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April 2011

Jonathan Cohn: Taxes Pay For Necessary Government Services And Make Capitalism Workable

JC:

Taxes Pay For Necessary Government Services And Make Capitalism Workable: I like what my tax dollars buy. Public schools. Safe food and consumer products. National security. The post office. Guaranteed income and health insurance for my aging parents, plus (soon) a guarantee of health insurance for my immediate family. I benefit directly from all of these programs. And I benefit indirectly from the stability they provide. Capitalism and democracy could not survive without a vibrant, activist government. Such a government costs money to run.

Which is not to say government cannot be wasteful or that every tax dollar is well spent. Very clearly that is not the case. When I go to the supermarket, I seek low prices and high quality. And I begrudge nobody’s insistence that taxpayers show the same vigilance....

If we want to reduce government spending and, by the way, reduce taxes as a share of our collective income, we’ll have to scale back dramatically on the income security we provide our citizens. The Congressional Budget Office thinks Ryan's plan would leave the typical retiree responsible for two-thirds of his or her medical expenses. That would be a radical change, a return to a world we've not seen since the early 1960s. Many conservatives insist that at least some painful austerity is necessary for our economic survival. Otherwise, they warn, taxes will grow to unprecedented levels, slowing down the economy. Ross Douthat makes this point today in his New York Times column. Philip Klein made a similar argument last week in the Washington Examiner....

[T]he international evidence tell a very different story about taxes and the economy... the tax burden in the Nordic countries far surpasses ours. In fact, the tax burden in those countries exceeds 50 percent. That money helps finance a welfare state far more comprehensive than ours... these countries have thrived. In fact, the Nordic formula may actually bolster growth, because the income protection it provides makes the people of Scandinavia more willing to tolerate the dislocations that come with loose labor rules and free trade.... [E]ven if we do absolutely nothing but let current law stand--in other words, if we let the Bush tax cuts expire, allow the alternative minimum tax to remain in place, allow scheduled reductions in physician fees to take effect, and limit the control of health care costs only to the official projections for the Affordable Care Act--it seems likely that our tax burden would still not exceed what the Nordic countries face today, at least not for another 50 years.

I'm not saying that the "do nothing" approach, as Ezra Klein calls it, is ideal..... My ideal plan would look a bit more like the Bipartisan Policy Center’s plan.... I also could live with a less progressive tax system if (and only if) it was for the sake of financing a more robust welfare state.


Why Oh Why Can't We Have a Better Press Corps? New York Times/Ross Douthat Median Family Income Edition

UPDATE: Ross Douthat says this is a Family Economic Income concept--not just wages but value of benefits and employer social insurance contributions as well...


Dean Baker:

Douthat Makes It Up On Median Family Income: Ross Douthat struck another blow against fact-based arguments when he told readers that the median family of four has an income of $94,900.... If Douthat wanted to base this argument in reality then he would have had to start with a median income for a family of four of $75,700. This is what the Census Bureau reports Douthat overstated the median income for a family of four by more than 25 percent. But hey, it's for a good cause, he wants to keep taxes low.

Douthat also includes some bizarre racial politics... argues that we will face racial tensions in future years because most of the working population will be non-white whereas most seniors getting Social Security and Medicare will be white. His story is that the non-white working age population will resent paying benefits to white retirees. This is possible if rich people can direct racial resentments towards retired workers. However the more obvious racial tension would be between the working population and the very wealthy, who are also overwhelmingly white. The  top 1 percent's share of national income has increased by close to 10 percentage points in the last 30 years...


Eleanor Roosevelt Liveblogs World War II: April 18, 1941

ER:

My Day by Eleanor Roosevelt, April 18, 1941: In the past few days I have had so much time on planes that I actually finished reading everything I took with me. I may have mentioned to you before "War By Revolution," by a young Englishman, Francis Williams, who has been in politics for a number of years. I was much interested in it because I feel that his contention is correct, that really to win the fight against Hitlerism, the people in all the countries under Hitler's control must want freedom and a better life brought about through their own action in preference to accepting whatever a dictator gives them. Mr. Williams insists that this must be a "people's war." The following quotation, perhaps, epitomizes his view of the future:

It (the war) will be won when the people of Britain speak to the people of Europe and in one voice call them to a democratic revolution of the people against tyranny everywhere.

Another small book, by an American who originally came from Kansas but has lived for many years in the Balkans, is apparently inspired by Anne Lindbergh's book, "The Wave of the Future." Mr. R. H. Markham writes "The Wave of The Past" and insists: "The past has its mark and the future has its mark. The one is slavery and the other is freedom." I think you will find both of these books of interest.

If you want a rather weird but touching story, read Paul Gallico's "Snow Goose." In every war certain legends get about in the army. This is a legend of the beaches of Dunkirk, with a background of sadness and tenderness expressed most beautifully in the story.


Nice to See This--Even If It Is Ten Years Late and $4 Trillion Short

Luca di Leo:

Greenspan Steps Up Call to End Bush-Era Tax Cuts - Washington Wire - WSJ: Former Fed Chairman Alan Greenspan is stepping up his call for Congress to let the Bush-era tax cuts lapse. In an appearance Sunday on ABC’s “Meet the Press,” Mr. Greenspan used his strongest words yet to urge lawmakers to let them expire. The risk of a U.S. debt crisis, he said, is just too big. Mr. Greenspan, who retired from the Federal Reserve in 2006, had endorsed the cuts back in 2001 championed by then-President George W. Bush. “This crisis is so imminent and so difficult that I think we have to allow the so-called Bush tax cuts all to expire. That is a very big number,” he said, referring to how much the U.S. government could save from letting income taxes go back up to levels last seen under former President Bill Clinton.

Mr. Greenspan was talking about re-imposing the taxes for all Americans. The Treasury has estimated that a permanent extension of all the Bush tax cuts would cost $3.6 trillion over the next decade. Allowing taxes to increase on those in the top income brackets would take the cost to the government down to $2.9 trillion, according to White House estimates...

Of course, the crisis isn't imminent: it looks to me like it is more than a decade away. But it is not too soon to start trying to avoid it.


This Would Be a Significant Mistake

Robin Harding of the FT:

Fed to signal end of monetary easing: An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June....

Even the more dovish officials at the Fed see little case for further asset purchases because the risks that led them to launch QE2 last autumn have abated. Core inflation, excluding volatile food and energy prices, is still below the Fed’s goal of “2 per cent or a bit below” but it now appears to be rising rather than falling. In recent testimony to Congress, Ben Bernanke, Fed chairman, noted evidence of “a self-sustaining recovery in consumer and business spending”. He added that “downside risks to the recovery have receded and the risk of deflation has become negligible”....

However, the broad consensus that further asset purchases are not necessary does not mean that a majority of FOMC members are in any hurry to raise interest rates. “As long as core inflation year-over-year is 1.5 per cent or lower, I am extremely doubtful that we’ll need an adjustment to monetary policy,” Charles Evans, president of the Chicago Fed, told reporters after a recent speech.

According to some of the standard policy rules favoured by the Fed, unemployment is still higher and inflation is still lower than levels that would prompt a tightening.... Some FOMC doves remain concerned about risks to growth, especially the cost to consumers from high oil prices . By contrast, FOMC hawks who favour earlier tightening believe the Fed should act against higher headline inflation...

With an 8.8% unemployment rate, core inflation still below full 2%, the price level well below it's trend, nominal GDP well below it's trend, and a significant fiscal contraction likely--the case for further monetary policy ease is very strong indeed.


College Orientation

Welcome to Faber College!

The events planned for your first days of college are intended to acquaint you with important aspects of life in college. We hope you will approach these events as opportunities to explore college resources and meet new people. So learn, enjoy, and know that we’re delighted to welcome you!

Sunday, August 28, 2011 — New students (including new transfer students) are expected to arrive on campus (at Faber Hall) between 9 a.m. and noon. Orientation begins! If you arrive after noon, pick up your keys at Campus Police.

Monday, August 29, 2011 — Last event for parents ends at 1:30 p.m. Parents remaining on campus after 1:30 p.m. will be hunted down with dogs.


Yes, of course Homeland Security Is Out of Control. Why Do You Ask?

Cory Doctorow reports:

CNN has discovered that the TSA considers "complaining about TSA procedures" to be a profiling marker for potential terrorists. They explain that one terrorist (the "twentieth hijacker") complained a lot about TSA screening, and so that means "getting angry about TSA screening procedures" goes in the "signs of terrorist intent" bucket. However, CNN also notes that intelligence analysts say that Al Qaeda official policy is for its operatives to be meekly cooperative when pulled over for TSA screening. Strangely, "cooperating with the TSA" has not been added to the TSA's profiling screen.

http://www.boingboing.net/2011/04/17/tsa-considers-being.html


A Half-Completed...

Matthew Yglesias:

Yglesias » Politics In A Steep Recession: Some people have expressed surprise that the Great Recession hasn’t proven to be a boon to left-wing political movement. I think the expectation that something like that would be the result of a financial collapse is based on an over-generalization of FDR and the New Deal. If you look at the 1930s in a global context, the predominant trend was the rise of far-right nationalist parties, not just in Germany and Japan but across a huge swathe of Europe. And today’s lesser recession is prompting a

And his commenters:

longbongsilver 35 minutes ago: There are two groups of people: Those who can extrapolate from incomplete information.

Salient 5 minutes ago in reply to longbongsilver: There are two groups of people: Those who read an unexpectedly incomplete sentence and feel an unresolved tension following them around for the rest of the day,

JMGK 33 minutes ago: For only $10/month, Yglesias Premium will let you find out what, in fact, today's lesser

riggabyte 29 minutes ago: This is why we always

beamishy 24 minutes ago: We shouldn't be afraid, since there's simple and straightforward way to prevent the rise of fascism. We must act now, but if we

gregorsam 9 minutes ago: Charming. First the spellings and now

Salient 9 minutes ago: the predominant trend was the rise of far-right nationalist parties, not just in Germany and Japan but across a huge swathe of Europe. And today’s lesser recession is prompting a

OH MY GOD THE NAZIS GOT HIM


Jane Austen Blogging: Oh Dear...

Mark Mitchell writes:

Why We Need Jane Austen or How to be a Gentleman with Examples Good and Bad: Kearneysville, WV. I am currently teaching a course that includes several works of literature including Jane Austen’s Pride and Prejudice. Right from the start I must admit that I was not trained in an English department so I am hampered to the extent that I’m rather inept at reading great works of literature for their sublimated eroticism, their homo-erotic subtexts, and covert commentaries on sexual, racial, and economic oppression. It is, then, with apologies to those who know better that I read literature as a naïve lover of a good story, good writing, and commentary on the unchanging human condition...

Oh dear.

I did not catch any homo-erotic subtexts in Pride and Prejudice. But for sublimated eroticism and for for sexual and economic oppression--well, reading Pride and Prejudice for its sublimated eroticism and its not-at-all covert commentaries on sexual and economic oppression is not in opposition to reading it as good story, good writing, and commentary. It is of the essence and at the heart of reading it as good story.

For example:

Elizabeth looked archly, and turned away. Her resistance had not injured her with the gentleman, and he was thinking of her with some complacency, when thus accosted by Miss Bingley: "I can guess the subject of your reverie." "I should imagine not." "You are considering how insupportable it would be to pass many evenings in this manner—in such society; and indeed I am quite of your opinion. I was never more annoyed! The insipidity, and yet the noise—the nothingness, and yet the self-importance of all those people! What would I give to hear your strictures on them!" "Your conjecture is totally wrong, I assure you. My mind was more agreeably engaged. I have been meditating on the very great pleasure which a pair of fine eyes in the face of a pretty woman can bestow." Miss Bingley immediately fixed her eyes on his face, and desired he would tell her what lady had the credit of inspiring such reflections. Mr. Darcy replied with great intrepidity: "Miss Elizabeth Bennet"...

And

Mr. Bennet had very often wished before this period of his life that, instead of spending his whole income, he had laid by an annual sum for the better provision of his children, and of his wife, if she survived him. He now wished it more than ever. Had he done his duty in that respect, Lydia need not have been indebted to her uncle for whatever of honour or credit could now be purchased for her. The satisfaction of prevailing on one of the most worthless young men in Great Britain to be her husband might then have rested in its proper place. He was seriously concerned that a cause of so little advantage to anyone should be forwarded at the sole expense of his brother-in-law, and he was determined, if possible, to find out the extent of his assistance, and to discharge the obligation as soon as he could. When first Mr. Bennet had married, economy was held to be perfectly useless, for, of course, they were to have a son. The son was to join in cutting off the entail, as soon as he should be of age, and the widow and younger children would by that means be provided for. Five daughters successively entered the world, but yet the son was to come; and Mrs. Bennet, for many years after Lydia's birth, had been certain that he would. This event had at last been despaired of, but it was then too late to be saving. Mrs. Bennet had no turn for economy, and her husband's love of independence had alone prevented their exceeding their income...

