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July 2011

As at Least Three Senior Journalists Have Remarked to Me, on a Good Day We Learn More from Ezra Klein than from the National News Staff of [Insert U.S. Newspaper Name Here]

Somebody in Washington Post management seems to have noticed. Jim Romanesko:

WP hires three bloggers to work with Ezra Klein: They are Suzy Khimm, who leaves Mother Jones; Sarah Kliff, formerly of Politico; and Brad Plumer, a New Republic associate editor. The Post memo is after the jump:

The Financial staff is thrilled to announce that we’ve hired three talented bloggers to work with Ezra Klein. Stay tuned, because we’ll have more to say about these plans. But in the meantime, please welcome our new colleagues, who all start July 25:

  • Suzy Khimm, who comes to us from Mother Jones, where she covered Congress, politics and domestic policy. Previously a staff member at The New Republic, she has also contributed to the Economist, Newsweek, Slate, Foreign Policy, The Wall Street Journal Asia, the Christian Science Monitor and Los Angeles Times. From 2006-7, Suzy was an associate editor for the English-language Cambodia Daily in Phnom Penh. She also spent two years in Rio de Janeiro, reporting on urban violence in Brazil’s prisons and shantytowns.

  • Sarah Kliff, who joins us from Politico, where she covered how federal regulation, Congress and lobbying affect the implementation of health care reform. She also was an author of Politico Pulse, a daily health policy briefing. Prior to Politico, Sarah was a staff writer at Newsweek, reporting on issues at the intersection of health policy and politics. She covered the 2008 election for Newsweek, traveling with Vice President Joe Biden. Sarah is the recipient of reporting fellowships from both the Kaiser Family Foundation and University of Southern California’s Annenberg School of Journalism. Her writing has appeared in National Geographic, the BBC, Humanities Magazine and St. Louis Magazine.

  • Brad Plumer, who was previously an associate editor at The New Republic, where he reported on the environment and energy issues and wrote TNR’s green blog, The Vine, for three years. Before that, he was an assistant Web editor at Mother Jones. His work has appeared in Audubon, New York, Foreign Policy, The National and The Journal of Life Sciences.

So how much of an equity/option stake in Stanley Kaplan Daily does Ezra get? Seems to me he deserves one..

What Plan for Europe? Rolling Over Italy's Debt

Felix Salmon writes:

Larry Summers’s inadequate plan for Europe: Summers has magically gone from “the debts incurred will in large part never be repaid” to “default to the official sector will not be tolerated so there is no reason to charge a risk premium,” without ever explaining how he got there from here.

It seems, here, that Summers has gone effortlessly from “you can’t just extend and pretend that there won’t be any default to the official sector” to “let’s extend and simply declare that there won’t be any default to the official sector.”

It’s precisely this kind of thinking that the tumult in Italian markets makes untenable. As the chart in Summers’s column makes clear, Italy has $471 billion of government debt maturing in less than one year. If the private-market window for Italian debt closes as it has done for Greece and Portugal, then the official sector would be on the hook to lend Italy that entire sum itself. And there’s simply no way that Europe can find that kind of money, especially not if it’s lending it out at close to risk-free rates...

I think that the smart Felix Salmon is wrong.

Let us parse this:

  1. Summers says that peripheral countries that cannot access the private market cannot repay their debts if the strong countries of Europe charge them high premium interest rates.
  2. Summers says that peripheral countries that cannot access the private market can repay their debts if the strong countries of Europe charge them the interest rates at which the strong countries can borrow.

Both of these statements by Summers seem to me to be true. It is often the case that debt loads that are unsustainable at high interest rates are very sustainable indeed at low interest rates.

Yes, this does involve a (rather large) interest subsidy from the strong countries of Europe to the weak countries.

But that is what the strong countries signed up for when they let the weak countries join their currency.

And I simply do not understand Felix's claim that "there’s simply no way that Europe can find that kind of money [$471B], especially not if it’s lending it out at close to risk-free rates..." Here is how it works:

  1. France and Germany loan the ECB $10B.
  2. France and Germany announce that the liabilities of the ECB are full faith and credit obligations of France and Germany.
  3. The ECB lends that $10B to Italy.
  4. Italy uses that $10B to repay $10B of Italian debt.
  5. The ECB goes to those who just liquidated their Italian debt assets and says: "Hey? Want to put your money in $10B of ECB obligations guaranteed by the German and French governments?"
  6. The ex-creditors of Italy become creditors of the ECB.
  7. The ECB lends another $10B to Italy.

And then repeat, until all the $471 billion has been washed into ECB debt or until Italian debt holders are happy rolling their debt over into new Italian issues.

The Limits of Left Neo-Liberalism Revisited

Henry Farrell writes:

The Limits of Left Neo-Liberalism: [Brad DeLong wrote:]

Henry’s theory of politics is that successful and beneficial long-run politics can only be accomplished by a political party that is the political arm of a universal class—of a self-confident, organized group whose collective material interest is in fact the public interest.

Brad – I’m not at all sure where you’re getting this from, but it’s about as far from my theory of politics as one can get. If you can point to somewhere where I make an argument that even hints at this, I would love to see it. My ideal of politics is one in which power asymmetries between different classes of actors are as minimal as possible, so as to forestall the development of systematic inequalities of outcome in the marketplace, in society, and in politics...

Oh. I got Henry wrong then.

I thought that he thought that rational public policy was possible only within the Democratic coalition. Thus I thought he wanted our interest groups--Big Labor and Big Celebrity--to absolutely and completely stomp their interest groups so that our side could exercise political hegemony and make the world a better place.

It turns out that what he want is for our Big Labor and Big Celebrity to neutralize and offset their Big Business and Big Fundamentalism, so that then the public interest can bubble up via grassroots democracy.

And I really don't think that is workable or advisable. I don't think that is the way things work...

Debt Ceiling: What Really Changes on August 3?

On May 16, 2011, Tim Geithner sent the following to Reid, Boehner, Pelosi, and McConnell:

I am writing to notify you, as required under 5 U.S.C. § 8348(l)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the portion of the Civil Service Retirement and Disability Fund (“CSRDF”) not immediately required to pay beneficiaries. For purposes of this statute, I have determined that a “debt issuance suspension period” will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted. During this “debt issuance suspension period,” the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law.

In addition, I am notifying you, as required under 5 U.S.C. § 8438(h)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit.

Each of these actions has been taken in the past by my predecessors during previous debt limit impasses. By law, the CSRDF and G Funds will be made whole once the debt limit is increased. Federal retirees and employees will be unaffected by these actions.

I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens. I again urge Congress to act to increase the statutory debt limit as soon as possible.


Timothy F. Geithner

What this means is that the debts that the U.S. Treasury owes to the Civil Service Retirement and Disability Fund and to the Government Securities Investment Fund of the Federal Employees' Retirement System are no longer Treasury bonds, notes, and bills (which are included in the "debt subject to limit"). They are, instead, simply unpaid debts of the U.S. Treasury (which are not included in the "debt subject to limit").

What is and has always been unclear to me is what Geithner's claim that the "borrowing authority of the United States will be exhausted" on August 2 means.

It seems to me that the borrowing authority of the United States was exhausted on May 16. On May 16 the Managing Trustee of the CSRDF and of the GSIF (who is the Secretary of the Treasury) attempted to buy Treasury bonds with the federal employees' contributions to the funds and found that he could not do so--that the Secretary of the Treasury did not have authority to issue the bonds. H

The Secretary of the Treasury then declared a debt issuance suspension period.

The Secretary of the Treasury then took the cash and deposited the cash into the Treasury's main account as if he had issued bonds and had authority to borrow the money from the CSRDF and the GSIF, citing as explicit statutory authorization 5USC§1848, which explicitly allows him to do so when the borrowing authority of the United States Treasury has been exhausted.

The Managing Trustee of the CSRDF and of the GSIF (who is the Secretary of the Treasury) did not object.

So what changes on August 3? And what happens on August 3?

It is not the case that the borrowing authority of the United States is newly exhausted on August 3--the borrowing authority was exhausted on May 16. What happens on August 3 is that the CSRDF and GSIF fund balances hit zero--that the Secretary of the Treasury will have to do something more than breach his fiduciary duty to the investors of the CSRDF and GSIF while relying on 5USC§8438 as authority for this breach.

Thus it seems to me that on August 3 the Treasury Secretary must decide whether to:

  • Breach his constitutional duty to repay bondholders (and be subject to suit).
  • Breach his constitutional duty to pay government contractors duly appropriated and authorized funds (and be subject to suit).
  • Disinvest some other government trust fund than the CSRDF and the GSIF of which the Secretary of the Treasury is also Managing Trustee (and to do so without the safe harbor of 5USC§1848, but Roberts would have to work very, very hard indeed and break a great deal of precedent in order to give anybody standing to file suit).
  • Mint a large platinum or palladium coin and use it to buy back some Treasury debt.
  • Persuade some other actor (the IMF? The government of China?) to make a big wire transfer to the Treasury's cash account in return not for a U.S. Treasury bond but for a handwritten IOU of or simply the handshake of the Treasury Secretary.

Anybody have a better idea of what the options are?

Henry Farrell Argues Against Left Neoliberals Like Me...

Henry Farrell:

The Limits of Left Neo-Liberalism: There is a real phenomenon that you might describe as left neo-liberalism in the US - liberals who came out of the experience of the 1980s convinced that the internal interest group dynamics of the Democratic party were a problem. These people came up with some interesting arguments (but also: Mickey Kaus), but seem to me to have always lacked a good theory of politics.

To be more precise – Neo-liberals tend to favor a combination of market mechanisms and technocratic solutions to solve social problems. But these kinds of solutions tend to discount politics – and in particular political collective action, which requires strong collective actors such as trade unions. This means that vaguely-leftish versions of neo-liberalism often have weak theories of politics, and in particular of the politics of collective action.

