Best Thing I Have Read Today: Mark Elvin (1972), "The High Level Equilibrium Trap"

China had its commercial, its "industrious" revolution long, long before northwestern Europe did. And yet, and yet, and yet...

Mark Elvin (1972), "The High Level Equilibrium Trap: The Causes of the Decline in Invention in the Traditional Chinese Textile Industries," in William E. Wilmott, ed. (1972), Economic Organization in Chinese Society (Palo Alto: Stanford: 0804707944).

Ten Economics Pieces Worth Reading: February 8, 2010

It is nice that Cassidy is able to use the story of the financial crisis to exemplify some of the systematic sources of egregious market failure. But there is a deeper, or at least prior, question that he does not take up. Is all this financial activity socially useful, even in the absence of breakdown? It is worth a moment’s thought. Cassidy quotes Alan Greenspan:

Recent regulatory reform coupled with innovative technologies has spawned rapidly growing markets for, among other products, asset-backed securities, collateral loan obligations, and credit derivative default swaps. These increasingly complex financial instruments have contributed, especially over the recent stressful period, to the development of a far more flexible, efficient, and hence resilient financial system than existed just a quarter-century ago.

Flexible maybe, resilient apparently not, but how about efficient? How much do all those exotic securities, and the institutions that create them, buy them, and sell them, actually contribute to the “real” economy that provides us with goods and services, now and for the future? The main social purpose of the financial system--banks, securities markets, lending institutions, and the rest--is to allocate society’s pool of accumulated savings, its capital, to the most productive available uses.... We would be much poorer without a functioning financial system.... If anyone who wanted to start a business--a software company, a biotechnology laboratory, a retail store--had to do so with his or her already saved-up wealth and the help of relatives, many good ideas would go unrealized....

But those needs were being taken care of a quarter-century ago, and well before that. The real question, to which Greenspan gave such a confident and grandiose answer, is whether anything much was added to the system’s ability to allocate capital efficiently by the advent of naked CDSs and CDOs and the rest of the alphabet...

Today CBO released a letter... about policies that could be adopted to increase employment... a policy option to reduce employers’ payroll taxes for firms that increase their payroll, and how different design elements of this type of policy might affect its impact on employment. In CBO’s January 2010 publication, Policies for Increasing Economic Growth and Employment in 2010 and 2011, the agency analyzed the effects on employment of several policy options, including giving employers a one-year, nonrefundable credit against their payroll tax liability for increasing their payrolls in 2010 from their 2009 levels.... CBO estimated that, through its effects on wages, prices, and profits, the policy would add 8 to 18 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost, measured in terms of lost revenues. Thus, the budgetary cost of increasing employment by one full-time person for one year would probably be between $56,000 and$125,000. Although such a policy would have economic benefits in the short run, it would also add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been....

Capping the size of the tax cut for individual firms would decrease the employment effect; Restricting eligibility to small firms would decrease the employment effect; Limiting the eligible wage base would not change the employment effect, but would alter the types of employment fostered by the policy; Basing the tax cuts on the total payroll in 2010 for new hires rather than on the net change in a firm’s payroll from 2009 to 2010 would have a similar effect on employment; Offering larger tax cuts in economically depressed areas would probably not significantly alter the effect on employment; Raising awareness of the tax change would increase the employment effect; and Increasing the complexity of the tax change would reduce the employment effect.

I like this concept of “low volatility, interrupted by occasional periods of high volatility”. I think I will call it “volatility”.

Brad DeLong makes a very good point: "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 actually a very broad problem with all accounts of the crisis that try to exonerate the private sector and place the blame on the government and/or the Fed: none of the proposed evil deeds of policy makers were remotely large enough to cause problems of this magnitude unless markets vastly overreacted. That is, you have to start by assuming wildly dysfunctional financial markets before you can blame the government for the crisis; and if markets are that dysfunctional, who needs the government to create a mess? This logic applies... to all attempts to explain the crisis in terms of excessively low Fed funds rates for a few years.... to John Cochrane’s story that financial markets are efficient, but were terrorized by George W. Bush’s scary speech.... John Taylor’s basically similar claim that policy uncertainty in the couple of weeks after Lehman fell did it... claims that the Community Reinvestment Act and/or Fannie Freddie somehow led to massive bubbles in high-end housing and commercial real estate. Put it this way: if our financial system is so high-strung, so manic-depressive, that low rates for a few years can inflate a monstrous bubble, while a few discouraging words from high officials can send them into a tailspin*, this doesn’t make the case that policy must walk on eggshells, forgoing any attempt to fight prolonged unemployment. Instead, it makes the case for much, much stronger financial regulation.

“I applaud the fact that Robert Lucas received the Nobel Prize last year. I thought it was overdue,” Samuelson said. In terms of economic theory, he went on, the rational expectations approach was very significant, but its practical importance was negligible. “The rational expectations paradigm of analysis had nothing to contribute to the Reagan administration, where it would have been welcome, or, indeed, to the Federal Reserve Board’s outside committee of academic consultants, which I used to attend. There was usually one rational expectations man at each meeting, but it was rarely the same one twice. In terms of practical analysis, they had nothing to teach us.” “What is real”—of the rational expectations approach—“is that you can’t fool all of the people all of the time,” Samuelson said, but the suggestion that changes in monetary policy don’t impact the economy, at least in the short-term, was plainly wrong. “That is the Achilles heel of the Lucas vision.” Equally troubling, Samuelson went on, were later elaborations of the rational expectations approach, particularly the “real business cycle” theory, which posited that the economy at large was in a continuous state of equilibrium, and that economic outcomes, including mass joblessness, were a product of voluntary choices. “If somebody says, as Friedrich Hayek said when one in four Germans were unemployed, that people are out of work because they are choosing to consume leisure, that, to my mind, is a ridiculous real-business cycle theory”...

President Obama has laid out a series of steps that should be at the heart of our continuing efforts to accelerate job growth, rebuild our economy for the long term, and bring American families relief during these difficult times. These proposals are an important steppingstone in our efforts to fix the economy - but they are only a part of our strategy. There is no single piece of legislation that will solve our problems. Our nation faces double-digit unemployment. Far too many Americans still are struggling to make ends meet.

But to understand where we need to go, it's important to look back at where we started. On the first days after the president was elected, our economy was rolling toward the edge of a cliff with ever-increasing momentum.... [W]e took unprecedented - and often unpopular - action to stave off a total economic collapse. We worked with Congress to pass the American Recovery and Reinvestment Act... saved more than a million jobs and begun to lay the foundation for lasting recovery. We took these steps out of necessity. Today, our economy is growing for the first time in more than a year. Last month, employment was nearly stable and the unemployment rate dropped slightly.

But we understand that talking about what we've accomplished may mean little to someone who is still out of a job. That's why President Obama outlined plans earlier this month to accelerate private-sector job creation.... First... the president's plan encourages investment by small businesses and improves their access to capital by proposing a one-year elimination of the tax on capital gains from new investments in small businesses. We're also calling for the extension of Recovery Act provisions to give small businesses tax incentives to invest in new equipment and other types of capital goods. We will work with Congress to create a tax cut for small businesses that hire new workers. And we will eliminate fees and increase loan guarantees for small businesses that borrow through the Small Business Administration.

Second... we will create new incentives for consumers who invest in energy-efficient retrofits... expand Recovery Act programs to leverage private investment in energy efficiency....

Finally, the president is calling for investments in a wide range of infrastructure....

These are important steps, but there is still so much work that remains. President Obama hears about the struggles the American people are facing every day. He will not rest until every American who wants a job has one.

7) HISTORICAL DOCUMENT OF THE DAY: The dissent of Mr. Justice "Please Mr. President, Don't Put Another K-ke on the Court" McReynolds from the Switch in Time That Saved Nine--the Supreme Court's unexplained 1937 reversal of itself between Shechter Poultry and Carter Coal on th one hand and Jones and Laughlin Steel on the other: LABOR BOARD V. FRIEDMAN-HARRY MARKS CLOTHING CO., 301 U. S. 58 (1937) -- US Supreme Court Cases from Justia & Oyez:

MR. JUSTICE McREYNOLDS delivered the following dissenting opinion.

MR. JUSTICE VAN DEVANTER, MR. JUSTICE SUTHERLAND, MR. JUSTICE BUTLER, and I are unable to agree with the decisions just announced.

We conclude that these causes were rightly decided by the three Circuit Courts of Appeals, and that their judgments should be affirmed. The opinions there given without dissent are terse, well considered, and sound. They disclose the meaning ascribed by experienced judges to what this Court has often declared, and are set out below in full.

Considering the far-reaching import of these decisions, the departure from what we understand has been consistently ruled here, and the extraordinary power confirmed to a Board of three, [Footnote 1] the obligation to present our views becomes plain.

The Court, as we think, departs from well established principles followed in Schechter Poultry Corp. v. United States, 295 U. S. 495 (May, 1935), and Carter v. Carter Coal Co., 298 U. S. 238 (May, 1936). Upon the authority of those decisions, the Circuit Courts of Appeals of the Fifth, Sixth, and Second Circuits in the causes now before us have held the power of Congress under the commerce clause does not extend to relations between employers and their employees engaged in manufacture, and therefore the Act conferred upon the National Labor Relations Board no authority in respect of matters covered by the questioned orders. In Foster Bros. Mfg. Co. v. Labor Board, 85 F.2d 984, the Circuit Court of Appeals, Fourth Circuit, held the act inapplicable to manufacture, and expressed the view that, if so extended, it would be invalid. Six District Courts, on the authority of Schechter's and Carter's cases, have held that the Board has no authority to regulate relations between employers and employees engaged in local production. [Footnote a] No decision or judicial opinion to the contrary has been cited, and we find none. Every consideration brought forward to uphold the act before us was applicable to support the acts held unconstitutional in causes decided within two years. And the lower courts rightly deemed them controlling...

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Justin Fox: What to do about those danged bank lobbyists:

Those who would address the financial problems of the past few years with better laws and regulations (a group of which I am a member) have a big problem when the rulemakers are captured not just by the industry they regulate but the dodgiest parts of that industry. So what do we do about this?

1. Get out of the regulating business. This is the libertarian solution, and while it reeks a bit of libertopianism, there is a basic truth behind it: The less affected by regulation and/or government spending an industry is, the less it spends on campaign contributions and lobbying, as a general rule.

2. Shine a light on what's going on so the public interest can trump private interests. This does work sometimes. And the increased attention paid to the House Financial Services and Senate Banking committees over the past couple of years has made life more difficult for financial industry lobbyists (at least, that's what people in the financial industry say). Because the Republican Congressional leadership has decided its most promising political strategy for the first two years of the Obama Administration is to be against everything, though, it's hard to put together majorities without including goodies for the most bought-and-paid-for Democrats...

9) STUPIDEST THING I HAVE READ TODAY: Niall Ferguson: An Empire at Risk:

[I]f the United States succumbs to a fiscal crisis, as an increasing number of economic experts fear it may, then the entire balance of global economic power could shift.... [T]he president's... indecision about the deficit could matter much more for the country's long-term national security. Call the United States what you like—superpower, hegemon, or empire—but its ability to manage its finances is closely tied to its ability to remain the predominant global military power. Here's why.

The disciples of John Maynard Keynes argue that increasing the federal debt by roughly a third was necessary to avoid Depression 2.0. Well, maybe, though some would say the benefits of fiscal stimulus have been oversold and that the magic multiplier (which is supposed to transform $1 of government spending into a lot more than$1 of aggregate demand) is trivially small... let's consider the cost of this muted stimulus... there is no end in sight to the borrowing binge.... [C]alculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt. No sweat, reply the Keynesians. We can easily finance$1 trillion a year of new government debt...

[which "Keynesians" is he talking about? He never says--because they are the ones who exist only in his fevered brain...]

10) HOISTED FROM THE ARCHIVES: DeLong and Summers (1996): Is Increased Price Flexibility Stabilizing?