I wonder if any students were brave enough to point out that the novel gets much of its good-story charge from its sublimated eroticism and its overt commentaries on sexual and gender oppression--those pieces of it that Mitchell sneers at so?

And it does get worse. Mitchell claims that: "it is the women who are in want of a husband and the men of fortune, while not disinclined to marry, are surely not obsessed with the idea." But surely Darcy has got it real, real bad for Eliza from chapter 34, and has it bad for her from chapter 6? She, by contrast, does not have it bad for him until chapter 50.

I wonder if Mitchell will next write about Anna Karenin as a novel about railway safety...


David Frum: Two Cheers for the Welfare State

David Frum:

Two Cheers for the Welfare State | FrumForum: In the interval since I started this response to Yuval Levin... the Ryan budget plan has been approved by the House of Representatives.... Ideas like those endorsed by Yuval Levin are now the formal position of the Republican party. My guess is that the party’s presidential nominee will attempt to tip-toe away from that position in 2012, but who knows? Anyway, it will not matter. President Obama’s billion-dollar campaign will ensure that Republicans are thoroughly identified with it. So Yuval Levin’s proposition is the proposition that Republicans will take to the country. Perhaps that is as it should be. Since the economic and electoral disasters of 2006-2009, Republicans have veered in a sharply libertarian direction. Why not put that new direction to the test of democracy? Perhaps Paul Ryan is right, and Americans (or anyway: voting Americans) have abruptly changed their minds during this economic crisis about their expectations from government.

I’ll admit: I’ve also changed my mind during this crisis, but in the opposite direction....

The radical free-market economics I embraced in the late 1970s offered a trade: Yes, there would be less social provision. In return, Americans would receive an economy that was simultaneously more dynamic and also more stable.... Some of the terms of that trade were honored. From 1983 through 2008, the US enjoyed a quarter-century of economic expansion, punctuated by only two relatively mild recessions.... New industries were born, new jobs created on an epic scale, incomes did improve, and the urban poor were drawn into the working economy. But of course, other terms of the trade were not honored. Especially after 2000, incomes did not much improve for middle-class Americans. The promise of macroeconomic stability proved a mirage.... [T]he crisis originated in the malfunctioning of an under-regulated financial sector, not in government overspending or government over-generosity to less affluent homebuyers. Fannie Mae and Freddie Mac were bad actors, yes, but they could not have capsized the world economy by themselves. It took Goldman Sachs, Merrill Lynch, AIG, and — maybe above all — Standard & Poor’s and Moody’s to do that....

GK Chesterton once wrote that we should never tear down a fence until we knew why it had been built. In the calamity after 2008, we rediscovered why the fences of the old social insurance state had been built.... I cannot take seriously the idea that the worst thing that has happened in the past three years is that government got bigger. Or that money was borrowed. Or that the number of people on food stamps and unemployment insurance and Medicaid increased. The worst thing was that tens of millions of Americans – and not only Americans – were plunged into unemployment, foreclosure, poverty....

I strongly suspect that today’s Ayn Rand moment will end in frustration or worse for Republicans.... We can fulminate against unchangeable realities, alienate ourselves from a country.... Or we can go back to work on the core questions facing all center right parties in the advanced economies since World War II: how do we champion entrepreneurship and individualism within the context of a social insurance state? Those are words I would not have written 15 years ago. I write them now, conscious that I am very far from the first person to write them.... Yuval Levin knew this truth when I did not. I’ll preserve it here in safe keeping for him and all his friends until they are ready to remember it again.


Tom Levenson: Albert Einstein was a Friend of Mine, and I Can Tell You, Representative: You Are No Albert Einstein

Tom Levenson:

Balloon Juice » Albert Einstein was a Friend of Mine, and I Can Tell You, Representative: You Are No Albert Einstein: From Think Progress (h/t Daily Kos) we learn that in the midst of yet another creationist eructation, a Tennessee state representative has invoked the ghost of the good Dr. Einstein to defend the teaching of woo to the unwary:

Rep. FRANK NICELEY (R-Strawberry Fields): I think that if there’s one thing that everyone in this room could agree on, that would be that Albert Einstein was a critical thinker. He was a scientist. I think that we probably could agree that Albert Enstein was smarter than any of our science teachers in our high schools or colleges. And Albert Einstein said that a little knowledge would turn your head toward atheism, while a broader knowledge would turn your head toward Christianity.

I don’t have much truck with the argument from authority, but just this once, let me let it rip. Dude:  I wrote the book here. Well, not the book, but one more in the seemingly limitless pile of Einsteiniana that has chased the poor man through the years. So, a couple of things.  First:  Einstein himself was high school and college science teacher.  He taught secondary school briefly during the years between his graduation from Zurich’s ETH (1900) and the start of his job at the Swiss Patent Office (1902), tutoring a private student or two as well.  He became a university professor in 1908, and taught at that level until his move to Berlin in 1914.  He’s part of the set that the Representative—perhaps stunned by a too-prolonged exposure to tangerine skies—would seek to diss.

But the real howler, the grotesque lie, comes with the claim that Albert Einstein, famously Jewish and equally so an atheist by most senses of the word, would suggest that deep learning and understanding would make a person a Christian.

This is, of course, nonsense, and worse that that—a willful deception and one more example of the urge to invent a comforting falsehood when reality bites too hard.  Which sums up the whole modern GOP world view, sadly...


Donald Trump on George W. Bush and Barack Obama

Dominic Carter reports:

NY1 Exclusive: Donald Trump Slams "Evil" Bush, Praises Obama : "McCain, really, that was almost an impossible situation," said Trump. Bush has been so bad, maybe the worst president in the history of this country. He has been so incompetent, so bad, so evil that I don't think any Republican could have won." During an exclusive interview with NY1 in his Midtown office on Fifth Avenue, Trump slammed President George Bush's foreign policies. "You know, you can be enemies with people, whether it's Iran, Iraq, or anyplace else and you can still have dialogue. These people wouldn't even talk with him. It's terrible," said Trump.

While he had harsh words for the outgoing president, he had a much different opinion of President-elect Barack Obama. "I think he has a chance to go down as a great president. Now, if he's not a great president, this country is in serious trouble," said Trump. "I think [Obama's] going to lead through consensus," continued Trump. "It's not going to be just a bull run like Bush did. He just did whatever the hell he wanted. He'd go into a country, attack Iraq, which had nothing to do with the World Trade Center and just do it because he wanted to do it."

Trump was then asked if he ever thought he would see an African-American president in his lifetime. "They always said 100 years before a black man or woman could be elected president. And the 100 years turned out to be, like, one year. He's done an amazing job," said Trump.


Health Policy Experts Really, Really Dislike the Ryan Plans

Harold Pollack:

Health policy experts really, really dislike the Ryan plans « The Reality-Based Community: More than 190 health policy experts really, really hate the Ryan proposals. This is a pretty distinguished group: Hank Aaron, David Cutler, Judy Feder,, Jacob Hacker, Harold Pollack, Uwe Reinhardt, Theda Skocpol, Paul Starr–you know, people like that. In a letter to congressional leaders, these scholars had this to say about Medicaid:

We write this letter to oppose plans to convert Medicaid to a block grant and to cut Medicaid benefits.

These changes would do nothing to improve quality but would ration care to millions of America’s most vulnerable citizens.

Medicaid supports health care for nearly 60 million people, including 30 million children. Two-thirds of Medicaid expenditures support services for impoverished people who are elderly or who suffer from disabilities. By spreading the cost of care between federal and state budgets, Medicaid helps state governments maintain services during economic downturns.

Looming budget deficits have led some to propose capping federal spending by converting Medicaid into a blockgrant program. We recognize the challenges posed by budget deficits. Actions must be taken to close those deficits. Yet block granting Medicaid is both unfair and unwise. During economic downturns it would expose states to the full costs of increasing enrollments just when their revenues are falling. The inevitable result would be curtailed services, reduced eligibility, and increased charges that many low-income patients would be unable to pay, forcing them to forego care or placing burdens for uncompensated care on hospitals and physicians.

And this to say about Medicare:

Advocates of vouchers seem unwilling to label what they are advocating for what it is, and seek to rechristen their plan as “premium support.” Premium support referred to payment linked to health costs, not a more slowly growing economic index. It entailed aggressive regulation to promote informed choice by patients. The voucher proposals now being advanced have none of those protections.

We are particularly concerned by recent Congressional Budget Office analyses, which indicate that current proposals would link voucher payments to growth in the Consumer Price Index adjusted for population growth. Because medical care costs are rising much more rapidly than the CPI, this guarantees that the value of the proposed Medicare vouchers would erode over time. By 2030, the Congressional Budget Office estimates that a typical 65-year-old would pay more than twice as much for health care under the voucher proposal than that individual is predicted to pay under current law….

In summary, turning Medicare into a voucher program would undermine essential protections for millions of vulnerable people. It would extinguish the most promising approaches to curb costs and to improve the American medical care system. We urge responsible members of Congress to reject calls for repealing traditional Medicare and to support vigorous implementation of the Affordable Care Act.

The Congressional Budget Office has essentially echoed these findings in a devastating analysis. Paul Ryan is an appealing guy. He has produced an extreme and appalling proposal for the future of American social insurance.


Emerging Asia Has Recovered from the Downturn. And Now What?

Paul Krugman:

Inflation, Here and There: In advanced economies, the collapse of housing bubbles and the overhang of debt run up during the Great Moderation is leading to persistently depressed demand, even with very low policy interest rates. The result is low returns to investment; not much point in adding to capacity when you’re not using the capacity you have.

Meanwhile, emerging economies have plenty of demand, in part because they’re emerging, in part because they didn’t share in the big debt runup. So what the world economy “wants” to do is have large capital flows from North to South, and, correspondingly, large current account deficits in the emerging world — which would, of course, help the advanced economies recover.

But... the transmission mechanism by which capital flows get translated into trade balances has to involve a rise in the relative prices of goods and services produced in the emerging nations. The natural and easy way to get that would be via currency appreciation; but governments don’t want to see that happen. So the invisible hand is in effect getting the same result — gradually — by pushing up nominal prices in these countries [via inflation]. It’s worth noting that when these governments try to control inflation by squeezing demand rather than by letting their currencies rise, they’re... helping to perpetuate the slump in advanced countries. Good work all around.

Meanwhile, back in the North... March core inflation came in lower than expected.... But really, when it comes to high-frequency data, stuff happens.... [S]hort-run spikes in inflation generally reverse themselves.... [T]he big price bump of early 2011 is fading away. And taking the longer perspective, you can’t have a wage-price spiral if wages refuse to spiral; and all indications are that wages are being held down by high unemployment, never mind gas and food prices.

Wage growth hasn’t fallen as much as I expected a couple of years ago; it’s now clear to me that I failed to put enough weight on the downward wage rigidity literature. But there’s nothing here to suggest any reason to consider inflation a problem.

See Akerlof, Dickens, and Perry (1996), "The Macroeconomics of Low Inflation" http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1996_1_bpea_papers/1996a_bpea_akerlof_dickens_perry_gordon_mankiw.pdf


Econ 210a: Readings for April 20, 2011: World War II, the Mixed Economy and Actual Existing Socialism (DeLong)

Extra Reading for April 20, 2011:

Previously Assigned Readings for April 20, 2011:

  • Paul Krugman (2006), "Introduction" to John Maynard Keynes, The General Theory of Employment, Interest and Money. http://tinyurl.com/dl20090112z

  • John Maynard Keynes (1926), "The End of Laissez Faire." http://tinyurl.com/dl20090112ad

  • Mancur Olson (1996), "The Varieties of Eurosclerosis: The Rise and Decline of Nations Since 1982," in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe Since 1945, (Cambridge, Cambridge University Press), pp.73-94. http://tinyurl.com/dl20090112x

  • Barry Eichengreen (1996), "Institutions and Economic Growth: Europe Since 1945," in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe Since 1945 (Cambridge University Press), pp. 38-72. On reserve at Graduate Services, 208 Doe Library. http://tinyurl.com/dl20090112x


Why Oh Why Can't We Have a Better Press Corps?: Joe Nocera of the New York Times Edition

Indeed. In his first paragraph Nocera complains that his critics are "unimpressed with the idea of substituting natural gas for imported oil... [to] wean the country from its dependence on OPEC." It is only further down that Nocera admits that the complaints are that he has "gnored the environmental dangers of drilling for gas, particularly the use of hydraulic fracturing, or fracking." Those two are not the same.

Ed Cone has some advice that Nocera really should listen to:

EdCone.com: Fracking Nocera: [Joe] Nocera, fresh to the big stage of the oped page, responds to legitimate questions about a recent column by throwing a hissy fit.

Joe, Joe, Joe. You wrote a column about natural gas without mentioning environmental concerns. Readers pointed out the omission. The proper response is to concede the oversight and deal with the issues at hand, not to snark at your critics and wave the bloody shirt ("...the Middle East, where American soldiers continue to die") as if drill, baby, drill was the only true expression of patriotism.

