## Three Ways of Looking at Ken Rogoff

We are, again, live at the Financial Times:

FT.com / Comment / Opinion - Rogoff is wrong on debt worries: I read Ken Rogoff writing that maybe expansionary fiscal policy isn’t all that effective – we don’t really know: “Stimulus benefits of... deficits are not nearly so certain.... Aggressive fiscal stimulus... was reasonable as part of an all-out battle to avoid slipping into a depression... Today, the panic has abated and a more sober cost-benefit analysis is required...”

I read Prof Rogoff writing that the real brake on the speed of recovery are central banks, which won’t let the economy grow “too fast” and will take steps to offset further fiscal stimulus as of, more or less, right now: “Governments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions... Otherwise... they will rightly worry about being gamed into inflationary finance of runaway deficits...”

I sense three things in Prof Rogoff’s thought with which I disagree.

First, a different assessment of the current policy path: Prof Rogoff believes that central banks worldwide are about to start to tighten – and will tighten faster the larger are current deficits, and so additional deficit spending over the next three years is unlikely to generate much if any demand. I believe that the Bank of England and the European Central Bank are about to do so – but should not. And I see the Federal Reserve as recognising the weakness of the recovery and as unwilling to take contractionary monetary policy steps to offset the effects of Office of Management and Budget fiscal policy or Treasury banking policy stimulus.

Second, a different assessment of the speed limit of recovery: Prof Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilise confidence in price stability. I see an economy in which there is enormous slack pretty much everywhere – empty retail storefronts in Berkeley just to my left, anyone? – in which even the US housing stock is no longer above its trend, and in which we are currently building houses at half the trend pace. If output in even our single-family residential-housing sector is significantly depressed below its steady-state growth value – if, economy-wide, 10 per cent of the spending that ought to be there is missing – then we need not policies that carefully create new jobs only in the appropriate sectors but instead policies that create new jobs pretty much anywhere.

Third, an inappropriate linkage between short-term and long-term policy horizons that are not connected: as best as I can figure out, CBO director Doug Elmendorf’s judgment as expressed in his recent Long-term Budget Outlook is that if the policies enacted in the Obama Health Care Reform Bill can be sustained then it has reduced projected primary US federal deficits over the next 50 years by $12,600bn. That’s 16 stimulus packages the size of the Obama 2009 ARRA stimulus. That’s 370 times as much as this afternoon’s unemployment insurance extension. Solidifying the long-term foundations of fiscal sanity is, as Larry Summers said in his contribution, completely at right angles to the question of how much the US federal government does to boost demand and be a good customer for world businesses over the next two years when private households and businesses are not going to be such good customers. You can do both – and we should be doing both – and the Obama administration has taken major strides at doing both. And even big short-term stimulus measures have a trivial effect on the long-term budget picture. Rogoff will respond that, unless you tighten fiscal policy now when doing so raises unemployment, nobody will ever believe that you will maintain fiscal discipline over the long run. The best rebuttal to that point I have ever seen is Martin Wolf’s: “Let us translate this proposal into ordinary language: ‘If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.’ But might it not make sense to get better first?” My original draft: I read Ken Rogoff writing that maybe expansionary fiscal policy isn't all that effective--we don't really know: "[S]timulus benefits of... deficits are not nearly so certain.... Aggressive fiscal stimulus... was reasonable as part of an all-out battle to avoid slipping into a depression.... Today, the panic has abated, and a more sober cost-benefit analysis is required..." I read Ken Rogoff writing that the real brake on the speed of recovery are central banks, which won't let the economy grow "too fast" and will take steps to offset further fiscal stimulus as of, more or less, right now: "[G]overnments that emphasise long-term fiscal sustainability are likely to have an easier time inducing their central banks to maintain highly supportive monetary conditions.... Otherwise... they will rightly worry about being gamed into inflationary finance of runaway deficits..." I sense three things in Ken Rogoff's thought with which I disagree: 1. A different assessment of the current policy path: Ken Rogoff believes that central banks worldwide are about to start to tighten--and will tighten faster the larger are current deficits, and so additional deficit spending over the next three years is unlikely to generate much if any demand. I believe that the Bank of England and the ECB are about to do so--but should not. And I see the Federal Reserve as recognizing the weakness of the recovery and as unwilling to take contractionary monetary policy steps to offset the effects of OMBfiscal-policy or Treasury banking-policy stimulus. 2. A different assessment of the speed limit of recovery: Ken Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilize confidence in price stability. I see an economy in which there is enormous slack pretty much everywhere--empty retail storefronts in Berkeley just to my left, anyone?--in which even the U.S. housing stock is no longer above its trend, and in which we are currently building houses at half the trend pace. If output in even our single-family residential-housing sector is significantly depressed below its steady-state growth value--if, economy-wide, ten percent of the spending that ought to be there is missing--then we need not policies that carefully create new jobs only in the appropriate sectors but instead policies that create new jobs pretty much anywhere. 3. An inappropriate linkage between short-term and long-term policy horizons that are not connected: As best as I can figure out, CBO Director Doug Elmendorf's judgment as expressed in his recent Long-Term Budget Outlook is that if the policies enacted in the Obama Health Care Reform Bill can be sustained then it has reduced projected primary U.S. federal deficits over the next 50 years by$12,600 billion. That's sixteen stimulus packages the size of the Obama 2009 ARRA stimulus. That's 370 times as much as this afternoon's unemployment insurance extension. Solidifying the long-term foundations of fiscal sanity is, as Larry Summers said in his contribution, completely at right angles to the question of how much the U.S. federal government does to boost demand and be a good customer for world businesses over the next two years when private households and businesses are not going to be such good customers. You can do both--and we should be doing both--and the Obama administration has taken major strides at doing both. And even big short-term stimulus measures have a trivial effect on the long-term budget picture. Rogoff will respond that unless you tighten fiscal policy now when doing so raises unemployment nobody will believe that you will maintain fiscal discipline over the long run. The best answer to that point I have ever seen is Martin Wolf's: "Let us translate this proposal into ordinary language: ‘If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.’ But might it not make sense to get better first?"

Gee. Perhaps I need to become a bigger consumer of anti-anxiety medications...

Or perhaps not. Perhaps I see things clearly...

## Another Reason to Think Hard About 1937-1938

Derek Thompson:

The Scariest Unemployment Graph I've Seen Yet: The median duration of unemployment is higher today than any time in the last 50 years. That's an understatement. It is more than twice as high today than any time in the last 50 years. OK, you're saying, but what does this mean? Does it mean we must increase the duration of unemployment benefits to protect this new class of unemployed, or does it mean we need to stop subsidizing joblessness? Does it mean we need to expand federal retraining programs, or does it mean federal retraining programs aren't working? Does it mean we need more stimulus, more state aid, more infrastructure projects, more public works ... or does it mean it's time to stop everything, stand back and let business be business?

You're going to find smart people make a case for all six of the above public policy directions. (I tend to side with the first of each coupling.) It's hard to know for sure how to design public policy for historically unique crises precisely because they are historical orphans, without precedent to show us the right way from the wrong.

Actually we do have a precedent. So far the rule "don't do what people did in the decade after 1929" has served us rather well. Which is why those arguing for a withdrawal of stimulus should think hard about 1937 and 1938

## Barry Ritholtz: No, the Housing Bubble Is Not FNMA's Fault...

Barry Ritholtz:

Global Housing Boom: [A]n email came in....

Can you support your position, in a fast, easy way, why the US housing boom was NOT caused by Fannie and Freddie, or the CRA? I understand all the factors you laid out in the book — but I would like to see more evidence to support your view.

Well, its difficult to prove a negative — supporters of the “FNM/FRE/CRA caused it” should have to prove their case, as I did in Bailout Nation. However, I have always found this chart to be quite compelling.... Pray tell what caused the same boom and bust in these other nations? And how could Fannie/Freddie or the CRA be responsible — that only applies to the US — when you have the same, global, coordinated rise in prices?  (And you can add Korea and New Zealand to the chart above).

For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

## DeLong Smackdown Watch: Alan Taylor Advances the Claims of Thomas Attwood

From Threadneedle Street, Alan Taylor emails that he believes that Thomas Attwood in 1817 has priority over John Stuart Mill in 1829 in figuring out the importance of financial market mechanisms in causing a "general glut":

FYI: Thomas Attwood in 1817: http://books.google.com/books?id=IcFHAAAAIAAJ&printsec=frontcover&dq=thomas+attwood&hl=en&ei=DGVFTOLMEoS0lQeNq-XEBA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEEQ6AEwBA#v=onepage&q&f=false See pages 28-42 ish -- especially 34-35 and 38-40.

Does he have the model down 8 years before Mill? Not perhaps in a totally coherent way.

Attwood is the Birmingham School leader whom Mill was ridiculing in the Currency Question pamphlet two decades later (1844)...

Thomas Attwood on debt-deflation, overleverage, positive-feedback trading, the panicked flight to quality, sticky prices, and all their consequences (note that "stocks" means "stocks of commodities"--i.e., capital or inventory):

The prosperity of a country... consists in the free and easy exchange of stocks for labor, of consumption for production, of commodities for commodities, upon certain fixed terms or relations to each other, which men understand and have confidence in.... [W]henever these terms or relations are broken up, a general want of confidence is occasioned, and a general demand takes place upon property, each individual seeking to lessen those credits and engagements which are likely to involve him in losses or ruin, and to exchange his stocks for money, in order that he may become possessed of greater stocks by re-purchasing at some future time, or at least be enabled to meet securely those monied engagements which all men are more or less exposed to.

