## Patrick Leigh Fermor: A Time of Gifts

Jan Morris on A Time of Gifts:

## The Tomato, Once Again...

The sabbath was made for humanity, not humanity for the sabbath. And the entire point of horticulture is to grow people the food they would like to eat. And we like to eat tomatoes--even in winter, even though the tomatoes we eat in winter are far, far beneath the Idea of the tomato.

But Maggie Koerth-Baker and Barry Estabrook resent the fact that we like to eat lousy tomatoes in winter. They wish... well, it is not clear what they wish. But they both clearly think that the existence of the winter tomato--which people who want to eat one can eat and people who do not want to eat one cannot eat--somehow has "hurt us."

My brain explodes. Freedom is good. Freedom to do what you want--if you are a properly-informed adult--is good. Freedom to eat winter tomatoes is good. The banning of winter tomatoes by some Sinister Foodie Oligarchy would be bad.

What am I missing here?

Continue reading "The Tomato, Once Again..." »

## Fareed Zakaria Joins the Ancient and Hermetic Order of the Shrill...

He does not quite go all the way, however: he does not yet dare draw the conclusion that America's best hope of avoiding a rapid relative decline from its status of city-upon-a-hill almost surely hinges on the destruction of the Republican Party. But give it a year or two, and he will come around.

Fareed Zakaria:

Party Politics: How Conservatism Lost Touch with Reality: Conservatives now espouse ideas drawn from abstract principles with little regard to the realities of America's present or past.... The Republican prescription is to cut taxes and slash government spending — then things will bounce back.... [W]hat is the evidence that tax cuts are the best path to revive the U.S. economy?... [T]he case that America is grinding to a halt because of high taxation is not based on facts but is simply a theoretical assertion. The rich countries that are in the best shape right now, with strong growth and low unemployment, are ones like Germany and Denmark....

Many Republican businessmen have told me that the Obama Administration is the most hostile to business in 50 years. Really? More than that of Richard Nixon, who presided over tax rates that reached 70%, regulations that spanned whole industries, and who actually instituted price and wage controls?

In fact, right now any discussion of government involvement in the economy — even to build vital infrastructure — is impossible because it is a cardinal tenet of the new conservatism that such involvement is always and forever bad. Meanwhile, across the globe, the world's fastest-growing economy, China, has managed to use government involvement to create growth and jobs for three decades. From Singapore to South Korea to Germany to Canada, evidence abounds that some strategic actions by the government can act as catalysts for free-market growth. Of course, American history suggests that as well. In the 1950s, '60s and '70s, the U.S. government made massive investments in science and technology, in state universities and in infant industries. It built infrastructure that was the envy of the rest of the world. Those investments triggered two generations of economic growth and put the U.S. on top of the world of technology and innovation.

But that history has been forgotten. When considering health care, for example, Republicans confidently assert that their ideas will lower costs, when we simply do not have much evidence for this. What we do know is that of the world's richest countries, the U.S. has by far the greatest involvement of free markets and the private sector in health care. It also consumes the largest share of GDP, with no significant gains in health on any measurable outcome....

[W]hat we have instead are policies that don't reform but just cut and starve government — a strategy that pays little attention to history or best practices from around the world and is based instead on a theory. It turns out that conservatives are the woolly-headed professors after all.

## Establishment Figures Saying Things That Just Ain't So, Over and Over Again

Paul Krugman:

Denialism, Here and There: In the United States, we learn that Barney Frank was responsible for the housing bubble and the financial crisis. Who knew that a member of the minority party in the House, at a time when Republicans not only ruled the House with an iron fist but also controlled the White House, had such power?

In Europe, the new president of the Bundesbank tells us that:

The current crisis is no crisis of the euro. It is a sovereign debt crisis of individual, smaller countries in the euro area, which is caused not least by the disregard of the rules.

which you can see clearly in the case of Ireland and Spain below:

Um, not.

You can only learn from history if you’re prepared to remember it as it actually happened. As it is …

## Expansionary Fiscal Policy "Only Requires Unusual Action While the Situation Remains Grave"

By contrast, expansionary monetary policy at the zero lower bound requires that the Federal Reserve commit to continuing extraordinary action even after the crisis is passed--and that markets believe it.

Paul Krugman listens to Mike Woodford on monetary and fiscal policy at the lower bound, and reports:

Woodford on Monetary and Fiscal Policy: I’ve been asked... why I spent 2009 campaigning for fiscal expansion rather than monetary expansion. Well, at the Keynes conference this morning Mike Woodford gave an overview of policy options when you’re up against the zero lower bound that in some ways expressed better than I’ve managed to what I was thinking at the time.

First, Mike argued that monetary expansion once you’re at the ZLB mainly works, if it does, through affecting expectations. If people don’t perceive the expansion as representing a change in policy that will persist even after the economy has recovered, even big changes in the monetary base have hardly any effect.... Japan reversed much of the initial expansion in the monetary base, confirming the expectations of those who might have regarded that expansion as temporary – and Japan did this even though deflation continued! Note also that nominal GDP never moved at all despite the huge amount of money “printed”.

So why is a fiscal response any better? Mike argued:

1. A fiscal response to a severe slump doesn’t require committing yourself to changes once the storm has passed; it “only requires unusual action while the situation remains grave.”
2. Fiscal policy is “not wholly dependent on expectations changing for its effect (more robust to alternative models of expectations)”

That’s about what I was thinking in, say, January 2009. With the severe financial crisis still relatively recent, and many people still expecting a V-shaped recovery, it didn’t seem possible to persuade the Fed to commit to a permanent rise in the monetary base or a rise in the medium-run inflation target, nor did it seem possible to convince markets that there had been a long-run change in policy. The chances for persuading Congress to agree to a large temporary fiscal stimulus seemed much better.

But as it turned out, that didn’t happen either; we got an inadequate stimulus, and the failure of that stimulus to do more was then taken as proof that Keynesian policies don’t work – in part because the Obama administration insisted and continues to insist that the size of that stimulus was just right.

So what was the right answer? I guess I’d say that if powerful political forces block any effective response to a crisis, there is no effective response to that crisis.

## Collapse of the Chicago School: Gary Becker Edition

Residential investment right now is not depressed because of fears of Barack Obama's policies. Residential investment right now is depressed because (a) some parts of the country are overbuilt, (b) mortgage finance is broken, and (c) lots of people are scared and living with their inlaws:

Nonresidential investment is recovering from its depression lows at a healthy pace:

And Matthew Yglesias reads Gary Becker:

Yet Another Conservative Economist Thinks Barack Obama Can Travel Through Time: In addition to repeated attacks on American business, especially banks (some of the attacks on banks were well deserved), Congress passed an expensive stimulus package that did not stimulate much. The health care bill Congress passed seems likely to increase the cost to small and large businesses of providing health insurance for employees. Congressional leaders proposed high taxes on carbon emissions, large increases in taxes on higher income individuals, corporate profits, and capital gains as part of vocal attacks on “billionaires”. Many in Congress wanted to cap, or at least control, compensation of executives. Proposals were advanced to make anti-trust laws less pro-consumer, and more protective of competitors from aggressive and innovative companies. Congress passed and the president signed a financial reform bill that is a complicated and a politically driven mixture of sensible reforms, and senseless changes that have little to do with stabilizing the financial architecture, or correcting what was defective in prior regulations. It is no surprise that this rhetoric and the proposed and actual policies discouraged business investment and slowed down the recovery.

Admittedly, I don’t have a Nobel Prize. But I can look up the trajectory of private investment in the United States.... [B]usiness investment... did the bulk of its plunging in 2008. It also seems to me that George W Bush was president at this time. Soon after Barack Obama took office, investment bottomed-out and began to rebound. Neither Obama’s rhetoric nor his policies can possibly be responsible for the Obama-era drop in investment for the simple reason that no such drop occurred.

Indeed. As I have posted before, given the depressed state of the economy--high unemployment and slack capacity utilization--you would expect very few businesses to be interested in investing right now, for most would be waiting to invest until they were using the capacity they have already got. But that is simply not the case: conditional on the unemployment rate, nonresidential business investment is remarkably strong as a share of GDP:

Not only is Becker's claim that Obama's policies and not the recession have "discouraged business investment" simply wrong--nonresidential business investment has grown under Obama much more strongly than other components of GDP--but the claim that business investment is lower than we would expect it to be at this stage of the recovery is simply wrong: it is higher.

Scanning over Becker, I see that those aren't the only simply wrong claims he makes. Becker writes that: "At the height of the financial crisis, the media frequently had discussions of the 'failure of capitalism'". The only such discussion I recall came not from "the media" but from Gary Becker's co-blogger Richard Posner, who used the phrase as the subtitle of a book.

Of course, his co-blogger Posner is little more reliable. I note:

Posner: Why the economic recovery is lagging: The sharp and rapid decline of the economy that began with the financial crisis of September 2008 was expected to be followed by a sharp and rapid rise (making for a V-shaped economic cycle) when the crisis was resolved by the bank bailouts and other emergency measures taken by the Federal Reserve and the Treasury Department...

Maybe by the Chicago economists that Posner talks to. But not by others like Carmen Rienhart, Ken Rogoff, Ben Bernanke, and Paul Krugman. For example, January 22, 2008:

Deep? Maybe. Long? Probably: I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But both were followed by prolonged “jobless recoveries” that felt like continuing recessions. Below is the employment-population ratio since 1989, with shading showing the official recessions. In both cases the employment slump went on for a long time after the recession was supposedly over. There’s every reason to think that the same thing will happen this time. There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending. There’s still the question of how deep the slump will be. I can see the case for arguing that it will be nasty. The 1990-91 recession was brought on by a credit crunch, the 2001 recession by overinvestment; this time we’ve got both. I guess we’ll see. In any case, whatever happens will probably last quite a while.

Update: If this report is true, Ben B. is thinking along similar lines.

I do get the sense that these people aren't even trying any more.

They don't seem to look at data--it would not have been hard for Becker to call up a graph of nonresidential business investment.

They don't seem to survey the literature--it would not have been hard for Posner to read Reinhart and Rogoff's This Time It's Different.

They don't try to get their citations correct--Becker simply should not claim that his target is "the media" rather than Posner.

## For the Virtual Green Room: June 20, 2011

Rebuttals to right-wing talking-points misinformation that I want to have at the forefront of my brain--for when I am surprised, as I will be, by an unexpected question from an unexpected direction while talking to reporters, phone callers, passers-by, radio interviewers, cable TV interviewers, etc....

A baker's dozen:

1. Fake Republican claims that the Affordable Care Act is being waived only for Democratic groups: Rebutted by Harold Pollack: "I’ve corresponded offline with Avik Roy about his column today titled “Obama Administration Says It Will End “Waivers for Favors”.... [H]is column and headline are unfair. GAO performed an actual audit study of this waiver program, finding that it operates as the administration stated it did, granting or refusing waivers based on objective and explicit criteria. One can agree or disagree with this waiver program. I myself find the waivers a distasteful short-term compromise to prevent large immediate rate hikes in plans that offer poor coverage. Still, I think the process has been conducted with integrity under difficult political and administrative circumstances. It’s not right to imply otherwise. But don’t take my word for it. Read Roy’s and Suderman’s columns and then the GAO report, and you decide."

2. Greg Mankiw's fake claim that Democrats should be supporting the Ryan Plan because it is like the Affordable Care Act: Rebutted by Mark Kleiman: "Is Greg Mankiw really as stupid as he pretends to be?... Hummm … let’s see … that’s a hard one … gimme a second... Maybe – possibly – because subsidized access to the private insurance market is better than nothing but not as good as Medicare? The most valuable lesson economics teaches isn’t a proposition, it’s a question:  ”Compared to what?” Providing subsidized access to the health insurance market to those who had nothing was progress; pushing people who have Medicare back into the insurance market would be regress. No, of course Mankiw isn’t that stupid. He just hopes you are. And this is a senior intellectual adviser to the official “moderate” Republican candidate for President. And a tenured professor at Harvard. Feh."

3. David Brooks's claim that the housing crash was Fannie Mae's fault: Rebutted by Kevin Drum: "It's absolutely legitimate to be mad as hell at what Fannie did. It's not legitimate, though, to pretend that Fannie was really a motivating force behind the financial crash. The evidence is pretty clear on this point: although Fannie (and Freddie Mac) expanded their share of the mortgage securitization market dramatically in the 80s and 90s, their market share plummeted just as dramatically at exactly the time when the housing bubble really started to take off in 2002. It was mostly the private sector that drove the declining standards in home loans during the bubble, with Fannie and Freddie playing catchup only years later after they had lost a big chunk of market share.... This is important. Fannie and Freddie screwed up badly during the tail end of the housing bubble.... They shouldn't be let off the hook for that. But did they drive the housing bubble? No. Wall Street is desperate for confirmation that they weren't really to blame for the collapse in underwriting standards and the securitization mania that followed in the early aughts, but they shouldn't be allowed to get away with this no matter how many conservative think tanks are in the bag for them..."