This paper uses Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing. This result arises because of the Mundell effect. While lower prices increase output [conditional on nominal demand], the expectation of falling prices decreases [demand and so decreases] output. Simulations based on realistic parameter values suggest that increases in price flexibility might well increase the cyclical variability of output in the United States.

Clive Crook Doesn't Do His Homework... (Why Oh Why Can't We Have a Better Press Corps?)

Clive Crook:

Republicans and the politics of No: the question remains, what will Republicans do with their political power if they get it back? The answer is mostly silence. I say mostly, because the party is not entirely without thinkers or ideas. But in some ways the exceptions only underline the point. One of the most interesting politicians in the House is Paul Ryan, the ranking Republican on the budget committee. He recently published a budget proposal, and had it scored (insofar as it could be), by the independent Congressional Budget Office. It was a much better budget than the one produced by the administration because, unlike the official version, it proposed a way to bring public debt under control...

Howard Gleckman read the CBO letter on Ryan's proposal:

Assume a Can Opener: Word is getting around that CBO has blessed a major budget reform plan proposed by Representative Paul Ryan (R-WI) as, in the words of National Review Online, “a roadmap to solvency.” It isn’t true.... [T]his confusion is due to a letter written on Jan. 27 from CBO director Doug Elmendorf to Ryan.... But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP....

On the tax side... Ryan would: turn the current exclusion for employer-sponsored health insurance into a refundable credit; allow people to choose to pay either under the current income tax system or a two-rate, broad-based alternative; replace the corporate income tax with a business consumption tax, and exclude from tax dividends, capital gains, interest, and estates. We don’t have any idea what this plan would do to revenues, but in some ways it resembles former GOP presidential candidate Fred Thompson’s campaign plan. TPC figured that scheme would reduce tax revenues by between $6 trillion and$8 trillion over 10 years... not exactly a roadmap to solvency in my book...

Other Tax Provisions. The proposal would make significant changes to the tax system. However, as specified by your staff, for this analysis total federal tax revenues are assumed to equal those under CBO’s alternative fiscal scenario (which is one interpretation of what it would mean to continue current fiscal policy) until they reach 19 percent of gross domestic product (GDP) in 2030, and to remain at that share of GDP thereafter...

Yes, That Is a Snowdrift...

I Know People Dig Cars Out of the Snow, But This Is Ridiculous...

Something Is Going Wrong...

Social roles and social pressures in America today are such that if you are male between 25 and 54 in America and you don't have a job, there is a presumption that there is something wrong:

One thing that goes wrong is a recession (or a depression), but steadily since 1950 other things have been going wrong for an increasing number of American prime-aged males...

Literature: Home Redecoration at Minas Morgul

One of my favorite passages from the late Kage Baker (2008), The House of the Stag (New York: Tor):

She looked up from her loom. The sergeant of the guard, the one with red eyes, bowed to her. "Sergeant?"

"Lady, we have the workmen for you. The Children of the Sun you wanted. With all their tools and gear. Himself says come and see."

"Thank you, Sergeant." She rose, smiling. "Where are they?"

"Got 'em in the lower courtyard."

He escorted her down through the corridors. Hideous monsters saluted shyly as she passed them. She stepped out into the courtyard and beheld red men, kneeling in a long row., They were blindfolded, their hands bound before them, and some wept and prayed to their gods. Piled in a heap to one side of them were chests and trays of tools. Gard stood to the other side of them, in his full black armor. When he spoke, it was not to her but to the prisoners, in a voice full of rolling thunder.

"Now, Children of the Sun, if you die tomorrow, you will still have seen the fairest sight of your lives, and you'd not see anything fairer if you lived on a thousand years. Free their eyes!"

His guards stepped forward and pulled off the blindfolds, one by one. One by one the red men blinked, stared around, then gasped as they saw the Saint. Some of them fell prostrate before her, bound hands outstretched. "Oh, Lady, save us!"

"Have mercy on us!"

"Don't let him kill us!"

She looked at them with horror and looked white rage at Gard. "What have you done?"

"Brought you workmen, as I promised," he said in that same theatrical tone, meeting her eyes without flinching. She saw amusement there, and covert purpose. "Why, madam, are you displeased? Shall I have them hanged?"

"No!" she cried. "You will have them released at once!" The red men crowded forward on their knees, weeping, thanking her, imploring her, praising her.

"Then I will spare your lives," said Gard to the Children of the Sun. "But you will slave for me nonetheless, to make fair the rooms in which my lady lives."

"They will not slave!" said the Saint. "If they choose to work, you will pay them in gold, and then you'll let them go!"

"Lady, is it fine work you want?" said one of the prisoners. "By all the gods, I swear you'll have rooms finer than a duchess's!"

"Wife, I will defer to your wishes," said Gard. "For I am your slave in all things. Should one of them displease you, however, his head shall look down sadly from a pike."

"May I speak to you alone a moment?" said the Saint to Gard.

He bowed her to the door, and she pulled him within the hall after her. "Now they will do anything you ask them," said Gard smugly.

"How dare you!" The Saint looked him full in the eyes with all the force of her anger, and he rocked back a little on his heels but did not look away.

"Wife, this is the way a Dark Lord accomplishes his affairs. And I had to bring them up here blindfolded, you know, that's elementary security. They haven't been hurt. They haven't been robbed. If they do a good job for you, by all means pay them what you will. They'll have to be taken down the mountain blindfolded too, but you have my word they'll be released alive and unharmed. That's fair, isn't it?"

"That isn't the point! Why couldn't you have asked them to come?"

"Because they wouldn't have. What with me being a Dark Lord and all, as they'd say. But look now: we'll get your rooms redecorated. They'll go back home and spread tales about the terrible Master of the Mountain and his beautiful and saintly Lady, who saved their lives. It'll do both our reputations a world of good."

"But this is all absurd!"

"Isn't it? I lie to survive, because people fear and respect a black mask more than an honest face. Life became much simpler once I understood that."

"We have not done with this conversation," she said. He bowed to her. She turned and went out to the Children of the Sun...

A Rare Event: The Sharp and Thoughtful Ryan Avent Gets One Wrong...

He writes:

Sovereign debt: Where's the deficit news?: Look, I think that the immediate priority should be economic weakness rather than deficits (although these needn't be mutually exclusive—you can always pass budget fixes now that take effect several years down the road). But it's just not true to say there is no news driving the interest. There is actually quite a bit of news on the risk of sovereign debt crises, driven by developing conditions in Europe. Here is just one of the stories describing the deficit worries sweeping Europe. Mr Krugman has been arguing that Europe's debt troubles don't have anything to do with fiscal irresponsibility, but that's also wrong. As you can clearly see at right, Europe's deficit troubles began well before the global economic collapse.

The problem is that this isn't a graph of government budget deficits, this is a graph of current account deficits.

Krugman's graph showing that the countries that have seen increasing debt-to-GDP ratios over the decade before the crisis are not the PIIGs but are Korea, Poland, Norway, Hungary, and Japan:

is more relevant.

Now just because the large current-account deficits of the PIIGs were not a reflection of spendthrift feckless governments does not mean that they are now a problem. They were (and are) a big problem. The claim that private sector-driven current account deficits are not a problem is the infamous "Lawson Doctrine," and I know nobody who has advocated it since the Thatcher administration in which he was Chancellor of the Exchequer.

But they are a different problem and a different kind of problem than a standard government-debt explosion problem. That's Paul's point.

Notes on the Seasonal in Unemployment...

Ever since the mid-1970s the largest spikes in non-seasonally adjusted unemployment in July and January have been getting smaller. Since the Labor Department's seasonal adjustment procedure looks backward to estimate the seasonal, it doesn't capture this--and so will tend to "expect" a larger seasonal each January and July than we, who can see this trend toward shrinkage, do.

More important, however, in the past two years has been California's administrative processing backlog: a lot of unemployment claims filed in the first two weeks in January are processed during the last two weeks, and the Labor Department's seasonal adjustment does not pick up this two-year California-specific administrative problem...

Ten Economics Pieces Worth Reading: February 7, 2010

Former George W. Bush economic advisor Keith Hennessey is tired of the Obama administration dragging its predecessor's name through the mud. So rather than simply imply or assert that President Obama's fiscal record is worse than George W. Bush's, like most conservatives do, Hennessey actually tries to make the argument that Obama's policies are more profligate than Bush's. I remember Bush's fiscal policies, and the political environment that surrounded them, pretty well. In the wake of the Bush administration's collapse, its defenders have been mostly laying low, trying to make their man look good by taking passive-aggressive shots at his successor. I've been waiting for Bush's loyalists to try to rewrite the past. So consider this fisking the beatdown that was nine years in the making...

Scott Brown, the Republican state senator who won a stunning upset in Tuesday's election, voted for the state's health-care legislation, which was signed by then-Gov. Mitt Romney (R) and has covered all but 3 percent of Massachusetts residents. That legislation became the basic model for national health-care legislation. Brown has not disavowed his support for the state's law, which retains majority backing in Massachusetts. Instead, he argued on the campaign trail that Massachusetts had taken care of its own uninsured, and it would not be in the state's interest to contribute to an effort to cover the uninsured nationwide. "We have insurance here in Massachusetts," he said in a campaign debate. "I'm not going to be subsidizing for the next three, five years, pick a number, subsidizing what other states have failed to do."

In a news conference Wednesday, he said, "There are some very good things in the national plan that's being proposed, but if you look at -- and really almost in a parochial manner -- we need to look out for Massachusetts first. . . . The thing I'm hearing all throughout the state is, 'What about us?' " Brown's message underscores a little-noticed political dynamic in a country where rates of the uninsured vary widely, from Massachusetts to Texas, where 25 percent are uninsured. Seeking national universal coverage means sending money from states that have tried hard to expand coverage, mostly in the Northeast and Midwest, to states that have not, mostly in the South and West...

It's impossible to characterize economist Mark Zandi as some kind of liberal partisan -- he was an adviser to the McCain/Palin campaign in 2008. With that in mind, it should carry a little more weight than usual when he credits Democratic recovery efforts with creating strong economic growth. Here was Zandi yesterday:

I think stimulus was key to the 4th quarter. It was really critical to business fixed investment because there was a tax bonus depreciation in the stimulus that expired in December and juiced up fixed investment. And also, it was very critical to housing and residential investment because of the housing tax credit. And the decline in government spending would have been measurably greater without the money from the stimulus. So the stimulus was very, very important in the 4th quarter.

This isn't exactly new. Last November, Zandi was saying the same thing, arguing that "the stimulus is doing what it was supposed to do -- it is contributing to ending the recession." He added, "In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent."

Maybe someone ought to let Tim Pawlenty know.

[T]he whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound. Everything is different if the central bank is busy adjusting rates in response to conditions, and may well raise rates to offset the effects of any fiscal expansion. Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high. Second, they use a statistical method to identify fiscal expansions.... But how well does that technique work?... Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.

So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.

Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.