I see Doug [Henwood] and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case. Even if left-leaning neo-liberals are right to claim that technocratic solutions and market mechanisms can work to relieve disparities etc, it’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics. I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is. Of course I may be wrong – and look forward to some pushback in comments...

Henry's theory of politics is that successful and beneficial long-run politics can only be accomplished by a political party that is the political arm of a universal class--a self-confident, organized group whose material interest is in fact the public interest.

Adam Smith saw the improving landlords of Britain as the universal class. The merchants and manufacturers each had an interest in monopoly--they should be kept as far from power as possible. The urban and rural laboring classes were short-sighted and uneducated--they would sacrifice the future for the present. The crown, the aristocracy, and the executive were too interested in playing the negative-sum game of imperialist war and conquest--they needed to be curbed. Only the landlords, whose rents rose with general prosperity and fell with general penury, had the brains, the organization, the far-sightedness, and the material interest to pursue policies to better the condition of Great Britain. Thus the landlords should rule.

Karl Marx, of course, saw the industrial proletariat as the universal class in embryo.

Henry Farrell doesn't say what his alternative proposed universal class is. Perhaps it is composed of, in rough order:

  • Unions
  • Public employees
  • Technologists
  • Celebrity entertainers
  • Trail lawyers

But the argument that the Democratic Party should adopt the strategy of pursuing policies to enrich those six groups and hope that it all adds up to (a) the public interest and (b) long-run political dominance seems to me to be relatively weak. Left neoliberal policies may well not produce. But it is not clear to me that Henry's alternative would produce either...

Department of "Huh!?": Measuring American Economic Growth Department

Mark Thoma sends us to Richard Green:

Economist's View: Best Quarter-Century of Economic Performance in American History?: Richard Green:

How does Michael Boskin do math?, by Richard Green: He writes in the Wall Street Journal this morning:

The lower marginal tax rates in the 1980s led to the best quarter-century of economic performance in American history.

This didn't seem right to me, so I went to the National Income and Products Account web site. For GDP growth after 1947 (the beginning of the quarterly NIPA data), the best 25 year period was between the first quarter of 1949 and the last quarter of 1973, when the economy grew by a multiple of 2.68.  This is well before Reagan took office. The period of 25-year spells after Reagan took office is small, but the best period is the fourth quarter of 1982 until the third quarter of 2007, when the economy grew by a multiple of 2.26.

GDP growth likely overstates the benefit of the post Reagan era, because the benefits of the growth have been unevenly distributed. If we look at median household income, it is really hard to figure out how to find a "best in history" 25 year period after Reagan.

Indeed--especially if one does not allow the obvious cheat of measuring trough-to-peak, but actually makes a sensible estimate of trends.

Indeed. If you look at GDP per capita the post-rate reduction quarter century looks marginally, marginally superior to growth during the oil shock-ridden 1970s--but distinctly inferior to the 1960s and what came before.

FRED Graph  St Louis Fed

And if you look at labor productivity it is the high marginal rate 1950s and 1960s that do best, the post-Clinton tax increase technology boom starting in 1994 that looks second best, and the Reagan-Bush low marginal rates period is once again barely, barely better than the oil shock-ridden 1970s.

Can't say I understand where Boskin is coming from on this one...

Principles of Tax Policy: A Note

What we want to tax:

  • We want to tax labor.
  • We want to tax monopoly.
  • We want to tax luck.

And we want to do so progressively.

What we don't want to tax:

  • We don't want to tax thrift.
  • We don't want to tax innovation.
  • We don't want to tax risk-bearing.

Larry Summers: Europe Needs to Bail Its Periphery Out Now

Larry Summers:

How to save the eurozone: Teaching investors a lesson is a wish not a policy. US policymakers were applauded for about 12 hours for their willingness to let Lehman go bankrupt. The adverse consequences of the shattering effect that had on confidence are still being felt now.... Those who let Lehman go believed that because time had passed since the Bear Stearns’ bail-out, the market had learnt lessons and so was prepared. In fact, the main lessons learnt were on how best to find the exits, and so uncontrolled bankruptcies had systemic consequences that far exceeded their expectations....

[N]o country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors. Meeting debt burdens at rates currently charged by the official sector for credit – let alone the private sector – would involve burdens on Greece, Ireland and Portugal comparable to the reparations’ burdens Keynes warned about in The Economic Consequences of the Peace....

A fundamental shift of tack is required.... European authorities must restate their commitment to solidarity as embodied in a common currency and recognise that the failure of any European economy is unacceptable.... [T]he technicalities of a policy response are not that difficult....

First... interest rates on debt to the official sector should be reduced to a European borrowing rate....

Second, countries whose borrowing rate exceeds some threshold – perhaps 200 basis points over the lowest national borrowing rate in the euro system – should be exempted from contributing to bail-out funds. The last thing the marginal need is to be pulled down by the weak.

Third, there must be a clear commitment that... no big financial institution in any country will be allowed to fail....

These measures would do much to contain the storm.... This leaves the question of what is to be done with sovereign private debt.... Some [creditors] will want to sell out of their exposures at prices marginally above their current market value. Others, who are still regarding sovereign European debts as worth par, should be given appropriate, reduced interest rate longer maturity options.... But any approach should be judged on the sustainability of programme country debt repayments....

The alternative to forthright action today is much more expensive action – to much less benefit – in the not too distant future. The next few weeks may be the most important in the history of the EU.

Department of "Huh?!"

Poor Richard Berner moves to Treasury to try to sensibly implement Dodd-Frank--and runs into the Republican Party crazies, and some others:

Victoria McGrane:

Dodd-Frank-Created Stats Office Comes Under Fire: For the most part, Treasury’s new Office of Financial Research has gone unnoticed as Washington and Wall Street agonize over other aspects of last year’s Dodd-Frank financial-overhaul law. Indeed, the office’s mandate to description as a provider of data and economic analysis to federal regulators hardly sounds like ingredients of controversy. But the new office and the man in charge of setting it up – former chief U.S. economist for Morgan Stanley, Richard Berner – felt some heat this afternoon.

The subject of an oversight hearing Thursday, the investigating subcommittee’s chairman, Rep. Randy Neugebauer (R., Tex.) criticized the office’s data-collecting mission as “Orwellian” in his prepared remarks, and painted an image of powerful bureaucracy with no limits on how much it can spend or what information it can demand from the industry, a characterization echoed by many of his Republican colleagues.

Author and investor Nassim Taleb, one of the witnesses at the hearing, described the office in his prepared testimony as an attempt to create “an omniscient Soviet-style central risk manager.”...

The OFR has two key components – a data-collection arm that has broad power to request any kind of information from financial firms it deems necessary, and a research and analysis arm that to be focused on monitoring the financial system for risk and producing research to improve regulation.

“As we learned during the financial crisis, many firms did not understand what they had on their own balances sheets, let alone how their balance sheets interacted with their counterparties. The goal of OFR is to standardize and coordinate data with the aim of reducing firms operating costs while protecting taxpayers from another forced Wall Street bailout,” said Sen. Jack Reed (D., R.I.), who helped write the provision creating the OFR....

Its director is appointed by the President, and confirmed by the Senate, serving a six-year term. The director can testify to Congress without Treasury’s approval. After getting its funding for the first two years from the Federal Reserve, the OFR will then fund itself through fees it will levy on large bank holding companies – and there’s no limit in the law as to how high those fees can go, or what the OFR’s budget will be. Republicans complained that the OFR director can set his staffs’ salaries at any level he wants, without regard for the federal government’s general schedule. The OFR has subpoena power to demand information from financial firms....

Mr. Berner sought to temper the Frankenstein-like descriptions of the OFR. He said the office’s goal is to “fill in information gaps, not duplicate” data collection that’s already going on among financial regulators. But the 2008 financial crisis revealed that there are shortcomings in the data available to police threats to the system....

Republican lawmakers, pointing to the recent spate of attacks on financial firms and government entities, also raised concerns that concentrating an enormous trove of valuable, confidential information in one office leaves it open to serious risk of theft by cyber criminals. One called it “a hacker’s dream.”

Mr. Taleb’s critique of the OFR, on the other hand, is directed at the whole concept of creating a body to try to measure risk in the financial system. Mr. Taleb gained fame for his book “The Black Swan,” which suggested consequential, and unpredictable, events in financial markets are more likely than most investors believe.

In his testimony, Mr. Taleb said that “[f]inancial risks, particularly those known as Black Swan events cannot be measured in any possible quantitative and predictive manner; they can only be dealt with [in] nonpredictive ways.” He argued that trying to do what the OFR is designed to do could actually increase risks, in part by increasing “overconfidence” in the information’s ability to predict the next crisis.

If Victoria is accurately summarizing Taleb, he is incomprehensible.

His argument is that you should actively seek to be completely ignorant of everything, for if you learn something then you will be overconfident about how much you know and will run unacceptable risks as a result. Better to just shut your eyes and act completely at random. And that makes no sense.

DeLong Smackdown Watch: We Don't Have to Guess What a Public Agency Would Have Done in the Bubble

Mort Fin writes:

Hoisted from Comments: Bakho on How Fannie and Freddie Should Always Have Been Arms of the Treasury: We don't have to speculate on the behavior of a fully public mortgage entity, because we have one. Just look at FHA's behavior. They lost market share much faster than F&F did. And they responded by loosening their underwriting standards in an attempt to maintain volume - witness the down payment assistance scam that will cost the taxpayers plenty but has dropped off the radar screen (since it pales compared to what F&F will lose). A look at the evidence would indicate that a public sector entity WOULD respond by loosening standards in an attempt to stay relevant, but would be too slow in responding, so that the private sector would clean their clock on volume anyway.