4. Tim Pawlenty's claim that tax cuts pay for themselves: Rebutted by Bruce Bartlett: "[T]he only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies. This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss..." 5. RERUN: Obama's claims to be restoring the rule of law in America:** Rebutted by Jack Balkin: "George W. Bush... sought legal justification for his decision to engage in... torture. Bush wanted above all to be able to deny that he was violating the anti-torture statute and other laws and treaties. So he found a small group of lawyers in the OLC, headed by John Yoo, and asked for their opinions. This short-circuited the usual process.... Obama routed around the OLC, asking for opinions from various lawyers, including the White House Counsel and the Attorney-Advisor for the State Department. It is difficult to escape the conclusion that from the outset Obama was prospecting for opinions that would tell him that his actions were legal, and once he found them, he felt comfortable in rejecting the opinion of the OLC.... By bypassing a careful set of procedures designed to produce careful legal opinions, George W. Bush... was effectively undermining the OLC's function as an honest broker of executive branch opinions. Obama also bypassed this same careful set of procedures by canvassing various lawyers until he found opinions he liked better than the OLC's. If one is disturbed by Bush's misuse of the process for vetting legal questions, one should be equally disturbed by Obama's irregular procedures..." 6. Republican Senator Orrin Hatch's fake claim that Medicaid coverage is worse than none at all: Rebutted by Judy Solomon: "Studies that appropriately adjust for the fact that Medicaid enrollees tend to be both sick and poor, as well as other factors that can skew results, “have consistently found that Medicaid coverage leads to health improvements,” conclude the authors, who include noted health policy experts Austin Frakt and Uwe Reinhardt. George Washington University professors Leighton Ku and Christine Ferguson also point out that Gottlieb confuses causation and correlation: “Patients often become eligible for Medicaid as a result of being sick,” they write. “It is not that Medicaid enrollment causes ill health, but that ill health leads to Medicaid enrollment.” To be sure, adequate access to physicians — particularly specialists — remains a concern in Medicaid, as a new study notes. But Ku and Ferguson cite abundant evidence that people have much better access to health care when they have Medicaid than when they are uninsured..." 7. RERUN: Republican claims that the economy does not need more quantitative easing: Rebutted by Joe Gagnon: "QE2 did work.... One element was of moderate importance, one element was of minor importance. The moderate one is that QE2 convinced markets that the Federal Reserve would not allow deflation or a double dip recession to happen.... While QE2 had good effects, it was too timid. A QE3 needs to be bigger than QE2 — you want to signal a larger amount. A trillion dollars sounds like a big number, but it isn’t like a trillion dollar tax cut. All it is is a swap of two different assets. Buying one kind, selling another..." 8. RERUN: Republican fake claims that the stimulus was too large: Rebutted by former Reagan CEA Chair Martin Feldstein: "As for the "stimulus" package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than$500 billion. The drop in home building subtracted another $200 billion from GDP. The total GDP shortfall was therefore more than$700 billion. The Obama stimulus package that started at less than $300 billion in 2009 and reached a maximum of$400 billion in 2010 wouldn't have been big enough to fill the $700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.... Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending.... President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth..." 9. RERUN: Fake Republican claims that discretionary spending has risen by 80% under Obama: Paul Krugman: "Politifact has now updated its work on the claim, universal on the right — and repeated often by Paul Ryan — that discretionary non-defense spending is up 80 percent under Obama. It’s completely false. As anyone who knows how to read federal statistics should have known, the real number — including the stimulus — is 26 percent. And it’s now in the process of falling off. The discretionary spending falsehood is a key part of the claim that Obama has presided over a vast expansion of government; as I’ve tried to explain, the only real area of rapid growth has been in safety net programs that spend more when there is high unemployment..." 10. RERUN: Douglas Holtz-Eakin's claim that it would be better to default than to pass a clean increase in the debt ceiling: [Rebutted by] Douglas Holtz-Eakin, a top Republican advisor and former CBO director, [who] warned in a panel discussion this week that creditors would not be easily reassured after a default: "The idea that somehow it's a pro-growth strategy to raise interest rates on a permanent basis in the United States is just crazy," he said. "We need to grow at this point more than anything else." 11. RERUN: Republican claims that Peter Diamond is unqualified to be on the Federal Reserve: Clive Crook: "Peter Diamond's decision to withdraw from contention for a seat on the Fed board is a very low moment in US politics. Diamond is an indisputably brilliant economist with no ideological baggage and highly relevant expertise--contrary to what his GOP critics say, and as he explains in his NYT article. It ought to be shocking, but it no longer is, that a man of his distinction could not get confirmed to the position. At times the US seems a country hell-bent on its own failure." 12. RERUN: Mitt Romney's claim that we are only inches away from ceasing to be a free market economy: Buce: "[W]hen Mitt Romney says that we are 'only inches away from ceasing to be a free market economy', you'd just have to write it up as an arrogant, insolent, baldfaced lie. Which is pretty much what they are calling it over at Politifact, the Poynter journalistic fact-checker (sourced, ironically, in large measure, to those bomb-throwing insurrectionists at the Heritage Foundation).... [T]he US ranks ninth from the top "freest") out of 179.... None of this is surprising to anyone of even mildly wonky sentiments, a group which clearly includes Romney himself. But here's an extra irony I hadn't noticed before: health care. Namely that every one of those top eight has some kind of universal public health care. And they virtually all get better results than the US has, and at substantially less cost.... I dunno, maybe Romney (who can clearly say anything with the same schoolboy grin) will soon be telling us that Singapore and Hong Kong (and Switzerland, and Denmark, and Canada, and Ireland, and New Zealand, and Australia) are just mired in post-Leninist purgatory. Others might say otherwise: they might say it shows that freedom can be enhanced (even on a Heritage definition) by the right kind of government intervention. Like, say, in Massachusetts..." 13. SPEAKS FOR ITSELF: Ludwig von Mises: "It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history..." ## Liveblogging World War II: June 20, 1941 June 1941 events of the Battle of the Atlantic: The battleship USS Texas (BB-35), while on a "neutrality patrol," was followed by the U-203, commanded by Kapitänleutnant Rolf Mützelburg, between Newfoundland and Greenland within the area that Germany has declared is the operational area for U-boats.. The German captain checked with the U-boat command and the USS Texas was not attacked. For more information on these vessels visit the USS Texas and the U-203 pages on http://www.uboat.net ## P.Z. Myers Muses on the Elective Affinity Between Organized Religion and Pointless Cruelty... If there is a better proof of humanity's Fallen Nature than this, I do not know what it is: Not the puppy dog! : Pharyngula: Religion really does make people crazy. Here's a story about a dog who walked into a Jewish court. The dog entered the Jerusalem financial court several weeks ago and would not leave, reports Israeli website Ynet. It reminded a judge of a curse passed on a now deceased secular lawyer about 20 years ago, when judges bid his spirit to enter the body of a dog. So, obviously, this stray mutt must contain the displaced, reincarnated soul of a dead lawyer. At least, that's what somebody steeped in magical thinking would assume. If you have an animal possessed by the soul of a lawyer (what? Satan was busy?), what's the next step? Obviously, you have to kill the dog, and since you're a traditionalist, stoning is the method of choice. Again, if you're full of theological wackiness. Then, because you are incompetent at managing reality rather than your fantasy life, the dog escapes (Hooray! There's one heartwarming moment in this story, at least). What to do next? Tell all the children to hunt down the dog and kill it. Way to pass on humane values to your kids, rabbis! ## What Should We Think Keynes Meant? Paul Krugman: Paul Krugman: What did Keynes really intend to be the key message of the General Theory?... [I]t’s surely not the most important thing.... What matters is what we make of Keynes, not what he really meant. I’d divide Keynes readers into two types: Chapter 12ers and Book 1ers. Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology, its analogies to beauty contests, and more. Its essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer, and that the conventions men use to pretend that they know what they are doing are subject to occasional drastic revisions, giving rise to economic instability.... Part 1ers, by contrast, see Keynesian economics as being essentially about the refutation of Say’s Law, about the possibility of a general shortfall in demand. And they generally find it easiest to think about demand failures in terms of quasi-equilibrium models in which some things, including wages and the state of long-term expectations in Keynes’s sense, are held fixed.... So who’s right about how to read the General Theory? Keynes himself weighed in, in his 1937 QJE article, and in effect declared himself a Chapter12er. But so what? Keynes was a great man, but only a man, and our goal now is not to be faithful to his original intentions, but rather to enlist his help in dealing with the world as best we can... ## Strength of the Recovery: Robert Shiller Is Alarmed Bradley Davis reports: Shiller Sees ‘Substantial’ Probability of Recession: “Forecasting models would say no” on the question of whether the U.S. will face a double-dip, Shiller said. “But I’m seeing signs that encourage me to worry about that.” Shiller, who is one of the two men behind the S&P Case-Shiller home-price index, said home prices could still decline despite being lower than where they were more than five years ago. The summer season could see a pickup in prices, he said, but “I still worry about the general downtrend.” “There might be a turnaround if psychology changes,” he said. But “I fear that it may just continue down. “It just doesn’t look good,” he said in an interview with The Wall Street Journal... I am not sure why he is alarmed in spite of forecasting models' non-pessimism. So let me tell you why I am alarmed. One way to think of large-scale forecasting models is that they are essentially vector autoregressions surrounded by a shell of behavioral equations and accounting relationships. The purpose of the equations and relationships is to trigger alarm bells in your mind when you look at the vector autoregression forecast--and then decide whether or not you want to incorporate an add factor. This methodology does, I think, work pretty well for forecasting: it works much better than a poke in the eye with a sharp stick, for example. But the underlying VAR correlations still largely come from an age of inflation-fighting recessions and rapid bounce-back. Thus that is an input to what the markets are forecasting. And is that input still valid for today? That is why I am alarmed. ## Liquidity Preference, Loanable Funds, and Interest Rate Spreads Paul Krugman: The Obstinacy of Error, Interest Rates Edition - NYTimes.com: Brad DeLong reposts something he wrote two years ago about interest rates; it was, I think, at least in part a followup to my slightly earlier post on liquidity preference and loanable funds.... The economic argument for [interest] rates staying low [in spite of enormous government deficits]... wasn’t complicated: it amounted to saying that the IS curve looked like this: and that there was no reason for the interest rate to rise, even with large government borrowing, unless that borrowing shifted the IS curve enough to the right to bring the economy above the zero lower bound.... [H]ere we are, two-plus years later, and the interest rate on 10-year U.S. Treasuries is only 2.94 percent. This should count as a triumph of economic analysis: the model was pitted against the intuitions of practical men, making a prediction many people considered ridiculous – and the model was right. And nobody noticed; economic discourse – and even a lot of investment strategy — continues to rely on the supply-and-demand-for-bonds view, even though it has been thoroughly discredited by experience. How is this possible? One answer is that the Greeks muddied the waters. The solvency problems of the Greek government actually have nothing to do with the notion that we’ll face crowding out because the government is selling too many bonds, even with the economy depressed; but many of the original crowding-out prophets nonetheless seized on Greece and claimed that it vindicated their views. More broadly, I guess it turns out that Hicks/Keynes analysis is harder than it looks, and that even smart people – many of them with economics PhDs – just can’t wrap their minds around the notion that sometimes just doing supply and demand isn’t enough. The result – that one theory has been proved wrong, another proved right, yet the world continues to believe in Theory #1 – is frustrating. It’s also tragic, because that intellectual obstinacy is contributing to the “new normal” of permanently high unemployment. The Hicksian liquidity-trap model that Paul is working in (and that I find myself working in these days, almost in spite of myself) is about the simplest possible general equilibrium model with three goods: money M, bonds B, and currently-produced goods and services on which people spend their incomes Y. It has two equilibrium conditions. The first is that the level of total economy-wide spending Y and the interest rate i on bonds must be such as to make people happy to hold the economy's current stock of safe liquid cash--of money M: M = L(Y, i) with the proviso that if the interest rate i on bonds is very low people may be happy holding enormous amounts of money M even if the economy-wide level of total spending Y is low. The second is that the interest rate i and the level of total economy-wide spending Y must be such as to make people happy to hold the economy's current stock of financial assets--bonds B plus money M--so that planned spending on currently-produced goods and services is equal to income. B + M = S(Y, i) If spending is less than income, inventories are piling up and firms are firing people and cutting prices--and so spending is shrinking. If spending is more than income, inventories are being drawn down and firms are hiring people and raising prices--and so spending is growing. Three commodities--currently-produced goods and services, safe short-term nominal bonds, and liquid cash money. Two equilibrium conditions--that the amount of money some people wish to trade for bonds must be equal to the amount of bonds other people wish to trade for money, and that the amount of financial assets people want to hold is equal to the amount of financial assets in existence. Two adjustment processes--that the interest rate adjusts instantaneously to clear the money-bond market and that spending adjusts over a longer period to clear the financial assets-currently-produced goods and services market. And from this the conclusion follows: as long as the central bank is keeping the money stock M high enough to keep you at the zero-lower bound where the interest elasticity of money demand is well-approximated by +∞, fiscal expansion--having the government print more bonds B and spend the proceeds on currently-produced goods and services--raises Y and has no effect on i. Note that it is not just the ignorant, the uncurious, and the slow-of-thought among economic Ph.D.s who do not buy this argument: who cannot believe the argument that more expansionary fiscal policy is what the world needs right now. Why, just yesterday it was IMF chief economist Olivier Blanchard, smarter than whom on these issues there is nobody alive--who taught me this stuff--who wrote: Department of "Huh?!": Speed of the Recovery Edition - Grasping Reality with Both Hands: Policy inertia is not an option. This is especially true in the advanced economies.... Fiscal repair is also essential. A key priority for advanced economies is to continue the process of fiscal adjustment that most of them initiated.... [T]he US and Japan... have not yet started along this path. They should put in place as soon as possible credible consolidation plans that are specific in terms of not only goals, but also the tools to achieve them. The pace of fiscal consolidation should be set with a keen eye on growth and employment. Too slow will kill credibility, but too fast will kill growth... Olivier is, implicitly at least, working with a more complicated model than Hicksian IS-LM. Let us see if we can figure out what it is... The first thing to notice is the bonds in Hicks's setup: Hicks assumes that the bonds are short-term safe nominal bonds. Or, perhaps, Hicks assumes that all the bond spreads--the expected inflation spread between nominal and real interest rates, the default spread, the risk spread, and the term spread--are constant. This matters: the interest rate that clears the money-bonds market may well be the short-term safe nominal interest rate that is Hicks's i; but the interest rate that clears the financial assets-spending market is pretty clearly a long-term real risky interest rate--call it r. So let's introduce a wedge between i and r--plotting both i and r on the vertical axis of our IS-LM curve. Then we can at least start to see what worries Olivier. We start here, at a low level of spending and at the zero nominal interest rate bound with a wedge between i and r: We do another round of expansionary fiscal policy and wind up here, worse off than we were before: Why? Because the printing-up of extra government bonds to pay for the wave of expanded government spending has cracked the government bond's status as a safe asset and thus greatly diminished the market value of financial assets. Because bondholders don't want to hold risky assets but rather safe financial assets--they price risky financial assets at an enormous discount--and with the shift of medium- and long-term government bonds from the safe asset to the risky asset box, spreads spike. And as spreads spike and the market value of government and corporate bonds collapse, the economy finds itself not with abundant financial assets but with a shortage of financial assets, and so spending Y does not rise but falls. Could happen. Happened in Austria in 1931. This is the argument of Reinhart and Rogoff: that in the aftermath of a financial crisis the economy is on the verge of a sovereign debt crisis, and fiscal consolidation is essential to avoid fear of such a sovereign debt crisis take hold--for once markets begin to fear that there might be such a crisis the fact of such a crisis is inescapable. From the Reinhart and Rogoff--and the Blanchard--perspective, the question is not: "will further fiscal expansion crack the status of the government bond as a safe asset and cause an explosion of spreads?" It will, someday. The question is: "when will further fiscal expansion crack the status of the government bond as a safe asset and cause an explosion of spreads, and why hasn't it happened already?" And, indeed, the global market's willingness to swallow unbelievably large tranches of U.S. government debt without a burp is extraordinary: ## Clarence Clemons, RIP Eric Alterman sends us: Let me also take this opportunity to thank Michael Mattis for showing up at Weld Hall in the fall of 1978 with some 60 hours of E Street Band bootlegs on cassette tapes... ## Liveblogging World War II: June 19, 1941 19 June 1941: Germany and Italy requested withdrawal of United States consular staffs from territories under their control by July 15. ## A Sokratic Dialogue: Liquidity Preference, Loanable Funds, and European Hedge Funds that Fear the Collapse of U.S. Treasury Bond Prices - Grasping Reality with Both Hands Hoisted from the archives due to popular request: Meno: I haven't seen you since spring classes ended. Adeimantos: I have been away: Paris. London. Frankfurt. Meno: Oh. Pleasant? Interesting? Adeimantos: Not really interesting--too jet-lagged, so I sit in my hotel room in my underwear, read the Economist and Financial Times,, and reflect on how if in my 20s I had been in a fancy hotel in central Paris with someone else paying I would have thought I was in heaven, but that now I am just tired. Thus not too pleasant either. Meno: Middle age is a shipwreck? Kephalos: It gets worse... Adeimantos: However, it was somewhat lucrative: talking to European hedge funds. Meno: And what do European hedge funds think?... Adeimantos: They demand that I tell them why U.S. Treasury bond prices have not already collapsed (and Treasury interest rates risen) in anticipation of this forthcoming tsunami of bond issues. Given that Treasury bonds have not yet collapsed they are very very bearish about U.S. Treasury bond prices and interest rates. Supply and demand. The supply of U.S. Treasury bonds is about to become huge, and when supply goes up price should go down. Sokrates: But if that argument is correct, then rational profit-seeking traders should already have sold U.S. Treasury bonds and already have pushed their prices down in anticipation of the sudden increase in supply... Meno: Are you Sokrates or Milton Friedman? Kephalos: There are two supply-and-demand arguments that can be made here. The first is that the supply of U.S. Treasury bonds is about to jump enormously--and so by supply-and-demand the price will be low once the extra bond issues hit the market, and should be low now in anticipation of this low-price Treasury bond market equilibrium. The second is that the inverse of the price of U.S. Treasury bonds--the Treasury nominal interest rate--is the price of liquidity: the amount of interest income you forego by keeping your wealth in cash rather than in securities. According to this second argument, the supply-and-demand is the supply and demand for cash: when the supply of cash is high, the price of liquidity is low, and since the price of liquidity is the short-term Treasury interest rate the short-term Treasury interest rate should be very low. Adeimantos: Which it is... Kephalos: And the long-term Treasury interest rate is the average of expected short-term future Treasury interest rates. Since the Federal Reserve has flooded the economy with cash and will keep flooding it with cash for the foreseeable, Treasury interest rates should be low which means Treasury bond prices should be very high--which they are--and stay high. Adeimantos: Loanable funds vs. liquidity preference. Sokrates: So, Kephalos, with your impeccable logic and deep wisdom derived from a long career financing expeditions to the shores of the Black Sea, you have presented us with two different supply-and-demand arguments, one saying that Treasury bond prices should be low and hence are about to collapse, and the other saying that Treasury bond prices should be high and are likely to stay more-or-less where they are for some time to come. Meno: Which argument is right? Is the price of bonds the price that balances the supply and demand for bonds in the bond market? Or is the price of bonds the inverse of the interest rate which balances the supply and demand for cash in the money market? Both cannot be true, can they? Adeimantos: Ah. But both arguments are true... Meno: Why do I get the feeling that I am being cast as the dumb straight man in this dialogue? Sokrates: Because you are a sophist and we are philosophers. We write the dialogues, and we write them to make ourselves look good so that everyone thinks that philosophers are the roxxor and sophists are lame... Meno: What have I ever done to you? Glaukon: Tried to take our students and their fees, perhaps? Sokrates: And we have won. There are now departments of philosophy everywhere. But when was the last time you saw a department of sophistry? Meno: OK. I will take up my role: Kephalos: Can you explain to me how two perfectly-coherent supply-and-demand arguments lead to opposite conclusions? And if both arguments are coherent, why do European hedge funds all believe the first? Kephalos: I can answer the second question but not the first: European hedge funds live in the bond market and they see the supply and demand of bonds all day, so that is the market they believe is most important... Adeimantos: That is true about European hedge funds. But, Meno, the way you have posed the issue is somewhat misleading. It is not which supply-and-demand argument is correct--for both are: the price/interest rate on Treasury bonds clears both the bond and the money market, both loanable funds and liquidity preference. It is how does the economy adjust in order to make the Treasury bond price/interest rate clear both these markets. Meno: And I have the feeling that you are about to tell me... Adeimantos: Let's start with an economy in equilibrium--where Treasury bond prices are such as to satisfy both loanable funds and liquidity preference, so that everyone is happy to hold the