## Citigroup Resolution: Romer-Summers vs. Geithner-Emmanuel

From Ron Suskind's Confidence Men:

Some of it is that Tim had already tried to be "tough on banks"--with Lehmann Brothers--and it was a disaster. Some of it is clearly that Tim had no confirmed deputies, little ability to control the Treasury Building, and a huge amount of work to do, so some assignments were certain to get dropped on the floor.

## Why Oh Why Can't We Have a Better Press Corps?: This Is SImply Totally Unfair to Tim Geithner Edition

From Ron Suskind's Confidence Men:

The fact of the matter is that Tim Geithner had line responsibilities--and that he would not have been serving Obama well at all had he dropped them on the floor to attend the health care summit.

## In Which Barack Obama Flunks Bureaucratic Process 1...

From Ron Suskind's Confidence Men:

Not a good thing to do. Not a good thing at all.

In the spring of 2009, any such memo to the president should begin:

Back under the George H.W. Bush administration the ten-year Treasury bond rate was 9%/year. Now it is 3%/year. The possibility of a run on the Treasury bond is not one of the ten biggest and most urgent problems we face now.

But if you ask for a memo from Peter Orszag of OMB, not only is that sentence not the first sentence of the memo, that sentence is not in the memo at all.

## Reading Ron Suskind's "Confidence Men"...

Why does Ron Suskind believe that the Treasury Department's Assistant Secretary for Economic Policy "carries the additional title--dating back to the nineteenth century--of 'Chief Economist of the United States'"?

And here it is again, via the magic of Kindle book search:

assistant secretary of the Treasury for economic policy and--in a term dating back to the eighteenth century--the "chief economist of the United States". Another holder of that title was Paul Volcker, when he had this job in 1969.

Hmmm… I had thought that Paul Volcker in 1969 was Undersecretary of the Treasury for Monetary Affairs--not Assistant Secretary for Economic Policy--and that his portfolio included not just Economic Policy, but also International Affairs and one of the Domestic Finance branches as well--I forget which one.

## James Fallows: I Wonder If President Obama Really Believes This

James Fallows is puzzled:

I Wonder If President Obama Really Believes This: Read the two bits of testimony by Congressional staffers -- one Republican, one Democratic -- about the nihilist freefire zone that is the modern Congress. Then consider President Obama's Labor Day pledge:

We've got a lot more work to do to recover fully from this recession," Mr. Obama said. "I'm going to propose ways to put America back to work that both parties can agree to because I still believe both parties can work together to solve our problems.

An objective observer must of course conclude that in fact there is no way "to put America back to work that both parties can agree to," because not agreeing is, for today's Republican leadership, a paramount goal.

It is admirable, even touching, that the President of all the people states his faith that "both parties can work together to solve our problems." But can he actually "still believe" this? Based on what vote? By what Republican? On what bill? At what point during Obama's time in office? It is hard to imagine that he has not noticed the real-world evidence. So if he has observed reality and knows that no matter what he proposes the GOP simply will not sign on, what's the next move? And lot depends on whether and when the "Mr. Reasonable" strategy pays off"…

Put me down as somebody who believes that the President of the United States should not say things that he believes to be untrue. He is then relying on people's believing that they know what you really mean--that they are in on the con--to keep them from thinking that he is a fool. And being asked to believe that they are in on the con makes most people nervous, or should make most people nervous.

I don't like it.

## Judges Unclear on What "Free Country" Means

Timothy B. Lee:

Judge worries recording police will lead to excessive "snooping around": Judge Richard A. Posner... the constitutionality of the unusually strict Illinois wiretapping law, which makes it illegal to record someone without his consent even if the recording is done openly and in a public place. The ACLU was asking a panel of three judges from the US Court of Appeals for the Seventh Circuit to strike down the law on First Amendment grounds. But Judge Posner wasn't having it. "Once all this stuff can be recorded, there's going to be a lot more of this snooping around by reporters and bloggers," he said.

He was particularly worried that allowing recording would impact police work. "I'm always suspicious when the civil liberties people start telling the police how to do their business," he said. He speculated that gangs would love the ACLU's argument because recordings would make it easier to discover and retaliate against informants....

Last month, the United States Court of Appeals for the First Circuit handed down a unanimous ruling in the Simon Glik case. That case held that Glik had a "clearly-established" First Amendment right to record the actions of the police on the Boston Common, and that police officers should have known this when they arrested him. Civil libertarians are hoping a second ruling in Illinois will help cement the principle that audio recording is an activity protected by the First Amendment.

## Residential Construction and Government Purchases Are Much Bigger Trailing Sectors than Business Equipment

Just saying:

I do think that this is not a bad way to look at (much of) what is going on in the current Lesser Depression. The boom of the 1990s had been driven by rising exports and, overwhelmingly, business investment in equipment investment and software as Bill Clinton's stabilization of the U.S. government's long-term finances and his shrinkage of the government had unleashed a high-investment, high productivity growth recovery. The recession of 2001 was driven primarily by a fall in exports and secondarily by a fall in business equipment investment. The mid-2000s recovery was led by residential investment, with exports and business equipment investment adding support.

That takes us up to the end of 2005.

With the start of 2006, the housing bubble bursts and residential construction investment begins to decline as a percentage of potential GDP. But for the first two and a half years exports stand up as housing construction stands down and the economy remains near an even keel even with the growing financial turmoil.

Then in late 2008 the economy falls off a cliff: business investment in equipment and software collapses, housing investment collapses further to far below any equilibrium level, and exports collapse. Exports and business equipment and software investment start to recover in the third quarter of 2009. If only their good recovery performance had been matched by a recovery in residential investment and an increase in government purchases, we would due fine.

But there was no recovery in residential construction. There was no increase in government purchases. And starting in 2010 the shrinking government sector puts additinal downward pressure on the economy.

## Ezra Klein Claims That the Obama White House Has Finally--33 Months Late--Woken Up to Reality

and recognized that it cannot govern from the center by striking deals with Republicans.

