## Macroeconomics Is About Technocratic Management: It Is Not a Theatre for a Morality Play

Karl Smith:

You Can’t Overwork Yourself By Smoking Joints and Watching Too Many Episodes of Jersey Shore: [P]eople are confusing cyclical prosperity with personal luxury. In your personal life you might feel like you are doing well because you have a new house or a new car, etc. However... we measure the cyclical wealth of nations... by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff.... [I]t makes no sense to say that a recession is inevitable because we overconsumed. Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought?...

The overconsumption theory... says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. Its balance. Steve Waldman says I shouldn’t tell people that economics is not a morality play. How about this then.... On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.

If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation, then there would be no recession. There is a recession because fewer factories are being built. There is a recession because less work is being done.

Let me be very clear about this. I am not saying that it might seem as if the world works according to common sense but when you study hard and look at lots of equations then you will see that in some abstract way it is wrong.

No, not at all.

I am saying the overconsumption view is completely at odds with what is in front of our faces. It doesn’t even make basic logical sense. The morality play is one without any morals...

## The Deepest Mystery of Creation Is...

Let me just say that Eliezer Yudkowsky is a bad man for writing almost-comprehensible weblog posts about them...

Jeebus! Write one post--just one--with the word "therapy" in it, and what does Google start serving up?

## A Platonic Dialogue on the Failure of Economics Education

Thrasymakhos: You have to realize, Monetaristoteles, that only 4% of the American people and 10% of Washington elites believe what you and I do: that our current macroeconomic disorder of high unemployment is a serious but curable disease of the industrial market economy--a disease curable by strategic interventions to rebalance financial markets through appropriate monetary, fiscal, and banking policies. 96% of the American people and 90% of elites believe, by contrast, that our current macroeconomic disorder and high unemployment is--in some sense they cannot fully explain--just punishment for our sins against financial prudence, that we must take our just punishment like manly men, and that we must not attempt to evade punishment through financial trickery. Think of David Brooks: that argument, on that level, with that degree of background knowledge, and that degree of certainty.

Monetaristoteles: Do I have to?

Thrasymakhos: Yes.

Monetaristoteles: Very well. I do find this astonishing. Professional economists would go the other way. 90% or more of professional economists think times of high unemployment are cases of a disease that can be cured by strategic interventions to rebalance financial markets. They disagree about how and what those rebalancing policies should be. But they agree that there is a cure, and that it is to undertake the right strategic intervention in financial markets.

Thrasymakhos: I think you are wrong about professional economists...

Monetaristoteles: May I finish?

Thrasymakhos: It is what they would think if they understood their discipline, its foundations, and hits history, but...

Monetaristoteles: MAY I FINISH? Thank you. As I was saying, only a small but vocal minority of economists--starting with Karl Marx and continuing with his left-wing disciples like Rudolf Hilferding and his right-wing disciples like Joseph Schumpeter claim that the episodes of high unemployment are a disease that has no cure--that downturns and depressions are functional and necessary for any industrial market economy. And they have never been able to make their arguments in a form that makes any sense to the rest of us.

Monetaristoteles: Simply this: the Marxists and the Austrians, the theorists of the Pointless Pain Caucus in their various flavors, have not had control over the Econ 1 curriculum. We have had control over the Econ 1 curriculum. If there are two lessons we want people to remember from the "Intro Macro" part of Econ 1, they are (a) that government can stabilize the price level and prevent inflation by stabilizing the money stock over the long-term, and (b) that downturns--episodes of high unemployment--are usually cases of a disease that can be cured by the right strategic interventions in financial markets. Keynesians and monetarists, classicals and neoclassicals, credit-channelers and post-Keynesians--this is what we all believe: that while Say's Law can be broken, the only thing that can break it is some imbalance in financial markets that produces excess demand for some category of financial assets, and that a competent and nimble technocratic government can conduct strategic interventions that make Say's Law--even though false in theory--roughly true in practice. That is what we all think...

Thrasymakhos: But you fight over what the right strategic interventions in financial markets are...

Monetaristoteles: Only the Marxists and their mutant Austrian descendants believe that times of high unemployment must be suffered through if the industrial market economy is to function, and they have never had control over the Econ 1 curriculum...

Thrasymakhos: Yes but...

Monetaristoteles: So why has what we have to say gone in one ear and out the other?

Thrasymakhos: Because your discipline has had an amazing educational failure on a remarkably fundamental level?

Sokrates: Aren't you a member of the Institute for New Economic Thinking's Education Committee?

## Paul Krugman on Today's Obama Photo-Op

PK:

Yep, that’s exactly what we needed: a transparently cynical policy gesture, trivial in scale but misguided in direction, and in effect conceding that your bitter political opponents have the right idea.

## Econ 1: Fall 2010: Econ 1 Lecture

Former Chair of the President's Council of Economic Advisors and National Economic Council Principal Chistina D. Romer: "Fiscal Policy in the Obama White House:  Reasoning, Results, and Challenges Going Forward”

Yes, there will be a question about her talk on the final exam...

## The Left Opposition Has a Budget-Balancing Plan

And it is a very good one--a much better one than the amateurish, unthought-through and far-right Simpson-Bowles or the professional but inequality-increasing and right-wing Domenici-Rivlin.

Matthew Yglesias has beat me to the punch and already written about the thing:

Yglesias » The Left and the Budget: Liberals didn’t like the Simpson-Bowles deficit plan largely because neither Simpson nor Bowles is a liberal.... Today the Our Fiscal Security coalition, comprised of Demos, the Economic Policy Institute, and the Century Foundation have released their fiscal blueprint which shows you would that liberal take would look like... the heavy (and appropriate) emphasis in the short term on mobilizing excess capacity to increase growth and decrease unemployment rather than austerity budgeting that will only increase resource-idling... No Cost Shifting, namely:

Policies that simply shift costs from the federal government to individuals and families may improve the government’s balance sheet but may worsen the condition of many Americans, leaving the overall economy no better off...

[M]edium term balance can be achieved basically entirely on the tax and defense sides. For the longer-term, like all long-term budget plans they need to rely... [on hand-waving to control] health care costs. .. OFS offers the least hand-waving on this point of any plan....

This chart from OFS is an excellent illustration of what the Social Security debate is about:

Note that the bottom 40 percent don’t live as long as richer people, so the impact of raising the retirement age is especially regressive.

## A Temporary Federal Pay Freeze Might Be Part of an Acceptable Long-Term Deficit Reduction Deal with Republicans

But it makes no sense at all as a preemptive pre-negotiation concession.

Larry Mishel:

Federal pay cuts: A bad idea for what gain?: In the context of the deficit, Obama will get chump change from freezing federal pay, and will only enlarge the degree to which federal pay lags that of the private sector (a gap of 22%, according to the federal pay agent’s report. See Table 4.) This is another example of the administration’s tendency to bargain with itself rather than Republicans, and in the process reinforces conservative myths, in this case the myth that federal workers are overpaid. Such a policy also ignores the fact that deficit reduction and loss of pay at a time when the unemployment rate remains above 9% will only weaken a too-weak recovery.

Why oh why can't we have better Democratic presidents?

## Our Health Care Cost Problem Is Overwhelmingly a Private Cost Problem

Ezra Klein sends us to N.C. Aizenman:

Want an appointment with kidney specialist Adam Weinstein of Easton, Md.? If you're a senior covered by Medicare, the wait is eight weeks. How about a checkup from geriatric specialist Michael Trahos? Expect to see him every six months: The Alexandria-based doctor has been limiting most of his Medicare patients to twice yearly rather than the quarterly checkups he considers ideal for the elderly. Still, at least he'll see you. Top-ranked primary care doctor Linda Yau is one of three physicians with the District's Foxhall Internists group who recently announced they will no longer be accepting Medicare patients.... Doctors across the country describe similar decisions, complaining that they've been forced to shift away from Medicare toward higher-paying, privately insured or self-paying patients in response to years of penny-pinching by Congress...

As Ezra points out, this fits very ill with the Republican talking point that the government cannot control Medicare costs:

Ezra Klein - What happens when Medicare controls costs too well: One of the dirty little secrets of the health-care system is that Medicare has done a much better job controlling costs (pdf) than private health insurers.

The problem is that Medicare can't control costs too much better than private insurers or, as you see from the article above, doctors will simply abandon Medicare.... [T]he dominant opinion is that Medicare can't control its spending. A lot of this... has to do with the failure of the Medicare Sustainable Growth Rate... a small formula that Republicans inserted into the 1997 Balanced Budget Act that was meant to save a bit of money.... The formula was wrong, and it quickly required massive cuts that would destroy the program, and that the SGR's authors never intended. So congresses controlled by both parties have repeatedly kept them from going into effect. Meanwhile, the SGR formula actually has cut costs in Medicare dramatically.... As James Van Der Water and Jim Horney document, the byproduct of the compromises required to keep the formula's cuts from taking effect is that "the reimbursement rate for physicians next year will still be 17 percent below the rate paid in 2001, adjusted for subsequent increases in the costs that physicians incur in providing services as measured by the [Medicare Economic Index]." This is why physicians are so upset. Meanwhile, the vast majority of Medicare cuts passed in the last 20 years have been implemented as scheduled...

## Milton Friedman Supports Ben Bernanke on Quantitative Easing

David Beckworth relays a catch by Doug Irwin:

http://macromarketmusings.blogspot.com/2010/11/case-closed-milton-friedman-would-have.html Case Closed: Milton Friedman Would Have Supported QE2: The debate over what Milton Friedman would say about QE2 can now be closed.  Below is a Q&A with Milton Friedman following a speech he delivered in 2000.  In this excerpted exchange with David Laidler, we learn that Friedman's prescription for Japan at that time is almost identical to what the Fed is doing now with QE2:

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero,  monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

So Milton Friedman said in 2000 that the Bank of Japan should do what the Federal Reserve would be doing 10 years later!  In fact, if names, dates, and places were changed in the above excerpt one could get a 2010 Ben Bernanke Q&A. Friedman's belief that a zero policy interest rate could be contratctionary and thus required the central bank to buy long-term securities shows that he understood unconventional monetary policy long before it was vogue.  He truly was a great economist.

Note, though, that his emphasis is still on expanding the monetary base as much as needed to start and maintain an economic expansion.  This implies he saw an excess money demand problem in Japan, just as there is one today in the United States.  He understood, though, the need to expand the monetary base through purchases of long-term securities rather than short-term ones.  This is because short-term securities are close to a perfect substitute for the monetary base at a zero percent policy rate. Swapping perfect substitutes does not change anything in one's portfolio of assets and therefore has no effect on spending.  Thus, Friedman saw the need for purchasing long-term securities, which are not perfect substitutes with the monetary base.

