mae, for contributing to our current woes. The problem is that Johnson ran the company from 1991-1998; I am guessing that few mortgages from his tenure are even around anymore, and if any are, their balance is so much lower than the value of the house supporting them (house prices are still much higher than in 1998, and the loan would have amortized a lot), that the incentive to default is non-existent. Of course, in the piece he approvingly quotes Peter Wallison, an AEI "scholar" who never met a bank he didn't like.

Over the years, Fannie has done plenty of things not to like. But jeez!

4) Clay Shirky: The Shock of Inclusion:

It is our misfortune to live through the largest increase in expressive capability in the history of the human race, a misfortune because surplus always breaks more things than scarcity. Scarcity means valuable things become more valuable, a conceptually easy change to integrate. Surplus, on the other hand, means previously valuable things stop being valuable, which freaks people out.... This shock of inclusion, where professional media gives way to participation by two billion amateurs (a threshold we will cross this year) means that average quality of public thought has collapsed; when anyone can say anything any time, how could it not? If all that happens from this influx of amateurs is the destruction of existing models for producing high-quality material, we would be at the beginning of another Dark Ages. So it falls to us to make sure that isn't all that happens....

To return to the press analogy, printing was a necessary but not sufficient input to the scientific revolution. The Invisible College, the group of natural philosophers who drove the original revolution in chemistry in the mid-1600s, were strongly critical of the alchemists, their intellectual forebears, who for centuries had made only fitful progress. By contrast, the Invisible College put chemistry on a sound scientific footing in a matter of a couple of decades, one of the most important intellectual transitions in the history of science. In the 1600s, though, a chemist and an alchemist used the same tools and had access to the same background. What did the Invisible College have that the alchemists didn't? They had a culture of sharing. The problem with the alchemists had wasn't that they failed to turn lead into gold; the problem was that they failed uninformatively. Alchemists were obscurantists, recording their work by hand and rarely showing it to anyone but disciples. In contrast, members of the Invisible College shared their work, describing and disputing their methods and conclusions so that they all might benefit from both successes and failures, and build on each other's work. The chemists were, to use Richard Foreman's phrase, "pancake people". They abandoned the spiritual depths of alchemy for a continual and continually incomplete grappling with what was real, a task so daunting that no one person could take it on alone. Though as schoolchildren, the history of science we learn is often marked by the trope of the lone genius, science has always been a networked operation. In this we can see a precursor to what's possible for us today. Just as the Invisible College didn't just use the printing press as raw capability, but created a culture that used the press to support the transparency and argumentation science relies on, we have the same opportunity.... It will require that we adopt norms of open sharing and participation, fit to a world where publishing has become the new literacy.

5) Ezra Klein: You can never go home again (and nor should you):

Roger Lowenstein thinks people should stop pretending that mortgages are a moral obligation and begin viewing them as a business contract -- and one that it often makes sense to break.... The key moral point, I think, is this one: "Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them." If banks aren't supposed to view mortgage contracts as moral agreements that should be followed in spirit as well as in letter, why should homeowners?

6) P. O'Neill: The Theory Strikes Back:

In November of last year, an economic research paper appeared... "The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, 1989-2002." It’s by Lars Jonung and Eoin Drea.  There are 2 ways to read it. One is an intellectual history of the attitudes of US-based economists to the Eurozone project.... The second is, as the Americans would say, a spike of the football in the endzone in the faces of the defensive players after a touchdown has been scored (”We find it surprising that economists living in and benefiting from a large monetary union like that of the US dollar were so sceptical of monetary unification in Europe”).... [O]ne awkward thing about this is the timing.  November 2009 was not exactly the time to be claiming that silly American economists were too wedded to optimal currency area theory to see the wisdom of the Eurozone.... Martin Wolf... and his bracing conclusion – "When the eurozone was created, a huge literature emerged on whether it was an optimal currency union. We know now it was not. We are about to find out whether this matters." And whether that matters is ultimately a political decision.  To dig into the pop culture well, the US-based economists who form the sample in the Jonung-Drea paper were giving the Star Trek answer: “Damn it Jim I’m an economist not a politician.”  Looking at the predicament of Ireland, Greece, Spain, Portugal, and Italy, they may still be right...

7) Michael Pettis: Everyone wants to talk about currencies:

The dominance of the dollar in reserve accumulation has little to do with a lack of an alternative currency and a lot to do with the inability of any country but the US to absorb the trade deficits created by export-dependent development strategies.  Trade-surplus countries buy dollars because when they buy euros, they cause angry reactions from European businessmen and politicians who are uncomfortable with the impact of a rising euro on domestic manufacturing and employment.  In fact, the rise of the euro against the dollar is precisely what Sarkozy claims to oppose in the first part of his statement and to support in the second part.  If Asian central banks rely less on the dollar and more on the euro for their reserve accumulation, guess what will happen. Yes, the euro will rise against the dollar. It always surprises me how readily people believe that the status of the dollar as a reserve currency has to do with same nefarious conspiracy.  As long as the US is willing and able to run large trade deficits, the dollar will be the overwhelming currency of choice for reserve accumulation...

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Ezra Klein: California's scary sneak preview:

California is in a total fiscal crisis. It's had to slash state services to the bone and will have to cut further. It's gutted the University of California and lost its credit rating.... [T]his picture is probably coming to a theater near, well, all of us. California's fiscal crisis will look sadly familiar to close watchers of the national checkbook. That's because California is not having a fiscal crisis so much as a political crisis. The trigger may have been the recession, but the root cause was written into the state constitution, and it was visible long before the housing boom went bust. In California, passing a budget or raising taxes requires a two-thirds majority in both the state's Assembly and its Senate. That need not pose a problem, at least in theory. The state has labored under that restriction for a long time, and handled it with fair grace. But as the historian Louis Warren argues, the vicious political polarization that's emerged in modern times has made compromise more difficult.

All of this, however, has been visible for a long time. Polarization isn't a new story, nor were California's budget problems and constitutional handicap. Yet the state let its political dysfunctions go unaddressed. Most assumed that the legislature's bickering would be cast aside in the face of an emergency. But the intransigence of California's legislators has not softened despite the spiraling unemployment, massive deficits and absence of buoyant growth on the horizon. Quite the opposite, in fact. The minority party spied opportunity in fiscal collapse. If the majority failed to govern the state, then the voters would turn on them, or so the theory went. That raises a troubling question: What happens when one of the two major parties does not see a political upside in solving problems and has the power to keep those problems from being solved?