Indeed. Joe Nocera:

About My Support for Natural Gas: Some readers of The New York Times are unimpressed with the idea of substituting natural gas for imported oil, even though such a move would help wean the country from its dependence on OPEC. Or so it appears after I made that argument in my column on Tuesday, noting that natural gas is a fossil fuel we have in abundance and is cleaner than oil to boot.

After that column was published, I was buried under an avalanche of angry e-mails and comments, most of them complaining that I had ignored the environmental dangers of drilling for gas, particularly the use of hydraulic fracturing, or fracking, a technique that involves shooting water and chemicals into shale formations deep underground.

“No mention of the disastrous consequences of fracking?” read one e-mail. Many readers pointed to a study by a Cornell scientist — reported in The Times the same day my column appeared — claiming that methane gas emissions posed a bigger threat to the environment than dirty coal. Another reader called my column “a disgrace.”

Really? Let’s take a closer look. To begin with, fracking is hardly new. In Texas and Oklahoma, it has been used for decades, with nobody complaining much about environmental degradation. It must be a coincidence that these worries surfaced when a natural gas field called the Marcellus Shale was discovered in the Northeast, primarily under Pennsylvania and New York. Surely, East Coast residents wouldn’t object to having the country use more natural gas just because it’s going to be drilled in their own backyard instead of, say, downtown Fort Worth. Would they?

As for the actual environmental questions.... In Dimock, Pa., where methane appears to have leaked into the water supply, state environmental officials say that the problem was not fracking but rather sloppy gas producers who didn’t take proper care in cementing their wells.... In the Southwest, producers bury the waste in sealed containers deep underground. The geology of the Marcellus Shale, however, makes that much more difficult.... Ultimately, producers in the Marcellus Shale will have to do a better job getting rid of the waste. Finally, there is the concern raised by Robert Howarth, the Cornell scientist, who says that natural gas is dirtier than coal. His main contention is that so much methane is escaping from gas wells that it is creating an enormous footprint of greenhouse gases. His study, however, is not exactly iron-clad. Industry officials have mocked it, but even less-biased experts have poked holes in it. The Environmental Defense Fund, for instance, has estimates of methane gas emissions that are 75 percent lower than Howarth’s....

The truth is, every problem associated with drilling for natural gas is solvable.... The country has been handed an incredible gift with the Marcellus Shale.... You can play the Not-In-My-Backyard card, employing environmental scare tactics to fight attempts to drill for that gas.

Or you can embrace the idea that America needs the Marcellus Shale, accept the inconvenience that the drilling will bring, but insist that it be done properly. If you choose this latter path, you will be helping to move the country to a fuel that is — yes — cleaner than oil, while diminishing the strategic importance of the Middle East, where American soldiers continue to die.

It’s your call.


A Primer on Social Insurance

Ezra Klein writes:

Why can’t we just give seniors cash?: Tyler Cowen and Matt Yglesias are going back and forth on the appeal of converting Medicare into a straight cash grant.... As Matt writes, “If grandma wants to spend that money at the hospital, good for her. If she wants to spend it on heroin or a television, then that’s good for her, too.” Cowen concurs. “What would terrify the left,” he says, “is the likelihood that genuine privatized cash would actually win that competition.”

This... misses the problem.... As a society, we are not willing to let people die painfully in the street.... [W]hat terrifies all of us is what happens after someone takes the cash and then gets sick....

At age 65, grandma decides to purchase no health-care plan, as she figures she’ll just get one when she gets sick, or maybe just get one next year, or perhaps she just doesn’t want to spend money extending decrepitude. But then she has a stroke and gets rushed to the hospital. Someone is paying for that emergency care. It might be the hospital. It might be the taxpayers. But it’s someone: The paramedics aren’t going to refuse to lift her onto the gurney. And then she needs rehabilitation. Someone is going to end up paying for that, too. Or perhaps she gets leukemia and, in a display of consistency, doesn’t want heroic efforts made to fight it. But are we really prepared to deny her pain meds? Or hospice?...

This is why Medicare is universal and the health-care law has an individual mandate. If we were willing to let people simply live with the consequences of their decisions, we could have a very different health-care system than we do. But we’re not — and, as a compassionate, rich society, I don’t think that’s such a bad thing. This is why we, like every other developed nation, are moving toward insurance solutions that assume an eventual need for health care. If we can’t say no credibly, then we need to say yes responsibly, and in advance.

I think Ezra is completely correct. But Ezra misses a big point: adverse selection. Some seniors will cost Medicare zero. Some seniors will cost Medicare $2,000,000. The seniors know more about their health status than the insurance companies do.

When those seniors who rationally think that they could pay for their health care out of the cash take the cash, that means that the rest of the cash does not cover the cost of treating those who do want insurance. In Tyler Cowen's world, those who want to buy Medicare almost surely cannot. The market to sell and buy medical risk is unlikely to exist.

Tyler Cowan would probably say: tough. If you were born with a tendency toward high cholesterol you ought to have known that by age 20 and been busily saving all your life in order to pay the extra expected costs of treating your heart diseases. But I don't think the rest of us are willing to say that a bad dice roll in the genetic lottery plus an absence of foresight should doom you to an early, untreated death.

That is the point of Ken Arrow (1963), "Uncertainty and the Welfare Economics of Medical Care". That insight is one of many reasons he deserves his Nobel Prize.


Jonathan Leviin: John Bates Clark Medalist

Ryan Avent writes:

Economics: Jonathan Levin wins the John Bates Clark medal: THE American Economic Association has announced that Jonathan Levin, an economist at Stanford University, has one the prestigious John Bates Clark medal, which is given to the most promising economist under 40. Previous winners include Milton Friedman and Paul Krugman; last year's winner was Esther Duflo. Here's the AEA's introduction of Mr Levin:

Jonathan Levin is a leading scholar in the fields of industrial organization and microeconomic theory, whose work stands out for its combination of theoretical depth, empirical methods, and compelling applications. He has conducted influential research on the economics of contracting, the organization and design of markets, subprime lending, and on empirical methods for studying imperfect competition. His research is methodologically broad, and often combines a sophisticated grasp of economic theory with careful empirical analysis. He has been a leader both in developing new methods in industrial organization and microeconomic theory, and in producing path-breaking applied research. You can read more here and here. Or here, at Mr Levin's website.


Is "Modern Monetary Theory" Modern or Monetary or a Theory?

I think I am beginning to understand what had confused me: MMT is not M, or M, or T. Steve Randy Waldmann:

interfluidity » MMT stabilization policy — some comments & critiques: Enthusiasts sometimes present MMT in a manner that’s too complete and hermetically sealed. While some MMT theorizing is based on “double entry accounting” or “obvious, unarguable facts”, when MMT adherents offer non-trivial conclusions, they rely upon assumptions about human behavior that are in fact contestable...

But unless the proponents of a point of view admit that it is a set of guesses about the world that is potentially falsifiable, you don't have a theory--rather you have a tautology.

This will be a long post.... The summary points... are repeated below.... (1) The central macroeconomic policy instrument available to governments is regulating the flow of “net financial assets” to and from the private sector. The government creates private sector assets by issuing money or bonds in exchange for current goods or services, or else for nothing at all via simple transfers. Governments destroy private sector financial assets via taxation. MMT-ers tend to view financial asset swaps, whereunder the government issues money or debt to buy financial assets already held by the private sector (“conventional monetary policy”) as second order and less effective, although they might acknowledge some impact.

Issuing money in exchange for goods or services is called "spending". Issuing bonds in exchange for goods or services is called "borrowing." Destroying private-sector assets via taxation is called "taxing." The government's spending, borrowing, and taxing together make up not its monetary policy but its fiscal policy.

If people want to talk about spending, borrowing, and taxing, I cannot object unless they call themselves "Modern Monetary Theorists." That seems to me to be the equivalent of somebody making the claim:

The phrase 'neige est blanche' is true if and only if penguins are orange.

Either it is false, or else people are not using words to mean what the words mean.

If MMTites believe as Steve Randy Waldmann claims they do, then they seem to me to be Hansenites (not Hicksians!) or Wicksellians, not monetary theorists in any Fisher-Friedman tradition. And it doesn't seem to me to be "modern" either. It seems to be what my notes from Tom Sargent's 1981 class call the "fiscal theory of the price level"...

Nick Rowe has an alternative interpretation:

Worthwhile Canadian Initiative: Reverse-engineering the MMT model: The IS curve is vertical. The IS is assumed vertical because the rate of interest is assumed to have no effect on either desired savings or desired investment. There is no natural rate of interest in the MMT version.... If the IS curve lies either to the right or to the left of full-employment output, there exists no interest rate such that desired savings equals desired investment at full employment.... If, by sheer fluke (or by skillful fiscal policy) the IS curve is exactly at full employment, any rate of interest will make desired savings equal desired investment at full employment.... Monetary policy has no effect on AD. Fiscal policy can be used, and must be used, because this model, with its vertical AD curve, has no inherent tendency towards "full employment" output. The price level is indeterminate, unless active fiscal policy makes it determinate.

Since monetary policy has no role to play in determining AD, the central bank can set any interest rate it feels like setting. Indeed, it might as well set a nominal interest rate near zero.... The rate of interest plays no allocative role in savings and investment. It does not coordinate intertemporal consumption and production plans of households and firms. It merely re-distributes wealth between borrowers and lenders.

In a standard model, the government has a long run budget constraint.... If the nominal/real rate of interest is less than the growth rate of nominal/real GDP, the government can run a stable Ponzi scheme. It can borrow, then borrow again to pay the interest, and the debt/GDP ratio will still fall over time, because the debt is growing at the rate of interest, which is lower than the growth rate of GDP. If the central bank can set any interest rate it likes, it might as well set a rate of interest below the growth rate of GDP. So the government debt becomes a stable Ponzi scheme, and there is no long run government budget constraint in the normal sense. The only constraint on fiscal policy is that if the government runs too big a deficit and/or allows the debt to grow too large this would cause the IS to shift to the right of full employment output, and so causes accelerating inflation....

MMTers have a liquidity preference (LM) theory of the rate of interest, and a loanable funds (IS) theory of the level of income.


Why Oh Why Can't We Have a Better Press Corps?

Jonathan Schwarz:

A Tiny Revolution: Then They Came for Dana Milbank: Dana Milbank has made a great living as a media liberal who constantly ridicules liberals. But recently it seemed as though he'd suddenly noticed something was going on. Why? Because it was happening to him and his "brand-name MBA" wife, who were being screwed by Citibank after they'd refinanced their mortgage. (In fact, while he didn't mention it, his wife actually once worked for Citibank.) Now Milbank understood that "big banks" needed to be "brought to heel."

Except...after his brief encounter with reality, Milbank has gone right back to telling us what losers liberals are. Did you know the House Progressive Caucus has come up with some kind of preposterous socialist budget? But they didn't move the press conference inside even though it was raining! And they were all carrying umbrellas! What a bunch of nimrods! Ha ha ha ha ha ha oh crap look at the caller ID that's Citibank again ha ha ha ha ha ha!

First they came for the welfare mothers, but I did not speak out, because I was a member of Skull & Bones.

Then they came for middle-class manufacturing unions, but I did not speak out, because I had to get to a party at Marty Peretz's.

Then they came for the upper middle class people who didn't have columns in the Washington Post, but I did not speak out, because Dennis Kucinich is short.

And then they came for me...and I was STILL so fracking stupid that I spent my time making fun of the House Progressive Caucus.


Why Do Stephen Gandel Rana Foroohar and Felix Salmon Read Larry Summers's Endorsement of Dodd-Frank as a Call for Deregulation?

Damned if I know. Felix Salmon and Stephen Gandel Rana Foroohar, I think, gets it wrong. Felix writes:

Larry Summers has had enough financial regulation: The financial crisis? Regrettable, obviously. But let’s not rush to judgment here. Our financial system, pre-crisis, worked pretty well. Let’s not break it just because there was a crisis. That’s the message being peddled by Alan Greenspan, predictably, sadly, and hilariously. And now he has a high-profile bedfellow from the other side of the aisle: Larry Summers.... Stephen Gandel Rana Foroohar summarizes:

One of the other big questions was what, if anything, Summers would have done differently in terms of regulating the banking system. The answer – not much. “I’ve been more cautious than many about constraining financial innovation,” he said, adding that he didn’t believe the financial crisis had its roots in “new-fangled financial instruments” but rather in a simple real estate bubble. Hmmm—tell that to Iceland. One thing Summers said that most of the crowd could agree with is that “anger and dissatisfaction with the financial system doesn’t constitute a [coherent regulatory] policy.”

There’s much more where that came from. This, for instance, is classic Larry:

It’s common in a moment like this to go into a general bash on economics. And everyone who hates economics because they don’t like markets in any context, or because they don’t do math, and so if you do a subject with math you have a bias towards believing that math is useless — everyone who doesn’t like economics has piled on at this moment to regard this crisis as a repudiation of economics. And I don’t think that’s right...

