"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Saturday, October 15, 2011

Great-grandmother's slump

Krugman in 2002:
The key point is that this isn't your father's recession -- it's your grandfather's recession. That is, it isn't your standard postwar recession, engineered by the Federal Reserve to fight inflation, and easily reversed when the Fed loosens the reins. It's a classic overinvestment slump, of a kind that was normal before World War II. And such slumps have always been hard to fight simply by cutting interest rates.
Now there's no question that the Fed's rapid rate reductions last year helped avert a much bigger slump. But a hard look at monetary policy suggests that the Fed hasn't done enough -- and possibly can't do enough. Although the Fed funds rate, the usual measure of monetary policy, is at its lowest level in generations, the real Fed funds rate -- the interest rate minus the inflation rate, which is what matters for investment decisions -- is actually about the same as it was at the bottom of the last recession, in the early 1990's, because inflation is considerably lower.
The link is found in this blog post from February 2009:
So, how does this all end?

I’ve been saying for a long time that this isn’t your father’s recession — it’s your grandfather’s recession. (I actually used the phrase about the last recession, too.) That is, it isn’t something like the 1981-82 recession, which was brought on by the Fed to control inflation, and ended when the Fed decided that we had suffered enough. Instead, it’s like the 1929-33 recession — or the recession of 1873-1879 — a slump brought on by the collapse of an investment and credit bubble. And monetary policy, at least in its conventional form, has already reached its limits.
Now, the Great Depression was ended by massive fiscal expansion, in the form of World War II. Maybe that will happen again; but so far policy seems inadequate to the task, and the political environment raises concerns about whether we’ll be able to do much more.
So we may end up waiting for the economy’s ills to go into spontaneous remission. Which raises the question, how does that happen?
And it turns out that this is a question our grandfathers thought about quite a lot. Maybe it’s time to dust off Keynesian business cycle theory.
Keynes himself actually didn’t have much to do with this theory. In fact, one of the key moves in his development of the General Theory was the decision to focus on how economies stay stuck in depression for extended periods, rather than on the more complex question of explaining the economy’s ups and downs. But he did devote a brief chapter at the end to the subject, and Hicks elaborated on this quite a lot.

What’s notable about this theory is that it made no use of the self-correcting mechanism expounded in every principles textbook, mine included — the mechanism in which falling prices lead to a rising real money supply, which shifts the aggregate demand curve out moves the economy down the aggregate demand curve. Why? Well, as we’ve now learned the hard way, a sufficiently severe bubble-bursting pushes you into the liquidity trap, and makes the aggregate demand curve more or less vertical.
Instead, recovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. And eventually this leads to an investment recovery, which is self-reinforcing.
And what do we mean by use, delay, etc.? Calculated Risk had a nice piece on auto sales, which I find helps me to think about this concretely. As CR pointed out, at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won’t happen. Even if the desired number of vehicles doesn’t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are so much worse than newer models that they’re worth replacing to get the spiffy new features (obsolescence).
As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail. On the other hand, in the long run …
How is Japan's lost decade different? Deflation?
Winter Work Done on the Farm by Robert J. Shiller (October 15, 2011)

Winter Work Done on the Farm by Mark Thoma (December 8, 2010)

Pehaps it's a common analogy used in Economics?

What Really Caused the Eurozone Crisis? by Kash Mansori

From a recent speech by Narayana Kocherlakota
But this connection between bank reserves and inflation is simply not operative right now. Banks have few good lending opportunities, and so they’re not trying to attract deposits. As a result, they are keeping nearly $1.6 trillion of reserves at the Fed in excess of what they need to back their deposits. In other words, banks have the licenses to create money, but are choosing not to do so.
Endless Stagnation is Bad for Banks by Yglesias

Dallas Fed Board of Directors

Minneapolis Fed Board of Directors

Philadelphia Fed Board of Directors

From Greider's Secrets of the Temple: How the Federal Reserve Runs the Country:
The ideological implications of the money system had to be understood on two different planes. The idea of money created through new debt offended many conservatives because, in essence, it was a forward-looking process, a social commitment to the future. Bankers were not ordinarily thought of as a progressive element in American politics, yet banking itself functioned on the premise of progress, on a working belief that reliable gambles could be made in the future. On this faith rested the process of economic growth, the financing of new ideas and ventures, of change and innovation. The folk wisdom feared debt, yet future prosperity depended on it.