But if a disposition of this kind operates upon all the holders of stocks of property under these circumstances, it operates still more actively upon those descriptions of persons who are enabled to hold the whole or a great part of their stocks by the monied credits which they receive from others. A slight fall in the monied value of stocks involves all those kind of persons in losses or ruin, and in order to avoid this, they rush the more earnestly into the market to dispose of their stocks, whilst there is a chance of their securing their credit and solvency by so doing. This is a class of men perhaps the most active, industrious, and enterprising of any in the nation, Possessed of little capital, but their credit and knowledge, they give activity to the dormant capital, of others which would otherwise be unemployed. They are the first to suffer from the contractive action upon currency, but their sufferings are quickly extended to their richer neighbours, and to all classes of the community.

At the same time that the stocks are thus forced upon the markets, the consumption of the markets is reduced, by the impoverishment and diminished expenditure of individuals, who are obliged to contract their expences within their reduced means, and it takes a condierable period before the general reduction of all prices will enable those reduced means to consume their former amount of commodities.

During this state of things, it may be obsereved, that the situation of the labourer or of what is called the Poor Man, is injured in four different ways.... The reduction of prices, if those prices have once become sufficiently permanent to have acted upon trade, is the bitterest evil that ever the poor man can experience....

I will venture to lay it down as a rule, that it is not possible for labourers, (I mean labourers generally,) to be in want of employment, whilst the circulating medium is equivalent to its purposes... sufficient... to effect the exchagne of property, upon the same ratio of prices at which that property has been obtained.... A redundant production may certainly take place in particular articles... but it cannot take place in all articles genrally, because the production of one man is the consumption of another.... But if any circumstances of depression should occur to arrest the creation of the circulating medium, or to require a greater quantity than usual of bullion or Bank Notes to support it, then production and consumption are thrown out of their natural channels and relations, and they continue to diminish alternately until the progress of necessities which cannot be avoided, or the artificial creation of currency produces a reaction upon both...

## Yes, Arnold Kling Really Is That Big a Wingnut...

Arnold Kling:

The Neo-Reactionaries: Some core beliefs that I share with the neo-reactionaries.... 3. American government has become structurally less libertarian and less democratic in recent decades [i.e., since 1940]...

Arnold: the Stupidest Man Alive contest is over.

## Mollie Panter-Downes Liveblogs World War II: July 20, 1940

New Yorker Letter from London:

The general atmosphere of the city is tense but by no means unhopeful, and the only really despondent people are parents who had wanted to get their children off to safety overseas... before anything appalling should happen....

Now that the scheme has been withdrawn, with a statement that the future dispatch of children must be at the parnts' own risk, a cruel dilemma is preented to those who remember with equal clarity the shambles of french homes and the sinking of the Arandora Star....

Britons still have an immense faith in America and the workings of her national conscience, but they hope that any such gestures will not be delayed much longer. Over here one gets a new conception of time. It doesn't march on; it hurtles, like a dive bomber.

## Lemmings Marching Off a Cliff...

Wolfgang Mommsen on Max Weber:

Max Weber was not unprepared for the misfortune that befell Germany and Europe in August 1914. He was nevertheless deeply disturbed that the Reich had to face a superior coalition in the battle to retain its position as a world power. He had viewed a war for German equality to be unavoidable, and he was in principle inclined to support such a way. The war turned out to be a struggle to preserve Germany's national existence. The catastrophic diplomatic situation that isolated Germany at the war's outset clouded Weber's prophetic eyes.

How can we think of a peace? And when? Hundreds of thousands are bleeding because of the embarrassing incapacity of our diplomacy. We cannot deny it. Therefore I do not expect a lasting and fruitful peace for us even in the event of a favorable outcome.

In the most favorable circumstances, he did not expect this war would permit Germany to enter the ranks of the world powers. For this reason the World War seemed to make little real sense. It was above all the bloody reckoning for a quarter of a century of a boasting and arrogant German foreign policy that had offended all the powers equally.

Max Weber did share the national enthusiasm of the late summer of 1914. He had frequently criticized the German people for quietism and apolitical attitudes. He was now deeply affected by the national élan and the willingness for sacrifice with which the entire nation took up the fight for national preservation. He was fascinated by the event itself, independent of the fearful question of what it would lead to:

"Whatever the outcome, this war is great and wonderful." The nation's patriotic enthusiasm, its willingness to make sacrifices, its national unity--Weber sensed all this as of final and permanent value. To this extent he was able to find inner meaning in the bloody event, whatebver the outcome might be. "We have proved we are a great cultural nation," Weber wrote to his mother in April 1915.

People who live in a civilized milieu and are nevertheless able to rise to the horrors of war (no achievement for a black man from Senegal!) and to return as honorably as most of our people do--that is real humanity. We cannot overlook this even in the light of much that is unpleasant. This experience will remain, no matter what happens in the end, and indeed it does not look good if Italy cannot be pacified....

Although Max Weber attributed the rise of a "world coalition" against Germany primarily to the failure of German foreign policy, he also rejected the view that Germany could have avoided the World War through a better and more modest foreign policy.

We have to be a world power, and in order to have a say in the future of the world we had to risk the war.... Responsibility before the bar of history

demanded that Germany resist the division of the world between the "Anglo-Saxon convention" and "Russian bureaucracy"; otherwise the foundation of the Reich would have been meaningless and Germany should have remained divided into small states.... Weber was convinced that the only justifiable objective of the war was the preservation of the German Reich as a great power among "European world powers"...

It is never clear to me to what extent the fact that faithful translations from the German seem evasive of agency to nos Anglo-Saxons is an artifact of translation, a reflection of truth about German habits of thought, or an accurate view into authorial decisions. The use of passive in the translation of Mommsen:

• "the misfortune that befell Germany and Europe..."
• "the Reich had to face a superior coalition..."
• "the war turned out to be..."
• "the catastrophic diplomatic situation that isolated Germany..."
• "It was above all the bloody reckoning..."

is striking. Alternatives that focus more attention on agency are almost immediately thought of by one:

• "great powers decided not to shrink from the risk of war..."
• "the German government struck first and struck at Belgium and France, creating the coalition of Russia, France, and Britain it then fought..."
• "the German government raised the stakes from their initial Balkan-squabble value..."
• "Imperial Germany alienated all possible allies and neutrals in the years and months before the war..."
• "Germany's boastful and arrogant foreign policy over twenty-five years created a bloody reckoning..."

## Critique of Niall Ferguson

We are live at the FT:

FT.com / Comment / Opinion - Deficit data and the fog of war: On first reading I found myself greatly puzzled by Niall Ferguson’s claim that:

It was [the second world war] that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war...

In 1942 the US ran a federal budget deficit of 14.8 per cent of GDP; in 1943 30.8 per cent; in 1944 23.3 per cent; and in 1945 22.0 per cent – a four-year average deficit of 22.7 per cent of GDP.

Today, in 2010, the US is running a federal budget deficit that the CBO estimates at 10.3 per cent of GDP. Its score of Obama’s budget proposals has that deficit falling next year to 8.9 per cent of GDP, then over the next two years to 4.5 per cent of GDP, and remaining in the 4-5 per cent of GDP range for the rest of this decade – for an average CBO-scored Obama policy deficit of 5.3 per cent over the next eight years.

Compare that to the Great Depression: in Roosevelt’s disastrous 1937-38 fiscal austerity and monetary tightness experiment, the US federal government deficit shrank to 2.8 per cent and then to 0.5 per cent of GDP; otherwise the deficit bounced around between 3.8 per cent and 5.5 per cent of GDP between Roosevelt’s inauguration and the end of the 1930s – for an average deficit in the years outside the disastrous austerity experiment of 4.6 per cent of GDP between Roosevelt’s inauguration and the second world war.

So 22.7 per cent, 4.6 per cent, 5.3 per cent: the New Deal’s 4.6 per cent looks a hell of a lot more like our forecast 5.3 per cent than the second world war’s 22.7 per cent does. On first reading, I simply did not understand how Ferguson could with a straight face claim that “what we are witnessing today has less to do with the 1930s than the 1940s: it is world war finance without the war.”

On looking again, I found in Ferguson’s piece the sentence: ”The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war...”

On June 30, 1933 the US federal debt was $22.5bn – 40 per cent of 1933 GDP. By June 30, 1941 the US federal debt had more than doubled to$49bn – 87 per cent of 1933 GDP. That’s a big increase. How can that mesh with Ferguson’s observation that “the federal debt burden rose only slightly... prior to the outbreak of the second world war”? Look at nominal GDP: it grew from $56.4bn in 1933 to$126.7bn in 1941. Even a more-than-doubling of debt will not raise the debt buden if economy-wide spending more than doubles as well.

But that does not mean that deficits in the 1930s were an order of magnitude smaller than the deficits we are looking forward to today, or that today’s fiscal picture looks more like that of the second world war than like the picture of the New Deal.

## And We Are Live at the Financial Times...

It is far too soon to end expansion...

My original draft:

In 1829 the then-young economist John Stuart Mill put his finger on how it could be that there could be excess supply of everything in the economy--of pretty much all currently produced goods and services and pretty much all kinds of workers. Previous economists had asserted a "metaphysical necessity" that excess supply of one commodity be matched by excess demand for another: that if there were unemployed cobblers then there were desperate consumers frantically looking for more seamstresses, and thus that the economy's problems were never those of a general shortage of demand but of structural adjustment instead. These previous economists, John Stuart Mill was the first to point out, had forgotten about the financial sector. If there was an excess demand for some set of financial assets, then there could be an excess supply of everything else--what they used to call a "general glut," and what we now call a depression.

But what is the financial excess demand, exactly? Friedmanite monetarist dogma says that the key financial excess demand is always and everywhere for money--and you can always cure depression by bringing the money supply up so that there would no longer be excess demand for money. Hicksian doctrine says the key financial excess demand is almost invariably a demand for bonds--for vehicles to transport purchasing power in the form of savings from the present into the future--and you can almost invariably cure the depression by (i) raising business confidence so that they would issue more bonds and build capacity or (ii) getting the government to borrow and spend and so boost the supply of bonds.