How we think about the design of regulatory institutions... the public choice school has taken that very seriously, but they have driven it relentlessly towards nihilism.

Larry’s keen on saying that “we’d make a serious mistake if we threw the baby out with the bathwater here.” But it seems to me that most people talking about babies and bathwater — and Summers is a prime example here — tend to be much more keen to protect their precious babies than they are constructive when it comes to the big questions of how to drain away the poisonous bathwater. In this case, Summers has gone so far as to launch ad hominem attacks on reformers, calling them angry people who hate economics and don’t do math. At one point in his talk, Summers explains that people who want to regulate the financial system are very much like the smart people who became communists and who went on to create the Soviet Union.

Salmon's and Gandel's Foroohar's glosses on what Summers said seems to me to be largely wrong--not that I was there (I was stuck at the Philadelphia airport on a USAir jet whose engine would not start), but I watched the video.

First, the passage that Salmon calls "classic Larry" is the second half of a single answer to a question from Martin Wolf about whether economists simply do not understand what is going on. In fuller context, Summers says:

There is an enormous amount that is essentially distracting, confusing, and problem-denying in the stuff that is the substance of the first year course in most [economics] Ph.D. programs. I think economics knows a fair amount [about financial crises]. I think economics has forgotten a fair amount that is relevant. And it has been distracted by an enormous amount. I don’t think in general macroeconomics kept up with the [behavioral-noise] revolution in finance, as it was realized that asset prices show large volatility that does not reflect anything about fundamentals. I do not think contemporary macroeconomics adjusted or adapted to [model and understand] changes in the patterns of financial intermediation and the ways in which that took place.

I think people who were practical understood [the] concepts of liquidity finding its way into price inflation or into asset price inflation and being problematic either way. But I think those concepts of [how] liquidity [generated] into asset price inflation were at the very edge of, and in many cases not even at the edge of, contemporary macroeconomics, to the great detriment of contemporary macroeconomics.

On the other hand, it is common in a moment like this to go into a general bash on economics, and everyone who hates economics because they don’t like markets in any context, or because they don’t do math--and if you don't a subject with math you just have a bias towards believing that math is useless. Everyone who doesn’t like economics has piled on at this moment to regard this crisis as a repudiation of economics. And I don’t think that’s right. I think the wisdom that is in Bagehot, Minsky, Kindleberger, Eichengreen, Akerlof, Shiller, mand any, many others, actually runs way ahead of those who mostly bring negative attitude about economics. And I think that we make a serious mistake if we threw the baby out with the bathwater here.

It reads rather differently if you understand that the passage Salmon quotes (i) comes after a general bash on economics Ph.D. programs as they are currently constituted, (ii) starts with an "on the other hand" to mark the passage as a secondary point that Larry thinks does not have the force of the earlier, primary point, and (iii) that the baby that Larry does not want thrown away is not the policy of financial deregulation but rather the behavioral finance analyses of Bagehot, Minsky, Kindleberger, Eichengreen, Akerlof, and Shiller.

Second, Felix implies that Larry is stupid in not believing that the financial crisis had its roots in new-fangled financial instruments. But that is not what Summers said. What Summers said is:

[T]here’s a debate to be had about the extent to which the financial innovation has been [in general] stabilizing or de-stabilizing, and that’s an important set of questions. I have tended to be more cautious than many about condemning financial innovation, [but] not because [I think] it is unassociated with all sorts of problems. My observation... [is that] the Japanese financial crisis... [and] the Nordic financial crisis--the two examples preceding this one that were biggest in the industrial world, both of which were actually far more costly for their countries than this one looks likely to be--involved, overwhelmingly, [not fancy new-fangled instruments but simple] bank lending to real estate. And that is what the Irish crisis involves. The Greek crisis is mostly about an excessive budget deficit. Most financial crises do not seem to have their roots in new-fangled financial institutions and new-fangled financial instruments. So I am in less of a hurry to condemn the innovation as the cause of the crisis than many.

He did not say that this financial crisis did not have its roots in new-fangled financial instruments. He said that the biggest financial crises before this one did not have such roots, that the severity of the Irish and Greek crises does not spring from such roots, and that most financial crises do not have such roots. Those observations seem to me to be perfectly correct.

Third, Felix does not get what Summers says about financial regulation. Salmon thinks that Summers endorses the nihilism toward regulation of the public-choice school. Summers does not. What he says is:

We have a bunch of people who kind of assume that the regulators are smart and that the private sector is greedy and that [regulators] will figure things out right. We have a bunch of people who assume that the government always gets coopted and the regulators always end up working for the regulated. And we have sort of a dialogue of the deaf between them.

The truth is, the regulators haven’t done a terrific job. The truth is, we have a broad social problem that covers everything from finance to deep sea drilling to nuclear--in all kinds of areas that are technical and hugely important to society, there’s roughly nobody who knows about them who doesn’t have some set of deep interest in them. That creates all kinds of questions of legitimacy and knowledge. We don’t really want regulation by the coopted. But we also really don’t want regulation by the ignorant. And there’s hardly anybody who is both knowledgeable and un-coopted.

How we think about the design of regulatory institutions to address those structures--we economists have a tendency to spend too much time on whether the Basel system should say 7 percent or 7.8 percent. [We do not spend] enough time thinking about how over many years do accounting conventions [come] to be set. There are all kinds of interactions between the regulated and the regulator [in] how the system will adapt in terms of incentives of all the actors.

The public choice school has taken that very seriously, but they have driven it relentlessly toward nihilism in a way that is not actually helpful [for] those charged with designing regulatory institutions. But their recognition that regulators are people who have incentives too is, I think, a very important one. So that would be an additional area that I would highlight for research.

That, too, reads very differently when you realize that Summers is not endorsing but rejecting the nihilistic conclusions of the public-choice school about financial regulation. Just after Salmon cuts off the quote, the very next words are "in a way that is not actually helpful [for] those charged with designing regulatory institutions."

Fourth, Salmon's reference to how "Summers explains that people who want to regulate the financial system are very much like the smart people who became communists and who went on to create the Soviet Union" once again misses the context and the meaning. The context is a response to a question from Martin Wolf:

[W]e have this fantastically dangerous [financial] engine... the obvious conclusion is you just cannot risk deregulating it. It has to be under government control, very tightly, all the time. How would you tell a layperson that that’s not a reasonable response?

And what Summers says is:

Well, in some ways it probably is a reasonable response. The last time [we had such a big crisis]--this is an overstatement--this was why Harry Dexter White was a communist. This was why there were a very large number of thoughtful people who were communists in the 1930s. They looked and they saw that just letting the market rip had ended in disaster. They convinced themselves that having not just the financial system but the processes of production be controlled and planned as they were in the Soviet Union, [which] had not suffered a similar [Great Depression] unemployment problem, would produce a better outcome. And that did not prove to be conspicuously successful.

So I think the question one has to ask is: there are going to be decisions that are going to be made by people, those people are going to have incentives, they are going to follow their incentives, and you want to get an outcome that is stable. You have to ask: what is meant by saying that you’re going to have the financial system completely regulated and controlled by government? In some sense we had that system in the Soviet Union and it collapsed. We had that system with respect to exchange rates in the 1950s and 1960s.

[W]e did not move away from the Bretton Woods system because a bunch of economists got in a room and convinced everybody that fixed exchange rates were a bad idea, [that] capital mobility was a good idea, and so we needed to shift monetary systems from a system that was working well. We shifted from the Bretton Woods system because the Bretton Woods system collapsed, because [of] the internal contradictions within it--even as people tried to paper it over, it didn't work.

And so the question about more dirigiste approaches is: what exactly is the dirigiste approach and how will it work? Now, if you ask in general, has the world had too much leverage, or has the world had too little leverage, I think the case is overwhelming that it has had... too much leverage; that the externality associated with taking on increased leverage has been under-internalized; that capital requirements in various ways should be systematically increased.

There are a lot of ways to lend money in a modern economy with integrated production, and so controlling leverage is a complicated thing. It takes a lot of thought as to how best to do it. But it is absolutely right. Every time I’ve spoken to a financial audience for the last two years, I’ve gone through some version of saying: We had the 1987 stock market crash, the S&L crisis, the commercial real estate crisis, Mexico, Asia, Russia/LTCM, the Internet bubble, Enron, and now this. [We have had] one crisis every three years from a system that is supposed to minimize, diversify, and spread risk. [It] has in fact been a source of risk that’s led hundreds of thousands of people each time to lose jobs through no fault of their own.

So I think it’s absolutely right to be worried about the outcomes that are produced. I think it is less right to assume that anger and dissatisfaction with the financial system constitutes a policy, or provides a very clear blueprint as to the directions and the ways in which it is best reformed to promote stability. For my money, the best judgments that we have right now--and obviously there are ways it could be improved--are those embodied in Dodd-Frank. If you are big enough and systemic enough that your failure is a major event, you are big enough and systemic enough that it should be one [single government] institution that is competent with technical things whose job is to regulate you.

There need to be procedures for resolving and managing the failure of any kind of financial institution, not simply banks. There needs to be a systematic and across the board effort to make levels of leverage lower and levels of capital higher, so as to make the system safe [in spite of] the greed and cupidity that will eventually happen. I think these kinds of principles we know. But if you [look], the financial institutions with which the U.S. government was most heavily involved were Fannie Mae and Freddie Mac--which arguably were the site of the greatest degree of irresponsibility.

It was commonly argued in the 1960s and 1970s that a great thing about socialism and communism was that if the government ran the factories, then the externality [of] pollution would be completely internalized... if you just could have the government run the factories, then the externality would be well-managed and you’d avoid having the kind of [environmental] degradation that you had when people ran them purely for profit. That didn't prove to be a good theory of public ownership. So I think one has to think very hard about alternatives. I think the type of approaches that the world’s groping towards, while very imperfect, are in the right direction...


Ryan Avent on the Pointless Pain Caucus within the Federal Reserve

Ryan Avent:

Monetary policy: Not yet time to worry about inflation | The Economist: SHOULD the Fed be worried about rising inflation?... Tim Duy discusses... Luca di Leo rounds up statements.... The members of the Federal Open Market Committee that are worried about inflation are mostly basing their arguments on headline inflation figures (I say mostly, because Dallas Fed President Richard Fisher seems to be basing his views on his gut).... But the Fed tends not to focus on headline inflation. Yesterday, Mr Tarullo explained fairly clearly why that was the case—core inflation is a better predictor of future inflation than is headline inflation. Why? Because headline inflation is often driven by volatile and transitory components like food and energy, and because American institutions don't pass through headline increases to the extent that other economies do.... Is there any reason now to think that the Fed is allowing core inflation to get out of control? The answer is a resounding no.... It's certainly clear that inflation expectations are well in hand.... Inflation expectations are inching up. That's good! The Fed began QE2 in order to reverse a steady decline in expectations, and a rise in expectations reduces real interest rates, which helps to stimulate the economy. But the reversal of falling expectations has not translated into a jump in expected inflation. As you can see, 10-year expected inflation remains below 2%. Based on the data, there is no reason to tighten policy now.

What if the rise in food and energy prices turns out not to be transitory?... Robin Harding put that question to Stanley Fischer.... Fischer spoke plainly on the issue. He said it's impossible to know whether rising commodity prices might continue and the central bank can't make policy based on something it doesn't know.... [Y]ou tolerate rising energy costs until they're clearly feeding back into core inflation and inflation expectations.... America is nowhere near that point. A panicky response to below-target inflation is bad for Fed credibility and very bad for macroeconomic stability. This is why the FOMC members who matter are firmly behind a plan to stand behind full execution of the QE2 purchases...

The real game, of course, is that the economy needs nominal demand to catch up to its pre-2008 trend, and so we need a QE3..,


Ryan Patmintra: My ‘Senator Kyle's Statement Was Not Intended To Be A Factual Statement’ Statement Was Not Intended To Be A Factual Statement

ThinkProgress:

ThinkProgress » Kyl Aide: My ‘Not Intended To Be A Factual Statement’ Statement Was Not Intended To Be A Factual Statement: Senate Minority Whip Jon Kyl (R-AZ) has been lampooned in recent days after his office clarified his wildly inaccurate comments about Planned Parenthood on the Senate Floor last week by telling CNN it was “not intended to be a factual statement.” Yesterday, Kyl walked back his walk back, saying he “misspoke” on the floor and that the “factual statement” statement “was not me — that was my press person.” Now, that very press person is falling on his (non-factual) sword, admitting to the Arizona Republic that his statement “made no sense“:

Ryan Patmintra, Sen. Jon Kyl’s Washington, D.C.-based press secretary, today issued a statement to The Arizona Republic taking responsibility for his office’s widely lampooned claim that a public Kyl misstatement about Planned Parenthood was “not intended to be a factual statement.”