bonds given their current price and everyone is happy to hold the economy's cash supply given the current interest rate. Now suppose the Treasury issues a huge honking tranche of bonds (and Obama spends the money hiring the unemployed to give people cholesterol screenings on the street and hand out statins). Now the supply of bonds is greater than demand at current bond prices. So what happens? Kephalos: The prices of Treasury bonds fall--interest rates rise... Adeimantos: And what happens in the money market as interest rates rise? Kephalos: People are no longer happy holding the economy's cash--it's too expensive; it's burning a hole in their pocket. So they start spending it faster... Adeimantos: And as they start spending it faster? Kephalos: This puts upward pressure on prices and employment, as businesses find that they can charge more and make hire profits and so hire more people... Adeimantos: Incomes rise, and as incomes rise savings rise because people don't spend all of their increased incomes, do they? Sokrates: Very true, Adeimantos. Adeimantos: And what happens as savings rise? Kephalos: People want to park those savings somewhere. They want to park those savings in Treasury bonds. And so demand for Treasury bonds rises... Adeimantos: And the economy settles back at its new equilibrium, with (a) somewhat higher interest rates and (b) higher spending and income so that (c) people are happy holding the economy's cash at the current interest rates and rate of spending, and (d) people are happy holding the bonds at the current bond prices and level of income. Kephalos: So both supply-and-demand arguments are true... Meno: And the way that they can both be true is that there isn't just one quantity--the bond price--that adjusts to match supply and demand in the bond and the money markets... Sokrates: But there are two quantities that adjust: the bond price and the level of spending... Adeimantos: Yes. You have just derived things that were well-known 72 years ago. See John Hicks (1937), "Mr. Keynes and the 'Classics': A Suggested Interpretation." Sokrates: But which adjusts more? Adeimantos: Once again back to Hicks (1937). When the unemployment rate is high and the nominal interest rate on Treasury bonds is very very slow, adjustment comes in the form mostly of changes in spending and only slightly in changes in interest rates--the world is then "Keynesian." But when the unemployment rate is normal or low and the nominal interest rate on Treasury bonds is near its normal levels, adjustment comes in the form mostly of changes in interest rates and only slightly in changes in spending--the world is than "Classical." That's why the title of the article is "Mr. Keynes and the 'Classics'." Meno: So when European hedge funds predict the collapse of U.S. Treasury bond prices as the new issues hit the market and ask where is the extra demand to hold all these new bonds come from, the answer is...? Adeimantos: That even as the government issues the bonds it is also spending the money, and as the money it spends is parked in the bank accounts of the businesses the government is buying things from, the banks in which the money is parked take it and use it to buy Treasury bonds. Meno: That sounds like sophistry... Sokrates: You should talk... Glaukon: Actually, it's just general equilibrium... Meno: But is this doctrine--that the government's issuance of a fortune in bonds and spending of a fortune in money will show up primarily not as a collapse in bond prices and a spike in interest rates but as an expansion of spending--true? Sokrates: We will see. Keynesian--or maybe I should say Hicksian--economists would say that bond prices/interest rates and spending/income levels are the two quantities that together adjust to jointly clear the bond and the money markets, to satisfy both loanable funds and liquidity preference equilibrium; that sometimes the principal movement is in interest rates; that sometimes the principal movement is in spending levels; and that right now it is likely that spending will adjust by much more than interest rates. Adeimantos: And there is a little bit of empirical evidence that the Hicksian economists are right.... Meno: And the Chicago School economists who say that government borrow-and-spend logically cannot increase overall spending? The Robert Lucases who say: "[W]ould a fiscal stimulus somehow get us out of this bind...? I just don't see this at all. If the government builds a bridge... by taking tax money away from somebody else, and using that to pay the bridge builder... then it's just a wash.... [T]here's nothing to apply a multiplier to. (Laughs.)... [And] taxing them later isn't going to help, we know that..."? And the John Cochranes who said: "[W]hile Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. 'It’s not part of what anybody has taught graduate students since the 1960s. They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.'" To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit..."? Sokrates: I, at least, find myself unable to understand them. They say they believe in the quantity theory of money--that spending is equal to the economy's cash times its velocity. And they say that they believe that velocity is interest elastic--that people respond to incentives and spend the cash in their pockets more rapidly when nominal interest rates are high. They say that they believe that bond prices/interest rates are such as to balance saving and investment and make people willing to hold the stock of bonds. That's all you need to be a Hicksian. Yet they also claim that Hicks is wrong, somehow--without giving arguments. I can trip up and make foolish anybody who makes an argument, but if they don't make an argument I cannot make them look any more foolish... ## New York Times Epic Fail: David Brooks Edition Why oh why can't we have a better press corps? Jonathan Bernstein: David Brooks: Blame the economic collapse on Barney Frank and ACORN: Barney Frank? Really, David Brooks? The leading villain in the global economic collapse was ... Barney Frank? I don’t think so. Brooks today calls the Fannie and Freddie scandal — in which Fannie May contributed to the housing bubble by writing bad mortages — the worst scandal since Watergate, and assigns it a leading role in tanking the economy. Brooks singles out Barney Frank as singularly immoral in the saga of Fannie and Freddie and the housing collapse. And of course, because Fannie bought the support of ACORN, too, ACORN is also one of the leading villains in this tale.... David Brooks today singles out Barney Frank. The same Barney Frank whose Democrats were the minority party in the House from 1995 through 2006. Hey, for all I know Frank was incredibly evil during those years (I haven’t read the book Brooks is working from), but it just couldn’t have mattered very much, at least in the twelve years leading up to the crisis. Meanwhile, where in the Brooks account is, say, Tom DeLay? Or George W. Bush? Or Alan Greenspan? Really, the tip-off is that Brooks manages to fit ACORN into his story; ACORN looms large within the conservative mind, but in fact there’s not much evidence that anyone in Washington ever cared about ACORN at all until very, very recently. If you want a more reality-based approach, Dean Baker has a substantive response to Brooks. It finds fault with a wide variety of players, Democrats and Republicans. But in Brooks’ fairy tale, you can blame it all on the House minority party, ACORN, and other bystanders like the Congressional Black Caucus. Surely as influential a commentator as Brooks knows that Washington just doesn’t work this way. Brooks knows better. ## Mark Thoma: Labor's Share of Nonfarm Business Income Plummets Mark Thoma reproduces a graph from Frum Forum and comments: Economist's View: Labor's Share of Nonfarm Business Income Plummets: This graph of labor's falling share of income explains a lot about the growing political discord.... I've talked a lot about the need for job creation, and that is still of utmost importance. But job creation alone is not going to be enough to turn the tide of growing unhappiness with our increasingly two-tiered society. ## Uniqueness and Stability of General Equilibrium Alejandro Nadal writes: Whatever happened to stability analysis?: Once upon a time, stability of the general equilibrium was considered an important element in the education of students in economics. Today it seldom receives the attention it deserves.... This crucial aspect of microeconomics is seldom covered adequately (if at all) in recent textbooks and university programs, whether at the undergraduate or post-graduate levels. Most students spend years learning how individual agents maximize, or exploring cases of oligopoly, or playing around with game theory, but when it comes to stability, their teachers skirt the main issues. As a result, a cloud of confusion persists. Students come to believe that somewhere in the sacred scriptures of the discipline there exists a theory that accurately reproduces just how the market forces of competition guide an economy through a price adjustment process that leads to the formation of equilibrium prices. In fact, if stability analysis received the attention it deserves, students would be able to see that it is the most important failure of general equilibrium theory.... In 1958-9 two papers, by Arrow and Hurwicz and Arrow, Block and Hurwicz, showed how under certain conditions an economy could converge to equilibrium. But these were extreme conditions: gross substitution (GS) for all goods or the validity of the weak axiom of revealed preferences (WARP) at the market level.... In the sixties a different tack was followed. Trading models were developed by Hahn and Negishi, Fisher and others.... The stability debate reached its climax with the papers published by Sonnenschein, Mantel and Debreu in 1973-4. These results show that the usual assumptions of GET allow the dynamics of the classic tâtonnement process to be essentially arbitrary. To avoid this, additional restrictions must be imposed on excess demand functions.... As Mundell once remarked, stability analysis is the most successful failure of general economic theory. It is also the best example of how an academic community pushes the most serious problems of mainstream theory under the rug and gets away with it... From my perspective, the strange thing is that people kept trying to prove uniqueness and stability of general equilibrium. Simply look at: and try to avoid the conclusion that to first order the U.S. economy can be in at least meta-stable equilibrium with an adult employment-to-population ratio of about 63% or with an adult employment-to-population ratio of 58.5%--and probably anywhere in between as well. Proposing that economists pursue the research program of demonstrating that the economy has a unique stable equilibrium has thus always seemed to me to be like proposing that physicists pursue the research program of demonstrating the feathers fall unusually rapidly... ## Department of "Huh?!": Speed of the Recovery Edition Olivier Blanchard, Jose Vinals and Carlo Cottarelli write: The Long and Winding Road to Recovery by Olivier Blanchard, Jose Vinals and Carlo Cottarelli: The headline numbers do not look so bad. We expect global growth to be around 4.5% in 2011 and 2012, although the two-track recovery will continue, with advanced economies chugging along at around 2.5% annual GDP growth... Huh? If--with large output gaps and still-live threats of deflation--growth barely below or barely above potential output in the industrial core is not "bad", then what would be "bad"? Things get better once we get out of the lead, however: Policy inertia is not an option. This is especially true in the advanced economies, where policymakers must address the issues more forcefully.... A more robust global financial system is urgently needed. There has been some progress on bank repair, but it is too slow.... The pace of recapitalization needs to be stepped up, and the new round of “stress tests” for European banks will mark a clear line in the sand. Then it gets worse again: Fiscal repair is also essential. A key priority for advanced economies is to continue the process of fiscal adjustment that most of them initiated this year. But the two largest advanced economies – the US and Japan – have not yet started along this path. They should put in place as soon as possible credible consolidation plans that are specific in terms of not only goals, but also the tools to achieve them. The pace of fiscal consolidation should be set with a keen eye on growth and employment. Too slow will kill credibility, but too fast will kill growth. Thus, the tools used to carry out fiscal adjustment should boost economic efficiency, or at least not damage it... If interest rates were rising, I would say that long-term fiscal repair is essential. But they are not. Long-term fiscal repair is only desirable. It is short-term expansion that is essential. And the IMF is almost the only authoritative policy voice right now that is even semi reality-based... ## What Is the NLRB Doing with Boeing? Ellin Dannin on the NLRB: Execution First . . . Trial Later: Wild claims – without any basis in fact – are being made that the NLRB has already made a decision that Boeing violated the law and that the NLRB is going on a rampage against “right to work” states. If you listened to Congress’ version of events, you would think that the NLRB has become the major threat to the economic life of this country.... Of course, none of this is true. In fact, it is just Plane Nonsense.... The Boeing case began when the Machinists Union in the State of Washington filed a charge with the NLRB alleging that Boeing had retaliated against its Washington employees for past strikes by moving work to South Carolina. The right to strike is protected by law, and an employer’s retaliating against employees for exercising their legal rights violates the NLRA, the law the NLRB enforces. After the charge was filed, the NLRB’s regional office in Washington investigated the case. That investigation involved taking sworn affidavits from witnesses and collecting other relevant evidence. Boeing had the right to present its evidence during the investigation. The evidence included public statements by Boeing officials – and reported in the Seattle Post Intelligencer Aerospace News and the Seattle Times – that they were angry that Boeing employees in Washington had gone on strike in the past. Boeing officials also said that they would, therefore, move work that was originally going to be done in Washington to a plant in South Carolina. This evidence, if credited by the judge at trial, supports a finding that Boeing violated § 8(a)(1) and (3) of the NLRA. There is nothing in the case about one state being a right to work state or not. That red herring was created by Boeing in its aggressive campaign against the NLRB.... Congress created the National Labor Relations Board and charged it with enforcing the National Labor Relations Act. The NLRB’s General Counsel’s role is similar to that of a District Attorney. When the investigation shows that the law has been violated, a DA normally seeks an indictment and tries to bargain a plea. The NLRB’s General Counsel has discretion to decide not to issue a complaint even when there is evidence that a violation occurred. In the Boeing case, the NLRB investigation found evidence that Boeing had essentially confessed to the violation.... As with all trials, the purpose of NLRB trials is to sort out facts and let the parties prove or dispute the complaint’s allegations. The case is now scheduled to be heard on June 14 before an Administrative Law Judge. The NLRB has the burden of proving the complaint allegations. The judge will listen to the testimony, make credibility findings, and apply the law to the facts. That decision will be in writing and can be appealed to the five-member Board in Washington, D.C., and from there to a federal court of appeals. ## Working with Say's Law: Tyler Cowen Gets Something Elementary Wrong Edition Admittedly, a rare event--Tyler's mistakes are almost always complex and subtle ones. But I recommend anybody within 100 km of Nick Rowe take cover immediately... Tyler writes: Marginal Revolution — Small steps toward a much better world.: Before the financial crisis, symphony orchestras had considerably more financial support than they do today. We now observe the Philadelphia Orchestra, one of America’s most classic musical institutions, dealing with issues related to bankruptcy. Other orchestras are on the verge on folding or at least scaling back their season’s programs. The initial negative shock of the crisis, among its other effects, caused donors and potential donors to see that support for these projects was weaker than they thought. Many of these donors are now less than keen to keep pouring money into losing endeavors. An unraveling process has set in. It’s not just the negative wealth effect, but new information has been revealed about popularity and sustainability of the underlying venture. Neither monetary nor fiscal stimulus will prove any kind of easy cure for these institutions or, potentially, for these jobs. There is a well-known literature in finance about how trading, combined with the possibility of sudden price dips, causes market participants to learn the shape of the market demand curve and thus revalue the appropriate overall level of prices. The mere act of trading can generate market volatility. This kind of insight is not yet sufficiently appreciated in macroeconomics. The financial crisis caused us to see that many market institutions were on shakier ground than we had thought. You will note, once again, that this structural problem — like so many others — does not imply excess demand for labor in any sector. Why do I keep reading literally hundreds of blog posts which conceive of structural labor market problems only in terms of “‘excess supply of labor in one market, excess demand for labor in another.” That’s a simple, unforced error. Hmmmm... Philanthropists suddenly decide to stop spending money on symphony orchestras. Unless they decide to hoard their cash--to build up their cash balances for whatever is the appropriate definition of "cash" in this case--they thereby decide to spend their money on something else. Suppose they decide to spend it on charter schools. Voila: excess supply of violinists and excess demand for fifth-grade math teachers. Only if the recognition that there is less support for symphony orchestras induces wealth-holders to conclude that the world is riskier than they thought it was and they need to hold larger cash balances will there be an excess supply of violinists not offset by another excess demand for some other kind of labor. This Say and Mill had straight by 1829... ## For the Virtual Green Room: June 18, 2011 Rebuttals to right-wing talking-points misinformation that I want to have at the forefront of my brain--for when I am surprised, as I will be, by an unexpected question from an unexpected direction while talking to reporters, phone callers, passers-by, radio interviewers, cable TV interviewers, etc.... A baker's dozen: 1. Obama's claims to be restoring the rule of law in America: Rebutted by Jack Balkin: "George W. Bush... sought legal justification for his decision to engage in... torture. Bush wanted above all to be able to deny that he was violating the anti-torture statute and other laws and treaties. So he found a small group of lawyers in the OLC, headed by John Yoo, and asked for their opinions. This short-circuited the usual process.... Obama routed around the OLC, asking for opinions from various lawyers, including the White House Counsel and the Attorney-Advisor for the State Department. It is difficult to escape the conclusion that from the outset Obama was prospecting for opinions that would tell him that his actions were legal, and once he found them, he felt comfortable in rejecting the opinion of the OLC.... By bypassing a careful set of procedures designed to produce careful legal opinions, George W. Bush... was effectively undermining the OLC's function as an honest broker of executive branch opinions. Obama also bypassed this same careful set of procedures by canvassing various lawyers until he found opinions he liked better than the OLC's. If one is disturbed by Bush's misuse of the process for vetting legal questions, one should be equally disturbed by Obama's irregular procedures..." 2. George Will's claim that ""Conservatism is true... rooted in reality... starts not from an imagined society but from the world as it actually exists": Rebutted by Fareed Zakaria: "Consider the... economy. The Republican prescription is to cut taxes and slash government spending — then things will bounce back.... [w]hat is the evidence that tax cuts are the best path to revive the U.S. economy?... [T]he case that America is grinding to a halt because of high taxation is not based on facts but is simply a theoretical assertion. The rich countries that are in the best shape right now, with strong growth and low unemployment, are ones like Germany and Denmark, neither one characterized by low taxes. Many Republican businessmen have told me that the Obama Administration is the most hostile to business in 50 years. Really? More than that of Richard Nixon, who presided over tax rates that reached 70%, regulations that spanned whole industries, and who actually instituted price and wage controls?... [D]iscussion of government involvement in the economy — even to build vital infrastructure — is impossible because it is a cardinal tenet of the new conservatism that such involvement is always and forever bad. Meanwhile, across the globe, the world's fastest-growing economy, China, has managed to use government involvement to create growth and jobs for three decades. From Singapore to South Korea to Germany to Canada, evidence abounds that some strategic actions by the government can act as catalysts for free-market growth..." 3. David Brooks's claim that the housing crash was Fannie Mae's fault: Rebutted by Dean Baker: Just to be clear, Fannie and Freddie were serious bad actors.... It is incredible that they did not recognize the housing bubble.... As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if... Greenspan had paid attention... he would have had the Fed's staff devoted full-time to document the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed's full regulatory authority to police the mortgage issuing practices of the banks under its supervision.... My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route..." 4. Republican Senator Orrin Hatch's fake claim that Medicaid coverage is worse than none at all: Rebutted by Judy Solomon: "Studies that appropriately adjust for the fact that Medicaid enrollees tend to be both sick and poor, as well as other factors that can skew results, “have consistently found that Medicaid coverage leads to health improvements,” conclude the authors, who include noted health policy experts Austin Frakt and Uwe Reinhardt. George Washington University professors Leighton Ku and Christine Ferguson also point out that Gottlieb confuses causation and correlation: “Patients often become eligible for Medicaid as a result of being sick,” they write. “It is not that Medicaid enrollment causes ill health, but that ill health leads to Medicaid enrollment.” To be sure, adequate access to physicians — particularly specialists — remains a concern in Medicaid, as a new study notes. But Ku and Ferguson cite abundant evidence that people have much better access to health care when they have Medicaid than when they are uninsured..." 5. RERUN: Clifford Asness's claim that it is not policy "uncertainty" that is hobbling recovery but rather the certainty that Obama's policies on the deficit, debt, and regulation are disastrous: If it was certain that they were disastrous, the 30-year Treasury bond would not be priced as it is. Its interest rate would be much, much higher. Lack of confidence in America would be disastrous for bond values. Enough said. 6. RERUN: Republican claims that the economy does not need more quantitative easing: Rebutted by Joe Gagnon: "QE2 did work.... One element was of moderate importance, one element was of minor importance. The moderate one is that QE2 convinced markets that the Federal Reserve would not allow deflation or a double dip recession to happen.... While QE2 had good effects, it was too timid. A QE3 needs to be bigger than QE2 — you want to signal a larger amount. A trillion dollars sounds like a big number, but it isn’t like a trillion dollar tax cut. All it is is a swap of two different assets. Buying one kind, selling another..." 7. RERUN: Republican fake claims that the stimulus was too large: Rebutted by former Reagan CEA Chair Martin Feldstein: "As for the "stimulus" package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than$500 billion. The drop in home building subtracted another $200 billion from GDP. The total GDP shortfall was therefore more than$700 billion. The Obama stimulus package that started at less than $300 billion in 2009 and reached a maximum of$400 billion in 2010 wouldn't have been big enough to fill the $700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.... Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending.... President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth..." 8. RERUN: Tim Pawlenty's fake claim that tax cuts almost always raise revenue: Rebutted by former Jack Kemp aide Bruce Bartlett: "During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue. These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut." I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it..." 9. RERUN: Fake Republican claims that discretionary spending has risen by 80% under Obama: Paul Krugman: "Politifact has now updated its work on the claim, universal on the right — and repeated often by Paul Ryan — that discretionary non-defense spending is up 80 percent under Obama. It’s completely false. As anyone who knows how to read federal statistics should have known, the real number — including the stimulus — is 26 percent. And it’s now in the process of falling off. The discretionary spending falsehood is a key part of the claim that Obama has presided over a vast expansion of government; as I’ve tried to explain, the only real area of rapid growth has been in safety net programs that spend more when there is high unemployment..." 