If all this is sounding familiar, that's because it is. Congress doesn't need a two-thirds majority to get anything done. It needs a three-fifths majority, but that's not usually available, either. Ever since Newt Gingrich partnered with Bob Dole to retake the Congress atop a successful strategy of relentless and effective obstructionism, Congress has been virtually incapable of doing anything difficult because the minority party will either block it or run against it, or both. And make no mistake: Congress will need to do hard things, and soon. In the short term, unemployment is likely to remain high and the economy is likely to remain weak unless Congress can muster another round of serious stimulus spending...

9) WORST THING I HAVE NOT READ TODAY AND WILL NOT READ: John Heilemann and Mark Halperin (2010), Game Change: Obama and the Clintons, McCain and Palin, and the Race of a Lifetime. Courtesy of, who emails:

All I have to say about Heilemann and Halperin's book is this: Brumberger thought that she was trouble from the get-go. She looked like a hybrid of Stevie Nicks and Lucinda Williams, in an outfit more suitable for a Grateful Dead concert than an evening at the Regency..." What terrible writing. Someone who dresses like a "hybrid of Stevie Nicks and Lucinda Williams" is probably not going to a Grateful Dead show.

10) HOISTED FROM THE ARCHIVES: The Mendacity of the Washington Post: DeLong (May 2006): Deborah Howell Resurfaces:

She writes: "Policy vs. Reality in Correcting Errors: Corrections also need to be published sooner. Usually, there's a backlog of corrections, as many as 20, waiting to get in. My own experience taught me that waiting to correct mistakes is, well, a mistake. I made an error in January. Because my column runs on the editorial page, I could not correct the error on Page A2. A correction ran the following Thursday on The Post's Web site and my next column acknowledged the mistake. I should have pushed for an A2 or editorial page correction the day after the original column..."

An ordinary person, reading this, would believe that Deborah Howell waited a week to correct her "mistake" in January because of the Post's bureaucratic procedures--the bureaucracy wouldn't let her put the correction in on page 2 the following day, and the next opportunity she had to get something in the print paper was the following Sunday. But, an ordinary person would think, she worked hard, and even got a correction onto the website on Thursday. That's what the paragaph implies to an ordinary reader, no?

That's definitely not what happened. Howell did not wish or seek to get any form of correction onto page A2 on Monday...

Thomas Geogahan Has Convinced Me that the Filibuster Is Unconstitutional


Mr. Smith Rewrites the Constitution - Article I pointedly mandates... that a majority of senators... constitute a quorum... to keep a minority from walking out and thereby blocking a majority vote.... Hamilton dismissed a supermajority rule for a quorum thus:

All provisions which require more than a majority of any body to its resolutions have a direct tendency to embarrass the operations of the government and an indirect one to subject the sense of the majority to that of the minority....

[T]he Constitution... [cannot logically] preclude a supermajority rule with respect to a quorum while allowing it on an ad hoc and more convenient basis... [which is] what Senate Rule 22 achieves...

How about it, Mr. Biden? The next time a cloture motion fails with less than 60 senators on the floor, entertain and accept a motion to rule that debate is closed. Sooner or later some Vice President will do it--Cheney almost did it--so what's the advantage to waiting?

Best of 2009 — Crooked Timber

Henry Farrell joins the Livescribe Cult:

Best of 2009 — Crooked Timber: The Livescribe pen. This really is the most brilliant gadget I’ve seen in years (nb that it has been around for a while – but I encountered it first late last year). None of its functions are extraordinary on their own – it’s a combination pen, scanner and voice recorder. But when you put them together, you get a technology that will genuinely transform your worklife if you regularly conduct qualitative interviews, attend lectures that you need to take notes on or whatever. You use yer Livescribe pen together to take notes special paper that you can buy or print out with a colour laser printer – and then upload what you have written as a file to your computer. Once you’ve done this, you can then click on the relevant bit of your written notes – and hear what you were listening to when you took the notes. This is going to make keeping track of interesting interview material ever so much easier than it used to be.

James Fallows is also a member. Who else?

Steve Cohen and I Have Depressed Reihan Salam...

He writes:

The Revenge Of Mercantilism - [T]he United States drove hard bargains with a British Empire that was fighting for its life. In 1956, during the Suez Crisis,President Dwight Eisenhower brought Britain and France to heel, threatening to inflict serious economic pain if they didn't abandon a military intervention in Egypt. While this humiliating reversal didn't change the fact that "most of our people have never had it so good," it is easy to see why Britons might have felt otherwise. Over 50 years on, Americans are experiencing a similar unease.

In their new book The End of Influence, Stephen S. Cohen and J. Bradford DeLong vividly describe the evaporation of American economic power and what it is likely to mean for the United States and the world. Cohen and DeLong are shrewd observers... they suggest that we're living through the unraveling of a basically benevolent neoliberal era, in which debt-financed American consumption fueled rapid growth throughout the world.

Resource exporters, from Norway to Abu Dhabi, have avoided the dreaded "Dutch disease" by using their export earnings to build enormous sovereign wealth funds. In East Asia, meanwhile, state-led development policies, ranging from "administrative guidance" from state-owned or state-controlled banks to currency manipulation aimed at preserving highly competitive exchange rates, spurred growth in the export sector while suppressing domestic demand.... The end result has been that American consumers enjoy cheap manufactured goods while emerging East Asian economies have poor populations but a powerful hedge against currency crises. If these countries could rely on better global institutions to protect themselves against financial crises, they wouldn't have to engage in this wasteful form of self-insurance....

After sparking a wave of free-market global growth that has transformed the world for the better, America's debt-financed spending binge seems to have ended with vast state-controlled pools of money calling the shots. The supposed anarchy of free-market capitalism is once again being replaced by a more regimented and statist world order. The result will be a poorer and more dangerous world, defined by zero-sum competition, deep distrust, and political elites that will line their pockets at the expense of the powerless and vulnerable. Somehow, believers in free markets and social democrats, in the U.S. and around the world, will have to unite behind a more constructive agenda, a neoliberalism tempered by a far heavier emphasis on the interests of the global poor and the global middle class.