For evidence of FHA's attitude, just take a look at the 2006 GAO report on FHA and down payment assistance, and especially look at HUD's comments at the back of the report, where they talk about not getting rid of these programs because of their need to maintain volume.

DeLong Smackdown Smackdown Watch: Housing and the Economy

FRED Graph  St Louis Fed 1

Duncan Black:

Eschaton: Chicken Becomes The Egg: I do think there were policy steps to "fix" the housing market which could have helped to spur an economic recovery. Those steps were not taken. Or, to put it another way, there are two sets of problems with the housing market. One is that the economy sucks. Two is the bundle of issues related to the popped housing bubble (corrupt bankster practices, destruction of faith in our property title system, underwater borrowers). Fixing two to some degree might have been enough to have enough of a housing market rebound such that it would improve the economy. We didn't.

Yet Another Washington Post Total Fail...

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

Dean Baker watches the train wreck:

Robert Samuelson Wants Us to Follow the Example of a Country With 7 Years of Double-Digit Unemployment: Yes, I am serious. In his column today Samuelson holds up Latvia as the model for the United States to follow. The unemployment rate in Latvia is currently close to 20 percent. According to the latest projections from the IMF, it is still projected to be double-digits by 2016, the end of its projection period. Its 2016 GDP is projected to be 1.5 percent below its 2007 level. If this is a model for success, it's interesting to think of what Samuelson would view as a failure.

Glenn Hubbard: Ten Years Late and at Least $6 Trillion Short

Back in 2001--when Glenn Hubbard was a cabinet-rank appointee of President George W. Bush--this might have been useful, especially if it had been backed up by strong and vociferous arguments within the administration that we cannot afford tax cuts without a plan for controlling health-care spending in the long run and we cannot afford to add a Medicare Part D prescription drug benefit without a plan to finance it and we need tax reform to broaden the base and lower the rates and we cannot afford to commit our army to a decade-long war in Iraq without considering how to finance it.

But I heard no rumblings from inside the Bush administration of such strong and vociferous arguments.

And even after Hubbard left the Bush administration, he was vewy, vewy quiet as budget-busting Bush spending programs moved through the system

[UPDATE:] Glenn Hubbard protests that he was vociferously opposed to Medicare Part D in the administration, and continues to oppose it in his Seeds of Destruction, which is... on my bedside table... but unread and at the bottom of the pile.

Now, however, he speaks. Glenn Hubbard:

US faces economic suicide if spending isn’t restrained: The US debt-to-gross domestic product ratio is set to cross 90 per cent in a decade, with significant further increases due to higher entitlement spending on Social Security, Medicare, and Medicaid. Previous run-ups in the debt-to-GDP ratio were associated with wars and fell with modest spending restraint and economic growth. No such self-correcting possibility emerges for rising debt levels from social spending.... So, where do we go from here? Any path forward should be judged according to progress in two areas – reducing spending over the long term and supporting economic growth....

[F]irst, marry an increase in the debt ceiling with as much spending restraint as both sides can agree on (possibly as much as $3,000bn over the next decade).... To be meaningful, such spending restraint should slow the long-run growth in entitlement costs.... Leaving the current tax code in place in this first step provides support for the recovery.... [A] second-step discussion – through next year’s election – would address whether tax changes should promote only tax reform (lower tax expenditures and marginal tax rates) as the Republican leadership suggests; both tax reform and contributing revenue to deficit reduction as the Bowles-Simpson Commission suggests; or revenue from increasing marginal tax rates and accommodating higher future spending levels as the president suggests.... [T]he discussion of tax reform versus tax increases is a political question (though with economic consequences) ripe for public debate in the next year’s campaign, generating a mandate for action for the victor.

Herbert Hoover Against Early Payment of the WWI Veterans' Bonus

Herbert Hoover:

September 14, 1932: It is my duty to the country and to the veterans that there should be no misunderstanding of my position upon payment of the face value of the adjusted service certificates prior to maturity, as recommended in the resolution pending before the convention in Portland. I have consistently opposed it. In public interest I must continue to oppose it.... Every right-thinking man has the deepest sympathy for the veteran suffering from disability, for those out of work or for veterans on farms struggling with the adversities of the depression. No one who began life in the humble circumstances that I did, and who at the earliest and most impressionable age learned the meaning of poverty from actual experience, can be lacking in feeling and understanding of the problems and sufferings of these men and their families. I have seen war at first hand. I know the courage, the sacrifice of our soldiers.

But there are many million others in the same circumstances. They too must be entitled to consideration. Their employment and their farm recovery, as well as that of the veterans, can be secured only by the restoration of the normal economic life of the Nation. To that end we have been and are devoting our best efforts. Anything that stands in the way must be opposed. The welfare of the Nation as a whole must take precedence over the demands of any particular group....

This would, I am advised, add about $2,250,000,000 to the amount which the people of the United States acting through Congress, undertook to pay when they gave the certificates.

No such sum is available. It cannot be raised by adding to the crushing burden of taxes which drain every family budget in our country today and weigh heavily on business struggling in the midst of depression. It cannot be borrowed without impairment of the credit of the National Government and thus destroy that confidence upon which our whole system depends. It is unthinkable that the Government of the United States should resort to the printing press and the issuance of fiat currency as provided in the bill which passed the House at the last session of Congress under the leadership of the Democratic vice presidential candidate. Such an act of moral bankruptcy would depreciate and might ultimately destroy the value of every dollar in the United States. It would cause the collapse of all confidence in our Government and would bring widespread ruin to the entire country and to every one of our citizens. Daniel Webster one hundred years ago stated: “He who tampers with the currency robs labor of its bread. He panders, indeed, to greedy capital, which is keen-sighted, and may shift for itself; but he beggars labor, which is honest, unsuspecting, and too busy with the present to calculate for the future. The prosperity of the working classes lives, moves, and has its being in established credit, and a steady medium of payment.” And the experience of every Government in the world since that day has confirmed Webster's statement.

Let us not forget that while we have lost much in this depression, we still have much more to lose. And our whole future may be said to depend upon early recovery.

For many months the right-thinking men of both parties have been engaged in organizing and mobilizing the resources of the Nation to promote the economic recovery which is the one sure and effective means of restoring the standard of living of all of our people and rescuing millions of them from suffering and to pay it to a particular group constitutes a fatal threat to the entire program of recovery, to the success of which all must look for their well-being, security and happiness. In my judgment the enactment of any such proposal into legislation would be a deadly blow at the welfare of the Nation. I was elected to protect and promote the interests of all of the people. As long as I am President I shall continue to do so and to oppose with all of the strength and influence at my command any demand that runs counter to the common welfare.

John Scalzi on George R.R. Martin's "A Dance with Dragons"

John Scalzi:

A Small Observation Regarding Words and Releases « Whatever: I’ve written roughly 440,000 words worth of novels since 2005. A Dance With Dragons, so I am told, clocks in at 416,000 words. So, in terms of total novel words written for publication since 2005 (and omitting excised material), there’s a 5.5% difference between the amount that I have written for novels and what Martin has. If we’re talking about the actual words published, written since 2005, there’s a 13.5% difference — in Martin’s favor, because my 2012 novel won’t be published until, well, 2012.

Shorter version: During those years the unsocialized were snarling at Martin for being lazy or procrastinating or indolent or whatever, he wrote about as many words for novels as I had. By this superficial but easy-to-quantify metric, on the novel front he was as productive as I was, and most people seem to agree that I’ve been pretty productive these last six years. I just spread my words around five novels while he poured all of his into one.

Yes, but — some of you are about to say. To which I say, yes but what?

Here is what:

Suppose that last week Martin had stood up and said:

I am actually releasing the 'The Winds of Winter' now, the next volume after 'A Dance with Dragons'--that is what I have been working on for the past six years.

Really, only three important things happened during 'A Dance with Dragons'--Gljva'f oebgure Xrina gevrf gb ubyq gur Ynaavfgre snpgvba gbtrgure ohg trgf nffnffvangrq ol Inelf. N arj Gnetnelra cergraqre fhccbfrq gb or Cevapr Nrtba nccrnef. Wba Fabj nggrzcgf gb gnxr gur Jngpu fbhgu naq trgf nffnffvangrq. The rest you can quickly pick up from context as you read 'The Winds of Winter'. You won't miss it. Let's get on with the story.

I think we would all be a lot happier now.

I know I would be.

I think Scalzi proably would be.

And I suspect Martin would be.

Books--especially 1000 page books--should advance the story, not just tread water.

The Aristotelian Unities: They are not just a good idea, they are the law...

Fiscal Policy and Governance: "No, No, No! First Loot, Then Burn..." Revisited

Greg Sargent sends us to Barack "Unraed" Obama, who is off message:

Obama makes his case to the left: If you are a progressive, you should be concerned about debt and deficit just as much as if you’re a conservative. And the reason is because if the only thing we’re talking about over the next year, two years, five years is debt and deficits, then it’s very hard to start talking about how do we make investments in community colleges so that our kids are trained. How do we actually rebuild $2 trillion worth of crumbling infrastructure.

If you care about making investments in our kids, and making investments in our infrastructure, and making investments in basic research, then you should want our fiscal house in order so that every time we propose a new initiative, somebody doesn’t just throw up their hands and say “more big spending, more government.”

It would be very helpful for us to be able to say to the American people: “Our fiscal house is in order. So, now the question is, what should we be doing to win the future, and make ourselves more competitive, and create more jobs, and what aspects of what government’s doing are a waste, and we should eliminate.” And that’s the kind of debate that I’d like to have.

This is backward, and wrong.

What Obama should have said if he wanted to stay on message:

If you are a conservative, you should be even more concerned about reducing unemployment and speeding growth right now than if you are a progressive. And the reason is that rapid economic recovery is the only thing that could materially reduce the burden of the debt over the next one, two, or three years. Policies adopted to reduce the deficit will largely fail without a strong recovery.