“Senator Kyl misspoke when he incorrectly cited a statistic on the Senate floor last week regarding Planned Parenthood,” Patmintra said. “Rather than simply state that in response to a media inquiry, I responded that his comment was not intended to be a factual statement; a comment that, in retrospect, made no sense. Senator Kyl neither saw nor approved that response.”

So neither Kyl’s original statement nor his press aide’s refutation of it were intended to be factual statements.


In a Sane World We Would Be Talking About Borrowing Cheap Money and Spending It on SUPERTRAINS!

So says Atrios. And he is right:

Eschaton: Progress: We shouldn't be talking about the deficit at all, we should be talking about borrowing cheap money and spending it on SUPERTRAINS, sewer repair, massive subsidies to the blogger-industrial complex, etc. But [Obama's] speech at least did, for the first time in awhile, draw some distinctions other than 'not quite as evil as the other guys,' which is something. Though, of course, ultimately it's the legislation that matters.

So say we all!


John Quiggin: Richard Lindzen Does Not Understand Statistics

Indeed. The moment I first read global warming denier Richard Lindzen's claim that "there has been no statistically significant global warming since 1995" my first reaction was: "does he really not understand how to do statistical power calculations?" And, indeed, the answer was no: he did not know enough statistics to even know that he did not know enough statistics to understand what he was trying to do. And somebody who speaks with such authority about things he demonstrably fails to understand raises red flags: how much of the rest of what he says with such authority is really not so at all? The answer is: quite a lot.

John Quiggin:

John Quiggin » Lindzen, Davidson and statistical significance: Among the many anti-science talking points, a striking one is the widely repeated claim (originating with Richard Lindzen) that there has been no significant warming since 1995. In his original statement, Lindzen was careful to refer to “statistically significant” warming.... [A]ll Lindzen’s claim means is that, given the noise in the data, you need more than the 14 annual observations from 1995 to 2008 (when he made the claim) to get statistical significance. Of course, we had the additional observations, namely those before 1995, so Lindzen’s statement was trivial. It was also safe to predict that, given a few years more data, the trend for the period since 1995 would be significant, and so it has proved.

Sinclair Davidson... introduce[s] a new wrinkle.

Davidson wants to use monthly data, with a first-order autoregressive error structure... [a model] with two estimated parameters... instead of one. That means... the statistical significance of the parameters will be slightly lower.... And, sure enough, he gets a p-value just above 0.05, so, for this model, he can still just claim that the trend is not statistically significant. But this is just another version of Lindzen’s original cheat. There’s no reason to start with 1995, except that it’s the latest date that will fail to give a statistically significant trend....

It’s safe to predict though, that the next El Nino will confirm the upward trend, even with the arbitrary starting point of 1995. At one level, I’m sure Davidson is aware of this (and absolutely sure Lindzen is aware of it). But this isn’t about objective truth. By the time the post-95 trend is confirmed as statistically significant beyond any possibility of a fiddle, they will have moved on to a new talking point.

A final observation is that this bogus controversy illustrates how unhelpful is the classical statistical apparatus of “significance” and hypothesis testing. I’d prefer a Bayesian approach which would work as follows. Start at 1990, when we had a fair bit of evidence and theory supporting global warming, but it was still possible to argue that the observed warming was a natural cycle.... [I]f the observed warming were a natural cycle it would be highly likely to stop or reverse (say 90 per cent), but there would be a small probability of it continuing by chance. Now suppose that Lindzen initially thought the natural cycle hypothesis was likely to be true with a probability of 80 per cent, while Hansen thought the same for the AGW hypothesis. What has actually been observed since 1990... is warming consistent with the AGW hypothesis. We can now update the conditional probabilities using Bayes theorem. For Hansen, the likelihood of (observed outcome + AGW true) is 0.8*0.9= 0.72, while the likelihood of (observed outcome + AGW false) is 0.2*0.1= 0.02, so his revised probability for AGW is 0.72/0.74 = 0.97.... For Lindzen, the likelihood of (observed outcome + AGW true) is 0.2*0.9= 0.18, while the likelihood of (observed outcome + AGW false) is 0.8*0.1= 0.08, so his revised probability for AGW is 0.18/0.26 = 0.69.

That is, if Lindzen was an honest seeker after truth, he would concede that the observed outcome is radically different from what he would have predicted in 1990 based on his preferred model and therefore that his model was most probably wrong. But of course Lindzen isn’t an honest seeker after truth. He’s an irresponsible contrarian who made a wrong call twenty years ago, and is willing to tell any lie necessary rather than admit the fact.


Yves Smith: Senator Levin Claims Goldman Execs Perjured Themselves Before Congress

YS:

Senator Levin Claims Goldman Execs Perjured Themselves Before Congress on Mortgage Testimony « naked capitalism: [T]he Senate Permanent Subcommittee on Investigations just issued another report, "Wall Street and the Financial Crisis."... The committee took the approach of drilling into certain practices and players they regarded as key to see where that took them.... I suspect that some of its supporting evidence, which the subcommission also released, will point to issues that the report did not stress. The report looks at WaMu (considered heretofore to be one of the better subprime lenders), the Office of Thrift Supervision (among other things, the hapless supervisor of AIG’s holding company) rating agencies, and Goldman’s and Deutsche Bank’s behavior in the RMBS and CDO markets.... Senator Carl Levin, in releasing the report, took aim at Goldman’s truthiness in its testimony before Congress and called on Federal prosecutors to examine whether Goldman committed perjury. Two issues are at stake. First it the Goldman claim that it lost money on its housing bets and was not net short housing (or at least not for long). Second is the notion that the firm was acting merely as a market marker, which basically means caveat emptor, if clients made bad bets, Goldman was merely acting as a neutral middleman. While Goldman made the usual pious denials, the evidence in the report supports the Levin charges. It notes:

Overall in 2007, its net short position produced record profits totaling $3.7 billion for Goldman’s Structured Products Group, which when combined with other mortgage losses, produced record net revenues of $1.2 billion for the Mortgage Department as a whole.

2007 was the critical year when the market turned decisively south and all dealers were dumping mortgage-related inventory. Goldman had been further ahead in the process and appears to be the only firm to put on very sizeable short positions. The magnitude of the profits on the short side lend credence to the charge that Goldman was substantially and successfully net short. The second major charge, that Goldman was merely a market maker, never passed the common sense test. The report delineates the aggressive measures the firm took to unload CDOs, with e-mails showing an aggressive, full bore sales push, including salesmen relying on their credibility with clients to get them to buy doggy deals and demanding extra sales credits in return. This is contrary to the role of a market maker, which intermediates client orders.... Since the three year statue of limitations for civil litigation under the securities law has passed, we are unlikely to see any new litigation, but Goldman’s statements about its role look to be gross misrepresentations...


The Debt Limit: When Will It Be Raised?

Gillian Tett has a good column:

Can we believe Geithner’s patter on debt?: Don’t panic. That, in a nutshell, was the soothing message of Tim Geithner, US Treasury secretary, as he did the rounds of Washington on Thursday, the day after President Barack Obama called for a fiscal reform deal, together with $4,000bn cuts. Never mind that President Obama’s plan sparked a furious response from Republicans; this could further rile Tea Party politicians who are so opposed to letting the US government raise its debt ceiling that they are threatening to force a US bond default this summer.

If Mr Geithner is to be believed, bond investors should know that this default chatter is just part of the normal political process.... Can this reassuring patter be believed? Up to a point, m’lud. On the surface, the current behaviour of the bond market appears to support Mr Geithner; though the government came to the brink of a shutdown last week, due to fiscal brinkmanship, 10-year Treasury yields were on Thursday trading at just 3.48 per cent. There is little sign of foreign selling; bond auctions remain well covered.

However, what is less visible – and more ominous – is that, behind the scenes, some large asset managers and banks are already discreetly debating contingency plans... [for] a technical default....

[On] the “acknowledgement” question – there has been progress. In late 2010, when Mr Obama’s bipartisan fiscal commission first issued a report on the debt, the White House hoped that tough fiscal debates could be delayed until after the 2012 election. That thinking, however, has now changed.... However, Mr Obama’s speech this week may – ironically – have actually undermined this constructive debate, by alienating Republicans. Sensible dialogue remains the exception, not norm. And that makes it that much harder to produce the third item... a credible fiscal plan. Optimists in Congress insist that the main players in the fiscal debate now accept that any eventual plan “will look something like Simpson-Bowles, plus or minus twenty per cent,” as one leading senator says... $4 trillion-$5 trillion [over ten years] range. However, the two sides remain bitterly divided about the fiscal mix.... [T]hat long delay may not be entirely disastrous for market sentiment if the first two factors on that checklist are in place. At the very least, Congress must have enough “process” in place to raise the debt ceiling...

It is an interesting expectational dilemma. My view is that Republicans in congress will not vote to raise the debt limit until there is an interest rate spike. But once there is an interest rate spike they will raise it very quickly--and interest rates will go back down--so that those whose bond sales are the interest rate spike will lose a lot of money: they will have sold their Treasuries cheaply at prices that make them look like fools in retrospect.

The way to make money is then to buy Treasuries when interest rates spike... thus keeping them from spiking enough to trigger enough panic in Washington to produce an increase in the debt limit...


Austin Frakt on the Medicare Drug Benefit

AF:

What if Medicare’s drug benefit was more like the VA’s?: In his budget deficit speech yesterday, Obama said, “We will cut spending on prescription drugs by using Medicare’s purchasing power to drive greater efficiency.” The accompanying White House fact sheet says, “The framework would limit excessive payments for prescription drugs by leveraging Medicare’s purchasing power – similar to what was called for by the bipartisan Fiscal Commission.” But the bipartisan Fiscal Commission report says no such thing.... [I]f Obama’s statement about “purchasing power” of Medicare means anything for the Part D program, it’s something neither he nor the Fiscal Commission has specified yet. But what? My sample is small, but some have speculated he wants to make Medicare’s drug program more like the VA’s. If you know anything about the VA’s drug benefit, you’ll know that this would be a huge change for beneficiaries and drug manufacturers, and therefore politically unlikely. Yet, it is worth asking, what would happen if Medicare did buy drugs like the VA does?

Turns out, with colleagues Steve Pizer and Roger Feldman, I asked and answered that question in a paper titled “Should Medicare Adopt the Veterans Health Administration Formulary?” (funded by the Department of Veterans Affairs and the Robert Wood Johnson Foundation). It is soon to appear in the journal Health Economics. Journal editors have suggested I release a working paper version now (ungated) and discuss it in advance of publication on this blog. Below is a summary. The details and limitations are in the paper....

[W]e compute the savings to the Medicare program and the loss of value (formally, consumer surplus) to beneficiaries due to tightening Part D formularies to the level found in the Veterans Health Administration (VA). (A formulary is a list of drugs covered by a health plan.) We measure formulary generosity as the percentage of the 200 most popular drugs covered. The VA’s national formulary covers 59% of the top 200 drugs while Medicare PDPs cover between 68% and 93% of those drugs, averaging about 85% covered. So, if Medicare plans looked more like the VA, a lot fewer drugs would be covered.

But the tighter the formulary (the less drugs it covers) the more bargaining leverage a plan has with respect to drug manufacturers. Plans able to restrict drugs from their formularies have the clout to say “no” to high prices. This is one, but not the only, reason the VA can purchase drugs at prices 40% below those paid by Medicare Part D plans. If Medicare drug plans restricted their formularies to the level of generosity offered by the VA and obtained VA-like drug prices by doing so, we estimate that the program would save $510 per beneficiary per year or a total of $14 billion per year (2009 prices).

However, in tightening formularies, beneficiaries would lose low-cost access to many drugs. That loss of choice is worth something, and it can be monetized using econometric techniques. Doing so, we estimate the loss of choice to be valued at $405 per beneficiary per year. Because the savings ($510 per beneficiary) exceeds the loss of value to beneficiaries ($405), they could, in principle, be made whole with $105 left over (= $510 – $405). This could be done by lowering premiums, for example...


Barack Obama on the Simple Truth About Fiscal Policy

Kevin Drum reports:

Just the Simple Truth | Mother Jones: Have I mentioned my favorite part of Obama's speech yesterday? Here it is:

America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program — but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts — tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

But that’s not what happened. And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit, annually, was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.

Translation: F--- you, Republicans.

And I'd say it's a well deserved flip of the bird. Republicans, as you can imagine, are less enthusiastic, and this bit of the speech undoubtedly accounts for most of the bile being tossed around on Fox and elsewhere today. But hey — sometimes the truth hurts. And all Obama did was speak the simple truth. In the past decade, Republicans slashed taxes, started two wars, approved a big unfunded entitlement, and presided over an economic collapse that cratered tax revenues and required massive government spending to counteract. That's pretty much 100% of our existing deficit problem right there. All we're doing now is trying to clean up the mess the GOP has left us.

This is why I think that there is something seriously and morally wrong with people who support the Republican Party.