Cohen and DeLong don't offer a road map as to how we can do this, but they do offer an invaluable diagnosis of the darker world to come.

I don't think we are quite as depressed about the future as he is, but he has definitely put his finger exactly on the problem.

Circular Rebuking...

Jim Henley rebukes Conor Friedersdorf:

To Crush Your Enemies, Who Are AWESOME! To Drive Them Before You, Since They Do So Much For Us; And To Hear The Lamentations Of Their Charming, Gracious Women: Look, Conor: You can’t shiv a man while kissing his feet. Okay, maybe you could shiv him in the ankle. That would hurt. But then maybe he falls on you. That’s the best case. The worst involves his boot, your teeth, and parabolic arcs. More straightforwardly, there is no nice way to call someone a bitter, disingenuous hack, which Friedersdorf does, to his credit. Trying not to hurt your target’s feelings in that circumstance is like packing a suicide bomb into a Strawberry Shortcake knapsack and singing the Barney theme while showing off pictures of baby otters at play: it doesn’t really take the sting out of the flying nails. More murder and less art next time...

Conor Friedersdorf rebukes Glenn Reynolds:

Instant Pithyness Corrupts Instantly: [N]ot yet ready for prime time one-liners end up inscrutable... deciphered by the few people who already share all the assumptions.... All this helps us understand the most aggravating characteristic of Instapundit... [who] often writes posts whose pithiness comes at the expense of substance, accuracy or integrity... publishing posts that are political commentary, ideological point scoring, or a critique of another writer, and reacting to the inevitable blow back by ignoring his interlocutors or else blaming them for misunderstanding him, even when they read his words in perfectly reasonable ways. This alternating evasiveness and passive aggression is somewhat puzzling....

I find myself nostalgic for the Instapundit of old. I wonder whether I am remembering it accurately, or whether it’s me that’s changed. Unsure, I dip back into the unread posts on my Google Reader with cautious optimism, and quickly enough become frustrated by the Pajamas Media version of Instapundit, where the unpredictability is gone, the typical reader is never challenged, and instead of an intelligent voice having interesting arguments with ideological opponents there’s just Twitter length sniping at them. Why has a tenured law professor who doesn’t need the money or even the page views settled on this particular approach to the medium? So many posts either panders to or coddle the movement conservative’s ideological preconceptions — so you have controversial plank X in the Tea Party platform, and Professor Reynolds signals his agreement with it, almost always without any argument about why it is correct. Other times he actually disagrees with plank X, something he’ll occasionally make known, but very seldom does he actually argue against plank X, or try to change anyone’s mind about it. Instead he’ll note that while he happens to be against plank X, other people who are against it are silly or annoying or hypocritical or ham-handed in their advocacy or approaching things in the wrong way or are the subject of a really funny Mark Steyn one-liner.

Instapundit punts on the substance of so many matters, choosing instead to make the pithiest point that jives with his readers’ sensibilities. There’s a climate change conference? Well is it cold there? Did anyone fly there on a private plane? Did any MSM reporter betray bias in their writeup? There’s your Instapundit climate change coverage for the day....

Then there are the occasional times that a Glenn Reynolds post is particularly egregious in its pandering, or wrongheaded... he is called out on his post in the manner familiar to everyone who blogs. “How can you say that about Y?” his critic demands... sometimes there is a response, almost always evading or pithily dismissing the critic’s point without addressing it, or else feigning shock, shock that anyone could ever think that his post was saying that — I’ve never said or meant that — never mind the peculiar way I wrote my post, or that I link almost exclusively to people who think that, always mock opponents of that, and never mock or even argue with anyone who does think that. Sometimes Professor Reynolds has half a point in the resulting exchange. I take him at his word that he really is against torture, for example, though I still find it absolutely bizarre that he is less against torture than he’d otherwise be because Andrew Sullivan annoys him....

Every time I’ve done an “Instapundit sanity test,” where I show one of these kerfuffles he’s occasionally engaged in to apolitical friends clueless about the blogosphere, they’re sympathetic to the person accused of having misunderstood him. “Wait, he’s against torture? Well don’t just show me this ‘heh’ post that set off the kerfuffle, show me the post where he makes the best case against torture. Oh, you can’t ever recall having read one like that?”...

[T]hese lamentable aspects... are trending in the wrong direction... makes the blogosphere a worse place: one where pithiness is prized too highly, cheap demonstrations of pseudo-hypocrisy and insubstantial zings take the place of considered opinion (or substantial zings!), and too many bloggers on the right try for an Instalanche by producing more of this Glenn Reynolds bait than they otherwise might.... Perhaps this background information will help Professor Reynolds understand why I reacted so unfavorably when I saw him uncritically link a Pajamas Media piece titled, “Dear Mr. President, Your Policies Are Hurting Women the Most.” That’s the most cliched kind of identity politics, I wrote, akin to that old New York Times joke: “World Ends, Women and Minorities Hit Hardest.” Then Professor Reynolds updated his post, claiming, “Conor Friedersdorf is immune to irony.” So I re-read the Pajamas Media letter. Hints of tongue-in-cheek? None. Ironic tone? Certainly not. What’s going on here? Querying a few friends, I didn’t find anyone who took it ironically either. And let’s be honest, do numerous Congressional Representatives ever co-sign ironic op-eds?

Querying Twitter, I got a response from John Tabin, who hazarded that “appropriating the language of identity politics to tweak the left is not the same as embracing identity politics in earnest.” In other words, it quacks like a duck, but isn’t one.... Instapundit jumped back into the fray. “JOHN TABIN takes the time to explain,” he wrote. “I thought about doing that, but it spoils the pithiness when you have to help people who don’t catch on. This blog is for serious blog readers. The rest will have to keep up if they can. Hang on tight!” Spoken like a tenured professor! Unfortunately, I’m not the only kid in the class who is having trouble keeping up....

[T]he Glenn Reynolds approach to argument, where pithiness rules them all, detracts from rather than facilitates that conversation...

