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August 2011

Yes, the Composition of the Government's Liabilities Matters

A history lesson from Paul Krugman:

France in the 1920s: France came out of World War I with very large debts, peaking at 240 percent of GDP… unable politically to raise enough taxes to cover the cost of servicing that debt… investors lost confidence in the government’s solvency. Various expedients were tried, including — late in the game — creation of monetary base, which was advocated by a finance minister on the (very MMT) grounds that the division of government liabilities between currency and short-term bills made no difference. But it turned out that it did: the franc plunged, and the price level soared.

Now as it turned out this was just what the doctor ordered: because France’s budget problem was overwhelmingly the debt overhang rather than current spending, inflation eroded the real value of that debt and made possible the Poincare stabilization of 1926.

So what does this say about the United States? At a future date, when we’re out of the liquidity trap, public finances will matter — and not just because of their role in raising or reducing aggregate demand. The composition of public liabilities as between debt and monetary base does matter in normal times — hey, if it didn’t, the Fed would have no influence, ever. So if we try at that point to finance the deficit by money issue rather than bond sales, it will be inflationary.

And unlike France in the 1920s, such a hypothetical US deficit crisis wouldn’t be self-correcting: the biggest source of our long-run deficit isn’t the overhang of debt, it’s the prospective current cost of paying for retirement, health care, and defense. So such a crisis — again, it’s very much hypothetical — could spiral into something very nasty….

Now, all of this is remote right now. And notice too that France in the 1920s stabilized with debt of 140 percent of GDP — far higher than the numbers that are supposed to terrify us now. So none of this is relevant to the current policy debate.

The Memory Palace of Andy Drucker

Scott Aaronson:

Shtetl-Optimized: [W]e in MIT’s complexity theory group are doing everything we can to respond to the most pressing global challenges.  And nothing illustrates that commitment better than a beautiful recent paper by my PhD student Andy Drucker…. Briefly, what Andy has done is to invent—and demonstrate—a breakthrough method by which anyone, including you, can easily learn to multiply ten-digit numbers in your head, using only a collection of stock photos from Flickr to jog your memory…. [Y]ou’re not allowed to modify or rearrange the photos, or otherwise use them to record any information about the computation while you’re performing it.  You can only use the photos as aids to your own memory.

By using his method, Andy—who has no special mental-math training or experience whatsoever—was able to calculate 9883603368 x 4288997768 = 42390752785149282624 in his head in a mere seven hours….

[T]his method provides probably the most convincing demonstration so far that the human brain, unaided by pencil and paper, can indeed solve arbitrary problems in the class P (albeit thousands of times more slowly than a pocket calculator)…

Economist's View: Rogoff: The Second Great Contraction

Mark Thoma thinks about Ken Rogoff's latest:

Economist's View: Rogoff: The Second Great Contraction: I think the term "balance sheet recession" -- and the associated policies many of us have been pushing (unsuccesfully) -- takes care of this concern:

The Second Great Contraction, by Kenneth Rogoff, Commentary, Project Syndicate: Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis ... leading to bad forecasts and bad policy. The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that ... this is just a deep recession that can be subdued by a generous helping of conventional policy tools...

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation....

Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic....

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were...

I wrote this last December:

Recessions can occur for a variety of reasons. For example, oil price shocks, stock market crashes, housing bubbles, monetary shocks, and productivity shocks can all lead to economic downturns. However, curiously, while the effects of a recession differ depending upon the cause, the response of policy – fiscal policy in particular – tends to be the same. This is undesirable, since a policy tailored to the specific type of recession would result in a speedier recovery. Monetary policy is better on this score, particularly nontraditional policy, but even this could be improved along these lines. And I wasn't the only one making this point.

Department of "Huh?!": Federal Reserve Dissenters Edition II

FRED Graph  St Louis Fed 3

When Federal Reserve Bank of Philadelphia President Charles Plosser parrots his talking point about how inflation has increased since QE II was decided upon last fall…

Does he not know or not care that break-even expectations of ten-year inflation as revealed by the bond market have not risen? Does he not know or not care that the latest read on ten-year break-even inflation expectations was 2.18%/year? Does he not know or not care that nobody in the market expects any of the shortfall in the evolution of the price level relative to its pre-2008 trend is going to be made up?

The Ability to Use the Printing Press to Inflate Away Your Debt Gives Investors More Confidence in Your Bonds

Yes, it is bizarre. But it's twue, it's twue!!

Paul Krugman explains why and how:

The Printing Press Mystery: John Plender at the FT seems mystified by something that has become obvious lately: bond vigilantes are only going after countries that no longer have their own currencies. He writes:

The underlying logic is that no country defaults on its domestic bonds if it retains the right to set the printing presses in motion. Yet it seems counter-intuitive that bond markets, with their traditional fear of inflation, should punish a country for not being able to debase its currency.

Oddly, he seems unaware of the pretty good explanation offered by Paul DeGrauwe…. Part of the answer is that countries on the euro are stuck with a severe competitiveness problem that can only be resolved with grinding deflation, making their debt problems worse. On top of that… countries without a printing press are subject to self-fulfilling crises… fears of default, by driving up interest costs… trigger default — and… once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.

That’s why America isn’t Greece; and why the UK is being foolish in imposing eurozone-type austerity on itself.

Department of "Huh?!": Federal Reserve Dissenters Edition

FRED Graph  St Louis Fed 2

When Federal Reserve Bank of Philadelphia President Charles Plosser parrots his talking point about how the labor market has improved and the unemployment rate has fallen…

Does he not know or not care that the employment-to-population ratio has fallen? Does he not know or not care that more than 100% of the decline in the unemployment rate is due to a smaller fraction of adults seeking work than six months or a year or a year and a half ago, and that less than zero is due to a greater fraction of adults actually having jobs?

Liveblogging World War II: 17 August 1941

Oral Statement of Franklin Roosevelt to Japanese Ambassador Nomura:

During past months the Governments of the United States and of Japan, through the Secretary of State and the Japanese Ambassador in Washington, have engaged in protracted conversations directed toward exploring the possibility of reaching a sound basis for negotiations between the two countries relative to the maintenance of peace with order and justice in the Pacific. The principles and policies which were under discussion in these conversations precluded pursuit by Other Government of objectives of expansion by force or by threat of force.

Only 24 last the.. President of the United States informed the Japanese Government through the Japanese Ambassador in Washington that he was willing to suggest to the Governments of Great Britain of The Netherlands and of China that they make a binding and solemn declaration that they had no aggressive intentions with regard to Indochina and that they would agree that the markets and raw materials of Indochina should be available to all Powers on equal terms. The President stated further that he would be willing to suggest to the Powers mentioned that they undertake this declaration, in which the United States would be willing to join, upon the understanding that the Government of Japan would be disposed to make a similar declaration and would be further disposed to withdraw its military and naval forces from Indochina.

Notwithstanding these efforts, the Government of Japan has continued its military activities and its disposals of armed forces at various points in the Far East and has occupied Indochina with its military, air and naval forces.

The Government of the United States is in full sympathy with the desire expressed by the Japanese Government that there be provided a fresh basis for amicable and mutually profitable relations between our two countries. This Government's patience in seeking an acceptable basis for such an understanding has been demonstrated time and again during recent years and especially during recent months. This Government feels at the present stage that nothing short of the most complete candor on its part, in the light of evidence and indications which come to it from many sources, will at this moment tend to further the objectives sought.

Such being the case, this, Government now finds it necessary to say to the Government of Japan that if the Japanese Government takes any further steps in pursuance of a policy or program of military domination by force or threat of force of neighboring countries, the Government of the United States will be compelled to take immediately any and all steps which it may deem necessary toward safeguarding the legitimate rights and interests of the United States and American nationals and toward insuring the safety and security of the United States.

Written Statement Handed by Franklin Roosevelt to Japanese Ambassador Nomura:

Reference is made to the question which the Japanese Ambassador raised on August 8 during a conversation with the Secretary of State whether it might not be possible for the responsible heads of the Japanese Government and the Government of the United States to meet with a view to discussing means whereby an adjustment in relations between the United States and Japan might be brought about. The thought of Prince Konoe and of the Japanese Government in offering this suggestion is appreciated.

Reference is made also to the desire expressed by the Japanese Ambassador during a call on the Secretary of State on August 16 that there be resumed the informal conversations which had been in progress between the two Governments toward ascertaining whether there existed a basis for negotiations relative to a peaceful settlement covering the entire Pacific situation.

When the Japanese Ambassador brought up these suggestions, the Secretary of State reminded the Ambassador that the Government of the United States had shown great patience and had been prepared to continue in that course of patience so long as the Japanese Government manifested a desire to follow courses of peace. It was pointed out to the Ambassador that while proceeding along this course this Government had received reports indicating clearly that the Japanese Government was adopting courses directly the opposite of those on which the recent conversations between the Ambassador and the Secretary of State had been predicated. It was pointed out also that the Japanese press was being constantly stimulated to speak of encirclement of Japan by the United States and was being officially inspired in ways calculated to inflame public opinion. The Secretary of State made it clear that he did not see how conversations between the two Governments could usefully be pursued or proposals be discussed while Japanese official spokesmen and the Japanese press contended that the United States was endeavoring to encircle Japan and carried on a campaign against the United States.

On two occasions officers of the Department of State, pursuant to instructions from the Secretary of State, called on the Japanese Ambassador to indicate concern over the reports that Japan intended to acquire by force or threat of force military and naval bases in French Indochina. Subsequently, on July 21 and July 23 the Acting Secretary of State raised with the Japanese Minister and with the Japanese Ambassador the question of Japan's intentions with regard to French Indochina and pointed out that the Government of the United States could only assume that the occupation by Japan of French Indochina or the acquisition of military and naval bases in that area constituted notice to the United States that Japan had taken by forceful means a step preparatory to embarking on further movements of conquest in the South Pacific area. The Acting Secretary pointed out further that this new move on Japan's part was prejudicial to the procurement by the United States of essential raw materials and to the peace of the Pacific, including the Philippine Islands.

The Government of the United States accordingly had no alternative but to inform the Japanese Ambassador that, in the opinion of this Government, the measures then being taken by the Japanese Government had served to remove the basis for further conversations relative to a peaceful settlement in the Pacific area.