The Minskyites have a different take. The Minskyites say that the monetarists and the Hicksians (usually called Keynesians, much to the distress of many who actually knew Keynes) are sometimes right but definitely wrong when the chips are down and a big depression is the result of a financial crisis. Then the key financial excess demand is for high-quality assets: safe financial places in which you could park your wealth and still be confident it would be there when you returned.

After a panic, Hyman Minsky and his (few) allies argued, boosting the money stock would fail. Cash is a high-quality asset, true, but even big proportional boosts to the economy's cash supply are small potatoes in the total stock of assets and would not do much to satisfy the key financial excess demand. Trying to boost investment would not work either, for there was no excess demand for the risky claims to future wealth that are private bonds. The right cure, Minsky and his allies argued, was the government as "lender of last resort": increase the supply of safe high-quality assets that the private sector can hold by every means possible: printing cash, creating reserve deposits, printing up safe high-quality government bonds and using the proceeds to buy goods and services, printing up safe high-quality government bonds and then swapping them out into the private market in return for risky assets.

When the government prints up cash and swaps it out for government bonds, we call that expansionary monetary policy. When the government prints up bonds and uses them to buy goods and services, we call that expansionary fiscal policy. When it prints up cash and bonds and swaps them for risky private financial assets or guarantees private assets we call that banking policy. All of these, the Minskyites say, have their place and should be pursued now--not as Friedmanite monetarism or Hicksian fiscalism, but instead as ways to boost the supply of high-quality financial assets that are in such extraordinary demand now.

But what happens should a government's printing press print more bonds than investors think it will dare to raise future taxes to pay off? What happens when a government's debts are no longer regarded as safe? Then policies of monetary or fiscal expansion or of banking sector asset swaps and guarantees do not boost but reduce the supply of safe high-quality assets: they move government paper out of the "safe" and into the "risky" category. We saw this in Austria in 1931 and in East Asia in 1997-8 and in Greece right now. Then not expansion but rather austerity to restore confidence in the safety and quality of government liabilities is the best a government can do to attempt to relieve depression--that and cry for help from outside.

Here we have the crux: Right now Greece and Ireland and Spain and Portugal and Italy need to be austere. But Germany and Britain and America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing that they can do to relieve the global depression is to engage in coordinated global expansion: expansionary fiscal policy, expansionary monetary policy, and expansionary banking policy are all called for on a titanic scale.

But, the members of the Pain Caucus say, how will we know when we have reached the limits of expansion? How will we know when we need to stop because the next hundred billion tranche of debt will permanently and irreversibly crack market confidence in dollar or sterling or deutschmark or yen assets? Will shrink rather than increase the supply of high-quality financial assets the world market today so desperately wants? And send us spiraling down?

Trust me, we will know when the time comes to stop expansion.

Financial markets will tell us.

And not by whispering in a still, small voice.

Trust me, we will know, and right now we are still very, very far from that point indeed.

940 words: July 15, 2010

## Yet Another New York Times FAIL

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

Eric Boehlert:

The NYT mangles Obama's approval ratings: The Times' Op-ed page devoted all kinds of space on Sunday so influential insiders could ponder the Times' question: "How Can Obama Rebound?"... [T]he Times Op-ed page even provided proof for why Obama's presidency need to be rescued:

Though BP managed to stop the spread of oil from its broken well last week, President Obama has been able to do little to stop the drop in his public approval ratings, which now, according to a new ABC News-Washington Post poll, hover just above 40 percent.

Well, there you go. According to the latest ABC News-Washington Post poll, Obama's approval rating hovers just above 40 percent.

Except that, of course, it doesn't.

In the latest ABC News-Washington Post poll, Obama's approval rating stands at a solid 50 percent. So the Times needs to issue a correction on getting that central fact wrong...

## Delong Smackdown Watch: Joe Smith on the Invisible and Insensible Bond Market Vigilantes

Joe Smith writes:

Niall Ferguson on the Wonders of the Invisible World: Yields on long US government bonds should be up over 6% on any rational basis. They are not because the would-be bond vigilantes have no place to go if they abandon the US government securities. If they give up on US bonds the only investments really left to them as alternatives are canned goods and ammunition.

There are other things the PIIGS bond market vigilantes could hold besides U.S. dollar-denominated liabilities of the United States federal government: Sewing needles... bottled water... old Tina Turner videos... bicycle pedals, magnets, and copper wire to generate electricity to play the old Tina Turner videos...

## Niall Ferguson on the Wonders of the Invisible World

Niall Ferguson:

Today’s Keynesians have learnt nothing: The anti-Keynesians point out that bond market sell-offs are seldom gradual. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off. And it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of the federal debt in public hands – worry about some kind of future default...

But they don't.

If foreigners holding the U.S. debt feared some kind of future default, some of them would buy CDS insurance and so push the price of CDS insurance for the United States up--as they have in the cases of Greece, Spain, and Ireland, where foreign holders of those sovereigns' debts do fear some kind of future default. They haven't.

And while we can never say that one piece of bad news would not trigger a genuine crash in U.S Treasuries, we can say that nobody trading in the markets fears that one piece of bad news will trigger a genuine crash. If anybody did, they would have bought insurance against a big move in U.S. Treasury interest rates--and that would show up as a rise in the price of the Merrill-Lynch MOVE index plotted above right. They haven't.

So not only are there no bond market vigilantes, but nobody trading in the markets today fears the emergence of bond market vigilantes.

Ferguson:

The Keynesians say the bond vigilantes are mythical creatures...

Well, he has got that right at least.

Ferguson's problem is that he wants to argue that further fiscal stimulus today would raise unemployment. And in order for that to happen, it's not enough that bigger deficits today might cause some kind of trouble in the future: Ferguson has to say that bigger deficits today are causing people today to fear trouble in the future, and that fear is causing them to pull in their horns. That horn-pulling cannot be accomplished without leaving tracks of some kind in asset markets. And those tracks simply aren't there.

But does that stop him from claiming that the invisible and insensible bond market vigilantes are really there? No!

These now Testify'd, that he had been at Witch-meetings with them; and that he was the Person who had Seduc'd and Compell'd them into the snares of Witchcraft: That he promised them Fine Cloaths, for doing it; that he brought Poppets to them, and thorns to stick into those Poppets, for the afflicting of other People; And that he exhorted them, with the rest of the Crue, to bewitch all Salem-Village, but be sure to do it Gradually, if they would prevail in what they did...

## Can't Anybody Here Play This Game? Fiscal Policy Edition

Niall Ferguson writes:

Today’s Keynesians have learnt nothing: When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden [in the United States] rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war...

Could we please have some acknowledgement of the fact that the reason the debt-to-GDP ratio did not rise across the 1930s was because GDP rose, not because debt didn't rise? Debt more than doubled from $22.5 billion to$49.0 billion between June 30, 1933 and June 30, 1941. But nominal GDP rose from $56 billion in 1933 to$127 billion in 1941.

And could we please have some acknowledgement that our 9.4% of GDP deficit in fiscal 2010 pales in comparison to the 30.8% of GDP deficit of 1943, or the 23.3% and 22.0% deficits of 1944 and 1945?

Niall Ferguson should not do this. The Financial Times should not enable Niall Ferguson to do this.

## Adolf Hitler Liveblogs World War II: July 19, 1940

Deputies, Men of the German Reichstag! In the midst of the mighty struggle for the freedom and future of the German nation, I have called on you to gather for this session today... to give our Volk insight into the historic uniqueness of the events we have lived through; to express our thanks to the deserving soldiers; and to direct, once again and for the last time, an appeal to general reason....

The program of the National Socialist Revolution, insofar as it concerned the future development of the Reich’s relations with the surrounding world, was an attempt to obtain a revision of the Treaty of Versailles under all circumstances-and as far as this was possible-by peaceful means. This revision was by nature a necessity. The untenability of the provisions of Versailles lay not only in the humiliating discrimination, the disarmament of the German Volk secured with the result that they lost their rights, but above all in the resultant material destruction of the present and the intended destruction of the future of one of the greatest civilized peoples in the world, in the completely senseless accumulation of vast terrains under the mastery of a few states, in the depriving of the losers of irreplaceable foundations for life and indispensable vital goods....

All endeavors of democratic Germany failed to obtain, by means of revision, an equality of rights for the German Volk.... The National Socialist Movement has, besides its delivery from the Jewish capitalist shackles imposed by a plutocratic-democratic, dwindling class of exploiters at home, pronounced its resolve to free the Reich from the shackles of the Diktat of Versailles abroad. The German demands for a revision were an absolute necessity, a matter of course for the existence and the honor of any great people. Posterity will some day come to regard them as exceedingly modest.... When it finally appeared as though, thanks to a gradually awakening common sense, a peaceful resolution of the remaining problems could be reached through international cooperation, the agreement concluded in this spirit on September 29, 1938, at Munich by the four great states... was condemned as a despicable sign of weakness. The Jewish capitalist warmongers, their hands covered with blood, saw in the possible success of such a peaceful revision the vanishing of plausible grounds for the realization of their insane plans.... It is to be ascribed to these criminal elements that the Polish State was incited to assume a posture which stood in no relation to the German demands and even less to the consequences that resulted.

The German Reich, in particular with regard to Poland, has shown restraint ever since the National Socialist rise to power. One of the basest and stupidest provisions of the Versailles Diktat, namely the tearing away of an old German province from the Reich, already cried for a revision in and of itself. But what was it that I demanded at the time? I must in this context refer to my own person. No other statesman could have afforded to propose a solution to the German nation in the way I did. It comprised merely the return of Danzig-that is to say of an ancient, purely German city-to the Reich as well as the creation of a connection of the Reich to its severed province. And this only pursuant to plebiscites conducted, in turn, under the auspices of an international forum....

n September 2, this struggle could yet have been avoided. Mussolini made a proposal to put an immediate end to the hostilities and to negotiate peacefully. Though Germany saw its armies advancing victoriously, I accepted this nonetheless.But the Anglo-French warmongers needed war, not peace. And they needed a long war.... It was to last for at least three years, since they had in the meantime invested their capital in the armament industry, bought the necessary machinery, and now needed the precondition of time for the thriving of their business and for the amortization of their investments. And besides: what are Poles, Czechs, or other such nationalities to these citizens of the world? A German soldier found a curious document while rummaging through train wagons at the La Charite station on June 19, 1940... the High Command of the Wehrmacht came into possession of a collection of documents of unique historical significance.