10. RERUN: Douglas Holtz-Eakin's claim that it would be better to default than to pass a clean increase in the debt ceiling: [Rebutted by] Douglas Holtz-Eakin, a top Republican advisor and former CBO director, [who] warned in a panel discussion this week that creditors would not be easily reassured after a default: "The idea that somehow it's a pro-growth strategy to raise interest rates on a permanent basis in the United States is just crazy," he said. "We need to grow at this point more than anything else." 11. RERUN: Republican claims that Peter Diamond is unqualified to be on the Federal Reserve: Clive Crook: "Peter Diamond's decision to withdraw from contention for a seat on the Fed board is a very low moment in US politics. Diamond is an indisputably brilliant economist with no ideological baggage and highly relevant expertise--contrary to what his GOP critics say, and as he explains in his NYT article. It ought to be shocking, but it no longer is, that a man of his distinction could not get confirmed to the position. At times the US seems a country hell-bent on its own failure." 12. RERUN: Mitt Romney's claim that we are only inches away from ceasing to be a free market economy: Buce: "[W]hen Mitt Romney says that we are 'only inches away from ceasing to be a free market economy', you'd just have to write it up as an arrogant, insolent, baldfaced lie. Which is pretty much what they are calling it over at Politifact, the Poynter journalistic fact-checker (sourced, ironically, in large measure, to those bomb-throwing insurrectionists at the Heritage Foundation).... [T]he US ranks ninth from the top "freest") out of 179.... None of this is surprising to anyone of even mildly wonky sentiments, a group which clearly includes Romney himself. But here's an extra irony I hadn't noticed before: health care. Namely that every one of those top eight has some kind of universal public health care. And they virtually all get better results than the US has, and at substantially less cost.... I dunno, maybe Romney (who can clearly say anything with the same schoolboy grin) will soon be telling us that Singapore and Hong Kong (and Switzerland, and Denmark, and Canada, and Ireland, and New Zealand, and Australia) are just mired in post-Leninist purgatory. Others might say otherwise: they might say it shows that freedom can be enhanced (even on a Heritage definition) by the right kind of government intervention. Like, say, in Massachusetts..." 13. SPEAKS FOR ITSELF: Elon Green: "MICHELLE BACHMANN WARNED ‘THE LION KING’ WAS GAY PROPAGANDA: At the November 2004 EdWatch National Education Conference, Bachmann said the “normalization” of homosexuality would lead to “desensitization”: “Very effective way to do this with a bunch of second graders, is take a picture of ‘The Lion King’ for instance, and a teacher might say, ‘Do you know that the music for this movie was written by a gay man?’ The message is: I’m better at what I do, because I’m gay.”" ## On the Other Hand, Sometimes I Am Not So Smart... When Obama got elected, I thought: "Gee, I won't have to listen to economists I respect say ridiculous things just because they are working for an administration with a silly message any more." Silly me. Jim Tankersley tallks to Becky Blank: Possible Goolsbee Successor Not Big on New Stimulus: When news broke last week that Austan Goolsbee, the chairman of President Obama’s Council of Economic Advisors, will leave his post this fall to resume teaching at the University of Chicago, administration officials quietly suggested what they were looking for in a replacement: a standout academic economist who has already won Senate confirmation. Perhaps no one in the federal government today fits that description better than Rebecca Blank. A poverty economist, a Clinton-era CEA member, and the former dean of the Gerald R. Ford School of Public Policy at the University of Michigan, Blank is now Commerce Secretary Gary Locke’s top economic adviser. She’s the acting deputy secretary at Commerce and the under secretary for economic affairs. She’s also a pragmatic, progressive economist—like Goolsbee—who is reluctant to call for new government stimulus even as the economic recovery slogs through a “soft patch” of slowing growth. “I think what the government is doing right now in terms of a push is not dollars of stimulus, but being smarter” in areas like streamlining regulations and cutting waste, Blank told National Journal, adding: “Could this economy take off again? The answer is absolutely yes. If you look at corporate profits, if you look at consumer balance sheets [improving] … gas prices are falling. I guess I understand the reason to say, let’s see if this economy can do it on its own.” In the course of a 40-minute interview with National Journal, Blank deflected a question about whether she is a candidate to head CEA. “I’ve got two jobs here,” she said. “I’m not looking for other employment at the moment.” She also: • Said that despite disappointing numbers for the first quarter, “There’s no question we’re in a steady, solid recovery. That’s the good news. The bad news is there are some sectors of the economy that aren’t recovered yet. Housing is the most dramatic … and unemployment is just way too high. Way too high.” • Expressed belief in what the economist and columnist Paul Krugman dubs the “Confidence Fairy”—the idea that psychological factors are restraining growth: “An awful lot of this [soft patch] has to do with confidence about, has the economy taken off? Is it time for me to start hiring permanently.... There’s a lot of confidence game going on in the economy right now. When we talk about the debt ceiling, when we talk about gas prices, the tsunami, all of that is about confidence” in whether things are going to get better. • Stressed the need to tame budget deficits over “five to 10 years” but cautioned against steep cuts to federal spending immediately: “In the next quarter, do we need to slash trillions of dollars in government spending? The answer to that is no. The short-term economic effect would outweigh any deficit reduction. Deficit-reduction gains are slow and steady. They aren’t something you need to do next quarter.” • Named two economic indicators she watches with particular interest among the data avalanche that fills her day: retail sales figures, which tell an evolving story of what Americans buy and where the economy is headed, and labor-force participation for older workers, which, against historical trends, rose during the recession as dwindling wealth forced seniors back to work. Let me note that a reporter would then have asked her the question: You say we don't need stimulus now. But you also say we don't need deficit reduction right now. Have we by lucky chance happened to arrive at just exactly the sweet spot? That's hard to believe. Why don't you fess up and say that the two things you claimed are unlikely to both be true? And a reporter would have asked: Larry Summers and Christina Romer both say that the economy needs more stimulus--and that it is a mistake not to be borrowing more at the extraordinarily low Treasury rates in order to rebuild our infrastructure. Are they wrong? Why do you think they are wrong? But asking Acting Deputy Secretaries tough questions does not appear to be part of the National Journal's modus operandi any more. Why oh why can't we have a better press corps? ## DeLong Smackdown Watch: Ghost of Milton Friedman Edition David Beckworth writes: Macro and Other Market Musings: Brad DeLong, Jim Grant, and Milton Friedman: [D]id Milton Friedman actually recommend doing successive rounds of quantitative easing until nominal spending returns to normal levels? Let's have Milton Friedman speak for himself. Here is an excerpt from a Q&A following a 2000 speech he delivered at the Bank of Canada (my bold below). David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue? Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy. During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?” It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy. The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity. So yes, Milton Friedman did call for buying longer-term securities until a robust recovery takes hold. He also notes that policy interest rates can be a poor indicator of the stance of monetary policy. I suspect, however, that Friedman would have preferred that such a monetary stimulus program be done in a more systematic manner than that of announcing successive, politically costly rounds of QE. Imagine how much easier all of this would have been had the Fed announced a level target from the start and said asset purchases will continue until the level target was hit. There would have been no need to announce the large dollar size of the asset purchases up front that attracts so much criticism. There would also have been no need to announce successive rounds of QE that make it appear the previous rounds did not work. More importantly, it would have more firmly shaped nominal expectations in a manner conducive to economic recovery. The question is what type of level target would Friedman have supported?... David is, of course, correct. Successive rounds of limited amounts of quantitative easing would have given Friedman hives--even though they would push policy in the right direction. ## Liveblogging World War II: June 17, 1941 Operation Battleaxe in the Western Desert: Wikipedia: At 04:30, Rommel's panzers began their advance.... As Rommel later wrote: It sounded suspiciously as though the British commander no longer felt himself capable of handling the situation. It being now obvious that in their present bewildered state the British would not start anything for the time being, I decided to pull the net tight by going on to Halfaya.... At 10:00, as the Panzer divisions pushed eastward, they ran into the remaining Matildas of the 4th Armoured Brigade, joined on the flank by the remaining cruisers and artillery.... At 10:45 Messervy contacted Creagh over the radio and, speaking Hindustani for security, informed him that he had ordered a retreat of his infantry from Capuzzo and Halfaya, to begin at 11:00.[70] At noon, an hour later, Wavell and Beresford-Peirse arrived at Halfway House and learned of the retreat Messervy ordered, to which Wavell then gave his approval. The armoured clash raged throughout the afternoon as the British armour stalled the panzer advance to Halfaya until 16:00, by which time the 22nd Guards had safely escaped. ## Grace Potter and the Nocturnals: Ain't No Time ## Macroeconomics: Safety, Savings, and Sovereigns Raghu Rajan: Money Magic: [T]he interest rate is a price for the savings that are transferred to spenders. To the extent that the Fed manages to push this price down... it taxes the producers of savings and subsidizes the spenders of savings. Clearly, no government considers pushing down the price of any real good an effective way to stimulate the economy--any gain to consumers is a loss to producers, and the loss typically will outweigh the gain if the market price is a fair one. So why are savings different?... Ummm... I think thre is an easy answer. First, correct a misconception: "the interest rate" is not that low. You can see what I mean if you are a Baa business or a small business out there in the market trying to borrow. You can see that if you look at stock market price-earnings ratios. The expected return to savers is not low. Indeed, it is rather high--it is more expensive than average for firms to get access to capital. What is low is your expected return if you are a saver that insists on safety. The collapse of confidence in rating agencies and in banks' risk-management departments greatly reduced the supply of safe savings vehicles--places you could park your money and be reasonably sure it would not melt away. The financial crisis and the coming of the Little Depression greatly increased the demand for safe savings vehicles. The net effect was that the price those few actors who could issue safe savings vehicles found themselves having to pay those many actors who wanted to hold safe savings vehicles fell to very low levels. That does not mean that the Federal Reserve needs to take steps to push the price of savings higher. At the moment production and employment are depressed. Why? Because if you want to start a profitable business now or expand a business profitably you face a joint production problem: you have to produce both (a) commodities that consumers will want to buy, and (b) savings vehicles that investors will want to hold. Those investment projects that promise enough safety for investors to want to hold them right now do not produce commodities consumers wish to buy at a price that allows for a profit. Those investment projects that produce commodities consumers wish to buy are not safe enough to provide backing and collateral for the safe savings vehicles investors want to hold and allow for a profit. Raghu may well say that this kind of situation simply should not happen. Real wages, commodity prices, risk premiums, and the intertemporal price structure should be such as to allow for full employment of all factors of production--labor, capital, finance, and entrepreneurship. I might agree with him that they should in the same sense that Galileo might have agreed that the Earth should be the unmoving center of the universe. But it is not. Given that this is the situation we are in, we have three options: 1. Tough it out, in the belief that austere virtue will in some way be good for us. 2. While most organizations cannot expand and produce at a profit, some can--notably the governments of France, Germany, Britain, the U.S., and Japan. Since they can borrow money extraordinarily cheaply and make things, they should do so--and thus restore full employment of factors of production. 3. The price of safety right now is at outlandish levels because financial markets do a lousy job of mobilizing the global risk-bearing capacity of the world. Central banks and the governments that back them can, however, mobilize that risk-bearing capacity. They should buy up risky assets, distribute the risks across the globe's taxpayers, and issue safe assets until supply and demand have once again pushed the price of safety down to a level at which ordinary companies can make a profit when they jointly produce commodities on the one hand and the quality of savings vehicles that they can issue on the other. This last is quantitative easing--what Raghu calls "easy money", and says the economy does not need. Raghu favors (1). I favor (2) or (3)--I don't much care which, and preferably both. Now note that (2) and (3) can only be done by solvent and credible sovereigns. An insolvent and uncredible sovereign cannot issue safe assets. It has no more ability to borrow and produce profitably than any other company. Indeed, its attempts to do so almost surely crowd-out private economic activity that would be more useful. And a government that is insolvent and uncredible cannot promise that it will earmark its future taxes to turn its citizens not already engaged in financial markets into risk-bearers--it has no such future tax capacity free to earmark. But the U.S. government--and the governments of France, Germany, Britain, and Japan--are certainly solvent, and markets find them very credible (although when I look at the U.S. Republican Party I wonder why). Their interventions in financial markets create a highly-valued commodity--safety backed by tax capacity--that these governments can produce very cheaply. They should do so. That is why savings (or, rather, safety) is different, and why we need more aggressive expansionary policy right now. Raghu disagrees. Yet when I try to figure out why Raghu disagrees and favors (1), I get nowhere: I can find no coherent argument. The closest thing there is is this declaration that the government should not intervene in any market--for "any gain to consumers is a loss to producers, and the loss typically will outweigh the gain if the market price is a fair one"--and the financial market is a market. If our principle is that markets are perfect, then of course the Federal Reserve should not do another round of quantitative easing. But that is merely a corollary of the conclusion that the Federal Reserve should never have been created, should not exist, and should be destroyed as soon as possible--for, after all, all it does is interfere in markets. This is the economics of Ron Paul. Mike Konczal has a somewhat stronger reaction: Rajan Plays Calvinball on Monetary Policy: A friend pointed out that post-crisis conservative economists talking about monetary policy in general, and QE2 specifically, is like watching a game of Calvinball.... If I read [Rajan] correctly, it’s an argument against monetary policy in general.... Here’s a thought exercise I encourage people to do when they dissect what people think about monetary policy at the zero bound, where we are now. Imagine short-term interest rates were actually at 2% right now. Somebody forgot to actually go ahead and push them down to zero. Whoops. If you looked out at the economy, would you lower interest rates?... Rajan... apparently wouldn’t reduce the short-term rates given the state of the economy. Even worse, he’s gone from creating arguments that the zero-bound encourages too much speculation to a morality play. There’s Ben Bernanke, a WWI general pushing soldiers over the trenches. Inflation taxes producers and subsidizes spenders is the main result. Would the phrase that inflation taxes hoarders, provides incentives to do transactions, relieves the debt burden of the past and balances the relationship between creditors and debtors (and debt and the entire economy) be equally acceptable?... [Monetary policy] is not about rewarding the good people and punishing the wicked, it’s about stabilizing growth, prices and maximum employment without overheating the system or letting it choke to death from a lack of oxygen. And it isn’t clear to me what rules or rough guidelines are motivating the argument here. Hence, Calvinball. ## Those of Us Who Remember History--and Forecast the Future--Are Also Condemned to Repeat It Hoisted from the Archives: July 17, 2009: Fasten Your Seatbelts for the Jobless Recovery... - Grasping Reality with Both Hands: As of this writing, it looks as though the average unemployment rate in 2009 is going to average at least 1.5 percentage points above where last December the incoming Obama administration thought that it was likely to be. Instead of the 7.8% forecast last December, year-2009 unemployment looks to average 9.3% or higher. Year-2009 real GDP also looks to be lower than the income Obama administration was forecasting last December:$11.40 rather than $11.53 trillion. The macroeconomic news has been bad. The financial crisis that gathered force from the summer of 2007 through the summer of 2008 and then exploded after the collapse of Lehman brothers did more damage to the economy than the consensus of forecasters had imagined. Back in the 1960s one of President Johnson's economic advisers, Brookings Institution economist Arthur Okun, set out a rule of thumb other quickly named "Okun's Law": if production and incomes--GDP--rises or falls 2% because of the business cycle, the unemployment rate will fall or rise by 1% along with it: the magnitude of swings in the unemployment rate will be half or a little less than half the magnitude of swings in GDP. Why? For four reasons: (a) businesses will tend to "hoard labor" in recessions, keeping useful workers around and on the payroll even if there is temporarily nothing for them to do; (b) businesses will cut back hours when unemployment rises, and so output will fall more than proportionately because total hours worked will fall by more than total bodies employed; (c) plant and equipment will run less efficiently when hours are artificially shortened because of the recession; and (d) some workers who lose their jobs won't show up in the unemployment statistics but will instead retire or drop out of the labor force. For all four of these reasons, whatever rise in the unemployment rate we see in a recession is supposed to be a fraction of the fall we see in GDP relative to trend. But this time we are not following this rule. This time Okun's Law is being broken. The unexpected 1.2% extra decline in real GDP in 2009 should have been accompanied by an 0.5 or 0.6 percentage-point rise in the unemployment rate, not by the 1.5 percentage point rise in the unemployment rate we are now seeing. I confess that the fact that this is happening comes as a surprise to me. But when I think back we have seen this before. In 1993--two full years after the National Bureau of Economic Research had called the end of the 1990-1991 recession--the unemployment rate was still higher and the employment-to-population ratio lower than it had been at the recession trough. And we saw the same "jobless recovery" after the recession of 2001: it took 55 months after the formal end of the recession in November 2001 before a greater share of Americans had jobs than had had them in November of 2001. It is likely to be a recovery. The central tendency forecast right now is that real GDP contracted at a rate of 1% per year or less between the first and second quarters of 2009, and will grow between the second and third quarters at a rate of 2% per year or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of the recession for June 2009, second most likely to call it's end in April, and a recession-end date later than June 2009 is a less likely possibility. One reason that we are likely to see a recovery starting... right now... is the stimulus package. It probably boosted the real GDP annual growth rate relative to what otherwise would have been the case by about 1.0 percentage point in the second quarter, and is going to boost the annual GDP growth by about 2.0 percentage points between now and the summer of 2010--after which its effects tail off. But it will not feel much like a recovery. After the 1982 recession the turnaround in employment lagged the turnaround in GDP by only six months. Thereafter employment growth was very strong: in the eighteen months up until the end of 1984, growth in work hours averaged 4.8% per year. it took only 7 months after the 1982 recession trough for the employment-to-population ratio to rise above its trough level (1980: 2 months. 1975: 5 months. 1970: 18 months. 1961: 13 months. 1958: 4 months. 1954: 8 months.) By contrast, it took 29 months after the 1991 recession trough for the employment-to-population ratio to exceed its trough level, and 55 months after the 2001 recession trough for the employment-to-population ratio to do so. Productivity growth in the immediate aftermath of the end of the 1991 and 2001 recessions was surprisingly rapid: rapid enough to eat up all of real demand growth and more as businesses decided to take advantage of the economic downturn to slim down their labor forces and become more efficient. Today--unless we get much faster real GDP growth than currently looks to be in the cards--we are headed for a jobless recovery. The answer to the economic question--was the stimulus sufficient to rapidly return the economy to something like normal unemployment?--is likely to be: "h--- no, it was much too small..." ## And Jared Bernstein and Larry Mishel Are Smarter too... Hoisted from the archives: January 15, 2008: Better Late than Never | TPMCafe: Allow us to quickly offer one more wrinkle—a really important one—to the ongoing debate about economic stimulus: we all want a quick, timely package to offset what, with each new data release, looks like a recession. But even if the process takes awhile, a stimulus package will still be very much worth pursuing. There have been many statements in the press contradicting this point, i.e., asserting that unless we can get a stimulus package into the economy quickly.... The reason this statement is wrong is because it is based exclusively on gross domestic product, as if mitigating the fall in overall growth is the sole focus of an anti-recession package. In fact, our efforts should also target insufficient job growth, rising unemployment, and the resulting wage and income losses for many families.... This insight is critical, because in both of the last two recessions—1990-91 and 2001—job market problems far outlasted the GDP contraction.... The 1990-91 recession officially ended in March 1991, but unemployment kept rising for another fifteen months, until June 1992. That was also the birth of the jobless recovery, as employment growth stagnated over this same period. But that was nothing compared to the jobless recovery following the 2001 recession: between the official trough (recession end-date) and August 2003, we lost another 1.1 million jobs (in addition to the 1.7 million lost over the recession).... [W]ill the pattern of the last two recessions show up in the next one? That’s unknowable, and we’ll keep our statistical eyes peeled for precisely this type of GDP up, jobs/incomes-down dynamic in coming quarters. At this point, many forecasters are calling for a relatively mild recession, but again, that’s ‘mild’ judged purely in GDP terms. Goldman Sachs analysts forecast unemployment climbing through 2009, hitting 6.5 percent by the last quarter. According to our calculations, based on the historical relationship between unemployment and middle-class incomes, an increase in joblessness of that magnitude would lower the real incomes of such families by$2,400 over 2008 and 2009.