Republicans. They LIe. All the Time. About Everything

The techocratic and highly competent Macro Advisers on the Republican "estimates" of the Ryan Plan made by the Heritage Foundation:

Macroadvisers: The Economic Effects of the Ryan Plan: Assuming the Answer?: Last week the House Budget Committee, chaired by Congressman Paul Ryan (R, WI) issued a Budget Resolution for fiscal year 2012 along with a Republican blueprint for addressing the nation’s long-term fiscal imbalance.[1] The “Ryan plan” would squeeze discretionary spending and health care entitlements very hard, lower marginal tax rates, and expand the tax base.... The Committee’s report included a simulation analysis showing the economy strengthening immediately as a result of the fiscal contraction; that is, a negative short-run fiscal multiplier. We don’t believe this finding, which was generated by manipulating an econometric model that would not otherwise have produced the result. That analysis implied other questionable results — some of them probably unintended — including over $1 trillion of net new borrowing from abroad over the coming decade and the construction of several million unoccupied houses. We consider the analysis both flawed and contrived....

At the request of the House Budget Committee and using the Global Insights (GI) model of the US economy, analysts at the Center for Data Analysis at the Heritage Foundation simulated the results of implementing the Budget Resolution on top of a baseline reflecting CBO’s Alternative Fiscal Scenario.... Despite meaningful cuts in federal outlays, there is an immediate rise in real GDP which, over the next decade, grows to 2.2% of the baseline value. By 2021 the federal debt is reduced by nearly $10 trillion, and the yield on 10-year Treasury notes is down 84 basis points. This sounds pretty good, but how seriously should we take these results and the analysis that gave rise to them?...

If the analysis shows that trimming $10 trillion of debt by 2021 reduces long-term rates by 84 basis points, then isn’t it the case that in the baseline the $9 trillion expansion of debt after 2016 should keep pushing rates further above 5.4% by 2021? If not, then what is preventing rates from rising?...

There were actually two sets of results. The first showed real GDP immediately rising by $33.7 billion in 2012 (or 0.2%) relative to the baseline, with total employment rising 831 thousand (or 0.6%) and the civilian unemployment rate falling a stunning 2 percentage points, a decline that persisted for a decade.... The decline in the unemployment rate was greeted — quite correctly, in our view — with widespread incredulity. Shortly thereafter, the initial results were withdrawn and replaced with a second set of results that made no mention of the unemployment rate, but not before we printed a hardcopy!... The results showed GDP increasing by 0.2 percent the first year, so a reasonable expectation is that the unemployment rate would fall by about 0.1 percentage point, not twenty times that!... An alternative interpretation of the sudden and persistent drop in the unemployment rate was that it reflected an immediate decline of 2 percentage points or so in the Non-Accelerating-Inflation Rate of Unemployment (NAIRU, which was not reported) that quickly became reflected in the observed unemployment rate as well.

This did seem consistent with the result that inflation remained at the baseline path over the whole decade despite the much lower average unemployment rate initially simulated under the Budget Resolution.... [I]t just seemed incredible to us that this (or any) fiscal plan would immediately reduce the NAIRU to a nonsensical value.

Whatever the explanation of the initially reported decline in the unemployment rate — and there’s more on that just below — the results were confusing. The simulation showed total nonfarm payroll employment rising by 831 thousand in 2012, with the unemployment rate falling 2 percentage points. One way to have produced this configuration of results is for the civilian labor force to have fallen sharply... a decline in the labor force of 2.3 million.... This doesn’t square with discussion of participation rates in the report....

In response, Heritage pulled the initial tabulations and replaced them with new ones that did not show or discuss the unemployment rate but left all the other results unchanged. Then, in a separate update, Heritage published a new path for the unemployment rate averaging 1.5 percentage points higher than the original path, along with the following explanation:

In further response to the Chairman’s letter of February 28, 2011 requesting technical advice and assistance, we have given additional scrutiny to calculations concerning the unemployment rate under the Chairman’s proposed budget plan. As a result of that examination, we are making an adjustment to one variable — the full-employment unemployment rate, which is one component of the equation for the overall unemployment rate....

In any event, the update goes on to say “while the adjustment has an impact on the unemployment rate in the model, the overall results elsewhere in the model do not change significantly”. Of course it can’t be the case that no other variables changed.... [I]f the unemployment rate rises for whatever reason, either household employment must be lower and/or the labor force participation rate must be higher. Is it really the case that in a general equilibrium model such large changes in labor force participation, household employment, and the NAIRU have no other significant impacts? We doubt it....

The simulation shows real federal nondefense purchases down by $37.4 billion in 2012, but real GDP up by $33.7 billion, so the short-run “fiscal multiplier” is negative. As noted above, that analysis was prepared using the GI model of the US economy.... [W]e doubt that the GI model, used as intended, shows a negative short-run fiscal multiplier. Indeed, GI’s own discussion of its model makes clear the system does, in fact, have positive short-run fiscal multipliers. This made us wonder how and on what grounds analysts at Heritage manipulated the system to produce the results reported....

The incremental strength of GDP is primarily in the components of gross private domestic investment.... [T]he sudden adoption of an expectation of a serious fiscal fix that was not already priced into markets could lower interest rates enough to stimulate the interest sensitive components of aggregate demand.... This can’t be what’s going on here. In 2012, long-term rates are lower by a measly 1 basis point and, by 2014, by only 9 basis points.... [A]s we parsed the simulation results, we couldn’t see what was stimulating aggregate demand at unchanged interest rates and in the face of large cuts in government consumption and transfer payments…until we read this:

Economic studies repeatedly find that government debt crowds out private investment, although the degree to which it does so can be debated. The structure of the model does not allow for this direct feedback between government spending and private investment variables. Therefore, the add factors on private investment variables were also adjusted to reflect percentage changes in publicly held debt....

The model undoubtedly has the standard identities... if government saving rises during a fiscal contraction, there must be a corresponding combination of changes in gross private domestic investment, personal saving, and foreign capital inflows. The usual mechanism by which this re-allocation occurs is through a decline in the interest rate.... Heritage, however, did something additional. It just adjusted up investment demand at every level of the interest rate, as if federal debt appeared directly in these equations.... Are there any genres of models — large scale structural macro models, overlapping generation computable general equilibrium models, dynamic stochastic general equilibrium models — that actually show this direct effect? Not that we’re aware of.... And what is the empirical evidence for this direct effect? The analysis cites two fairly well-known papers — one by Thomas Laubach and the other by Eric Engen and Glenn Hubbard. However, both of these papers examined the relationship between deficits, debt, and interest rates — the conventional channel though which crowding in occurs and the one that already is included in the model. Neither paper says anything about a direct effect (that is, for any given interest rate) of government debt on investment. Indeed, neither paper even discusses investment equations.

In sum, we have never seen an investment equation specified this way and, in our judgment, adjusting up investment demand in this manner is tantamount to assuming the answer....

In the simulation, the component of GDP that initially increases most, both in absolute and in percentage terms, is residential investment. This is really hard to fathom. There’s no change in pre-tax interest rates to speak of.... [A]t today’s real value of approximately $210 thousand per newly completed housing unit, the extra investment is enough to build roughly 425 thousand units in 2012, of which 350 thousand would be empty at a time when we estimate there already is an excess of more than a million units that could be absorbed by new household formation. And this imbalance only worsens through time... by 2021 the real residential housing stock is up $1.023 trillion... an additional 4.4 million units. By the end of 2021 households are up only 379,000, so that 4 million unoccupied housing units have been built....

The usual story one tells about deficit reduction is that as government or government-financed consumption shrinks relative to GDP, domestic interest rates fall, putting downward pressure on the dollar, which in turn encourages higher net exports and hence smaller reliance on borrowing from abroad. In this simulation, however, real net exports immediately decline by $82 billion and eventually by $183 billion.... [O]ne decade into the Republican plan the US has $1.3 trillion or so more net indebtedness to the rest of the world than under the baseline. Without more details we can’t be sure what’s going on here, but it looks as if this is at least partially the result of directly adjusting up domestic demand. With not much decline in interest rates, there’s probably little decline in the dollar (which is not reported) to stimulate net exports. But since domestic demand is adjusted up directly... more imports get sucked in immediately, implying an increase in foreign capital inflows.... [I]s all this extra debt to foreigners a sensible result, one that really is intended? It is our impression that reducing US indebtedness to the rest of the world is supposed to be a major benefit of, and hence motivation for, long-term deficit reduction.

There are other things wrong with this simulation.... We could go on, but won’t. Suffice it to say we see a lot of internal inconsistencies in the analysis.

Political winds and economic realities portend a fiscal contraction. Understanding the macroeconomic implications of both the amount and composition of any fiscal adjustment is critical to designing a good strategy for addressing the nation’s secular budget imbalance. We agree with most other economists that there is a long-run gain to deficit reduction, and that it matters how the deficit is reduced. Furthermore, we understand that there are defensible models that show less short-run pain from a fiscal contraction than does ours. The debate over the modeling of these fiscal effects is one we will eagerly join.

In our opinion, however, the macroeconomic analysis released in conjunction with the House Budget Resolution is not relevant.... [T]he main result — that aggressive deficit reduction immediately raises GDP at unchanged interest rates — was generated by manipulating a model that would not otherwise produce this result... not supported either theoretically or empirically. Other features of the results — while perhaps unintended — seem highly problematic to us and seriously undermine the credibility of the overall conclusions.

This is indeed unfortunate, since it might encourage some legislators to believe that slicing federal debt dramatically can produce long-run gain without short-run pain...


IAS 107 Spring Take Home Assignment

The level of the unemployment rate in the United States was 8.9% in the first quarter of 2011, compared to a consensus estimate of the current natural rate of unemployment of 5.5%. The level of GDP in the United States in the first quarter of 2011 was $15 trillion at the prices of 2010. There were 140 million people at work in the United States in the first quarter of 2011. Savings and investment as a share of GDP in the first quarter of 2011 were only 12.2% of GDP, compared to a normal level for the United States over the past generation of 18% of GDP.

Suppose by some implausible cinematic plot device your consciousness were to be transferred at this moment into the body of Eugene Sperling, Assistant to the President for Economic Policy, in his small cramped office on the second floor of the West Wing of the White House (no, the TV show does not give a good picture of what the offices are like: they have to get the cameras into and out of the set, after all). President Obama calls and tells you that Federal Reserve Chair Ben Bernanke has just told him that the Federal Reserve Open Market Committee is unwilling to take any additional steps to boost employment and production.

President Obama asks if you would write up a two-page memo for his political staff telling them what the ideal macroeconomic fiscal policy over the next several years for him and the congress to undertake to deal with the aftermath of the recession would be if there were no political constraints on the federal government's budget. He tells you to keep it to at most 400 words--that is all that they will read. He tells you that most of the audience for this memo took courses like Econ 1 and IAS 107 in the past, but that they have forgotten all of it. You can use equations and graphs if you wish, but they had better be understandable to somebody who knows no economics. He also asks you to forecast what will happen to the growth of the American economy over the next 25 years if we do not recover from the downturn but, like Japan after 1990, remain in a depressed state with low investment at its current share of GDP for a generation. Be sure, he tells you, to outline both the risks from adopting the policy you recommend and the risks from not adopting the policy you recommend but continuing with business as usual.

You call across to the staff in the Eisenhower Executive Office Building next door, and they tell you that the depreciation rate on capital looks to be 4%/year, the future rate of growth of the efficiency of labor looks to be 1.75%/year, the rate of labor force growth looks to be 0.75%/year, and that the diminishing-returns parameter in the production function looks to be 0.5. They also tell you that the Okun's Law coefficient is about 2, that the tax rate on income is about 1/3, that the marginal propensity to consume looks to be 3/4, and that the marginal propensity to spend on imports looks to be about 1/6.

You debate telling President Obama that you are sorry but that you are not Eugene Sperling. But you decide that you would then be hauled off to the mental hospital, that whatever else happened Eugene Sperling would never get his job back, and that after the situation is resolved he would be really unhappy and would not thank you. You decide to carry out the assignment. You decide to do the assignment yourself--you do not dare talk to anybody because it will slip that you are not really Eugene Sperling.

Email your answer to this take-home assignment as a pdf file to brad.delong@gmail.com and dzahedi@berkeley.edu by 11 AM on Tuesday April 19. Include in the title of your email your name, your SID number, and the phrase "IAS 107 take home".