Ezra:

Why the White House changed course: President Obama’s deficit-reduction plan (pdf) is most interesting for what’s not in it. It does not cut Social Security by “chaining” the program’s cost-of-living increases. It does not raise the eligibility age for Medicare from 65 to 67. Nor does it include any other major concessions to Republicans…. Since the election, the Obama administration’s working theory has been that the first-best outcome is striking a deal with Speaker John Boehner and, if that fails, the second-best outcome is showing that they genuinely, honestly wanted to strike a deal with Speaker John Boehner. That was the thinking that led the White House to reward the GOP’s debt-ceiling brinksmanship by offering Boehner a “grand bargain” that cut Social Security, raised the Medicare age, and included less new revenue than even the bipartisan Gang of Six had called for. It was also a theory that happened to fit Obama’s brand as a postpartisan uniter and his personal preferences for campaigning on achievements rather than against his opponents. But though it came close to happening, the “grand bargain” ultimately fell apart. Twice. The collapse of that deal taught them two things: Boehner doesn’t have the internal support in his caucus to strike a grand bargain with them, and the American people don’t give points for effort….

Perhaps the final and most conclusive evidence that the strategy had failed came last week, when Democrats lost special elections in Nevada and New York…. It was a far cry from the special election in May, when Democrat Kathy Hochul picked up a Republican-leaning seat by hammering her opponent’s support for Rep. Paul Ryan’s Medicare-slashing budget. The White House could have been hammering that message since the day the House Republican Conference passed Ryan’s budget. They didn’t. The truth is, they didn’t want to. The president doesn’t think of himself as that kind of Democrat…. And for the last few months, he gave what Sarah Palin might call “the hopey-changey thing” a shot. But it failed. The choice, it turned out, wasn’t between winning by making tough choices and hard compromises and winning by running as a populist. It was between losing because he was unable to get Washington to make tough choices and hard compromises and trying something else. So now the White House is trying something else.

The new theory goes something like this: The first-best outcome is still striking a grand bargain with the Republicans, and it’s more likely to happen if the Republicans worry that Democrats have found a clear, popular message that might win them the election. The better Obama looks in the polls, the more interested Republicans will become in a compromise that takes some of the Democrats’ most potent attacks off the table.

But the second-best outcome isn’t necessarily looking like the most reasonable guy in the room. It’s looking like the strongest leader in the room….

That isn’t how the White House would prefer to govern. It’s not how they would prefer to campaign. It is, let’s admit it, politics-as-usual. It’s the triumph of the old way of doing things, an admission that Washington proved too hard to change. But it’s also the only option they have left.

33 months is a very long time to take to mark your beliefs to reality. And I am still not confident that they have done so

## Double-Dip Watch: No Housing Recovery Department

Alan Zibel and Jeff Bater

Home Builders’ Sentiment Fell in September: The mood of U.S. home builders soured this month, as the industry coped with a stagnating economy and pessimism among consumers. The National Association of Home Builders said Monday its housing market index fell to 14 in September, down from 15 a month earlier. The results were worse than expected. Economists polled by Dow Jones Newswires had forecast a reading of 15.

## Liveblogging World War II: September 18, 1941

Nazis conquer Kiev.

## Menzie Chinn on Barro and Mankiw Investment Behavior and Policy Implications

Menzie Chinn:

Econbrowser: Investment Behavior and Policy Implications: Over the weekend, both Professors Barro and Mankiw wrote on investment… the focus on business fixed investment (BFI) or nonresidential investment was somewhat odd because BFI behavior had not been particularly anomalous…. [T]aking into account the depth of the recession, one finds that BFI is doing better than in the recovery from the previous recession (as well as the previous recession+recovery). It makes one wonder about this argument that great regulatory uncertainty is dampening business enthusiasm for capacity increases. After all, this bivariate logic would imply that regulatory uncertainty was greater in the years after the first Bush recession, relative to now….

Professor Mankiw [seeks]… "a cut in the taxation of income from corporate capital." I’ll just observe while the US corporate tax rate is relatively high, according to the CBO, it isn’t relative to other G-7, and the effective corporate tax rate is not particularly high…. Professor Barro['s]… fiscal reform package includes abolishing the corporate and estate taxes, implementing a VAT… cutting government spending… reducing regulatory uncertainty…

As Menzie noted, the truly screwy thing about both op-eds is that they both pretend that the problem that caused the recession was a downturn in business investment, with Barro saying not a word about construction and Mankiw only slightly better:

Barro:

How to Really Save the Economy: [T]he main driver of business cycles is investment… the main decline in G.D.P. during the recession showed up in the form of reduced investment…. What drives investment? Stable expectations of a sound economic environment…

Mankiw:

Business Investment as a Key to Recovery: "he most volatile component of G.D.P. over the business cycle is spending on investment…. From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent. The subpar recovery has coincided with a historically weak investment recovery. Compare our recent experience with that of the early 1980s, when the nation last experienc…. While the sluggish housing market can explain the slow pace of residential investment, it is not the whole story…

## Grading Obama Economic Policy: The First Year and a Half

The banking system collapse was averted.

The spike of the unemployment rate to 15% was averted.

Obama passed a pretty good regulatory reform.

Obama passed a pretty good health reform.

Obama passed the largest quick fiscal expansion he could get through congress (using Reconciliation would have taken a lot longer).

We are left with a jobless recovery, and with crippled mortgage finance and construction, and a ticking bomb in Europe.

But there was a policy process by which smart people with strong views argued about substance, and presented real options to the president, who chose. This sounds a lot like the Clinton administration--and we all remember Bob Woodward's The Agenda which was like "OMG! A contentious policy process! Who knew? I'm having an attack of the vapors!" until it became clear that the policies were working and that Clinton had a strong high-investment high-productivity growth recovery, at which point in time Woodward slunk off…

So all-in-all we are arguing over whether the economic policy team as a whole deserves a C+ or a B.