So when it comes to an effective stimulus package, we want it early, but we’ll take it late.

## Of Course, Paul Krugman Is Smarter Than I Am...

Hoisted from the archives: January 24, 2008:

Are Modern Recessions Different on the Labor Side? - Grasping Reality with Both Hands: Paul Krugman thinks they are. Recovery from the old pre-1990 the-Federal-Reserve-has-hit-the-economy-on-the-head-with-high-interest-rates recessions was quick once the Fed had concluded that inflation was under control and had eased up. But he thinks (and I more than half agree) that these days recessions are credit-channel-overinvestment-bubble-bursting events, and that on the labor side at least recovery from them is a much more lengthly and difficult process.

He may well be right.

Here is Paul Krugman:

Deep? Maybe. Long? Probably. - Paul Krugman - Op-Ed Columnist - New York Times Blog: I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But both were followed by prolonged “jobless recoveries” that felt like continuing recessions. Below is the employment-population ratio since 1989, with shading showing the official recessions. In both cases the employment slump went on for a long time after the recession was supposedly over.

There’s every reason to think that the same thing will happen this time. There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending.

There’s still the question of how deep the slump will be. I can see the case for arguing that it will be nasty. The 1990-91 recession was brought on by a credit crunch, the 2001 recession by overinvestment; this time we’ve got both. I guess we’ll see. In any case, whatever happens will probably last quite a while....

The extremely slow employment rebounds of the "Jobless Recovery" of 1991-1993 and of the "Bush Boom" of 2001-2005 are only two data points, but they are two data points.

## Hoisted from the Archives: Fiscal Policy and the Possibility of a Jobless Recovery

July 10, 2009:

Fiscal Policy and the Possibility of a Jobless Recovery - Grasping Reality with Both Hands: Think: jobless recovery. Now that we have the May trade figures, the modal forecast is (i) an economy that was flat in the second quarter relative to the first quarter, (ii) an economy that starts to grow relatively slowly in the third quarter, and (iii) an unemployment rate that keeps rising for another one and a half to two years--like it did in 1992 and 2002--as the old-fashioned business-cycle productivity-employment pattern is broken once again. Bob Hall's NBER committee is likely to proclaim that recovery began sometime in the second quarter, but it won't feel like a recovery to workers (as opposed to asset owners) for quite some time to come.

God! I wish I weren't right so much of the time!

## The War Situation Has Developed Almost Entirely to the Confederacy's Advantage!

Teresa Nielsen Hayden sends us to Jefferson Davis:

To the People of the Confederate States of America. Danville, Va., April 4, 1865 The General in Chief of our Army has found it necessary to make such movements of the troops as to uncover the capital and thus involve the withdrawal of the Government from the city of Richmond.