Still missing: Glenn Reynolds rebukes Jim Henley:

American Enterprise Institute "Economist" of Mass Destruction Kevin Hassett Strikes Again (Republican War on Science Department)

Carrying the Republican War on Science to previously unplumbed depths of human stupidity, Kevin "Dow 36000" Hassett of the American Enterprise Institute calls for the USAF to bomb both France and Switzerland, hoping to get the scientists in their tunnels before they can destroy the earth:

Atom Smasher Exposes Hole in Earth’s Defenses: The Large Hadron Collider... consumes about the same amount of energy as a large city... could provide evidence of the existence of the Higgs boson, a hypothesized particle that has become known as the God particle. If it is found to exist, it could complete our understanding of the basic laws of the universe.... [T]he collider’s energy could induce a catastrophic event. A brilliant review of the risks associated with the experiment by University of North Dakota law professor Eric Johnson.... The chief threat is that the LHC’s high-energy collisions might create a microscopic black hole that would, perhaps over a few years, swallow the Earth.... One paper even suggested that something with the energy level of the LHC might generate one black hole per second.

With its initial safety argument under assault, the physics community turned to an alternative. Even if a black hole were created, this new argument went, it would be tiny and would evaporate harmlessly. This was consistent with a theory of physicist Stephen Hawking. The evaporation argument was widely viewed as sound, and the LHC continued on track. But later, some top scholars began to publish papers questioning the evaporation hypothesis. The issue is far from decided. So the physics community retreated to what originally seemed like a terrific point: High-energy cosmic rays constantly bombard Earth and collide with particles in the atmosphere. If those collisions were going to create a black hole, then Earth would already be gone. It turns out that this argument, too, is a loser. When a cosmic ray rocketing toward Earth collides with a particle, the result of the collision would most likely be blasted into space. That means a black hole created by such a collision might be well beyond our galaxy before it is large enough to harm anything. In the LHC, by contrast, the result of collisions between two particle beams might stay put and cause significant trouble....

Oxford University’s Toby Ord, a philosopher by training, adds... [i]t may be that the models that we use to make predictions about the possibility of catastrophe are themselves flawed.... Ord estimates that the odds of the LHC producing a disaster are between one in 1,000 and one in 1 million... the likely benefits from this experiment... [cannot]... justify accepting a cost that includes a real risk of the Earth’s destruction.... As science progresses, the possibility climbs ever higher that the fondest dreams of scientists might entail risks of planetary destruction.... The best science explores things far from our understanding. How can we know that things we do not understand will not kill us?

Right now... [if] the U.S. wanted to stop the LHC experiment, it would have no recourse short of military action...

Business Week should be deeply, deeply ashamed of itself.

I know that the American Enterprise Institute is not shamed by anything, but even an organization that is not shamed by anything should be ashamed of this.

Let me just say that, IIRC, Leon Lederman named the hypothesized Higgs boson the "God particle" as a joke, because its effects were everywhere yet nobody had ever seen it in the flesh--not because it was in any way powerful or dangerous or numinous or terrifying.

It saddens me to think of the physicists who are going to have to waste their time dealing with this...

Ten Economics Pieces Worth Reading: January 11, 2010

1) Matthew Yglesias: Still No Jobs:

New employment report revises October downward, revises November upward (into slightly positive territory), and shows modest job losses for December. It’s important not to get too focused on the number zero. The November number was better than what we got in October or in December, but job creation at that anemic pace still means you have an increasing level of idleness rather than an a recovery from the jobs disaster of last winter.Given the situation, it’s pretty insane that the political conversation in DC seems to have pivoted to the budget deficit. We need to be talking about doing more to boost employment in FY2010 and we need to be talking about quantitative easing that could reduce the deficit through growth.

2) Heebie-Geebie on the state of the labor market:

My cousin is getting married this summer. He is a probation officer and his fiance is a nurse. They are postponing their honeymoon because neither of them feels that they can take two weeks off in a row. For their wedding! Not even just because! I don't doubt their judgement - it seems in her case that it would leave them impossibly short-staffed, and in his case, no one would bother to cover his caseload so he would be returning to an unmanageable mountain of work. (I grilled my cousin with less tact than I could grill her, so I can confidently say that his department sounds totally dysfunctional.) (It's very possible, in her case, that her department has merely successfully given her this impression, but that if she were more aggressive she could take two weeks off. In that case, that is still crappy to exploit your agreeable workers.) It's just appalling that these two public institutions are so chronically underfunded and dysfunctional that they can't handle six months advance notice of a two week vacation, for a big significant culturally-obvious milestone.

3) Matt Zeitlin: Conservatives and Economic Mobility:

[F]rom a Center for American Progress report ‘Understanding Mobility in America,’ “By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.” Now, conservatives could argue that all this talk of mobility doesn’t matter and that it’s aggregate growth that’s important. But when there is so much inequality, this type of argument isn’t likely to find much purchase in the electorate. And, even more damningly, there is a ton of research that suggests the best way to increase intergenerational mobility, especially among the very poor, is intensive, expensive investments in early childhood education and health care. Of course, the only conservative education policy is to make it easier to fire teachers, privatize as much as possible and just hope shit works out. Which I guess explains why they hold such contrary-to-reality views about intergenerational mobility.

4) Kevin Drum: FDR Earning Some Hatred: The quote is a famous one from a speech [Roosevelt] gave shortly before the 1936 election. Here's what he actually said:

We had to struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me — and I welcome their hatred.

5) Dave: Putting the cart before the horse (manure):

[T]o suggest that [Obama's] economic policies, not only those which have been passed... but those which have yet to pass or are simply on its wish list are hindering an economic recovery – a claim made by Gary Becker, Steven J. Davis and Kevin Murphy in this WSJ Op-Ed piece – without providing any real evidence to support your claim is weak. Call it a serious case of putting the cart before the horse manure.  Here’s an excerpt.... "[G]overnment proposals created greater uncertainty and risk... discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.... Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty... the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases." We have an evidence problem here.  Looking at the second paragraph, all one has to do is replace the word “policy” with “economic” in the second sentence and it is an appropriate description of the economic environment today.   The economy is still in the process of recovering from the ill effects of a financial crisis that is responsible for the worst business environment since the Great Depression....

The authors point to a December survey published by the National Federation of Independent Business, NFIB Small Business Economic Trends: "The weak economy is far and away the most prevalent reason given for why the next few months is “not a good time” to expand, but “political climate” is the next most frequently cited reason..." On Page 5, there is a summary table where survey respondents are asked whether or not it is a good time for expansion and the reason for their answers.  Here’s what the report found: 54% of respondents stated that it was not a good time for expansion due to the economic environment. 8% of respondents stated that it was not a good time for expansion due to the political climate

Technically, the political climate is the 2nd most frequently cited reason behind slow business expansion; however, that 8% of small business owners responding to a survey look at the political climate as a factor affecting their own businesses does not necessarily translate into public policy hampering a broader macroeconomic recovery...