So if you care about reducing the burden of the debt in the future, you should care very much today about making investments in our kids, making investments in our infrastructure, and making investments in basic research to boost the long-run growth rate of the American economy--and you should care most of all about using active expansionary fiscal, monetary, and banking policies to boost aggregate demand, because without strong demand growth we will not get the strong revenue growth needed to reduce the deficit.

It would be very helpful for us to be able to say to the American people: "We in Washington care most that you have jobs and have secure jobs. You have seen that we do so by our success in rolling up our sleeves and getting down to work and dealing with the unemployment and demand crisis in a bipartisan manner. Now that we have solved our short-run unemployment crisis, we can turn to dealing with the longer run problem of putting our fiscal house is in order.

It is true that right now Washington is talking about dealing with the deficit and not about boosting the recovery. In large part that is my fault: I made a premature pivot from fighting unemployment to fighting the deficit in early 2010 because I did not listen attentively enough to my economic forecasters and to the risks that they outlined. Those risks have come home to roost.

I am sorry.

I hereby pivot back. The state of the bond market and the extraordinary confidence that global investors have in the U.S. Treasury tells me that the major step we took in the Affordable Care Act to reduce our long-run health-spending government deficit problem was worthwhile, and that dealing with the rest of our long-run fiscal dilemma can wait until 2013. What cannot wait until 2013 is an unemployment rate stuck at 9%.

I hereby pivot back from dealing with the deficit to dealing with jobs.

Yes, Virginia, Our Housing Stock Is Now Way, Way Below Trend...

Privately Owned Housing Starts 1 Unit Structures Thousands SAAR 1

Privately Owned Housing Starts 1 Unit Structures Thousands SAAR 3

Privately Owned Housing Starts 1 Unit Structures Thousands SAAR 4

On a one-unit houses metric, the bust is now more than three times the size of the boom--and will be at least five times the size of the boom by the time we recover.

The boom was 4 years x 500,000 houses x 1/2 = +1,000,000 excess houses.

The bust so far is -3,500,000 houses.

And it will be -5,000,000 houses--or more--by the time we are finished with this episode...

DeLong Smackdown Watch: "The Economy Won't Be Fixed Until the Housing Market Is Fixed" Is Backwards

Hoisted from Comments: Jim Glass writes:

Business Investment in Equipment and Software Is Doing Fine...: The housing market, home construction starts particularly, closely tracks new household formation. After all, it is households that need homes. And new household formation has plunged in this recession as never since WWII -- the fall is more than twice the previous worst, by both speed and depth, and is continuing.

In 2010 household formation was down 78% from 2007 and down 76% from the prior ten-year average. Housing starts were down 57% from 2007 and down 66% from the prior ten years. That’s a big fall, but it is still well behind the fall in household formation.

With housing starts following household formation, the home construction industry won't turn around until sometime after household formation does.

With household formation following and constricted by the economy, it won't turn around until the general economy picks up.

In which case "the economy won't be fixed until the housing market is fixed" is backwards -- the housing market won't be fixed until the general economy is fixed enough to stop the decline in household formation and produce a significant increase.

Richard's Real Estate and Urban Economics Blog: One reason HAMP failed

Richard Green:

Richard's Real Estate and Urban Economics Blog: One reason HAMP failed: A remarkable interagency group of economists wrote a paper that investigated the NPV test that is at the heart of HAMP: for a borrower to get a loan modification, the value of the modification must be on net greater than zero (or in the case of Fannie-Freddie loans, greater than -$5000).  In other words, the losses from expected default must be greater than the losses from modification.

An upshot of this rule is that borrowers who are deeply under water get no modifications--because the chance their loan will in the end cure is very small.  This means that borrowers in places that need HAMP most--Las Vegas, Phoenix, Florida, etc.--are least likely to get it, all else being equal.

It also underscores a basic point: in places where values have fallen by more than, say, 50 percent, anything less than principal balance relief just delays the inevitable.  When households in, say, Central California want to move or retire, their house sale will not be sufficient to cover their loan balance.   Even moving to make short sales easier would help.  Otherwise, it is hard to see how we can restart the market anytime soon.

Brigadier General Sherman Miles Liveblogs World War II: July 17, 1941

Sherman Miles:

Japanese Movement Into French Indo-China: Memorandum for the Chief of Staff:

Subject: Japanese Movement Into French Indo-China.

  1. As was made known to the Chief of Staff July 16,1941, the Japanese Government on July 12, 1941, delivered what amounts to an ultimatum to the Vichy Government, the terms of which, among other items, provided for the occupation by Japanese armed forces of eight air bases and two naval bases in Southern Indo-China (see attached map).
  2. It is the considered opinion of this Division that this Japanese movement as planned, while opportunistic in conception, was also strategically defensive in character and designed primarily to prevent British and American influence from shutting off supplies of rubber, tin and rice from Thailand and Indo China which are badly needed by Japan.
  3. The French were given until July 20th in which to comply with Japan's demands. Military preparations were initiated by the Japanese, but no military pressure had been put on Indo-China up to midnight July 15-16.
  4. On July 16th the Japanese Cabinet resigned en masse. It is too early to attempt a detailed explanation of this act. For the present, it must be taken as further proof of the fact, known for some time, that there was an element of violent discord in the inner government circles of Japan.
  5. Until the personnel of the new Cabinet is announced it would be futile to attempt a prediction as to Japan's possible change of policies. One fact seems evident, however, and that is that Vichy will be given a breathing spell and the expedition to Indo-China may be deferred or even abandoned.

Hoisted from Comments: Bakho on How Fannie and Freddie Should Always Have Been Arms of the Treasury


Varieties and Alternative Definitions of the "Financial Crisis" Revisited...: The Freddie and Fannie Mae that got in trouble were part private-part public. Would an all-private Freddie/Fannie have been more or less likely to get in trouble? Would an all-public Freddie/Fannie have been more or less likely to get in trouble?

Freddie/Fannie responded to the housing bubble once they started losing market share. The pressure on the private F/F was to regain market share.

Would a fully public F/F be under the same pressure to increase market share? No. The pressure would have been for a public institution to not compete with the private sector and only write those loans the private sector was unwilling to write.

Not only was F/F a lesser actor, but the privatization of a public institution created the problems it experienced.

Indeed. It was privatized, but it retained its government guarantee as "too big to fail"...

Business Investment in Equipment and Software Is Doing Fine...

FRED Graph  St Louis Fed 1

Companies are having no trouble at all finding the cash to boost their stocks of machinery, equipment, and software. No trouble at all. And they are not scared of "uncertainty"--whether about future taxes, future health-care costs, or even future demand. Perhaps it would be better to say that healthy profits (because wages are flat on their back) and low interest rates (if you have collateral) offset whatever fear of low future demand is doing to discourage investment in equipment and software.

Business confidence is not abnormally low, and is not in more-than-normal need of a boost.

What is still profoundly in the dumps is residential construction investment. The housing market needs to be fixed. Not "business confidence" as a whole.

Varieties and Alternative Definitions of the "Financial Crisis" Revisited...

Matthew Yglesias writes:

Fannie, Freddie, “The Crisis”: This, to me, is what “the financial crisis” is:

  1. There was a large run-up in property values.
  2. Many highly rated mortgage backed securities were created based on the assumption that that a systematic decline in property values was impossible.
  3. A lot of financial transactions were undertaken based on the assumption that the high ratings were deserved.
  4. Property values declined.
  5. Highly rated MBS lost their value.
  6. Financial panic!

I would add (3a) major Wall Street banks, especially, lost control of their derivatives books and lost their risk controls; (5a) the large size of the MBS that were not distributed by highly-leveraged financial firms but retained became known; and (5b) the investment community lost confidence in the safety, soundness, and competence of the major highly-leveraged money center banks.

Matthew goes on:

The part where unwise public policies to subsidize homeownership would seem to come into this is step (1), but we in fact see this happening in many markets (Spain, commercial real estate) where Fannie and Freddie weren’t players. Admittedly, about a hundred other terrible economic things have happened over the past four years. But this chain, to me, is the financial crisis. Before the financial crisis, I remember a number of people warning that the problem with Fannie and Freddie was that they could leave the taxpayers on the hook for a lot of money if something went wrong. And, indeed, something went wrong and Fannie and Freddie left taxpayers on the hook for a lot of money. That, to me, seems sufficient to make the case against Fannie and Freddie. But people want this fact to do some kind of ideological work that it won’t support. Banking activities need to be regulated or else asset price fluctuations will lead to macroeconomic instability.

[UPDATE] I don’t think I want to endorse Brad DeLong’s conclusion that Fannie and Freddie made the crisis better. American housing policy is really bad, along a number of dimensions, of which Fannie and Freddie were one and I don’t think that does much to help anything. But I see F&F’s critics as trying to make the problems with housing subsidies do ideological work regarding bank regulation in a way that doesn’t make sense.

Well, clearly I was not clear.

Fannie and Freddie created one variety of crisis, they made a second variety of crisis less damaging, and they were irrelevant to the third variety of crisis.

Fannie and Freddie's actions created crisis1: as organizations whose debts have an explicit or implicit government guarantee, they played heads-we-win-tails-the-government-pays, flipped tails, and the government had to pay out a lot of money.

Fannie and Freddie's existence greatly moderated crisis2: The really bad parts of the crisis--crisis2 and then the subsequent failures of political economy that have given us crisis3 started with the uncontrolled bankruptcy of Lehmann Brothers, in which it was all of a sudden no longer clear where the government stood and which financial assets had value. But people knew one thing at least: they knew that the government stood behind Fannie and Freddie. If every Fannie and Freddie bond and mortgage guarantee had suddenly dropped to the quality of Lehmann Brothers' liabilities--as would have happened if they had not been GSE's--things would have been much much worse. Crisis1 phenomena encourage overleverage during the boom, but they are a fountain of confidence and stability and make crisis2 much less severe when the crunch comes (as long as the government remains a high-quality debtor, at least).