It would be unwise, even were it possible, to conceal the great moral as well as material injury to our cause that must result from the occupation of Richmond by the enemy. It is equally unwise and unworthy of us, as patriots engaged in a most sacred cause, to allow our energies to falter, our spirits to grow faint, or our efforts to become relaxed under reverses, however calamitous. While it has been to us a source of national pride that for four years of unequaled warfare we have been able, in close proximity to the center of the enemy's power, to maintain the seat of our chosen Government free from the pollution of his presence; while the memories of the heroic dead who have freely given their lives to its defense must ever remain enshrined in our hearts; while the preservation of the capital, which is usually regarded as the evidency to mankind of separate national existence, was an object very dear to us, it is also true, and should not be forgotten, that the loss which we have suffered is not without compensation.

For many months the largest and finest army of the Confederacy, under the command of a leader whose presence inspires equal confidence in the troops and the people, has been greatly trammeled by the necessity of keeping constant watch over the approaches to the capital, and has thus been forced to forego more than one opportunity for promising enterprise. The hopes and confidence of the enemy have been constantly excited by the belief that their possession of Richmond would be the signal for our submission to their rule, and relieve them from the burden of war, as their failing resources admonish them it must be abandoned if not speedily brought to a successful close. It is for us, my countrymen, to show by our bearing under reverses how wretched has been the self-deception of those who have believed us less able to endure misfortune with fortitude than to encounter danger with courage. We have now entered upon a new phase of a struggle the memory of which is to endure for all ages and to shed an increasing luster upon our country.

Relieved from the necessity of guarding cities and particular points, important but not vital to our defense, with an army free to move from point to point and strike in detail the detachments and garrisons of the enemy, operating on the interior of our own country, where supplies are more accessible, and where the foe will be far removed from his own base and cut off from all succor in case of reverse, nothing is now needed to render our triumph certain but the exhibition of our own unquenchable resolve. Let us but will it, and we are free; and who, in the light of the past, dare doubt your purpose in the future?

Animated by the confidence in your spirit and fortitude, which never yet has failed me, I announce to you, fellow-countrymen, that it is my purpose to maintain your cause with my whole heart and soul; that I will never consent to abandon to the enemy one foot of the soil of any one of the States of the Confederacy; that Virginia, noble State, whose ancient renown has been eclipsed by her still more glorious recent history, whose bosom has been bared to receive the main shock of this war, whose sons and daughters have exhibited heroism so sublime as to render her illustrious in all times to come - that Virginia, with the help of her people, and by the blessing of Providence, shall be held and defended, and no peace ever be made with the infamous invaders of her homes by the sacrifice of any of her rights or territory. If by stress of numbers we should ever be compelled to a temporary withdrawal from her limits, or those of any other border State, again and again will we return, until the baffled and exhausted enemy shall abandon in despair his endless and impossible task of making slaves of a people resolved to be free.

Let us not, then, despond, my countrymen; but, relying on the never-failing mercies and protecting care of our God, let us meet the foe with fresh defiance, with unconquered and unconquerable hearts.

## Ronald Reagan on the Necessity of a Clean Debt Ceiling Bill

Hoisted from Comments: foosion sends us to Ronald Reagan:

For the Virtual Green Room: June 16, 2011: This country now possesses the strongest credit in the world. The full consequences of a default -- or even the serious prospect of default -- by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets. The Nation can ill afford to allow such a result. The risks, the costs, the disruptions, and the incalculable damage lead me to but one conclusion: the Senate must pass this legislation before the Congress adjourns.

As Clive Crook likes to say, for this the Republican Party deserves annihilation...

## Liveblogging World War II: June 16, 1941

Operation Battleaxe in the Western Desert:

Wikipedia: The 11th Infantry Brigade renewed their attack on Halfaya Pass, but met with same failure as the day prior.... Neumann-Silkow began his attack on British held Fort Capuzzo.... By 10:00, the 15th Panzer Division had lost fifty of its tanks, and by 12:00, they were forced to withdraw.... Starting at dawn, the 5th Light Division began to advance southwards past the western edge of Hafid Ridge.... During the running skirmish, the British tanks... found themselves at a significant disadvantage anytime they engaged the panzers.... The Panzer IV's, armed with high-explosive 75 mm guns with an effective range of ~2750 m, would open fire while still well out of the ~460 m range of the 2-pounder guns found on British tanks. While this would do minimal damage to the British tanks, it decimated their towed 25-pounder artillery, which would be forced to withdraw. Without British artillery to concern them, the Panzer IV and 50 mm gun armed Panzer III's could then safely close range with their British counterparts and pick off the thinly armed cruiser tanks while still remaining beyond the range of the British tank guns.... To make matters worse for the 7th Armoured Brigade, they had problems with the reliability of their tanks and suffered numerous breakdowns...

## Should We Do Another Round of Quantitative Easing? Debate with Jim Grant

What I prepared:

I am here to bring you the word that Milton Friedman would bring if he were still with us.

We have seen something like this--but worse--twice before: the Great Depression, and Japan's lost decades. A collapse in trust in the solvency of financial institutions induces the hoarding cash as part of the safe-asset tranche of portfolios. The economy's cash disappears from the transactions money stock--and so, for standard monetarist reasons, spending declines and unemployment rises. It's not a conventional monetarist recession in which the money supply shrinks, for the money is still there--just not available for transactions.

In such a situation, standard open-market purchases don't help the economy: the increased money stock goes straight into the hoarded safe-asset tranche. What you need to do is one of two things: fiscal policy--have the government create additional Treasuries for the safe-asset tranche and thus trigger the release of the economy's cash back into the transactions balances; monetary policy via quantitative easing. Expansionary monetary policy even at the zero lower bound via quantitative easing is what Milton Friedman recommended for the Great Depression and for Japan.

That's what Friedman would be recommending were he with us today--keep doing rounds of quantitative easing until we get the economy's transactions cash balances and the flow of spending back to normal levels.

If you want to oppose quantitative easing you need to denounce Milton Friedman as a dangerous lefty.

Reflections:

I must say I found spending six minutes with Jim Grant rather depressing...

I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.

I found it depressing that when Jim Grant searches for an analogy to quantitative easing, the analogy he comes up with is the creation of the special drawing right in 1968. In 1968 employment in the North Atlantic was full. Today it is not. In 1968 growth in the North Atlantic was rapid. Today it is not. In 1968 expectations of inflation had lost their anchor. Today inflation expectations are better anchored than I have seen them in my lifetime. You would have to search long and hard to find an analogy to quantitative easing worse than the creation of the special drawing right in 1968. depressingI found it remarkable that Jim Grant is hostile to all forms of macroeconomic policy: they manipulate things. They manipulate demand. They manipulate prices. They manipulate interest rates. And all of these manipulations are bad. But why are they bad? In a world of moral hazard, over everage, fads, bubbles, herding , extrapolate of expectations, and sudden shifts in confidence and risk tolerance there is plenty of room for government with deep pockets and some informational advantages to stabilize the economy and push market price is closer to their fundamental values. The government can be the ultimate stabilizing speculator. And it should be applauded when it plays this role. But Jim Grant doesn't admit this possibility. For Jim Grant: the market giveth, the market taketh away, blessed be the name of the market and cursed be thou that interfereth with it.

And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed--and the employed--to the underwater homeowners--and the above-water homeowners--and to the bankrupt businessmen--and to the businessmen not yet bankrupt.

Other things I had prepared, but did not say:

A depressed economy with a slack labor market, low wages, and very low interest rates can be consistent with high asset values and ample corporate profits. But policies that produce such an outcome aren't policies for economic recovery. They are policies for class war. They are not in the public interest...

A too-strong dollar is not in the public interest: a too-strong dollar greatly increases the future chances of a major, major dollar crash that will produce a depression that makes today look like a day on the beach at Malibu. When the dollar is at a level where U.S. net foreign debt is growing unsustainably fast it is time to think about lowering it, not keeping it where it is or raising it...

There were economists who thought that you really needed to eat the high unemployment of a recession and not do anything to try to boost the economy. Ludwig von Mises, for example. And von Mises used to denounce Milton Friedman at Mont Pelerin Society meetings as a socialist. But von Mises is really not the company you want to be in...

## Things Never Learned, Things Forgotten, Things Irrelevant, and Things Known But Just Not So: Why Economists Did Such a Lousy Job in the Little Depression of 2007-2012

Well, I have a title.

What should I say?

## For the Virtual Green Room: June 16, 2011

Rebuttals to right-wing talking-points misinformation that I want to have at the forefront of my brain--for when I am surprised, as I will be, by an unexpected question from an unexpected direction while talking to reporters, phone callers, passers-by, radio interviewers, cable TV interviewers, etc....

A baker's dozen:

1. Clifford Asness's claim that it is not policy "uncertainty" that is hobbling recovery but rather the certainty that Obama's policies on the deficit, debt, and regulation are disastrous: If it was certain that they were disastrous, the 30-year Treasury bond would not be priced as it is. It's interest rate would be much, much higher. Lack of confidence in America would be disastrous for bond values. Enough said.

2. Republican claims that the economy does not need more quantitative easing: Rebutted by Joe Gagnon: "QE2 did work.... One element was of moderate importance, one element was of minor importance. The moderate one is that QE2 convinced markets that the Federal Reserve would not allow deflation or a double dip recession to happen.... While QE2 had good effects, it was too timid. A QE3 needs to be bigger than QE2 — you want to signal a larger amount. A trillion dollars sounds like a big number, but it isn’t like a trillion dollar tax cut. All it is is a swap of two different assets. Buying one kind, selling another..."

3. Republican claims that the debt ceiling should not be raised unless the Democrats agree to their budget: Rebutted by Ben Bernanke: "Failing to raise the debt ceiling in a timely way would be self-defeating if the objective is to chart a course toward a better fiscal situation for our nation..."

4. Republican claims that they do not want to cut benefits for current seniors: Rebutted by Brian Buetler: "The Medicare plan, as written, would attempt to preserve fee-for-service Medicare for people in or near retirement. But the overall GOP budget would also repeal the new health care reform law, which is already providing new benefits for current retirees -- including a rebate for those who fall into the so-called "donut hole" for prescription coverage and free annual checkups for all seniors. Those benefits would disappear if the GOP budget were implemented..."

5. RERUN: Republican fake claims that the stimulus was too large: Rebutted by former Reagan CEA Chair Martin Feldstein: "As for the "stimulus" package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than $500 billion. The drop in home building subtracted another$200 billion from GDP. The total GDP shortfall was therefore more than $700 billion. The Obama stimulus package that started at less than$300 billion in 2009 and reached a maximum of $400 billion in 2010 wouldn't have been big enough to fill the$700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.... Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending.... President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth..."

6. RERUN: Tim Pawlenty's fake claim that tax cuts almost always raise revenue: Rebutted by former Jack Kemp aide Bruce Bartlett: "During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue. These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut." I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it..."

7. RERUN: Fake McKinsey claims that one-third of employers will drop employer-sponsored health insurance because of the PPACA: Rebutted by anonymous McKinsey analysts: "A McKinsey spokesperson... [said] that, for the moment, McKinsey will let the study speak for itself. However, McKinsey notes that the survey is only one indicator of employers' potential future actions.... The three authors of the report were not immediately available for comment. Another keyed-in source says McKinsey is unlikely to release the survey materials because "it would be damaging to them." Both sources disagree with the results of the survey, which was devised by consultants without particular expertise in this area, not by the firm's health experts..."

8. RERUN: Republican claims that cutting the deficit now is the key to recovery: Lawrence Summers: "[T]he greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded..."

9. RERUN: Fake Republican claims that discretionary spending has risen by 80% under Obama: Paul Krugman: "Politifact has now updated its work on the claim, universal on the right — and repeated often by Paul Ryan — that discretionary non-defense spending is up 80 percent under Obama. It’s completely false. As anyone who knows how to read federal statistics should have known, the real number — including the stimulus — is 26 percent. And it’s now in the process of falling off. The discretionary spending falsehood is a key part of the claim that Obama has presided over a vast expansion of government; as I’ve tried to explain, the only real area of rapid growth has been in safety net programs that spend more when there is high unemployment..."

10. RERUN: Douglas Holtz-Eakin's claim that it would be better to default than to pass a clean increase in the debt ceiling: [Rebutted by] Douglas Holtz-Eakin, a top Republican advisor and former CBO director, [who] warned in a panel discussion this week that creditors would not be easily reassured after a default: "The idea that somehow it's a pro-growth strategy to raise interest rates on a permanent basis in the United States is just crazy," he said. "We need to grow at this point more than anything else."

11. RERUN: Republican claims that Peter Diamond is unqualified to be on the Federal Reserve: Clive Crook: "Peter Diamond's decision to withdraw from contention for a seat on the Fed board is a very low moment in US politics. Diamond is an indisputably brilliant economist with no ideological baggage and highly relevant expertise--contrary to what his GOP critics say, and as he explains in his NYT article. It ought to be shocking, but it no longer is, that a man of his distinction could not get confirmed to the position. At times the US seems a country hell-bent on its own failure."

12. RERUN: Mitt Romney's claim that we are only inches away from ceasing to be a free market economy: Buce: "[W]hen Mitt Romney says that we are 'only inches away from ceasing to be a free market economy', you'd just have to write it up as an arrogant, insolent, baldfaced lie. Which is pretty much what they are calling it over at Politifact, the Poynter journalistic fact-checker (sourced, ironically, in large measure, to those bomb-throwing insurrectionists at the Heritage Foundation).... [T]he US ranks ninth from the top "freest") out of 179.... None of this is surprising to anyone of even mildly wonky sentiments, a group which clearly includes Romney himself. But here's an extra irony I hadn't noticed before: health care. Namely that every one of those top eight has some kind of universal public health care. And they virtually all get better results than the US has, and at substantially less cost.... I dunno, maybe Romney (who can clearly say anything with the same schoolboy grin) will soon be telling us that Singapore and Hong Kong (and Switzerland, and Denmark, and Canada, and Ireland, and New Zealand, and Australia) are just mired in post-Leninist purgatory. Others might say otherwise: they might say it shows that freedom can be enhanced (even on a Heritage definition) by the right kind of government intervention. Like, say, in Massachusetts..."

13. SPEAKS FOR ITSELF: Ron Paul: The First Amendment Establishes a Christian Religion for America: "I think faith has something to do with the character of the people who represent us and law should have a moral fiber too and our leaders should. We shouldn't expect, uh, us to try to change morality. You can't teach people how to be moral. But the Constitution addresses this by saying literally it says no theocracy but it doesn't talk about church and state. The most important thing is the First Amendment -- that Congress shall write no laws -- which means Congress should never prohibit the expression of your Christian faith in a public place..."

## Boo-Boos in Paradise: David Brooks

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

Sasha Issenberg:

Boo-Boos in Paradise: Brooks is operating in a long tradition of public intellectualism.... Whyte, who was an editor for Fortune in the 1950s, observed how people lived, inferred trends, considered what they meant, and then came up with grand conclusions about the direction of the country. When, in 1954, he wanted to find out which consumers were trend-setters, he went into Overbrook Park and surveyed 4,948 homes.... Brooks, by way of contrast, draws caricatures. Whether out of sloppiness or laziness, the examples he conjures to illustrate well-founded premises are often unfounded, undermining the very points he's trying to make.