I would say the staff deserves a B. It is not Romer and Summers's fault that Bernanke-in-office forgot that the Fed has a dual mandate, or that Obama chose to go not with Romer-Summers but with Geithner.

Why Geithner and Obama thought their do-less policies were best is not something I have any insight into. We are in the lower tail of the distribution as it looked in March 2009, but not that far down in the tail...

## Greta van Susteren Is Puzzled by Ron Suskind

GVS:

What’s up with our corporate cousins Harper Collins? And author Ron Suskind? This is really odd…: Prior to publication, it is routine for publishers to send anchors copies of the author’s book so that the anchor can prepare for an interview with the author after the book comes out. I read the books of the authors I interview. With the advance copy comes an agreement to embargo the contents until publication date. That is routine. Author Ron Suskind has a new book out Confidence Men: Wall Street, Washington and the Education of a President. I asked one of my producers to do the routine – get the book and we would agree to embargo until the book comes out. What happened next was not routine and I think peculiar.

The producer told me that he contacted the publisher, our corporate cousins Harper Collins, for a book and received back that they would give us an advance copy but in exchange demanded that we agree not to contact anyone in the book about the book AFTER publication. Really? Not contact the people quoted? Or written about? What are they afraid of? That we will fact check the book? Well now, of course I am suspicious… what are they afraid of? And of course I will not sign any agreement like this. I am not going to be censored or hoodwinked.

What I also wonder is whether other news organizations or anchors DID agree to this. I don’t know what was asked of others. Maybe they were offered a different embargo agreement? I would love to know.

## Ezra Klein Says That James Pethokoukis Is Worth Reading But Not

I confess I have never thought him a good read--for reasons well laid out by Ezra Klein here:

A weak argument against the stimulus: Reuters’ conservative economics columnist James Pethokoukis is a good read... so I was looking forward to his longer take on whether President Obama made the recession worse.... Pethokoukis begins with a big claim:

Instead of saving us from a Greater Depression, the Obama stimulus (together with his health-care plan and financial reforms) was a two-year waste of precious time and money that may actually have impeded economic growth.

That goes further than even the stimulus’s most ardent detractors tend to tread. As Doug Holtz-Eakin, chief economic adviser to John McCain during the 2008 campaign and current president of the American Action Forum, told me, “the argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong. If you throw a trillion dollars at the economy it has an impact, and we needed to do something.”... So what evidence does Pethokoukis offer for his position? Almost no evidence, actually. And what he does have calls the rest of the article into question.

Pethokoukis’s first argument is that the White House’s “own economists predicted the stimulus would prevent the unemployment rate from hitting 8 percent...." [T]hough it’s fine as a politician’s dishonest soundbite, it’s disqualifying for a serious economic commentator.... In general, I have actually found this to be a useful test: When economic commentators use this argument, I know not to take them seriously, because they either don’t know the facts or aren’t letting them stand in the way of their argument....

[H]is second piece of evidence suffers from much the same problem.... Pethokoukis... quotes an analysis by John Taylor.... Dylan and I found that of the nine serious efforts to estimate the stimulus, six found substantial positive effects, two found no effect, and one found a slight effect. Taylor’s paper was nowhere near the most convincing of the bunch, and Taylor, a longtime spokesperson for Republican economic policies, is not the most convincing messenger, either. But Pethokoukis neither attempts to deal with the flaws in Taylor’s study — he gestures toward one of them and then misuses a quote Larry Summers gave me about “shovel-ready” infrastructure projects — or the contrary results in, say, Feyrer and Sacerdote.

That’s ... it...

## How Not to Keep Your Wirecutters from Walking Away

Cory Doctorow finds this:

## Looking Back on the First 2 3/4 Years of Obama Administration Economic Policy...

When a new administration takes office and attempts to settle on its economic policy, it needs to do three things:

1. Forecast what is most likely to happen.

2. Design and implement policies that will deal with what is likely to happen and put the economy on a trajectory toward a good outcome.

3. Think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well.

The last questions asked at every meeting should be:

• What if we are wrong in our estimation of the situation--what might the world then look like three years from now?
• What if more things go wrong in the next year or two--what might the world then look like three years from now?
• In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?

These three questions are a large part of what Robert Rubin means when he talks about the importance of "thinking probabilistically".

As I see it, the incoming Obama administration at the start of December 2008 did an excellent job at (1) and (2), completely and totally fell down on (3), and has continued to fall down on (3).

The major risks that confronted the Obama administration-to-be in December 2008 were, roughly:

1. That the moderate Republicans in the Congress would, rather than engaging in normal American governance, join their colleagues out of party loyalty and help them wage a scorched-earth war against all administration policies--even their own Republican policies--following the Gingrich playbook that the road to victory in the next election is to make the Democratic President be and appear to be a failure.

2. That the Federal Reserve would ignore half of its dual mandate, and be satisfied with policies that avoided deflation now matter what unemployment rate or capacity utilization rate those policies brought.

3. That the recovery that would follow once the recession was over would be a slow, hesitant, "jobless" recovery.

4. That the initial shock to the financial system and downturn would be much larger than anticipated as of early December 2008.

5. That mortgage finance might not resolve itself, and that construction might remain deeply depressed for a very long time.

6. That government attempts to support weak banking systems would set off a wave of sovereign debt crises that would then deepen the global downturn.

7. That repeated waves of expansionary policies might set off a dollar and sovereign debt crisis inside the United States.

Each of these seemed to me to have a 20% chance of coming to pass--large enough to require insurance.

To deal with the first, the Obama administration needed to set up the Budget Act Reconciliation process and to husband executive branch authority so that it could conduct large-scale expansionary economic policy via Reconciliation and loan guarantees and quantitative easing if Republicans filibustered and the economy was still in the dumps in 2010 and 2911.