Although Milton Friedman probably would have preferred a rule-based approach to QE2, this excerpt is the smoking gun that ends all debate on whether he would have supported QE2. The case is closed.

Thanks to Doug Irwin for locating this gem.

## Liveblogging World War II: November 29, 1940

Eleanor Roosevelt:

My Day by Eleanor Roosevelt, November 29, 1940: I wonder if you feel as I do when I turn on the radio every morning to listen to the news from Berlin and London. It seems to me that those boys sent out from Germany to destroy innocent people in England, and the other boys of the RAF rising from the ground in their planes, trying to drive back the invaders, must occasionally want to rebel at the destruction which it is their patriotic duty to create. Of course, for both of them, military objectives are marked on their maps. But they know that it isn't possible to be absolutely accurate and there must be moments when facing the actual results of their work must be difficult.

At least, the boys in the RAF can feel that they are fighting against great odds. Just as the Spanish aviators in the Loyalist cause performed extraordinary feats, these English boys, because of the odds against them, prove their extraordinary gallantry over and over again. We, who watch them and know what their victory means to civilization, must pay them the tribute of gratitude and admiration.

Whenever one dies, something good is lost to the future. We women, who are conservers of the race, must weep that so much gallantry and high-hearted purpose could not be of greater benefit to man.

## Mark Thoma Watches Barack Obama and His Political Advisors Go Off Message Yet Again...

Can we please get the White House back on message?

Mark Thoma:

Economist's View: The Administration's "Communication Problem": I find it incredible and disturbing that on the eve of the recent election in which Democrats got trounced, the administration was still trying to figure out if the unemployment problem is structural or cyclical. Even if you attribute a large fraction of the unemployment to structural factors, there is still plenty of cyclical unemployment left over to target with policy. For example, the SF Fed estimates that only about 1.25% of the rise in the unemployment rate is due to structural factors.... Even if you attribute half of the rise in unemployment to structural factors, that still leaves between 2% and 3% of the rise in unemployment to cyclical problems. Since neither monetary or fiscal policy is likely to be large or aggressive enough to fully solve the cyclical problem... there was no real need to debate this issue, particularly on the eve of the election.... The administration needed to be out there pushing for employment policies, doing everything it could to signal to people that it was on their side, not the side of corporations and big banks. That requires that you figure out that you have a cyclical unemployment problem before the election is all but over, and that you begin pushing for solutions in public forums. That push needs to start at the very top with Obama, and it needs to be reinforced every single day by other administration officials. One mention by Obama in a Saturday address to the nation doesn't get the job done...

And Mark Sends us to Richard Wolffe:

Obama could learn from Bush: The day before his party's shellacking in this month's elections, President Obama sat down with his economic team to examine the single most important issue for voters across the country: jobs. But... the president had called the meeting to grapple with what he and his propeller-head economists have been debating for some time: the wonkish question of whether today's high unemployment rate is structural or cyclical.... Two years into this presidency, and many months into a sluggish recovery, may be a little late to try to agree on the root cause of today's high unemployment. This lack of agreement on economic fundamentals is a primary factor behind one of this White House's most obvious failures: communications. As one senior Obama advisor told me the day after the disastrous midterms:

It was hard to find a single economic message when the economic team couldn't agree on a single economic policy...

However, a new economic team will not resolve the communications problems.... Obama told me six months ago that poor communications had hampered his ability to execute his policies.... But the White House has failed to realize that the communications problem is a symptom of Obama's problems, not a cause.... Reports of Obama's political death have been greatly exaggerated. To prove the pundits wrong, he needs to take control of writing his own story once more...

Let me point out that I think that the senior Obama advisor quoted is a liar.

Given who they were and what I know of how they all think, all the members of Obama's original economic policy team--except, I suspect, Peter Orszag--did indeed have different views of what would be the best policy to try to generate jobs in the short run, but they all agreed that anything was better than nothing. (Peter thought, I think, that only policies that promised credible long-term deficit reduction were better than nothing.)

## "Could Be a Lot Worse!" Macroeconomic Situation Blogging

A correspondent with senior experience in government emails with respect to Battered but Not and Beaten:

You should be a lot less depressed, and a lot prouder of the economics profession's role over the past three years. Remember Barry Eichengreen's and Kevin O'Rourke's observation: because of the extraordinary leverage of the shadow banking system and the complete lack of control of senior management over their firms' derivative books, we had an initial shock that was larger than that which produced the Great Depression.

But we do not have 23% unemployment.

We do not even have the 16% unemployment of the Zandi-Blinder baseline.

Instead, we have only 10% unemployment.

That is a great victory. It is not the victory that we would have wanted to have. But it is a great victory.

## Larry Meyer on the Politicization of U.S. Monetary Policy

"Politicization" is the wrong word here. I would call it simply another example of how the Republican Party is not serious about government and policy, and how we would all be better off if it simply withered up and blew away:

Macroadvisers: Meyer's Musings: The Politicization of U.S. Monetary Policy: The FOMC’s move to resume large-scale asset purchases (LSAPs) was a controversial one.... The hawks on the Committee opposed this move and have been, as usual, very vocal after the meeting, loudly proclaiming their opposition. Outside the Committee, foreign government officials (principally finance ministers) have opposed the move.... Now, there is also a domestic backlash outside the FOMC. We remain steadfast in our view that the Fed will stay the course on its LSAPs plans....

What is disturbing about recent developments is the politicization of monetary policy. Notable Republican politicians have teamed up with a handful of mostly Republican economists to criticize the Fed’s actions in a politically-charged manner.... [T]he President’s defense of the Fed’s actions... triggered an automatic and reflexive reaction among some Republicans: If the President supports Fed policy, they must oppose it. It was as if Sarah Palin’s call for the Fed to “cease and desist” was all that was needed to make other Republican politicians quickly fall in line.

Those who know me know that I hate to be embroiled in a senseless partisan debate.... [W]e have worked for Republican and Democratic Administrations alike.... We were particularly troubled by the open letter to the Chairman.... The fact that (almost) only Republicans signed this “open letter” confirms that the Fed has become a political, partisan issue. That’s not healthy... as long as the Fed’s independence is respected and reaffirmed. By the tone of their criticism and the company they kept—mostly Republicans and other right-wing ideologues—the economists who signed the letter undermined their credibility to conduct the dispassionate analysis we are all trained to do.

We did take some comfort, however, in the fact that many of the most respected Republican-leaning economists did not sign this letter....

For our part, we will continue to study monetary policy issues in a dispassionate way, hopefully contributing to the serious work that needs to be done: Will LSAPs work What’s their effect on longer-dated yields? Is the monetary transmission mechanism still working? What is the best model of inflation dynamics?... What are alternative instruments available to the FOMC that might be more effective than LSAPs, and what is the role of fiscal policy? The answers to the above questions do not call for either a Democrat or a Republican response. What we need is serious empirical and modeling work that stands up to responsible peer review and scrutiny.

## Foreign Policy: The Four Horsemen of the Teapocalypse

The Four Horsemen of the Teapocalypse - By Brad DeLong | Foreign Policy: John Maynard Keynes once famously observed, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." During the crisis years of 2007, 2008, and 2009, it was the great British economist himself, along with three other dead men, who dictated the world's response from beyond the grave: Hyman Minsky, Walter Bagehot, and Milton Friedman.

Minsky, an economist at Washington University in St. Louis, for warning that times of financial calm and economic growth led banks to step further and further out onto the ice of leverage -- until finally they would step too far and fall through. Bagehot, the 19th-century Economist editor, for advising that when the bankers fell into the ice-cold lake it was essential that the government spare no expense to make sure that the network of banking survived, but needed to do so in a way that took the bankers' fortunes away. Friedman, the consummate monetarist, for seconding Bagehot's call for bank rescues in depressions -- and calling for central banks to keep the money flowing. And Keynes, for his gloomy fears that central banks would not prove powerful enough to do the job -- coupled with his overoptimistic hope that clever technocrats could then boost government spending to take up the slack.

But we are now into the "recovery," and 2010 has been a very different year. Its horsemen are of a different breed entirely. Where Keynes and his ilk were optimistic believers in the power of technocratic governments to do good, this year's horsemen are practitioners of more dismal sciences: believers that the market metes out judgments that we must suffer -- and that it is our own flawed nature that makes us believe so. In short, it has been a year for Austrian economists Friedrich von Hayek and Joseph Schumpeter, for plutocrat and Great Depression-era Treasury Secretary Andrew Mellon -- and, above all, for Friedrich Nietzsche.

There was silence in the seminar room. Richard Kahn broke it. "Do you mean to say," he asked, "that if I were to go out tomorrow and buy a new overcoat, that it would increase unemployment?"

"Yes," said the man in the front of the room, Friedrich von Hayek, "but it would take a long and complicated mathematical argument to explain why."

That is how historian Robert Skidelsky describes Hayek's visit to the proto-Keynesian economists of Cambridge University. It was the 1930s, and Hayek had met them in London to convince them that depressions were not to be avoided or cured, but rather endured. In his thinking, they were righteous karmic payback for past sins against the gods of monetary orthodoxy. Any attempts to cut them short or make them shallower would produce only temporary palliation, at the cost of a fiercer, deeper, and nastier further depression in the future.

Hayek's fellow countryman, Joseph Schumpeter, went further: "Gentlemen!" he announced to his students at Harvard University (there were no ladies). "A depression is healthy! Like a good ice-cold douche!" If depressions did not exist, Schumpeter thought, we would have to invent them. They were "the respiration of the economic mechanism."

Agreeing with Schumpeter was Herbert Hoover's Treasury secretary, Andrew Mellon. In his memoirs Hoover was bitter toward many, but bitterest of all toward Mellon, whom he called the head of the "leave it alone liquidationists." Hoover quotes Mellon: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." Hoover opposed Mellon's policies, he said, and worked to undermine them. But what could he do? He was, after all, only the president. And Mellon was Treasury secretary.

Think Mellon is just an anachronism? Then consider current British chancellor of the Exchequer, George Osborne, and his claim that today's record-low interest rates in Britain are a sign of financial strength and not of anticipated prolonged depression: "The emergency budget in June was the moment when fiscal credibility was restored. Our market interest rates fell to near-record lows." That is pure Mellon. It is definitely not Keynes. It is definitely not even Milton Friedman.