Informal discussions between the Japanese Government and the Government of the United States directed toward ascertaining whether there existed a basis for negotiations relative to a peaceful settlement covering the entire Pacific situation would naturally envisage the working out of a progressive program attainable by peaceful methods. It goes without saying that no proposals or suggestions affecting the rights and privileges of either the United States or Japan would be considered except as they might be in conformity with the basic principles, to which the United States has long been committed. The program envisaged in such informal discussions would involve the application in the entire Pacific area of the principle of equality of commercial opportunity and treatment. It would thus make possible access by all countries to raw materials and to all other essential commodities. Such a program would envisage cooperation by all nations of the Pacific on a voluntary and peaceful basis toward utilizing all available resources of capital, technical skill, and progressive economic leadership for the purpose of building up not only their own economies but also the economies of regions where productive capacity can be improved. The result would be to increase the purchasing power of the nations and peoples concerned, to raise standards of living, and to create conditions conducive to the maintenance of peace. If such a program based upon peaceable and constructive principles were to be adopted for the Pacific and if thereafter any of the countries or areas within the Pacific were menaced, the policy of aiding nations resisting aggression would continue to be followed by this Government and this Government would cooperate with other nations in extending assistance to any country threatened.

Under such a program for the Pacific area Japan would, in the opinion of the Government of the United States, attain all the objectives which Japan affirms that it is seeking. This program would not enable any country to extend its military or political control over other peoples or to obtain economic rights of a definitely monopolistic or preferential character. In those cases where the production and distribution of essential commodities are vested in monopolies, the Government of the United States would expect to use its influence to see that all countries are given a fair share of the distribution of the products of such monopolies and at a fair price.

If the Japanese Government is seeking what it affirms to be its objectives, the Government of the United States feels that the program above outlined is one that can be counted upon to assure Japan satisfaction of its economic needs and legitimate aspirations with much greater certainty than could any other program.

In case the Japanese Government feels that Japan desires and is in position to suspend its expansionist activities, to readjust its position, and to embark upon a peaceful program for the Pacific along the lines of the program and principles to which the United States is committed, the Government of the United States would be prepared to consider resumption of the informal exploratory discussions which were interrupted in July and would be glad to endeavor to arrange a suitable time and place to exchange views. The Government of the United States, however, feels that, in view of the circumstances attending the interruption of the informal conversations between the two Governments, it would be helpful to both Governments, before undertaking a resumption of such conversations or proceeding with plans for a meeting, if the Japanese Government would be so good as to furnish a clearer statement than has yet been furnished as to its present attitude and plans, just as this Government has repeatedly outlined to the Japanese Government its attitude and plans.

Reasons to Love Berkeley: The Two Weeks Before Classes Begin

Enough people are back that you run into by accident to make life really interesting, but people are not yet so harried with term-time work as to be running around with heads down grunting. So you learn a lot--and are entertained a lot by your colleagues.

For example, yesterday I spent four hours outside at Nefeli on Euclid, where we talked about (among other subjects):

Frida Kahlo's back brace, the descendents of Leon Trotsky's cats, how Europe has managed to step into the same Heraclitan river twice in 1931 and again in 2011, why Barry Eichengreen and I were so confident back in 2008 that we would not step into the same river twice, Tim Geithner's unwillingness to have people call for his impeachment on the floor of the House of Representatives, whether the Obama Administration is lying when it claims that its desires to use Fannie and Freddie to boost the housing market are being blocked by Acting Director Ed DeMarco of the FHFA and there is nothing it can do, whether the Congressional Republicans are prisoners of or masters of their base, how Nelson Polsby missed an opportunity to say something truly gracious upon the death of Aaron Wildavsky, fights among the intellectual children of "Polyarchy" Dahl, whether it is a benefit or a curse to have a student of Soviet politics as a provost, the Rural Electrification Administration, the reliability of public utilities in the Berkeley Hills, what Obama will surrender to the Republicans in order to get a one-month continuing resolution passed on September 30, how to teach political economy to undergraduates, and assorted other topics.

Republicans Lie, About Everything, All the Time: Texas Health Costs Edition

Aaron Carroll does the intellectual garbage pickup:

Malpractice Reform in Texas: a Review\: On Sunday, Gov. Perry said:

“We’ve had the most sweeping tort reform in the nation…" asserting that as a result of the law passed in 2003, there are 20,000 more physicians in Texas. He spoke of cutting taxes and sparking the best job growth of any state in the nation.

Where to start?

A lot of what I’m going to show you comes form the good work of Public Citizen…. Let’s start with what Texas did.  They capped non-economic damages on malpractice lawsuits at $250,000.  It’s pretty much what they Republicans want to do with health care reform as well (see their plan).  And, yes, let’s be honest and say that when you cap damages, the total cost of payments goes down…. [T]otal malpractice payments dropped by about two thirds since reform was enacted in 2003…. The contention under dispute is that capping damages will be “health care reform”. Did tort reform lower the costs of care?  Not according to the Dartmouth Atlas of Health Care…. It appears that Medicare costs per enrollee went up faster than the national average.  In fact, Texas reimbursement rates in 2007 were the second highest in the country.

Did tort reform lower the rates of uninsurance in Texas?… Texas has the highest rate of uninsured people in the United States.

Did tort reform result in health insurance costs going down?  Not according to the Agency for Healthcare Research and Quality….

Did tort reform result in doctors flocking to Texas to practice? Not according to the Texas Department of State Health Services:

Gov. Perry might be accurate in that the number of physicians increased, but that’s because the total population increased. Doctors did not preferentially move there above and beyond all sorts of other people…..

If you believe that tort reform will work than you must believe that (1) it makes doctors want to practice there and (2) lowers medical costs which will then (3) lower the cost of insurance and (4) result in fewer people being uninsured.  And, it seems, many of you believe Texas proves this to be true. You couldn’t be more wrong.  Since tort reform, the number of doctors per population remains stable, health care costs have gone up (along with insurance costs), and the number of uninsured remains the worst in the nation.

There are probably some examples that can support the cause of tort reform, but Texas sure ain’t one of them.  Please stop using it.

New IMF Managing Director Christine Lagarde Pleads for Policy Makers to Come to Their Senses

Christine Lagarde:

Don’t let fiscal brakes stall global recovery: After the crisis unfolded in late 2008, global policymakers came together to act with common purpose. Their efforts saved us from a second Great Depression….

The situation today is different from 2008. Then, uncertainty came from the poor health of financial institutions. Now, it comes from doubts about the health of sovereigns and the tricky feedback loop to banks. Then the answer was unprecedented monetary accommodation, direct support for the financial sector and a dose of fiscal stimulus. Now monetary policy is more constrained, banking problems will again have to be addressed, and the crisis has left behind a legacy of public debt…. So there are no easy answers. But that does not mean there are no options. For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.

Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs. By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation. After all, who will believe that commitments to cuts are going to survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?…

Policy actions can focus on areas where the pressure is mounting tomorrow, but have little effect on demand today – such as reforming entitlements or restructuring the tax system. At the same time, short-term measures must be supportive of growth, yet economical in terms of the impact on fiscal sustainability, and can include policies supporting employment creation, advancing planned infrastructure and easing adjustment in housing markets.

Nor will spending cuts alone do the trick – revenues also must increase, and the first choice must be measures that have the lowest effect on demand….

Financial sector repair also remains essential: recapitalising and restructuring good banks, closing bad banks – and addressing the lack of transparency that clouds financial markets….

If policymakers can act boldly, act together and act now on these priorities, confidence can be restored and the recovery sustained.

Friends Don't Let Friends Believe Anything They Read in National Review

Matthew Yglesias:

Conservatives Whine About Unfairness Of Quoting Rick Perry Accurately: Rick Perry holds a lot of extreme views about American public policy and constitutional law. I know that because I’ve read Rick Perry’s book, Fed Up, which about his extreme views about American public policy and constitutional law. My method for demonstrating that Rick Perry holds these extreme views about American public policy and constitutional law was to quote accurately from Rick Perry’s book. Avik Roy at National Review seems to like Rick Perry, and thus has penned a purported takedown piece of my series of accurate quotations of Rick Perry’s extreme views. The key to Roy’s method is to insinuate that it’s somehow unfair to quote Rick Perry’s views extreme views accurately. He prefers to quote other, less extreme things Perry said, and then ignore the most extreme claims.

For example, I say that Perry says that all federal banking regulation is illegal. I say that because Perry says it. Roy says this is unfair and that Perry’s “principal criticism of Dodd-Frank is not on constitutional grounds, but rather that Dodd-Frank is excessively complicated, economically harmful, and unresponsive to democratic feedback.” Which criticism is Perry’s “principal” one is an exercise in mind-reading. In the book I read, Perry launches a series of criticisms at Dodd-Frank, including the ones Roy canvasses. He then concludes his discussion of the issue with his alternative to Dodd-Frank: “if the Constitution were shown the appropriate respect, Washington regulation writers wouldn’t have to worry about underrepresented views, because they wouldn’t have control over them in the first place.”

Rick Perry doesn’t think Dodd-Franks should be replaced with some different, simpler, more growth-friendly, more responsive set of federal banking regulations. He says that federal bank regulation is unconstitutional. Which is why I say that Perry says that federal bank regulation is unconstitutional.

Roy’s entire piece is like that. Rick Perry says that the Depression didn’t end “until World War II, when FDR was finally persuaded to unleash private enterprise.” I point out that it’s absurd to say that FDR unleashed private enterprise during World War II. Roy defends Perry by ignoring what Perry said and quoting Larry Summers on the fact that the Depression didn’t end until World War II. True enough. But that’s not what Perry said.

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

One More Depressing Paragraph About Obama

Ta-Nehisi Coates:

One Depressing Paragraph: The Times looks at the White House's thinking on the economy:

Mr. Obama's senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. These include free trade agreements and improved patent protections for inventors.

The message I got from that piece is that Obama really has no plans to "pivot to jobs" in any meaningful way. There's a real point to be made that Obama is limited (though not totally stymied) by House Republicans. It's one of the reasons anything dubbing itself a "poverty tour" should begin by targeting vulnerable GOP districts, and registering voters in those districts. Still, unemployment in African-American communities is somewhere around 16 percent. From what I can tell, the argument that these people should support Obama seems to be "Vote Democratic, or your life will get even worse." Not the stuff of inspiration, but it does have the virtue of likely being true.

The heartbreaking thing is that the executive branch could do a lot to boost the economy right now by supporting the housing market--and we will wish in five years that right now we had been building a million houses a year rather than only five-hundred thousand.

But as one former senior policymaker said to me last week: The thing about Bernanke and Geithner is that they believe that bold action is only needed if there is a crisis in which lots of money-center banks are about to fail, otherwise they are status-quo players...

True Names

Antonio Porreca:

Do waterfalls play chess? and other stories: After a brief introduction to complexity theory (Section 2), Aaronson turns his attention to one of the main cornerstones of this field, which is also one the points that are usually criticised: the relevance of polynomial time, as opposed to exponential time. Here he argues that this distinction is at least as interesting as the distinction between computable and uncomputable. Section 3.3 contains an interesting question that can be answered using a complexity-theoretic argument: why would we call 243112609 − 1 (together with a proof of its primality) a “known” prime, while “the first prime large than 243112609 − 1” feels somehow “unknown”?

james Kwak: What Is Our Ten-Year Deficit Problem?