And Fannie and Freddie seem to me to be irrelevant and orthogonal to our current crisis3: unemployment remaining at 9% even four years after 2007. That's a consequence of the Obama administration, the Federal Reserve, and the Congress--not of Fannie Mae.

Hoisted from Comments: Risk Controls at Fannie Mae During the Mid-2000s

Ken Houghton:

Three Flavors of the Economic Crisis: You are, as usual, too kind to Mr. Cowen's predilections. I'm still trying to figure out if that's not having followed through the history of the mortgage market or deliberate obtuseness, but the benefit of nagging doubt goes with the former.

You're letting Cowen use numbers to confuse and conflate. "It's not denied that the mortgage agencies were guaranteeing about half of all U.S. mortgages right before the crisis (Yet somehow they had not so much to do with the crisis?)" implies that those mortgages were equally shite with those issued by Countrywide/BofA, Bear/EMC, Lehman/GKW, Wells Fargo, The Big C, and others.

They weren't. Despite Daniel Mudd's best efforts, the risk controls at Fannie (at least) were still somewhat in place.[1] Also--fortunately, since it was offsetting Mudd's desperate "if Wells and Countrywide are doing it, why aren't we? There are fees to be made!" attitude (which made him ridiculously rich, while that git at the NYT tries to blame the man long gone, but that's a side issue)--the credit reserves required of Fannie and Freddie during that period were rather higher than the banks. (Strangely, no one--not even the people who talk about how TX was "saved from the RE bubble" because of regulations put in place after the last RE bubble--talks about that.)

Tell you what: pari passu and sight unseen (random selection), you take $100MM initial face non-GSE MBSes from 2004 and I'll take the same Face Value bonds from the GSEs, and we'll see who is still closest to a positive NPV.

If you play that same game with 2005 and 2006 vintage MBSes--no cherry-picking, just random--you'll find the gap tightens but the premium remains with the GSEs.

So if you want to say "Fannie and Freddie still controlled half the market and there was a problem that was not strictly a subprime problem," your next dependent clause better be "although most of the problem was and is sourced to those non-GSE-originated securities."

Which does, of course, explain one of the major reasons Fannie/Freddie are still problematic, even ignoring the politics. The Fed bought many of those non-GSE-issued MBSes from the banks and stuffed them into Fannie and Freddie. This makes sense if you're trying to shore up bank balance sheets--we can discuss whether that is the same as "recovery the economy"--but it also means that the banks who made bad loans/purchases now appear more solvent, and Fannie and Freddie appear less so--not through business acumen, but because the deck is rigged.

I cannot believe Tyler Cowen does not know this has happened. That he perpetuates such counterfactual horse puckey on his unsuspecting readers (and even gets Buce or you to go along with him a ways) is therefore presumptively out of malice, not ignorance.

[1] I presume, based on the data, that they were in place at Freddie, too.

Three Flavors of the Economic Crisis

The smart Tyler Cowen gets one very wrong:

How much did Fannie and Freddie cause the financial crisis?:

(1) It is not denied that the mortgage agencies were guaranteeing about half of all U.S. mortgages right before the crisis  (Yet somehow they had not so much to do with the crisis?)  And the crisis was not just about subprime.  The mortgage market remains screwed up to this day, with no clear end in sight.

(2)There is also the more ambitious claim — not necessarily true but not obviously dismissable either — that leverage would have been much, much lower in American real estate markets without the mortgage agencies.  It is hard to judge such counterfactuals, but arguably lenders would have demanded more money down and offered fewer 30-year fixed rate mortgages.

(3) Arnold Kling has a good response to the delinquency chart which is circulating.

(4) Following the crisis, banks recovered and paid back virtually all of their bridge/bailout.  The mortgage agencies remain hundreds of billions in the red.  And yet the agencies had not much to do with the crisis?

(5) It is wrong to suggest that the agencies caused the crisis in the sense that I will cause myself to eat breakfast cereal this morning.  One can debate which weaker notion of cause might be appropriate, but I will just say that the mortgage agencies made the crisis much, much worse...

The problem, I think, is that Tyler is playing three-card monte with the word "crisis". In this context, "crisis" means three different things:

  • crisis1: organizations whose debts have an explicit or implicit government guarantee play heads-we-win-tails-the-government-pays, flip tails, and the government has to pay out a lot of money.

  • crisis2: the web of financial trust and leverage collapses, risk premia on all assets spike, and the ability of the private market to intermediate between savers and investors collapses.

  • crisis3: unemployment remains at 9% even four years after 2007.

Let's go in order of Tyler's points:

(1) The non-subprime mortgage market remains screwed up to this day because of crisis3: household formation is way down and the overhang of foreclosed houses remains unsold because unemployment remains at 9%. If unemployment were right now down at 6% and if everybody's sister were moving out their basement and buying a house, the non-subprime mortgage market would be fine. You can't blame Fannie and Freddie for crisis3.

(2) The collapse of the web of financial trust and leverage that was crisis2 did not come about because Fannie and Freddie guaranteed mortgages. It came about because Countrywide, AIG, Bear Stearns, Lehmann Brothers, Merrill Lynch, Morgan Stanley, Citigroup, Deutsche, a host of others--and, yes, Morgan Stanley, JPMorgan Chase, and Goldman Sachs too--lost control of their derivatives books and had no effective risk controls. You can't blame Fannie and Freddie for crisis2.

(3) Arnold Kling's response is simply not good. It is silly enough to make me think he has not thought the issues through. a 7% delinquency rate on a mortgage portfolio is horrible in normal times, but is actually very good if you are in a depression--ever our Lesser Depression. For an investment with a 15-year duration that's a cost of less than 50 basis points in a "black swan" near worst case scenario. A portfolio that does that well under such conditions is a solid gold one.

(4) The mortgage agencies remain hundreds of billions in the red because of crisis3 and because of crisis1. You can blame Fannie and Freddie for crisis1--and you should. But the fact that Fannie and Freddie have been playing heads-we-win-tails-the-government-pays is not the cause of either crisis2 or crisis3. The S&L's played heads-we-win-tails-the-government-pays in the 1980s, generated a crisis1 at the start of the 1990s, the government established the RTC to clean up the mess and pay through the nose, and the economy grew. There was no crisis2 or *crisis3 at the start of the 1990s.

(5) Fannie and Freddie did not make the crisis worse but rather made it better. The really bad parts of the crisis--crisis2 and then the subsequent failures of political economy that have given us crisis3 started with the uncontrolled bankruptcy of Lehmann Brothers, in which it was all of a sudden no longer clear where the government stood and which financial assets had value. But people knew one thing at least: they knew that the government stood behind Fannie and Freddie. If every Fannie and Freddie bond and mortgage guarantee had suddenly dropped to the quality of Lehmann Brothers' liabilities--as would have happened if they had not been GSE's--things would have been much much worse. Crisis1 phenomena encourage overleverage during the boom, but they are a fountain of confidence and stability and make crisis2 much less severe when the crunch comes.

The fifth point is, I think, the most important. What Fannie and Freddie created was a crisis1--like the S&L crisis of the late 1980s. But S&L crisis-like crisis1s do not create Little Depressions. They create embarrassments for the government, and bills for the taxpayer to pay, but because the government is on the hook and will pay there is no collapse of trust, no flight to quality, no persistent high unemployment. It's only the failure to distinguish between the meanings of "crisis" at play here that allows fuzzy thinkers to even advance the idea that an institutional flaw that creates a crisis1 is in some way responsible for our crisis2 and crisis3.

Tyler is smart. This isn't rocket science. So why doesn't he see that "crisis" has three meanings here, and that they are not synonymous?

Paul Krugman and Mike Konczal on the Political Economy of the Lesser Depression

Paul Krugman:

The Political Economy of the Lesser Depression: Everyone in the forecasting business is scrambling to mark down both their estimates of second-quarter growth and their forecasts for later in the year.... [t]errible growth prospects; low inflation; oh, and low interest rates, with no sign of the bond vigilantes. Ordinary macroeconomic analysis tells you very clearly what we should be doing: fiscal expansion and monetary expansion by any means we can manage; in fact, the case for a higher inflation target pops right out of just about any model capable of producing the kind of mess we’re in.

And what are we talking about in policy terms? Spending cuts and an end to monetary expansion.

I know the arguments — fear of invisible bond vigilantes, fear that 70s-style stagflation is just around the corner despite the absence of any evidence to that effect. But why do such arguments have so much traction, while everything economists have spent the last three generations learning is brushed aside?

One answer is that macroeconomics is hard.... But the susceptibility of politicians — including, alas, the president — and pundits to these wrong ideas demands a deeper explanation.... [T]he wealthy [are] gravitating toward views of economic policy that make immediate sense in terms of their own interests, and politicians believing that only these views count as Serious because they’re the views of wealthy people.

But the upshot is terrible: more and more, this really does look like the Lesser Depression, a prolonged era of disastrous economic performance. And it’s entirely gratuitous.

Mike Konczal:

A Response to Corey Robin on The Political Idea of Monetary Policy: [M]onetary policy balances the relationship between savers and borrowers.... Given the concentration of wealth at the top and the indebtedness of everyone else, it’s arguable one of the most important political projects out there. From a series of legal codes favoring creditors, a two-tier justice system that ignore abuses in foreclosures and property law, a system of surveillance dedicated to maximum observation on spending, behavior and ultimate collection of those with debt and beyond, there’s been a wide refocusing of the mechanisms of our society towards the crucial obsession of oligarchs: wealth and income defense.  Control over money itself is the last component of oligarchical income defense, and it needs to be as contested as much as we contest all the other mechanisms.