Friedman himself condemned Hayek, Schumpeter, and Mellon as devotees of an "atrophied and rigid caricature" of his own doctrines. "[T]his dismal picture," said Friedman, led "young, vigorous, and generous mind[s]" to recoil. And both Keynes's and Friedman's flavors of postwar American macroeconomics, with its focus on government action to maintain stable growth, were the happy result.

Nothing has changed in the past few years to make Hayek's, Schumpeter's, and Mellon's arguments stronger intellectually against the critiques of Keynes and Friedman than they were 60 years ago. On substance, their current victory is inexplicable. But their triumph, epitomized by the Tea Party movement and its hostility to government action, can be explained by our fourth horseman: Friedrich Nietzsche in his role as psychologist of human ressentiment.

Nietzsche talked about the losers -- or rather, about those who thought they were the losers. He looked at those who saw themselves as weak and poor -- rather than strong and rich -- and saw trouble. "[N]othing on earth consumes a man more quickly than the passion of resentment," he wrote. It drives us to madness.

Think of that when you consider this: The U.S. unemployment rate is stubbornly high, yet aid from a federal government that can borrow at unbelievably good terms could allow states to maintain their levels of public employment, and those public workers would then spend their incomes and so boost the number of private-sector jobs as well. But the voters are against that. No, they say. We have lost our jobs. It is only fair that those who work for the government lose their jobs as well -- never mind that each public-sector job lost triggers the destruction of yet another private-sector job. It's the underlying logic that has led to a wave of austerity across Europe that is now headed for America's shores. And it's the same logic that says, "It is only fair that homeowners lose their money" -- never mind that everyone's home prices will suffer. What does not kill me makes me stronger.

Because some are unemployed, unemployment is good -- we need more of it. Because some have lost their wealth, wealth destruction is good -- we need more of it. That is a psychology that Friedrich Nietzsche would have understood all too well. For, as he put it, "If you gaze long into an abyss, the abyss will also gaze into you."

## Yet Another Reason Friends Don't Let Friends Vote Republican

Douglas Holtz-Eakin, Kevin Hassett, and others on November 15, 2010:

An Open Letter to Ben Bernanke: We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that "the Federal Reserve cannot solve all the economy's problems on its own." In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed's purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Douglas Holtz-Eakin, on November 24, 2010, trying to claim that the letter was not the partisan political attack that it was:

Quantitative Easing II: The letter... does not say... anything...that might be genuinely politicizing the Fed.... [T]he issue became “political” the moment that the QE II defenders asserted that it was a political attack. It is disappointing that when presented with a serious critique by academics, think tank analysts, and market participants the immediate response is “it must be a conservative attack on the Fed.” Note that implicitly this also carries the message: “I’d never consider that conservatives have ideas or that I might learn something from them.”  So sad...

Kevin Hassett, on November 23, 2010, undermining Doug's claim that the letter was not what it was before Doug said it:

Guest Commentary: I’ve signed many open letters to policy makers over the years. The response to this one was stunning. I was surprised, and remain so, that the letter was criticized so widely and so passionately.... I’ll be the first to admit that the letter may have forfeited some impact because of the obvious Republican bent of the signers, some of whom, shall we say, don’t exactly spend their typical workday immersed in equations...

Doug says--despite its raving about "currency debasement... inflation... broad opposition from other central banks"--the letter is not a partisan attack but rather "a serious critique by academics, think tank analysts, and market participants." Kevin says that the signers were not people qualified to make a serious technocratic critique but rather Republican worthies--and that that made it impossible to read it as a serious technocratic critique.

I am with Kevin. I read this as Brent Scowcroft and Jack Danforth read Republican opposition to START. Scowcroft:

It is not clear to me what [the source of opposition] is. I have got to think that it is the increasingly partisan nature [of the Republican Party] and the desire [by the Republican Party] for the president not to have a foreign policy victory...

Danforth:

If Dick Lugar, having served five terms in the U.S. Senate and being the most respected person in the Senate and the leading authority on foreign policy, is seriously challenged by anybody in the Republican Party, we have gone so far overboard that we are beyond redemption. I am glad Lugar’s there and I am not...

If Douglas Holtz-Eakin wants to make a serious critique of Federal Reserve policy, he should make it in different company--and he should actually make it rather than raving about "currency debasement... inflation... broad opposition from other central banks."

## Department of "Huh?!"

Robert Barro says two things:

Free exchange | The Economist: My conclusion is that QE2 may be a short-term expansionary force, thereby lessening concerns about deflation. However, the Treasury can produce identical effects by changing the maturity structure of its outstanding debts.

And:

The downside of QE2 is that it intensifies the problems of an exit strategy aimed at avoiding the inflationary consequences of the Fed’s vast monetary expansion.

Would we say that a change by the Treasury in the maturity of its outstanding debt intensifies the problems of devising an exit strategy for unwinding the Federal Reserve's vast monetary expansion when it is appropriate?

I do not think we would. The problems of the Federal Reserve exit strategy are there, and they remain unchanged no matter what the Treasury does with the maturity structure of its debt.

So how is it that QE can (a) be identical to a Treasury shift in maturity structure, and yet (b) intensify problems of unwinding monetary expansion?

## The Washington Post Embarrases Itself Once Again

Will somebody please go hose it off?

Calculated Risk watches the train wreck:

Calculated Risk: Monetary Policy Confusion: An editorial in the WaPo yesterday - and some recent emails I've received - indicate there is some confusion on the difference between monetary and fiscal policy. From the WaPo yesterday:

Kicking the Fed: [B]uying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name.

Calculated Risk says:

Well, these "economists, market participants and politicians" are confused.

Me? I don't believe these economists, market participants, and politicians exist. Expansionary monetary policy is when the Federal Reserve buys government debt for cash. Expansionary fiscal policy is when the U.S. Treasury sells government bonds for cash and uses the cash to fund its operations. See the difference between "buy" and "sell"? Buying something is not "like" selling it: it is the opposite of selling it.

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

## Slacktivist Is Dismayed

Slacktivist:

slacktivist: 'Dismaying': One fourth of respondents said they "do not believe in evolution," while another 36 percent said they had no opinion and only 39 percent said they "believe in evolution." So that's about 60 percent of the country that doesn't "believe in" evolution. It's hard to know what that means, exactly, to "believe in" or "not believe in" evolution. It's like not believing in Missouri, or not believing in thermal conduction...

## Fall 2010: Econ 1: Request for Questions for Final Exam

Anybody have any questions they want me to ask on the final exam--either the sample final exam or the real final exam?

## Econ 1: Fall 2010: Draft Problem Set #8

DRAFT Problem Set #8 : Due at the beginning of lecture Monday, December 6, 2010

(A) Economic Theory of Politics: Suppose that there are two political parties--the Caps and the Hats. Suppose voters’ preferences as to the size of federal government spending are uniformly distributed between a lower value of 10% of GDP and a higher value of 40% of GDP. Suppose also that each political party announces a single number as its platform for the federal government share of GDP, and that voters vote for the party whose platform is closest to their preference.

1. Suppose that the Caps announce a platform of 15% of GDP and the Hats announce a platform of 30% of GDP. What share of the vote do the Caps get?

2. Suppose that the Caps announce a platform of 25% of GDP and the Hats announce a platform of 30% of GDP. What share of the vote do the Caps get?

3. Suppose that the Caps announce a platform of 24.99% of GDP and the Hats announce a platform of 25.01% of GDP. What share of the vote do the Caps get?

4. Economists Anthony Downs and James Buchanan and political scientist Gordon Tullock have argued that a two-party system where politicians are most interested not in maintaining ideological purity but in getting elected and reelected does a good job in producing a government that governs according to the will of the people. What bearing do you think this problem has on this issue? Does it strengthen or weaken your assessment of the Downs, Buchanan, Tullock position?

(B) Economic Theory of Politics: Suppose that two-thirds of the voters have preferences as to the size of federal government spending that are uniformly distributed between a lower value of 10% of GDP and a higher value of 40% of GDP, and that one-third of the voters have no preference at all but vote for the party whose candidates’ advertisements have the highest production values. The rich who can afford to make campaign contributions all prefer a government of 10% of GDP. Suppose that there are two political parties: the Caps and the Hats. Each political party announces a single number as its platform for the federal government share of GDP, and that voters vote for the party whose platform is closest to their preference.

1. Suppose that the Caps announce a platform of 25% of GDP and the Hats announce a platform of 25.01% of GDP. What share of the vote do the Caps get?

2. Suppose that the Caps announce a platform of 25% of GDP and the Hats announce a platform of 20% of GDP. What share of the vote do the Caps get?

3. Suppose that the Caps have to announce first, and the Hats—who have no principles at all—then get to choose the platform that maximizes their vote share. If the Caps choose 25%, what do the Hats choose?

4. Suppose that the Caps have to announce first, and the Hats—who have no principles at all—then get to choose the platform that maximizes their vote share. If the Caps choose 15%, what do the Hats choose?

5. Suppose that the Caps have to announce first, and the Hats—who have no principles at all—then get to choose the platform that maximizes their vote share. What should the Caps choose in order to maximize their vote share assuming that the Hats will then make the best move in response?

6. Suppose that the Good Government Coalition puts a referendum on the ballot—a referendum abolishing private campaign contributions and establishing a public system of funding elections that gives each party equal amounts of money to make high production value advertisements. Do you vote for or against this referendum? Why?

(C) Social Choice: Alice thinks the government should build a bridge. If it can’t build a bridge, she thinks it should build a dam. Bobby thinks the government should build a dam. If it can’t build a dam, he thinks it should establish a nature preserve. Carla thinks the government should establish a nature preserve. If it can’t establish a nature preserve, she thinks it should build a bridge. You are brought in as a mediator to suggest a system for social choice that they could establish to decide what the government should do. What do you suggest?