The problem is that America has three problems: a short-run jobs problem, a ten-year tax-cut extension problem, and a long-run health-care financing problem.

James Kwak:

How Big Is the Deficit, Anyway? « The Baseline Scenario: First, since when is a stable deficit of 2 percent of GDP a national emergency? I agree the situation is not ideal. We won’t have a lot of fiscal space to deal with future shocks (e.g., financial crises), and we’ll be in a race pitting economic growth against the real interest rate on the debt. But at that point we’ll basically be paying interest on stupid policy decisions from the past (take your pick). The real problem is that over the following two decades, things will slowly and then rapidly get worse as more Baby Boomers retire and health care costs continue to increase. But that takes place outside the ten-year window—and it’s mainly a health care problem. So why do we have a joint committee of Congress mandated to slash $1.2 trillion from the budget within that window? I know the political reason, but that doesn’t mean it makes any economic sense.

Second, the not-so-bad scenario… has one major assumption: that we let all expiring tax cuts, well, expire…. President Obama can say: “I have a bulletproof, real plan to bring the deficit down to a sustainable level within this decade. I will veto any tax cut extension unless it is fully offset. The entire existence of a deficit crisis over the next decade is predicated on extending the tax cuts.” (I know, the fact that I used the word “predicated” rules me out as a political speechwriter.) Then he can negotiate from a position of strength. But, of course, we’ve been through this before.

Third, and less importantly: What was S&P thinking? According to their downgrade explanation, the problem is that total government debt (including all levels) is growing from 74 percent of GDP in 2011 to 85 percent in 2021…. The only way they get numbers that high is by working off of an alternative scenario in which all the tax cuts are extended and then assuming poor economic growth….

So if there’s one thing you should take away, it’s this: The ten-year deficit problem is a tax cut problem. No tax cuts, no problem. This won’t solve the all the long-term problems, but it’s a good start.

American Politics: Brad DeLong Hasn't Been Listening...

UPDATE: James Fallows points out that what is new is not the Republican desire to wreck the country in order to make the Democratic President look like a loser, but rather the accusation that to try to promote the public interest is "almost treasonous". That is genuinely new. He is correct. Gingrich worked as hard as he could to try to make sure that Clinton's policies failed and the country became worse off, but he didn't call those of us trying to make the policies work traitors.

James Fallows:

3 Points on Rick Perry - Politics: For the past few months, Democrats have had the suspicion that Republicans are playing a double or even triple-game in opposing the Obama Administration on spending and deficit issues. At the most principled levels, they're upholding their belief in a smaller government. At the next level down, they're trying to limit Obama's operational successes wherever they can. And, most cynical of all, they understand the idea of "the worse, the better." The surest path toward beating Obama next year is for the economy to stagnate or decline.

Perry's comments about Ben Bernanke cut through any such subtlety. If Bernanke "prints money" in the next 15 months, toward the end of forestalling a recession or preserving jobs, Perry would consider that "almost treasonous." This is the kind of thing you just don't hear from national-level politicians, and for a reason.

On the contrary, this is what I have heard from national-level Republican politicians--admittedly, in private and among friends--since I went to Washington in 1993. What do you think Gingrich sounded like when rallying his troops? That the path to power was to make sure that Clinton's policies failed. Little has changed.

Liveblogging World War II: August 16, 1941

The Supreme Command of the Red Army:

August 16, 1941 Not only his friends but our enemies are forced to admit that our war of liberation from Nazi invaders, the vast majority of the Red Army behaved impeccably, with courage, and heroically. Even those parts of our army who accidentally broke away from the army and were surrounded preserved the spirit of fortitude and courage and did nt surrender, trying to cause harm to the enemy. Some parts of our army, surrounded by the enemy, used every opportunity to inflict a defeat on our enemies and break out of encirclement.

Commander of the Western Front Lieutenant-General Boldin, while in the 10th Army near Bialystok, surrounded by Nazi troops… after 45 days of fighting behind enemy lines and made their way to the main forces Western Front. They destroyed the headquarters of two German regiments, 26 tanks, 1049 cars, vehicles and staff vehicles, 147 motorcycles, five artillery batteries, 4 mortars, 15 machine guns, eight machine guns, a plane on the airfield and warehouse bombs….

But we can not hide the fact that lately there have been some shameful facts of surrender. Separate the generals is a bad example to our troops…. The commander of the 13th Rifle Corps, Major General Kirillov, surrounded by German troops, rather than fulfill his duty to the country… deserted the battlefield and surrendered to the enemy. As a result, part of the 13th Rifle Corps were broken and without serious resistance surrendered….

These shameful instances of surrender to our sworn enemy suggests that in our brave Red Army… there are unstable, cowardly, cowardly elements. And these cowardly elements are not only among the Red Army, but also among the command staff….

Can I put up in the Red Army with cowards, deserters to the enemy, or faint-hearted chiefs who at the first hitch on the front tear off their insignia and desert to the rear? No, impossible! Cowards and deserters must be destroyed.

Can we allow battalion commanders or commanders of the regiments who hide in crevices during the fight, do not see the battlefield, do not watch the course of the battle on the field, and still imagine themselves to be the commanders of regiments and battalions? No, impossible! They are not commanders of regiments and battalions, they are impostors….

I hereby order:

Commanders and political workers who during the battle defect to or surrender to to the enemy will be considered malicious deserter. Their families are subject to arrest as a family that has violated the its and betrayed its homeland.

All higher-level commanders and commissars to shoot deserters from command personnel on the spot.

Encircled units and subunits to selflessly fight to the last, preserving their weapons as part of the apple of their eye, and make their way into the rear of the enemy so defeating the fascist dogs.

Require each soldier, regardless of his official position, to demand from a superior to fight if surrounded until the last possible moment….

Require division commanders and commissars to immediately remove from their posts of commanders of battalions and regiments who hide in crevices during the battle… and if necessary to shoot them on the spot, putting in their places brave and courageous junior command personnel from the ranks of the distinguished.

Order to read in all companies, squadrons, batteries, squadrons, teams and staffs.

Supreme Command of the Red Army

Chairman of the State Defense Committee STALIN

Chairman of the State Committee of Defense V. Molotov
Marshal S. Budyonny
Marshal Voroshilov
Marshal S. Timoshenko
Marshal B. Shaposhnikov
Army Gen. Zhukov

You Know, I Arrived in Washington in 1993 to Work for Lloyd Bentsen's Treasury as Part of the Sane Technocratic Bipartisan Center...

And it took me only two months--two months!--to conclude that America's best hope for sane technocratic governance required the elimination of the Republican Party from our political system as rapidly as possible. Dole and Gingrich's "We really don't care that these policies are good for the country--are a lot like policies we would enthusiastically support if proposed by a Republican president--but we are going to try to block them because that will weaken Clinton" wad a real eye-opener...

Nothing since has led me to question or change that belief--only to strengthen it.

We really need a very different opposition party to the Democrats: a less dishonorable one.

Josh Micah Marshall:

Perry: Bernanke Policies "Almost Treasonous": I guess this is going to be a pretty interesting election. Rick Perry is now saying that any more emergency efforts by Ben Bernanke to resuscitate the economy would be "almsot treasonous."

If you are still playing for Team Republican and want to have any honor whatsoever, you need to leave the Republican Party now, apologize to America, and work to remove it from our political system.

Karl Smith: Sticky Wages Are a Side Issue

Karl Smith:

Sticky Wages, Sticky Prices, Sticky Debt «  Modeled Behavior: Tyler Cowen calls sticky wages a weak and embarrassing paradigm:

Often when this topic comes up I feel I am playing a game of whack-a-mole.  Most of all, I am struck by how little attention people pay to their own sticky nominal wage hypotheses…. [Y]ou might expect people to blog the microfoundations of nominal wage stickiness very, very often…. Dozens, no hundreds of blog posts on the all-important microfoundations of the #1 social problem of our time…. [T]he sticky nominal wage theory is an embarrassment….

[T]he [real] story [is] sticky-prices… firms with some measure of market power… [that] want to sell more at the market price than the market will demand…. [A]lmost no business seems indifferent to more customers. A perfectly competitive firm would not really care at the margin if it had more customers…. The question is why would prices stick… menu costs… adjusting prices often imposes real costs for customers… limited attention… price increases trigger search.

Another [reason] is that there are some prices which are especially sticky for special reasons and this sticks the whole system – that’s part of my interest in real estate.

Another is that debt is nominal and solvency constraints cause stickiness. Lower your prices too much and you can’t pay your debt…

Other People Do Not Understand the Obama Administration Either…

Jay Ackroyd:

Eschaton: Baffling: The continued systematic pursuit of obviously bad public policy is baffling. It's not like it's good politics. Does the Obama campaign staff really think they are gonna hold PA or OH with trade concessions to Korea? Do they think they will turn out voters in New Mexico on a deportation platform?

This isn't hard. Hire people to build things with the free money the world is offering us.

Thank-Eee Mister Rooz-Eee-Velt!

No sooner did we move into our rented house at the top of the Berkeley hills, but our electricity went out.

That seemed to carry the heat with it, either from the thermostat or the electrical igniter. Moreover, since everything was in boxes, we needed a flashlight to find the box with the flashlights in it. And our movers in trying to install our refrigerator had somehow switched off and then broke the valve to the water in the kitchen.

We were--barring expeditions down Marin, watching regenerative braking recharge the Prius's battery followed by purchasing prepared foods at Andronicos--suddenly reduced to the 19th century: no running water, no central heat, no electricity, no phone, no Internet, no cable.

Then over the next five days all of these services were restored, and we went in less than one week from the 19th to the 21st century.

And now my wife occasionally chirps up and says: That rural electrification initiative shoor is something! Thank-eee Mister Rooz-eee-velt! I am going to vote for him for life!

An Elbow to the Ribs While the Ref Isn't Looking II: Macroeconomic Analysis Department

Hoisted from comments: John Hund:

An Elbow to the Ribs While the Ref Isn't Looking: Macroeconomic Analysis Department: It really bugs me that Greg also linked "uncritically" to this graph, pointing to it as an example of massive Obama stimulus:

As I pointed out there, this is a red herring to anyone with a remote understanding of Federal budgeting and GDP figures. Discretionary non-defense spending, even if you attribute it all to the President and not the Congress who actually appropriates it looks nothing like this, even with the "wrong" nominal GDP denominator. For kicks, it looks like this:

Why link here if not to make a political point? Greg clearly knows that the correct graph doesn't look like that.