6) Bob Rubin: Getting the Economy Back On Track:

About four years ago, a well-known London investor said to me that the only undervalued asset in the world was risk. I had the same view, as did many others, and often said that markets, including credit, had gone to excess... would probably be followed by a cyclical downturn.... But that's not what happened... excesses combined... unsound reaching for yield... complexity of derivatives that heightened systemic risk... misguided and powerfully consequential AAA ratings ... stagnant median real wages and rising housing prices that led consumers to overborrow... lax and often abusive mortgage practices; overleveraging... this extraordinary combination that led to the worst financial crisis in 80 years....

While some people saw one or more of these factors, virtually no one... recognized the breadth of forces at work or the possibility of a megacrisis... personally, I regret that I, too, didn't see the potential....

Looking forward... I would recommend the following... greatly increased capital and margin requirements... derivative contracts should trade on an exchange... two sets of more stringent leverage limitations for systemically significant institutions, one defined by risk-based models and the second by much simpler measures... significant constraints on off-balance-sheet financing... change in accounting systems to avoid the artificial effects of mark-to-market accounting for illiquid assets... effective mechanisms for dealing with systemically important nonbank financial institutions... greatly increased protections... to safeguard consumers and to reduce systemic risk... understandable disclosure, suitability requirements, prohibition of practices or instruments inherently susceptible to abuse, and... personalized advice for the most vulnerable...


They [journamalists like Maureen Dowd] don't just want a daddy, they want a bad daddy, one who occasionally beats up the wife and kids and regularly runs the risk of passing out with a lit cigarette and lighting the homestead on fire.

Why that is, I do not know...

and Digby on Chris Matthews and Company: They All Want a Daddy:

Being calm and deliberate about terrorism is the right policy to keep America secure. Chest pounding and overreaction just so that the pundits and politicians can get that marvelous thrill up their legs is the wrong policy.... [T]hey... [want] the president to come before the microphones and "sound" really mad so that they can feel comfy and secure that Daddy will keep the boogeyman from killing them in their beds. But the more belligerent he gets and the more bellicose the threats, the less safe we all actually are.... [Obama's] calm, mature demeanor and deliberate approach to national security is an asset both in political and policy terms. Regardless of the conclusions he reaches about military escalation and the rest, we know this: the last thing we need is another angry, sophomoric cheerleader giving the Islamic fundamentalists exactly what they want.

This has been another edition of What Digby Said...

9) WORST THING I HAVE READ TODAY: Courtesy of, who recalls David Brooks

in a fit of blog-induced apoplexy: "[David Brooks:] The Keyboard Kingpin, a.k.a. Markos Moulitsas Zúniga, sits at his computer, fires up his Web site, Daily Kos, and commands his followers, who come across like squadrons of rabid lambs, to unleash their venom on those who stand in the way." The metaphor - squadrons of rabid, venom-unleashing command-lambs - has the virtue of originality, even if it has nothing else to recommend it.


First Time Tragedy, Second Time Farce, Nth Time What?: Hugo Chavez in Action...

I've heard of "war on inflation," but this is ridiculous:

Benedict Mander: Chávez calls on troops to curb price rises:

Hugo Chávez, Venezuela’s president, on Sunday threatened to deploy troops and expropriate businesses that increase their prices following a steep devaluation of the currency on Friday.

“I want the national guard on the streets with the people to fight against speculation,” said Mr Chávez during his weekly television show, Alo Presidente.

“Go ahead and speculate if you want, but we will take your business away and give it to the workers, to the people,” he said, stating there was no reason for businesses to raise prices...

Apropos of Jim Manzi's "Keeping America's Edge"...

May I say that after he spends his time writing:

One obvious response is to use the political process to both slow down the rate of innovation to an acceptable pace and redistribute the country's economic output.... This is the logic of the welfare state, and the direction pursued by much of Western Europe since the Second World War.... From 1980 through today, America's share of global output has been constant at about 21%. Europe's share, meanwhile, has been collapsing in the face of global competition — going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share...

It is a bit rich for Jim Manzi to write:

I used the word "Europe" as per its dictionary definition...

i.e., to include the European Soviet Union and Eastern Europe? None of which "opted for social democracy" or pursued "the logic of hte welfare state"?

Especially since, as Paul Krugman points out, he didn't use "Europe" as per its dictionary definition:

[U]sing the "dictionary definition" of Europe, its share of the world economy declined from 40 percent to 31 percent, not 25. My guess is that Manzi used Europe including Eastern Europe and the European USSR for 1970, but only Western Europe for 2008...

UPDATE: Manzi now writes:

I was very careful to try to identify only economic output of those sub-components of the USSR that were West of the Urals, as per the dictionary definition of Europe. Therefore, the estimate from this dataset for Europe was about 43%. Averaged with the other dataset available to me for that year (also cited and linked in my blog post), you will find an estimated global GDP share of 39.8%, or as I said in my article, “a little less than 40%”...

Department of "Huh?"

Peter Boettke praises Charles Rowley:

Charles Rowley on the State of Macroeconomics: Charles Rowley has never shied away from speaking truth to power. This is a very admirable trait.  In a series of posts this week he demonstrates that principled stance as an economist again and is discussing the state of modern macroeconomics...  

Charles Rowley, however, writes:

[T]he Keynesian model never worked... has been resuscitated by opportunistic economists not because they believe in its merits as an agent of macroeconomic rehabilitation, but because they recognize its political value as a weapon for moving economies from laissez-faire capitalism, or (hopefully) beyond that to fully-fledged socialism.

Peter, in saying that I do not believe in the merits of the Keynesian approach as an agent of macroeconomic rehabilitation Charles Rowley is not "speaking truth to power": he is lying through his teeth.

Peter, in saying that I advocate the policies I do because I seek to move economies to fully-fledged socialism Charles Rowley does not "demonstrate that principled stance": it is the most unprincipled thing I have read this year.