(D) Adverse Selection: Suppose that half of all potential used-car sellers are people who have to sell because they are moving to Fairbanks, Alaska tomorrow and the other half are people who will sell only if they are offered a good deal. Suppose that, for each group, the value of the used car is uniformly distributed between 0 and $10000. 1. Suppose that you offer$2000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

2. Suppose that you offer $4000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car? 3. Suppose that you offer$6000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

4. Suppose that you offer $8000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car? 5. Suppose that you offer$10000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

6. What would you offer, and why?

(E) Uncertainty: Suppose that your happiness bears a logarithmic relationship to your total lifetime income—that you gain as much happiness moving from a lifetime income of $2.5 million to$5 million than you gain from moving from a lifetime income of $5 million to$10 million. If so, which would you rather have: a certain lifetime income of $5 million, or... 1. A 50% chance of$2.5 million and a 50% chance of $10 million. 2. A 50% chance of$2 million and a 50% chance of $20 million. 3. A 75% chance of$2 million and a 25% chance of $50 million. 4. A 90% chance of$4 million and a 10% chance of $50 million. 5. An 80% chance of$2 million and a 20% chance of $150 million. 6. A 90% chance of$2 million and a 10% chance of $1 billion. 7. An 80% chance of$2 million and a 20% chance of $1 billion. 8. Do the answers to these calculations feel right or wrong to you? Why? (F) Information Goods: Consider an information good—that is, something with a marginal cost of zero, like a piece of software. It does, however, cost an amount C to invent and start to distribute the good. Demand for the good in terms of consumers’ willingness-to-pay is given by Q = Qmax(1 – P/20), where P is the price that people are charged in dollars. The government does not know Qmax: all it knows is that it is uniformly distributed between 0 and 1000. The government does not know C: all it knows is that it is uniformly distributed between 0 and$20000 independent of the value of Qmax. There is, however, a Megalomania Corporation that knows C and Qmax, and that offers to undertake production of the information good if it is either (a) given legal rights to stamp out software piracy and charge a price P that it chooses to all users, or (b) given a large enough payment from the government after which it will open-source and freely-distribute its software.

1. Suppose the government offers to pay $2000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus? 2. Suppose the government offers to pay$4000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

3. Suppose the government offers to pay $6000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus? 4. Suppose the government offers to pay$8000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

5. Suppose the government offers to pay $10000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus? 6. Suppose the government grants Megalomania Corporation enforceable property rights backed by Black Ice Hunter-Killer software bots so that everybody using its software must pay its price P to Megalomania Corporation. What price does Megalomania Corporation chooses to charge if it undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected consumer surplus plus net monopoly profits? 7. What would you recommend that the government do? ## Why We Would Be Better Off without the Republican Party Ben Armbruster reports on Brent Scowcroft: Scowcroft on START: ‘Partisan’ GOP Don’t Want To Give Obama ‘A Foreign Policy Victory’: Sen. Richard Lugar (R-IN) has been the leading Senate Republican urging the upper chamber of Congress to ratify the New START arms control treaty with Russia.... Lugar has been reluctant to criticize his colleagues’ obstruction. When asked last week if they were just playing politics, Lugar said, “I am not ascribing motivations to anybody.” But other Republicans don’t seem to be holding back. Brent Scowcroft served as national security adviser to two Republican presidents and has been pleading with Congress to ratify New START. Profiling Lugar’s awkward position vis-a-vis other Senate Republicans on this issue, [Abby Phillip and Carol E. Lee of] Politico report today that Scrowcroft isn’t being as diplomatic as Lugar on the GOP’s incentive for holding up START: In an attempt to rally bipartisan support for the treaty, the White House has enlisted the kind of GOP foreign policy wise men that Lugar exemplifies – among them former secretaries of state Henry Kissinger and James A. Baker. But they have had no success with members of their own party, and it has left them scratching their heads over the source of the GOP opposition. “It’s not clear to me what it is,” said Brent Scowcroft, a former national security adviser to President George H.W. Bush who noted that this START treaty is not very different from previous ones negotiated and ratified under Republican presidents. “I’ve got to think that it’s the increasingly partisan nature and the desire for the president not to have a foreign policy victory”... ## Grandmothers Raising Grandchildren Annual Fundraiser http://grgahero.org is 55 Luo grandmothers and great-grandmothers raising 150 AIDS-orphaned grandchildren and great-grandchildren in Ahero, Kenya. They sell their baskets to buy animals, schoolbooks, and extra food through this one-woman zero-overhead NGO who is our neighbor Bee Sjostrum, who spent two years in Ahero as the oldest Peace Corps volunteer in East Africa. From 24 hours, from noon EST November 27 to noon EST November 28 only, Ann Marie and I are matching basket purposes through the GRG website. Our basket is now three years old, and has worn like iron: they do good work in Ahero. If you want a hand woven basket, or simply to spend$30 that would otherwise go to your surplus on their substance, please buy.

And Ann Marie and I extend a special invitation to those who want to do the right thing for the wrong reason--who want to boast about how generous they are, or feel the warm glow of knowing that they are good people, or fend off feelings that they are bad and greedy people, or who think they need to buy advocates before the Judgment Throne: your deeds are as precious as anyone's.

## John Taylor vs. John Taylor

John Taylor, 2010:

[T]he Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances.... [I] disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets...

John Taylor, 1994:

[A] good policy allows a speedup in growth above potential GDP growth after a recession.... The faster growth in the United States compared with that in Europe just after the 1982 recession is an example of such a better policy.... [O]ne rule I have found attractive has the federal funds rate adjusted up if GDP goes above target or if inflation goes above target, and vice versa...

You can't consistently be for policies of monetary ease strong enough to make nominal GDP catch up to its pre-recession growth path in 1994 and against them in 2010. At least, I don't see how you can.

## Why Iceland Is Doing Better than Ireland

Paul Krugman:

Eating the Irish: [A]t this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump.

None of these heterodox options are available to Ireland, say the wise heads. Ireland, they say, must continue to inflict pain on its citizens — because to do anything else would fatally undermine confidence.

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

## The Column That I, Now Green with Envy, Wish That I Had Written

Paul Krugmnan:

The Instability of Moderation - NYTimes.com: Brad DeLong writes of how our perception of history has changed in the wake of the Great Recession. We used to pity our grandfathers, who lacked both the knowledge and the compassion to fight the Great Depression effectively; now we see ourselves repeating all the old mistakes. I share his sentiments.

But watching the failure of policy over the past three years, I find myself believing, more and more, that this failure has deep roots – that we were in some sense doomed to go through this. Specifically, I now suspect that the kind of moderate economic policy regime Brad and I both support – a regime that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable. It’s something that can last for a generation or so, but not much longer.

By “unstable” I don’t just mean Minsky-type financial instability, although that’s part of it. Equally crucial are the regime’s intellectual and political instability.

Intellectual instability:

The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.

It’s a deeply reasonable approach – but it’s also intellectually unstable. For it requires some strategic inconsistency in how you think about the economy. When you’re doing micro, you assume rational individuals and rapidly clearing markets; when you’re doing macro, frictions and ad hoc behavioral assumptions are essential.

So what? Inconsistency in the pursuit of useful guidance is no vice. The map is not the territory, and it’s OK to use different kinds of maps depending on what you’re trying to accomplish: if you’re driving, a road map suffices, if you’re going hiking, you really need a topo.

But economists were bound to push at the dividing line between micro and macro – which in practice has meant trying to make macro more like micro, basing more and more of it on optimization and market-clearing. And if the attempts to provide “microfoundations” fell short? Well, given human propensities, plus the law of diminishing disciples, it was probably inevitable that a substantial part of the economics profession would simply assume away the realities of the business cycle, because they didn’t fit the models.

The result was what I’ve called the Dark Age of macroeconomics, in which large numbers of economists literally knew nothing of the hard-won insights of the 30s and 40s – and, of course, went into spasms of rage when their ignorance was pointed out.

Political instability:

It’s possible to be both a conservative and a Keynesian; after all, Keynes himself described his work as “moderately conservative in its implications.” But in practice, conservatives have always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge. When William Buckley wrote God and Man at Yale, one of his key complaints was that the Yale faculty taught – horrors! – Keynesian economics.

I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

When monetarism failed – fighting words, but you know, it really did — it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles.

And this worked for a while – roughly speaking from 1985 to 2007, the era of the Great Moderation. It worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too. If we’re living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way.

Financial instability:

Last but not least, the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression.

And by the time that big shock arrived, the descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree on a wider response.

In the end, then, the era of the Samuelsonian synthesis was, I fear, doomed to come to a nasty end. And the result is the wreckage we see all around us.

We could go the other way--we could make micro about myopia: about psychological, behavioral, and institutional myopia. Then micro and macro would fit together in a stable whole, and the research frontier would be all about proper institution design.

## The Retreat of Macroeconomic Policy: The Column I Wrote

Project Syndicate: The Retreat of Macroeconomic Policy by J. Bradford DeLong:

BERKELEY – One disturbing thing about studying economic history is how things that happen in the present change the past – or at least our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.

Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons, all of which vanished by the end of WWII.

First, there was a hard-money lobby: a substantial number of rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds. They had little personally at stake in high capacity utilization and low unemployment, but a great deal at stake in stable prices. They wanted hard money above everything.

Second, the working classes that were hardest-hit by high unemployment generally did not have the vote. Where they did, they and their representatives had no good way to think about how they could benefit from stimulative government policies to moderate economic downturns, and no way to reach the levers of power in any event.

Third, knowledge about the economy was in its adolescence. Knowledge of how different government policies could affect the overall level of spending was closely held. With the exception of the United States’ free-silver movement, it was not the subject of general political and public intellectual discussion.

All three of these factors vanished between the world wars. At least, that is what I said when I lectured on economic history back in 2007. Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low.

Economists today know a great deal more – albeit not as much as we would like – about how monetary, banking, and fiscal policies affect the flow of nominal spending, and their findings are the topic of a great deal of open and deep political and public intellectual discussion. And the working classes all have the vote.

Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc were over in the rich world. No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.

I was wrong. That is precisely what is happening.

How did we get here? How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?

Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned? Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?

It is now clear that the right-wing opponents to the Obama administration’s policies are not objecting to the use of fiscal measures to stabilize nominal spending. They are, instead, objecting to the very idea that government should try to serve a stabilizing macroeconomic role.

Today, the flow of economy-wide spending is low. Thus, US Federal Reserve Chairman Ben Bernanke is moving to have the Fed boost that flow by changing the mix of privately held assets as it buys government bonds that pay interest in exchange for cash that does not.

That is entirely standard. The only slight difference is that the Fed is buying seven-year Treasury notes rather than three-month Treasury bills. It has no choice: the seven-year notes are the shortest-duration Treasury bonds that now pay interest. The Fed cannot reduce short-term interest rates below zero, so it is attempting via this policy of “quantitative easing” to reduce longer-term interest rates.