Liveblogging World War II: August 15, 1941

FDR and WSC:

Joint Message of Assistance to the Soviet Union: We have taken the opportunity afforded by the consideration of the report of Mr. Harry Hopkins on his return from Moscow to consult together as to how best our two countries can help your country in the splendid defense that you are making against the Nazi attack. We are at the moment cooperating to provide you with the very maximum of supplies that you most urgently need. Already many shiploads have left our shores and more will leave in the immediate future.

We must now turn our minds to the consideration of a more long term policy, since there is still a long and hard path to be traversed before there can be won that complete victory without which our efforts and sacrifices would be wasted.

The war goes on upon many fronts and before it is over there may be further fighting fronts that will be developed. Our resources though immense are limited, and it must become a question as to where and when those resources can best be used to further the greatest extent our common effort. This applies equally to manufactured war supplies and to raw materials.

The needs and demands of your and our armed services can only be determined in the light of the full knowledge of the many factors which must be taken into consideration in the decisions that we make. In order that all of us may be in a position to arrive at speedy decisions as to the apportionment of our joint resources, we suggest that we prepare for a meeting to be held at Moscow, to which we would send high representatives who could discuss these matters directly with you. If this conference appeals to you, we want you to know that pending the decisions of that conference we shall continue to send supplies and material as rapidly as possible.

We realize fully how vitally important to the defeat of Hitlerism is the brave and steadfast resistance of the Soviet Union and we feel therefore that we must not in any circumstances fail to act quickly and immediately in this matter on planning the program for the future allocation of our joint resources.



Department of "Huh?!": Labor Market Demand and Supply for the Elderly Edition

Tyler Cowen writes:

How are nominal wages sticky for the unemployed?: Why don’t the unemployed lower their wages to find a job?… There’s pretty clear evidence that, during the crisis, when the elderly wanted to work more, the elderly were able to work more…


Let's see--the latest employment-and-earnings report

In July 2011 7.6% of those 75+ were in the labor force and 7.2% of those 75+ were employed. In July 2007 6.9% of those 75+ in the labor force, 6.6% employed. 0.7% more of the population looking for work, 0.6% more of the population with jobs. A marginal employment rate of 6/7.

70-74: in 2010 18.9% in the labor force, 17.5% employed; in 2007 17.4% in the labor force and 16.5% employed. 1.5% more of the population looking for work, 1.0% more of the population with jobs. A marginal employment rate of 2/3.

65-69: in 2010 31.0% in the labor force and 28.9% employed; in 2007 29.6% in the labor force and 28.4% employed. 1.4% more of the population looking for work, 0.5% more of the population with jobs. A marginal employment rate of 0.36.

55-64: 63.8% and 59.0% in 2010 and 63.8% and 61.7% in August 2007. You cannot calculate a marginal employment rate.

If Tyler really wants to characterize this as a labor market in which marginal elderly entrants have an easy time finding jobs, I have several bridges I could sell him--in fact, I can see two bridges right now, quite attractive (or I could see them if the fog were to lift), which I am willing to let go for prices that make them very good values indeed. Even for the select 75+ group, the unemployment rate rose from 3.8% to 5.2% between July 2007 and July 2011. For the 65+ as a whole, the unemployment rate rose from 4.2% to 6.7%. The deterioration in the labor market matching process for the elderly looks to me as of the same order of magnitude as the deterioration for the labor force as a whole. Yet Tyler claims that it is different.

So what's going on here with Tyler? The link to "pretty clear evidence" is to Casey Mulligan. Experience, I think, teaches us that it is as unwise to trust Casey Mulligan's interpretation on any issue of theory or data as it is to get involved in a land war in Asia. I see no anomaly in the labor market experience of the elderly: the housing downturn has made many of the elderly poorer and thus unretired, but the unretired elderly are having as much harder a time finding jobs than normal as the general population is.

There is s deeper analytical issue. Four years ago I would have said that there is substantial mean reversion in the employment-to-population ratio: I would have confidently said, based on post-WWII data, that if you put the U.S. economy in a position in which the employment-to-population ratio is away from its current natural rate, then even with aggregate demand policy in neutral the economy will close about 2/5 of the gap back to the natural employment-to-population ratio in a year. That prediction that I would have made four years ago has been falsified.

FRED Graph  St Louis Fed

The old Hayekian line was that if you ever got yourself in a situation where the employment-to-population ratio was not rapidly mean-reverting to its natural rate it was because nasty unions were fixing nominal wages and keeping the unemployed from bidding nominal wages down, and if only you smashed unions nominal wages would become flexible again and the labor market would work again. Well, we have smashed our unions, but we do not have a mean-reverting employment-to-population ratio. Tyler, however, believes that all this proves is that we have not been right-wing enough: some additional--unspecified--government intervention in markets in addition to union-smashing is needed to restore nominal wage flexibility is the road to macroeconomic utopia.

The old Keynesian line was that nominal wage flexibility--and the union-smashing recommended by Hayekians--was a side issue. In an economy with nominal debt contracts downward-flexible nominal wages were likely to produce deeper depressions as the economy was subjected to much stronger downward shocks from the deflation, debt, and bankruptcy cattle prod. Wage inertia was thus a blessing--albeit a poorly-understood blessing--rather than a curse.

I think that everybody open-minded and nuanced is finding themselves moving rapidly toward the old Keynesian position under the pressure of events and data right now.

An Elbow to the Ribs While the Ref Isn't Looking: Macroeconomic Analysis Department

Greg Mankiw, January 10, 2009, in a column written to diminish the chances that the Recovery Act would pass called: "A Dose of Skepticism on Government Spending":

Greg Mankiw: When the government spends a dollar, the dollar is spent. When the government gives a household a dollar back in taxes, the dollar might be saved, which does not add to aggregate demand. The evidence, however, is hard to square with the theory. A recent study by Christina D. Romer and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the G.D.P. by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases…

This struck me as the equivalent of an elbow to the ribs while the ref wasn't looking, for Mankiw knew damned well that David and Christina Romer thought not that tax multipliers were bigger than spending ones but that both were bigger than studies like Valerie Ramey's suggested.

Me, January 12 2009:

The Romer View of Tax and Spending Multipliers Revisited: Mankiw's comparison of the 1.4 estimated spending multiplier from Valerie Ramey's study with the 3.0 estimated tax multiplier from the Romers' study is inappropriate…. [t]he Ramey study on the effects of government spending… does not fully control for the tax increases that often accompany spending increases. Thus it is very likely to understate the effects of spending increases alone: her study assesses the impact of the Korean-War military spending increase without taking account of the fact that it was accompanied by a large tax increase.

What Romer and Romer's study (and their earlier work on monetary policy) shows is not that tax cuts are uniquely effective, but rather that failing to consider the reasons for policy changes leads to underestimates of the effects of all types of stimulus. Because these issues of omitted variable bias are likely to be as strong for spending as for tax changes, the most reasonable interpretation of their paper is that all types of fiscal stimulus are more potent than conventional estimates would lead us to believe.

It is somewhat puzzling that Mankiw appears to believe that the Romers do think that tax multipliers are larger than spending multipliers, as they do not, and this is something that he could have very easily checked.

And Mankiw continued to argue that the Obama Recovery Act had been only minimally effective--that the poor state of the economy as the Recovery Act was implemented was not because the Recovery Act was too small but rather that it was the wrong kind of stimulus:

Crisis Economics: The patient, however, returns a few weeks later; this time, her symptoms are worse. What, then, should the doctor conclude? He might decide that he gave the patient the wrong medicine. Or he might determine that the patient was even sicker than he originally thought, and thus that the medicine should be administered at an even higher dosage. Either conclusion is plausible….

To the question of why their patient — the U.S. economy — did not respond as expected, the Obama team's answer is that the patient was sicker at the beginning of 2009 than they had originally thought, not that they administered the wrong medicine. The spending-heavy fiscal stimulus, they argue, was the right approach and did some good; if the stimulus bill had not been enacted, unemployment today would be even higher….

[I]nspired by the view that fiscal policy can prop up aggregate demand, Obama's advisors (and their congressional allies) began to design a stimulus plan heavy on direct government spending…. They determined that the "government-purchases multiplier" — that is, the multiplier for direct spending — would be 1.57, while the tax-cut multiplier would be 0.99. In other words, every dollar spent by the government would yield $1.57 in aggregate demand, while every dollar in reduced taxes would yield only 99 cents in increased demand…. The question for economists now is whether the administration's assumptions, and the model based on them, were correct….

Several studies on government-spending multipliers have been conducted using techniques similar to those used by the Romers. And none has found government-spending multipliers to be so large as to justify assumptions about the inherent superiority of government spending over tax cuts….

[T]he fiscal-policy decisions of the past year and a half have not been implausible or inexplicable — but they have also not been empirically shown to work. The data point to other approaches…

That struck me as much more than an elbow to Christina Romer's ribs--as, rather, a head butt, for Mankiw's argument was simply incoherent: use of Ramey rather than Romer-Bernstein multipliers led one to expect that the Recovery Act would be 50% more effective than the Obama Administration had claimed, and that the Recovery Act medicine was more rather than less potent:

Brad DeLong: Department of "Huh?!" Greg Mankiw Is Not Making Any Sense...: The $787 billion ARRA was about 2/3 spending increases and 1/3 tax cuts. Jared Bernstein and Christie Romer estimated that with a spending multiplier of 1.57 and a tax multiplier of 0.99 that the ARRA would boost production over its lifetime by $787 x 2/3 x 1.57 + $787 x 1/3 x 0.99 = $1,083 billion.

Now comes Greg Mankiw to say that they overestimated the impact of the ARRA because their multipliers were wrong: that he prefers a tax multiplier of 3 (from Romer and Romer) and a spending multiplier of 1.4 (from Valerie Ramey) and that as a result the right estimate was that the ARRA would boost production over its lifetime by $787 x 2/3 x 1.4 + $787 x 1/3 x 3 = $1,521 billion.

But, Greg, $1,521 > $1,083…

This track record seemed to use out here in Berkeley to demonstrate that Mankiw was being neither nuanced nor open-minded but, rather, playing for Team Republican. There is an argument that tax cuts for businesses are more effective stimulus than the hydraulic Keynesian model predicts because they bring the Confidence Fairy with them--but that argument is not buttressed by comparing Ramey kumquats to Romer and Romer oranges. And there is no argument whatsoever that adopting Romer-Bernstein rather than Ramey multipliers led Romer and Bernstein to overestimate the efficacy of the Recovery Act. No argument None. Nada.