[H]ere are some basic facts about the deficit that Americans need to consider: HOW DID WE GET HERE? When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come. By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 — two weeks before Mr. Obama was inaugurated — the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion. About half of today’s huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit — all of which Republicans supported, virtually in lockstep. The other half of recent deficits is due to the recession and the financial crisis.... Were it not for those multiple calamities, budget deficits today would be negligible. That does not mean we would be off the hook. An aging population and relentlessly rising health care costs will hit the country with even deeper deficits as the baby boomers retire. Politicians need to pass health care reform now and start thinking seriously about Social Security and tax reform. So what are the immediate fiscal lessons... spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse. WHAT CAN BE DONE NOW? Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.... [I]n the Senate, Republicans are balking at the prospect of a big bill, saying they need to hold down the deficit. They have spooked the Democrats, who are now trying to negotiate what appears to be a far too modest bill in hopes of winning Republican support. What they should be saying — and what the White House should be saying a lot louder — is that a prolonged downturn or a renewed recession would do far more damage to the budget than upfront deficit spending. In fact, a clear lesson from the Depression of the 1930s is that reducing deficits at a time of economic fragility undercuts recovery. SO DO WE JUST LIVE WITH THE DEFICIT? The problem must be addressed.... If the government must keep borrowing to make up the difference, it could drive up interest rates and force private companies to compete with the government for investors. That, in turn, would reduce economic growth and, by extension, the potential earnings — and standard of living — of everyone. The process is generally gradual. But it could be wrenching if creditors lose confidence that the government will ever put its fiscal house in order and suddenly decide to put their money elsewhere. That could lead to a fiscal crisis, with sharp spikes in interest rates and a rapidly depreciating currency.... SO HOW DO WE FIX IT?... To truly tame deficits will require serious health care reform, the sooner the better.... Contrary to popular belief, there are many well-thought-out ideas for such reforms. Where technical questions are difficult, particularly on health care costs, reformers have advocated demonstration projects that can be tested over time. Where the real difficulty lies is summoning the political will to do what must be done, even though it will be unpopular... 6) GRAPH OF THE DAY: 7) SECOND BEST NON-ECONOMICS THING I HAVE READ TODAY: Mitch Wagner: Something that really bugs me about the recent Star Trek movie: There’s a scene at the end of the movie—and I don’t think this is a spoiler, the movie has been building to this point the whole time—where Kirk has the bad guy on the main bridge viewscreen. The bad guy is defeated, his ship crippled, and Kirk offers amnesty. The bad guy proudly refuses, and instead dies with his ship. Spock approaches Kirk afterward and asks if Kirk was really going to help the bad guy out. And Kirk smirks and says, no, of course not. Spock is happy about that. It seems to me that one scene spits in the face of one of the greatest things about the original Trek. The show was primarily an action-adventure program, with plenty of fistfights and stirring ship-to-ship battle. But in the end, Gene Roddenberry and the rest of the people who created Trek were espousing a philosophy of peace and forgiveness. Kirk and the crew of the Enterprise extended forgiveness to enemies many times, including the very first time they encountered the Romulans, in a sequence that the movie echoes. The message of Trek: It’s better to talk than to fight. It’s better to forgive your enemies. When I was in my teens and 20s I thought that was sappy, but now that we’re a decade into the Never-Ending War On Terror, I think it’s lovely. It’s even more lovely because the original creators of Trek were themselves warriors, in real life. The older ones, at least, were part of the generation that served in World War II. Gene Roddenberry was a decorated bomber pilot who flew 89 missions. He crashed one of them. He later became a cop. James Doohan fought at Normandy on D-Day. He shot two snipers, led his men to higher ground through a field of land mines, and got hit with friendly fire and lost a finger, an injury which he tried to conceal as an actor. A bullet to his chest was stopped by a silver cigarette case. Doohan also trained as a pilot. Leonard Nimoy served as a sergeant in the U.S. Army 1953-55. DeForest Kelley served as an enlisted man during World War II. These men who knew war, evangelized peace, a message which the creators of the current Trek movie laugh at... 8) BEST NON-ECONOMICS THING I HAVE READ TODAY: James Fallows: Do we need another Turnip Day?: This is further on the question of what Barack Obama and the Democrats can do about an opposition that is disciplined to vote No on all major issues, and that thwarts "bipartisan compromise" because there is no plausible item that could be added to a stimulus or health reform bill that will swing one of those votes to Yes. A reader writes: I have been waiting for someone somewhere to relate the current Congressional impasse to the 'Turnip Day' special session that Truman called in his acceptance speech at the 1948 Democratic Convention. Some Republicans believed they should complete some unobjectionable legislation in the session, but Leader Robert Taft was adamant that they would yield nothing to 'that son of a bitch the President'. Taft succeeded in making the session an utter failure, but Truman succeeded in demonstrating that the Republicans were obstructionist and he won the campaign meme of the 'Do-Nothing Congress'. This experience of the American electorate punishing rabid partisanship seems too poignant to disappear into history, don't you agree? Agree! The official US Senate history of Turnip Day is here; the text of Truman's Democratic Convention speech is here, courtesy of the Miller Center's excellent presidential archives. As the Senate history says about the moment: At 1:45 in the morning, speaking only from an outline, Truman quickly electrified the soggy delegates. In announcing the special session, he challenged the Republican majority to live up to the pledges of their own recently concluded convention to pass laws to ensure civil rights, extend Social Security coverage, and establish a national health-care program. "They can do this job in 15 days, if they want to do it." he challenged. That two-week session would begin on "what we in Missouri call 'Turnip Day,'" taken from the old Missouri saying, "On the twenty-fifth of July, sow your turnips, wet or dry." Republican senators reacted scornfully. To Michigan's Arthur Vandenberg, it sounded like "a last hysterical gasp of an expiring administration." Yet, Vandenberg and other senior Senate Republicans urged action on a few measures to solidify certain vital voting blocs. "No!" exclaimed Republican Policy Committee chairman Robert Taft of Ohio. "We're not going to give that fellow anything." Charging Truman with abuse of a presidential prerogative, Taft blocked all legislative action during the futile session. By doing this, Taft amplified Truman's case against the "Do-nothing Eightieth Congress" and contributed to his astounding November come-from-behind victory. 9) STUPIDEST THING I HAVE READ TODAY: Wall Street Journal Editorial Board. Outsourced to Media Matters: WSJ falsely claims Romer's research showed "superiority" of tax cuts over spending for stimulus: A Wall Street Journal editorial claimed that "current White House chief economist Christina Romer has done economic research showing the superiority of tax cutting over spending as fiscal stimulus," presumably referring to a March 2007 paper by Christina and David Romer, who found that "tax changes have very large effects on output." However, contrary to the Journal's claim, the Romers' paper did not compare the impact of tax changes on output to the impact of spending... 10) HOISTED FROM THE ARCHIVES: DeLong (June 2002): Philip Habib and Ariel Sharon: My friend John Boykin has just finished a book [John Boykin (2002), Cursed Is the Peacemaker (Belmont, CA: Applegate Press: 0971943206)] about American diplomat Philip Habib, and his (successful) attempt to stop the 1982 Beirut Massacre.... John says (p. xv) that he "neither knew nor cared about [Ariel] Sharon" when he started the book, and "simply followed the most interesting vein of the story wherever it led." In this context it is interesting that the person who comes off worst of all in the book is Alexander Haig.... In the months leading up to Sharon's invasion, Sharon had repeatedly told Haig that the PLO's armed presence in Lebanon was intolerable, that the security of Israel required that it be ended, and that he--Sharon--was going to do the job. Sharon interpreted what Haig told him back as a green light for the invasion--that Haig understood Israel's problems and requirements, and that such an operation would be acceptable to the United States if it was carried out in response to a sufficiently bloody and brutal provocation. Sharon and his Prime Minister Menachem Begin took the attempted assassination of Israel's Ambassador to Great Britain as such a provocation.... But Haig had, apparently, not told Ronald Reagan or anyone else in the White House about his conversations with Sharon, or failed to understand how Sharon would interpret them. When the Israeli invasion of Lebanon began, the White House's first reaction was to summon Special Presidential Envoy Philip Habib to meet with Reagan, and to send him off to the Middle East to stop the war--to find an acceptable political solution.... Habib found it "...very strange, like having two different mandates." Reagan's instructions had been, "Go over there and get this thing settled." Haig's had been, "Go over there"and, as Boykin tells it, more or less go through some motions. Habib was Reagan's representative, but reported to Reagan through Haig, who had "in fact blessed this [invasion] without telling anybody.... [T]hat put [Habib] in a very strange situation." Reagan's instructions had been based on Reagan's... view.... As Boykin tells the story (pp. 57-58), "Habib always knew what Reagan wanted: for him to keep people from killing one another and to get them talking. That wasn't terribly sophisticated guidance, but it was clear. It suited Habib fine.... Reagan had complete confidence in Phil Habib because he liked him and because Habib came highly recommended and seemed to know what he was doing.... The disadvantage... was that [Reagan] had little understanding of the problems Habib was trying to solve.... He thought Syria's missiles in Lebanon were aimed at the heart of Israel, that the troubles of Lebanon were stirred up by the Soviets, and that the PLO was an instrument of the Soviets.... Habib found Reagan... a man 'who couldn't remember detail from one minute to the next'."... Haig's view of what should happen was very different (see pp. 84-5). Haig thought that a good outcome would see the Israel Defense Force--the IDF--smash the PLO's military capability, send its political leadership running for whatever safety they could find, and in the process destroy whatever of Hafez Assad's Syrian military got in the way. This would, he thought, gut Soviet influence in the Middle East. If it were demonstrated that the U.S. client (Israel) could easily whip the Soviet client (Syria), then more countries would want to be U.S. clients and the U.S. would have won a victory. It was almost as if Haig saw the U.S. and the U.S.S.R. as the fans of rival sports teams, each taking pride and joy in its team's victory. But it was far from clear that a full-scale military clash between Israel and Syria accompanied by Syria's decisive defeat and withdrawal would "gut Soviet influence" in the Middle East.... A Brezhnev anxious to demonstrate the Soviet Union's commitment to its allies might have been willing to base a Soviet Motorized Rifle Army in Syria. A Hafez Assad terrified of what Israel might do might well be willing to accept such a basing--even if it did mean that his independence from Soviet control thereafter would have been... rather limited. It seems to me (and seemed to almost everyone at the time save Alexander Haig) that a major clash between Israel and Syria would increase the Soviet Union's influence in the Middle East, not decrease it... Can Someone Tell Me How My 5:30 From Dulles Can Fly Today... ...when my 6:50 last night could not? Unemployment Rate Down by 0.3% to 9.7% Payroll unemployment down by 20K. Looking like another 4% or more productivity growth quarter, and perhaps a labor market improving by the equinox. Five Economics Pieces Worth Reading: February 5, 2010 Dani Rodrik of Harvard University estimates that China’s undervaluation has boosted its long-run growth rate by more than 2 per cent by allowing greater output of tradable goods, a sector that was the engine of growth and an escape route from underdevelopment for postwar successes such as Japan, South Korea and Taiwan. Higher tradable goods production in China results in lower traded goods production elsewhere in the developing world, entailing a growth cost for these countries. Of course, some of these costs may have been alleviated by China’s rapid growth and the attendant demand for other countries’ goods. But China’s large current account surpluses suggest that the alleviation is only partial. These emerging market victims of China’s exchange rate policy have remained silent because China is simply too big and powerful for them to take on. And this despite the fact that disaffected constituencies now encompass not just companies but also central bankers, who have found macro-economic management constrained by renminbi policy. Hence the third consequence. By default, it has fallen to the US to carry the burden of seeking to change renminbi policy. But it cannot succeed because China will not be seen as giving in to pressure from its only rival for superpower status. Only a wider coalition, comprising all countries affected by China’s undervalued exchange rate, stands any chance of impressing upon China the consequences of its policy and reminding it of its international responsibilities as a large, systemically important trader. Word is getting around that CBO has blessed a major budget reform plan proposed by Representative Paul Ryan (R-WI) as, in the words of National Review Online, “a roadmap to solvency.” It isn’t true. Even Washington Post blogger Ezra Klein, who normally does a terrific job with this stuff, reports Ryan’s plan “erases the massive long-term deficit.” That’s not true either. All this confusion is due to a letter written on Jan. 27 from CBO director Doug Elmendorf to Ryan. In that 50-page document, CBO suggests the plan could eliminate the deficit in 50 years and, even more impressively, eliminate the debt by 2080. But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP. You know the old joke: Two economists are stranded on a desert island with only canned food to eat. But they have no way to open the containers. What do we do,” asks one. “Assume a can opener,” replies the other. When it comes to Ryan’s plan, CBO has, in effect, assumed the can opener. 3) GRAPH OF THE DAY: The Option-ARMs Are Coming: 4) BEST NON-ECONOMICS THING I HAVE READ TODAY: Initial NIF experiments meet requirements for fusion ignition: The experiments, described in an article in today’s edition of Science Express, the online version of the journal Science, resulted in highly symmetrical compression of simulated fuel capsules – a requirement for NIF to achieve its goal of fusion ignition and energy gain when ignition experiments begin later this year. “Laser-plasma interactions are an instability, and in many cases they can surprise you,” said ICF Program Director Brian MacGowan. “However, we showed in the experiments that we could use laser-plasma interactions to transfer energy and actually control symmetry in the hohlraum. Overall, we didn’t find any pathological problem with laser-plasma interactions that would prevent us generating a hohlraum suitable for ignition.” Using LPI effects to tune ICF laser energy is “a very elegant way to do it,” said Siegfried Glenzer, NIF plasma physics group leader. “You can change the laser wavelengths and get the power where it’s needed without increasing the power of individual beams. This way you can make maximum use of all the available laser beam energy.” 5) STUPIDEST THING I HAVE READ TODAY: Senator Brown of Massachusetts. Outsourced to Lee Fang of Think Progress: Flashback: In 2009, Scott Brown Said The Senate Health Bill ‘Mirrors’ The Massachusetts Plan He Supports: Now, Brown is coming to the Senate promising to kill health reform. He reiterated this promise last Sunday, telling ABC’s This Week that legislators should scrap current legislation and “go back to the drawing board.” But late last summer, before it was politically advantageous to capitalize on health reform misinformation, Brown actually endorsed the Senate bill he now wants to kill. In an interview with MSNBC’s Dylan Ratigan, Brown stated that the Senate health bill was “really mirroring” the “really great” Massachusetts health plan: BROWN: Well it’s been interesting looking at the Senate and the US Senate is doing. They’re really mirroring what we did a couple of years ago through Governor Romney’s leadership. We had a bipartisan plan that was carefully crafted to make sure that everybody’s interests were taken into consideration: business, providers, individuals and obviously the Commonwealth. And as I said we have a plan that is somewhat similar to what the Federal plan [...] Without the Federal stimulus dollars and the waiver money filling our plan, it would fail. And you have a really great plan, we’ve gone from 10% uninsured to really 2.6 million people uninsured, er, 2.6% people uninsured. So it’s worked, but it also has its failures. A 6.2% Productivity Growth Quarter, a 5.1% Productivity Growth Year Alan Rappeport of the FT: 6.2% Productivity Growth Quarter: The labour department said separately on Thursday that productivity, excluding farmers, rose by 6.2 per cent during the fourth quarter of last year. Output per hour has climbed by 5.1 per cent during the last four quarters, the biggest yearly rise since 2002.... The increase in productivity has helped businesses boost their profits and be more efficient. Labour costs fell by 4.4 per cent as the jump in output outpaced the uptick in compensation.. The flip side of the jobless recovery is a high productivity-growth recovery--and, with stagnant wages, a rise in the profit share... Unemployment Insurance Claims This is the fifth year in a row in which the year start has been accompanied by a drop in seasonally-adjusted UI claims that is then immediately reversed--suggesting that there might perhaps be a small bug in the seasonal adjustment process. This year, fortunately, the reversal has been small... Brad DeLong Smackdown Watch-Steve Horwitz Edition--or Is It? I'm not sure whether this is a successful smackdown or not--and I'm not sure of whom. An email exchange: Anonymous Correspondent: ...You really shouldn't say that Steve Horwitz is an ethics-free partisan hack... Me: Why shouldn't I say that he's an ethics-free partisan hack. He writes things like: That's certainly hackish--so false that nobody who has thought for ten minutes about the issues can believe that it is true. And as an attack against Obama's fiscal policies it's certainly partisan. AC: A hack says things that he doesn't believe. Horwitz believes every word he writes. Me: I don't think so. Take Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy... and replace "government" by "Larry and Sergei's internet company." It then reads: Larry and Sergei's internet company can only spend what it gets from other businesses and consumers one way or another, either through sales or borrowing. For every dollar that Larry and Sergei's internet company spends, there is one less dollar being spent somewhere else in the economy... Horwitz has just proved that the funding and creation of Google did absolutely nothing to increase the flow of spending in the economy: if the VCs hadn't funded Google, they would have funded somebody else, and if consumers didn't buy services from Google, they would buy services from someone else. It generalizes: if Horwitz believes what he says about how government decisions to spend don't change the total flow of spending, he is thereby committed to believing that nobody's decisions can change the flow of spending--and thus that the flow of demand (whether nominal or real isn't quite clear) is always constant. He doesn't believe that. AC: ...I don't think he has ever thought of it that way. But he does believe what he says. You should not call him an ethics-free partisan hack... Ten Economics Pieces Worth Reading: February 4, 2010 The current proposals, I was told this past weekend by George Miller, chairman of the House Education and Labor Committee and probably Speaker Nancy Pelosi's most trusted counselor, "are not adequate to the scope of the problem. You still have a big gap between the resources we're offering and where we need to be. Clearly, more has to be done." The$100 billion stimulus President Obama put forth in his budget is almost laughably smaller than last year's $787 billion package, which most economists credit with saving or creating 1.5 million to 2 million jobs.... Late last year, House Democrats passed a stimulus bill authorizing$154 billion in spending on infrastructure, assistance to states and aid to the unemployed. The Senate, which is reportedly planning to unveil proposals this week, is said to be hung up on the cost of legislation. Early indications are that it will be a good deal smaller than the House's.