Yet America’s right wing objects to this, for reasons that largely remain mysterious: what, at the level of economic theory, is the objection to quantitative easing? Blather about Federal Reserve currency manipulation and excessive risk-taking is not worthy of an answer.

Still, here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

## The Social Studies Major 50th Anniversary Celebration Party and Bitter Internal Ideological Power Struggle

By my rough count, one-third the people who had ever taught in and one-fourteenth of those who had ever graduated from Harvard's Social Studies major showed up in Cambridge, Massachusetts on the last Saturday in September this year for the major's fiftieth-anniversary celebration and bitter internal ideological power struggle. And that is not counting those graduates who did not attend but looked on via the Internet, or those outsiders--Nick Kristof, James Fallows--who felt compelled to comment on the exercise.

That is, I think testimony to the amazing intellectual strength of the program.

And, indeed, as one senior member of the faculty said, those who came to the party got just what they bargained for: serious engagement with political action and moral responsibility at a rarified intellectual level rarely seen on this green earth.

For example, the Q-and-A period of the afternoon panel:

Elliott Prasse-Freeman: This question is for Ms. Gorelick. I want to start with Professor Walzer's invocation to take "theoretical imperialism" seriously. While I do not agree with his rubbishing of Foucault, I do think that it is a good thing to do. I would like to do this in the context of Marty Peretz. I am going to read a Marty Peretz quote. And I want us to think: "what theory comes through here?"

So many of the Black population are afflicted by... cultural deficiencies. I would guess that in the ghetto a lot of mothers do not appreciate the importance of schooling...

What kind of theory comes through here?

Do we have an account of biopolitics, perhaps?

Differential access to resources and opportunities that, perhaps, makes education less desirable for certain populations?

Nope.

It's just either stupid, or racist, or both.

So now I turn my question to you, Ms Gorelick: a person who has that kind of model for the world--what kind of teaching can they really be doing? If they have that much hatred of one entire aspect of humanity, what exactly would they be teaching you?

I finish my little diatribe by asking you to defend such a disgusting person, and also to say that people like you allow him to have the power that he does. (applause)

Jamie Gorelick: He was a fantastic teacher. He was generous with his time. He encouraged debate. He encouraged us in our studies. And we honor him for that by creating a fund to help undergraduates continue their work. Most of us have known Marty for a long time, and we disagree with him on many of his opinions. This is not an endorsement of any particular view. I will tell you that, as Richard Tuck said at the outset, when we heard of this convocation we thought that this would be a nice way to honor a teacher who has meant a lot to many of us. And we sent out notes to people who had had Marty as a tutor, and they responded with contributions and a desire to fund the fellowship. It is pretty much as simple as that. Marty has been a loyal and good friend to many people. He has views that he has explicated and changed, some of which I agree with and some of which I do not. And that is what I have to say. As E.J., who has been a partner with me on this on this effort has said, if anyone could hold two contradictory thoughts in his head at the same time, it should be people in this group, and you can honor someone as a teacher without endorsing everything that they have said.

Nisha Agarwal: I want to make a general comment on the theme of this panel--Social Studies and social change. Let me start by saying, how excited I was to be invited to this event. I did not go to my ten-year college reunion. But when I got the email about this, I signed up immediately (applause). The reason that I am part of a movement for racial justice is this program. So that is the love part that I am going to put out there, before I provide the alienation part. (laughter). Coming here today ,I felt somewhat disappointed and a little bit naive in thinking about the connection between Social Studies and social change. I have really enjoyed the panelists. But I do not feel that the selection of panelists throughout the day reflects the diversity of the communities that Social Studies cares about, writes about, and thinks about. I not think that the curriculum of Social Studies 10--though I saw that Franz Fanon has crept in there--is still very western-centric. And I think, most important, that the decision to honor Marty Peretz who has said things like the previous commentator said, and also said things like "Arab-Americans are hidebound and backwards," is really not my memory of what the Social Studies Committee is about.

I suppose that this is my recommendation for the next fifty years of the program. If there is a true commitment to Social Studies and social change, it will turn a well-developed critical gaze on ourselves. Realize that what happens in rooms like this: who we invite to speak, who we read, and certainly who we choose to honor very much impacts that product of social change that is happening out in the world today. That is my embedded critique. I urge Social Studies to rethink what is going on here today in terms of who is honored and who is invited to speak (applause).

E.J. Dionne: This was an effort to honor a great teacher. I have disagreed with Marty on all kinds of things over the years. I argued with him in a friendly way--and friends can argue, friends can passionately disagree about. Some of the recent comments. I understand the passion that has been aroused by this. I think there is a fascinating division here. It could be the object of some interesting social science. People who knew Marty a long time ago and have worked with him and argued with him and even had disagreements with him understood why people would honor him for the teaching. People who have never met Marty, who have seen some of the stuff that he has written which, as I say, I have disagreed with Marty only know him through that. They don't know that he stood up for the Roma. They don't know that he stood up for gays very early, when others were not. They don't know that he stood up for the Kurds. This is a very complicated person like most of us are. And I think that is the split here. Honoring Marty because we really loved him as a teacher and his passion.... In terms of our speakers, we should have had two days because we could have gotten more voices up here. I have enjoyed this so much and I would stay for a second if I could. Thank you very much. It seems that was a fair comment. (applause)

Michael Walzer: With respect to the previous questioner, I wonder if you have undertaken a survey of everything that every present member of the Social Studies faculty has said in postings, in footnotes, in lectures to make sure that nothing they have said is offensive or hurtful or embarrassing. If you are not doing that, well you had better start doing that because you will find a lot of things that you do not like.

Abdelnassar Rashid: My name is Abdelnassar Rashid and I am a junior in Social Studies. I would like to point out that Social Studies actually did make the decision to honor Martin Peretz. They did meet last Friday and over the weekend. They did finally come to the decision to honor him. It is not just his former students who are doing this. The Standing Committee made the decision itself. One thing to notice is that Marty Peretz has made a pseudo-apology for the latest bigoted thing that he has said. He took back his comment about Muslims not deserving first amendment protections. Since we have three friends on the panel, I would ask you for a commitment to ask him to apologize for twenty-five years of bigotry. Thank you (applause).

Richard Tuck: I let Abdelnassar Rashid speak because he is somebody that I have had dealings with and whose substantive views on this matter I respect. But I do not think it is appropriate for us at the moment to pursue these issues any further. If there is any other question about the substance of the panel I would be reasonable to have that. Otherwise I am afraid that we should accept that this has been a very difficult issue which has understandably throughout our meeting and we should reflect on its implications. Are there any other questions specifically to the points being raised by the panel?...

And Robert Paul Wolff's luncheon talk:

You see before you a coelacanth, a survivor from ancient days swimming up to the surface from the depths of time. I was there at the very start of Social Studies--I have with me the original reading list from 1960-1. Yet when I look at today's Social Studies 10 reading list--it is much the same.

Why is it that the core readings in Social Studies have not changed for fifty years? I will try to answer that question with yet another story from the early days of Social Studies, but it will take me a moment to sketch the background, so bear with me.

In the early '50s, a famous Swarthmore social psychologist named Solomon Asch did an experiment to study the effect of social pressure on belief and perception. [Asch published an article about his research in SCIENTIFIC AMERICAN. You can find it if you Google it.] Briefly, Asch put a small group of young college men in a seminar room and told them he was studying perception. In fact, only one young man was a real subject; the others were Asch's collaborators. Asch then showed the men two cards. On the first were three straight lines of very unequal length. On the second was one line, obviously equal in length to one of the three lines. He asked each student in turn which line on the card of three the single line matched. At first, as he went around the table, everyone gave the same correct answer. But then, as he showed them successive pairs of cards, everyone but the last to be called on [who was the real subject] gave the same obviously wrong answer. The first or second time around, the real subject, looking puzzled or troubled, gave the correct answer, but as the experiment continued, with everyone in the room giving a wrong answer, a significant percentage of the subjects -- more than a third -- started to go along with the group and give the wrong answer also. When Asch interviewed these men later -- the ones who had switched to the wrong answers -- some said they just did not want to "spoil the experiment." Some said that at first they thought everyone was wrong, but after a while they began to think something was wrong with their own judgment. And some even said that although the line chosen by the group looked unequal to the other line, when they looked closely they could see that it was really equal.

The experiment was much commented upon, and everyone took it as distressing evidence of the effects of social pressure on conformity of behavior. But I was interested in another aspect of the experiment. It occurred to me that in order to perform the experiment, Asch had first to take a position on what the correct and incorrect answers were. Otherwise, he would just have statistics about shifting public opinion, which would reveal nothing about the distorting effects of social pressure. Well, obviously, you will say. After all, Asch needed simply to put a ruler down next to the lines and measure them.

I first read the Asch experiment in the early Fall of 1960, just as Social Studies was starting. One day, in October, I ran into Barrington Moore on the street and we stopped to chat. This was during the run-up to the 1960 presidential election in which John F. Kennedy was running against Richard M. Nixon. Everyone at Harvard was mad for Kennedy, of course. He was a Harvard man, his wife spoke French, and he had even won a Pulitzer Prize -- although we did not know then that Ted Sorenson had written the book for which he won the prize. I talked excitedly to Moore about the campaign, and said that I hoped Kennedy would win. Moore looked down his long, aristocratic nose at me and then said, 'There's not a dime's worth of difference between them.' Then he walked on.

I thought that was just Barry being his usual contrarian self, but Kennedy got selected, and the first thing he did was to invade Cuba. The scales fell from my eyes and I realized Barry was right. Now, even back then, social scientists were doing a good deal of public opinion polling, but I thought, 'Wouldn't it be interesting for someone to do a study of why so many voters perceived Kennedy and Nixon as unequal when they were obviously equal?'

'Ah well,' you will say. 'To do such an experiment, the social scientist would have to be able to look beneath the surface appearances of society to the underlying socio-economic reality. AND THAT IS PRECISELY WHAT THE STUDY OF SMITH AND MARX AND DURKHEIM AND FREUD AND WEBER TEACHES US TO DO. Each of these authors, in his different way, goes beneath surface appearances to examine underlying social and economic realities. That is why those authors have been on the reading list for fifty years.

But, you will protest, it is easy enough for Asch to determine whether two lines are equal or un equal in length. He just lays a rule down next to them and measures them. But to say that Kennedy and Nixon are equal, the social scientist must take a political or ideological position. Any such investigation is, as the French used to say, guilty. That is, it is inseparable from some ideological stance. How will we as students know what ideological stance to take?