The folk fears were correct in only one sense: if a society contracted too many claims against the future, if it amassed debts that the future economic effort could not possibly pay off, sooner or later it would pay the consequences.... Bankers as a consequence dwelt between two conflicting commandments: one was to be generous with the future, to take risks and make loans that businesses needed to expand and consumers needed to buy: the other was to be always prudent in the risk taking...
interview with Frances Fox Piven
Arrested Development film in the works

The Demands of Occupy Wall Street
Yglesias relays that Rush Limbaugh endorses The Lord's Resistance Army.

Hitchens article from 2006.
On the Fed (from Doug Henwood's book Wall Street, downloadable here)
"Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah's Flood."

Overcoming America's Debt Overhang: The Case for Inflation by Christopher Hayes (Sept. 9, 2009 two years ago)

(via Rortybomb)

Also from Rortybomb:
First, also from Ezra’s article, Joe Stiglitz gets the core of it:
Yet even among economists who admire Reinhart and Rogoff’s work, there is skepticism.  One source comes in how Reinhart and Rogoff find the economic phenomena they’re trying to study. “There’s an identification problem,” Stiglitz says. “When you have underlying problems that are deep, they will cause a financial crisis, and the crisis itself is a symptom of underlying problems.”
Next Ben Bernanke, transcript:
CHAIRMAN BERNANKE: …I thought [This Time It's Different] was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.
What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries…
That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.
Here is Joe Gagnon:
Some have argued that economies take longer than normal to return to full employment after financial crises (Reinhart and Rogoff 2009). However, there is a wide range of growth outcomes after financial crises, and the worst outcomes tended to be associated with the poorest policy responses.
The goal of policymakers should be to learn from the past and achieve a better outcome than simply the average of past outcomes. In the current crisis, the zero bound on interest rates has been a major factor preventing monetary policymakers from doing as much as they otherwise would to speed recoveries. But, as discussed below, the zero bound is not a limit on what monetary policy can do. There is plenty of scope for further monetary stimulus.

Friday, October 14, 2011

DeLong sends us to Miguel Almunia, Augustin S. Bénétrix, Barry Eichengreen, Kevin H. O’Rourke, and Gisela Rua: 18 November 2009:
The effectiveness of fiscal and monetary stimulus:

There is one important source of information on the effectiveness of monetary and fiscal stimulus in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion that has not been fully exploited: the 1930s.... [W]here fiscal policy was tried, it was effective.

Cross-country comparisons can thus help us untie the Gordian Knot and move the debate from the realm of ideology to that of evidence. Our project therefore focuses on assembling annual data on growth, budgets and central bank policy rates, mainly from League of Nations sources, for 27 countries covering the period 1925-39....

The details of the results differ, but the overall conclusions do not. They show that where fiscal policy was tried, it was effective. Our estimates of its short-run effects are at the upper end of those estimated recently with modern data; the multiplier is as large as 2 in the first year, before declining significantly in subsequent years....

The results for monetary policy are less robust but point in the same direction. A positive shock to the central bank discount rate leads to a fall in GDP... [that] just misses statistical significance at conventional levels.... This result is notable, given the presumption, widespread in the literature, that monetary policy is ineffective in near-zero-interest-rate (liquidity trap) conditions. On the contrary, in the 1930s it appears that accommodating monetary policy helped, by transforming deflationary expectations (Temin and Wigmore 1990) and by helping to mend broken banking systems (Bernanke and James 1991). Given the prevalence of both problems circa 2008, we suspect that the results carry over...
So ... fiscal policy gives more bang for the buck with a multiplier of 2 and monetary policy is less robust but pointing in the same direction. "Accomodating monetary policy helped, by transforming deflationary expectations and by helping to mend broken banking systems."
The Beatings Will Continue*

Who'll Stop the Pain? by Krugman (February 19, 2009)
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873.** That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.
You can see, then, why some Fed officials are so pessimistic.
Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?
Krugman is prescient again as usual.