The common thread within the Obama and congressional proposals is, alas, resignation. Faced with Republicans who won't support any solution but tax cuts, and with increased though mistimed concern over the size of the deficit, the Democrats propose to shrink unemployment only at the margins.... Democratic job proposals fall woefully short. "If you're really going to make a dent in the unemployment numbers, you have to move in the direction of public jobs," says Miller. "We could create a lot of those jobs -- not with a great wage, but a decent wage. We could put people to work in local agencies." Miller is looking at such proposals, but it would probably take a mass movement of labor, community groups and whatever is left of Obama's scattered legions all demanding jobs and economic equity for such a bill to garner even a chance of passage.

Yet it's not as if the government hasn't done this before. In the winter of 1933-34, with unemployment close to 25 percent, FDR aide Harry Hopkins put an astonishing 3 million people on the federal payroll in just 90 days, repairing airports, military bases and schools. This in a nation of just 130 million people -- the equivalent today would be around 7.5 million. Hopkins and Roosevelt faced the same criticisms -- over the size of the deficit and the growth of the federal government -- that Obama and the Democrats face. But the New Dealers persisted throughout the 1930s, reducing unemployment; building roads, airports and bases; and securing the allegiance of voters for decades to come.

The Lasik thing is interesting because it gets to the question of whether health care is a market. When I think of getting Lasik, or buying a television, I can walk out of the store. That’s what gives me as a consumer my power in the market. But if I have chest pains and my doctor prescribes a bypass, how do I walk out of the store?

Reuters is quoting President Obama: "One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage." Pimco's Paul McCulley listed this as one of the key issues for 2010: "The first issue is the peg between the Chinese yuan and the U.S. dollar, which essentially gives us a one-size-fits-all monetary policy in a very differentiated world..." And Professor Krugman wrote about this on Dec 31, 2009.... And Larry Summers mentioned this at Davos.... Getting the Chinese to revalue (or float) their currency is probably critical to the U.S. achieving Obama's ambitious SOTU goal of doubling U.S. exports in the next five years.