What was found were the secret files of the Allied High War Council... handwritten notes in the margins penned by Gamelin, Daladier, Weygand, and so on.... [H]ow these cold-blooded politicians and military men have used all these small peoples as a means to an end; how they tried to subject Finland to their interests; how they determined to make Norway and Sweden the theater of war; how they planned to set fire to the Balkans to procure the assistance of 100 divisions from there; how they prepared to bomb Batum and Baku under the cover of a shrewd as well as unscrupulous reading of the Turkish neutrality in favor of their own interests; how they spun their web around the Netherlands and Belgium, pulling its strings constantly tighter, and finally engaging them in general staff agreements; as well as many other things....

The course of events in the ten months of war now lying behind us has proved my assessments correct and those of our adversaries incorrect.... You have seen the losses, individually surely heavy, though as a total relatively low, which the German Wehrmacht has suffered in battle within the past three months. When you consider that, within this time, we erected a front which reaches from the North Cape to the Spanish border, then our losses are extraordinarily low, especially when compared with those of the World War. The cause lies-besides with the, on an average, excellent leadership-with the outstanding tactical training of the individual soldier and of the units, as well as with the cooperation among the branches of the service. Another cause is to be found with the quality and efficiency of the new weaponry. A third cause lies with the conscious refusal to... to avoid any attack or operation which was not necessary in the context of the actual annihilation of the adversary, but was instead to be carried out for the sake of what was regarded as prestige....

In the eyes of English politicians, their last hopes... lie with a series of propped-up heads of state without thrones; statesmen without subjects; and generals without armies; as well as on renewed complications they believe they can conjure up thanks to their well-proven deftness in such matters. A true Ahasuerus amongst these hopes is the belief in a possible new estrangement to separate Germany and Russia. German-Russian relations have been established for good.... Based on this clear delineation of mutual spheres of interest, the Russo- German relationship was revised. It is childish to hope that in the course of this revision tensions might arise anew between Germany and Russia. Germany has not stepped outside its sphere of interest, and neither has Russia....

The injury the gentlemen Churchill and Reynaud have done millions of people, through their advice and commands-this they can neither justify in this world nor in the next.... I myself am too much a soldier not to comprehend the tragedy of such a development. Still all I hear from London are cries-not the cries of the masses, but of the politicians-that this war must now, all the more, be pursued. I do not know if these politicians have an inkling of just how this war is in fact to be pursued. They declare that they will continue this war, and should England fall, then they will do so from Canada. I do not believe this means that the English people will all emigrate to Canada, but rather that the gentlemen war profiteers will all retreat to Canada by themselves. I fear the people will have to remain behind in England....

Mr. Churchill has repeated the declaration that he wants war. About six weeks ago now, he launched this war in an arena in which he apparently believes he is quite strong: namely, in the air war against the civilian population... open cities, markets, villages, residential housing, hospitals, schools, kindergartens, and whatever else happens to be hit. Up to now I have given little by way of response. This is not intended to signal, however, that this is the only response possible or that it shall remain this way. I am fully aware that with our response, which one day will come, will also come the nameless suffering and misfortune of many men. Naturally, this does not apply to Mr. Churchill himself since by then he will surely be secure in Canada, where the money and the children of the most distinguished of war profiteers have already been brought. But there will be great tragedy for millions of other men. And Mr. Churchill should make an exception and place trust in me when as a prophet I now proclaim: A great world empire will be destroyed. A world empire which I never had the ambition to destroy or as much as harm. Alas, I am fully aware that the continuation of this war will end only in the complete shattering of one of the two warring parties. Mr. Churchill may believe this to be Germany. I know it to be England. In this hour I feel compelled, standing before my conscience, to direct yet another appeal to reason in England. I believe I can do this as I am not asking for something as the vanquished, but rather, as the victor, I am speaking in the name of reason. I see no compelling reason which could force the continuation of this war....

Deputies, Men of the German Reichstag! In reflecting on the ten months lying behind us, all of us will surely feel overcome by the grace of Providence which allowed us to accomplish so great a task.... The disgrace we suffered for twenty-two years and which had its beginnings in the Forest of Compiegne was erased forever at the very same site. Today I have named the men who, before history, enabled me to accomplish this great task. They have done their best, dedicating their talents and their industry to the German Volk.... Today many of them rest in the same graves in which their fathers have rested since the Great War. They bear evidence to silent heroism. They stand as a symbol for all those hundreds of thousands of musketeers, anti-tank gunners and tank gunners, pioneers and artillerymen, soldiers of the Navy and the Luftwaffe, men of the Waffen SS, and all those other fighters who stood for the German Wehrmacht in the struggle for the freedom and future of our Volk and for the eternal greatness of the National Socialist Greater German Reich.

## A 25% Probability of a Double Dip Is Alarmingly Large...

Calculated Risk tells us:

Calculated Risk: Goldman Sachs lowered their Q2 real annualized GDP growth estimate to 2%, and put the odds of a technical double-dip recession at 25%-30%.

What is Plan B... No, we are up to Plan AX by now, if there is a double dip?

In fact, what is Plan AX if the jobless recovery continues?

## David Dayen Thinks He Spots Dingbat Kabuki

David:

Kabuki Activism: Obama, Axelrod Engage on Unemployment Extension After Outcome Decided: I’ve noticed a disturbing trend of the White House ramping up its rhetorical machinery only after a gain has been secured. Organizing for America is becoming famous for sending out emails on votes where the outcome is pre-ordained; they did it last week with the Wall Street reform vote in the Senate, after enough Senators made their positions known to get to 60 votes. Now it’s happening again on unemployment insurance. President Obama’s weekly address was hard-hitting and actually welcome, slamming Republicans for opting to “filibuster our recovery and obstruct our progress.” David Axelrod followed up with an email to supporters.

The White House on Saturday deployed senior advisor David Axelrod to bolster President Barack Obama’s political attack on Senate Republicans for blocking extension of unemployment benefits. Axelrod, echoing Obama’s weekly radio address, circulated an email that calls on Republicans to allow an up-or-down vote. “Unemployment insurance is a vital lifeline for many families struggling to find work in these tough times. Over the past few weeks, that lifeline has disappeared for more than 2 million Americans, and if Congress doesn’t act, that number will grow to 3.2 million people by the end of this month,” Axelrod writes.

I’m happy to see the White House enter the playing field on unemployment benefits, but this is a fait accompli.... [T]he White House is very late to the game and only getting involved once the outcome has been decided. But the email list includes millions of people who don’t track this so closely. And because of that, this maneuver is the worst kind of cynicism. It creates the illusion that the White House is fighting for something when the fight has concluded. Those unaware supporters will think that Obama and Axelrod made a difference somehow, but they didn’t. The move won’t change one vote in the Congress, nor does it need to. Furthermore, the unemployment fight has played out for three months. Why step up now, when it’s reached its endgame. Why wasn’t Obama’s address, which is quite good, televised live the first day that Republicans blocked the bill?...

[T]his is worse than being too late to the game; it’s deciding not to play at all until the game ends.

Let me say that Larry Summers and Christie Romer and company have been in there for months pounding away, lobbying tirelessly up on Capitol Hill for this...

## Hoisted from the Archives: The Obama Fiscal Boost: A Note (January 10, 2009)

You know, I really wish that I had not been just talking to myself...

From January 10, 2009: The Obama Fiscal Boost: A Note:

Paul Krugman writes:

Romer and Bernstein on stimulus - Paul Krugman Blog - NYTimes.com: Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of... the... American Recovery and Reinvestment Plan would accomplish.... Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics....[I]t [is] hard to evaluate the reasonableness of the assumed multipliers. But... the estimates appear to be very close to what I’ve been getting.

[T]hey do estimates of effect in the fourth quarter of 2010, which is roughly when the plan is estimated to have its maximum effect. So they say the plan would lower unemployment by about 2 percentage points, I said 1.7.... They have the plan raising GDP by 3.7 percent, but that’s at peak; I thought 2.5 percent or so average over 2 years, again not much difference. So 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.

One more point: the 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... the CBO estimates an average unemployment rate of 9 percent for 2010.... 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.

If I were in the Obama White-House-to-be right now, I would announce that we would be using CBO numbers as our baseline for everything, and focus on providing analytical input to CBO so that its numbers are as good as possible. Doug Elmendorf is honest and reliable and will do his best. And if there is no daylight between the administration and CBO, that is one fewer way that the David Brookses and the John Boehners and the other bad actors can confuse the gullible, lazy, and dishonest among reporters and commentators who do so much to degrade the level of the policy debate.

I agree with Paul that this fiscal boost plan is too small, but I do want to admit that doing this well is harder than it looks. The tax-cut part does not look terribly effective as a stimulus--it is a step toward compensating for higher income inequality and a political play to make it more likely that Republicans will lose politically by trying to block the package rather than a significant boost to employment. Thus I do not think you would want to make the tax-cut part larger. And it is hard to find a lot of additional spending projects that can be ramped up quickly and do a lot of good--relatively soon in that endeavor the short-term fiscal multiplier falls below one. They are trying their best.