This track record was why we out here in Berkeley were amused when Noah Smith saw Greg Mankiw on the teevee analyzing the situation as if it were obvious that the Recovery Act had a substantial effect on the economy--an effect as substantial as Christy Romer and Jared Bernstein had argued it would back in January 2009:

Noahpinion: Greg Mankiw thinks Obama's stimulus worked: Mankiw says:

Fiscal policy is going to be a drag going forward as the stimulus wears out.

And Noah commented:

Note that Mankiw has stated numerous times that he is a "stimulus skeptic." In general, he has been coy on the subject. On one hand, he has never claimed outright (as have many prominent "neoclassical" economists) that stimulus is incapable of boosting growth, and he has extolled the virtue of tax cuts (though he has left it unclear whether he believes they work via demand-side effects). But he has also said that he doesn't think Obama's stimulus was very effective, and he linked uncritically to a paper that purported to show that the stimulus destroyed jobs overall…. As Bob Lucas once said, "I guess everyone is a Keynesian in a foxhole." We're certainly in a foxhole right now…

Today Mankiw protests:

Greg Mankiw's Blog: Coy or Nuanced?: I have never asserted that the Obama stimulus was a complete failure in expanding aggregate demand.  Instead, I have suggested that there might well have been much better ways to promote recovery…. [F]rom a welfare standpoint, "conventional fiscal policy is the demand management tool of last resort."  In other words, in that model, conventional fiscal policy is effective, but it is still not the best tool to take off the shelf when facing a collapse in aggregate demand. Some may think I am being coy.  I consider myself nuanced and open-minded…

Alas! Mankiw's claim back in the summer of 2010 that the Recovery Act was significantly less effective than Romer-Bernstein had originally estimated--that $1,521 billion was less than $1,083 billion--did not strike any of us here at Berkeley as nuanced and open-minded. Nor did his attempt to demonstrate that spending increases were relatively ineffective by comparing Ramey kumquats to Romer and Romer oranges strike us out here as nuanced and open-minded.

More important, it seems to me that the claim that "conventional fiscal policy is the demand management tool of last resort" is neither nuanced nor open-minded when applied to the current situation.

The U.S. government right now can borrow at a nominal rate of 2.24%/year for ten years in an environment where expected ten-year inflation is around 2.5%/year. The short-term nominal interest rates the Fed usually targets are zero, turning its preferred policy tool--open-market operations--into relatively ineffective swaps of one zero-yield government asset for another. Asset prices tell us that our current macroeconomic distress is that the private sector is desperately hungry not for liquidity (which could be provided for the Federal Reserve) or savings vehicles of substantial duration (which could be provided by inducing businesses to invest) but rather for safe assets, which right now can most easily be provided by having credit-worthy governments spend and borrow.

An open-minded and nuanced look at the current situation strongly leads to the conclusion that conventional fiscal policy is, in situations like today, the demand management tool of first resort.

In Which Charlie Stross Complains That California Is Insufficiently Terraformed...

The reason that the Lincoln Town Car is available as a "free" rental car "upgrade" is that nobody wants to drive a Lincoln Town Car: its gas mileage is too poor for anybody driving The Five to want it, and its handling characteristics are such as to make driving it on The One a knuckle-whitening experience.

Nevertheless, Charlie Stross appears to have survived…

But let us add "never drive a Lincoln Town Car on The One" to "never get involved in a land war in Asia", "never go up against a Sicilian when death is on the line", "never accept a battle of wits where iocane powder is a factor", "never call your own website 'poor and stupid'", "never attempt a reductio ad absurdum argument on talk radio", "never read My Pet Goat when death is on the line", "never blithely download and install a file from Microsoft without carefully, carefully researching what it will do beforehand", "never post about human genetics on you weblog", "never play poker with a man called 'Doc'", "never eat at a place called 'Mom's'", and "never use vodka to try to remove bloodstains from white linen", and "never fire your best polemicist if your dork quotient is over 30%"…

Back again: My wife and I needed to be in Portland by Friday evening... so we hired a car and drove. Note: this was the first time in 18 years that I'd attempted to drive on the wrong side of the road.

Things I learned:

  1. California State Route 1 is a scenic route, for values of "best enjoyed from a helicopter or light plane". I would, however, characterise it as somewhat more exciting than one wants if the objective is to get from SF to Portland within a fixed time frame… landslides, holes in the crash barriers on cliff-edge hairpin bends, and lots of detours around trees…..

  2. A Lincoln Town Car is not the right vehicle in which to enjoy Highway One…. (In my defense, we don't have Lincoln Town Cars in the UK….)

  3. The combination of charming cliffside switchbacks and a five litre V8 results in gas mileage such that it's a good thing for my wallet that fuel is so cheap in California. About the rural gas station where they only take cash and amuse themselves with a banjo between customers we'll say no more.

  4. Dear brown black bear, please learn to look both ways before bounding across the road twenty metres in front of a wheeled avatar of Father Darwin. This will enhance your life expectancy, not to mention that of the folks in the car….

  5. Highways 101 and 199 were better than Highway 1, and still scenic (for values of "where did that three metre wide tree jump out from?")….

  6. A Lincoln Town Car is the right vehicle for pounding up the interstate [The Five] we eventually decided to divert onto. Still, no love — as I discovered after I accidentally did 450 miles on the second day then nearly collapsed…

Let me just say that driving the whole Ellay-Portland route on The Five has scenic charms of its own to not quite match those of The One but that are still very impressive: whether the aqueduct-siphons cresting the ridge to your right around Santa Clarita, the long descent from the Angeles National Forest--for a value of forest = "high desert"--to the Central Valley with its runaway truck ramps, the straight shot across the Central Valley itsef--land of heat (dry heat), sunshine, phosphates, soil, flatness, and huge amounts of water from the Sierra snowmelt--the CHiP fixed-wing aircraft followed by the appearance of people in mirrored sunglasses writing tickets, the exploded caldera of Lassen off to the right, the distant snow peak of Shasta visible from more than 100 miles south on a clear day as a floating island in the sky, the unexploded peak of Shasta as you pass by, the high prairie (and if you are lucky, a thunder snow storm) between Shasta and the Oregon border, Grant's Pass, the Willamette garden spot, Mt. Hood off to the right, and ending up at the Columbia River and the exploded caldera of Mt. St. Helens

Unemployment of 9%+ for 28 Months Is a National Emergency

And on current policies, current forecasts tell us that unemployment will have stayed above 9% for 48 months before it drops into the 8s.

Christina Romer:

From World War II, Economic Lessons for Today: Could the Great Recession of 2008 drag on for years, just as the Great Depression did in the 1930s? Adding to the despair is the oft-repeated notion that it took World War II to end the economic nightmare of the ’30s.... Look more closely at history and you’ll see that the truth is much more complicated — and less gloomy... the wrenching wartime experience provides a message of hope for our troubled economy today: we have the tools to deal with our problems, if only policy makers will use them.... [T]he war first affected the economy through monetary developments. Starting in the mid-1930s, Hitler’s aggression caused capital flight from Europe. People wanted to invest somewhere safer.... Under the gold standard of that time, the flight to safety caused large gold flows to America. The Treasury Department under President Franklin D. Roosevelt used that inflow to increase the money supply. The result was an aggressive monetary expansion.... From 1933 to 1937, real gross domestic product grew at an annual rate of almost 10 percent, and unemployment fell from 25 percent to 14. To put that in perspective, G.D.P. growth has averaged just 2.5 percent in the current recovery, and unemployment has barely budged.... Monetary expansion was very effective in the mid-1930s, even though nominal interest rates were near zero, as they are today....

One reason the Depression dragged on so long was that the rapid recovery of the mid-1930s was interrupted by a second severe recession in late 1937. Though many factors had a role in the “recession within a recession,” monetary and fiscal policy retrenchment were central.... The lesson here is to beware of withdrawing policy support too soon. A switch to contractionary policy before the economy is fully recovered can cause the economy to decline again....

[F]iscal stimulus can help a depressed economy recover — an idea supported by new studies of the 2009 stimulus package. Additional short-run tax cuts or increases in government investment would help deal with our unemployment crisis.

What of the idea that monetary and fiscal policy can do little if unemployment is caused by structural factors, like a mismatch between workers’ skills and available jobs?... [S]ich factors are probably small today. But World War II has something to tell us here, too. Because nearly 10 million men of prime working age were drafted into the military, there was a huge skills gap between the jobs that needed to be done on the home front and the remaining work force. Yet businesses and workers found a way to get the job done.... Here the lesson is that demand is crucial — and that jobs don’t go unfilled for long....

Finally, what about the national debt?... Well, at the end of World War II, that ratio hit 109 percent — one and a half times as high as it is now. Yet this had no obvious adverse consequences for growth or our ability to borrow....

In place of the tepid budget agreement now in place, we could pass a bold plan with more short-run spending increases and tax cuts, coupled with much more serious, phased-in deficit reduction.... Equally important, someone needs to explain to the nation and to world markets just why we must increase the debt in the short run. Unemployment of roughly 9 percent for 28 months and counting is a national emergency...

The Bad Thing About Cutting the Deficit Right Now

Daniel Davies:

D-squared Digest -- FOR bigger pies and shorter hours and AGAINST more or less everything else: Just to be clear on this, as I think some people are confused. The bad thing about cutting the federal deficit is not that it might affect Social Security or Medicare. Even if these were totally ringfenced it would be a bad idea. The bad thing about cutting the federal deficit is not that some other virtuous program might be defunded. Even if all the savings came from military procurement it would be a bad idea. The bad thing about cutting the federal deficit is not that it "shrinks the state". Even if all the deficit cuts were obtained by tax rises it would still be a bad idea. The bad thing about cutting the federal deficit is not that the burden falls disproportionately on the poor. Even if the deficit were reduced specifically by taxes which only fell on the top 1% of the income distribution it would still be a bad idea.

The bad thing about cutting the federal deficit is that unemployment is very high and interest rates are very low. Given that, taxing productive activity to pay down debt is really obviously the wrong thing to do, and borrowing money to employ currently unemployed resources is really obviously the right thing to do. It would not need to be spent on "shovel-ready" projects. By definition, for purposes of expansionary fiscal policy, anything you can spend money on is shovel ready. It doesn't have to be spent on vital infrastructure. Even completely pointless activity would be better than nothing. In some cases, even actually destructive activity, like war, has had a stimulative effect on the domestic economy.

The basic issue, and the one which ought to have people running around like their hair is on fire, is the unemployment rate. That, combined with the interest rate, shows you that deficit reduction is the stupidest possible policy at the current time. This is a very important issue, and the current President of the USA is on the wrong side of it.