Amazon's business model was, in fact, the reverse of the one used so successfully by Gillette, selling razors at little or no profit but making it up on high-margin razor blades. In this case, the $9.99 retail price for the books (the blades) was actually less than the$12 to $14 "wholesale" price Amazon paid to publishers. That loss, however, was made up for by the high profit margins on the Kindles (the razors), which sell for$260 to $490. The genius behind the deeply discounted book price is that it seems to have greatly accelerated the inevitable transition from physical books to digital ones, while allowing Amazon to build a commanding lead in the digital space. That has not sat particularly well with book publishers, which continue to get the overwhelming share of their profits from hard-copy sales and don't welcome competition on pricing or the prospect of getting strong-armed by a dominant distributor. But as long as Kindle was the digital reader of choice for nearly 3 million consumers, there wasn't much they could do to challenge Amazon's dominance. And then Steve Jobs showed up with the iPad. Apple's new$500 tablet computer can do almost everything a Kindle can, and much more. And to the delight of publishers, he was offering not only 25 million new potential customers but also a new business model in which Apple would serve merely as a distribution agent for the publishers, rather than a wholesaler. Under this arrangement, publishers are free to set retail prices as high as $15 per book and pay Apple a flat fee of 30 percent of the price. With a higher price for both the tablet and the books, you wouldn't expect this new model to pose much of a challenge to Amazon's dominance in digital books. But then over the weekend, Macmillan told Amazon that if it didn't agree to the same terms it had hammered out with Apple, Amazon would no longer have access to new books from the publishing house until several months after they were released through bookstores and Apple... In models, it is easy to specify an announced future policy stance and assume the public believes the announcement. In practice, there is inevitably uncertainty about ex- actly how firm are commitments to future policy, even if the future policy is announced in detail.... Central banks in most developed countries have succeeded in convincing the public that they are committed to maintaining low and stable inflation. But this credibility has built up over decades as the central banks have acted to deliver on their commitment. In the presence of a binding ZLB, the result from the models is that the central bank ought to commit to expansionary future policy. A bank that has built up inflation-fighting credibility may find this is a liability if it tries to convince the public that it is temporarily committed to increasing the inflation rate. Announcements about future policy at a time when the short rates that ordinarily are seen as set by the central bank are stuck at zero are partic- ularly subject to doubt, just because they are accompanied by no current action... 6) DRIVEN INSANE BY MICROSOFT: James Fallows: "I Don't Thik I Can Do That, Jim": [A] lame reference to 2001: A Space Odyssey, in which the creepy-voiced computer, HAL 9000, hears that Keir Dullea / "Dave" is planning to turn it off -- and takes aggressive action.... I think my version of HAL - that is, Outlook -- overheard me saying that I was planning to move messages out of it and into the cloud, via Gmail. Apparently it is taking matters into its own hands!... his is what we call in tech-land a "reproducible error." Same result after reboots, resets, you have it. Entirely inaccessible .PST file. Large-scale data loss! Many hundreds of messages marked "to follow up" or "to answer"! Another reason to move the rest of the data into the cloud, before something screws it up. 7) GRAPH OF THE DAY: Maxim Pinkovskiy and Xavier Sala-i-Martin: 8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Adam Serwer on Richar Chen of the Washington Post, Fascist: Richard Cohen doesn't care about the law; he just wants to feel safe! There is almost nothing the Obama administration does regarding terrorism that makes me feel safer. Whether it is guaranteeing captured terrorists that they will not be waterboarded, reciting terrorists their rights, or the legally meandering and confusing rule that some terrorists will be tried in military tribunals and some in civilian courts, what is missing is a firm recognition that what comes first is not the message sent to America's critics but the message sent to Americans themselves. Cohen is in the minority of Americans in terms of his disapproval of the Obama administration's handling of terrorism. Later in the column, Cohen admits that Dick Cheney's "hearty endorsement of ugly interrogation measures" may have "soiled America's image." Never mind that those interrogation methods were originally developed to secure false confessions (not accurate intelligence), or that Cohen seems to have endorsed them quite heartily himself above. This isn't a matter of mere "image" -- I doubt another Muslim parent would come forth as Umar Abdulmutallab's father did, knowing that their child might be tortured at the hands of American authorities just so Cohen can "feel safe." But hey, we already know Cohen's national security motivations. After the Iraq War, Cohen conceded that his support for the invasion was due to his desire to "go to 'them,' whoever 'they' were, grab them by the neck, and get them before they could get us. One of 'them' was Saddam Hussein." Cohen's tendency to support war as a form of collectivist revenge against "them" makes me skeptical that his reasons for supporting torture are rational, rather than emotional -- not that either would be acceptable. 9) STUPIDEST THING I HAVE READ NOT TODAY: Peggy Noonan. Outsourced to Ed Kilgore: Gulliver Among the Lilliputians: Reading Peggy Noonan is emotionally difficult for me. For one thing, she was the first of a breed that I find inherently obnoxious: the Celebrity Speechwriter... there's something, well, unseemly, about a ghost that is so all-pervasively visible, and so willing to take credit for the golden words uttered by employers who, after all, were actually elected.... But more importantly, ever since she obtained her own bylines and television gigs, Noonan has steadily "grown" into one of those imperious columnists who express exasperation at the idiocy and small-mindedness of politicians.... [S]he is offering dubious and partisan "advice" to Barack Obama, designed to attack what he is doing while professing sympathy for his challenges. There are no less than three such toxic bits of "advice" in the column in question. First, Noonan mocks President Obama for allowing Congress to push him around, unlike, of course, her first Big Boss, Ronald Reagan: James Baker, that shrewd and knowing man, never, as Ronald Reagan's chief of staff, allowed his president to muck about with congressmen, including those of his own party. A president has stature and must be held apart from Congress critters. He can meet with them privately, in the Oval Office. There, once, a Republican senator who'd announced opposition to a bill important to the president tried to claim his overall loyalty: "Mr. President, you know I'd jump out of a plane for you if you asked, but—" "Jump," said Reagan. The senator, caught, gave in. That's how you treat them. You don't let them blur your picture and make you more common. You don't let them call the big shots. Aside from reflecting the eternal Cult of Reagan, these words certainly distort the actual relationship of the 40th president with Congress. Nothing was more central to the Reagan presidency than his initial budget and tax proposals. His budget director, David Stockman, wrote an entire book on how these proposals were mangled into a fiscal abomination by Members of Congress from both parties. It was entitled, revealingly, The Triumph of Politics: Why the Reagan Revolution Failed. 10) HOISTED FROM THE ARCHIVES: DeLong (2003): Nazis and Soviets: In 1928 the British publisher Methuen published a book entitled Republican Germany: An Economic and Political Survey (by H. Quigley and R.T. Clark). In the introduction the authors wrote that they were fortunate because they had a single, central, powerful theme: the coming-to-maturity of the post-World War I German republic: The consolidation of the German [Weimar] Republic is in itself a theme of the most absorbing interest; it lends itself to dramatic presentation with the leading characters active at moments with a real dramatic force.... The fifth and probably last act is now being played, and promises something more heartening than a catastrophic ending. There may be scenes of conflict, world-shaking events, accompanied by the possibility and dangers of war, but the real consumation will probably be reached--namely, the recognition of the German Republic as a permanent feature in German history and its economic and political relations, and, with it, the opening of a new era of international prosperity. Quigley and Clark's--long--book contains three mentions of Adolf Hitler: a passing reference to the "Hitler incident", a half-page narrative of Hitler's unsuccessful 1923 attempt to take over the Bavarian provincial government via a coup, and a classification of Hitler as one of the leaders of: ...secret societies in morality and mentality far more akin to the worst traditions of medievalism than to those of the twentieth century... Writing in 1928, five years before Hitler was to take power and destroy the German Republic, and Adolf Hitler is simply not a big deal to two people writing a political and economic survey of Germany. Were Quigley and Clark obtuse? Not at all. Hitler was an unimportant part of the political fringe in Germany in 1928. In May 1928 Germany held elections for its legislature, the Reichstag. The Nazis won 2.6% of the vote: they were part of a fringe of small parties with more-or-less impractical and nutty programs that together drew off some twelve percent of the vote from the established parties on the right-left spectrum. Ten Economics Pieces Worth Reading: February 3, 2010 Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of what the American Recovery and Reinvestment Plan would accomplish.... This looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.... [T]he estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am. Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak. The biggest challenges, then, are political. The world’s leaders showed an impressive ability to deal with the crisis. The will to co-operate last year, seen not least in the rise of the G20, was remarkable. But such co-operation becomes far more difficult as we return to politics as usual, particularly given high unemployment and deep political divisions inside the US, still the world’s hegemonic power. The European Union remains ineffective. Indeed, the inability of the eurozone to address the fact that the periphery cannot escape from its fiscal trap without strong expansion in demand at the core is proof of that. China, too, is inward-looking. Mr Zhu promised rebalancing. But is that going to happen after today’s stimulus measures are withdrawn? We have a globalised economy, but politics remains local. In times of crisis, the pressure to look after the former dominates the latter. But now we face a different task: that of convalescence and the associated return to politics as usual. Nobody can imagine that managing this transition will prove easy. But, as the global balance of power continues to shift year by year, the challenge must be met. If it is not, the global economy and global co-operation might yet founder. This is my principal lesson from Davos. President Obama broke new ground last year by presenting a budget that assumed changes in the tax law as part of his baseline. Because no one wants to see the Bush tax cuts disappear as scheduled next year or the estate tax go after mere millionaires or the AMT hit a third of all taxpayers, his 2010 budget simply assumed that 2009 tax rules would become permanent and ignored the cost of forgone revenue. That made some sense, given that Congress would never allow all of the tax cuts to disappear or the AMT to affect so many of their constituents. Building those provisions permanently into the baseline only recognized reality, making budget projections both more reasonable—and more drenched in red ink. This year the president has taken his baseline approach a step further in a way that makes much less sense. His 2011 budget baseline assumes that two provisions of last year’s stimulus bill—expansions of the child tax credit and the earned income credit—become permanent.... (I found this only when TPC colleague Elaine Maag pointed out footnote 5 on page 170 of Analytical Perspectives. Talk about burying the news.) Although I happen to think both provisions make sense, they don’t belong in the baseline until Congress makes them permanent. The 2010 Green Book is a little more transparent but not much. A footnote to the table of contents and a closing sentence in the appendix reveal the secret. We all know that we face rough budget times ahead with huge deficits stretching on forever. Dealing with that situation is not made easier by relabeling tax changes to shield them from view. Viktor A. Semenov was growing lettuce on a collective farm outside Moscow in 1990 when a representative of McDonald’s stopped by. The company had just opened a restaurant. Could he sell it a few boxes of lettuce each week? Mr. Semenov’s assistant turned it down. One restaurant was too small an order. “I said, ‘My friend! You see how many McDonald’s there are in the West?’ ” Mr. Semenov recalled recently. “I said, ‘Sell them lettuce at any price. It’s our new strategy.’ ” With that, Mr. Semenov started a company that has all but cornered the market on packaged fresh vegetables in Russia. With a buy-one-get-one-free deal on hamburgers and a traditional Russian accordion band, McDonald’s celebrated on Monday the 20th anniversary of the opening of its first store in the Soviet Union, a restaurant that drew long lines. But the company celebrated a different milestone earlier this year by outsourcing the last product — hamburger buns — it had made at a proprietary factory outside Moscow called McComplex. It was built before the chain opened its first restaurant. Nearly everywhere else, McDonald’s buys ingredients, rather than making its own. But in the Soviet Union, there simply were no private businesses to supply the 300 or so distinct ingredients needed by a McDonald’s outlet. Everything — from frozen French fries to pie filling — had to be made from scratch at a sprawling factory. McDonald’s is always a good lens through which to view the 118 or so countries where it operates. In the 20 years since McDonald’s arrived in Russia, enough private enterprises have sprung up to supply nearly every ingredient needed to operate one of its restaurants. Today, private businesses in Russia supply 80 percent of the ingredients in a McDonald’s, a reversal from the ratio when it opened in 1990 and 80 percent of ingredients were imported... The fiscal situation is actually very simple. The budget was in surplus when President Clinton left office, although there was already the prospect of budget-busting Medicare deficits in the long-term future. The 2001 and 2003 Bush tax cuts and the unfunded Medicare prescription drug benefit created the large deficits of the Bush era. (The Iraq and Afghanistan wars didn’t help, but it’s not fair to blame those entirely on the Republicans; plenty of Democrats went along.) Then the financial crisis and the resulting recession blew a huge hole in government tax revenues, creating the current spike in deficits; that spike was exacerbated by the stimulus package, which most but not all economists would consider a sensible response to a major recession. (According to an earlier analysis by David Leonhardt, the projected average fiscal balance for the years 2009-2012 has changed, since Clinton left office, from an$846 surplus to a $1,215 billion deficit. The biggest lumps are$673 billion in Bush administration policies and $664 billion in the costs of the financial crisis and recession, including bailout costs.) Yet somehow the Republicans have tried–successfully!–to spin our current and projected deficits as the result of “more government spending,” putting the Democrats on the defensive. And unfortunately, the result is the Obama administration buying into the Republican attack line–that government spending must be reduced. How else to explain the three-year spending freeze, which is mainly symbolic and a little bit destructive? 6) GRAPH OF THE DAY: 7) BEST THING I HAVE READ TODAY: Tim Harford: Opportunity costs, again: I have not had time to read much of The End of Influence: What Happens When Other Countries Have the Money by Brad DeLong and Stephen Cohen. It’s a slim book and probably a good read for people interested in the political impact of economic change. I was slightly discouraged by the authors’ apparent reluctance to define what they mean by “when other countries have the money”. (I hope that Brad DeLong one day finds the time to publish his unfinished opus, “Slouching Towards Utopia” - early drafts circulated a decade ago and were brilliant.) 8) SECOND STUPIDEST THING I HAVE READ TODAY: You know, before they were on the New York Times op-ed page, Ross Douthat and David Brooks frequently wrote stuff that was worth reading. Even John Tierney wrote some stuff worth reading before he was on the Times op-ed page. Since then? Nada. Why would make a very good cultural studies dissertation. Today it is David Brooks, and I am going to outsource the critique to Matthew Yglesias: One of the oddities of the current political dynamic is that the largest slice of our government’s domestic spending goes to programs for old people, but old people have a marked tendency to vote for the party of tax cuts and benefit reductions. David Brooks thinks we can resolve this problem through a sudden outbreak of selflessness on the part of seniors: Spontaneous social movements can make the unthinkable thinkable, and they can do it quickly. It now seems clear that the only way the U.S. is going to avoid an economic crisis is if the oldsters take it upon themselves to arise and force change. The young lack the political power. Only the old can lead a generativity revolution — millions of people demanding changes in health care spending and the retirement age to make life better for their grandchildren. It may seem unrealistic — to expect a generation to organize around the cause of nonselfishness. But in the private sphere, you see it every day. Old people now have the time, the energy and, with the Internet, the tools to organize... As is often the case, actual Republican members of congress have a less edifying perspective than Brooks’ but perhaps a better sense of hardball politics. Thus when you look at Jeb Hensarling’s proposal for drastic cuts in Social Security benefits or Paul Ryan’s plan to pair drastic Social Security cuts with drastic Medicare cuts you’ll see that there’s a trick—none of it applies to anyone who’s 55 or older today. The basic idea is to take the GOP old white people base and insulate them from cuts. The under 55 crowd will still have to pay the taxes to finance their benefits, but we ourselves won’t get the benefits... 9) STUPIDEST THING I HAVE READ TODAY: via John Holbo, who comments "To judge from this interview with Zizek in The Times of India, they were right the first time," Slavoj Zizek: First they called me a joker, now I am a dangerous thinker: Q: How can you dismiss Buddhism so easily? It’s the fastest growing religion in the world. Zizek: In the West, Buddhism is the new predominant ideology. Things are so unstable and confusing that with one speculation you can lose billions of dollars in a minute. The only thing that can explain this is Buddhism which says that everything is an appearance. That’s why the Dalai Lama is so popular in Hollywood. Q: You have also been critical of Gandhi. You have called him violent. Why? Zizek: It’s crucial to see violence which is done repeatedly to keep the things the way they are. In that sense, Gandhi was more violent than Hitler. 10) HOISTED FROM THE ARCHIVES: DeLong (2000): What Happened to the Phillips Curve?: [T]ruth be told, the Phillips Curve has not worked well outside America. Economists Doug Staiger, Mark Watson, and Jim Stock pointed out in the Journal of Economic Perspectives that even in the United States the Phillips Curve relationship was never as strong or as good at forecasting inflation as was taught in intermediate macroeconomics. And only in the United States has there been a relatively stable natural rate of unemployment to serve as a reliable indicator of when demand pressure is about to raise inflation. Elsewhere the causes of rising inflation have always been too complex to be summarized by simply comparing unemployment to even a semi-stable "natural rate." Thus perhaps the surprising thing is not that Phillips Curve-based forecasts of inflation have gone awry in the past half decade. Perhaps the surprising thing is that the complicated economic processes determining changes in inflation could be summarized for so long by such a simple relationship as the standard Phillips Curve. In any event one thing is very clear: the simple theory of the relation between inflation and unemployment that economists have peddled for a quarter century no longer works; if economists are to be of any use, they need to come up with a better - and in all likelihood more sophisticated - approach to understanding why inflation rises. The Best That Has Been Said and Thought in the World... A man of wealth and taste, Rufus F., writes: Allow Me to Introduce Myself...: [W]hen you face a classroom of young people, newly paroled from the American high school system, and now stepping out of the blizzard of pop cultural nothingness, and start talking about “the canon” with them, it’s a bit like watching two alien life-forms encountering each other for the first time. There’s a total disconnect between their culture and their cultural patrimony. High culture--those elevating works of art and literature that have survived the test of time--are disdained as pretentious and elitist; and in turn seem to have been taken hostage by academics! And yet, while I am of the generation that remains steeped in pop culture, it’s hard not to feel increasingly that, in the words of David Cronenberg, “it just doesn’t feed me”. How did enjoyment of and engagement with the canon become so specialized, narrow, professionalized, and soulless? Here the culture wars have obscured more than they’ve illuminated. Dating the “crisis of the humanities”: namely, academia’s divorce from the larger culture, only back to “postmodernism” or “the 60s campus protests” suggests that the humanities were in far better shape before that time. But reading the memoirs of people who went through the educational system in the 1800s, one hears the same complaints.... The political debates about the canon overlook the fact that back to the Renaissance roots, the humanities have gone through alternating periods of deadening specialization and thrilling revitalization; we’re just overdue for the second.... I propose to “blog the canon”; from Homer to Hitchcock, Wittgenstein to Warhol, and Plato to Passolini. I want to do is write in a lively, irreverent, and passionate way about “the best that has been said and thought in the world”, and how these works affect me, a relative pisher in many of these areas. I am no expert. (With any luck, I’ll win one of Andrew Sullivan’s “poseur alerts”!) But I do want to write about the Aeneid the way we bloggers write about Avatar--as a living part of our culture... Unfortunately, he begins with Aeschylus's The Suppliants, which is not a terribly good play. Indeed, it is barely a play at all. It is much more a set of hymns and dances strung along a narrative arc: Danaos and his daughters arrive at Argos pursued by their Egyptian cousins, the King of Argos has to decide whether to recommend that the Assembly grant them asylum--thus risking bloody war--or turn them back--thus breaking their duty to and risking the anger of Zeus Xenios, protector of strangers and refugees. The King of Argos and Danaos go off to the Assembly. The daughters worry. The King of Argos and Danaos return with good news. The Egyptians arrive and are sent off. The part of it that is a play--the decision on the part of the King of Argos to try to offer aid--is made very quickly: Aeschylus, Suppliant Women (ed. Herbert Weir Smyth, Ph. D.): King of Argos: And on many sides there are difficulties hard to wrestle with; for, like a flood, a multitude of ills bursts on me. It is a sea of ruin, fathomless and impassable, which I am launched upon, and nowhere is there a haven from distress. For should I not pay the debt due to you, the pollution you name is beyond all range of speech; yet if I take my stand before the walls and try the issue of battle with the sons of Aegyptus, your kinsmen, how will the cost not mount to a cruel price--men's blood to stain the ground for women's sake? And yet the wrath of Zeus who guards the suppliant compels my reverence; for supreme among mortals is the fear of him. Aged father of these maidens, take these boughs straightway in your arms and place them upon other altars of the country's gods, that all the natives may see the sign that you have come in suppliance. And let no random word fall against me; for the people could complain against authority. It may well be that some, stirred to compassion at the sight, will hate the wantonness of the troop of males, and that the people will be more friendly towards you; for all men are well disposed to the weaker cause.... And its ratification by the Assembly takes place offstage, and its favorable outcome telegraphed--there isn't a lot of dramatic tension here: Your father will not leave you here alone for long. I am going now to call together the people of the land, that I may make the masses friendly; and I will instruct your father in what things he should say. Now stay here and beseech the gods of the land with prayers to grant what you desire, while I go to advance your cause. May persuasion and efficacious fortune attend me!... So, since we are bound to read it as a play--rather than as a succession of religious or quasi-religious hymns strung onto a narrative arc--we are bound to say "huh?!" when Rufus F. says that this is part of “the best that has been said and thought in the world.” It ain't. It would have been much better to start with Antigone. Now there is a play! Hell, start with Jean Anouilh's version--or, indeed, with the best of all Antigone's, Athol Fugard, John Kani, and Winston Ntshona's The Island... In Which Steven Horwitz Demonstrates That He Cannot Do Rocket Science--or Economic Science Either An ill-wisher sends me a link to Steven Horwitz, who I last saw carrying water for Republican stimulus opponents with badly-reasoned and fallacious arguments that were past their sell-by date at least seventy years ago. He is still doing it. At PBS. Shame on PBS--get someone half-competent, please: Slapping the Obama Administration Upside the Head with a Bastiat Clue Stick: [T]he Administration's accounting is still one-sided. What it doesn't consider are the jobs lost due to the very policies that are "saving" jobs....The jobs that weren't created because the private sector lacked access to capital due to increases in government borrowing should be offset against whatever jobs the stimulus supposedly is creating. The problem, of course, is that what was never created cannot be seen and therefore cannot be counted. I thank Lynne Kiesling for the wonderful phrase "hit them with a Bastiat clue stick." If Horwitz were--think of it!--to actually talk to Christie Romer or Alan Krueger or Chris Carroll or any of the people who are trying to track the effects of the stimulus program on the economy, he would learn that they are keenly interested in "crowding out"--on how much private demand for goods and services that would otherwise be there isn't there because of increased deficit spending. Even though they cannot see jobs that were never created, they nevertheless can count them--and are trying to do so. Economics isn't rocket science. Rocket science is harder. Rocket scientists, however, are very good at counting things that cannot be seen. Consider the neutrino, for example: the existence and properties of the neutrino were analyzed and powerfully argued for by Wolfgang Pauli and Enrico Fermi in the early 1930s. But nobody "saw" a neutrino for twenty-five years after that. And economists are good at counting things that cannot be seen. When increased government deficits crowd out private economic activity, they do so in one of two ways: 1. The government sells extra bonds to finance its deficit, reducing the price of government bonds--and their substitutes, private bonds, as well. Because private firms seeking to raise capital find that they must sell their bonds for less than they had expected (or get loans on worse terms than they expected), they cut back on their operations and their expansion plans. 2. The government's demand for goods and services leads the firms that provide those goods and services to hire extra workers. They thus bid up the wage--and other firms that would have produced goods and services find that it is no longer profitable to do so because the wage is higher than expected. In both these cases, it is true that we cannot see the jobs that haven't been created. But we can see the price changes that caused those jobs not to be created--just as we cannot see the neutrino, but we can see the Cherenkov radition emitted as a neutrino passes and triggers the creation of an electron moving faster than light. In the first case, we detect crowding out through the fall in bond prices and the rise in bond interest rates accompanying the non-creation of private sector jobs. In the second case, we detect crowding out through the rise in wages and the wage inflation accompanying the non-creation of private sector jobs. We haven't seen any fall in government bond prices associated with the stimulus. We haven't seen any rise in wage inflation associated with the stimulus. Romer and Krueger conclude that whatever crowding out is occurring is extremely weak, and cannot offset more than a trivial part of the surge in aggregate demand created by the stimulus. That there hasn't been any wage inflation-induced crowding-out is, to me, not surprising: the fracking unemployment rate is ten percent, after all. The full-employment world of Bastiat is very very far away. And relative to the magnitude of excess supply in the labor market, the stimulus is simply not big enough to induce any wage inflation-based crowding out. So I am not surprised that there has been no wage inflation-induced crowding out: that is a normal and expected part of our empirical reality. That there hasn't been any bond price fall-induced crowding-out is, to me, quite surprising. As I have said before, on June 29, 2007 there was$4.94T of U.S. federal government debt held by the public. Yesterday there was $7.85T. The U.S. government has issued an extra$2.91T of debt to the public in nineteen months. And the public has slurped it down--has been willing to hold it all in its portfolios at the same, nay at higher, prices than it was willing to do nineteen months ago.