Nevertheless, I agree that there best is almost surely not enough. I also believe that conventional monetary policy is tapped out, and unconventional monetary policy is of doubtful efficacy. So I am in favor of doing something else on the banking/finance side. My favorite idea right now is that of nationalizing Fannie Mae and Freddie Mac completely and unleashing them to buy up every single mortgage in the country at market rates. Their ability to borrow at the Treasury rate means that they should be able to make money by doing this. When they own mortgages they can renegotiate and refinance them all with the public interest in mind. And as they squeeze banks out of the mortgage business the fact that banks are looking for yield should push other financial asset prices up--and make it possible for those businesses that should be expanding to get financing right now on terms that make expansion profitable.

So at the moment my preliminary judgment of the Obama fiscal boost is that it is a good first bid, but that the administration ought to be doing a lot more.

It was clear--to me and to anybody else who had eyes to see that the fall of 2008 had inflicted a more-than-Great-Depression-sized shock to the global financial system--that the ARRA was not going to be enough: it wasn't big enough to fill anything near to the aggregate demand gap that anybody with eyes could see coming, and everybody with eyes knew that the odds were that a financial crisis-generated recession follows the pattern of not a "V" but an "L".

So why is John Harwood now writing about the "mystery" of the high jobless rate? This was baked in the cake--the most likely outcome if the government did not take substantial additional action beyond the ARRA--eighteen months ago.

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

John Harwood of the New York Times:

Mystery for White House: Where Did the Jobs Go?: [T]he biggest conundrum facing President Obama.... Why is unemployment so high? The whodunit has flummoxed economists in both parties for a year.... Part of the uncertainty concerns why. More consequential now, as the administration and Congress determine what to do, is whether the unemployment spike reflects a short-term or permanent shift in demand for workers. “The stakes are enormous,” said Alan S. Blinder, a Princeton economist who advised President Bill Clinton, because the answers are “going to dictate the pace at which jobs come back.” And that, in turn, may dictate whether Democrats keep control of Congress or surrender at least one chamber to Republicans. So long as the job market remains weak, even substantial achievements like the passage of new financial regulations won’t alleviate voter discontent with the party in power. With eight million jobs lost since the recession began, “We’re climbing out of a gigantic hole,” said David Axelrod, Mr. Obama’s top political adviser. “Until we fill the hole, we’ll get limited credit.”...

In January 2009, Mr. Obama’s economic advisers predicted that unemployment would peak around 8 percent if Congress passed their recommended stimulus program. As Republicans never tire of pointing out now, the rate hit 10.1 percent by October and has fallen less than one percentage point since.... [T]he rise in unemployment far exceeded what economists would have forecast.... Under Okun’s Law... the jobless rate at the end of 2009 would have been around 8.3 percent instead of 10 percent. “I don’t blame the administration for being off in these forecasts,” said R. Glenn Hubbard, dean of the Columbia Business School and chairman of the Council of Economic Advisers under President George W. Bush. He called the rise in unemployment “a mystery”...

But in both of the previous financial shock-generated recessions--the dot-com bust of early 2000s and the S&L crisis bust of the early 1990s--Okun's Law broke down too:

It was not terribly prudent to forecast that it would hold in the late-2000s recession...

## Hoisted from Archives: The Jobless Recovery (July 20, 2009)

You know, I really wish that I had not been just talking to myself...

From July 20, 2009: The jobless recovery has begun - The Week: Last December, economists forecast [average] 2009 unemployment at 7.8 percent. As of this writing, it seems likely to be 9.3 percent or higher—at least 1.5 percentage points higher than originally estimated.... [T]he next stretch of road bears all the marks of a jobless recovery. Back in the 1960s one of President Johnson's economic advisors, Brookings Institution economist Arthur Okun, established a rule of thumb quickly named "Okun's Law"... swings in unemployment will always be half or nearly half the magnitude of swings in GDP. Why? Four reasons: (a) businesses will tend to "hoard labor" in recessions, keeping useful workers around and on the payroll even when there is temporarily nothing for them to do; (b) businesses will cut back hours when unemployment rises, reducing output more than proportionately because total hours worked will fall by more than total bodies employed; (c) plant and equipment will run less efficiently when hours are artificially shortened; and (d) some workers who lose their jobs won't show up in the unemployment statistics, choosing instead to retire or drop out of the labor force....

According to Okun's Law, the unexpected extra 1.2 percent decline in real GDP in 2009 should have been accompanied by a 0.5 or 0.6 percentage-point rise in the unemployment rate. Instead, we experienced a 1.5 percentage point rise.... [E]vidence has been mounting that Okun's Law is broken—especially with regard to the retention of workers in a downturn. In 1993—two full years after the National Bureau of Economic Research said that the 1990–1991 recession had ended—the unemployment rate was still higher... than it had been at the recession's trough. We saw this same kind of "jobless recovery" after the recession of 2001. It wasn't until 55 months after that recession ended that a greater share of Americans were working than had been working before the contraction. Now in 2009... get ready for another jobless recovery....

Paul Krugman has a theory:

[Past] recessions . . . were very different. . . . Each of the slumps—1969–70, 1973–75, and the double-dip slump from 1979 to 1982—were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again. Since the mid 1980s, however . . . recessions haven't been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. . . . [T]hey've proved hard to end . . . precisely because housing—which is the main thing that responds to monetary policy—has to rise above normal levels rather than recover from an interest-imposed slump.

I'm guessing there is another set of factors at work. Manufacturing firms used to think that their most important asset was skilled workers. Hence they hung onto them, "hoarding labor" in recessions.... Skilled workers were the franchise. Now, by contrast, it looks as though firms think... their procedures and organizations that are key assets.... [F]irms believe that their remaining workers will forgive them if they fire large numbers of workers during a recession out of economic necessity....

At least it is likely to be a recovery. The prevailing forecast right now is for real GDP... growth between the second and third quarters... the NBER Business Cycle Dating Committee... is most likely to call the end of this recession for June 2009.... Yes, that would mean the recession is over right now. One reason for that is the much-maligned stimulus package, which probably boosted the real GDP annual growth rate by about one percentage point in the second quarter of 2009, and will boost it by another two percentage points between now and the summer of 2010....

Politically, the question "did the stimulus work?"... answered in the affirmative. Democratic members of Congress seeking reelection in 2010 will be able to point to real GDP growth and an official end to the recession in the second quarter of 2009. However, that is probably not the most relevant question to ask.... Barring much faster real GDP growth than is currently in the cards, we appear destined for another jobless recovery. So the answer to the question "did the stimulus work?" depends on the metric you use. If the metric is the unemployment rate, the answer is... it was too small.

## Paul Krugman Roasts the Village

PK:

The Pundit Delusion: The latest hot political topic is the “Obama paradox.”... The administration has had multiple big victories in Congress, most notably on health reform, yet President Obama’s approval rating is weak. What follows is speculation about what’s holding his numbers down.... But the only real puzzle here is the persistence of the pundit delusion, the belief that the stuff of daily political reporting — who won the news cycle, who had the snappiest comeback — actually matters. This delusion is, of course, most prevalent among pundits themselves, but it’s also widespread among political operatives. And I’d argue that susceptibility to the pundit delusion is part of the Obama administration’s problem.

What political scientists, as opposed to pundits, tell us is that it really is the economy, stupid.... Larry Bartels.... “Objective economic conditions — not clever television ads, debate performances, or the other ephemera of day-to-day campaigning — are the single most important influence upon an incumbent president’s prospects for re-election.”... Now, the fact that “ephemera” don’t matter seems reassuring, suggesting that voters aren’t swayed by cheap tricks. Unfortunately, however, the evidence suggests that issues don’t matter either, in part because voters are often deeply ill informed. Suppose, for example, that you believed claims that voters are more concerned about the budget deficit than they are about jobs. (That’s not actually true, but never mind.) Even so, how much credit would you expect Democrats to get for reducing the deficit? None. In 1996 voters were asked whether the deficit had gone up or down under Bill Clinton. It had, in fact, plunged — but a plurality of voters, and a majority of Republicans, said that it had risen.

There’s no point berating voters for their ignorance: people have bills to pay and children to raise... they react to what they see.... Given the realities of a bleak employment picture, Americans are unhappy — and they’re set to punish those in office.

What should Mr. Obama have done? Some political analysts, like Charlie Cook, say that he made a mistake by pursuing health reform, that he should have focused on the economy. As far as I can tell, however, these analysts aren’t talking about pursuing different policies — they’re saying that he should have talked more about the subject. But what matters is actual economic results. The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis. Obviously, he didn’t do that. Maybe he couldn’t have passed an adequate-sized plan, but the fact is that he didn’t even try.... [T]he administration itself was taken in by the pundit delusion, focusing on how its policies would play in the news rather than on their actual impact on the economy....

Can Mr. Obama do anything in the time that remains?... Obama’s best hope at this point is to close the “enthusiasm gap” by taking strong stands that motivate Democrats to come out and vote. But I don’t expect to see that happen. What I expect, instead, if and when the midterms go badly, is that the usual suspects will say that it was because Mr. Obama was too liberal — when his real mistake was doing too little to create jobs.

## Are America's Fiscal Policies Sensible? Yes, But They Are Not Strong Enough

Larry Summers:

Summers: America’s sensible stance on recovery: Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that has obscured rather than clarified the policy choices.... Critics have complained that the continued commitment by the administration of President Barack Obama to support recovery in the short term and also to reduce deficits in the medium and long term constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable....

[I]n normal times, the scale of government budget deficits affects the composition but not the level of output.... A range of other considerations – including the crowding out of investment; reliance on foreign creditors; misallocation of resources into inefficient public projects; and reduced confidence in long-run profitability of investments – all make a case in normal times for fiscal prudence and reduced budget deficits. And there are numerous examples, notably the US in the 1990s, where reducing budget deficits contributed to enhanced economic performance.

Second, where an economy’s level of output is constrained by demand and the central bank has at best a limited ability to relax that constraint because it cannot reduce interest rates to below zero, fiscal policy can have a significant impact on output and employment.... To the extent that expansionary fiscal policies affect growth, their impact on future indebtedness is attenuated as tax collections rise, transfer payments fall, and the ability of the economy to support debt increases.