What we have here is a very bad Inigo Montoya problem: the words you use simply do not have the meanings that you appear to ascribe to them.

Why the "Fiscal Times" is Off to a Very, Very Bad Start Indeed... (Why Oh Why Can't We Have a Better Press Corps?)

I write a letter:

Dear Mr Alexander, Mr. Pianin, and Ms. Povich:

I have read Mr. Alexander's piece beginning "Since the new year, The Post's integrity has come under withering assault from those claiming it took special-interest 'propaganda' and passed it off as a news story. That's false..." and Mr. Pianin and Ms. Povich's note stating that they found the ombudsman's piece "a fair, balanced and dispassionate look at the controversy, in contrast to some of the more inflammatory and one-sided stories and blogs published by our critics..."

As a former Treasury staffer, an economist, and a sensible deficit hawk, I think that none of you get it.

I know that after reading the start of Povich and Pianin's "Support Grows for Tackling Nation's Debt", I was extremely unhappy.

If, as you write, you truly do hope to provide "the best possible coverage and commentary on budget, economic, health care and other fiscal issues..." you have started out by shooting yourselves in the faces with a shotgun.

Let me tell you how I reacted to the first two paragaphs of the Pianin and Povich story:

Senate action late last week that increased the limit on the government's credit card..."

A credit card is a particular financial device that ought to be used for convenience only: it is something that you ought to pay off every month--and if you don't you are flushing money down the toilet by paying 18% interest a year and your finances are out of control. That's very different from the U.S. national debt, a thing that, as some-Treasury-Secretary-or-other once said, can under the right circumstances and if properly managed, be a national blessing. Especially at a time of record-low Treasury interest rates--when the U.S. government can borrow at truly extraordinarily advantageous terms--the analogy between raising the maximum amount of debt subject to limit and raising the spending limit on a trapped consumer unable to pay off his or her balance every month is deeply defective, and substantially misleading.

... to a record $12.4 trillion...

If you are going to give one debt number, and if you want to inform your readership, the number you give is not the amount of debt-subject-to-limit but rather the total debt held by the public, which is $7.8 trillion. Basic ethics seem to me to require that that phrase read "... to a record $12.4 trillion, $4.5 trillion of which is internal within-government accounting and $7.9 trillion is debt held by the public." As written, the phrase misinforms readers by giving them a greatly exaggerated idea of how big the national debt actually is.

This phrase leaves me wondering: Do Pianin and Povich understand the difference between debt-subject-to-limit and debt held by the public? Do they know that there is a bunch of debt that are true obligations of the government that are not in fact subject to limit--right now and most notably the liabilities of the Federal Reserve? They give no sign of knowing these things. Yet reporters who don't know these things and strain every nerve to inform their readers of them don't seem to me to have any business working for any publication called the Fiscal Times.

...gave a significant boost to a proposal to appoint a special commission..."

How did the Senate vote on the debt limit give a boost to the commission proposal? Pianin and Povich never say. By now I am skeptical not just of their knowledge not just of the substance of the national debt but also of the workings of the U.S. senate. make the tough decisions that will be required..."

What powers will the commission have to actually make tough decisions? Pianin and Povich never say. Later in the article they talk about very similar past commissions that in fact did nothing at all, quoting Rockefeller and Danforth--how congress and the president then ignored their recommendations completely. dig the nation out of debt...

One very knowledgeable budget analyst told me that they cringed when they read this phrase, for they would certainly never have used such a phrase in the lead." Eliminating the national debt is nobody's goal--not even Pete Peterson's: he would like to get us down to a steady debt-to-GDP ratio of 30% or so and stay there.

...President Obama has voiced support for such a plan, and 35 Democratic and Republican senators have signed on to legislation...

The antecedent of "plan" is "appoint a special commission to make make the tough decisions... to dig the nation out of debt." If you asked Obama and all 100 senators whether they have voiced support to delegate authority to enact a plan to eliminate the national debt to such a commission, all 101 of them would say: "No!" This could be sloppy writing: maybe they mean that the antecedent of plan is "appoint yet another budget commission that will, as every budget commission since the early 1980s has, almost surely spin its wheels." This could be sloppy thinking. In any case, it seems to me to be highly misleading.

...that would create a bipartisan commission with broad power...

And now I wait to learn what its powers are: force painful spending cuts and tax increases through Congress...

And there we are at the end of paragraph two with something that I have to conclude is much worse than simply misleading but instead totally and flagrantly false. What are the commission's powers to "force" the Congress to do anything? It has none. And even if it were to have some, Pianin and Povich never even try to tell us what the commission's powers are.

Senator Conrad says that: "Fourteen of the 18 Task Force members would have to agree to report the recommendations. And final passage would require supermajorities in both the Senate and House..." So it turns out that the commission's recommendation's don't "force" anything. If Speaker Pelosi is onboard with the commission's recommendations she could enact them through the House with two reconciliation-process majority votes--one on a no-amendment rule and then one on final passage. If Senator Reid is onboard with the commission's recommendations he could do the same. The commission's byzantine procedures don't "force" anything through Congress, but rather give additional outs. And, of course, there is the question of what kind of commission recommendations will emerge if you have to, as Conrad says, get 14 of 18 commission members to agree. That is a very high supermajority requirement--and an immense bar to leap before the commission would recommend anything.

But Pianin and Povich don't tell their readers any of these things--not anywhere in the article. It is as if they never even bothered to read Senator Conrad's press release on what his proposal was

And Pianin and Povich don't tell their readers--not anywhere in the article--that Judd Gregg's credential as a deficit hawk are deeply, deeply suspect: real deficit hawks, after all, voted against the Bush 2001 tax cuts--as Alan Greenspan said at the time, they were "irresponsible fiscal policy."

I can see a place for a Fiscal Times. But a Fiscal Times that is worth reading would have to be one staffed by reporters who know and inform their readers about the past policy positions taken by the principals that they are writing about, who know and inform their readers about the substantive proposals they are writing about, who know and understand and inform their readers about congressional and executive-branch procedures, and who know and understand and inform their readers about the substantive issues of budget policy.

The Povich-Pianin piece fails along all four of these dimensions.