FDR and WSC Liveblog World War II: August 14, 1941

The Atlantic Charter:

The Avalon Project : THE ATLANTIC CHARTER: The President of the United States of America and the Prime Minister, Mr. Churchill, representing His Majesty's Government in the United Kingdom, being met together, deem it right to make known certain common principles in the national policies of their respective countries on which they base their hopes for a better future for the world.

First, their countries seek no aggrandizement, territorial or other;

Second, they desire to see no territorial changes that do not accord with the freely expressed wishes of the peoples concerned;

Third, they respect the right of all peoples to choose the form of government under which they will live; and they wish to see sovereign rights and self government restored to those who have been forcibly deprived of them;

Fourth, they will endeavor, with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity;

Fifth, they desire to bring about the fullest collaboration between all nations in the economic field with the object of securing, for all, improved labor standards, economic advancement and social security;

Sixth, after the final destruction of the Nazi tyranny, they hope to see established a peace which will afford to all nations the means of dwelling in safety within their own boundaries, and which will afford assurance that all the men in all lands may live out their lives in freedom from fear and want;

Seventh, such a peace should enable all men to traverse the high seas and oceans without hindrance;

Eighth, they believe that all of the nations of the world, for realistic as well as spiritual reasons must come to the abandonment of the use of force. Since no future peace can be maintained if land, sea or air armaments continue to be employed by nations which threaten, or may threaten, aggression outside of their frontiers, they believe, pending the establishment of a wider and permanent system of general security, that the disarmament of such nations is essential. They will likewise aid and encourage all other practicable measure which will lighten for peace-loving peoples the crushing burden of armaments.

Obsolete Dogma: The Don Quixote Economics of the Fed Dissenters

The scary thing is that Dudley is the only bank president who votes with Bernanke on the FOMC these days:

Obsolete Dogma: The Don Quixote Economics of the Fed Dissenters: Confronted with subdued inflation expectations and a deteriorating jobs market, the Fed dissenters insist that the reverse is true. This is Don Quixote economics: waging war on imaginary problems while real ones persist unabated. It reflects little more than irrational angst over unconventional monetary policy, coupled with a misplaced conviction that any uptick in inflation augurs the return of stagflation. Regrettably, empirical evidence will not convince the inflation hawks that it is not 1980, nor will the continuing jobs crisis move them to act. As long as inflation runs between 1-2%, they consider it mission accomplished. Meanwhile, the economy is falling even further below its long-term trend.

Mark Thoma Watches the White House Lose to Itself in Eleven Dimensional Chess


Economist's View: White House Debates Giving Up on Helping the Economy: Apparently one of the things holding up a push to put people back to work is worries that the GOP might chant "tax-and-spenders," and the administration's demonstrated inability to respond or defend itself in response would harm Obama's reelection chances. In any case, the administration promised it would put doing what's right ahead of doing what's best for reelection. This is how you convince yourself that your reelection rather than, say, job creation is the most important thing to focus on:

Administration officials, frustrated by the intransigence of House Republicans, have increasingly concluded that the best thing Mr. Obama can do for the economy may be winning a second term, with a mandate to advance his ideas on deficit reduction, entitlement changes…

The best thing the administration can do is abandon support for struggling households now so Obama can get reelected and reduce social insurance programs that help struggling households?

The administration should put its effort into job creation and talk of little else (though mortgage relief is also high on the list). If Republicans go along, great, households need jobs. If not, it's up to the administration to make sure it's their loss.

Me? I have always thought that handicapping the political future is very difficult, that doing the right thing gets you a stronger economy which does improve the political climate, that there is no honor in pursuing bad policies that make the country worse off in order to get reelected and then losing, and thus that it is always best to try to do the right thing--then, at least, you aren't left looking at yourself in the mirror afterwards thinking that it would have been better for the country and the world if you had never been born.

Department of "Huh?!": I Really Do Not Understand the Obama White House

Calculated Risk writes:

Calculated Risk: White House Debates Doing Little or Nothing: This is depressing ...from the NY Times: "White House Debates Fight on Economy":

Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. These include free trade agreements and improved patent protections for inventors. But others, including Gene Sperling, Mr. Obama’s chief economic adviser [argue] for bigger ideas like tax incentives for businesses that hire more workers…

Tax incentives are the "bigger idea"? It sounds like the debate is between doing nothing and doing very little.

If I arrived on the scene today - with a 9.1% unemployment rate and about 4.6 million homes with seriously delinquent mortgages or REO - I'd be arguing for an aggressive policy response.

If Herbert Hoover were president today, he would be using the Treasury and the Federal Reserve to try to fix the housing market and boost infrastructure spending. There is a lot of running room for Federal Reserve and Treasury action to boost the flow of spending even though nothing can get through Congress. FHLB and RFC, anybody?

And your two Federal Reserve governors.

“Not Even Wrong” Is Not Praise

The collapse of intellectual standards in macroeconomics is truly amazing...

John Quiggin does some intellectual garbage pickup:

“Not even wrong” is not praise: [A] commenter pointed me to this piece by Stephen Williamson of Washington University at St Louis, who has apparently been asked to review the book for the Journal of Economic Literature. Williamson claims that I am badly confused about the EMH, and that

Market efficiency is simply an assumption of rationality. As such it has no implications. If it has no implications, it can’t be wrong.

He follows up with “Like the “efficient markets hypothesis,” DSGE has no implications, and therefore can’t be wrong.””

That’s right, Williamson not only defends the EMH on the basis that it’s not even wrong, but follows up by making the same claim about the whole of modern macro. Those are, quite literally, his only criticisms of these chapters. His commenters (none of whom seem particularly favorably inclined towards me) try to suggest that isn’t the most effective line of attack, but he comprehensively misses the point.

Williamson’s comments on my other chapters aren’t much better. He doesn’t present a single piece of empirical evidence. Responding to my chapter on Trickle Down, his only argument is

On some level, it seems obvious that economic growth benefits all residents of a country. Whatever my skill set, I would rather ply my trade in the United States than in Malawi.

Honestly, my lamest blog commenters can do better than that, and the same is true his snarky comments on the privatisation chapter.

How Many Layers Are There Here?

From George Bernard Shaw, Candida:

Act I: BURGESS [in a paroxysm of public spirit]: I acted in the interest of the ratepayers, James. It was the lowest tender: you can't deny that.

MORELL: Yes, the lowest, because you paid worse wages than any other employer--starvation wages--aye, worse than starvation wages--to the women who made the clothing. Your wages would have driven them to the streets to keep body and soul together. [Getting angrier and. angrier.] Those women were my parishioners. I shamed the Guardians out of accepting your tender: I shamed the ratepayers out of letting them do it: I shamed everybody but you. [Boiling over.] How dare you, sir, come here and offer to forgive me, and talk about your daughter, and--

BURGESS: Easy, James, easy, easy. Don't git hinto a fluster about nothink. I've howned I was wrong.

MORELL [fuming about]: Have you? I didn't hear you.

BURGESS: Of course I did. I hown it now. Come: I harsk your pardon for the letter I wrote you. Is that enough?

MORELL [snapping his fingers]: That's nothing. Have you raised the wages?

BURGESS [triumphantly]: Yes.

MORELL [stopping dead]: What!

BURGESS [unctuously]: I've turned a moddle hemployer. I don't hemploy no women now: they're all sacked; and the work is done by machinery. Not a man 'as less than sixpence a hour; and the skilled 'ands gits the Trade Union rate. [Proudly.] What 'ave you to say to me now?

MORELL [overwhelmed]: Is it possible! Well, there's more joy in heaven over one sinner that repenteth-- [Going to Burgess with an explosion of apologetic cordiality.] My dear Burgess, I most heartily beg your pardon for my hard thoughts of you. [Grasps his hand.] And now, don't you feel the better for the change? Come, confess, you're happier. You look happier.

BURGESS [ruefully]: Well, p'raps I do. I s'pose I must, since you notice it. At all events, I git my contrax asseppit [accepted] by the County Council. [Savagely.] They dussent'ave nothink to do with me unless I paid fair wages--curse 'em for a parcel o' meddlin' fools!

My economist's response is that Shaw is portraying Morell as a total prating ass: inducing their employers to substitute capital for labor and fire all their female workers does not make the female ex-workers better off at all, and should be greeted nt with enthusiasm but rather horror by their supporters. But is that the lesson Shaw draws? I am not sure...

Science Fiction: Jo Walton on C.J. Cherryh’s Cyteen

Jo Walton:

Designing people and societies: C.J. Cherryh’s Cyteen | Cherryh has ruined me for a lot of scifi. I think Heavy Time/Hellburner/Downbelow Station/Cyteen/Forty Thousand in Gehenna read together is a near perfect experience. I love the micro/macro implications to human development and that she stuck with the universe long enough for us as readers to see the payoff for a lot of it. The need to keep the human identity even as people expand out into space. Realizing if you don't make a plan perhaps someday a branch of the human race might come back generations later as alien to you as you are to them...

Policy Proposals to Boost Employment in Obama's 2010 State of the Union Address

I must say I don't know what quadrant Andrew Sabl is in these days.

Andrew Sabl writes:

For crying out loud: "I’m the process of moving house, and admit that I got to Friday morning’s Krugman column 24 hours after every other blogger. But I couldn’t let this go. Quoth Krugman:

For more than a year and a half — ever since President Obama chose to make deficits, not jobs, the central focus of the 2010 State of the Union address — we’ve had a public conversation that has been dominated by budget concerns, while almost ignoring unemployment.

Krugman should turn off the rage long enough to read the damn speech. Except for the parts that defended the stimulus and the Affordable Care Act, practically the whole thing was about job creation…

Let's roll the videotape:

Remarks by the President in State of the Union Address: I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat….

Tomorrow, I'll visit Tampa, Florida, where workers will soon break ground on a new high-speed railroad…. There are projects like that all across this country that will create jobs and help move our nation's goods, services, and information. We should put more Americans to work building clean energy facilities and give rebates to Americans who make their homes more energy-efficient, which supports clean energy jobs. And to encourage these and other businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America.nNow, the House has passed a jobs bill that includes some of these steps. As the first order of business this year, I urge the Senate to do the same, and I know they will….

But the truth is, these steps won't make up for the seven million jobs that we've lost over the last two years.  The only way to move to full employment is to lay a new foundation for long-term economic growth, and finally address the problems that America's families have confronted for years…. it's time to get serious about fixing the problems that are hampering our growth.

Now, one place to start is serious financial reform….

Next, we need to encourage American innovation….

Third, we need to export more of our goods….

Fourth, we need to invest in the skills and education of our people….

This year, we will step up refinancing so that homeowners can move into more affordable mortgages. And it is precisely to relieve the burden on middle-class families that we still need health insurance reform….