To deal with the second the Obama administration needed to rapidly nominate and get confirmed Federal Reserve governors and a Federal Reserve Chair who would take the Federal Reserve's dual mandate very seriously indeed if unemployment was above 9% and stable or rising in 2010 and 2011.

To deal with (3) and (4) the administration needed to prepare the ground by doing more of what it had done to buy insurnace against (1) and (2)--by warning at every opportunity that the first round of expansionary policies might not be enough, by preparing the ground via Reconciliation and by husbanding executive branch authority, and by making sure not to abandon the fight against unemployment for the fight for long-run fiscal stability until the recovery was well-established--lest the administration wind up in 2010 and 2011 with a jobless recovery and few remaining tools to expand demand.

To deal with (5), the administration needed to prepare the ground for using the FNMA and the FHLMC to essentially nationalize, refinance, and work out mortgages nationwide should it turn out in 2010 or 2011 that that would become advisable.

To deal with (6), it would have been wise on day 1 to promote the IMF to the role of global technocratic crisis manager, and to get commitments from major credit-worthy economies that they would back the IMF with sufficient resources for it to actually handle the situation. should the mortgage-induced banking crisis of 2008-9 set off sovereign debt crisis in 2010-11.

I wasn't a genius to see these as the risks.

Yet the only risk that the Obama administration has appeared to even think about guarding against is (7)--which is the one risk that has not come home to roost bigtime.

For me the big question since March 2009 has been: why? Why didn't the Obama administration make any significant effort to purchase insurance against risks (1) through (6)?

## Next Time, Support the Unknown Southern or Midwestern Governor in the Presidential Primaries...

Elias Isquith:

Ron Suskind’s new book on Obama shows why you should vote for the boring bureaucrat: I hope Democrats remember these years in the future, if for no other reason than to take arguments of “experience” seriously. I didn’t in 2007-2008, and I’ve come to the conclusion since that that was a mistake.

Which is not to say that I imagine things would be going substantially differently or better under a President Clinton; but it’s not altogether impossible that they’d be going somewhat better, if for no other reason than Senator Clinton’s vast experience working within the DC catacombs, both from the stance of a pseudo executive and from the stance of a Senator. And, really, that’s it—that’s the only argument for Clinton that I think carries any weight today.

Because it’s not about her being “tough,” but rather it’s about recognition of the fact that, despite what the Presidential election may lead one to believe, in many respects (but with serious exceptions) our federal government operates in a pseudo parliamentarian manner. It’s not about the personality of this politician or that; it’s about parties. And if we keep this in mind, it means that we should really only judge potential Presidential nominees by two criteria: electability, and capacity to manage unruly and inefficient bureaucratic systems.

Otherwise, charisma, youth, idealism, savvy, all of it, gets slowly eaten-away, bit-by-bit, by one underling after another with their conflicting, often parochial, interests…

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

A.S. of the Economist seems really confused:

Social Security: The real truth about Social Security: SOCIAL SECURITY manages to be one of the most popular and misunderstood government programmes. It serves two purposes: to provide an income floor which keeps people out of poverty in retirement (a form of insurance), and to replace income from previous work (a forced saving scheme). There may be more efficient ways to achieve these goals, but generally, Social Security does a decent job at both.

But there is a stunning amount of ignorance when it comes to its financing. On the right, people like Rick Perry call it a Ponzi scheme based on lies. The left prefers to believe there's nothing wrong with the programme and figures when revenues and the trust fund can no longer cover benefit payments some simple accounting trick will save the day...

That is very odd. I thought that the left believed that Social Security's long-term financing problem is a fairly easy fix and the sooner it is done the cheaper it will be.

And then she says:

Social Security’s financing problems can be fixed, ideally with some combination of tax increases and progressive benefit cuts. It is a fairly easy fix and the sooner it is done the cheaper it will be.

## Waiting for the Long Run

Tyler Cowen claims:

What might be Robert Barro’s argument?: We are once again witnessing the renaissance of old Keynesian economics as a theory of the long run not just the short run...

I think Tyler is wrong here. Old Keynesian arguments are not turning into a long-run theory. Rather, empirical reality is telling us that when inflation is very low--like now--the long run is likely to be a lot longer to arrive than we economists had previously thought it was.

Those whom Tyler calls "Old Keynesians"--me, Justin Wolfers, and Paul Krugman--used to think that the economy would not stay away from its long-run full-employment growth path for even as long as five years, and thus that when you looked out at the future five or more years in the future you should always use your long-run model rather than your short-run model.

But that is because up until the past decade cyclical variables like the employment-to-population ratio nearly always did return to their pre-recession levels within five years of the previous business-cycle peak. In the post-WWII U.S., only the 1957-8 recession was not followed by a rapid and full recovery.

Since 2000, things have been very different.

You can claim that supply-side rather than demand-side factors are responsible for our failure to reattain the full year-2000 peak in the employment-to-population ratio--that because we are richer now than we are then we wish to spend more time in school and more time in retirement than we did in the late 1990s. (You have a hard time sustaining that argument, however: only America's upper class looks to be significantly richer than it was back in the late 1990s.) But no matter what you strike as the full-employment level of the employment-to-population ratio today, we are not there and nobody is forecasting that we are going to get back to even the 2006 employment-to-population ratio in the next four years.

Empirical reality has told us that--at least when inflation is very low, as it is at present--the short-run is not less than five years but (shudder) can be as long as fifteen.

Justin, Paul, and I still have our long-run theories. It is just that empirical reality has told us that they do not apply until the end of the next presidential term.

We very much wish that it were otherwise.

But the principal intellectual task facing a macroeconomist today is to figure out how to change what he or she believes in response to the fact that empirical reality is speaking very loudly.

I get the impression that all of my right-wing colleagues are putting their fingers in their ears and telling empirical reality, in the words of Smeagol the Stoor: "I'm not listening. Not listening".

## Playing for Team Republican

Can anybody offer another explanation of what John Taylor thinks he is doing--other than playing for Team Repubican?