In January, I made my own trip to Franklin County, 175 miles southwest of Philadelphia, with a simple goal: I wanted to see where David Brooks comes up with this stuff. One of the first places I passed was Greencastle Coffee Roasters, which has more than 200 kinds of coffee, and a well-stocked South Asian grocery in the back with a product range hard to find in some large coastal cities: 20-pound bags of jasmine rice, cans of Thai fermented mustard greens, a freezer with lemongrass stalks and kaffir-lime leaves. The owner, Charles Rake, told me that there was, until a few years back, a Thai restaurant in Chambersburg, run by a woman who now does catering. "She's the best Thai cook I know on Planet Earth," Rake said. "And I've been to Thailand."

I stopped at Blockbuster, where the dvd of Annie Hall was checked out. I went to the counter to see how Scott, the clerk, thought it compared to Allen's other work. "It's funny," said Scott. "What's the funny one? Yeah, Annie Hall, that's the one where he dates everyone -- it's funny."

"In Montgomery County we have Saks Fifth Avenue, Cartier, Anthropologie, Brooks Brothers. In Franklin County they have Dollar General and Value City, along with a plethora of secondhand stores," Brooks wrote. In fact, while Franklin has 14 stores with the word "dollar" in their name -- plus one Value City -- Montgomery County, Maryland, has 34, including one that's within walking distance of an Anthropologie in Rockville.

As I made my journey, it became increasingly hard to believe that Brooks ever left his home:

On my journeys to Franklin County, I set a goal: I was going to spend $20 on a restaurant meal. But although I ordered the most expensive thing on the menu -- steak au jus, 'slippery beef pot pie,' or whatever -- I always failed. I began asking people to direct me to the most-expensive places in town. They would send me to Red Lobster or Applebee's, he wrote. I'd scan the menu and realize that I'd been beaten once again. I went through great vats of chipped beef and 'seafood delight' trying to drop$20. I waded through enough surf-and-turfs and enough creamed corn to last a lifetime. I could not do it.

Taking Brooks's cue, I lunched at the Chambersburg Red Lobster and quickly realized that he could not have waded through much surf-and-turf at all. The "Steak and Lobster" combination with grilled center-cut New York strip is the most expensive thing on the menu. It costs $28.75. "Most of our checks are over$20," said Becka, my waitress. "There are a lot of ways to spend over $20." The easiest way to spend over$20 on a meal in Franklin County is to visit the Mercersburg Inn, which boasts "turn-of-the-century elegance." I had a $50 prix-fixe dinner, with an entrée of veal medallions, served with a lump-crab and artichoke tower, wild-rice pilaf and a sage-caper-cream sauce. Afterward, I asked the inn's proprietors, Walt and Sandy Filkowski, if they had seen Brooks's article. They laughed. After it was published in the Atlantic, the nearby Mercersburg Academy boarding school invited Brooks as part of its speaker series. He spent the night at the inn. "For breakfast I made a goat-cheese-and-sun-dried-tomato tart," Sandy said. "He said he just wanted scrambled eggs." ## New York Times Epic Fail Department Why oh why can't we have a better press corps? Tax expert Daniel Shaviro should not be allowed to read the New York Times without a health aide standing by with a syringe of thorazine--he might run across Casey Mulligan writing about tax policy: Dan: Start Making Sense: Thanks again to a link in the Tax Prof Blog, I see that Casey Mulligan of the University of Chicago Econ Department is saying that the home mortgage interest deduction is no big deal, hence no particular reason to repeal it. He focuses mainly on the point that "one person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income." My god, but Mulligan has missed the boat on this one.... The problem isn't really the home mortgage interest deduction as such, although it may encourage the sort of excessive home leverage that helped contribute to the 2008 financial crisis. The real problem is the fact that homeowners get to exclude imputed rental income because it isn't derived from an observable market transaction. The home mortgage interest deduction merely builds off that. Its allowance would be uncontroversial if imputed rental income were included. One can't seriously discuss the home mortgage interest deduction without understanding its relationship to the underlying imputed rent exclusion. This is really basic stuff. Mulligan ought to know, not just before he blogs about the issue in the New York Times about the home mortgage interest deduction, but as a supposedly informed professional in the field of public economics. He further embarrasses himself by adding the following: In contrast, consumer durable goods do not enjoy the interest deductions that housing and business capital do. Someone who takes out a car loan to purchase an personal automobile cannot deduct the interest payments from her taxable income, even while the Internal Revenue Service may be collecting taxes on the interest income of the lender. In this regard, tax policy discourages investment in consumer durable goods relative to investment in housing and businesses. Mulligan apparently is unaware that the personal use of a car generates an economic return that the tax system excludes from income, whereas returns to business investment are at least in principle taxed. Again, this is really elementary stuff. Anyone who purports to do public economics and to have opinions about the tax system ought to know it. The University of Chicago Law School has a pretty good tax faculty, whose members I am sure would have been happy to bring Mulligan up to speed. But if you don't know that you don't know, I guess it's hard to find out. ## Liveblogging World War II: June 15, 1941 For the first time in the war, a significant Nazi force fights on the defensive as British forces in the Western Desert launch the attack that will cost General Wavell his job: Operation Battleaxe. Wikipedia: Operation Battleaxe: Day 1: June 15th: On the eastern side, at 05:15, Coast Force, commanded by Brigadier Reginald Savory and charged with capturing Halfaya Pass, started to move on to their objective. On the top of the escarpment was the Halfaya Group... the anti-tank guns of the German and Italian defenders opened fire and within a few hours all but one light tank and one of the Matildas had been destroyed.... The British forces below the escarpment did not fare much better, as four of the Matildas were disabled by anti-tank mines which were supposed to have been cleared.... At the central thrust, the 7th Royal Tank Regiment had reached Fort Capuzzo by noon and scattered the defenders who retreated north to join the 15th Panzer Division which lay between them and Bardia. Soon after though, they faced several counterattacks by a battalion from the 8th Panzer Regiment of the 15th Panzer Division... the 8th Panzer Regiment's primary tactic was to skirmish briefly and then feign a disordered rout in order to lure Matilda tanks into a chase which led them directly into concealed anti-tank guns.... On the western side... the 2nd Royal Tank Regiment... the 6th Royal Tank Regiment.... The force reached Hafid Ridge... attacked at near point-blank range by dug in anti-tank guns... the cruiser tanks were armed with 2-pounder anti-tank guns which lacked the High Explosive (HE) rounds needed to effectively engage infantry and artillery.... At 17:30 reports came in from the forward observers that the defences were withdrawing from Hafid Ridge. This seemed like the ideal time to strike... upon the British forces clearing the second ridge, the Axis forces sprung their trap and fired on the Crusader tanks at near point-blank range with waiting guns; within minutes, eleven of the Crusaders were destroyed and six more heavily damaged.... By the end of the first day Fort Capuzzo was held by the British while Halfaya Pass and Hafid Ridge both remained in Axis possession. During the attacks, the British had lost a significant number of tanks.... German panzer losses were mostly insignificant, though there had been fairly significant casualties among the garrisoning forces at Hafid Ridge, Point 206 and Fort Capuzzo... ## Is Thus a Joke? Why can't anybody in the White House play this game? Yahoo! News: Desert tortoise comes under fire from 'Sheriff' Biden: WASHINGTON (AFP) – As part of the White House's recently launched Campaign to Cut Waste, Vice President Joe Biden says one of his first wasteful spending targets is a website dedicated to the desert tortoise.... In a message on the White House website entitled, "There's a New Sheriff in Town," Biden addressed potential cuts to spending. "And I bet you didn't know that your tax dollars pay for a website dedicated to the Desert Tortoise. I'm sure it's a wonderful species, but we can't afford to have a standalone site devoted to every member of the animal kingdom," Biden wrote in the message also sent via email to supporters. "It's just one of hundreds of government websites that should be consolidated or eliminated."... "This kind of waste is just unacceptable. Particularly at a time when we're facing tough decisions about reducing our deficit, it's a no-brainer to stop spending taxpayer dollars on things that benefit nobody," said Biden. The site identified by Biden, http://www.deserttortoise.gov, is managed by the Mojave Desert Ecosystem Program, a database about a desert area that spreads into California, Nevada, Utah and Arizona. "The Fish and Wildlife Service is committed to saving the taxpayers' money. At the same time, we will continue to work with all agencies involved to protect all endangered species," agency spokeswoman Vanessa Kauffman told AFP. As Duncan Black writes: Eschaton: Punchlines: Setting out to find wastefraudandabuse in government spending sounds noble enough, but it quickly becomes a punchline because unless you're willing to go after the big ones - intelligence and defense contractors - you turn your effort into a joke by bragging about the fact that you're shutting down websites that cost much much less to leave up there than holding the press conference to talk about them does. ## Looking Back and Looking Forward: The Macroeconomic Outlook J. Bradford DeLong: U.C. Berkeley: June 15, 2011 ## How We Got Here This is a bad time to be an economist--unless, that is, you are fresh from the womb and had no past opinions to defend, or are willing to fake complete amnesia about everything you said before July 2008, or perhaps July 2009. Only four short years ago we economists were writing learned papers about the "Great Moderation": how it looked as though the governing institutions of the world economy had finally learned how to control and moderate if not completely tame the business cycle that we had been seeing fairly regularly since at least 1825. But if we had been smart we would have noted that economists had been claiming they had the cycle licked fairly regularly since 1825 as well--and had been wrong: we were wrong in the 1840s, wrong in the 1920s, wrong in the 1960s, so it should hvae been no surprise that we were wrong in the 2000s when we noticed that between 1950 and 1985 we had had one significant recession every five years, while from 1985 to 2007 we had only one significant recession every eleven years and extrapolated that we had the business cycle licked. That was our--that was my--first big mistake. The story of this particular crash and downturn is familiar. We had a global savings glut. We had the rich of the emerging global periphery looking for insurance by parking their money in the U.S. so that if something went badly wrong at home they could afford to flee in the Lear Jet or the rubber boat. To an even greater degree we had the governments of the periphery anxious to keep the values of their currencies low so they could keep their exports high to prevent mass unemployment in Shanghai and thus buying up dollar-denominated assets at a furious pace. The result was a large increase in the demand for safe dollar-denominated assets. Investment bankers saw this. Investment bankers calculated that if they could produce dollar-denominated assets the rating agencies would say were safe they could make fortunes. And so they turned their financial alchemists at work on the problem of turning risky-mortgage lead into derivative gold. And the financial alchemists took a look at the problem, got out the can of gold spray paint, and let loose painting lead bricks with a veneer of gold. Then came the collapse of lending standards--for if financial alchemy allows you to construct safe derivatives from risky underlyings why care about the riskiness of the underlyings? That was the second mistake--not the economists' mistake this time, but Wall Street's. The economists' second mistake--my second mistake--was not worrying about housing bubbles, subprime mortgages, and derivatives. We thought: So what if a bunch of bad mortgage loans got made and a bunch of investors lost their money? The Federal Reserve could then step in, buy bonds to expand the money supply, and so build a firewall between financial distress and the real economy of production and jobs. The Federal Reserve had done so in 1987, 1991, 1995, 1997, 1998, and 2001. It could do it again. Besides, we thought--I thought--subprime simply was not large enough to bring down the economy as a whole. We only built$300 billion worth of extra houses above trend in 2003-6. Double that figure for all of the homeowners who bought existing houses who overcommitted themselves, and we still have only $600 billion of potential losses in a global economy that had$80 trillion of financial assets. That loss is one-eighth the relative size of the dot-com crash. It is one-fifth of the size of Black Monday in 1987. And there were all these fancy derivative securities associated with subprime mortgages to spread the risks associated with holding them all over the world. The large and highly leveraged money center banks that had originated them were too smart to hold onto them, weren't they?

They weren't.

That was my third mistake: trusting the risk management practices of the large highly-leveraged financial institutions that were too big to fail.

There was regulatory arbitrage: banks decided that now that we’ve gotten Moody’s to rate this security as AAA we might as well hold them as if they were AAA. And it turned out that the banks themselves did not have any idea what their risks were. CEOs would ask if they were hedged against subprime right. Subordinates would say: "Right, chief, we are." And the subordinates would lie.

And so we had the collapse of subprime. We had general panic, as everybody feared that the large highly-leveraged money-center banks' debt was no good because their subprime losses had eaten through their capital. We had a bigger panic as people feared that the same financial establishment that had no clue what risks they were running in subprime had other points of vulnerability as well.

It was the standard story. Nobody trusts anybody else’s paper. Everybody stops spending on currently-produced goods and services to build up their holdings of safe assets. But because one person's spending is another person's income, stopping spending stops income too--so there is no buildup of safe assets but rather a fall in demand, production, employment, and incomes that further increases risk and further increases people's desire to cut back on spending in order to build up their safe asset stocks.

The result was the deepest downturn in the post World War II era.

Now, this downturn is not nearly as bad as it could have been. Kevin O'Rourke and Barry Eichengreen point out that the 2008 shock to the world economy was bigger than the 1929 shock. In 1933 our unemployment rate kissed 23%, and our nonfarm unemployment rate kissed 28%. This time the unemployment rate only kissed 10%. The nonfarm unemployment rate didn’t get anywhere near the 28% of the great depression, it didn’t get anywhere near the 16 or 17% that Allan Blinder and Mark Zandi calculate would have been the peak unemployment rate had the government followed ineffective and counterproductive Herbert Hoover policies. If you could go to Tim Geithner and Ben Bernanke and get them to tell you what they really think, I believe they would say that a 10% unemployment peak is not a good thing but it is not 17%, and it is definitely not 28%. They would say that they and his peers have done a lot better job at handling this than their predecessors 80 years ago did handling their problem.

And they would be right.

## Where Is Our Recovery?

So by mid-2009 I was breathing easier. It was clear that we were not facing Great Depression II. And I was looking forward to a recovery--I thought it would be a relatively swift bounce-back recovery like the one we saw in 1982-1984.

That was my fourth mistake.

I thought that we would have a strong recovery because I knew that we had the technocratic knowledge to generate one, and I thought that we had the political will to do so.

Back up to technocratic knowledge. Back at the very start of economics as a discipline--back in the early nineteenth century--one of the hot topics of debate was between Thomas Robert Malthus and Jean-Baptiste Say over whether an economy could suffer from a "general glut": a condition in which demand for not one or a few commodities but for every commodity fell short of supply, and in which there was a crash of production, a recession, and mass unemployment. Malthus said yes--although he could never construct an airtight argument for how that could be so. Say said no. Say said that nobody makes something unless they intend to use it or sell it, and that nobody sells anything unless they intend to use the money they earn to buy something else that they find useful. Thus, Say said, supply of necessity creates its own demand: total planned purchases must equal total production for sale. You could have excess supply of individual commodities if people making things guessed wrong about what consumers would want--you could have an economy where there were unemployed yoga instructors and yet jobs for baristas making lattes went begging. But you could not have unemployment and slack capacity all across the board.

Say was wrong. And in his later career, especially after watching the British financial crisis and depression of 1825-6, Say admitted that he was wrong. The crux, as a younger economist named John Stuart Mill put it, was that you don't just buy currently-produced goods and services with your income, you buy financial assets as well. If everybody or even a critical mass decides to cut back on their spending and plans to build up their holdings of financial assets--well, then production will be larger than demand for currently-produced goods and services, inventories will grow, firms will fire people, production will fall, the incomes of the newly-fired will fall, inventories will rise further, firms will fire more people, and the downward spiral will continue until incomes have fallen by so much that people forget about trying to build up their holdings of financial assets and are once again planning to spend as much on currently-produced goods and services as is made. There the economy will settle at its new, low-activity, high-unemployment equilibrium.