Third... there is a very strong presumption that there are likely to be beneficial effects from the expectation that budget deficits will be reduced after an economy has recovered and is no longer demand-constrained....

In most of the industrialised world, given that economies are in or near liquidity trap conditions, it is the last two propositions that should control policy. Together they make a case for fiscal actions that maintain or increase demand in the short run while reassuring markets on sustainability over the medium term.... Obama is building on the Recovery Act... by fighting to extend unemployment and health benefits to those out of work, and to help struggling state and local governments prevent cutbacks in vital services and avoid job losses for teachers, police officers and firefighters.... Obama has also made it a priority to take tough steps to bring down the deficit to sustainable levels as recovery is achieved.... During the next five years, the US is expected to experience the fastest deficit reduction since the second world war. Much of that will stem from the return to growth and the phasing out of Recovery Act programmes. But Mr Obama has made other commitments that further reduce the deficit.... He has also put in place a framework that offers the potential to contain health costs, and convened a bipartisan commission....

The combination of measures that prevent sharp declines in demand in the short run, and measures that add to confidence by controlling the factors that drive deficits, offers the best prospect for moving the economy forward... pushing growth and reducing deficits are complementary, not competing, objectives...

Indeed. Which is why our complaints are that both sets of policies are too weak to be proper tea: not enough deficit spending now, not enough deficit reduction starting when the unemployment rate drops below 7%...

## How About Suspending All Social Security Taxes for the Next Sixteen Months?

And then make it up by reimposing FICA uncapped on December 1, 2011...

Roughly deficit-neutral over the next ten years. Helps the Social Security and the long-term fiscal gap balance in the long run. And pushes some more money out into the private sector economy now.

What is the downside?

## I Do Wish They Were Calling It "The Great Stimulus Debate"

The FT writes:

The great austerity debate: Over the next week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy. This page allows you to see the highlights from each contribution and join the discussion in the comment box at the end of this page. You can also click through to read each piece as a whole and comment on that specific contribution.

Martin Wolf, FT’s chief economic commentator

The interaction of high indebtedness with deflation could create a cumulative downward spiral. A Japanese-style “lost decade” threatens the developed world. That is particularly likely if everybody starts to tighten together. If anything, further loosening is needed: in the first quarter of 2010, the gross domestic product of every member of the group of seven leading high-income countries was still below its pre-crisis peak. Readers must make up their own minds on the merits of the arguments this week. My own strong sympathies are with the postponers. But of one thing everybody agrees: this debate matters. We cannot be sure who is right. But we can be sure that if policy-makers get it wrong, the results may well be dire.

Keep reading Martin Wolf, Why the battle is joined over tightening

Lawrence Summers, director of President Barack Obama’s National Economic Council

Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that, despite its apparent simplicity, has obscured rather than clarified the policy choices ahead in the US, Europe and elsewhere. Critics have complained that President Barack Obama’s continued commitment both to support recovery in the short term and to reduce deficits in the medium and long term constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable.

Keep reading Lawrence Summers, America’s sensible stance on the recovery

Next in the series: Niall Ferguson and Brad DeLong

## Eleanor Roosevelt Liveblogs World War II: July 18, 1940

Eleanor Roosevelt:

Address to the 1940 Democratic Convention: Delegates to the convention, visitors, friends: It is a great pleasure for me to be here and to have an opportunity to say a word to you.

First of all, I think I want to say a word to our National Chairman, James A. Farley. For many years I have worked under Jim Farley and with Jim Farley, and I think nobody could appreciate more what he has done for the party, what he has given in work and loyalty. And I want to give him here my thanks and devotion.

And now, I think that I should say to you that I cannot possibly bring you a message from the President because he will give you his own message. But, as I am here, I want you to know that no one could not be conscious of the confidence which you have expressed in him.

I know and you know that any man who is in an office of great responsibility today faces a heavier responsibility, perhaps, than any man has ever faced before in this country. Therefore, to be a candidate of either great political party is a very serious and solemn thing.

You cannot treat it as you would treat an ordinary nomination in an ordinary time. We people in the United States have got to realize today that we face a grave and serious situation.

Therefore, this year the candidate who is the President of the United States cannot make a campaign in the usual sense of the word. He must be on his job.

So each and every one of you who give him this responsibility, in giving it to him assume for yourselves a very grave responsibility because you will make the campaign. You will have to rise above considerations which are narrow and partisan.

You must know that this is the time when all good men and women give every bit of service and strength to their country that they have to give. This is the time when it is the United States that we fight for, the domestic policies that we have established as a party that we must believe in, that we must carry forward, and in the world we have a position of great responsibility.

We cannot tell from day to day what may come. This is no ordinary time. No time for weighing anything except what we can do best for the country as a whole, and that responsibility rests on each and every one of us as individuals.

No man who is a candidate or who is President can carry this situation alone. This is only carried by a united people who love their country and who will live for it to the fullest of their ability, with the highest ideals, with a determination that their party shall be absolutley devoted to the good of the nation as a whole and to doing what this country can to bring the world to a safer and happier condition.

## Francisco Franco Liveblogs World War II: July 17, 1940

Francisco Franco:

The government of Spain has informed the government of the United Kingdom that it confidently expects to recover administrative control of Gibraltar in the near future.

## Can We Please Shut the Washington Post Down Today?

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

There should be resignations from the Washington Post today in protest of their running their unfact-checked piece by Republican representative Paul Ryan. You'd think they'd be embarrassed to be complicit in yet more selling of deficit-exploding plans as deficit-reducing ones.

But, then, it is a freezing day in August when there shouldn't be resignations in protest from the Washington Post, isn't it.

Dean Baker cleans up the rotting filth and garbage:

Fun With Paul Ryan and the Washington Post: The Washington Post really really hates Social Security... hate[s] Medicare almost as much... give[s] its critics space to say almost anything against the program... no matter how much they have to twist reality.... Today, Republican Representative Paul Ryan stepped up to the plate. The Post felt the need to give him an oped column.... Let's count the inaccuracies....

)1 and 2) In the second sentence we get the line:

Only in Washington could the government raid one entitlement program [Medicare] to finance a brand-new one [Obama's health care program] and still claim that deficits have been reduced and entitlements have been reformed.

Let's see, "raid" refers to proposals to contain costs in Medicare. If I spend less on groceries this week, have I "raided" my food budget?... [If] projected cost savings can be achieved without jeopardizing the quality of care (Ryan does not argue this point), what is the problem?... That's the same arithmetic they use everywhere, even in Representative Ryan's home state of Wisconsin....

3) In the next sentence Ryan tells readers:

This year the shortfall appears to have decreased, but only after the Democrats' health bill cut $529 billion from Medicare. Okay, this may not be a misrepresentation, just a non sequitur. Yes, if you are to improve a program's finances you must either increase its revenue or cut its spending.... You caught them in the act, Mr. Ryan. 4) In the next sentence we have: This apparent improvement was the basis for Democratic celebration -- even though the program remains tens of trillions of dollars in the hole.... The new projections show a Medicare shortfall equal to 0.3 percent of GDP over its 75 year projection period. This is equal to$2.7 trillion. And, even in Washington, $2.7 trillion is not "tens of trillions."... 5) and 6) Ryan then tells us: The Obama administration's own chief actuary.... [T]he chief actuary is a non-political position. The current chief actuary, Richard S. Foster, was not appointed by Obama.... 7) Ryan begins the fourth paragraph: Put simply, Medicare is on course to collapse. No, the trustees report released last week implies that it has a relatively minor shortfall.... 8) In the middle of the paragraph we get: Exacerbating our unsustainable trajectory, health spending explodes under the Democrats' health plan -- raiding Medicare, expanding Medicaid and creating two entitlements without any clue of how to finance the ones we have now.... CBO and the trustees showed health spending growing less rapidly than they had been without the plan. And, note that we have our fourth "raid" of Medicare. 9) The paragraph concludes: the CBO warned last month of a devastating debt crisis within two decades. Actually, CBO bears part of the blame on this. It made a mistake in its projections which it subsequently corrected. 10) The fifth paragraph begins: We do not have a choice as to whether Medicare will change from its current structure. No, if the trustees projections are correct, then we do not have to change Medicare's structure beyond [implementing] the changes [that are now] in current law. 11) and 12) Later in the paragrpah Ryan tells us: the Democrats' political machine has attacked my contribution to this debate, making the false claim that the only solution put forward to save Medicare would "end Medicare as we know it. The main attacker of Ryan is Paul Krugman. Krugman is very far from being part of the "Democrats' political machine." In fact, he is almost certainly the prime embodiment of the "professional left" recently criticized by White House spokesperson Robert Gibbs. Of course Ryan's plan would end Medicare as we know it... replac[ing] a Medicare system that pays directly for health care with a voucher... explicitly designed not to keep pace with health care costs.... 13) and 14) In the next paragraph Ryan boasts that his Medicare cuts (raids?) would maintain the program's solvency: while reforming the program to ensure it will be there for younger generations. Future seniors would have access to the same coverage I enjoy as a congressman.... [C]urrent projections already show that the program will be there for younger generations, so they don't need Mr. Ryan's plan, if the projections are correct... absolutely nothing [in Ryan's plan] ensures that Mr. Ryan's Medicare voucher will provide seniors with the same coverage that he enjoys as a member of Congress. 15) The next paragraph reads: Far from the claims of "radicalism," this proposal is based on a key reform from the National Bipartisan Commission on the Future of Medicare, chaired by then-Sen. John Breaux (D-La.). That commission in 1999 recommended "modeling a system on the one Members of Congress use to obtain health care coverage for themselves and their families." Ryan's Medicare voucher might be a voucher system in the same way that a Yugo and a BMW are both cars, but there is absolutely nothing about Ryan's proposal that ensures Medicare beneficiaries the same quality of care as members of Congress. 16) Ryan then describes his Medicare voucher: The Medicare payment would grow every year, with additional support for those who have low incomes and higher health costs, and less government support for high-income beneficiaries.... [T]he [voucher] payment is explicitly designed to fall behind the rate of medical care cost inflation.... 17) and 18) The penultimate paragraph begins: "If we act now, we can avoid disruptions for current seniors while advancing patient-centered reforms so Medicare will be strengthened for future beneficiaries. The alternative is the European-style death spiral of the welfare state: kick the can down the road as our debt explodes." Again, the latest projections from the Medicare actuaries imply that there is no great urgency to "act now." The "European-style death spiral" might be useful political ad hominem, but it has no meaning. Some European countries, like Greece and Italy, do face severe budget problems, however some of the countries with the most expansive welfare states, like Denmark and Sweden, have much lower debt burdens than the United States. 19) Ryan continues: "Under an ever-expansive, all-consuming central government, costs will be contained with Washington's heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors' care." Actually no one has raised the issue of rationing in any context. President Obama's plan will limit the procedures for which the government will pay, as is currently the case with Medicare. However, there is nothing that President Obama has put forward that would do anything to prevent people from getting whatever care they are willing to pay for. Apparently the word "rationing" scores well in focus groups, which is why Ryan and other Republicans use it frequently in their attacks. 20) The second to the last sentence in the last paragraph tells readers: "Ironically, if Democrats succeed in demagoguing to death efforts to save Medicare, that political victory will hasten the program's end." Of course, the Medicare trustees projections are correct, the program is nowhere near death, so we don't need Mr. Ryan's voucher plan to save Medicare. Ryan concludes by telling readers that his proposal is "my sincere attempt to break the political paralysis on entitlement reform, to show that this challenge can be met -- mathematically and politically -- and to challenge those who disagree with my proposal to offer their own." In the forgiving spirit of Friday the 13th, I will not count the reference to sincerity as an inaccuracy. The 20 inaccuracies and 4 references to raiding Medicare can speak for themselves. Of course to the seniors who would be unable to afford decent health care if Mr. Ryan's plan became law, his sincerity won't make any difference. But, I am happy to offer my own test of Mr. Ryan's sincerity. How about giving Medicare beneficiaries the option to buy into the more efficient health care systems in Europe, Japan, and Canada. The beneficiaries and the taxpayers will split the savings. This leaves the current system intact for those who like it, while offering seniors who opt to go elsewhere for their health care the opportunity to pocket tens of thousands of dollars while saving taxpayers money as well. What's wrong with giving people a choice, Mr. Ryan? ## Adolf Hitler Liveblogs World War II: July 16, 1940 Adolf Hitler: As England, despite her hopeless situation, still shows no sign of willingness to come to terms, I have decided to prepare and if necessary to carry out a landing operation against her. The aim of this operation id to eliminate the English motherland as a base from which war against Germany can be continued, and, if this should become unavoidable, to occupy it to the full extent. FOR THIS PURPOSE I ORDER THE FOLLOWING: (1) The landing must take the form of a surprise crossing on a broad front, approximately from Ramsgate to the region west of the Isle of Wight, whereby elements of the Luftwaffe will play the role of artillery and elements of the navy the role of engineers… PREPARATIONS FOR THE TOTAL OPERATION MUST BE COMPLETED BY MID-AUGUST. (2) Included in these preparations is the bringing about of these preconditions which make a landing in England possible: (a) The English air force must have been beaten down to such an extent morally and in actual fact that it can no longer muster and power of attack worth mentioning against the German crossing.... THE OPERATION WILL CARRY THE CODE NAME ‘SEA LION’. ## What Went Wrong: David Obey's Take Paul Krugman: What Went Wrong: The Rahm Factor: A fascinating and depressing interview with David Obey: The problem for Obama, he wasn’t as lucky as Roosevelt, because when Obama took over we were still in the middle of a free fall. So his Treasury people came in and his other economic people came in and said “Hey, we need a package of$1.4 trillion.” We started sending suggestions down to OMB waiting for a call back. After two and a half weeks, we started getting feedback. We put together a package that by then the target had been trimmed to $1.2 trillion. And then [White House Chief of Staff] Rahm Emanuel said to me, “Geez, do you really think we can afford to come in with a package that big, isn’t it going to scare people?” I said, “Rahm, you will need that shock value so that people understand just how serious this problem is.” They wanted to hold it to less than$1 trillion. Then [Pennsylvania Senator Arlen] Specter and the two crown princesses from Maine [Sens. Olympia Snowe and Susan Collins] took it down to less than $800 billion. Spread over two and a half years, that’s a hell of a lot of money, but spread over two and a half years in an economy this large, it doesn’t have a lot of fiscal power. But remember, the Cossacks work for the czar. ## Can't Anybody Play This Game? Shahiwn Nasiripour: Tim Geithner Opposes Nominating Elizabeth Warren To Lead New Consumer Agency: Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views. The financial reform bill passed by the Senate on Thursday mandates the creation of a new federal entity charged with protecting consumers from predatory lenders. But if Geithner has his way, the most prominent advocate for creating the agency may not be picked to lead it... David Dayen: Assistant Treasury Secretary Michael Barr: Elizabeth Warren “Extremely Well-Qualified” for CFPB: I’m on a conference call with Michael Barr, the assistant Treasury Secretary for Financial Institutions, about the Wall Street reform bill. Barr has been basically the lead at Treasury on the bill. So I asked him about this disturbing report about Timothy Geithner trying to block Elizabeth Warren from heading the Consumer Financial Protection Bureau, which was her brainchild. Barr totally denied this to me. “I don’t know where that (report) came from,” he said. I asked him if he thought Warren was well-qualified for the position and if anyone at Treasury would stand in her way if she were the top choice. “I think Elizabeth is absolutely terrific,” Barr said. “She’s been working closely with me and Secretary Geithner for a year and half to push for this consumer protection bureau. I believe and Secretary Geithner believes that she’s exceptionally well-qualified to run it.” That’s on the record now. Tim Geithner and his lead deputy at the Treasury Department think Elizabeth Warren is well-qualified to head the CFPB. It’s important that this information gets distributed far and wide... and: Geithner Agrees: Warren “Exceptionally Well-Qualified” to Lead Consumer Protection Bureau: I just secured a statement from Andrew Williams, Treasury’s Deputy Assistant Secretary for Public Affairs, about Timothy Geithner’s views on Elizabeth Warren. This has been a raging controversy since it was reported last night that Geithner would potentially move to block Warren’s appointment to head the Consumer Financial Protection Bureau due to friction between the two in the past. Here’s the statement in full: Elizabeth Warren has been a driving force behind the creation of the consumer financial protection bureau, and we have worked very closely with her over the past year and a half to make that idea a reality. Given her strong leadership on consumer protection, Secretary Geithner believes that Elizabeth Warren is exceptionally well qualified to lead the new bureau, and, ultimately, that’s a decision the President will have to make. ## DeLong Smackdown Watch: As I Sit Peacefully Poolside Among the Palm Trees of Ell-Ay... Ken Houghton wants me to make contact with his alternate reality--the one with the Black president and the flying killer robots: Waiting patiently for you to read Simon Johnson on Tim "I'm a politician, not a competent economist" Geithner... ## Greenspan Calls for Letting All Bush Tax Cuts Permanently Expire... Very nice to see. Now what other Republican economists will join him? ## links for 2010-07-15 • Mike writes about Ricardo Caballero. Ricardo's theory is that the world economy suffers not from a structural global savings glut but from a structural global safe asset shortage. • TD: "or those counting, the gap between prerecession trend and actual sales now exceeds a trillion dollars - correct, a trillion dollars of foregone spending relative to the previous trend. That gap is growing by over$50 billion each month. One can argue that the previous trend wasn't sustainable, but where would sales be if unemployment rates were closer to 5% rather than 10%? Just more evidence that the US economy is settling into a suboptimal equilibrium."
• MY: "I’m a pretty typical 401(k)-holder at this point—a college educated professional who has neither the time, inclination, or competence to do due diligence on the firms I “own” through my investment vehicle. The good news is that I know a person in that situation should invest in index funds rather than try to pick stocks... the flipside of small investors not being able to manage our own investments in a sound way is that having small investors participate in the market can only serve to undermine financial markets’ role in providing corporate governance and allocating capital. Now defined-benefit pensions have declined in the private sector for some pretty good reasons. It’s both personally liberating and economically efficient for there not to be an expectation that you’ll work at the same place for decades. But the substitutes we’ve dreamed up—tax subsidies for middle class stock ownership—are regressive and don’t really make sense."
• VG: "Plants, scientists say, transmit information about light intensity and quality from leaf to leaf in a very similar way to our own nervous systems. These "electro-chemical signals" are carried by cells that act as "nerves" of the plants."

## DeLong Smackdown Watch: Andrew Harless

He believes that my current Regulationism masks a truly unrepentant Greenspanism at the core:

I sense a certain cognitive dissonance here. On the one hand, you acknowledge having recanted your Greenspanism. On the other hand, you ridicule the punchbowlists. Which are you?

For my part, I am an unrepentant Greenspanist. Ideally, I'm a modified Greenspanist with a higher inflation target and preferably with that target embodied in a price-level rule or (even better, I'm beginning to think) a nominal-GDP-level rule that would produce more confidence in the central bank's response to a financial crisis. But I'll take traditional Greenspanism as a second best. There will be financial crises from time to time. But the underlying cause of the current depression was not the financial crisis but the pre-existing global savings glut. To toss aside Greenspanism is essentially to surrender to the global savings glut, to say that we will accept a more-or-less permanent mild depression (or even a serious depression) in order to avoid the risk of occasional severe recessions. I recommend against making deals with the devil unless you have a very good lawyer.

