Dean Baker on David Brooks's magical thinking.

In his worst column so far this year, Brooks writes:

Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. There are some reasons to think this is so, but events tell a more complicated story. 

A theorist named Ben Bernanke, chairman of the Federal Reserve Bank who was appointed by Bush and kept on by Obama, i.e. the most powerful man in the federal government, said yesterday that "This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support."

For example, retail sales declined in May. This is just one month, but it's a weak report.
Brooks:

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, "in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions."

Someone should Fisk that paper. At the very beginning of his column Brooks writes "Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now."

And then a couple of paragraphs later "Over all, most economists seem to think the stimulus was a good idea..." Were economists divided into two camps where most thought the stimulus was a good idea and a minority of ambitious, know-nothing suck-ups didn't?

Paul Krugman on Chermany.

You know the answer, don’t you? Yep: everyone is counting on the US to become the consumer of last resort, sucking in imports thanks to a weak euro and a manipulated renminbi. Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits.

Massive Flow Of Bullshit Continues To Gush From BP Headquarters

new unemployment claims fell

A Labor Department report Thursday said new claims for unemployment fell by a less-than-forecast 3,000 to a seasonally adjusted 456,000. While that figure fell short of economists’ forecast for a drop to 448,000, investors were heartened by data showing total claims last week dropped by the largest amount in almost a year. Total unemployment benefit rolls fell by 255,000 to 4.5 million.

The drop in total claims provides some hope that laid-off workers are starting to find new jobs. It was welcome relief after the Labor Department said last week that private employers slowed their hiring in May to the lowest levels since January.

In response to a question from Representative Paul Ryan of Wisconsin, Bernanke wasn't as dire as the House Republicans' point man on the budget:

"If markets continue to stabilize, then the effects of the [European sovereign debt] crisis on economic growth in the United States seem likely to be modest," Mr. Bernanke testified. "Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages, as well as lower prices for oil and some other globally traded commodities"

Department of Overrated

I've always believed Jeffrey Sachs to be overrated. First he inflicts massive austerity on the former Soviet Union via "shock therapy" during the '90s, then he turns around and advocates for the world's poor as maybe some kind of penance. These days he's writing misguided Op-Eds calling for more austerity, which surprises Brad DeLong, who writes:

Whenever I build a model in which expansionary fiscal policy fails to reduce unemployment, it is for one of three reasons:

1. Expectations of the present and future deficits cause the price level to jump now, so that increased nominal spending does not translate into increased real demand (i.e., Mitterand ca. 1981)
2. The expansionary effect of higher deficits is offset by higher interest rates that crowd out private investment and exports, offsetting the stimulative effect of the fiscal policy (i.e., Kohl ca. 1982)
3. Households expecting higher future tax liabilities cut back on their spending and boost their savings now, thus offsetting the stimulative effect of the fiscal policy (i.e., I can't think of a historical episode).

Jeff Sachs writes:

Time to plan for post-Keynesian era: Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future. The US was not in a credible position to raise an already enormous deficit "temporarily" because the prospect for future deficit cutting was and remains extremely clouded. America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits...

In the model in which Sachs is working--I think--the passage of the ARRA was coupled with a massive jump in U.S. long-term interest rates as financiers lost confidence in the ability of the U.S. to solve its long-run fiscal problems. The consequent appreciation of the dollar reduced exports and the steep rise in interest rates reduced investment spending so that the fact that the government was spending money didn't boost employment relative to what it would otherwise have been.

The problem, of course, is that U.S. Treasury rates did not jump at all.

(Via Krugman) Responding to DeLong's post in part, Krugman writes:

Something like that, I believe, is going on here. Calling for austerity and tight money feels courageous, tough-minded, and virtuous; it allows the economist making such calls to take the pose of a Serious Person standing firm against the easy-money guys.

Yes, I know that’s insulting. But what’s so striking is that in all three cases I’ve cited you had highly trained economists -- that is, people who have spent their whole lives arguing in terms of carefully laid out models -- making arguments that aren’t backed by any model I can see.

Krugman's cameo in the movie Get Him to the Greek.

(via DeLong)

Associated Press reports:

One sign of better economic times is when more people start finding jobs. Another is when they feel confident enough to quit them.

More people quit their jobs in the past three months than were laid off -- a sharp reversal after 15 straight months in which layoffs exceeded voluntary departures. The trend suggests the job market is finally thawing.

Some of the quitters are leaving for new jobs. Others have no firm offers. But their newfound confidence about landing work is itself evidence of more hiring and a strengthening economy.

"There is a century's worth of evidence that bears out this view that quits rise and layoffs fall as the job market improves," said Steven Davis, an economist at the University of Chicago.

Still, the number of people quitting their jobs is nowhere near what it was before the recession. Economists expect the improvement in the job market to be fitful, rather than consistent. In May, for example, private employers added only 41,000 net jobs after adding 218,000 in April.

Yet the long-term trend points to an improving job market. The economy has created a net 982,000 jobs this year after a recession that wiped out more than 8 million of them.

David Leonhardt writes on the government's failure to help support aggregate demand:

Despite all this, there is reason to think that more stimulus may finally be on the way. Last Friday’s jobs report showed little private-sector job growth in May, which was a good reminder that recoveries from financial crises are usually rocky. The report has the potential to persuade Congress to expand the jobs bill passed by the House, which is now before the Senate.

As is, the House bill would cut taxes for businesses and temporarily extend jobless benefits, among other things. By the end of the year, it would add about 170,000 jobs, Moody’s Economy.com estimates. Expanding the bill to include extra Medicaid funds for states -- which seems politically conceivable -- could add 100,000 more jobs. Expanding it to keep teachers employed -- which is unlikely -- could add 200,000 or so.

Will another half-million jobs make the economy feel strong again? No. Will the next round of stimulus be more popular than the last one? Probably not.

Is it nonetheless the right thing to do? That’s another question entirely.

Blanche Lincoln won the primary in Arkansas probably because of the Obama administration's stimulus bill and the jobs it created. How well the Democrats fair in November will be in large part determined on how well the economy creates jobs during the remainder of the year. Presumably their fund-raising efforts will be helped by tough talk on deficits, but who knows for sure?

Full Employment by Benjamin Kunkel

There are also historical reasons for supposing that the fatal flaw in postwar capitalism lay in not-full-enough employment. The interpretation of the inflationary troubles of the ’70s as a price spiral induced by high wages (along with high oil prices) is not the only one; in the late ’70s, with inflation at its postwar worst, unemployment also ran much higher than in prior decades. In the US, the Ford and Carter administrations attempted to stimulate the economy by deficit spending and tax cuts, but so long as workers were not producing a supply of goods and services commensurate with the increased monetary demand, what could the prices of existing goods and services do but rise? Another solution would have been to create new jobs, turning out new commodities, to soak up excess currency. But this could only have been achieved at the cost, unthinkable to business, of greater power for labor. 

Vampire Squid Releases Ink Cloud of Data

The Financial Crisis Inquiry Commission issued a subpoena to Goldman Sachs.

"Goldman Sachs has not, in our view, been cooperative with our requests for information, or forthcoming with respect to documents, information or interviews," Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, told reporters on a conference call.

The deputy chairman, Bill Thomas, accused Goldman of stonewalling, and said, "They may have more to cover up than either we thought or than they told us"

...

 Mr. Angelides and Mr. Thomas both said that Goldman had inundated the panel with data -- about five terabytes, equivalent to several billion printed pages -- and dragged its feet on answering detailed questions about derivatives, securitization and other business activities.

Hungary is Playing Debt Games

In Hungary -- a small, open economy that traditionally depends on exports to drive growth -- there is also a view that officials invoked the specter of a Greece-style financial meltdown to talk down the value of the forint and thus make Hungarian exporters more competitive in world markets.

Mark Kirk, the Republican candidate for the open Illinois Senate seat, did not tell the truth about his military record. James Warren discusses this and other fibbings by candidates.

Yglesias says Joe Nocera is wrong about what the House and Senate FinReg bills do about the the credit agencies and he suggests Nocera may be erring on the pessimistic side in his overall analysis.

Unrelated, Senator Charles Schumer works to save free, indie-music, pool-party concerts in Williamsburg, Brooklyn.

Jane Lynch, 49, marries her partner. She stars in the TV show "Glee" and was in "Party Down", "Arrested Development," and "the L Word." She was in the films "Julie and Julia,"  "Role Models," "The Rocker," "Walk Hard," "Smiley Face," "For Your Consideration," "Talladega Nights," "The 40 Year Old Virgin," "A Mighty Wind," and "Best in Show" among others.

Flight to Treasury Bonds wasn't supposed to happen.

It is also sobering that a vast majority of economists and market strategists were forecasting a different chain of events. Treasury yields were universally expected to be rising, not falling, as the United States recovered from a deep recession. The domestic economy is, in fact, growing, and corporate profits have been rising, but the European crisis has overturned many expectations.
...
But Mr. Knapp had thought that the stock market decline would be set off by a tightening of monetary policy by the Federal Reserve, which has operated on an emergency basis since the onset of the financial crisis in the United States. The Fed hasn’t tightened. Instead, to keep the economy stable in the face of Europe’s problems, it has held short-term interest rates near zero. In addition, it reopened emergency swap lines with European central banks last month, to help maintain liquidity there.
...
Mr. Davis said that there is a very "strong correlation" between low Treasury yields and subsequent strong economic growth. And there is a weaker but still significant connection between low yields and high stock returns.

In short, at current prices, it would appear that there is some reason for long-term optimism for stock investors.

(via DeLong)

Geithner urges G-20 nations to spur domestic demand.

The United States wants countries with trade surpluses, like Germany and China, to stimulate domestic demand, fearing that tighter fiscal policy will impede growth and endanger the still-nascent recovery.

"Fiscal consolidation should be 'growth-friendly,'" Mr. Geithner told reporters, saying the "pace and composition of adjustment" should vary across countries.

Krugman responds to the G-20 communiqué:

But don’t we need to worry about government debt? Yes -- but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered -- specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.