Bretton Woods Blogging: The Architecture of Asia

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The Architecture of Asia:

Sunday, April 10, 2011: 4:45 PM EDT

Moderator: Paul Blustein - Nonresident Fellow, Global Economy and Development, The Brookings Institution

Panelists:

  • Charles Dallara - Directory, Institute of International Finance
  • Yasheng Huang - Professor of Political Economy, MIT Sloan School of Management
  • Y.V. Reddy - Former Governor, The Reserve Bank of India, currently University of Hyderabad
  • Joseph Stiglitz - University Professor, Columbia University, Nobel Laureate

Discussants:

  • Brad Delong - Professor of Economics, University of California
  • Yu Yongding - Director, Chinese Academy of Social Sciences



The Architecture of Asis: Comment

Let me pick up some threads that I think have been implicit in most of what has been said in this session. It has, however, been said politely. I will be less polite—as befits a Dismal Scientist. I will make the four points that I think need to be made about the architecture of Asian economies

  1. Asia, both East Asia and South Asia, have been more expansionary in their policy mixes in the aftermath financial crisis than have the developed economies of the North Atlantic. Asian policies—both expansionary Keynesian and expansionary monetarist—have worked. They have been remarkably successful in cushioning the crisis and restarting growth. North Atlantic policy makers and academics should take note. To my dismay and somewhat to my horror, by and large they have not. The fact that the Asian countries' recipes for dealing with the crisis have been more successful than those of the North Atlantic—and perhaps deserve some imitation—is not part of the North Atlantic debate. Why not? The reasons escape me.

  2. I have just complimented Asia. Now let me warn it. Asia is now riding high. Among not so much us Dismal Scientists but among others elsewhere in the great wide world we hear others—policymakers, public intellectuals, politicians—saying that it has now been revealed that the economic policy doctrines of the North Atlantic were simply the emperor's new clothes. North Atlantic economists, I hear people say, may indeed have forgotten a great deal and may indeed have been distracted by a great deal in the runup to the financial crisis—but most of all North Atlantic economists were simply wrong. Thus I hear that Asia does not have much to learn from the accumulated human capital of economists. I hear that Asia does not have much to learn from the experience of the North Atlantic. This is, I think, a big mistake. Economists did know a great deal about financial crises and how to deal with them. It is embarrassing when Larry Summers, asked for an example of useful economics, names a book published in 1873: Walter Bagehot's Lombard Street. The cutting-edge economics of macroeconomics of 1873 is indeed our new and relevant economic thinking. That this is so means that we economists are in significant trouble. Nevertheless, we do know something—or at least those of us who know our Bagehot know something.

  3. Asia should listen to what we know. Ignorance by Asia of the context and history of financial crises may well lead to hubris, which is then followed by nemesis. Nemesis can arrive for one or both of two reasons. First, Asian growth is now rapid. Asian expectations are now extrapolative. Everybody buying assets in Asia expects the current growth pattern to continue, perhaps for 20 years, perhaps for 10 years, perhaps only for 5, but they all expect it to continue. Thus they all price that continuance of rapid growth into asset prices. To the extent that there are bears who have been cautious their cautious portfolios have been outperformed by and will be outperformed by others. And, according to Charlie Kindleberger's precept that nothing so deranges your mind as to watch your friends become rich, the bears are shifting to extrapolative expectations as well. And there will be a slowdown in Asian growth at some point. At the moment it is catch-up growth; easy transfer of well-established technologies, relatively easy boosting of savings rates, relatively straightforward acquisition of human capital. Catch-up growth inevitably slows when it reaches the limits of physical capital accumulation, expands to more difficult and sophisticated levels of education, reaches for technologies that are harder to transfer. The slowdown may be 5 years away, it may be 10, it may be 20. It is unlikely to be more. When it comes, whenever it comes, it will hit Asian economies that will be expecting and pricing further rapid growth. And when the slowdown comes, asset prices will then fall far and fall fast.

  4. Remember global imbalances? Not so very many years from now Beijing alone will have 40 trillion yuan invested in dollar-denominated assets. Some day exchange rates will move. When they do, those 40 trillion will be worth 30 trillion or 25 trillion or 20 trillion Renminbi. Those 40 trillion have been borrowed from the good burghers of Shanghai. The good burghers of Shanghai will want them back. When the slowdown comes and they want their money back, 20 or 15 or 10 trillion renminbi of it simply will not be there. Asset prices will then move far and move fast. Asset prices that move far and fast are recipes for financial crisis.

Well before Walter Bagehot there was Jean-Baptiste Say. Say did not really want to be an academic economist. He wanted to be a policymaker. He wanted to be a finance minister. In fact, Jean-Baptiste Say was special assistant to French Secretary of the Treasury Étienne Clavier during the First French Republic. But then his boss was purged, arrested, imprisoned, tortured, sentenced to death, and cheated the guillotine by suiciding in his cell the night before his planned execution. Somehow, Say escaped with not only his life but also his freedom and even his property. Say decided it was a good idea to retire to the countryside and write books of economics. Say decided not to play the high-stakes game of French politics and government any more.

Back in 1829 Say wrote one of the very first analyses of the very first industrial depression, the bust of the British canal boom of the early 1820s. The lesson Say drew was that a financial crisis was the only time in which Say's Law was false: when supply did not create its demand. In the aftermath of a financial crisis, you see, the private sector could not by itself create the safe and liquid financial assets of appropriate duration that the economy wanted to hold. At other times it could—and as long as the private sector was happy holding the existing stock of financial assets income for one would become demand for the products made by another which would become income for a third, and supply would indeed create its own demand. But in the aftermath of a financial crisis what the classical economists called a "general glut" of idle factories and high unemployment was indeed possible.

It turned out that Say was right. Ever since whenever depressions have become deep the odds are that it has been because of a financial crisis. That financial crisis deranged the private sector's ability to settle its own kind of internal financial arrangements via the creation of credit.

Thus whenever these asset prices in Asia move far and fast—either because the dollar has collapsed, or because East Asian growth has slowed markedly, or because of both—these movements of asset prices are the things that generate financial crises and shake the foundations of trust needed for the private sector to do the financial intermediation to make Say's Law true in practice (even thought it is not true in theory).

Back in 2005 we economists were discussing where the next financial crisis might emerge. Back then such discussions settled on the conclusion that the next big financial crisis to appear was likely to be the result of global imbalances in savings and investment. You could call that a "dollar crisis" if you focused on the deficit country. You could call it a "reorientation of Asian development crisis" if you focused on the surplus countries. Whatever you called it, it was the same thing.

That crisis is still out there.

That crisis is still possible.

The success of Asia in surmounting this last crisis says little about its ability to surmount the next one.

And that potential next crisis—in its potential at least a larger crisis than the one we have just been through—is now six years closer.

Thank you.


Gene Callahan Complains...

Callahan:

Crash Landing: Jumping on Sharks: with whom he disagrees. For instance, today he accuses Greg Mankiw of "jumping the shark." (I don't think he is using that phrase properly, by the way: Wikipedia says it means becoming absurd, while DeLong is accusing Mankiw of being mendacious.) What was Mankiw's sin? He summarized an article by Bowles and Simpson as follows: "readers might like to know that Bowles and Simpson themselves have called the Ryan plan a positive step..." This prompted Delong to write: "Naughty, naughty. It is not good to quote people out of their context. Not good at all."

Somewhat oddly, I thought, Delong offered no links to either Mankiw's or Bowles and Simpson's pieces. "Hmm, I wonder why?" So I googled for Mankiw's piece, which nicely offers a link to Bowles and Simpson, allowing Mankiw's readers to easily check and see if he is mis-characterizing them. And when I followed that link, what did I find? An article with the title "Paul Ryan's budget is a positive step." Now, a title is, for one thing, an author's way of giving a very brief summary of what he is going to say. So DeLong is saying that Mankiw was being "naughty, naughty" for summarizing Bowles and Simpson's piece in the exact same way they summarized it themselves! Wow, that is naughty.

Gene is, I think, wrong in claiming that The Hill's title, "Paul Ryan's Budget Is a Positive Step," is a good summary of and the author-chosen title of Bowles and Simpson's statement on Chairman Ryan's budget plan. I believe that it is neither.

First, my faxed copy is simply called: "Erskine Bowles and Alan Simpson React to Chairman Ryan's Budget Proposal."

Second, Conor McKay of the "Moment of Truth Project" mccay@newamerica.net confirms that "Erskine Bowles and Alan Simpson React to Chairman Ryan's Budget Proposal" at http://crfb.org/sites/default/files/Release4.4_0.pdf is indeed the title of the statement, and that "Paul Ryan's Budget Is a Positive Step" was added by The Hill.

Third, The Hill's headline "Paul Ryan's Budget Is a Positive Step" is a poor characterization of Bowles and Simpson's reaction. A better characterization is an earlier headline in The Hill: "Bowles, Simpson offer mix of praise and criticism for Ryan budget" http://thehill.com/blogs/on-the-money/budget/154007-bowles-simpson-offer-mix-of-praise-and-criticism-for-ryan-budget. David Weigel calls the Bowles-Simpson statement "A Mixed Endorsement" and characterizes it as "one of the more milquetoast responses Ryan's got... [with] happy talk... [and] unhappy talk" http://www.slate.com/blogs/blogs/weigel/archive/tags/Erskine+Bowles/default.aspx. I believe those are more accurate.


Matt Yglesias: America’s Human Capital Slowdown

Safari 1

MY:

Yglesias » America’s Human Capital Slowdown: There’s an image of the United States out there as the land of free market capitalism. And certainly there’s something to that. But it’s also the case that throughout our history, America has traditionally been the best educated country in the world. That goes all the way back to New England’s settlement by Bible-obsessed Puritans who through up schools everywhere so kids could learn to read the word of God. It continues through Justin Smith Morrill’s Land Grant Colleges Act, through an emphasis on being an attractive destination for high-skill workers, through to the GI Bill, and public school desegregation in the twenty years after 1955. But we’ve really slowed down. Our fancy colleges are getting more expensive rather than getting bigger or better. The downscale for-profit college sector is dynamic and innovative, but it’s basically a scam where barely anyone graduates. We’re not investing in high-quality preschool, we’re shutting the door on skilled migrants, and we’re not investing in effective job training programs. On top of that, we’ve created housing policies that generally make it too expensive for low-income families to move to school districts whose public school perform well!

And yet while all this is happening, financial deregulation has sucked an increasingly large share of ambitious people with technical skills into the financial sector and out of more entrepreneurial realms of endeavor.


Annie Lowrey's Ten-Year Balanced-Budget Plan

The best plan of the lot, I think.

Anie Lowrey:

Balanced-budget plan: How Congress could cut the deficit to zero in eight years by literally doing nothing: One might think that we need all of these big plans, these grand bargains, because of the enormity of the fiscal challenge the country faces. The United States is swimming in a sea of red ink, with trillion-dollar annual deficits and an unfathomably gigantic cumulative debt.

But the truth is we don't need any of these plans. Every one of them is entirely unnecessary for balancing the budget and eventually reducing the debt. They may even be counterproductive. Thus, Slate proposes the Do-Nothing Plan for Deficit Reduction, a meek, cowardly effort to wrest the country back into the black. The overarching principle of the Do-Nothing Plan is this: Leave everything as is. Current law stands, and spending and revenue levels continue according to the Congressional Budget Office's baseline projections. Everyone walks away. Paul Ryan goes fishing. Sen. Harry Reid kicks back with a ginger ale. The rest of Congress gets back to bickering about mammograms. Miraculously, the budget just balances itself, in about a decade....

So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama's health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care's cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular "doc fixes" that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

These are the CBO's baseline projections. But, of course, Congress is not likely to let the Bush tax cuts fully expire, or slash doctors' payments. So the CBO also prepares an "alternative fiscal scenario" that looks more like the path we expect Congress to take. It's the alternative scenario that has the horror-show deficits. But Congress doesn't have to act. It just has to do nothing. Or when it does do something, it has to pay for it.

That last bit is important: We want the numbers of the do-nothing path but not necessarily the policies. The fiscal future written in current law is hardly the best of all fiscal futures. For one, health care spending would comprise an enormous portion of overall spending. Right now, the United States spends about $1 in every $6 on health care. In a decade or two, based on the do-nothing plan, it would spend $1 in every $5, then $1 in every $4, and not get better health outcomes, either. Those dollars would be better spent in other industries or on other priorities. Moreover, under the do-nothing plan, the government would tax a much bigger share of GDP than it currently does, and the tax burden on the middle-class would be uncomfortably high.

But the do-nothing plan proves the point that the budget revolution does not need to be particularly revolutionary. Yes, the dollar figures are enormous, so big that it would appear to require "bold" plans that include massive new taxes or cruel new cuts. But, in fact, we don't really need to end Social Security, sell Alaska, or ship the poor to Canada to get back in the black. We just need to stick to current law—particularly the tax and health care provisions—and then we can tinker our way toward a better, healthier economy...


Greg Mankiw Jumps the Shark Yet Again...

Naughty, naughty. It is not good to quote people out of their context. Not good at all.