And here's something I don't understand. The Greenspanist consensus was that we should have 2% inflation and not worry about the collateral effects of easy money. Clearly there were problems with that view as a whole. But how is it that central bankers have taken the lesson to be that we should have 2% inflation and do worry about the collateral effects of easy money? The collateral effects of easy money would be much less of a problem if the inflation rate were higher, since that would give central banks the option of easing further in response to a financial crisis, after already having been easy to begin with. In principle one could adjust both premises of the old consensus, and each adjustment would reduce the need for the other. But there isn't the slightest suggestion that central bankers are considering discarding the low inflation part of the old consensus. Why are they convinced that the solution to this optimization problem is a corner solution and not an interior one?

## Eleanor Roosevelt Liveblogs World War II: July 15, 1940

Eleanor Roosevelt:

My Day by Eleanor Roosevelt, July 15, 1940: Yesterday I had a ride and swim in the morning, and Mrs. Florence Kerr, head of the Women's and Professional Projects in WPA, brought her regional area supervisors for a picnic lunch. We sat in the sun on the lawn and I heard reports of the work being carried on in different parts of the country. We discussed at some length the relationship of much of the training which is going on under WPA to the emergency situation created by the need for national defense.

I have recently been looking over a pamphlet called "If War Comes. M.–Day Plan. What Your Government Plans For You," by Donald Edward Keyhoe. It is very interesting, though the War Department says nothing of the kind has been worked out in such detail and, so far as they are concerned, the whole thing is still in the realm of discussion.

My main objection to this plan is that, while the publication of such a plan may be of value in arousing the United States to the realization of the possibility of someday having to defend its own shores, the plan does not make clear that it is too late to undertake such mobilization when there is an attack.

Mobilization, if it is going to have any deterrent effect, must be perfected long before there is a war in which we can take any part. Our only hope of keeping the peace which we so prize, is to prove before there is any involvement in war, that we are a unified nation for defense, mobilized that each and every one of us know what job to do, how and where to do it. Therein lies the one hope for peace.

## No, the Reagan Tax Cuts Did Not Pay for Themselves...

Paul Krugman:

Carter, Reagan, Revenue: One common reaction of conservatives, when you point out that the experience of the last 20 years offers zero support for the idea that tax cuts pay for themselves, is to start shouting “Jimmy Carter! Reagan! Supply side roolz!” So I thought it might be worth presenting a bit of evidence from an earlier 20-year stretch. Here’s real federal revenue, in 2005 dollars, from 1970 to 1990. I’ve plotted the log.... [T]he Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high.

Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.

This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.

## Yes Our Press Corps Is a Joke. Why Do You Ask?

Somebody with a much stronger stomach than I have forwards a piece from the execrable Mike Allen, with the comment:

I'm not even an Obama fan but this sentence makes me want to stab myself in the EYES.

From: Mike Allen mallen@politico.com
Date: July 15, 2010 7:23:15 AM EDT
To: Undisclosed recipients;
Subject: POLITICO Playbook

Obama is perceived as failing to win over the public, even though by most conventional measures he is clearly succeeding.

Courtesy VandeHarris natural-@&#&$(*-ly. Why oh why can't we have a better press corps? ## links for 2010-07-14 • SJ: "There was really no explanation for why the economy has become such a difficult place for so many people.... Blaming things on the Republicans in some vague sense (e.g., tax cuts) also doesn’t make sense to people. If you want to get partisan, you have to connect the dots.... Does the problem here lie with the economic briefing that Axelrod received before going on air? If so, changing those responsible would be an obvious first step. But the issue may be deeper – or higher up.... It is entirely possible, based on what we are seeing and hearing now, that even Axelrod and other members of the political wing of the White House don’t really understand what happened (the big banks blew themselves up) – and why they are now so powerless to do anything about it (after being rescued, the banks fought hard to block effective change). The credit system remains fundamentally damaged and unfixed; this undermines expectations for the future in many ways and slows the recovery of jobs." • John Boehner, March 2009: "It’s time for government to tighten their belts and show the American people that we ‘get’ it". Barack Obama, yesterday: “At a time when so many families are tightening their belts, he’s going to make sure that the government continues to tighten its own,” Obama said. " We’ll never know how differently the politics would have played if Obama, instead of systematically echoing and giving credibility to all the arguments of the people who want to destroy him, had actually stood up for a different economic philosophy. But we do know how his actual strategy has worked, and it hasn’t been a success. ## Dylan Matthew on the Congressional Deficit Turkey Vultures Dylan: What's the fiscal impact of estate tax cuts vs. unemployment insurance?: The unemployment extension proposal that Harry Reid is trying to pass has a one-time cost of$33 billion. That's for one year, and then the additional cost vs. the baseline is zero thereafter. So let's compare that temporary bump up in the deficit with four proposals (PDF) for reforming the estate tax. The first is outright repeal. The second, proposed by John McCain in the presidential election, would reduce the tax rate to 15 percent and exempt the first $5 million of an estate. The third, Jon Kyl's initial proposal, also has a$5 million exemption, with a 20 percent rate on estates up to $25 million and a second 30 percent bracket for larger estates. The fourth, Barack Obama's proposal during the presidential election, has a lower exemption of$3.5 million and a 45 percent tax rate. Here's how the total revenue effect on the deficit of those proposals compares with that of extending unemployment benefits from 2009 to 2018....

Not only do estate tax cut proposals add much, much more to the deficit in the medium-term than unemployment benefits do, they continue to grow more expensive over time, at least for as long as we have estimates. Supporting estate tax cuts but not unemployment benefits indicates something about a politician, but it's hardly proof of a deep, serious interest in cutting the deficit.

## DeLong Smackdown Watch: Mark Thoma

Mark Thoma writes to inquire why I am endorsing a helicopter drop--a money printing-financed mass mailing of tax rebate checks--when a money printing-financed increase in government purchases dominates it from an economic point of view. Aren't I surrendering to the dysfunctionality of our political system rather than fighting it?

Mark Thoma snarks:

I am very simplistic.

When you trade money for bonds, it simply changes the composition of what people have in savings. Before it was bonds, now its cash. No effect on real activity. You need actual demand, or the prospect of it, to create expected inflation.

When you drop money from helicopters, the people who need it most scramble for it, and then rush to spend it before everyone else spends their money and drives up prices (expected inflation) or causes stock-outs. It has real effects. And I don’t think the people willing to fight for \$100 bucks when the helicopter comes each day give a damn about future taxes.

But instead of simply dropping it, why not buy something on the first step? Print money, buy labor (the labor then spends the “found”, i.e. earned, money). Print money, buy goods and services. Because this is too slow. Deciding what labor should do, hiring, etc. takes way too much time and political effort, as does figuring out what to buy.

So save this time by just letting the money rain down on people and letting them figure out what to do with it. I’d guess that money falling in a city would begin to see effects on aggregate demand, oh, a matter of minutes, if that long.

But I know this is too simple.

## After the British Financial Crisis and Depression of 1825-6, Jean-Baptiste Say Was too Smart to Believe in Say's Law

La crise commercial qui en lieu en Angleterre est propre à faire sentire les inconvénients qui peuvent naitre de cette faculté illimitée de multiplier l'agent de la circulation. Les banques ont abusé de cette facilité et se sont servies de leurs billets pour escompter une trop grande quantité d'effets de commerce. Les chefs de beaucoup d'entreprises ont pu, an moyen du ces escomptes, donner à leurs entreprises une extension disproportionée avec leurs capitaux. La multiplication de l'agent de la circulation a fait tomber la valeur de l'unité monétaire au-dessous de la valeur d l'or qui doit légalement s'y trouver. Une livre sterling en or valent dès ce moment un peu plus qu'une livre sterling en billets, les porteurs de billets e sont précipités à la banque pour se faire rembourser. M. Senior, professeur d'economie politique à l'université d'Oxford, assure que lexportation de l'or, dans la seule année 1924, s'est élevée à 4,400,000 livres sterling. La banque, obligée per les lois à rembourser ses billets un numérarie métallique, s'est vue contrainte de racheter de l'or, à tout prix, et de la faire frapper en monnaie avec des pertes et des frais considérable; pour éviter ces pertes, elle a fait rentrer ses billets, et a cessé d'en mettre de nouveaux en circulation. Il a donc fallu qu'elle cessat d'escompter des effects de commerce. Les banques provinciales ont été contraintes par suite d'en faire autant, et le commerce s'est trouvé privé tout à coup des avances sur lesquelles il avait compté, soit pour former des entreprises nouvelles, soit pour donner plus d'extension aux anciennes. A mesure que l'échéauce arrivait des engagements que les négociants avaient escomptés, ils ont dù les acquitter; et ne trouvant plus d'avances chez les banquiers, chacun a éé forcé d'user de toutes les ressources dont il pouvait disposer; on a vendue des marchndises pour la moitié de ce qu'elles avaient couté; on n'a trouvé à vendre le fonds des entreprises pour aucun prix; toute espèce de marchandises ayant baissé au-dessous de leurs frais de production; une mulititude d'ouvriers sont restés sanas ouvrage; beaucoup de faillites ac sont déclarées parmi les négociants et parmi les banquiers, qui, ayant mis dans la circulation des billets au porteur poour une somme plus forte qui celle dont pouvait répondre leur fortune personelle, n'avaient plus pour gage de leurs émissions qu des engagements de particuliers dont plasieurs étaient faillis...

Thus Say gives what is the first thorough explanation I have ever seen of irrational exuberance, overtrading, excessive leverage, disappointment, panic, flight to quality, excess demand for high-quality and liquid assets producing excess supply of goods and services and labor, falls in incomes, and the fall in incomes causing the initial problem to snowball...

It was, I must say, completely unfair of John Maynard Keynes to use John-Baptiste Say the way he did...

## Liveblogging World War II: July 14, 1940

BBC reporter Charles Gardner comments live on a dogfight over the Channel:

Air Battle off Dover