Sincerely Yours,

Brad DeLong

Ten Economics Pieces Worth Reading: January 10, 2010

1) David Wessel on Andrei Shleifer's Argument That Fed Debt Purchases Boost Lending:

Andrei Shleifer is offering an justification for what Federal Reserve Chairman Ben Bernanke calls “credit easing.”... It is, Shleifer argued at a presentation at the American Economic Association in Atlanta, the best way to get banks to resume lending. In a crisis, the price of securities — mortgage-backed, Treasury debt, packages of loans, etc. — fall to fire sale prices, well below fundamental values.... Banks with the wherewithal to make new loans... prefer to buy securities because the opportunity for profit is so tempting.... “Because asset prices are out of whack,” he said, “injecting capital into banks doesn’t restart lending.” Banks simply use the money “to buy underpriced securities… to speculate.” “Financing of new investment by banks [via lending to business] is always competing with speculation. If speculation is more attractive, it is going to draw the attention of banks,” he argued.

The solution: The Fed or the government should buy a lot of securities, so many of them that the price rises and the banks no longer find them attractive for speculation and lend instead...

2) Cecilia Kang: iPhone/AT&T Woes at CES:

A spokesman for AT&T, which provides service exclusively for the iPhone, said the large numbers of people using smartphones at CES clogged up the network. “In preparation for CES, we optimized our network in Las Vegas by significantly augmenting our network capacity. However, at an event such as CES, where large numbers of people in a dense area are using smartphones over finite spectrum, periods of network congestion can occur. Our network engineers on site continue to take steps to optimize our network as needed for the large number of mobile broadband customers at CES.”

3) Noel Maurer: I have your Chinese consumer price inflation right here - The Power and the Money:

Why isn’t there more inflation in China?  We looked at that on December 28th.  On January 6th, Brad Delong wrote: "Every month the People’s Bank of China pays 200 billion renminbi to China's exporters to buy up the dollar-denominated assets they have accumulated and so prevent those assets from generating upward pressure on the value of the renminbi. It gets those 200 billion renminbi by borrowing them from the good burghers of Shanghai. By now the central bank owes the good burghers of Shanghai some 16 trillion renminbi. To them, this wealth is nearly as good as cash. It has been piling up for years — and because it is nearly as good as cash, the good burghers of Shanghai should be spending it."... Professor DeLong then links to James Hamilton, who suggests that the reason is that monetary growth in China leads to asset price inflation rather than goods-and-services price inflation.... The PBOC kept its huge growth of reserves from leading to a huge growth in high-powered money via... illiquid bonds that the PBOC basically ordered the banks to hold.... [and] government income (likely from state-owned enterprises, but I’m not sure that it matters) that was deposited with the central bank rather than spent. Those two mechanisms mopped up most of the growth in high-powered money. In 2007 and 2008... high-powered money started to grow like gangbusters. So why didn’t inflation get out of control?...  China let the value of the renminbi rise.... The rise in the renminbi helped keep a lid on import prices.... Fast forward to 2009.  The renminbi is no longer rising, so that can’t explain the lack of inflation.... High-powered money isn’t growing. What is growing is the white block at the top, what the PBOC calls “other liabilities.”  I have no idea what those are, but they represent currency mopped up by the central bank. In other words, the PBOC is keeping a lid on inflation by taking in liquid renminbi from somebody in exchange for an IOU of some sort. At some point, the PBOC will no longer be able to keep up this balancing act.... But there are reasons to believe — and I should mention that I have changed my opinion on this issue in the last year or so — that the Chinese government and PBOC may be able to keep up the balancing act for some time... as long as Chinese firms remain profitable enough to finance themselves via retained earnings despite the fact that a big chunk of those earnings wind up metaphorically sitting in the PBOC coffers.

4) Paul Krugman: The health insurance excise tax:

Should there be a limit to the tax deductibility of employer-provided health insurance.... My answer is yes, but the final bill should address the criticisms. The argument for limiting the tax exclusion is that the tax break on health insurance encourages over-spending, so limiting it could help in the process of “bending the curve”. More generally, since we think the United States spends too much on health for not-so-good results, it makes sense where possible to pay for expanding coverage from the health sector itself. Both arguments are reasonable. The counter-arguments seem to run along three lines. First, there’s the argument that many “Cadillac” plans aren’t really luxurious — they reflect genuinely high costs.... Second, there’s the argument that any reductions in premiums won’t be passed through into wages. I just don’t buy that.... The last argument is that this hurts unions which have traded off lower wages for better benefits. This would be a bigger issue than I think it is if the excise tax were going to kick in instantly. But it won’t, giving time to renegotiate those bargains.... A last general point: we really don’t know what it will take to rein in health costs, but that’s a reason to try every plausible idea that experts have proposed. Limiting tax deductibility is definitely one of those ideas.

Bottom line: the details of the excise tax should be fixed, but it’s on balance a good idea.

5) Jonathan Chait: More Quality Wall Street Journamalism from Peggy Noonan:

The latest entry in the endless series of columns upbraiding President Obama for doing too much comes from Peggy Noonan.... "The public in 2009 would have been happy to see a simple bill that mandated insurance companies offer coverage without respect to previous medical conditions. The administration could have had that—and the victory of it—last winter. Instead, they were greedy for glory..."

In fact, a bill like that couldn't work at all. If you forbid insurance companies from discriminating on the basis of previous illness, than nobody has an incentive to buy insurance until they get sick. Then rates skyrocket and the individual market collapses. Not only is this not a partial victory, it's a massive step backward.... There are a couple more strange things about this column. Most of the Obama's-doing-too-much punditry has an implicit argument that Obama should place his party's popularity above solving enormous problems -- implicit, because to make that premise explicit would justifiably invite ridicule. Well, Noonan goes ahead and makes it explicit:

If you mention to Obama staffers that they really have to be concerned about the polls, they look at you with a certain... not disdain but patience, as if you don't understand the purpose of politics. That purpose, they believe, is to move the governed toward greater justice...

6) Menzie Chinn: Reserves Are Revised Upward, the Dollar Share Declines:

Perhaps the most startling thing about the new COFER data on reserves released by the IMF is not the declining dollar share in total reserves, but rather the fact that reserves have risen relative to where we thought they were [0]. The change is entirely due to the upward revision in unallocated reserves by emerging market and LDC central banks.... Total reserves were revised up $381 billion in 2009Q2, as were total emerging market/LDC reserves, and unallocated emerging market/LDC reserves. The revision in total reserves constituted a 5.5% change -- quite substantial. A straightforward interpretation of the data also reveals a continued -- and exacerbated -- decline in the identified US dollar share of total reserves...