If one of your primary political objectives is income defense then anything that increases, as Yglesias puts it, “the cost of hoarding cash,” is a major problem....

It seems like a lot of historians and political scientists are turning their focus to the 1970s as the time when the liberal coalition fully collapsed and conservatism found its legs (see this Rick Perlstein summary in The Nation).  I’ll leave it to others to figure that out, but it certainly seems like the 1970s stagflation was the death of the Keynesian economic agenda.  And in the same way the strong language of justice disappeared from liberal lexicon in the 1960s, the language of inflation, money and the demand in the economy disappeared in the ashes of the 1970s....

[G]oing back to the Cross of Gold speech, through Franklin Roosevelt’s abandonment of the gold standard and aggressive price targeting, progressives and liberals have had a long-tradition with monetary battles.  These battles have disappeared from the agenda, but it needs to come back as we have the right answer: money is a social creation, one that the government has a responsibility to use to stabilizing growth, prices and full employment with a view towards building a future without overheating the system or letting it choke to death from a lack of oxygen.

Back before World War I there was a hard-money politically-powerful rentier class: landlords whose lands were let out on long-term leases at fixed nominal rents, coupon-clippers whose money was in nominal government bonds or private bonds or mortgages. They did not benefit from faster economic growth and lower unemployment. They lost significantly from inflation and devaluation.

But today there is no such rentier class. Even--especially--the shareholders and option holders of JPMorganChase make much more money with 5% unemployment and 5% growth than with 9% unemployment and 2% growth. 5% unemployment and 5% growth turns their lead troubled fixed-income assets into silver. 5% unemployment and 5% growth turns their equity positions into rivers of gold. It greatly increases the confidence of their creditors that JPMC will still be around in a decade--and so allows them to leverage up cheaply and profit even more from a general rise in financial asset values.

Wall Street especially stands to gain the most from a rapid recovery and a high-pressure economy--even one that comes along with slightly higher rates of inflation.

The problem is not that the modern state is an executive committee[1] for managing the affairs of the rentier class: there is no rentier class and there has not been one for a century. The roblem is not that the modern state is an executive committee for managing the affairs of the bourgeoisie: every day I pray to the Holy Name of the One Who Is that it become such...

[1] I know, I know: Marx and Engels did not write "the modern state is an executive committee for managing the affairs of the bourgeoisie". Instead they wrote: "he executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie". For Marx and Engels in 1848, the democratically-elected legislature of a modern state (one that allowed elections, at least) was the friend of the people and the arena for socialist politics.

No, No, No! First Loot, Then Burn...

Which viking tribe are you?:

When you capture a monastery, do you?

a. First loot, then burn.

b. First burn, then loot.

The correct answer, of course, is (a). Only Aethelraed Unraed says (b). A similar logic applies to jobs and the deficit. Do you (a) fix the short-run jobs crisis first and then tackle the long-run deficit problem, or do you (b) tackle the long-run deficit problem first and leave the short-run jobs crisis to wither on the vine until you get to it?

Barack Unraed appears to say (b).

Duncan Black is unhappy:

Eschaton: Jobs Now, Deficits Later: Would have made a lot more sense,because the jobs will help cure the deficit, in part from higher tax revenues and in part from lower spending on various programs related to unemployment. There's a very real (and IMHO climbing) chance that unemployment will still be above 8.5% a year from now. Oy. happy to be wrong

And David Dayen:

Obama’s “Deficit Now, Jobs Later” Strategy Doesn’t Seem Sound: I was in and out of the Obama press conference, but I didn’t get the sense that there was a lot new there. We did hear that what he didn’t like about Bowles-Simpson is that it cut too much from defense. So file that away.

There was another moment, near the end, that was notable as well. Here’s a rough transcript:

And, so, that’s where I have a selling job, Chuck, is trying to sell some of our party that if you are a progressive, you should be concerned about debt and deficit just as much as if you’re a conservative. And the reason is because if the only thing we’re talking about over the next year, two years, five years is debt and deficits, then it’s very hard to start talking about how do we make investments in community colleges so that our kids are trained. How do we actually rebuild $2 trillion worth of crumbling infrastructure. You know, if you care about making investments in our kids and making investments in our infrastructure and making investments in basic research then you should want our fiscal house in order so that every time we propose a new initiative, somebody doesn’t just throw up their hands and say more big spending, more government. You know, it would be very helpful for us to be able to say to the American people, our fiscal house is in order. So, now the question is, what should we be doing to win the future and make ourselves more competitive and create more jobs and what aspects of what government’s doing are a waste, and we should eliminate. And that’s the kind of debate that I’d like to have.

The Progressive Caucus budget actually eliminates the deficit faster than any other plan out there, and does it while also providing stimulus in the form of public works investment in the first two years. So this is largely concern trolling. There is no sell job that needs to be done on the importance of the deficit among politicians in Washington, even if there should be. The sell job is that this deficit should be closed in unnecessarily cruel ways instead of smartly.

Earlier in the press conference, Obama said that the budget deficit exploded because of unpaid tax cuts, an unpaid prescription drug benefit in Medicare, two wars and the recession. That’s largely correct.... But if you believe that, it seems that the course of action would be to end the Bush tax cuts, end the wars and get people back to work. Yet none of this will be a feature of even the “grand bargain” proposal that Obama still wants....

As for the idea that you can get the deficit “off the table,” I think the word naive actually fits best here. Even a $4 trillion solution would be... smaller than the Ryan budget.... Republicans are never going to stop shrieking about stopping the spending. And they would especially be angered by efforts to invest.... >This “get it off the table” strategy was behind the 2002 Iraq war resolution, actually. Getting Iraq off the table would lead to a focus on the economy and a victory for Democrats in the midterms. It didn’t work out that way. It never does. Especially in this case, future Congresses will not be bound by the dictates of past Congresses, and the spending debates will always be intense. There’s no way around this but to go through it.

Of course, Obama is sincere when he says that he believes deficits are a big problem. That’s what he said today when he demurred on the McConnell plan. “There are two problems,” he said, one a routine problem to raise the debt limit and the other a problem with deficits and debt. The McConnell plan “solves one problem. It does not solve the other.”

And that’s why $1.5 trillion or so in spending cuts were added to the plan, something Obama called the “bare minimum.” And that’s why the Catfood Commission II will be added to that plan, with a binding vote on the recommendations without amendments. Because the President isn’t interested in signing a bill without those elements.

The debt “crisis” is manufactured. Even the President said today that people are more concerned about getting a job. But the idea that we can turn to that later after slashing the discretionary budget more than ever before and setting up a commission to pummel Social Security and Medicare just seems wildly off base.

Macro Outlook: Where Is Third-Quarter Growth Going to Come From?

Where is third-quarter growth going to come from? That is the question I was asking yesterday morning...

And now I learn that Jan Hatzius of Goldman Sachs has marked his third-quarter growth rate estimate down from 3.25% to 2.5%:

We have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%.

Even excluding any further changes we now expect the unemployment rate to come down only modestly to 8.75% at the end of 2012.

High-frequency information on overall economic activity has continued to fall substantially short of our expectations. Some of this weakness is undoubtedly related to temporary factors, namely supply chain disruptions and (the temporary part of) the oil shock. But the slowdown of recent months goes well beyond this.

Bleak Revenge Comedy...

In my inbox this morning:

Twelfth Night is a rather bleak revenge comedy (as its season-pair, Hamlet, is a rather funny revenge tragedy), and one would think that to make it funnier one should ramp down the bleakness, and ramp up the comedy, while to make it bleaker one should do the opposite.

But neither way works at all.

You have to ramp up both together, and then the funnier it gets, the bleaker it becomes, and vice-versa. This is true of most of Shax's work...

A Dance With Dragons

Abi Sutherland:

Making Light: A Dance with Dragons, with Spoilers: Smaug looked down at the wilting bunch of flowers in his claw, then up at the door in front of him. “I don’t think this is a very good idea.”

“Go on,” urged Yevaud. “Just ring the bell. When she comes out, say she looks beautiful in that dress and give her the corsage.”

“We could go burn a village or something instead,” Smaug countered brightly. “That would be fun. That would be much more fun than this.”

“She asked you to the prom. You said yes. Now you have to go through with it. And can you hurry it up? We still have to get my date, and figure out where Maur is. He was supposed to…” Yevaud’s voice trailed off.

Smaug, having rung the doorbell, turned to see what had struck his friend dumb. He was still staring when his date came out of her door and stopped dead in her tracks.

Maur sauntered toward them, enjoying the attention. Around his neck, lying rather crooked between his great dorsal spines, was a long strip of red satin. The ends met in a neat bow at the front. “Hey, guys, how’s it going? Do you like my tie?”

By the end of the evening, Yevaud will have lost his date to the griffin doing security at the door. Maur will be kicked out of the prom for knocking over the chaperones’ table with his tail while trying to break dance. The ordinarily quiet Oolong will fly off with the homecoming queen, to the ruin of her reputation on campus. And Smaug will ask his date to go steady with him. She will say yes, and one day they will marry. Her parents will come round eventually.

Alyssa Rosenberg:

On ‘A Dance With Dragons’ | ThinkProgress: I’ve long been a defender of the idea that George R.R. Martin will definitely finish A Song of Ice and Fire, less on the grounds that I have faith in the man himself, and more on the rationale that capitalism is powerful, and HBO doesn’t mess around. But while I though certain parts of A Dance With Dragons were profoundly moving and very effectively structured, the novel as a whole left me with grave concerns that Martin has a coherent master plan to bring the story to a manageable conclusion. I’d expected that this would be the point in the series when events—if not Martin’s world as a whole—would start to contract and gain momentum as the story moves towards a central conflict.