You are correct. And what is more, Smith and Marx and Durkheim and Freud and Weber cannot answer that question for you. I will give you an answer, by telling you another story, this time from my years teaching at Columbia. In 1968, as some of you will recall, the students occupied several buildings and brought the university to a screeching halt for two weeks. The next semester, I was teaching a course in which I was anguishing over my inability to find, in the text of Kant's GROUNDWORK OF THE METAPHYICS OF MORALS, an absolutely valid a priori proof of the universal validity of the fundamental moral principle, the categorical Imperative. After class one day, one of the students came up to talk to me. He was one of the SDS students who had seized the buildings, and I knew that he was active off campus in union organizing. 'Why are you so concerned about finding that argument?' he asked. Well, I said, if I cannot find such an argument, how will I know what to do? He looked at me as one looks at a very young child, and replied, 'First you have to decide which side you are on. Then you will be able to figure out what you ought to do.'

At the time, I thought this was a big cop-out, but as the years have passed, I have realized the wisdom in what he said. I want [I now said] to direct these next remarks to the undergraduates who are here today. [There were maybe two dozen among the 200 people at the lunch]. As you complete your studies and go out into the world, you have a decision to make. You must decide who your comrades are going to be in life's struggles. You must decide which side you are on. Will you side with the oppressed, or with the oppressors? Will you side with the exploiters, or with the exploited? Will you side with the occupiers, or with the occupied? I cannot make that decision for you, and neither can Smith and Marx and Durkheim and Freud and Weber. All I can do is to promise you that if you side with the oppressed, with the exploited, with the occupied, then the next time you decide to seize a building, I will be with you.

There is one more matter about which I feel I must say something. I refer to the controversy to which Richard Tuck referred in his opening remarks this morning [ed. Tuck, the current head of Social Studies and a splendid man, had said a few words about the controversy during his welcoming speech, distancing himself from the content of Peretz's statements.] I have anguished a great deal about this matter, at one point uncertain whether I ought even to attend the celebration. If I were a religious man, I could let my bible fall open at random, relying on The Lord to guide me to a chapter and verse in which I might find some wisdom. But since I am an atheist, that course was not open to me. So I did the next best thing. I took down my copy of Volume One of Das Kapital. As I turned the old, familiar pages, covered with my underlinings and notes, my eye fell on this famous passage from the great chapter on Money. Since you are all former or present Social Studies students, I am sure you will all recall it. Here is what Marx says.

Because money is the metamorphosed shape of all other commodities, the result of their general alienation, for this reason it is alienable itself without restriction or condition. It reads all prices backwards, and thus, so to say, depicts itself in the bodies of all other commodities, which offer to it the material for the realisation of its own use-value. At the same time the prices, wooing glances cast at money by commodities, define the limits of its convertibility, by pointing to its quantity. Since every commodity, upon becoming money, disappears as a commodity, it is impossible to tell from the money itself, how it got into the hands of its possessor, or what article has been changed into it. Non olet, from whatever source it may come.

Marx assumed that the working men and working women for whom he wrote this book all had a classical education, but since I did not, I was forced to look up the source of the Latin tag, non olet. It seems that in the time of the Emperor Vespasian, the Roman state raised a little extra money by taxing the public urinals. One day, Vespasian sent his son, Titus, to collect the taxes from the urinals. Titus was offended by the task, which he considered beneath him, and when he returned he flung the money at his father's feet. Vespasian looked down with equanimity and remarked languidly, "Pecunia non olet." The money does not stink.

In the realm of higher education, Harvard is an imperial power, so quite naturally it adopts Vespasian's point of view toward the money it accepts, Pecunia non olet. But from its founding, fifty years ago, Social Studies has held itself to a higher standard, and so I would hope that it will reject this money for a scholarship, because pecunia olet. The money stinks.

I, by contrast, think that there is much more than a dime's worth of difference between Kennedy-Johnson on the one hand and Nixon-Lodge on the other--and I marvel that Robert Paul Wolff, now 77, does not think that Medicare matters at all.

And I think that the important thing is not to side with the oppressed as an attitudinal pose but rather to do something to enhance freedom. I side with Keynes against Trotsky:

Trotsky is concerned in these passages with an attitude towards public affairs, not with ultimate aims. He is just exhibiting the temper of the band of brigand-statesmen to whom Action means War, and who are irritated to fury by the atmosphere of sweet reasonableness.... "They smoke Peace where there should be no Peace," Fascists and Bolshevists cry in a chorus, "canting, imbecile emblems of decay, senility, and death, the antithesis of Life and the Life-Force which exist only in the spirit of merciless struggle." If only it was so easy! If only one could accomplish by roaring, whether roaring like a lion or like any sucking dove!

The roaring occupies the first half of Trotsky's book. The second half.... First proposition. The historical process necessitates the change-over to Socialism.... Second proposition. It is unthinkable that this change-over can come about by peaceful argument and voluntary surrender. Except in response to force, the possessing classes will surrender nothing.... Third proposition. Even if, sooner or later, the Labour Party achieve power by constitutional methods, the reactionary parties will at once Proceed to Force.... Fourth proposition. In view of all this, whilst it may be good strategy to aim also at constitutional power, it is silly not to organise on the basis that material force will be the determining factor in the end....

Granted his assumptions, much of Trotsky's argument is, I think, unanswerable. Nothing can be sillier than to play at revolution if that is what he means. But what are his assumptions? He assumes that the moral and intellectual problems of the transformation of Society have been already solved--that a plan exists, and that nothing remains except to put it into operation.... He is so much occupied with means that he forgets to tell us what it is all for. If we pressed him, I suppose he would mention Marx.... Trotsky's book must confirm us in our conviction of the uselessness, the empty-headedness of Force at the present stage of human affairs. Force would settle nothing no more in the Class War than in the Wars of Nations or in the Wars of Religion. An understanding of the historical process, to which Trotsky is so fond of appealing, declares not for, but against, Force at this juncture of things. We lack more than usual a coherent scheme of progress, a tangible ideal. All the political parties alike have their origins in past ideas and not in new ideas and none more conspicuously so than the Marxists. It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel. The next move is with the head, and fists must wait.

## Liveblogging World War II: November 26, 1940

November 26, 1940:

Stalin tries to cement his alliance with Hitler: The German Ambassador in the Soviet Union (Schulenburg) to the German Foreign Office: Molotov asked me to call on him this evening and in the presence of Dekanosov stated the following:

The Soviet Government has studied the contents of the statements of the Reich Foreign Minister in the concluding conversation on November 13 and takes the following stand:

The Soviet Government is prepared to accept the draft of the Four Power Pact which the Reich Foreign Minister outlined in the conversation of November 13, regarding political collaboration and reciprocal economic support subject to the following conditions:

1. Provided that the German troops are immediately withdrawn from Finland. which, under the compact of 1939, belongs to the Soviet Union's sphere of influence. At the same time the Soviet Union undertakes to ensure peaceful relations with Finland and to protect German economic interests in Finland (export of lumber and nickel).

2. Provided that within the next few months the security of the Soviet Union in the Straits is assured by the conclusion of a mutual assistance pact between the Soviet Union and Bulgaria, which geographically is situated inside the security zone of the Black Sea boundaries of the Soviet Union, and by the establishment of a base for land and naval forces of the U.S.S.R. within range of the Bosporus and the Dardanelles by means of a long-term lease.

3. Provided that the area south of Batum and Baku in the general direction of the Persian Gulf is recognized as the center of the aspirations of the Soviet Union.

4. Provided that Japan renounces her rights to concessions for coal and oil in Northern Sakhalin.

5. In accordance with the foregoing, the draft of the protocol concerning the delimitation of the spheres of influence as outlined by the Reich Foreign Minister would have to be amended so as to stipulate the focal point of the aspirations of the Soviet Union south of Batum and Baku in the general direction of the Persian Gulf.

Likewise, the draft of the protocol or agreement between Germany, Italy, and the Soviet Union with respect to Turkey should be amended so as to guarantee a base for light naval and land forces of the U.S.S.R. On [am] the Bosporus and the Dardanelles by means of a long-term lease, including-in case Turkey declares herself willing to join the Four Power Pact-a guarantee of the independence and of the territory of Turkey by the three countries named.

This protocol should provide that in case Turkey refuses to join the Four Powers, Germany, Italy, and the Soviet Union agree to work out and to carry through the required military and diplomatic measures, and a separate agreement to this effect should be concluded.

Furthermore there should be agreement upon:

a) a third secret protocol between Germany and the Soviet Union concerning Finland (see Point 1 above).

a fourth secret protocol between Japan and the Soviet Union concerning the renunciation by Japan of the oil and coal concession in Northern Sakhalin (in return for an adequate compensation).

a fifth secret protocol between Germany, the Soviet Union, and Italy, recognizing that Bulgaria is geographically located inside the security zone of the Black Sea boundaries of the Soviet Union and that it is therefore a political necessity that a mutual assistance pact be concluded between the Soviet Union and Bulgaria, which in no way shall affect the internal regime of Bulgaria, her sovereignty or independence."

In conclusion Molotov stated that the Soviet proposal provided five protocols instead of the two envisaged by the Reich Foreign Minister. He would appreciate a statement of the German view.

## Liveblogging World War II: November 24, 1940

November 24, 1940:

World War II Day-By-Day: Day 451 November 24, 1940: Operation Collar. Convoy ME4 from Britain passes the Straits of Gibraltar bound for Malta and Alexandria (merchant ships SS New Zealand Star, SS Clan Forbes and SS Clan Fraser, escorted by cruisers HMS Manchester and HMS Southampton carrying 1,370 RAF personnel to reinforce the garrison at Malta). Destroyer HMS Hotspur and 4 corvettes join to escort the convoy at Gibraltar. Mediterranean convoys are escorted from Gibraltar to Malta by Admiral Somerville’s Force H and then onwards to Alexandria, Egypt, by Admiral Cunningham’s Mediterranean fleet. Battleships HMS Ramillies and HMS Malaya, cruisers HMS Newcastle, Coventry and Berwick plus 5 destroyers are on their way from Alexandria to pick up the convoy in mid-Mediterranean...