This extraordinary price elasticity of demand for U.S. Treasury debt is, to me, astonishing, terrifying, and unexpected--I expected bond price fall-induced crowding-out to be showing itself by now. It is not, however, surprising to some other economists--people like Paul Krugman, Jamie Galbraith, and the ghost of John Hicks, all of whom did predict this and whose views must now be given some extra respect. For that there has been no fall in bond prices as debt held by the public has exploded, and hence no crowding out from the expenditures funded by the debt explosion, is a part of our empirical reality--even though I find it a surprising part.

So what about the Steven Horwitzes of the world? How do they deal with the fact that Romer, Krueger, and company are keenly watching for signs of the crowding-out that Horwitz mendaciously claims they are ignoring? How do they deal with the fact that we do not see either the bond price declines or the wage inflation accelerations that would be signs that crowding-out was at work?

They don't.

They shut their eyes.

They pretend that our empirical reality simply does not exist. They pull down the windowshades lest they see something outside, and lose themselves amidst their early-nineteenth century books, one hundred and seventy years behind the state of the art in economics--which is, or rather can be if you read widely and think hard, a progressive discipline.

Did you know that M. Frederic Bastiat's Essays on Political Economy contains no references to "panic" or "crisis" or "depression" or "unemployment"? Only a truly clueless idiot would try to take it as a source of wisdom on macroeconomic questions.

When Will It Be "Morning in America"?

What if, starting in January of 2009, the unemployment rate were to have gone up by as much and then come down as much and as rapidly as unemployment did starting in January 1982?

That's the red line.

Recent history and the administration's unemployment forecast make up the blue line:

The Changing Shape of the Future

• 12/08 Baseline: What the Obama Administration forecast in late 2008 the unemployment rate would be if Bush administration fiscal policy were retained and the ARRA were not passed.
• 12/08 Baseline + ARRA: What the Obama Administration forecast in late 2008 the unemployment rate would be if its proposed policies were enacted.
• 2/10 Forecast: What the Obama Administration is currently forecasting for the unemployment rate.

Yes, I know, I know, it's been scary since the spring of 2009. But it is scary.

Even the Best of the Republicans Are Pretty Awful...

Alan Kling and Greg Mankiw do Tyler Cowen no good service in recommending that he read Keith Hennessey--who is in full spin entropy-maximization mode, striving to reduce the level of the debate.

And Tyler does his readers no good service in reproducing Hennessey:

Marginal Revolution: Obligatory budget post: I keep on hearing about a "pivot," but where is it?  Via Greg Mankiw and Arnold Kling, here is Keith Hennessey:

We can draw five important conclusions from this graph:

1. At 8.3% of GDP, the proposed budget deficit for 2011 is still extremely high.
2. President Obama is proposing larger budget deficits than he did last year.
3. For 2011, the most relevant year of this proposal, the President is proposing a budget deficit that is 2.3 percentage points higher than he did last year (8.3% vs. 6.0%).
4. Using his own numbers, the President’s proposed budget deficits will cause debt as a share of the economy to increase. 4.Under the President’s proposal, budget deficits begin to increase as a share of the economy beginning in 2018.

Adding further detail to (4), the President’s own figures show deficits averaging 5.1% of GDP over the next 5 years, and 4.5% of GDP over the next ten years.  They further show debt held by the public increasing from 63.6% of GDP this year to 77.2% of GDP ten years from now.  I think it’s a safe assumption that CBO’s rescore of the President’s budget will be even worse.