That downward spiral is what we saw in 2008-2009. It is the job of the government--which the government did not accomplish very well--to prevent or quickly head off the emergence of an excess demand for financial assets which is the flip side of deficient demand for currently-produced goods and services.

But once the economy has finished its decline, what then causes the bounce-back? Just as planned excess demand for financial assets produces the decline, so if people find that their holdings of financial assets are greater than they wish they will attempt to spend down their wealth and buy currently-produced goods and services in excess of production--and the economy will be on the road to expansion. In order to spark a strong recovery, something or someone--businesses that see how low interest rates are and what good workers they can hire cheaply and so decide that now is the time to issue corporate bonds and build capacity, a government deciding to borrow-and-spend and thus issue its Treasury bonds, a Federal Reserve that acts to improve the liquidity position of the banks and thus induces an expansion of the money stock--must create the financial assets that then make people feel flush and eager to expand their spending. And once spending starts to expand, firms seeing their inventories decline will hire more workers and increase production, and expanding incomes will start a further wave of increase in spending.

In 1983-1985 the Volcker Federal Reserve embarked on an enormous program of aggressive expansion of the money stock, the Reagan administration's tax cuts kicked in and the government issued bonds to cover the tax revenues that were not there, and in addition the Reagan administration issued yet more bonds in order to pay for its expansion of military spending as it launched Cold War II. The result was a 3.5% decline in the unemployment rate before the next election. It was, Reagan's campaign commercials said, "morning in America."

It seemed to me in 2009 that the Congress, the Treasury, and the Federal Reserve all knew how to expand the economy's supply of financial assets in order to create the excess supply of financial assets needed to generate a 1983-1985 pace of recovery. Congress could spend and borrow. The Treasury could use FANNIE and FREDDIE to take over mortgage financing to stem foreclosures and give all American homeowners a break on interest rates. The Treasury could use TARP money as an equity tranche to recapitalize distressed assets and so boost their value on the market in what would have been the world's largest hedge fund operation ever. The Federal Reserve could engage in quantitative easing programs to boost the money stock.

It seemed to me that these institutions would do their job. Oh, one or two might balk for political or bureaucratic reasons. But it seemed to me in mid-2009 that a rapid reduction in unemployment was a political necessity--as well as being of vital importance for the welfare of Americans. And it seemed to me that the Obama administration would turn all of its energies to making sure that rapid recovery happened: getting advocates of monetary expansion on the Federal Reserve Board; following up the stress tests that had increased the banks' ability to roll over their debt and issue new tranches with other policies to restore the web of trust that was the financial system; and following the Recovery Act with additional fiscal stimulus measures if necessary. It seemed to me that the only things that could cut short this pressure for rapid recovery would be (a) if an inflationary spiral were to develop, or (b) if fears of future government insolvency were to induce interest rate increases that would then choke off private investment and new issues of corporate bonds.

Neither an inflationary spiral nor upward-spiraling interest rates seemed to me to be in the cards--and I was right about both of those. But even though neither of the economic problems that might block rapid recovery developed, and even though the economic desirability of rapid recovery was unquestioned, and even though you would think that President Obama would much rather run for reelection with the unemployment rate at 6% than at 8.5%--the rapid recovery did not appear.

And there are no signs of it on the horizon.

Thus right now we have a stubbornly persistent slump in the economy. We have economic growth at about our normal long-run pace, with very little signs of closing the gap between the productive capacity of the American economy and its current level of production. And we have a Washington DC that is dysfunctional--out of ammunition to take any effective additional steps to boost the economy.

In Washington today there appears to be substantial fear of inflation--even though there are no signs of inflation gathering anywhere rather than energy and food prices, and we understand that those reflect China’s growing demand and not any domestic price spiral.

In Washington right now there is now substantial fear of "crowding out"--that boosting US government spending or cutting taxes to get more money into the hands of the consumers would rapidly raise interest rates and discourage private investment--would trigger the appearance of the "bond market vigilantes." But so far the bond market vigilantes have been completely invisible.

Right now the breakeven inflation rate comparing the 10-year Treasury bond to the 10-year tip is 2.1%--hardly a sign of any inflationary spiral. Right now the 10-year TIP is paying a real interest rate of 0.94%--hardly a sign that the government's enormous demand for funds is putting pressure on interest rates and crowding private businesses that seek to fund capacity expansion out of the market.

Yet Washington DC is stuck in gridlock. And, right now, there is growing pressure for short-run deficit cutting--for the U.S. to sell fewer rather than more bonds, thus reducing the pace at which the supply of financial assets expands, and threatening to create not an excess supply but a deficient supply of financial assets which would be the thing to induce another cutback in spending and a double dip. Britain is a year and a half ahead of us on this austerity road, and few would claim that it has had a stronger recovery as a result.

This means that our hopes for economic recovery right now rest not on any government boost to aggregate demand--whether through fiscal, monetary, or banking policy--but rather on the natural equilibrium-restoring full-employment achieving market forces of the economy, especially in the labor market. Businesses have to see the numbers of unemployed and the terms on which they are willing to work, and be willing to gamble that now is the time to expand operations and borrow money or issue bonds to do so.

And so we are in trouble: right now there are no signs that the economy is crawling up back to anything like full employment on its own.

Back when I started in this business, back in the Spring of 1980, I had as teachers two of the smartest men I have ever known: Marty Feldstein and Olivier Blanchard. They taught that John Maynard Keynes had feared that if the economy got itself wedged into a situation of high unemployment that it would never recover by itself--that it would settle into an "underemployment equilibrium." It would need some large positive shock--either a wave of business exuberance, either rational or irrational, or activist stimulative monetary, banking, and/or fiscal policy on the part of government in order to knock unemployment down and employment back up to where it ought to be. Back in 1980 they said that we economists had learned that the market system worked better than that, and that there were substantial equilibrium-restoring forces in the world economy.

But look at the U.S. labor market over the past two years. Those forces are not there. There are no signs that the share of American adults with jobs has been growing, or is about to start growing. Ben Bernanke and Barack Obama both like to talk about how the unemployment rate is falling. But all of the decline in the unemployment rate has come from the fact that people have been dropping out of the labor force. None of it has come from any increase in the share of the adult population with jobs.

That suggests, to me, that we fact a very long slog. The economy will grow, but we won’t close the gap between actual and potential output. We will not for a long time to come get back to the 62 to 64% of the adult population having jobs that we thought was normal back in the decades of the 2000.

And that is the depressing overall macroeconomic picture.

## What Does This Mean for Investors?

This situation means horrible things for 50- and 60-something male middle managers who have lost their jobs. It means very bad things for ex-construction and ex-manufacturing blue-collar workers. It means bad things for new college graduates.

But what does it mean for investors?

What does it mean for macroeconomic risks that people should guard against? And what does it mean for opportunities?

The first and most obvious macroeconomic feature--an opportunity for those who spend their money on U.S.-made goods, a risk for those who spend their money on goods made outside the U.S.--is the dollar. The value of the dollar has been kept up in spite of enormous trade deficits because foreigners see parking their money in the U.S. as a form of political risk insurance, and want to do more of it. But at some point foreign millionaires and foreign governments will decide that they hold enough dollar-denominated assets--and when they do decide that that is the case, the dollar is likely to fall far and fast. Think of 1985-1987, between the G-7 Plaza Hotel meeting and the Louvre accord. When this will come we do not know. One of the smartest people I know, Maury Obstfeld, has the office next door to me at Berkeley. He and Ken Rogoff think the fall in the dollar and the resolution of this global imbalance will come no later than... 2006. That, at least, is what they wrote back in 2002. The late Rudi Dornbusch said that unsustainable asset price configurations could easily sustain themselves much longer than academic economists thought possible and then resolve themselves much more quickly than academic economists thought likely. Rudi was wise.

The second and only slightly less obvious macroeconomic feature is the rapidly-growing volume of outstanding U.S. Treasury debt. At the very start of the 2000s in the years of the Clinton budget surpluses--remember those?--the U.S. government was repaying its debt at the rate of $60 billion a quarter. George W. Bush--with assistance from Alan Greenspan and the entire rest of the Republican Party--quickly fixed that: from 2002 to 2007 the average quarter saw net Treasury issues of some$70 billion. A bunch of us (definitely including me) feared that this shift from prudent to feckless fiscal policy would put substantial upward pressure on interest rates and so create a low-investment low-productivity growth recovery. We were wrong about the upward pressure on interest rates part. The end of 2007 saw the 10-year U.S. Treasury rate exactly where it was when the Clinton surpluses had come to an end at the end of 2001. The market took six years of this swing in bond issue rates and ate it down, without a burp.

Then came the recession. Revenues collapsed. Spending on unemployment insurance and other social insurance expenditures rose. A U.S. government that had been paying back $60 billion a quarter at the start of the 2000s and issuing a net of$70 billion a quarter in the mid-2000s was suddenly issuing $380 billion a quarter. Back in the third quarter of 2008 I wondered: "Who is going to buy all of these things?" There were nearly$5.3 trillion of Treasuries held by the public in mid-2008. But we were about to start adding to that at a pace of $1.4 trillion a year:$6.7 trillion by mid-2009, $8 trillion by mid-2010,$9.4 trillion by mid-2011, and we are on target to have $10.7 trillion outstanding by mid-2011--doubling U.S. Treasury debt held by the public in four short years. By next summer the U.S. Treasury will have expanded its marketable debt liabilities by$5.4 trillion--an amount equal to more than half all equities in America, an amount equal to at least one-fifth of all traded dollar-denominated securities. And yet the market has swallowed all these past issues and is looking forward to swallow the next tranches without, once again, a single burp.

This is, to me as an economist, frightening. Supply-and-demand are supposed to rule. A sharp increase in Treasury borrowings is supposed to carry a sharp decline in Treasury bond prices and thus a sharp increase in interest rates along with it.

There was always the argument that the normal bond-market laws of supply-and-demand were repealed in deep downturns. But back when I was in graduate school I was taught that this was a naive Keynesian argument, a phenomenon that could hold for a quarter or a year or so--but not for any much longer period. But we have had three years of extraordinarily rapid rates of increase in Treasury issues and are looking forward to at least two more, and yet there no signs that the marginal holder of Treasuries expects any increase in Treasury bond rates anytime in the future. In the long-run supply and demand must rule. But the long run is taking its own sweet time to arrive.

I cannot help but recall that it has been twenty years since Japan's real estate crash, and twenty years that people have solemnly reassured themselves that in the long run the prices of JGBs have to fall. And yet over the last two decades the trade of betting on a rise in Japanese interest rates has acquired a special name: we now call it "the widowmaker."

Third and last, there is housing and construction. This, I fear, is not obvious.

Mot of us economists expected a construction slump after the mid-2000s boom. Take construction spending in the United States as it stood back in 2001--when nobody thought we were overbuilding or overbuilt--and project it forward at the 3% growth rate of the American economy. We should probably project the construction trend at a slightly higher rate than that, because as people grow richer they do want to spend a greater share of their larger incomes on housing.

We did expect a post-boom construction slump. But we didn’t expect this construction slump. We didn’t expect construction to go below trend and then stay below trend for a slump relative to trend that now is, cumulatively, four times as large as the boom was. And a slump relative to trend that shows no sign of ending.

It is certainly true that a bunch of our boom houses were in the wrong place. We built a lot of single family houses in the swamp of Florida and in the deserts between Los Angeles and Albuquerque when we probably would rather have had more multifamily units in--say--close in Atlanta or in Venice Beach, California where people could actually commute to jobs. We would rather not have so many houses in Las Vegas, where the major industries are entertainment, are distribution for Los Angeles, and are building more houses in Las Vegas.

But the fact that we build some of our boom houses in the wrong place should strengthen rather than weaken post-crash demand for housing.

These factors should be pulling housing construction out of its depression right now. But they will do so only when the employment-population ratio recovers, and only when people become confident that if they lose their jobs that they will be able to find a new one, and only when people get so profoundly sick of doubling up and living with their in-laws that they are willing to pay any price and take on any mortgage burden in order to escape. I keep thinking that we are now so underbuilt relative to trend that the next housing boom should be coming any day now. But I thought that back in May of 2009. And I have thought that "any day now" every month since.

But once again, as the late Rudi Dornbusch said, asset prices can stay out of equilibrium long beyond the period that economists consider possible--and then move much more swiftly than economists think likely.

That is the macroeconomic overview. I know that economics is called the dismal science. But even so I wish that I had better news--that I could predict a strong recovery, further increases in corporate profits, strong investment, much money to be made by riding the next real estate boom.

But that is not the way to bet. The way to bet is for a very slow recovery of employment to its normal relation to the total adult population. And the way to bet is for growth in real GDP in the 3% to 4% per year range--nothing like the speed of the 1983-85 recovery--albeit growth accompanied by stagnant wages and thus also by relatively healthy corporate profits.

I wish I could say something that would bring you more smiles. But thank you for listening.

## Liveblogging World War II: June 14, 1941

From Martin Gilbert's The Second World War:

## Why Oh Why Can't We Have a Better Press Corps? Hardly an A-List Performance Edition

Mitt Romney denounces the Federal Emergency Management Agency and disaster relief as immoral:

CNN.com: KING: Governor Romney? You've been a chief executive of a state. I was just in Joplin, Missouri. I've been in Mississippi and Louisiana and Tennessee and other communities dealing with whether it's the tornadoes, the flooding, and worse. FEMA is about to run out of money, and there are some people who say do it on a case-by-case basis and some people who say, you know, maybe we're learning a lesson here that the states should take on more of this role. How do you deal with something like that?

ROMNEY: Absolutely. Every time you have an occasion to take something from the federal government and send it back to the states, that's the right direction. And if you can go even further and send it back to the private sector, that's even better. Instead of thinking in the federal budget, what we should cut -- we should ask ourselves the opposite question. What should we keep? We should take all of what we're doing at the federal level and say, what are the things we're doing that we don't have to do? And those things we've got to stop doing, because we're borrowing \$1.6 trillion more this year than we're taking in. We cannot...

KING: Including disaster relief, though?

ROMNEY: We cannot -- we cannot afford to do those things without jeopardizing the future for our kids. It is simply immoral, in my view, for us to continue to rack up larger and larger debts and pass them on to our kids, knowing full well that we'll all be dead and gone before it's paid off. It makes no sense at all...

Jacob Weisberg writes:

The A-List: America’s new politics of Republican sanity: The GOP presidential field... appears far less outlandish than one might have predicted.... No one called Mr Obama a socialist. No one gave ambiguous encouragement to the “birther” faction.... [N]o one bashed homosexuals. With the exception of the marginal former Pennsylvania Senator Rick Santorum, no one directly endorsed the Ryan Plan....

Mitt Romney... held centre stage, literally and metaphorically.... Mr Romney now accuses Mr Obama of failure, rather than leftism. He also does not repudiate his belief that human activity is causing climate change or his support the legislation that his overhyped rival Mr Pawlenty calls “Obamneycare.”...

Mr Romney is now running against Mr Obama, while the other Republicans are running against Mr Romney. The most credible challenge to the Republican frontrunner is likely to come... from... Jon Huntsman, the even more liberal former Governor of Utah.... Primaries usually pull candidates to the margin, but the GOP is now experiencing a politically healthy course correction. Until recently the most evident forces were indeed pushing them away from the centre. We are now seeing an opposite shift, away from then margin, and toward the middle. For Mr Obama, this movement, and the outbreak of Republican sanity it signals, is a worrying development indeed.

Did Weisberg watch?