I was wrong. Instead of focusing, the story adds points of view and conflicts. Now, instead of one surviving Targaryen, we’ve got two—Aegon, Rheager’s son, is apparently alive and well and bumming around with Rheager’s childhood best friend, Jon Connington. Davos Seaworth is off on a mad quest to find Rickon Stark, one of the most invisible characters in the entire series. Mance Rayder is alive and well and living, if not in Paris, at least in Westeros. The Horn of Winter is apparently still out there, maybe on Victarion’s ship, maybe in Sam’s cache of dragonglass. We’re tangled up in a comparative anthropology of sellsword companies. It’s exhausting. And I think the only way to continue reading the novels is to focus your emotional energies on a couple of key storylines and characters. So while these thoughts are by no means complete, they’re the things that grabbed me most strongly on a first read of A Dance With Dragons...

Chart of the Week: Lane Kenworthy on Why the U.S. Desperately Needs Health-Care Reform

Consider the Evidence 1

Lane Kenworthy:

Consider the Evidence: This chart shows trends in life expectancy by trends in health spending from 1970 to 2008. The United States still stands out, and in a big way. Our gain in life expectancy per additional health spending is much smaller than in other countries, particularly after the early 1980s when we reached expenditures of about $2,500 per person (in 2005 dollars) and life expectancy of around 74-75 years. The advantage of analyzing country differences in change is that it takes constant nation-specific factors out of play.... This kind of analysis is by no means conclusive. Life expectancy and total spending are highly aggregated indicators; it’s important to also examine more fine-grained measures of health care effort and outcomes.... But to the extent we treat the aggregate patterns as informative, a comparison of changes over time, rather than of levels, is likely to be our most valuable guide.

Double Dip Watch: Consumer Sentiment

Calculated Risk Chart Gallery

Calculated Rsk:

Calculated Risk: Consumer Sentiment declines sharply in July: The preliminary July Reuters / University of Michigan consumer sentiment index declined sharply to 63.8 from 71.5 in June.... In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. However, even with lower gasoline prices, consumer sentiment declined sharply - possible because of the heavy coverage of the debt ceiling charade. This was well below the consensus forecast of 71.0 and definitely in the recession range.

And where is third-quarter growth going to come from, again? Not G, and it doesn't look like much C...

Fiscal Policy: Barack Obama Is Badly Off Message

Ryan Avent:

Economics focus: Cut or loose: TO LISTEN to Barack Obama, there is no trade-off between supporting a weak economy and tackling America’s strained public finances. “We have to cut the spending we can’t afford so we can put the economy on sounder footing,” the president said on July 2nd. Big spending cuts are necessary, he added, to “give our businesses the confidence they need to grow and create jobs”. Perhaps.... [P]ublic-sector job losses helped drive the unemployment rate up to 9.2% in June, which didn’t obviously do a lot for confidence.

Mr Obama is not alone in arguing that austerity can boost growth: Britain’s deficit-slashing coalition government and the European Central Bank (ECB) also make the case.... In practice, however, it rarely works out that way. In a recent study of 173 fiscal-policy changes in rich countries from 1978 to 2009, economists from the IMF found that cutting a country’s budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point.

Occasionally, an economy will buck the trend. In a new paper, Roberto Perotti of Bocconi University presents a series of case studies of “expansionary austerity”, in which cuts in spending coincide with GDP growth. Support for the confidence theory is scarce. In only one of the cases considered—a period of Danish fiscal consolidation from 1983 to 1986—did rising domestic demand lead an expansion. And Denmark in 1983 could scarcely be more different from America today. Its economy was stronger, growing at 4% per year when austerity began (compared with 1.9% in the first quarter for America). More important, Denmark had stratospheric interest rates. Consolidation succeeded in bringing long-term rates down from a peak of 23%. Durable-goods consumption and investment boomed. House prices rose by 60% from 1982 to 1986, raising household wealth and buoying confidence. In America the long-term interest rate is already on the floor, at under 4%, yet consumption remains anaemic. Housing markets are stuck in a post-crash funk. With interest rates low, an austerity-induced fall in inflation would increase real rates and weaken an already listless economy.

Rising domestic confidence is not the only route to growth amid austerity. Foreign demand is typically more important. From 1987 to 1989 Ireland’s fiscal balances improved and debt declined even as growth accelerated.... Italy’s 1990s austerity programme... tells a similar story.... There is a lesson in this for Greece, but not the one euro-zone leaders wish to impart....

A last lifeline for the president is the hope of support from the Federal Reserve. Central banks can partially offset the negative effect of budget cuts with looser monetary policy.... But with interest rates near zero, the Fed’s choices are limited to unconventional policy options....

America... needs to lay out credible plans for medium-term deficit reduction. But it has more leeway to delay cuts than most other countries, thanks to continued demand for its debt. Another year of recovery would help confidence more than a premature swing of the fiscal axe.

Ben Bernanke is worried that premature deficit reduction would stall the recovery. Barack Obama isn't. Who is more likely to be correct?

Claims That Fiscal Contraction Boosts GDP: For the Virtual Green Room

Rebutted by Jaime Guajardo, Daniel Leigh, and Andrea Pescatori:

[W]e examine the behavior of economic activity following discretionary changes in fiscal policy that historical sources suggest are not correlated with the short-term domestic economic outlook... cases of fiscal consolidation motivated not by a desire to restrain domestic demand in an overheated economy, but instead by a desire to reduce the budget deficit.... [A] 1 percent of GDP fiscal consolidation reduces real private consumption over the next two years by 0.75 percent, while real GDP declines by 0.62 percent.... [U]sing the change in the C[yclically ]A[djusted ]P[rimary ]B[alance]... a rise in the CAPB-to-GDP ratio is associated with a mild expansion in private consumption and GDP. The large difference in these estimates... suggest[s] that the biases associated with using cyclically-adjusted data may be substantial.

Terry Bisson: "They're Made Out of Meat!"

Mind Hacks:

“They’re Made Out of Meat” is a short story by Terry Bisson. It’s a great rift of the improbability of the human situation, and particularly relevant to psychologists (e.g. “So... what does the thinking?” The full text is here. The story has its own wikipedia page, and there’s a YouTube film here. Now, for your listening delight Erin Revell and Geraint Edwards, at my request, have recorded the story so I can play parts of it during a lecture. The result was too good not to share, so with Terry Bisson’s permission, here’s a link...

Why It Would Be Very, Very, Very Good for the Economy for Fannie and Freddie to Buy Up Mortgages, Refinance Them, and Cut Principal Amounts

It Was Debt What Did It  NYTimes com

Paul Krugman sends us to the extremely smart and hard-working Amir Sufi and Atif Mian's Figure 2, and comments:

It Was Debt What Did It: [Y]ou can see is that there was a drop in demand even in low-debt counties during the... period that followed the fall of Lehman; but since then demand in these countries has fully recovered. What’s holding the economy back despite the easing of the financial crisis per se, the evidence suggests, is the overhang of household debt. This does not say that there’s nothing policy can do. On the contrary, debt-deleveraging models say that fiscal policy can help bridge the gap while households pay down debts, and that debt relief — either directly or via inflation that erodes the real value of debt, can make a big difference...

As Paul and Gauti Eggerttson wrote:

Debt, deleveraging, and the liquidity trap: A new model: [I]magine that there are two kinds of people, “patient” and “impatient”; the impatient borrow from the patient.... We can then model a crisis like the one we now face as the result of a “deleveraging shock.” For whatever reason, there is a sudden downward revision of acceptable debt levels – a “Minsky moment.” This forces debtors to sharply reduce their spending. If the economy is to avoid a slump, other agents must be induced to spend more, say by a fall in interest rates. But if the deleveraging shock is severe enough, even a zero interest rate may not be low enough. So a large deleveraging shock can easily push the economy into a liquidity trap....

One implication... is that in the aftermath of a deleveraging shock the aggregate demand curve is likely to be upward, not downward-sloping. That is, a lower price level will actually reduce demand for goods and services. More broadly, large deleveraging shocks land the economy in a world of topsy-turvy, where many of the usual rules no longer apply. The traditional but long-neglected paradox of thrift – in which attempts to save more end up reducing aggregate savings – is joined by the “paradox of toil” – in which increased potential output reduces actual output, and the “paradox of flexibility” – in which a greater willingness of workers to accept wage cuts actually increases unemployment.

Where our approach really seems to offer clarification, however, is in the analysis of fiscal policy.... In the current policy debate, debt is often invoked as a reason to dismiss calls for expansionary fiscal policy as a response to unemployment; you can’t solve a problem created by debt by running up even more debt, say the critics.... What's wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn't matter who owes the money. Yet that can't be right; if it were, debt wouldn't be a problem....

[T]he level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt. And this means that all debt isn't created equal.... [D]eficit-financed government spending can... allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past...


Simone Wilson:

Carmageddon Q&A: The worst freeway closure of all time: Ten miles of the 405, the busiest roadway in the U.S., will shut down for 53 hours.... Transportation officials, for their part, did try to calm the hype... with an official Carmageddon Q&A....

Q: Why is this happening to me?????
A: The 405 needs a carpool lane, and unless you want our bulldozers to flatten your Prius, you might want to get out the way.

Q: Will there be official-looking people everywhere I go, waving signs around and telling me how to proceed?
A: Yes. But that won't change the fact that you're screwed.

Q: I am a tourist. Am I also screwed?
A: Yes. Arrive hours -- better yet, days -- early, and spend your entire vacation worrying about how you'll get from one clogged attraction to the next.

Q: I live in Long Beach. Am I also screwed?
A: Stop whining. There are bigger problems in the world. Like living in Westwood.

Q: I am anticipating my first ride on a Los Angeles subway transit bus-train thingy. Will I be forced to pay the conductor my quarters? You see, I fear if there's cash on me, I may get mugged.
A: Shut up and go to our website.

Q: Why are you guys so incompetent?
A: It's harder than you think, OK? There's lots of documents and meetings and people talking simultaneously. You wouldn't understand.