## We Need More Health Care Reform

Matthew Yglesias:

Affordable Care Act Repeal Unlikely, Unpopular: Nobody is head over heels in love with the Affordable Care Act, but McClatchy notes that much of the discontent is from the left and the public constituency for repeal is quite small:

On the side favoring it, 16 percent of registered voters want to let it stand as is. Another 35 percent want to change it to do more. Among groups with pluralities who want to expand it: women, minorities, people younger than 45, Democrats, liberals, Northeasterners and those making less than $50,000 a year. Lining up against the law, 11 percent want to amend it to rein it in. Another 33 percent want to repeal it. Among groups with pluralities favoring repeal: men, whites, those older than 45, those making more than$50,000 annually, conservatives, Republicans and tea party supporters.

Nothing surprising about the demographics here or the outcome. If you polled me on this, I’d count myself as someone who wants to expand the law. To give a more nuanced view, though, I think there’s room for both expansion and curtailment. What’s more, even though few in Congress want to hear it the reality is that we need to do more health reform. Much more. The cost/quality situation is nowhere near good enough. What’s needed, in political terms, is some kind of credible escape hatch through which conservative politicians can engage with changing health care law in some way other than demanding repeal. This is what I think is promising about the Scott Brown / Ron Wyden state waiver initiative.

## The Difference Between Illiquidity and insolvency

Paul Krugman on Ireland and the "rescue":

HAMPing Europe's Periphery: The markets don’t seem impressed by the Irish bailout — nor should they be. As I read it, European policy makers are still — still! — viewing the crisis as a confidence problem.... The Irish bailout is not, after all, what one normally thinks of as a bailout.... It’s simply an agreement to lend Ireland funds at more or less safe market rates. Now, this represents a considerable gift relative to the situation Ireland would be in without such funding: Ireland must, as you can see, pay very high rates to borrow on the private market. But if we think about why this is true, we can also see why the bailout isn’t likely to succeed.

The basic situation is that given the cost of rescuing Ireland’s banks, and the damage harsh austerity is inflicting on Ireland’s economy, investors are understandably skeptical that the Irish government will actually be able to meet its commitments. That’s why rates are high — to compensate for a possible default. Now, this process is self-reinforcing: higher rates make it even harder to meet Ireland’s commitments, which leads to still higher rates, and so on. The European bailout basically short-circuits this vicious circle. But the bailout will only work if the vicious circle is at the heart of the story — as opposed to being a symptom of the fundamental unsustainability of the austerity-and-full-repayment strategy. That is, it will work only if Ireland is the fundamentally sound victim of a self-fulfilling panic. And that’s a hard claim to make.

What would Ireland (and Greece, and Portugal, and …) need if the problem is not essentially one of confidence and liquidity? Actual debt relief. Yet that is not on the table. As I suggested in the title of this post, this is somewhat like the failure of the HAMP program, whose whole approach was based on the idea that homeowners essentially had a liquidity problem, so that rescheduling their payments would solve everything.

As it is, I don’t see how this is supposed to work. Ireland, like Greece, is now insulated from the need to go to the market. But it still faces an enormous debt load, made worse by deflation and stagnation. The situation has not been resolved.

## Why Friends Don't Let Friends Vote Republican

John Berry:

What the Republicans Really Want - TheFiscalTimes.com: [J]ust before the mid-term elections, Senate Minority Leader Mitch McConnell candidly told the  National Journal, "The single most important thing we want to achieve is for President Obama to be a one-term president." If that means doing nothing to help 15 million Americans searching for work who can't find it, too bad. If that means blocking ratification of a nuclear arms control treaty with Russia that's wholeheartedly backed by all the top U.S. military leaders as needed for national security, so be it. If that means stone-walling efforts to stimulate the economy with business tax cuts, or  blocking extension of expiring jobless benefits, that's the way the cookie crumbles. If that means changing the law to direct the Federal Reserve to stop paying attention to unemployment and focus solely on inflation in its monetary policy decisions, we’ll ignore the fact that core inflation is the lowest in half a century.

In short, congressional Republicans don't want conditions in the United States to improve on any front before the 2012 elections. It's also clear they have no intention of cooperating with the president on any of the myriad problems facing the country. This was particularly evident when McConnell and John Boehner, incoming speaker of the newly Republican House of Representatives, said they were too busy to meet with Obama at the White House.

## The Two Biggest Lies of George W. Bush

Dan Froomkin:

The Two Most Essential, Abhorrent, Intolerable Lies Of George W. Bush's Memoir: [T]he two most essential lies -- among the many -- in his new memoir are that he had a legitimate reason to invade Iraq, and that he had a legitimate reason to torture detainees. Neither is remotely true. But Bush must figure that if he keeps making the case for himself -- particularly if it goes largely unrebutted by the traditional media, as it has thus far -- then perhaps he can blunt history's verdict....

In "Decision Points," Bush describes the invasion of Iraq as something he came to support only reluctantly and after a long period of reflection. This is a flat-out lie. Anyone who paid any attention to the news at the time knew Bush was dead-set on war long before he sent in the troops in March 2003. And there is now an abundant amount of documentation, in the form of leaks, unclassified memos, witness interviews and other people's memoirs to prove it.... The only real question is whether he actively deceived the American public and the world -- or whether he was so passionate about selling the public on the war that he intentionally blinded himself to how brazenly Vice President Cheney had politicized and abused the intelligence process....

Bush writes in his memoir that the idea of attacking Iraq came up at a meeting of his national security team at Camp David, four days after the 9/11 attacks. By his account, it was then Deputy Defense Secretary Paul Wolfowitz who "suggested that we consider confronting Iraq as well as the Taliban." Bush writes that he eventually decided that "[u]nless I received definitive evidence tying Saddam Hussein to the 9/11 plot I would work to resolve the Iraq problem diplomatically."... In the first tell-all book from inside Bush's national security team, Richard A. Clarke wrote in 2004 of a meeting he had with Bush the day after 9/11:

The president in a very intimidating way left us, me and my staff, with the clear indication that he wanted us to come back with the word there was an Iraqi hand behind 9/11 because they had been planning to do something about Iraq from before the time they came into office.... I think they had a plan from day one they wanted to do something about Iraq. While the World Trade Center was still smoldering, while they were still digging bodies out, people in the White House were thinking: 'Ah! This gives us the opportunity we have been looking for to go after Iraq.'

Clarke notes that the following day, Defense Secretary Donald Rumsfeld complained in a meeting that there were no decent targets for bombing in Afghanistan and that the U.S. should consider bombing Iraq, which had better targets.

At first I thought Rumsfeld was joking. But he was serious and the President did not reject out of hand the idea of attacking Iraq. Instead, he noted that what we needed to do with Iraq was to change the government, not just hit it with more cruise missiles, as Rumsfeld had implied.

Just over two months later, on Nov. 21, 2001, Bush formally instructed Rumsfeld that he wanted to develop a plan for war in Iraq. Sixteen months after that, in March 2003, the invasion began....

That torture is even a subject of debate today is a testament to the devastating effect the Bush administration has had on our concept of morality. And in his book and on his book tour, far from hanging his head in shame, Bush is more explicit and enthusiastic than ever before endorsing one of torture's iconic forms. "Damn right," he quotes himself as saying in response to a CIA request to waterboard Khalid Sheikh Mohammed. "Had we captured more al Qaeda operatives with significant intelligence value, I would have used the program for them as well."

Bush's two-part argument is simple; That waterboarding was legal (i.e., that it was not really torture); and that it worked. But neither assertion is remotely true. Waterboarding -- essentially controlled drowning -- involves immobilizing someone and pouring water over their mouth and nose in a way that makes them choke. It causes great physical and mental suffering, but leaves no marks. It's not new; villains and despots have been using it extract confessions for something like 700 years. The CIA just perfected it. It is self-evidently, almost definitionally, torture. The U.S. government had always considered it torture. In 1947, the U.S. charged a Japanese officer who waterboarded an American with war crimes. It is flatly a violation of international torture conventions. And as far as I know, no American government official had ever even suggested it wasn't torture until a small handful of lawyers in Bush's supine Justice Department, working under orders from the vice president, claimed otherwise...

## Friends Don't Let Friends Vote Republican

Why we would be better off if the Republican Party simply dried up and blew away tomorrow:

AMANPOUR: And, again, as Admiral Mullen said, it's not just a nice treaty with a foreign country. It is about Russia's cooperation on all the issues that the United States needs, whether it's Afghanistan, Iran, and all the rest of it. Plus, I don't know what you think, but some are saying that this could give rise to the hard-liners in Russia again, who just do not want to -- who just don't want to deal with the United States.

LUCE: Oh, absolutely. I think it's -- it's a dream -- if you picked two countries that would like to see a failure of [START]ratification, it would be North Korea and Iran. And I think that -- if that argument doesn't work with the Republicans, that sort of basic elemental national security argument doesn't work, nothing is. There's -- there's a greater hatred of Obama than there is a love of American national security.

## Could We Please Have Better German Policymakers?

Martin Wolf:

Martin Wolf - Ireland refutes the German perspective: If any good can come out of the Irish disaster it is via the realisation that the classic German perspective on the problems of the eurozone is mistaken... that the core problems of the eurozone are those of fiscal incontinence and economic inflexibility and so the right solutions are fiscal discipline, structural reform and debt restructuring. Ireland, however, is not in difficulty because of fiscal failings, but because of financial excesses; Ireland has needed rescue, notwithstanding its astonishingly flexible economy; and an emphasis on restructuring of debt has, predictably, triggered a crisis.

These realities should make Germany rethink. Will it? I doubt it.

Ireland is nothing like Greece. Back in 2007, Ireland’s net public debt was just 12 per cent of gross domestic product.... Spain, too, had net public debt in 2007 at just 27 per cent of GDP.... It was not the public but the private sector that went haywire in Ireland and in Spain. In the low interest rate environment caused principally by chronically weak demand in core European countries – Germany’s real domestic demand was a mere 5 per cent higher in 2008 than in 1999 – asset prices and credit exploded in several peripheral countries, particularly Ireland. An expansionary monetary policy has to work in much this way, somewhere. Moreover, until November 2007, spreads of Irish and Spanish public debt over German levels were next to zero. Nor is it surprising that private suppliers of credit failed to discipline the boom: they caused it.

Then came the “Minsky moment”.... [T]he Irish government rushed to guarantee its banks. The combination of the guarantees with huge fiscal deficits caused by private sector retrenchment – the Irish private sector will run a financial surplus of 15 per cent of GDP this year, according to the International Monetary Fund – has caused an explosion of public indebtedness. But this calamity is the consequence of the crisis, not its cause....