Left out of Hennessey's "analysis" i the reason that an 8.3% of GDP deficit is warranted: that the economy is very weak.

Left out of Hennessey's "analysis" is the reason that President Obama projects bigger deficits this year than he did last year--that the economy is extremely weak, and is much weaker than we expected it to be, and when the economy is weak the deficit goes up as revenues fall and social-insurance spending rises: a year ago the administration expected the unemployment rate now to be 7.7%, but it's 10.0%; a year ago the administration expected the unemployment rate at the start of fiscal 2011 to be 7.0%, but now it expects it to be 9.8%; a year ago the administration expected the unemployment rate at the start of fiscal 2012 to be 6.4%, but now it expects it to be 8.9%.

You won't learn any of this from Hennessey.

And, of course, left out of Hennessey's "analysius" is the explanation that the weakness of the economy is also the reason that the debt-to-GDP ratio is projected to climb over the next five years: the debt-to-GDP ratio ought to climb during periods of national emergency--resisting an invasion, fighting a major war, suffering a depression, et cetera. Hennessey and his peers in the George W. Bush administration share with the Reagan and George H.W. Bush administrations the singular distinction of having run the only administration to raise the debt-to-GDP ratio without resisting an invasion, without fighting a major war, without suffering a depression.

The only one of Hennessey's points that is not overspun well beyond the point of being misleading is (5): starting in 2018 our long-run fiscal crisis does knock on the door. It would have been nice if Newt Gingrich had helped Bill Clinton deal with it back in 1995. It would have been nice if George W. Bush had dealt with it rather than amplified it in 2001. It would be nice if Republicans like Keith Hennessey would help Barack Obama deal with it now...

Ten Pieces Worth Seeing (Mostly Economics): February 2, 2010

1) Courtesy of Don the Libertarian Democrat, Adam Smith on Financial Regulation:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed...

It would be overly simplistic, but partially accurate, to ascribe the current crisis at Harper’s to the fact that its website is mostly hidden behind a paywall. I can’t even remember when I let my subscription lapse, but the magazine simply isn’t on my radar screen these days: with the exception of its current highly controversial Guantanamo story (which, notably, Harper’s put outside the paywall), pieces from Harper’s simply don’t get talked about.

A magazine’s website can and should be a force multiplier, extending the reach of the magazine from its historical place in subscribers’ homes. No one has ever subscribed to Harper’s because of something they read on its website, and as public discourse moves increasingly online, any public-interest magazine with a high paywall will be doomed to irrelevance.

What’s clear in the case of Harper’s is that its paywall — just like its editor’s decision to remove himself from the office voicemail directory — is a clear sign of how stodgy and old-fashioned it is. Newspapers flirting with the idea of erecting such a wall should remember that, and realize that it’s a big step backwards. You can coast on an existing store of momentum for a while, but eventually and inevitably that momentum will fizzle out. If you want to build a franchise which can thrive over the long term, you need to pick up new readers to replace those who drop out. And in order to do that, you need an exciting >and vibrant website.

We need to learn from those countries that evidently did it right. And leading that list is our neighbor to the north.... [W]hen things fell apart... [i]n the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently? It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis. Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren... who place much of the blame for the crisis on failure to protect consumers from deceptive lending.... Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.... Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization.... There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.

So what are the chances that the United States will learn from Canada’s success?... [T]he Senate.... Republicans are clearly dead set against any significant financial reform — not a single Republican voted for the House bill — and some Democrats are ambivalent, too. So there’s a good chance that we’ll do nothing, or nothing much, to prevent future banking crises. But it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.

A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter. Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. His comments come as House Financial Services Committee Chairman Barney Frank (D-MA) predicted the proposals outlined by President Obama could be law within six months. Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

I start from the observation that, despite the phenomenal increase in number and complexity of financial transactions, it is possible and necessary to endow systemic risk managers with the informational advantage over financial market participants that they need to assess the weaknesses in the financial system as they develop. This will require a wide-ranging reform, in which all market actors who are – or maybe – involved in liquidity transformation disclose to supervisors the full extent of their activities. Another pillar of the reform strategy is a redesign to regulations pertaining to banks (client servicers) and investment managers (capital managers). It is generally agreed that these two functions are characterised by very different risks: hence a clearer institutional identification and separation of them is needed, as well as a uniform treatment of the different organisations within each function.

6) GRAPH OF THE DAY:

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Maria Farrell on the Pile of Toxic Sludge That Is the Washington Post:

The WaPo online has been given a good tongue-lashing by – so far – every single commenter on their ‘Is Elizabeth Edwards Right to Drop John?’ discussion. The forum set-up goes; ‘Elizabeth Edwards and her longtime husband, former senator and Presidential hopeful John Edwards, have separated, according to People magazine, via Reliable Source. … Is Elizabeth Edwards, who is battling incurable cancer, doing the right thing by separating from John? Should she file for divorce? Weigh in below.” Responses range from to “how in the world would I know whether two people I never met should stay together? Why would the Post have such an incredibly stupid discussion?” all the way to “When The Post would offer such an idiotic, shallow, voyeuristic question for discussion, it should surprise no one that the institution of the fourth estate has failed.” The obvious question, ‘is this TMZ?’, is asked along the way.

Shame on WaPo. This is cheap journalism in both senses of the word. Once more the newspaper is called on the carpet by readers who have no difficulty seeing the difference between public interest and voyeurism. How has WaPo fallen so low? Any of us who’ve been around the block a few times work-wise know how strong the toxic effect of a few key people can be. A whole organisational culture can shift with shocking ease from collegiality to zero sum games.... The nasty effect of ‘a few bad apples’ is nothing new.... I’ve no particular insight to what’s happened in the Washington Post.... They should listen to their readers to whom that bright line is very clear.

8) STUPIDEST THING I HAVE NOT READ TODAY: But Bruce Bartlett has. He covers Republican Governor Tim Pawlenty (Idiot-MN):

Pawlenty wants to have it every possible way: complain about the deficit while ignoring everything his party did to create it (Medicare Part D, two unfunded wars, TARP, earmarks galore, tax cuts up the wazoo, irresponsible regulatory and monetary policies that created the recession that created the deficit, etc.), illogically insisting that tax cuts are a necessary part of deficit reduction, and never proposing any specific spending cuts. The only specific thing Mr. Pawlenty is capable of proposing is a balanced budget amendment to the Constitution. It’s hard to know where to begin in explaining why this is such an irresponsible idea, but I will try: 1. It will take forever.... 2. The simplistic amendment Pawlenty proposes... was rejected by most Republicans in the 1980s on the grounds that it would likely force tax increases.... 3. It’s one thing to require a balanced budget when starting from a position of balance.... It’s quite another when we are running deficits of over $1 trillion per year.... 4. It’s doubtful that Mr. Pawlenty has any clue as to the composition of federal spending.... 5. Pawlenty says not a word about how a balanced budget amendment would be enforced.... 6. Finally... the exceptions Mr. Pawlenty would provide are loopholes big enough for a blind man to drive through.... Tim Pawlenty is not ready for prime time. He may think he has found a clever way of appealing to the right wing tea party/Fox News crowd without having to propose any actual cuts in spending, but it isn’t going to work. It’s too transparently phony even for them. 9) STUPIDEST THING I HAVE NOT SEEN TODAY: Democratic Senator Evan Bayh (Idiot-IN). Outsourced to Jason Linkins: Hyper-timid incrementalist Senator Evan Bayh (D-Ind.) gave his budget peacock legs a strut this past Sunday, accusing "far left-wing blogs" of criticizing the administration's proposed spending freeze. But this is a tidy talking point that obscures the fact that plenty of economists don't think the spending freeze is a good idea, and plenty of liberals don't think the freeze is austere enough. BAYH: If you look, I suspect [Representative Paul Ryan (R-Wisc.)] does not, but if you look at the far left-wing blogs and that kind of thing they're severely criticizing the president for being too fiscally austere. My own take on this, Paul is right. Domestic discretionary spending increased last year. I voted against the omnibus, I voted against the "minibus" and that's last year. the question is where do we go now? The freeze is important. He identified$20 billion if you aggregate over the next ten years is $250 billion less spending. Does it solve all our problems? No. But it's a step in the right direction. 10) HOISTED FROM THE ARCHIVES: DeLong (May 2003): Let's Get Even More Depressed About Cuba: Just because people begin their papers with quotes from Ludwig von Mises does not automatically mean that they are wrong: http://lanic.utexas.edu/la/cb/cuba/asce/cuba8/30smith.pdf http://lanic.utexas.edu/project/asce/pdfs/volume12/perezlopez.pdf The hideously depressing thing is that Cuba under Battista--Cuba in 1957--was a developed country. Cuba in 1957 had lower infant mortality than France, Belgium, West Germany, Israel, Japan, Austria, Italy, Spain, and Portugal. Cuba in 1957 had doctors and nurses: as many doctors and nurses per capita as the Netherlands, and more than Britain or Finland. Cuba in 1957 had as many vehicles per capita as Uruguay, Italy, or Portugal. Cuba in 1957 had 45 TVs per 1000 people--fifth highest in the world. Cuba today has fewer telephones per capita than it had TVs in 1957. You take a look at the standard Human Development Indicator variables--GDP per capita, infant mortality, education--and you try to throw together an HDI for Cuba in the late 1950s, and you come out in the range of Japan, Ireland, Italy, Spain, Israel. Today? Today the UN puts Cuba's HDI in the range of Lithuania, Trinidad, and Mexico. (And Carmelo Mesa-Lago thinks the UN's calculations are seriously flawed: that Cuba's right HDI peers today are places like China, Tunisia, Iran, and South Africa.) Thus I don't understand lefties who talk about the achievements of the Cuban Revolution: "...to have better health care, housing, education, and general social relations than virtually all other comparably developed countries." Yes, Cuba today has a GDP per capita level roughly that of--is "comparably developed"--Bolivia or Honduras or Zimbabwe, but given where Cuba was in 1957--we ought to be talking now about how it is as prosperous a place as Italy or Spain. Kudos to the Financial Times Editorial Board, Which Gets the Obama Budget Right The FT, the world's best newspaper: FT.com / Comment / Editorial - Budget distractions: The Obama administration’s 2011 budget... the mood is more siege mentality... deficit dread sweeps the country and hence Washington, the focus is on short-term medication of the deficit rather than two altogether more important tasks – strengthening the recovery and securing lasting fiscal health... reckless politicians have persuaded voters that runaway deficits threaten their livelihoods more than a renewed slowdown. This makes the administration sound a bit like a small European country eager to reassure Brussels: it wants to cut the deficit to 4 per cent of GDP within three years. Such a large swing is fine if growth proves robust, but dangerous if it does not, which is far from unlikely. Unemployment is likely to stay above 9 per cent into 2011.... Deficit-reduction noises may be no more than that: what matters politically is to be seen to care about the deficit but not do anything painful to shrink it. Besides, the US can afford a few more large deficits: net public debt, now just over half of GDP, is manageable. In the fine tradition of US budgets, however, the real fiscal threats are left unaddressed: untamed growth in health spending; demographic pressures on social security; and waste and lack of control over military spending, a sacred cow comfortably nestled in every congressional district. A proposed three-year spending freeze signally fails to apply to any of these.... Obama must push harder: that structural fiscal problems are not of his making does not make them any less of his responsibility. Let me highlight: "Such a large swing [in the deficit] is fine if growth proves robust, but dangerous if it does not, which is far from unlikely. Unemployment is likely to stay above 9 per cent into 2011..." By my back-of-the-envelope calculations, the administration is--relative to current spending and tax levels--loading 3 percentage points' worth of contraction into fiscal 2011. That's OK if the fiscal 2011 growth rate would otherwise be 9%--then we have 6% growth and the unemployment rate falls by two percentage points. That's not OK if the fiscal 2011 growth rate would otherwise be 3%--then we have 0% growth, and the unemployment rate rises by one and a half percentage points. The otherwise-growth rate for fiscal 2011 is as likely to be 3% as it is to be 9%. I am frightened... Fiscal 2011 vs Fiscal 2010 Tightening (change from 2010 to 2011): • 1.1% of GDP fall indiscretionary, split evenly between defense and non-defense; • 0.7% of GDP fall in mandatory; • receipts up 1.5%. • net interest up 0.8% Net impact: 2.5% of GDP worth of fiscal tightening, That is big, very big for a 9.5% unemoyment economy. Ludger Woessman: Catch Me If You Can: Education and Catch-Up in the Industrial Revolution Yet another paper convincingly arguing: • that Britain is very odd and unrepresentative. • that the textile industries are odd and unrepresentative. Department of "Huh?!?!" Howard Gleckman writes: TaxVox: the Tax Policy Center blog :: Obama’s Mind-numbing Budget: Senator Judd Gregg (R-N.H.) is a good guy and, left to his own devices, is serious about deficit reduction... Senator Judd Gregg is not a good guy. Senator Judd Gregg is not serious about deficit reduction. Senator Judd Gregg voted for the unfunded Bush 2001 tax cut--even though Alan Greenspan was at the time whispering to everybody that it was bad policy, and that we were likely to rue the day it was passed. Senator Judd Gregg voted for the unfunded Bush 2003 tax cut--even though it was very clear as he voted for it how serious our long-run deicit situation was. Senator Judd Gregg voted to get rid of the PAYGO rules that had served us well in the 1990s. And Senator Judd Gregg just voted against restoring PAYGO. A powerful man who is a United States senator and who "is serious about deficit reduction" would have voted very differently. But Judd Gregg didn't. And why should Gregg have voted differently? He could do what he did and please George W. Bush, commit arson on the federal budget, and still get praised by people like Howard Gleckman as "a good guy" who is "serious about deficit reduction." Why, Howard, why? Ryan Avent Is Bemused He writes: High unemployment sticking around: No quick end to joblessness: OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president's Fiscal Year 2011 budget. Ms Romer... noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections. She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration's forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.... [B]udget balancing amid a weak economy is a bit like pushing on a string. The more you increase taxes and reduce spending, the weaker is the economy, which leads in turn to reduced revenues and increased spending on things like unemployment insurance. But as Ms Reinhart and Mr Rogoff point out if you don't address the deficit at all then markets eventually get worried and interest rates rise, choking off recovery. The way you get around this is by taking credible steps to address long-term deficit issues while maintaining government support for the economy in the short run.... [T]he freeze itself will do nothing to convince markets of the administration's deficit-cutting resolve, given that it will result in only$250 billion in savings over the next ten years—a drop in the debt bucket.... Currently, America is looking at a budget deficit around 10% of output. Mr Orszag noted in the press conference that the administration would like to cut that to 3%. But their expectations are that the bulk of the improvement in the near-term deficit--producing a decline in the deficit from 10% of GDP to 5% by 2015--will come from economic recovery, and the resulting increase in tax revenues and decline in automatic stabiliser spending. Near-term deficit reduction is almost entirely about the strength of the economy. And nothing anywhere in the president's policies will do anything meaningful about the long-term deficit, which is almost entirely about growth in spending on health care.