Q: What's the last possible moment I can use the 405?
A: You sound like a junkie. Please get some help.

Q: How about the rest of the freeways?
A: In case we have been unclear, you are all screwed.

Q: What if I have a medical emergency?
A: Plan ahead.
Q: But --
A: Plan ahead...

Jonathan Rauch Is a Mainstream Journalist. Jonathan Bernstein Is a Weblogger. Which Is a Source You Can Learn More From?

Jonathan Bernstein, of course:

A plain blog about politics: 14 Year Rule? Not So Much: Jonathan Rauch has been asking for it this week over at Sullivan's place.... Rauch is pushing his idea that "you can't be elected president in America if it takes you longer than 14 years to make it from governor or senator to president or vice president." Sorry, but it's bunk.... [I]n 2003... he could argue that every president but one elected beginning with Teddy Roosevelt fit, and 12 of 18 losing major-party nominees.... Since then, he's one-for-one with newly elected presidents, but 0-for-2 on losing nominees.... As Rauch admitted in 2003, one can in fact come up with all sorts of patterns, although he later claims that it's hard to find one that works for a century. I disagree! Let's see if I can do it...we're talking 19 people, and he's giving himself one mulligan. Here's a list by date of birth -- guess what? None of the 19 were born in the three months from February 7 through May 7. That's a quarter of the year, and no presidents! Or: only one president was born from the 16th through the 26th day of the month. That's 11 days, over a third of all possible days -- and yet only a single exception defied the 16-26 rule....

[W]e know a whole lot about who wins presidential elections, and we can almost certainly eliminate any major proposed factor that is candidate-based and large. There just isn't enough unexplained variation, once you account for party and familiar "fundamentals" such as the economy and war.... But if you think that the candidates' height, or hair color, or handedness, or whatever, matters, it just really can't, very much.... [I]t's easy to conclude that if any candidate or campaign based effect "works" for the general election but not for nominations, it's almost certainly bunk. Which is exactly where I'll file Rauch's 14 year rule.

Right Now Contractionary Fiscal Policy (Probably) Makes the Long-Run Debt Problem Worse

Paul Krugman:

Interest Rate Stories: [T]here are two different stories about why deficits might drive up interest rates... not at all the same.... The first story is good old crowding out: the government is borrowing, that competes with private borrowers, and that drives rates up.... [I]t’s a reasonable story when the economy is near full employment. But it’s all wrong when the economy is depressed, and especially if it’s in a liquidity trap....

The other story involves fears about a government’s solvency. The key point to understand here is that one year’s deficit, in practice, can’t matter very much in determining a government’s solvency, which depends on the present discounted value of revenues and obligations over many years. So the deficit matters in that case only to the extent that it represents a signal about government determination....

It’s worth noting that the current attack on Italy was not triggered by news about the deficit; it was triggered by worries about economic growth. And this makes one wonder whether austerity can really restore confidence...

Once again, I think Paul understates his case:

The Keynesian logic for expansion right now is reinforced by the fact that recessions and austerity programs cast shadows: raise unemployment now via austerity cuts in government spending, and some of that increased unemployment sticks around permanently as higher structural unemployment. Call the share of unemployment that does so s. Then an austerity program today worsens the long-run debt-and-deficit picture if:

mt > (r - g)/(r - g + s)

where m is the multiplier, t is the marginal tax rate, s is the share of the cyclical recession rise in unemployment that turns into a permanent rise in unemployment, r is the real interest rate on government debt, and g is the economy's real growth rate. Since right now mt is about 0.5, and r is less than 2% per year, this means that fiscal contraction is bad for the long-run debt-and-deficit right now as long as:

s + g > 2%

As long as the sum of the economy's long-term growth rate--which is now about 3%--and the share of a rise in unemployment that becomes structural is greater than 2%--which it definitely is--fiscal contraction is a bad, imprudent, and spendthrift thing.

Moreover, even if you have no Keynesian effects in the model at all, there is still an overwhelming case for borrow-and-spend right now. Why? Because the thirty-year Treasury inflation-indexed security rate at 1.86% 1.62% per year is lower than the expected long-run growth rate of the real economy right now of close to 3% per year. This is a basic topic sometimes taught in intermediate undergraduate macroeconomics: the neoclassical optimizing growth "Golden Rule." If the economy ever gets itself into a situation in which risk-adjusted long-run interest rates are lower than the risk-adjusted expected long-run growth rate of the economy, it is dynamically inefficient--and government should borrow and spend and keep borrowing and spending until at least it drives long-term interest rates up to and above the risk-adjusted expected long-run growth rate. (And the Keynesian multiplier and the shadows cast by recessions strengthen the case for spending.)

Yet I find none of the classical, semi-classical, new classical, or neoclassical economists who believe in optimizing growth models stepping forward and saying: "Because r < g right now, what we really need is more government spending and an expanded government debt."

It is very odd...

New Unemployment Insurance Claims

Economagic Economic Chart Dispenser

In both July 2009 and July 2010 the BLS's seasonal adjustment algorithm overestimated the extent of the seasonal jump in new unemployment insurance claims in July. Thus both in 2009 and 2010 the seasonally-adjusted series "saw" a July fall in unemployment insurance claims that was not really there.

Is the same thing happening this year? Perhaps. Thus I am not as pleased with this week's decline in seasonally-adjusted UI claims as I would be normally...

Paul Krugman: What Is It About "Money"?

Paul Krugman:

Monetary Rage: We had dinner last night with Margaret Ray and Dave Anderson, the authors of the AP adaptation of our textbook (which is terrific, by the way). Over our $350 $22 bottle of wine, we talked about various issues involved in trying to explain economics — and everyone agreed that monetary economics is where people are most likely to get not only confused, but furious....

So what is it about money? I don’t have a full explanation, but here’s a thought: monetary economics is inherently about market imperfections. In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed. We’d just have Arrow-Debreu complete markets in everything.

Monetary theory — and monetary policy — are, then, all about dealing with an imperfect, frictional world. As a consequence, sensible policy is based around trying to figure how to reduce the costs of these frictions and imperfections; thus floating exchange rates may be a good idea (and how sensible Milton Friedman now looks!) to deal with the reality that it’s hard to change nominal prices.

So why the rage? I suspect that it’s because a certain sort of person wants more purity than the real world is willing to supply.... [W]hen you point out that it doesn’t work that way, that money is a social convention meant to deal with an imperfect world, and that dealing with that imperfect world sometimes means that central banks need to take exceptional action, they fly into a rage.

Adolf Hitler Liveblogs World War II: July 14, 1941

Adolf Hitler:

Führer Directive 32a: On the basis of my intentions for the future prosecution of the war, as stated in Directive 32, I issue the following general instructions concerning personnel and equipment :

1. General: Our military mastery of the European continent after the overthrow of Russia will make it possible considerably to reduce the strength of the Army. Within the limits of this reduced Army, the relative strength of the armoured forces will be greatly increased. The manning and equipment of the Navy will be limited to what is essential for the direct prosecution of the war against England and, should the occasion arise, against America. The main effort of equipment will be devoted to the Air Force, which will be greatly strengthened.

2. Manpower: The future strength of the Army will be laid down by me, after receiving proposals from Commander-in-Chief Army. The Replacement Army will be reduced to conform with the diminished strength of the Army. The Chief of the High Command of the Armed Forces will decide, in accordance with my directives, on the employment of the manpower which will become available for the Armed Forces as a whole and for the armaments industry. The Class of 1922 will be called up at the latest possible date, and will be distributed by the High Command of the Armed Forces in accordance with the future tasks of the various branches of the Armed Forces.

  1. Arms and Equipment: (a) The Armed Forces as a whole. The arming and equipment of troops will be reduced to the requirements of the situation in the field, without reference to existing establishment scales. All formations not intended for actual combat (security, guard, construction, and similar units) will be armed basically with captured weapons and second line equipment. All requests for 'general Armed Forces equipment' will be immediately reduced or rejected in relation to available supplies, need, and wear and tear. Continued manufacture of such weapons as can be proved to be necessary will be decided in agreement with the Minister for Armaments and Munitions....

(b) Army: The extension of arms and equipment and the production of new weapons, munitions, and equipment will be related, with immediate effect, to the smaller forces which are contemplated for the future. Where orders have been placed for more than six months ahead all contracts beyond that period will be cancelled. Current deliveries will only continue if their immediate cancellation would be uneconomic....

(c) Navy: The Navy will continue its submarine programme. Construction will be limited to what is directly connected with this programme. Expansion of the armaments programme over and above this is to be stopped.

(d) Air Force: The overall armaments programme will concentrate on carrying out the expanded 'Air Armaments programme' which I have approved. Its realisation up to the spring of 1942 is of decisive importance for the whole war effort. For this purpose all available manpower from the Armed Forces and industry will be employed. The allocation of aluminium to the Air Force will be increased as far as possible. The speed of the programme, and the extent to which it can be fulfilled, will be linked to the increased production of light metals and mineral oil.

4. The programme for powder and explosives will concentrate upon the requirements of the Air Force (bombs and anti-aircraft ammunition) at the expense of the requirements of the Army. Buildings will be restricted to the barest essentials and confined to the simplest type of construction. Production of explosives will be limited to the existing basis.

5. It is particularly important to ensure supplies of raw materials and mineral oil. Coal production and the extension of the light metal, artificial rubber, substitute materials, and liquid fuel industries will be supported by the Armed Forces in every way, particularly by the release of miners and specialist workers. The construction of the necessary plans for the extended air armaments industry will be developed simultaneously.

6. The allocation of manpower, raw materials, and plant will be made in accordance with these principles.

7. The Chief of the High Command of the Armed Forces will issue the necessary orders for the Armed Forces, and the Minister for Armaments and Munitions for his sector, in mutual agreement.