Now consider the solutions. Ireland is certainly not lacking in flexibility. On the contrary, its unit labour costs have collapsed... the fall in wages and prices worsens the overhang of euro-denominated indebtedness. Under pressure, Ireland has also imposed fiscal retrenchment. But deflating an economy suffering from the collapse of an asset price bubble often fails to work....

At best, reliance on fiscal disciplines and sovereign debt restructuring is sure to generate massively pro-cyclical policy. At worst, it will generate serial depression and default among member countries.... The crisis is a huge challenge for Ireland, which should surely convert unsecured bank debt into equity rather than force its citizens to bail out all the improvident lenders. But the Irish case also shows that the German view of how the eurozone should work is mistaken: fiscal sloppiness is not the main problem and fiscal retrenchment and debt restructuring are not the sole solutions. One cannot learn from history if one does not understand it.

## Justice DeLayed...

Duncan Black:

Eschaton: DeLay: Seems ancient history now, but the DeLay thing was one of the early "things only liberal bloggers care about" while being lectured by our betters in the Village that this was all the work of a partisan (read: Democrat) prosecutor trying to criminalize politics.

## Berkeley IIS Talk December 2

Thursday December 2: IES Rapid Response Forum:

Crying "Fire Fire" in Noah's Flood: What's behind the call for British Austerity?: Adiscussion with J. Bradford DeLong, Professor of Economics

12:30 pm European Studies Seminar Room (201 Moses Hall). A light lunch will be served.

## I Can See That Imperial Romanov Russia Is a Bear. But What Is England?

Imperial German Propaganda: War is the answer!:

UPDATE: Andrew Kanaber writes:

I Can See That Imperial Romanov Russia Is a Bear. But What Is England? - Grasping Reality with Both Hands: Sadly not German propaganda from this Universe. It's a painting by Keith Thompson for Scott Westerfield's book Behemoth. http://www.keiththompsonart.com/pages/imperial_propaganda.html. The online blurb for the book says

The behemoth is the fiercest creature in the British navy. It can swallow enemy battleships with one bite. The Darwinists will need it, now that they are at war with the Clanker powers.

Which probably explains why Britain is so Cthulean.

## Liveblogging World War II: November 22, 1940

Greek forces capture the town of Korçe, 10 miles inside Albania, after heavy fighting.

## Econ 1: Fall 2010: U.C. Berkeley: Files for November 22 "Risk Aversion and Information Goods" Lecture

Risk Aversion and Information Goods:

## Department of "Huh"? (Why Oh Why Can't We Have a Better Press Corps? New York Times Edition)

UPDATE: Deficit Hawks and Deficit Chickens:

Greg Mankiw appears to want to (a) count the impact of legislative actions he supports that raise taxes, (b) ignore the impact of legislative actions he supports that lower taxes, and (c) congratulate himself and pat himself on the back as he tells himself what a wonderful and responsible deficit hawk he is:

Greg Mankiw's Blog: Department of "Huh"? (Why Oh Why Can't We Have a Better Blogosphere? Brad DeLong Edition): Brad DeLong objects to my recent NY Times column by displaying some Tax Policy Center data that, he says, shows the Bowles-Simpson tax plan is hard on the poor and easy on the rich.  Progressives, he concludes, should oppose the plan. The problem, however, is the benchmark used in this particular table: current law as of 2015.  Under current law, all of the Bush tax cuts expire, and millions of new taxpayers are hit by the AMT.  That is an outcome that has never been in effect and that neither political party endorses.  It is an artifact of legislative history. A better benchmark, as noted by Howard Gleckman of the Tax Policy Center, is current policy.  Here are those results.  The implication is exactly the opposite.  All income groups take a hit, particularly those at the top of the distribution.

Current law is indeed an artifact of legislative history.

But all laws are artifacts of legislative history.

Given our long-term deficit problems as they appeared in 2001 and 2003, the only legislative coalition George W. Bush could assemble for his--well, it was not a tax cut because to spend is to tax and GWB really liked to spend: call it a tax shift--tax shift was for a temporary tax shift that would expire in 2010 precisely because key senators were worried about the long-run.

Now Greg wants to ignore this history.

To start--as he wishes--from the baseline he claims is "current policy" is to give Congress a pass to blow yet another hole in the ship of long-term fiscal stability, and then to pat himself on the back on how responsible a deficit hawk he is.

He wants to pat himself on the back on how good a fiscal conservative he is by counting the impact of future legislative actions he supports that raise taxes. And he wants to ignore the impact of future legislative actions he supports that lower taxes. And past fiscal actions he worked tirelessly for that blew our long-term deficit wide open? Not a word about any of them.

I say no no no.

I say it does not work that way.

This annoys me because this is yet another example of budget arsonists putting on fire chief hats. Mankiw has lobbied for more than a decade now for the permanent extension of the Bush tax cuts--without proposing a dime of offset for them--and for the unfunded Medicare Part D as well. Now he says that large action is needed to deal with our long-term deficit problems. He is right: large action is needed.

But couldn't he include one single sentence about how he and the politicians he worked for are the people who created our current long-term deficit mess?

Real deficit hawks insist on PAYGO and start from a current-law baseline.

My Original Post:(

What the Simpson-Bowles tax provisions do:

Eric Toder and Daniel Baneman: TPC Tax Topics | Distributional Estimates for Bowles-Simpson "Chairmen's Mark":

What Greg Mankiw writes:

Deficit Reduction Plan Is Realistic: Erskine B. Bowles and Alan K. Simpson, the chairmen of President Obama’s deficit reduction commission, have taken at hard look at these tax expenditures — and they don’t like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year. Such a drastic step would allow Mr. Bowles and Mr. Simpson to move the budget toward fiscal sustainability, while simultaneously reducing all income tax rates. Under their plan, the top tax rate would fall to 23 percent from the 35 percent in today’s law (and the 39.6 percent currently advocated by Democratic leadership). This approach has long been the basic recipe for tax reform. By broadening the tax base and lowering tax rates, we can increase government revenue and distort incentives less. That should command widespread applause across the ideological spectrum. Unfortunately, the reaction has been less enthusiastic. Pundits on the left are suspicious of any plan that reduces marginal tax rates on the rich. But, as Mr. Bowles and Mr. Simpson point out, tax expenditures disproportionately benefit those at the top of the economic ladder. According to their figures, tax expenditures increase the after-tax income of those in the bottom quintile by about 6 percent. Those in the top 1 percent of the income distribution enjoy about twice that gain. Progressives who are concerned about the gap between rich and poor should be eager to scale back tax expenditures. Isn't it worth saying that it looks as though Simpson-Bowles is an average$7000/year tax cut for the top 1% and an average \$600/year tax increase for the working and middle classes? "Progressives who are concerned about the gap between rich and poor should be eager to scale back tax expenditures" just does not cut it, does it?

## Hoisted from the Archives: Partha Dasgupta Makes a Mistake in His Critique of the Stern Review

Partha Dasgupta Makes a Mistake in His Critique of the Stern Review (November 30, 2006):

Partha Dasgupta makes a mistake. This is a rare, rare, rare event. Dasgupta writes, criticizing the Stern Review:

http://www.econ.cam.ac.uk/faculty/dasgupta/Stern.pdf: To give you an example of what I mean, suppose, following the Review, we set delta equal to 0.1% per year and eta equal to 1 in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels...

In the "deterministic economy where the social rate of return on investment is, say, 4% a year" model that Dasgupta is using, the concept of "output" Y is Haig-Simons output--what you could consume and still leave the economy next year with the same productive capacity as it has this year. With that definition of output Y, with consumption level C, and with social rate of return on investment r, it is indeed the case that the growth rate g(Y) of a zero-population-growth economy is:

g(Y) = r(1 - C/Y)

Take the expression for the rate of growth of consumption g(C) as a function of the parameters δ and η:

g(C) = (r - δ)/η

And see that the assumed values for r, δ, and η give us a 3.9% per year growth rate of consumption. If you impose the steady-state requirement that the growth rates of consumption and output be the same, you do indeed get a 97.5% savings rate--that consumption is 2.5% of Haig-Simons output:

C/Y = .025

because with r=4% per year that is the only way to get g(Y)=3.9%

But suppose that you use a different concept of output--GDP--and say that productive capacity increases not just because you save some of GDP but also because of improvements in knowledge and technology g(A), so that:

g(Y) = r(1 - C/Y) + g(A)

with worldwide g(A) equal, say, to 3% per year. Then our g(C) equation still gives us a 3.9% per year total economic growth rate, but our g(Y) equation is then:

3.9% = g(Y) = r(1 - C/Y) + g(A) = 4%(1 - C/Y) + 3%

which gives us a savings rate not of 97.5% of Haig-Simons output but rather of 22.5% of GDP, leaving 77.5% of GDP for consumption.

A consumption-to-output ratio of 77.5% is far from absurd, and so Dasgupta's critique of Stern fails. His mistake is in failing to remember that in his model Haig-Simons output is very, very different indeed from standard reported GDP.

That being said, I agree with most of Dasgupta's other major point: the action here is in the choice of the parameter η. I think it's appropriate to consider different ηs in the range from 1 to 5, and think the Stern Review should have done so.

(I'm also enough of a utilitarian fundamentalist to believe that the right value for δ is zero, and that Nordhaus's δ of 3% per year is unconscionable--it means that somebody born in 1960 "counts" for twice as much as somebody born in 1995, who in turn "counts" for twice as much as somebody born in 2020; somebody born in 1960 "counts" for 256 times as much as somebody born in 2160. That's not utilitarianism.)

## A Depressing Thought for the Morning...

Sometime in the past two years I have passed a milestone: I will never again wake up free of pain...

## Four Weeks Caffeine Free!!

Well, except when recovering from red-eye or other transcontinental or transoceanic airplane plights. Or for diet cokes before lectures (4 mg./oz.). Or for cups of decaf (0.5 mg./oz.)...

## Econ 1: Fall 2010: U.C. Berkeley: Student Oral Presentation Articles for the Weeks of November 22 and November 29:

Presentation Articles for Weeks of November 22 and November 29:

Timothy Jost: "Implementing Health Reform: Emerging Guidance on Insurance Exchanges" http://healthaffairs.org/blog/2010/11/19/implementing-health-reform-emerging-guidance-on-insurance-exchanges/

Report of the Commission on the Measurement of Economic Performance and Social Progress, pp. 7-18 http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf

Partha Dasgupta: Comments on the Stern Review http://www.econ.cam.ac.uk/faculty/dasgupta/STERN.pdf