7) BEST NON-ECONOMICS THING I'VE READ TODAY: Matthew Yglesias: While Economy Burns, Jon Kyl Blocking Treasury Nominees Over Petty BS:

This, ladies and gentlemen, is your modern United States Senate. If there’s some random c--- that nobody cares about, it just takes one Senator with a bee in his bonnet to ruin everything for everyone who would like to live in a country with a properly administered government. There are six Treasury nominees still awaiting action being held up by Kyl.

You might think it would be a good idea to have an Under Secretary for International Affairs. Kyl disagrees. You might think it would be a good idea to have an Under Secretary for Domestic Finance. Kyl disagrees. You might think it would be a good idea to have an Assistant Secretary for International Markets and Development. Kyl disagrees. You might think it would be a good idea to have an Assistant Secretary for International Economics and Development. Kyl disagrees. You might think it would be a good idea to have an Assistant Secretary for Financial Markets. Kyl disagrees. You might think it would be a good idea to have an Assistant Secretary for Tax Policy. Kyl disagrees.

This kind of thing really has to stop, it’s a ludicrous way to run a country. Amidst a global economic meltdown, we can’t get confirmation for the international economics officials. Not because the senate has a problem with them, but because one guy isn’t happy with the delay of some internet gambling regulations.

8) STUPIDEST THING I'VE READ TODAY: Peter Beinart: Profiling Will Never Work:

The normally sensible Stuart Taylor...

9) SECOND STUPIDEST THING I'VE READ TODAY: via Paul Krugman: Jim Cramer (2005): Bubbleheads, Admit Defeat by Housing:

As Toll Brothers (TOL - commentary - Cramer’s Take) cruises through $100, it’s time to hold the bubbleheads accountable. Who are the bubbleheads, in my book? Those are the people who have told you to bet against housing and to be worried about the speculative boom in homes. Here’s where I am coming from. All day, I listen to and read people who say that housing’s got to roll over, that these companies can’t work, that it is just a matter of time. Then I look to see what’s been outperforming these stocks. Is it drugs? I don’t think so. Financials? Nah. Techs? Nope, not at all. Now I want to know when those who have warned us incessantly or told us it can’t last will get their comeuppance.

10) FROM THE ARCHIVES: DeLong: Two Months Before the Mast of Post-Modernism:

I became convinced that Tribe and Foucault were right... only with Ricardo... [was] the economy... seen as something that was important enough, or separate enough, or coherent enough to be something that it made sense to write books about, and, indeed, something that it made sense to be an expert in. David Ricardo was a political economist. Adam Smith was a moral philosopher. To try--as somebody like Joseph Schumpeter was--to grade Adam Smith as if he were engaged in the same intellectual project as Schumpeter was somewhat absurd. Tribe applied this methodology to Adam Smith, his predecessors, contemporaries, and successors. What they were doing... was Political Oeconomy--writing manuals of tactics and policy as advice to statesmen... [on] how to keep public order and create public prosperity. Hence for Adam Smith Book V of Wealth of Nations is the payoff: it tells British statesmen what they ought to do in order to make the nation prosperous, their tax coffers full, and thus the state well-funded. Book IV is a necessary prequel to Book V: it tells the statesmen in the audience why the advice that they are being given by others in other books of Political Oeconomy--by Mercantilists and Physiocrats. Book III is another necessary prequel: it teaches statesmen about the economic history of Europe and how political oeconomy of various kinds has been practiced in the past.

But Tribe's (and Foucault's) methodology collapses when we work back to Books II and I of the Wealth of Nations. For Adam Smith is not the prisoner of the discursive formation of Political Oeconomy. He is not the simple bearer of currents of thought and ideas that he recombines as other authors do in more-or-less standard and repeated ways. Adam Smith is a genius. He is the prophet and the master of a new discipline. He is the founder of economics.

Adam Smith is the founder of economics because he has a great and extraordinary insight: that the competitive market system is a remarkably powerful social calculating and organizing mechanism, and that the sophisticated division of labor to which a competitive market system backed up by secure and honest enforcement of property rights give rise is the key to the wealth of nations...

Bubbleheads II

Mark Thoma writes:

Economist's View: Bubble? What Bubble?: Here is Ellen McGrattan and Edward Prescott in 2000 telling everyone not to worry about a bubble in the stock market. They don't call them bubbleheads, but the message is clear:

...Is the current stock market value too high? Glassman and Hassett (1999) have argued that it is not. In fact, they have said that the market is undervalued by a factor of three. But others have expressed concern that the market is, indeed, overvalued. Federal Reserve Chairman Alan Greenspan (1996), for example, has suggested that the recent high value of the market may  reflect “irrational exuberance” among investors. Shiller (2000) has reiterated this concern and said that a 50 percent drop in the value is plausible....

Conclusions Some stock market analysts have argued that corporate equity is currently overvalued. But such an argument requires a point of reference: overvalued relative to what? In this study, we use as our reference point the predictions of the basic growth model that is the standard model used by macroeconomists today. We match up all the variables in our model with the U.S. national income and product account data. We find that corporate equity is not overvalued...

S&P 500, June 30, 2000 close: 1455
S&P 500, December 31, 2009 close: 1145
Consumer Price Index, November 2009/June 2000: 1.26

Real price decline: -37.5%

I score this one for Bob Shiller...

Department of "Huh?!?!?!"

Jonathan Alter:

Alter: Dodd, Dorgan, and Discontent in the Senate: It's worked before. In 1993 then–House majority leader Richard Gephardt paid a call on a Republican backbencher named Newt Gingrich. Gephardt said: "We have a health-care plan. What's yours?" Gingrich said, "Our plan is to defeat your plan and win the next election." Which is what happened in 1994...

In 1989, Newt Gingrich was chosen by his Republican House peers to be Minority Whip--that is, the deputy to the Minority Leader Robert Michel. Gingrich's predecessor in the job was Dick Cheney--who left the job to become Secretary of Defense.

It seems to me inappropriate to call Newt Gingrich in 1993 a "Republican backbencher": Newt Gingrich in 1993 was the fourth most powerful Republican in the country, and the heir apparent to the House Minority leadership.