Bowles and Simpson on Paul Ryan:

While we are encouraged that Chairman Ryan has come forward with a serious plan, we are concerned that it falls short of the balanced, comprehensive approach needed to achieve the broad bipartisan agreement necessary to enact a responsible plan. The plan largely exempts defense spending from reductions and would not apply any of the savings from eliminating or reducing tax expenditures as part of tax reform to deficit reduction. As a result, the Chairman's plan relies on much larger reductions in domestic discretionary spending than does the Commission proposal, while also calling for savings in some safety net programs - cuts which would place a disproportionately adverse effect on certain disadvantaged populations. Nevertheless, by putting forward a credible plan, Paul Ryan has made a very constructive contribution to move the debate forward...

What Greg Mankiw says Bowles and Simpson say about Paul Ryan:

As I have pointed out before, a bipartisan group of ten former CEA chairs (including your humble blog host) has endorsed the Bowles-Simpson commission report as a starting point for dealing with the long-run fiscal imbalance. So readers might like to know that Bowles and Simpson themselves have called the Ryan plan a positive step...


The Obama Deficit Reduction Framework...

Obama's Deficit-Reduction Framework...

A process to by the end of June reach a bipartisan deal backed by automatic triggers starting in 2014 to cut spending and raise taxes relative to the current-policy baseline over the next twelve years. The targets are:

  • Restore high-bracket tax rates to Clinton-era levels: $1T
  • Cut tax-expenditure spending through the tax code: $1T
  • Cut health care spending: $0.5T
  • Cut other mandatory spending by: $0.4T
  • Cut security spending: $0.4T
  • Cut non-security discretionary spending: $0.8T
  • Those reductions will carry with them a reduction in net interest of: $1.2T

Total twelve-year deficit-reduction target of: $5.3T relative to the current-policy baseline...

This framework already includes major, painful concessions relative to the technocratic ideal. Obama has already made these in order to try to start this framework. They include:

  • The United States now really needs the government to be spending an extra $3T on infrastructure over the next 12 years--other Pacific nations are planning to do so. Obama is giving up.
  • The United States now really needs--and Ben Bernanke recommends--an additional ARRA-sized fiscal stimulus over the next three years of $1T or so. Obama is giving that up.
  • The United States really needs failure to meet budget-balance targets to trigger high-bracket tax increases. Obama is giving that up.
  • The United States really needs to deal with the greater fiscal needs of an aging America by either (a) opening the borders, or (b) implementing a VAT. Obama is giving that up.

I say this framework would be OK--not ideal, but OK--as a deal. Giving up infrastructure, giving up another full-employment boost, giving up high-bracket triggers, and giving up fixing the long-ran tax base are al very bad for America. We should not give up anything else in addition in "negotiations" but rather insist on hitting the targets. If Republicans want to participate in the process, they need to start by signing on to these targets.


We Would Be Better Off without the Republican Party Watch: Paul Ryan Edition

James Harney http://www.cbpp.org/cms/index.cfm?fa=view&id=3458:

Even some critics of House Budget Committee Chairman Paul Ryan’s budget plan have praised his “courage” and his willingness to make “hard choices” to address looming deficits. But, upon closer inspection, Chairman Ryan’s widely reported claim that his plan produces $1.6 trillion in deficit reduction proves illusory. In fact, the numbers in his plan show that his budget produces just $155 billion in real deficit reduction over ten years.... That’s because his budget cuts are offset by $4.2 trillion in tax cuts that would go disproportionately to those at the top. In essence, at least for the next decade, this plan is far less a blueprint for addressing deficits and far more a proposal to redistribute large amounts of resources from those at the bottom to those at the top....

About $1.3 trillion of the claimed $5.8 trillion reduction in spending, however, comes simply from taking credit for spending less in future years for the wars in Iraq and Afghanistan, as a result of the already-planned drawdown in the number of troops fighting in those countries. While this accurately reflects the difference between spending for the wars in Ryan’s plan and spending for the wars projected in CBO’s baseline, it does not represent savings or deficit reduction resulting from any change in policy proposed by Ryan....

CBO follows the baseline rules established in the Budget Enforcement Act of 1990 (as subsequently modified). For taxes and mandatory spending, the baseline projections generally assume that there will be no changes in current laws governing taxes and mandatory programs. But for discretionary spending... assuming current law does not make sense.... [B]aseline rules require CBO to assume that for each account and activity, Congress will provide the same amount of funding in each year the baseline projections cover as it provided in the most recently enacted appropriation bills (adjusted for inflation). This generally serves as an adequate proxy.... There is, however, one large anomaly — funding for the wars in Iraq and Afghanistan — that causes the current baseline projections to vary significantly from what it will cost to continue current policies. Following the baseline rules, CBO projects that in every year from 2012 through 2021, appropriations for the wars will remain at the current annual funding level.... Yet a drawdown in troops is already well underway in Iraq and is planned for Afghanistan.... Chairman Ryan’s budget merely plugs in the CBO’s estimate of the war costs under the President’s proposal, without changing them.

This difference of about $1.05 trillion between the war costs in the Ryan budget and those in the CBO baseline thus does not represent new savings that result from Ryan’s budget proposals. Yet Ryan counts this $1.05 trillion, plus the $250 billion reduction in interest costs that such a $1.05 trillion spending reduction would produce, as $1.3 trillion in spending cuts and deficit reduction....

Ryan himself said in a February interview that savings in the Obama budget that come from the troop drawdown should not be considered real savings or deficit reduction. Ryan commented that the Obama budget showed savings of $1.1 trillion because the costs under the proposed withdrawal were compared to a baseline that assumed “they’re going to be in Afghanistan and Iraq at current levels for ten years,” and called these “phantom savings.” Ryan was correct to term these “phantom savings.” And if the phantom savings are not counted as real savings, the amount of spending cuts that Ryan’s proposals produce is $1.3 trillion less than Ryan claims...


Scott Sumner: The Recovery Has Been Jobless Because It Has Been Absent

FRED Graph  St Louis Fed 2

Well, yes and no. That nominal demand growth has been slow is in part due to the facts that this is a financial crisis-caused recession and that there are strange things going on in the labor market that have, as one consequence, reduced monetary velocity. It is not quite right to say that the Federal Reserve can set the path of nominal GDP growth wherever it wants, so that whatever nominal GDP does was as intended by the Federal Reserve.

Scott Sumner:

Economics: There's been no jobless recovery, because there's been no recovery:IT'S been rather dismaying to see economists devote so much effort to explaining the recent trend toward “jobless recoveries”. Yes, there are some slight anomalies in the labour market, which suggest that job growth might be a bit less than expected, but most of these analyses overlook the bigger problem—there has been no meaningful “economic recovery” at all.... In the first 6 quarters of recovery we’ve seen 2.8% annualised growth in real GDP, which is roughly the trend rate of GDP growth.... Under those conditions one would not expect a significant change in the unemployment rate.... The only other post-war recession to see double-digit unemployment occurred in 1981-82. During the first 6 quarters of recovery from that slump we saw 7.7% annualised real GDP growth. Not surprisingly, the unemployment rate fell sharply (by more than 3 percentage points over 6 quarters).... The real question is why have we seen such sluggish growth in real GDP?... During the first 6 quarters of recovery from the 1982 recession we saw 11% annualised growth in nominal GDP. That rapid expenditure growth was associated with 7.7% real growth and 3.3% inflation. In the more recent recession we have seen 3.9% annualised nominal GDP growth, associated with 2.8% real growth and 1.1% inflation. This is completely consistent with mainstream demand-side models. Fast recovery in nominal expenditure leads to a fast recovery in real output, and vice versa. Not only is the so-called "jobless recovery” exactly what we should have expected from slow RGDP growth, but the slow RGDP growth is exactly what we should have expected from slow NGDP growth.

Modern macroeconomics tells us that it is the Fed’s job to keep NGDP growth at a rate consistent with macroeconomic stability and low inflation. They did that for about 15 years (with roughly 5% NGDP growth), and then let NGDP fall sharply in late 2008. At that time, most macroeconomists seemed to assume that the Fed was “out of ammunition”, despite dozens of academic papers by people like Ben Bernanke pointing out that the Fed still has many unconventional tools when rates hit zero....

Lars Svensson showed that monetary policymakers need to equate the policy goal with the policy target. If the captain of a ship hopes to reach New York, but expects (given wind and currents) to end up in Norfolk, then he needs to adjust the steering. If the Fed hopes for 5% NGDP, but expects a decline in NGDP (as was the case in late 2008) then they need to radically adjust monetary policy until their internal forecast unit expects NGDP to grow at the desired rate. Rumours of QE2 in the fall of 2010 boosted all sorts of asset prices, and depreciated the dollar, in direct contradiction to the late 2008 and early 2009 predictions of the "liquidity trap” Keynesians. The programme should have been done 2 years earlier and in much larger amounts. And it should have been combined with a switch to level targeting (of prices or NGDP) and a lower interest rate on bank reserves. The Fed should have done whatever it took to ensure on-target NGDP growth expectations. I.e. they should have done what Bernanke recommended that the Japanese do in 2003...


Insufficiently Expansionary Economic Policy Watch

FRED Graph  St Louis Fed 2

Ryan Avent:

America's recovery: The sails go limp: THIS morning, the Census Bureau released new trade data, and the news isn't great. The trade deficit fell in the month of February, but only because the decline in exports was smaller than the decline in imports. The revisions to forecasts of first quarter output are coming in fast and furious. Morgan Stanley's researchers have dropped expected real GDP growth in the first quarter to 1.5%, from 1.9%. And Macroeconomic Advisers also cut their projection to 1.5%, down from 2.1%. In January, Macroeconomic Advisers were anticipating growth of 4.1%. But that was before rising oil prices, disaster in Japan, and austerity fever. Real output growth of 1.5% is not very good, it should go without saying. It's below the trend growth rate, at a time when the economy should be roaring ahead at substantially more than trend growth. America still has a real output gap of about $800 billion, not to mention 13.5m unemployed workers to worry about.... Scott Sumner... writes:

The NBER dated the recession trough at June 2009. In the first 6 quarters of recovery we’ve seen 2.8% annualised growth in real GDP, which is roughly the trend rate of GDP growth. In other words we fell into a deep hole and then started digging sideways. Under those conditions one would not expect a significant change in the unemployment rate.... There may be a slight discrepancy with Okun’s Law, but the big problem is clearly the very slow recovery in real GDP. The only other post-war recession to see double-digit unemployment occurred in 1981-82. During the first 6 quarters of recovery from that slump we saw 7.7% annualised real GDP growth. Not surprisingly, the unemployment rate fell sharply (by more than 3 percentage points over 6 quarters). With only 2.8% real growth during the current recovery, it is no surprise that job growth has been anemic. The real question is why have we seen such sluggish growth in real GDP?... During the first 6 quarters of recovery from the 1982 recession we saw 11% annualised growth in nominal GDP. That rapid expenditure growth was associated with 7.7% real growth and 3.3% inflation. In the more recent recession we have seen 3.9% annualised nominal GDP growth, associated with 2.8% real growth and 1.1% inflation. This is completely consistent with mainstream demand-side models. Fast recovery in nominal expenditure leads to a fast recovery in real output, and vice versa. Not only is the so-called "jobless recovery” exactly what we should have expected from slow RGDP growth, but the slow RGDP growth is exactly what we should have expected from slow NGDP growth.

This is why it's a problem to be obsessively cutting short-term government spending. And this is why it's a problem when regional Fed presidents start recommending that the Fed end QE2 early. Real output growth may have clocked in at 1.5% in the first quarter, and Dallas Fed President Richard Fisher is going around giving speeches about how the American economy is overstimulated. I'd hate to see what Mr Fisher considers to be an appropriately-stimulated economy.


Ezra Klein: What Planned Parenthood Actually Does

Ezra Klein:

What Planned Parenthood actually does: With Planned Parenthood being either the major obstacle to a budget deal or one of the major obstacles to a budget deal, it’s worth taking a minute explaining what they do — and what they don’t do.

As you can see in the chart atop this post, abortion services account for about 3 percent of Planned Parenthood’s activities. That’s less than cancer screening and prevention (16 percent), STD testing for both men and women (35 percent), and contraception (also 35 percent). About 80 percent of Planned Parenthood’s users are over age 20, and 75 percent have incomes below 150 percent of the poverty line. Planned Parenthood itself estimates it prevents more than 620,000 unintended pregnancies each year, and 220,000 abortions. It’s also worth noting that federal law already forbids Planned Parenthood from using the funds it receives from the government for abortions.

So though the fight over Planned Parenthood might be about abortion, Planned Parenthood itself isn’t about abortion. It’s primarily about contraception and reproductive health. And if Planned Parenthood loses funding, what will mainly happen is that cancer screenings and contraception and STD testing will become less available to poorer people. Folks with more money, of course, have many other ways to receive all these services, and tend to get them elsewhere already.

The fight also isn’t about cutting spending. The services Planned Parenthood provides save the federal government a lot of money. It’s somewhat cold to put it in these terms, but taxpayers end up bearing a lot of the expense for unintended pregnancies among people without the means to care for their children. The same goes for preventable cancers and sexually transmitted diseases such as HIV/AIDS.