John Taylor:

Not More of the Same: In my estimation, those [Obama and Bernanke fiscal and monetary policy] interventions… have not only been ineffective but have also lowered investment and consumption demand by increasing concern about the federal debt, another financial crisis and threats of inflation or deflation…

Increasing concern about the federal debt would show themselves in sharply rising interest rates on Treasury securities, which we certainly have not seen. Increasing fears of another financial crisis here at home would show themselves in sharply rising interest rate spreads, which we have not seen. Increasing threats of inflation would show themselves in signs of coming inflation Increasing threats of deflation would show themselves in signs of coming deflation. To cause both would be a neat trick.

## The 2008 Death from Pneumonia of Ron Paul's Uninsured Campaign Manager Kent Snyder

Seth Abramovitch:

Ron Paul's Campaign Manager Died of Pneumonia, Penniless and Uninsured: Ron Paul… faced a pointed line of questioning from Wolf Blitzer regarding the case of an uninsured young man who suddenly found himself in dire need of intensive health care. Should the state pay his bills? Paul responded, "That's what freedom is all about: taking your own risks. This whole idea that you have to take care of everybody—" He never quite finished that point, letting the audience's loud applause finish it for him. So Blitzer pressed on, asking if he meant that "society should just let him die," which earned a chilling round of approving hoots from the crowd. Paul would not concede that much outright, instead responding with a personal anecdote, the upshot being that in such a case, it was up to churches to care for the dying young man. So basically, yeah. He'd let him die.

## M.S. of the Economist Is Really Unhappy with Rick Perry

M.S.:

Social Security: A monstrous truth: NO PONZI scheme in the history of the world has ever lasted 75 years. Ponzi schemes depend on garnering an ever-increasing pool of new investors to pay out returns to prior investors. When the potential pool of new investors runs dry, they collapse. This will occur when the scheme runs up against the natural limits of its recruitment strategy; in the ultimate case, it can't keep going past the point where the entire population is already subscribed.

This should provide us with a hint as to why, as Kevin Drum writes (rebutting Shikha Dalmia), Social Security is not a Ponzi scheme….

If you wanted to call Social Security an investment, you would say it is a play on the proposition that America's GDP will continue to grow over the long term. This is the safest play one can imagine making….

My colleague's partial defence of Rick Perry's attacks on Social Security construes them not as a call to scrap the system, but as a warning about its long-term problems…. I disagree that this is what he's doing. You don't call something a "monstrous lie" when you want to tinker with it. What Mr Perry is doing is part of a consistent decades-long habit across much of the conservative right of attacking the foundations of Social Security. Up until about 2007, the goal of such attacks was clear: conservatives wanted to replace it with a Chilean-style defined-contribution plan that would be invested in securities…. [S]ince the financial crisis, and with average returns from Wall Street now sharply negative over an entire decade, both the logic and the political support for any such programme have evaporated. If Mr Perry is no longer arguing for the dubious concept of turning Social Security over to the states, then it's not clear what he proposes as an alternative to the current system….

Perhaps opposition to Social Security has become a runaway train, a rhetorical and intellectual commitment too strong to give up even after it has lost its connection to an actual policy programme. But the effect of continued inaccurate attacks on the foundations of Social Security is to deepen most people's confusion about the actual soundness of the concept….

My grandmother cast her first presidential vote for FDR, in 1936. He had passed the Social Security Act one year earlier. She began receiving Social Security checks in the year Jimmy Carter was elected president. She turns 100 in December, and the checks are still coming in. She has since been joined on the rolls by her two daughters. There is every reason to believe that their children, who have been paying taxes into the Social Security system for decades now, will also enjoy its benefits when they retire. Unless, of course, conservative politicians succeed in convincing working Americans that the whole thing is a "monstrous lie".

I have said it before and I will say it again and again: nobody has any business working for, contributing to, or voting for this version of the Republican Party. Nobody.

## When Will It Be the "Long Run"?

New vs. old Keynesian macroeconomics: For how long — in today’s America — can an AD-driven recession last?  At what point do even the Keynesians toss in the towel and say “By now it is a growth and structural problem, not mainly AD”?

In the long run the actual rate of unemployment is the natural rate of unemployment--the rate "that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual characteristics of the labor and commodity markets…'

In the long run persistent and anticipated increases and decreases in the rate of nominal spending growth show up as increases or decreases in the rate of inflation and not as increases in real GDP growth.

In the long run rates of job finding, job quitting, and firing return to their normal equilibrium values.

When the quit rate gets back to its standard 2.2% per month; when the hire rate gets back to its standard 4% per month, when positive shocks to the rate of growth of nominal aggregate demand show up overwhelmingly as increases in the rate of inflation and negative shocks as decreases in the rate of inflation--then it will be time to say that it is primarily a structural problem, not aggregate demand.

## Paul Krugman on Irving Fisher

Paul Krugman:

Forsaken Fisher: Another nice piece from Sylvia Nasar, this time about Irving Fisher and the foundations of macroeconomics. Fisher remains hugely relevant to this day, and in particular to my own thinking about the mess we’re in. Yet it’s hard to read Sylvia’s piece without thinking about the intellectual regression we’ve suffered. Here’s how she puts it:

By the Panic of 1907, Fisher had concluded that most extreme fluctuations in economic activity resulted from monetary disturbances. He had identified too much money as the source of inflationary booms, too little as the source of deflationary depressions. By tracing seemingly unrelated economic pathologies to a single variable, money, he had identified a potential cure: Stabilize the value of money — that is, avoid inflation or deflation — and so stabilize economic activity. This was a cure that government, which issues money and determines its value, could dispense.

That’s basically right, although issuing money isn’t enough when you’re at the zero lower bound.

But think about the state of debate in America right now, with leading Republicans denouncing “fiat money”, and distinguished economists insisting that a slump that is obviously, obviously, a case of Fisherian debt deflation is instead the product of market fear of the socialist tendencies of a very centrist president.

Next up: resurrecting the phlogiston theory of fire.

## Adam Posen: The Case for Doing More (Expansionary Monetary Policy, That Is)

Wotton-under-Edge, Gloucestershire: the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus…. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the fiscal consolidations underway, and the simultaneity of similar problems across the Western world. Sustained high inflation is not a threat… the inflation that we have suffered due to temporary factors in the UK is about to peak. If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage….

[I ask] you as sensible listeners to see through the distortions and falsehoods that have cropped up again in the aftermath of this crisis as in the past. Some common sense can be just as useful in appraising monetary policy as in evaluating the overall worth and likely success of other services for which the public contracts with technical experts. After such appraisal, I hope that you will agree with my arguments that:

• More monetary ease will lead to greater restructuring of the economy in the right and necessary direction;
• More of the same Quantitative Easing [QE] program that the Bank already undertook would be where to start, especially if done on sufficient scale;
• More cooperation between the Bank and HM Government to promote investment and credit to small and medium business should be the beneficial next step….

There are too many excuses for passivity being offered, none of which stand up to scrutiny or to the data…. Almost certainly, even if we were to do everything right on monetary policy (and we certainly will not get everything right, despite the best of intentions), there will still be suffering and ongoing problems from economic adjustment. And the benefits of our right policies may not turn out to be self-evident. But it is our responsibility and our duty to make things better if we can. Central bank officials have wasted too much time over the last year worrying about how their institutions would appear to markets, to politicians, and to the public, were we to undertake more stimulus. Sometimes you have to do the right thing even if it may be misperceived. I believe that by explaining how doing more would work, as I am trying to do today, the chances may increase that we will do the right thing on monetary policy now, and that it will be recognized as right later if not immediately…

## Doug Elmendorf: More Fiscal Expansion Now

Doug Elmendorf:

Testifying in Front of the "Supercommittee": Credible policy changes that would substantially reduce deficits late in the coming decade and over the long term, without immediate cuts in spending or increases in taxes, would support the economic expansion in the next few years and strengthen the economy over the longer term,” Elmendorf said at the hearing. “There is no inherent contradiction between using fiscal policy to support the economy today, while the unemployment rate is high ... and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential….

If policymakers wanted to achieve both a short-term economic boost and medium-term and long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would widen the deficit now but reduce it later in the decade…

## Economic Anthropology: David Graeber Meets the Noise Machine...

…and is annoyed at having his summary of anthropological findings dismissed as "nonsensical":

David Graeber: On the Invention of Money: I mentioned that the standard economic accounts of the emergence of money from barter appears to be wildly wrong. Since this contradicted a position taken by one of the gods of the Austrian pantheon, the 19th century economist Carl Menger, [Robert M.] Murphy apparently felt honor-bound to respond….

I’m simply referring to arguments made in my book, ‘Debt: The First 5000 Years’. In his response, Murphy didn’t even consult the book; in fact he later admitted he was responding at least in part not even to the interview but to an inaccurate summary of my position someone had made in another blog!

We are not, in other words, dealing with a work of scholarship. However, in the blogsphere, the quality or even intention of an argument often doesn’t matter. I have to assume Murphy was aware that all he had to do was to write something—anything really—and claim it rebutted me, and the piece would be instantly snatched up by a right-wing echo chamber, mirrored on half a dozen websites and that followers of those websites would then dutifully begin appearing across the web declaring to everyone willing to listen that my work had been rebutted…

Graeber's summary:

[W]hat anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor's cow, you'd say, "wow, nice cow" and he'd say "you like it? Take it!" — and now you owe him one. Quite often people don't even engage in exchange at all — if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women's councils.

So the real question is not how does barter generate some sort of medium of exchange that then becomes money, but rather, how does that broad sense of "I owe you one" turn into a precise system of measurement — that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it's already happened. There's an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story — first there's barter, then money, then finally credit comes out of that — if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find "I'll give you twenty chickens for that cow" type of barter systems, it's usually when there used to be cash markets, but for some reason — as in Russia, for example, in 1998 — the currency collapses or disappears.

Indeed. It really looks from the anthropologists that Adam Smith was wrong--that we are not animals that like to "truck, barter, and exchange" with strangers but rather gift-exchange pack animals--that we manufacture social solidarity by gift networks, and those who give the most valuable gifts acquire status hereby.

## Hoisted from Comments: Robert Waldmann on Tyler Cowen and Robert Barro

RJW:

Tyler Cowen Says: Robert Barro's Argument Is Coherent If He Is Answering a Different Question than Barro Claims to Be Answering: [N]ote that Cowen can't reconcile his interpretation [that Barro is talking about the long-run] with the text which includes "the latest jobs report." and "Today’s priority." Cowen is (unusually) rude when he suggests that you and Krugman must be arguing that analysis of an economy in a liquidity trap is long run analysis. This assertion makes no sense. You and especially Krugman preface all discussion of what we should do "Today" by noting that the economy is temporarily different in a way such that normal rules don't apply.

I have the impression that Barro is not consistent with Barro in 2009: "I agree that the recession warranted fiscal deficits in 2008-10, but ... we no longer have the luxury of combating the weak economy with more deficits." Sure seems to suggest that we did have that luxury in 2009. But IIRC Barro called the ARRA the worst bill passed by congress in decades…. It is hard to make a coherent case against the ARRA, but when it was topical Barro was willing to just assert that it was horrible. Now two and one half years later, he seems willing to concede that something along the lines of the ARRA or the recently proposed jobs bill was reasonable then...

## Can I Please Go Back to My Home Planet Now?

Jamison Foser:

As rallying cries go, "Let him die" is somewhat less inspiring than "Yes we can."

heatheddy:

@jamisonfoser Perhaps, but "let them eat cake" was already taken...

## Wondrous Are the Ways of the Internet...

Underwater zombie vs. shark, courtesy of R.Mutt@crookedtimber.org:

## Yes, Contractionary Fiscal Policy Is Contractionary...

Paul Krugman:

The Death of the Confidence Fairy: In the first half of last year a strange delusion swept much of the policy elite on both sides of the Atlantic — the belief that cutting spending in the face of high unemployment would actually create jobs. I went after this stuff early and hard (I suspect that the confidence fairy will be one of my lasting contributions to economic discourse); still, it’s good to have a steadily mounting weight of evidence about just how wrong that view was. The latest entry is a comprehensive review of past episodes of austerity by economists at the IMF.... And as the authors point out, it’s probably even more contractionary than usual under current conditions:

The reduction in incomes from fiscal consolidations is even larger if central banks do not or cannot blunt some of the pain through a monetary policy stimulus. The fall in interest rates associated with monetary stimulus supports investment and consumption, and the concomitant depreciation of the currency boosts net exports. Ireland in 1987 and Finland and Italy in 1992 are examples of countries that undertook fiscal consolidations, but where large depreciations of the currency helped provide a boost to net exports. Unfortunately, these pain relievers are not easy to come by in today’s environment…. Simulations of the IMF’s large-scale models suggest that the reduction in incomes may be more than twice as large as that shown in Chart 2 when central banks cannot cut interest rates and when many countries are carrying out consolidations at the same time….

Unfortunately, austerity programs are now the rule everywhere; even if the new Obama plan became law, which it won’t, it would only slow the pace of fiscal consolidation in America, and there’s nothing like it even on the table elsewhere.

Economic policy: we’re doing it wrong.

## Department of "Huh?!" (Lost in Minkowski Space Department)

I ran across this:

William Patterson: The “Horst-Conrad-Milne” interplanetary space drive of [Robert Heinlein's] Between Planets has become in ** a sophisticated interstellar drive (though Milne got left off the name this time—as sometimes happens in real life; there is plenty of Einstein in Starman Jones, but no mention of Hermann Minkowski)…

I have long known that attacking Albert Einstein for undermining the morals of the West and for being an all-around bad guy was a staple of the whacka-whacka right wing of the American Spectator and its ilk. But I had never heard before that Hermann Minkowski was the unfair slighted discoverer or co-discoverer of Einstein's theory of relativity.

I had heard that there were whacka-whacks who claimed that Voigt, Lorentz, FitzGerald, Poincaré, and Larmor really deserved credit for special relativity. And, indeed, there is enormous credit to be shred that is shared: we do speak of Lorentz invariance, of the Lorentz-Fitzgerald contraction, of the Poincaré group of rotations, and of Minkowski space (alas, Larmor does not make it) all as essential parts of Einstein's theory of relativity.

But I had never heard Minkowski. He did not even start to work on relativity until after 1905. I had never heard any hint that it ought to be called the Minkowski or the Einstein-Minkowski theory of relativity--until now.

Anybody know where this comes from?

## Greg Clark: The Law of Return: Is There a Physics of Social Mobility

1. y(t) = b y(t) + e(t)
2. b = 0.75 on a generational scale
3. Social institutions matter rarely.
4. Matters: isolated non-intermarrying elite.
5. Matters: assortative mating.

Conventional estimates of b (a) different, (b) vary with social institutions, (c) low enough to guarantee complete reversion in five generations...

## Yes, Global Warming Is Very Real

Nobody has any business working for, contributing to, or voting for any candidate of this Republican Party in any general election. Nobody. Nobody at a all:

Arctic ice levels hit historic low, researchers say – This Just In - CNN.com Blogs: "The amount of Arctic sea ice has melted to a historic low, with the area of land covered by ice at the smallest level since scientists began observing it with satellites in 1972, researchers from the University of Bremen in Germany report…. Researchers, including those from the National Snow and Ice Data Center, had predicted earlier this summer that Arctic sea ice levels could reach extreme lows. But the University of Bremen physicists said there was uncertainty in July about whether the ice melt would surpass the previous record.

They said their studies indicated that continuing ice decline was related to man-made global warming. "It seems to be clear that this is a further consequence of the man-made global warming with global consequences," researchers said in their report.  "Directly, the livehood of small animals, algae, fishes and mammals like polar bears and seals is more and more reduced." As Arctic sea ice has continued to decline, it also has become drastically thinner overall, the report said….

The National Snow and Ice Data Center did not have updated data to confirm the German report but said it expected the historic low to be hit based on the past few weeks' data.  Its site is only up to date to September 6. The historic levels were reached two days later. The center said it would "make a preliminary announcement when ice extent has stopped declining and has increased for several days in a row" and said it would release monthly data for September early next month…

## Tyler Cowen Says: Robert Barro's Argument Is Coherent If He Is Answering a Different Question than Barro Claims to Be Answering

Tyler Cowen:

What might be Robert Barro’s argument? — Marginal Revolution: Paul Krugman, Brad DeLong, Justin Wolfers and others are not sure what is Robert Barro’s argument or model in his recent Op-Ed…. Sometimes growth slows down and afterwards it speeds up again…. There is in the meantime some depreciation of labor skills, from unemployment, but long-run output and welfare really does for the most part depend on the forces which govern economic growth…. That implies [that] lower government spending in most areas of the economy [is a good thing], and it also implies [that] lower taxation of capital [is a good thing]…. That view may not be true… but it’s hardly bizarre or economically illiterate…

The problem is that Barro says at the start of his op-ed that he is interested not in faster long-run growth--not in better economic performance once the economy reattains its full-employment growth path--but rather in speeding the recovery to the long-run growth path:

How to Really Save the Econom: "he economy is growing much more slowly than in a typical recovery, housing prices remain depressed and the stock market has been in a slump — all troubling indicators that another recession may be on the way. Most worrisome is the anemic state of the labor market, underscored by the zero growth in the latest jobs report. The poor results should not surprise us given the macroeconomic policies the government has pursued. I agree that the recession warranted fiscal deficits in 2008-10, but the vast increase of public debt since 2007 and the uncertainty about the country’s long-run fiscal path mean that we no longer have the luxury of combating the weak economy with more deficits. Today’s priority has to be austerity, not stimulus…

The question Barro claims to be trying to answer is not: "Never mind the slowness of the recovery, how do we boost the economy's long-run full-employment growth path?" The question Barro claims to be trying to answer is: "How do we speed the recovery of the economy to its long-run full-employment growth path and avoid another recession that will push us further below it?"

And it is the fact that Barro's op-ed makes no coherent sense at all to the question he claims to be addressing that has Justin, Paul, and me puzzled.

So I think Tyler has it completely wrong when he writes:

We are once again witnessing the renaissance of old Keynesian economics as a theory of the long run not just the short run.  The “New Old Keynesians” are of course entitled to their opinions, but given their minority status, it is strange when they find others difficult to comprehend.

What we are seeing, instead, is the abandonment by the right of any model of the short-run at all: Milton Friedman would have a view of what to do in the current situation, and it ain't what Barro recommends.

If the right wants to say that they have nothing useful to contribute in the debate over what to do in the short-run--that they have advice for long-run policies only, and that the only thing they have to say about the short-run is that your policies to match aggregate demand to potential output should not undermine what would be good policies for long-run growth--and so are going to be quiet as the rest of us try to figure out how to match aggregate demand to potential output, that would be fine.

But that is not what we are seeing from the right, is it?

## Now That I Live on the West Flank of the Berkeley Hills...

... I cannot understand why everybody who can see San Francisco Bay from their house did not return their ATT iPhone the day after they bought it.

I mean, with wifi for data or over Skype it is still a wonderful little machine over here.

But otherwise--via ATT 3G or (shudder) EDGE--we are talking serious brick city...

## Understanding Trichet and Conpany: A Note

What are Jean-Claude Trichet and company really thinking right now?

The most likely scenario is this: they bet on mean-reversion in unemployment, on the magic full-employment equilibrium-restoring properties of the market, on their role as prudent stewards of financial rectitude, and on a take-no-prisoners commitment to price stability in all circumstances as the driving force behind the great moderation.

They were wrong.

They now have a choice.

They can admit that they were wrong. Then they will probably have to resign, and then be snubbed worldwide. Nobody likes a loser.

Alternatively, they can double down. Their reputations right now are underwater. What do they have to lose reputationwise by saying more absurd nonsense? And there is a chance that tomorrow the confidence fairy will appear, wave her magic wand, and the V-shaped recovery will start.

That is my guess as to how to understand what Trichet and Company are now saying: they are reputationally-bankrupt zombies gambling for resurrection.

Is there another way to understand what they are now saying? I am trying to think of one, but I am not getting very far...

## James Kwak: Why Does Rick Perry Think He Can Get Away with It?

With Rick Perry's claiming that Ben Bernanke's attempts to stabilize nominal GDP are "almost treasonous" and that Social Security is a "Ponzi scheme", the natural question is: why is he doing this? The answer is that it gets him headlines and media oxygen, and that there is no downside at all--at boosts his standing with his primary audience, and by the time the general election rolls around it will be old news, he will be sounding more moderate and less like he wants to host a necktie party for Federal Reserve Chair Ben Bernanke, and the press will not cover it.

James Kwak has a more sophisticated view:

Ponzi Schemes for Beginners: On the theory that the best defense is a good offense, Rick Perry has been insisting to anyone who will listen that Social Security is a Ponzi scheme…. I think it’s important to be clear about why Rick Perry thinks it is—or, rather, why his political advisers think he can get away with it…. Social Security is… a pay-as-you-go system… different from a pre-funded pension system… [and] the trust funds will go bankrupt in about twenty-five years…

But:

There’s nothing wrong in principle with a pay-as-you-go system, as long as the future revenue stream is secure… saying that Congress underfunded Social Security is not a valid criticism of Social Security as a program: it’s a valid criticism of Congress…. [Y]ou can criticize our political leaders… for not fixing Social Security’s long-term funding problem, but you can’t use that fact to criticize the basic structure…

I think James is being much too sophisticated. I think Perry thinks he can get away with this because he can get away with it. Perry is doing this because there is no downside.

I haven't read Eddie Lazear or Greg Mankiw or Glenn Hubbard or John Taylor or Mike Boskin or Martin Feldstein pushing back against Perry and telling him that for Ben Bernanke to do his job is not "almost treasonous".

And about the "Ponzi scheme" meme: Reporters writing stories about Rick Perry will write: "Some economists say that Social Security is not a Ponzi scheme. But former Bush administration advisor and Harvard professor Greg Mankiw says that Democratic Nobel Prize-winning economist Paul Samuelson said that Social Security was a Ponzi scheme. Opinions of the shape of earth differ."

## Paul Krugman Wonders What Robert Barro's Argument Is...

Paul Krugman:

Shocking Barro: People have been asking for my reaction to Robert Barro’s op-ed…. [H]ere’s the structure of what he says:

1. Keynes said that investment is what drives the business cycle
2. Investment depends on long-term incentives
3. ???
4. Austerity!

So, about #1: yes, Keynes argued that fluctuations in aggregate demand are usually driven by investment. But he also favored expansionary fiscal policy during a slump, because that’s a statement about what usually happens, not what must happen; you don’t have to refill a flat tire through the hole. Is Barro really confused about this, or is he just trying to fast-talk past his readers? And about #2: that’s just wrong, as even a glance at data would tell you…. [Investment is] strongly affected by the business cycle: investment is high when demand is strong and firms see a good reason to expand capacity. So the best thing we could do to spur business investment would be to get a recovery going by whatever means necessary, including fiscal stimulus.

So, back to my shock: I would have expected Barro to offer some kind of argument based on real business cycle theory or whatever he believes about macro these days. Instead, all he offers is word games and nonsequiturs.

Why did he even bother?