Now, even as health care reform would reduce our deficit, it's not enough to dig us out of a massive fiscal hole in which we find ourselves…. [I]f we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit.  But we took office amid a crisis.  And our efforts to prevent a second depression have added another $1 trillion to our national debt.  That, too, is a fact…. So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. Starting in 2011, we are prepared to freeze government spending for three years…. We will continue to go through the budget, line by line, page by page, to eliminate programs that we can't afford and don't work.  We've already identified $20 billion in savings for next year…. I've called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. This can't be one of those Washington gimmicks that lets us pretend we solved a problem.  The commission will have to provide a specific set of solutions by a certain deadline. Now, yesterday, the Senate blocked a bill that would have created this commission.  So I'll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans…

Those were the two new policy proposals of Obama's 2010 State of the Union: the Simpson-Bowles Commission, and a federal spending freeze. Yes, there were 24 mentions of "jobs" and only 14 mentions of "deficit", but the only (small beer) thing Obama asked for that might have actually reduced the unemployment rate was his plea for the Senate to pass the House employment bill.

Hoisted from Mark Thoma's Archives: Clarida and DeLong on Fiscal (and Monetary) Policy

From March 16, 2009:

Economist's View: Clarida and DeLong on Fiscal Policy: Two views on fiscal policy from Brad DeLong and Richard Clarida. First, Clarida who has doubts about fiscal policy (and he isn't so sure about monetary policy either), then DeLong who, like me, is more supportive of fiscal policy efforts. Richard Clarida:

A lot of bucks, but how much bang?, by Richard Clarida, Vox EU: “We have involved ourselves in a colossal muddle, having blundered in control of a delicate machine, the workings of which we do not understand” - John Maynard Keynes, “The Great Slump of 1930”, published December 1930…. [T]here are, at last, a ‘lot of bucks’ now committed by policymakers to address the global recession and the global financial crisis, but there is real doubt about how much ‘bang’ we can expect from these bucks.

In the US, President Obama has just signed a nearly 800 billion dollar stimulus package and the Fed has cut the Federal Funds rate to zero…. To date, however, these traditional policies have been insufficient for the scale and scope of the task…. The Obama package includes tax cuts and credits that will provide a boost to disposable income, but how much of these will be spent rather than saved or used to pay down debt? The package also includes a substantial increase in infrastructure spending, as well as transfers to the states, but the infrastructure spending is back-loaded to 2010 and later, and the transfers to states will most likely just enable states to maintain public employment, not expand it appreciably…. Because of the severe damage to the system of credit intermediation through banks and securitisation, policy multipliers are likely to be disappointingly small compared with historical estimates of their importance…. Historically, multipliers on government spending are estimated to be in the range of 1.5 to 2, while multipliers for tax cuts can be much smaller, say 0.5 to 1. But these estimates are from periods when households could – and did – use tax cuts as a down payment on a car or to cover the closing costs on a mortgage refinance…. With the credit markets impaired, tax cuts and income earned from government spending on goods and services will not be leveraged by the financial system to nearly such an extent, resulting in (much) smaller multipliers…. Even if the global financial system soon restores some semblance of order and function, the collapse in global equity and housing market values has so impaired household wealth that private consumption (which represents 60% to 70% of GDP in G7 countries) is likely to lag – not lead – economic growth for some time….

So where does this leave us? A LOT is riding on the efforts of the Fed and other central banks to stabilise the financial system and restore the flow of credit. Officials recognising these challenges are now seriously considering “non-traditional” policies that combine monetary and fiscal elements…. Altogether, between the MBS, CPFF, and TALF programs, the Fed is committing nearly 2 trillion dollars of financing to the private sector. While these sums may be necessary to prevent an outright economic collapse that extends and deepens into 2011 and beyond, it is not clear to me that they are sufficient to turn the economy around so that it returns to robust growth…. If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability – and only if that is the case, in my view – there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery…. I am casting aside the contrary evidence and putting my ‘bucks’ on the Fed. But it is a close call.

Next, Brad DeLong:

My favourite line from Jaws is uttered police chief Martin Brody (Roy Scheider) when he finally sees the shark: “You are going to need a bigger boat.” We are at last seeing the shape of this downturn – and we are going to need a bigger fiscal stimulus than the deficit-spending package President Barack Obama pushed through the US Congress in February…. [F]our months from now we are going to want to do another round of government spending boosts and tax cuts to try to keep the unemployment rate from rising too much higher and capacity utilisation from falling too much lower. (And the legislative calendar means that we should start thinking about laying the groundwork for such a second round of stimulus right now; in order to be in the budget reconciliation bill that will pass the congress in August, provision for fiscal stimulus must be in the budget resolution that will pass the congress in April.) Moreover, if the next four months are months of worse-than-expected bad news – well, let’s not go there right now.

Getting another round of spending boosts and tax cuts will, however, be problematic….

[A]s we get ready to try to go and buy a bigger fiscal stimulus boat to deal with this Jaws recession, whose bite pushed the unemployment rate up to 8.1% in February, it is important to be clear why we ought to be doing this. And the first point that needs to be made is that the strange right-wing talking point that a government fiscal boost would not spur the economy because... because... well, it's not sure why... is badly mistaken at best and disingenuous at worst. But there are legitimate reasons to fear…. I classify these legitimate fears into four groups.

  1. Bottleneck-driven inflation. The fear is that although more deficit spending will increase total spending, and although businesses seeing increased demand for their products will indeed try to hire more workers to boost production, they will succeed only by offering their new workers higher wages – wages higher enough that they then have to boost their prices – and by snatching scarce commodities out of the supply chain by paying more and then having to boost their prices more as well….

  2. Capital flight-driven inflation. The fear is that the stimulus package will cause foreign holders of domestic bonds to believe that inflation is on the way and trigger a mass sell-off of US Treasuries and other dollar-denominated assets that will push the value of the dollar down. And as the value of the dollar falls, the dollar prices of imported goods and services rise – and we are off to the inflation races once again.

  3. Crowding-out of investment spending. The fear is that additional government borrowing may – not will, not must, but may, for this is a fear not a certainty – push up interest rates, make financing expansion even more expensive for businesses, and so discourage private investment. The boost to spending would thus come at a high cost-benefit ratio….

  4. Reaching the limits of debt capacity. The fear is that the long-term costs of additional fiscal boosts via deficit spending will be very large because those from whom the US government will have to borrow the money to finance spending will only loan it on lousy terms….

All of these are legitimate fears when a government undertakes a deficit-spending plan…. These four fears are all legitimate fears, but I believe that we, here, now do not need to fear them. In each of the cases in which these fears are legitimate, we can see in advance that the stimulus program is going wrong. Stimulus packages produce increases in nominal but not real demand when exchange rates fall and prices rise; we can watch the exchange rates fall and the prices rise, and we can watch as financial markets anticipate these events beforehand. Stimulus packages crowd-out private investment when the government’s borrowing causes medium-term interest rates on corporate borrowings to rise. Stimulus packages impose a heavy financing burden on the government when they cause long-term interest rates on government securities to rise….

Right now, however, we see none of these things. No signs of bottleneck-driven or wage-push inflation gathering force. No signs of approaching rapid dollar depreciation. No signs that the stimulus is pushing up medium-term interest rates on corporate borrowing. No signs that the stimulus is pushing up long-term interest rates on government bonds.

If any of these start to materialise, expect me and a number of other stimulus advocates to start backpedalling rapidly. But so far, so good.

Fed Austerity Dissenters Believe That They Are Entitled to Their Own Facts

Paul Krugman:

Economics and Politics: [T]he claim is that Narayana Kocherlakota, and presumably the other Fed dissenters, are “sticking to economic facts“, basing their opposition to expansionary policies on falling unemployment and rising inflation…. Kocherlakota seems to have been very selective… [the] fall in the unemployment rate is basically a statistical artifact, not reflecting actual job gains…. And… there is good reason to believe that the modest rise in core inflation was a blip driven by commodity prices, and is already fading out…. [T]his isn’t fact-based policy. The Fed dissenters are obviously looking for excuses to pursue tight policies; they’re looking at the facts only in search of support for their prejudices. As the old line goes, they’re using evidence the way a drunk uses a lamppost: for support, not illumination.

Mark Thoma:

What Was Kocherlakota Thinking When He Dissented on Monetary Policy?: Narayana Kocherlakota makes it clear that the rate at which the recovery is proceeding is just fine with him…. "[W]ell-calibrated" should include both the direction and pace of change. Even if the direction is correct, is he satisfied with the pace of change for employment? I realize he thinks we will have to tighten in 3-6 months, but it's hard to see how a data-based projection takes you to this outcome….

[T]his is not a rock solid commitment from the Fed. This is their view of the most likely path for the federal funds rate, they have not said this is what they will do independent of how the data evolve. All they have said is that economic conditions are likely to warrant this outcome. The dissenters seem to believe that another outcome is more likely, the view is that economic conditions will force the Fed into a different posture -- you know, that high inflation and rapid recovery we've been seeing to date -- in as soon as 3-6 months. Anything is possible, but again, it's hard to see how recent data point to this outcome.

Matt Rognlie:

Macroeconomics in action | Matt Rognlie: We can only conclude that Fisher, Kocherlakota, and Plosser are not interested in even a mild expansionary commitment of the kind in the August 9 statement. This would be understandable if they had some alternative proposal—say, an aggressive price level target—for escaping the current morass. In reality, however, their votes seem to be determined (at least for Fisher and Plosser) mainly by a wildly distorted view of macroeconomic conditions. Fortunately, the rest of the FOMC is a little more worried about the worst recession the United States has endured in over a half-century, and less sanguine about the prospects for recovery…

It is at moments like this that it would be very useful to have two additional Fed governors who see reality in the FOMC meetings.


I had thought the White House had nominated Dan Tarullo for the second Fed vice-chair slot. Shows what I know:

David Wessel: Congress last year created a second vice chairman's post at the Fed, this one for bank supervision and regulation policy. The White House has been expected to nominate current Fed governor Daniel Tarullo for that post.

Department of "Huh!?": Can't Anybody in the Obama Administration Play This Game Edition

David Wessel:

White House Identifies Two Economists for Fed Boar: The Obama administration has narrowed its search for candidates for two empty seats on the seven-member Federal Reserve Board to a pair of economists, one Democrat and one Republican…. Jeremy Stein… and Richard Clarida…. Mr. Stein did a stint in the White House at the beginning of Barack Obama's presidency. Mr. Clarida was a Treasury official in the early years of the George W. Bush administration.

The administration coalesced around the names a few months ago, hoping that pairing a Republican with a Democrat would smooth the way for Senate confirmation. But the White House has yet to formally nominate either and could change course depending on the political environment and the men's circumstances…

If they decided "coalesced around" Jeremy and Richard months ago, why didn't they nominate Jeremy and Richard months ago? Why are they saying that they "could change course"?