I've been rereading William Greider's Secrets of the Temple: How the Federal Reserve Runs the Country. He argues that Arthur Burns - Fed Chairman from 1970-78 - is the original History's Greatest Monster. An economics professor at Columbia, Burns was appointed by Nixon (thanks tricky Dick!) and had a reputation as a real hardass inflation hawk. However he was accused of priming the pump to help Nixon win the 1972 election. Nixon's Federal budget was already highly stimulative and the Fed added rapid money growth which approached 11 percent three months before the election. The following year had runaway inflation followed by the Fed tightening and a painful recession. Greider reports that some governors said Burns and the Fed had made an "honest mistake" and there was no conscious political manipulation of the economy. Later the Bush clan would blame Greenspan for causing Poppy to lose his re-election campaign to Clinton.***

Carter replaced Burns with G. William Miller and as Greider writes:
In Wall Street circles Miller was blamed for the surging inflation of 1978 and 1979, but Fed insiders understood that Miller had inherited errors made earlier by Burns - excessive monetary growth in late 1976 and 1977. One Fed official who worked closely with Burns attributed the mistakes to Burns's deep desire to win appointment to another term as chairman from the new Democratic administration elected in 1976. Money growth accelerated in the months right after Carters election - and Burns began a private campaign to ingratiate himself with the Carter White House. His campaign for reappointment ultimately failed, but monetary economists attributed the subsequent surge in inflation to Burns's overly generous money policy in the opening months of the Carter Adminstration.
There was also the oil shocks of the 1970s and unions could negotiate price hikes into contracts.
* Until Morale Improves ... or Not.

** Wikipedia entry on the "Long Depression."
Monetary responses
In 1874, a year after the 1873 crash, the United States Congress passed legislation called the Inflation Bill of 1874 designed to confront the issue of falling prices by injecting fresh greenbacks into the money supply.[34] Under pressure from business interests, President Grant vetoed the measure.[34] In 1878, Congress overrode President Hayes's veto to pass the Silver Purchase Act, in a similar but more successful attempt to promote "easy money."[21]

Labor unrest

The United States endured its first nationwide strike in 1877, the Great Railroad Strike of 1877.
*** According to the Wikipedia entry on Burns:
When Vice President Richard M. Nixon was running for President in 1959–1960, the Fed, under the Truman-appointed William McChesney Martin, Jr., was undertaking a monetary tightening policy that resulted in a recession in April 1960. [further explanation needed] In his book Six Crises, Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chairmanship in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972. 

They told me not to smoke drugs but I wouldn't listen,
Never thought I'd get caught and wind up in prison,
Chalk it up to youth, but young age I ain't dissin',
I guess I just had to get it out of my system,
out of my system, out of my system,
Although I'd never do it now - I know what I ain't missin', 
That I went and got it all out of my system,


They told me not to steal cars, said I'd wind up in prison,
Thought I knew it all, yeah I wouldn't listen,
Chalk it up to being young, but youth I ain't dissin',
I guess I just had to get it out of my system,

out of my system, out of my system,

Glad I did it all then now I know what I ain't missin', 

That I went and got it all out of my system,
Jeff Madrick on "A Zucotti Park Education"
There was no need at all to worry. Joe Stiglitz, the Nobel laureate economist, and I did a “teach-in” together at Zuccotti Park. It was two Sundays ago now...
...The press, almost uniformly derisive during the initial weeks, shows signs of understanding that the group touches a deep-seated anger and confusion in America. President Obama had to respond to a question about it last week, and said he understood the concerns. Occupy Wall Street is truly national—indeed international. Journalists in Australia and Switzerland have called me for interviews. I am sure others are receiving many such calls.
How could this have happened? Two reasons. The mostly young people who are driving the movement are very well-intentioned. They are almost all well-behaved. Many are highly-educated. They want to learn. And they perceive profound injustice in the land. The crisis they see is not just economic. It is about fairness and democracy. How could one blame those in their twenties for frustration when they can’t get a job with youth unemployment rates so high while Wall Street doles out enormous bonuses?

And the Cold War has long been over.
Doug Henwood on Occupy Wall Street and the Fed

Thursday, October 13, 2011

Divisions Grow on Federal Reserve’s Policy Committee by Binyamin Applebaum
WASHINGTON — The Federal Reserve’s policy-making committee is increasingly divided between advocates for stronger steps to bolster the economy and dissenters who see little benefit and considerable risk in such efforts, according to minutes of the committee’s most recent meeting.
The Federal Open Market Committee voted at the end of a two-day meeting in September to begin an effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.
The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.
The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy. 
The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.
All three were appointed by the banks in their respective regions. All five members of the committee appointed by the President and approved by Congress voted for more action.

The Fed iPad App
Matt Taibbi on OWS

Wednesday, October 12, 2011

E.J. Dionne on Elizabeth Warren and George Will

(via DeLong)
MMT or Chartalism

In Krugman's blogpost on the quasi-monetarists he links to Mike Konczal who mentions MMTers alongside Richard Koo, i.e. those who are skeptical of monetary policy. From Wikipedia:

"Austrian economist Robert P. