What Happened?

Atrios and Krugman linked this Romer-Bernstein chart on the Stimulus's effect on the economy. Obviously things have turned out worse, with the IMF forcasting 9% unemployment for 2010-11. Krugman blogs about what he believes Obama's economics advisors were thinking at the time. (Atrios just uses the chart to mock the Obama administration.)*

Now, I don’t have any inside information on what really happened; I do talk to WH economists, but they don’t offer -- and I don’t ask for -- any information on internal wrangling. But based on public reporting, like the Ryan Lizza article on Larry Summers -- which reads rather differently now that we know how things are really working out, or more accurately not working out -- it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. That’s the assumption embedded in the now infamous Romer-Bernstein chart, above. So all policy needed to do was meliorate the worst, while we waited for the economy to recover spontaneously. From the Lizza article:

Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was "an insurance package against catastrophic failure."

I don’t know why Summers etc. believed this.

Krugman is right and the stimulus should have been larger, but there were political considerations - did they have the votes? - and the European sovereign debt crisis didn't help the situation. Greece has become a convenient club for the heartless bastards in the Pain Caucus. Also, uninformed independent voters don't like government debt and the administration probably wouldn't have done a stimulus (porkulus to the rightwing) prior to their yearlong campaign to reform health care, had interest rates not already been at zero.

As Krugman would probably argue, the administration should have hit the slumping economy with overwhelming force precisely because interest rates were at zero and the Federal Reserve Bank had used up all of its conventional tools.

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*Which is why I don't like Atrios and rarely read Eschaton. That and the fact he was calling Treasury Secretary Tim Geithner "Timmeh." Look, yes Bernanke, Obama and Geithner et al. saved the financial system in ways that were more lenient on the bankers and more costly to the public than they needed to be. However, we were driving without a map and you can't really blame them for erring on the side of caution. The main thing is that the economy was in a tailspin and the governments of the rich nations coordinated successfully and stabilized the situation. However, as John Cassidy pointed out, the rescue of the financial system in the wake of the bursting of the housing bubble put the economy's inequities and unjust character in the spotlight:

The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry. "People just don’t get how these institutions got bailed out and their people are still making big bonuses," Mark Zandi noted. "It just does not compute. No matter what you say, you can’t persuade them it’s right."

Biggest Defaulters on Mortgages Are the Rich

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

"The rich are different: they are more ruthless," said Sam Khater, CoreLogic’s senior economist.

In a new attack ad, Illinois GOP Senate candidate Mark Kirk smears Giannoulias with a British Petroleum link. 2009 Pultizer Prize winner PolitiFact.com says it's "barely true." I believe it's more of an unfair smear. It's no surprise that Giannoulias's advisors have corporate connections. But Giannoulias refuses contributions from corporate PACs and federal lobbyists. Does Kirk? No, he depends on them. According to PolitiFact:

The aide in question here is Endy Zemenides, a Chicago attorney who is an unpaid senior advisor to the Giannoulias campaign.

Online records of lobbyists filed with the City of Chicago Board of Ethics show Zemenides and his then-law firm Acosta, Kruse, Raines and Zemenides (and later Acosta, Kruse and Zemenides) registered as lobbyists for BP Bovis Global Alliance from 2003 to 2007.

Giannoulias spokesman Matt McGrath called the ad's claim "a real misrepresentation and distortion of facts." Zemenides was a real estate attorney for BP Bovis Global Alliance, a partnership between BP and Bovis to develop the retail, gas station side of the business, McGrath said. Zemenides helped the company on landscaping and zoning issues as the company converted a number of Amoco stations to BPs in the Chicago area. Zemenides was never a lobbyist for BP, McGrath said. It's simply the policy of the City of Chicago that real estate attorneys handling zoning cases register as lobbyists.

"This is not exactly the guys drilling for oil in the Gulf of Mexico," McGrath said. "This group is not involved in refining or oil exploration. This is strictly to do with retail enterprises. It's guilt by association. He worked for a subsidiary involved in retail gas stations."

Regarding the BP oil spill, I believe it's more the result of Republicans' pro-corporation, anti-regulation, anti-environment policies of the past few decades than anything else. In the Senate, Kirk will simply support the Republicans' strategy of obstructionism and constant use of the filibuster.

And so it goes

I am reading Liaquat Ahamed's Lords of Finance and really liked these two paragraphs about Keynes on page 166.

The gold standard had only worked in the late nineteenth century because new mining discoveries had fortuitously kept pace with economic growth. There was no guarantee that this accident of history would continue. Moreover, while the original rationale for the gold standard -- the commitment that paper money could be converted into something unequivocally tangible -- might have been necessary to instill confidence at some point in history, this was no longer the case. Attitudes toward paper money had evolved and it was not necessary to allow the supply of precious metals to regulate the creation of credit in a sophisticated modern economy. Central banks were perfectly capable of managing their countries' monetary affairs rationally and responsibly, [Keynes] argued, without any need to shackle themselves to this "barbarous relic."

Though the Tract was a technical monograph, the Cambridge undergraduate in Keynes could not resist lacing the book with the playful sarcasms that had made The Economic Consequences such a success. He flippantly dedicated the book, "humbly and without permission, to the Governors and the Court of the Bank of England," knowing very well that the members of that august body would disagree with almost everything he had to say. He poked fun at the self-importance of those "conservative bankers" who "regard it as more consonant with their cloth, and also as economizing on thought, to shift public discussion of financial topics off the logical on to an alleged moral plane, which means a realm of thought where vested interests can be triumphant over the common good without further debate."

I never studied World War I much, so I was interest to read the Lords of Finance's discussion of World War I reparations, and the Treaty of Versaille, which many argue led to the rise of the Nazi party in Germany.

By the end of the war, the European allied powers - sixteen countries in all - owed the United States about $12 billion, of which a little under $5 billion was due from Britain and $4 billion from France. In its own turn, Britain was owed $11 billion by seventeen countries, $3 billion of it by France and $2.5 billion by Russia, a debt essentially uncollectible after the Bolshevik revolution.

At an early stage of the Paris Peace Conference, both the British and the French tried to link reparations to their war debts, indicating that they might be prepared to moderate their demands for reparations if the United States would forgive some of what they owed America. The United States reacted strongly, insisting that the two issues were separate.

Keynes and many economists found the reparations* excessive. British historian A.J.P. Taylor believed that the reparations weren't as over-the-top as Keynes viewed them, but that they were punitive enough to cause resentment in Germany while still not punitive enough to prevent Germany from rising to power again. According to Wikipedia,

In many ways, the Versailles reparations were a reply to the reparations placed upon France by Germany through the 1871 Treaty of Frankfurt, signed after the Franco-Prussian War. Note however that the amount of the reparations demanded in the treaty of Versailles were comparatively larger (5B Francs vs. 132B Reichsmark). Indemnities of the Treaty of Frankfurt were in turn calculated, on the basis of population, as the precise equivalent of the indemnities demanded by Napoleon after the defeat of Prussia.

(By the way, Daniel Radcliffe will start in a new version of All Quiet on the Western Front.)

DeLong asks for comments on his chapter on World War I titled "Chapter 15: The Knot of War, 1914-1920." 

Meanwhile, the overclass is demanding punitive reparations after the victory in its war on the lower class.

Reuters reports: 

In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.

The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a "double dip" in the housing market, it said. But the IMF said it did not think a renewed recession was likely.

"The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending," the Fund said.

Yglesias notes that at least the IMF is forcasting that the rest of the world will be growing at a nice pace.
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*From Wikipedia "Under the Hoover Moratorium of June 1931 issued by the American president Herbert Hoover, which was designed to deal with the world-wide financial crisis caused by the bankruptcy of the Creditanstalt in May 1931, Germany ceased paying reparations." Creditanstalt was the largest bank of Austria-Hungary and the Lehman Brothers of the Great Depression.

Federal Reserve Bank takes note of a change in conditions


Neil Irwin reports in the Washington Post:

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. But weak economic reports, the debt crisis in Europe and faltering financial markets have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.

"If the economic situation changes, policy should react," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. "You shouldn't sit on your hands. . . .  I think there's plenty more we could do if we had to."

Perhaps they also saw how the hearltess bastards in the Republican party blocked the extension of unemployment insurance and thereby 1) increased the hardship of many American families, 2) jeopardized a weak recovery 3) exacerbated the government's long-term debt problems. 

Kevin Drum reacts.

Yglesias comments.


Dean Baker patiently explains how the Washington Post is confused.

"When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now."

The markets don't tell anyone why they moved in a certain direction at a specific time. It is not clear what spike the article is referring to, but the cause of the spike is entirely the interpretation of the Post and should clearly be identified that way. The Post does not really know what caused interest rates to rise, it is presenting its speculation to readers as a fact that is then used to support the case for a more cautious monetary policy.

Sometimes You Have to Say: "What the Fuck!"

Krugman blogs:

The WSJ’s economics blog has an interesting piece about how failing to extend unemployment benefits may actually end up increasing the deficit in the longer run, by pushing marginal older workers into disability. But this is actually a much broader point. There’s a quite good case to be made that austerity in the face of a depressed economy is, literally, a false economy -- that it actually makes long-run budget problems worse.

People like me have been hesitant to make this argument loudly, for fear of being cast as the left equivalent of Arthur Laffer -- but the heck with it, I’m going to lay it out.

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In short, there’s a very good case to be made that austerity now isn’t just a bad idea because of its impact on the economy and the unemployed; it may well fail even at the task of helping the budget balance.

It’s important to realize that I’m not saying that government spending always pays for itself, and that saving money is always counterproductive. These kinds of effects are specific to a liquidity trap situation. But that’s the situation we’re in.

Krugman was absolutely right about the stimulus enacted after Obama entered office. It was too small.

DeLong writes:

Q: Will President Barack Obama's "recovery summer" convince voters the $787 billion stimulus package is pulling the economy out of recession?

My Answer: The problem is that the stimulus package Obama proposed was about 2/3 the size that Obama's economic technocrats thought appropriate in December of 2008, that the marginal votes needed in Congress--Snowe, Nelson, et cetera--cut its effectiveness down to half and had the bargaining power to do so because every single other Republican thought their job #1 was to make Obama look like a failure, and that the magnitude of the financial shock to the world economy turned out to be about twice as big as we were estimating in December 2008.

Thus we did about 1/4 of the job. It was clear relatively early that we had done about 1/4 of the job. Even on February 15, 2009, Mark Zandi--who had been John McCain's chief economic advisor during the 2009 campaign--was out there publicly saying that it was clear that we had not done the whole job.

Given that we did only 1/4 of the job, it looks like the stimulus has been quite effective: unemployment has stayed under 10%.

As an Obamabot, I understand the obstacles he was facing in early 2009. The question I have - and I honestly I don't know the answer - is should Obama and his economic advisors laid this out in early 2009 and/or should they say this now?

I'm leaning towards the affirmative, however, in 2009 there were a lot of "unknown unknowns" like the impending European Debt Crisis, the BP oil disaster, and known unknowns like Fed policy and market behavior. Perhaps the best policy is get what you can and hold off on the predictions.

Indian Army cracks down in Kashmir, kills 13.

NEW DELHI -- The Indian Army deployed on the streets of the disputed region of Kashmir on Wednesday, seeking to quell angry street protests that have convulsed the valley.

The protests, aimed at forcing India to withdraw its paramilitary forces from the predominantly Muslim Kashmir Valley, have raged for weeks, killing at least 13 people and paralyzing life in the region, which is claimed by both India and Pakistan.

The streets of Srinagar, the state capital, were deserted as the authorities enforced a strict curfew. The army presence was light and limited to a few patrols, officials in Kashmir said.

"The army has been asked to stand by to help the civil administration," said Taj Mohi-ud-Din, a senior minister in the state government.

Demonstrations in the streets of towns and cities across Kashmir are a regular feature of the summer months in the valley, but they have become particularly heated in recent weeks in the wake of allegations that police officers and soldiers brutalized civilians. The police and paramilitary forces have fired on groups of stone-throwing youths, and television news channels showed Indian forces firing directly into crowds of protesters.

5 Ways Congress Can Bolster Growth by David Leonhardt

Instead of just bemoaning the Republicans' Wall of "No" midterm election strategy, Leonhardt has some positive, proactive suggestions. (The following block quotes are snipped out of context.)

1. Race to Solvency

"Why should state workers or city workers or county workers have benefits that are far better than private sector workers?" Edward Rendell, the Democratic governor of Pennsylvania, told me earlier this year. "We should have parity, not better"

Meh, as they say. Well when they're better, they help raise the standards for private sector workers, at least in a tighter labor market. I'd be in favor of parity if it involved raising standards for private sector workers.

2. Lift Trade

American exports rose 11.5 percent from early 2009 to early this year, accounting for more than half of total economic growth. But this momentum will be hard to maintain if China’s currency remains as undervalued as it is.

This can help somewhat and has the advantage of being an issue which is difficult for the Republicans to demagogue.

3. Provide Clarity

Corporate executives complain that uncertainty about regulation has made them wary of expanding. Some of their complaints are classic political posturing -- an attempt to avoid oversight by claiming it will hurt the larger economy. In reality, consumer demand and Europe’s woes are much more important sources of uncertainty.

See #2 above.

4. Leverage Taxpayer Money

Last year’s big stimulus bill included $2.3 billion for promising clean energy projects. To qualify for the money, companies had put up 70 percent of a project’s cost, in exchange for a tax credit equal to 30 percent. The idea -- just as with cash for clunkers -- was to use a relatively small amount of government spending to spur much more private spending.
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The federal government could leverage its spending in other ways, too. It could give households an incentive to improve the energy efficiency of their homes -- cash for caulkers -- and could look for similar investment incentives for companies outside the energy sector.

Couldn't hurt.

5. The Fed's Mission

Ben Bernanke, the Fed chairman, seems genuinely torn about how weak the economy is. He has said that inflation is not a problem and that unemployment will probably remain high for years. Even so, he has been unwilling to push down long-term interest rates, which would encourage more consumer and business spending.

Mark Thoma, a monetary economist who writes a well-read blog, points out that Mr. Bernanke is in a political bind. He has been criticized by regional Fed presidents who always seem to worry that inflation is about to accelerate and who want the Fed to raise rates. But Mr. Bernanke faces no such internal pressure about the other part of the Fed’s mission: maximizing employment.

That could begin to change next week. The Senate will hold confirmation hearings for three new Fed governors, all of whom have the potential to make it a more balanced institution. It couldn’t hurt if a few senators used those hearings to review some basic facts: inflation has been zero lately, inflation expectations are tame, 15 million Americans remain unemployed and job growth has slowed in recent months.

Now we're talking.

In his column today, David Brooks writes about the economy and "economic realism."

Demand Sider Krugman responds.

Demand Sider Dean Baker responds as well.

Yglesias and Ezra Klein note Brooks disagrees with those who - like Republicans and Senator Nelson - believe unemployment insurance shouldn't be extended even with high unemployment and with states slashing budgets and other mixed economic indicators.

Yves Smith and Rob Parenteau have an Op-Ed next to Brooks's column:

Some may argue that businesses aren’t investing in growth because the prospects for success are so poor, but American corporate profits are nearly all the way back to their peak, right before the global financial crisis took hold.

Another problem for the economy is that, once the crisis began, families and individuals started tightening their belts, bolstering their bank accounts or trying to pay down borrowings (another form of saving).

If households and corporations are trying to save more of their income and spend less, then it is up to the other two sectors of the economy -- the government and the import-export sector -- to spend more and save less to keep the economy humming. In other words, there needs to be a large trade surplus, a large government deficit or some combination of the two. This isn’t a matter of economic theory; it’s based in simple accounting.

What if a government instead embarks on an austerity program? Income growth will stall, and household wages and business profits may fall.

George Packer reviews Peter Beinart's "The Icarus Syndrome."

Schlesinger started his career as an early candidate for the hubris of toughness. In 1949, he published a Cold War manifesto titled "The Vital Center," which, in its contempt for liberal soft-headedness, influenced "The Good Fight." In 1958, he published an essay in Esquire called "The Crisis of American Masculinity," arguing that the Eisenhower years had afflicted American men with conformity and ease--what they needed was a more virile politics. (Schlesinger was getting ready to join the Camelot team.) In a few years, a more virile politics sent large numbers of American military advisers to South Vietnam, with ground forces soon to follow. Schlesinger turned against the war in the mid-sixties, and, as Beinart points out, in every use of military force thereafter he saw the making of another Vietnam. Schlesinger warned of terrible consequences before the first Gulf War, counselled against intervening in Bosnia by invoking the spectre of a quagmire, and viewed the overthrow of the Taliban in 2001 as a Vietnam-like exercise in futility. None of these concerns were entirely misplaced, but, taken together, they would have handed Kuwait to Saddam Hussein, multicultural Bosnia to Serb fascists, and Afghanistan to the medieval Muslim rulers who had given Osama bin Laden a home. The hubris of youthful toughness yielded to the hubris of knowing better. Schlesinger, like Dewey, took the meaning of one huge tragedy as an answer to all subsequent questions. One of Beinart’s targets is the limited usefulness of historical analogies. In American foreign-policy circles, there are basically two: Munich and Vietnam, appeasement or quagmire. Both are regularly invoked by pundits and polemicists. We need more analogies, or none at all.