It's not as though they have been first off the mark in staffing up the Fed so far, and can take a break. Both would be very good voices on the FOMC. And both would have been very good voices on the FOMC three months ago. Or six months ago.

Depatment of "Huh?!": Is Narayana Kocherlakota Serious? Department

Neal Lipschutz

Sticking to Economic Facts at the Fed: Here’s Kocherlakota again on why he dissented on Aug. 9:

I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November.

The unemployment rate has indeed fallen since November--albeit not since January:

FRED Graph  St Louis Fed 7

However, the employment-to-population ratio looks somewhat worse than it looked in November--not better:

FRED Graph  St Louis Fed 6

A fall in the unemployment rate associated with a fall in the employment-to-population ratio is not a sign of a strengthening but a weakening labor market. Only a cherry-picker could disagree.

Our View of the Golden Gate and San Francisco This Morning...

Mail 2 048×1 536 pixels

With the imminent departure of the Youngest Child for college, we have sold our five-acre Mediterranean palazzino in Lafayette--the land beyond the tunnel--and are renting a small house for six months in Berkeley at the top of Grizzly Peak (because I was hinky about running the risk of owning two houses in a largely-frozen yet still overpriced housing market).

So now we have a comfortable hunk of change to serve as a down payment on our next: over 15 years 30% cumulative inflation, 20% real house price appreciation, 30% improvements that our buyers were willing to pay for, and 40% forced savings via amortization of the nominal principal do add up. Where should we buy next>

Liquidity Traps

Paul Krugman comments on David Wessel:

Liquidity Traps in the WSJ: David Wessel has a pretty good summary. Two things worth noting.

  1. Some of us did not come into this crisis cold: we’d been worrying about exactly this kind of situation since the 1990s, and it has played out very much the way those 1990s-vintage analyses said it would. That’s one reason it has been so frustrating to watch (a) policy makers totally flubbing it (b) economists who had no room for such a crisis in their philosophy making stuff up to rationalize events that should have made them rethink everything they thought they knew.

  2. Lars Svensson’s solution for a liquidity trap — which actually involved devaluing first, then raising the inflation target — was clever. But it won’t work when most of the world is in a liquidity trap, because we can’t all devalue against each other.

Balanced-Budget Amendments, Automatic Stabilizers, and Fiscal Policy

A correspondent emails:

Mankiw is advising Romney and Romney is for a balanced budget amendment. Isn't that worth a little discussion on the Delong blog? Does Greg disagree with his candidate? Does his textbook?

Asked and answered: N. Gregory Mankiw, Principles of Economics:

Principles of economics  Google Books

Principles of economics  Google Books 1

The Mystery of Why Anybody Reads the Wall Street Journal Editorial Page

Paul Krugman. No link because the New York Times website has delinked my online account from my paper subscription:

[Wall Street Journal] May 29, 2009:

They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession...

What does it take for a media outlet to be permanently disbarred from making economic commentary?

But here’s the thing: it wasn’t just the WSJ. Pundits, Very Serious Politicians, and more have spent the past two years plus doing everything they can to make the deficit the center of public discourse, to focus all our fears on the attack by bond vigilantes that was supposedly just over the horizon. And now it turns out that what really terrifies the markets, let alone the suffering unemployed, is the prospect of a second Great Depression — a prospect that has become much more likely thanks to the utter wrongness of elite policy priorities.

Great work, guys.


I don’t have time to do all the references, but here’s a quick summary of what Very Serious People have been saying over the past 2 1/2 years:

May 2009: Interest rates have risen on hopes of recovery, but lots of people claim that we’re seeing crowding out by government borrowing; the WSJ announces that the bond vigilantes, the “disciplinarians” of US policy, have arrived.

Fall 2009: Although rates keep refusing to soar, the story I hear is that it’s all because hedge funds are borrowing short and lending long, and that it’s going to end in grief any day now when this “carry trade” collapses. Obama goes on Fox and says that we have to cut the deficit or we’ll have a double dip.

May 2010: A slight rise in rates due to renewed optimism about recovery is described in news reports — and this is reported as a fact, not a speculation — as a sign of worries about US debt. Meanwhile, the OECD calls for immediate rate hikes.

Fall 2010-present: Despite the persistence of low rates, politicians and pundits state — again, as a fact, not a hypothesis — that we’re going to have a terrible crisis within 2 years if the deficit isn’t slashed.

Meanwhile, some us worked with a very different story: the Fed will determine short rates, and the long rate reflects expected future short rates. And the Fed will keep short rates near zero as long as the economy remains deeply depressed. So the long rate reflects beliefs about prospects for recovery, and hence of an eventual move off the zero-rate policy. According to this view, a weaker economy will push rates down even as it raises the deficit. And right now, with the 10-year rate at 2.19% — 2.19%! — the market is basically signaling that it doesn’t care a bit about the deficit, but that it’s terrified about growth prospects.

But I’m not a Serious Person.

Noah Smith: Greg Mankiw Thinks Obama's Stimulus Worked

A good catch from Noah Smith:

Noahpinion: Greg Mankiw thinks Obama's stimulus worked: Greg Mankiw's August 8 appearance on Larry Kudlow. At 3:27, Mankiw says:

Fiscal policy is going to be a drag going forward as the stimulus wears out…

So what Mankiw seems to be saying is that the Obama stimulus increased economic growth. Note that Mankiw has stated numerous times that he is a "stimulus skeptic." In general, he has been coy on the subject. On one hand, he has never claimed outright (as have many prominent "neoclassical" economists) that stimulus is incapable of boosting growth, and he has extolled the virtue of tax cuts (though he has left it unclear whether he believes they work via demand-side effects). But he has also said that he doesn't think Obama's stimulus was very effective, and he linked uncritically to a paper that purported to show that the stimulus destroyed jobs overall. Now, Mankiw seems to have revealed that, like John Taylor, he's a closet Keynesian… or, at least, that his views on the effects of government spending on growth are more nuanced than he usually admits. And by saying that the stimulus will soon "wear out," he is also admitting that his concern that "a spending-based stimulus to address the current short-term crisis might lead to a long-term increase in the size of government" was overblown. 

As Bob Lucas once said, "I guess everyone is a Keynesian in a foxhole." We're certainly in a foxhole right now…

The lesson I draw from this? That if you want to dodge and weave so that you can play on Team Republican (or Team Democrat) in pursuit of high federal office, you had better have a very, very good memory. If you don't, you may get yourself caught on video saying something that you believe but that you have been trying very hard not to say for years.

Life is a lot simpler if you just say what you think is going on--and why--all the time. For what good is it to attain high federal office if while you are there you spend your time shilling for policies you think are potentially disastrous--like Medicare Part D?

Mike Konczal Is Highly Shrill--and Thinks We Need a Different Way of Picking Fed Bank Presidents

The intellectual collapse of the Chicago School of Economics continues. Mike Konczal:

The Fed Dissenters, Or: Examining Narayana Kocherlakota’s Gut: [T]hree (three!) dissenters. How often has this happened? Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser all dissented…. What’s their motivation? We looked at Richard Fisher before.  In April 2011 his ”gut tells [him] that [QE2] will result in some unpleasant general price inflation” – something that was absolutely wrong….

But what is going on with Kocherlakota? Why is he dissenting in favor of tightening sooner?  Last time we saw him, he was talking about job openings taking off, numbers that turned out to be exaggerated by modeling assumptions at the BLS.  So that’s off the table.

What’s his deal now? Let’s go to his big discussion paper, "Labor Markets and Monetary Policy"…. [H]e uses a Diamond, Mortensen and Pissarides (DMP) model of unemployment…. First thing you should notice is that Kocherlakota of the Minneapolis Federal Reserve is basing his opinion on unemployment on an equation in which the Federal Reserve has no role.  Lots of people think the idea that the Fed can’t set a negative interest rate – that there is a “zero lower bound” – has something to do with our current problems.  Agree or don’t, there’s no possible way it impacts this model.  Product markets not clearing doesn’t factor into this model, which is all about how lazy workers are.  Some people, most notably Stanford economist Bob Hall, have tried to put the DMP model into a world of zero lower bounds and product markets not clearing and found results closer to our world – this isn’t mentioned in the report.

Second, many economists have tried to use this model to explain how unemployment spikes during a recession.  The main thing that would drive changes in unemployment in this model are changes to productivity.  As mentioned above, it was a major breakthrough when Shimer (2005) showed that there’s no way wild swings in productivity can cause the major swings in unemployment we’ve seen.  This goes double for the recent recession, where productivity has increased. As Hall pointed out:

First, Shimer’s (2005) influential paper showed than it would take a gigantic drop in productivity to cause the rise in unemployment in a typical recession, based on realistic values of the parameters of the DMP model. Second, productivity has increased in recent recessions…Productivity grew almost at normal rates during the huge contraction that started in 2008. To generate an increase in unemployment driven by productivity, an actual decline in productivity would be needed….

Here’s Kocherlakota, who explains a doubling of the unemployed with a (p-z) shift….

Given the enormous rise in the benefits of creating job openings, why weren’t firms creating more of them?  A common answer to this question is that firms face “insufficient aggregate demand.”…. But the DMP model suggests two other possible reasons…. [E]xpected after-tax productivity p fell. Over the past three years, the U.S. economy has experienced large increases in the federal budget deficits…. What about the utility that a person derives from not working? In response to the recession, the federal government extended the duration of unemployment insurance benefits…. [S]uppose that, for the reasons just mentioned, p fell by 10 percent in the past three years and z increased by 0.05 during this period. These are large changes, but they are not implausible…

There it is.  Job creators hate future taxes, and unemployment insurance has left our workforce weak, so don’t expect unemployment to come down anytime soon….

Where to begin?  If unemployment insurance extensions are causing a rampant increase in the time people are unemployed… you could compare the duration of unemployment for those who get unemployment insurance to quits and new entrants – or people that don’t get unemployment insurance.  If UI was causing unemployment, you’d see very different results.  In fact, Mary Daly, Bart Hobijn and Rob Valletta of the Federal Reserve Bank of San Francisco did this in January… “the results of this analysis suggests that the availability of extended unemployment benefits has increased the overall unemployment rate by about 0.4 to 0.8 percentage points”…. And why don’t we assume that “z” has gone up in this recession?  It is harder to find a job than in normal times per week of unemployment duration, outstanding debt loads hang larger over household net worth – having a job seems more important than ever.

If you believe that the natural rate of unemployment is near 9% because President Obama has terrified the job creators and the unemployed aren’t starving enough, I am unlikely to convince you otherwise using various forms of econometrics…