The president has looked at the problem, correctly identified its nature, and proposed solutions which are irrelevant to harmful. I don't doubt that they perceive political advantages.... But having sacrificed a narrative that makes sense, I struggle to understand what they're gunning for.

Duncan Black watches Chuck Toddler on Twitter:

Eschaton: That's Really Horrible: Chuck Toddler twitters:

Obama admin lays down unemployment rate markers: by end '10, will be below 10%, by end of '11, below 9% and by end of '12, just below 8%

If that's what they believe, Jeebus. When they passed the stimulus a year ago they projected that without the stimulus unemployment would drop below 6% by the end of 2012.

Objects in Your Calendar Are Closer than They Appear...

Dear Professor DeLong,

Greetings from Social Studies! We are celebrating our 50th anniversary on Saturday, September 25th, 2010. We are planning a day-long event, including a breakfast for current and former teaching staff, two panel discussions, a student-alumni lunch, a keynote speech by Amy Gutmann ‘73, and a reception and dinner. A committee is finalizing plans for the panel[s]... we are aiming to have one focus on Social Studies and the Social Sciences (with a possible sub-question: do we still need to read Marx, Weber, and Durkheim?).... I am therefore writing to invite you to attend the 50th anniversary and participate on this panel...

Ten Economics Pieces Worth Reading: February 1, 2010

Paul Volcker lays out his argument in the New York Times today for... Obama's new proposal to rein in "too big to fail'' institutions by limiting the size of banks and keeping them out of riskier businesses.... Volcker starts off well, identifying the core problem of protecting institutions considered too big to fail.... He even invokes Adam Smith, the father of free market theory, as a supporter for keeping banks small. But then there is this jolt: "That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required..."      Huh? What about Obama's idea to limit the size of the banks, based on the size of their liabilities?... [W]here was that? Nowhere.  Volcker simply pivots to the other proposal, on keeping banks out of prop trading. I became even more suspicious by the way Volcker made only glancing reference to other key initiatives that could reduce TBTF--namely, better capital requirements. If you really want to rein in moral hazard and risk-taking associated with the implicit goverment backstop for huge institutions, then your most potent tool is to impose sharply higher capital requirements on the giants....

Let me stipulate: I think Volcker sincerely wants to make big structural reforms, and he is clearly bolder than most of his colleagues. But it's much less clear what the Treasury and White House really want to do...

The long-standing inverse relationship between education and mortality strengthened substantially later in the 20th century.... [B]ehavioral risk factors are not of primary importance. Smoking has declined more for the better educated, but not enough to explain the trend. Obesity has risen at similar rates across education groups, and control of blood pressure and cholesterol has increased fairly uniformly as well. Rather, our results show that the mortality returns to risk factors, and conditional on risk factors the return to education, have grown over time.

Almost every state of any significance in history has aspired to dominate its known world. In the last century, Britain, Germany, Russia and even France aspired to this role, and right now Russia and China are keen to try. Religiosity, militarism, inequality, and governments that do little for their subjects are the norm rather than the exception. Long hours of hard work have been the lot of humankind at least since the arrival of agriculture.

The real exception to all of this is Europe. The largest economic aggregate in world history, it has enough military power to repel any invader, but is deeply uninterested in using this power to any more glorious end. It grows by a process of reluctant accretion, controlled by ever more onerous admission requirements. In all of history, it would be hard to find anything comparable in terms of pacifism, godlessness, equality, leisure for the masses or public provision of services. It’s for this reason that American views of Europe resemble de Tocqueville in reverse. Something so unprecedented, and against the laws of nature, they think, cannot possibly survive, let alone prosper. And yet it does.

This whole mess is basically about duelling supply chain models.... Traditionally the supply chain ran: author -> publisher -> wholesaler -> bookstore -> consumer.... Then the internet came along.... From the point of view of the public, to whom they sell, Amazon is a bookstore. From the point of view of the publishers, from whom they buy, Amazon is a wholesaler. From the point of view of Jeff Bezos' bank account, Amazon is the entire supply chain and should take that share of the cake that formerly went to both wholesalers and booksellers....

The agency model Apple proposed -- and that publishers like Macmillan enthusiastically endorse -- collapses the supply chain in a different direction, so it looks like: author -> publisher -> fixed-price distributor -> reader. In this model Amazon is shoved back into the box labelled 'fixed-price distributor' and get to take the retail cut only.... Amazon are going to fight this one ruthlessly because if the publishers win, it destroys the profitability of their business and pushes prices down....

[T]o customers, Amazon would like to be a monopoly (i.e. the only store in town). To suppliers, Amazon would like to be a monopsony (i.e. the only customer in town). Their goal is to profit via arbitrage, and if they can achieve those twin goals they will own everybody's nuts--the authors, the customers, everyone. They are, in fact, exactly the kind of middle-man operation that the internet tends to squish, gooily....

Amazon, in declaring war on Macmillan in this underhand way, have screwed me, and I tend to take that personally, because they didn't need to do that.

Think of this as a jobs version of cash for clunkers or the homebuyers’ credit. The explicit goal is to get employers to accelerate hiring into this year. An optimist would see this as a plan to jumpstart hiring and accelerate the virtuous demand cycle that usually kicks a sluggish economy into gear.... This proposal would cost between $30 billion and$35 billion for this year alone. The White House won’t say publicly how many new jobs it expects to create, but administration officials expect a minimum of 600,000. The problem with subsidies such as this is that they are exceedingly sloppy. A lot of money goes to those firms that would have hired anyway.... The timing of today’s credit is very different than last winter when Obama proposed a different jobs tax incentive while the U.S. was in the depths of the recession. I was very skeptical then, in part because it was hard to imagine many firms hiring even with a tax holiday. Now, with the economy recovering (GDP grew by 5.7 percent in the fourth quarter of 2009), it is much more likely companies will take advantage of the credit.... To its, um, credit, the White House seems to have carefully designed this version. It set reasonable anti-abuse rules.... CBO recently gave this design a good grade for boosting growth and employment. It concluded that a plan like this  would increase GDP by somewhere between 40 cents and \$1.30 for every dollar of budgetary cost. That’s not as good as increasing aid to the unemployed, but is comparable to boosting infrastructure spending. Creating new subsidies to jolt the labor market may not be great tax policy. But, if you are a Democratic office holder fixated on the top-line unemployment number, it might be the best option out there for some much desired personal security.

The last time the Chinese authorities attempted to deflate an asset price bubble was in January 2007. At that time interest rates were raised, bank reserve requirements increased, and important officials spoke openly about the need to quell speculation. Several commentators anticipated an imminent collapse of the Chinese stock market, which had doubled over the previous year. The outcome was rather different. Over the following months the Shanghai Composite entered a period of exponential growth. The market finally peaked in October 2007 after five rate hikes and 13 increases in bank reserve requirements since the beginning of the year. Experience suggests that recent tightening in Beijing is unlikely to mark the immediate demise of the frenzied Chinese real estate boom. Nevertheless, it brings that end one step closer.

7) VISUAL OF THE DAY: Harry Kreisler interviews Steve Cohen about our The End of Influence:

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Barack Obama: Remarks by the President at GOP House Issues Conference:

I know how bitter and contentious the issue of health insurance reform has become.... If anyone here truly believes our health insurance system is working well for people, I respect your right to say so, but I just don't agree. And neither would millions of Americans with preexisting conditions who can't get coverage today or find out that they lose their insurance just as they're getting seriously ill.... [T]he status quo is working for the insurance industry, but it's not working for the American people.  It's not working for our federal budget.  It needs to change.

This is a big problem... from the start, I sought out and supported ideas from Republicans.  I even talked about an issue that has been a holy grail for a lot of you, which was tort reform, and said that I'd be willing to work together as part of a comprehensive package to deal with it. I just didn't get a lot of nibbles.

Creating a high-risk pool for uninsured folks with preexisting conditions, that wasn't my idea, it was Senator McCain's.... Allowing insurance companies to sell coverage across state lines to add choice and competition and bring down costs for businesses and consumers -- that's an idea that some of you I suspect included... that's an idea that was incorporated into our package.... A number of you have suggested creating pools where self-employed and small businesses could buy insurance. That was a good idea. I embraced it.  Some of you supported efforts to provide insurance to children and let kids remain covered on their parents' insurance until they're 25 or 26.  I supported that.  That's part of our package.  I supported a number of other ideas, from incentivizing wellness to creating an affordable catastrophic insurance option for young people that came from Republicans like Mike Enzi and Olympia Snowe.... So when you say I ought to be willing to accept Republican ideas on health care, let's be clear:  I have...

9) STUPIDEST PEOPLE I HAVE HEARD ABOUT TODAY: Republicans. Outsourced to Stan Collender:

The following all happened just this week: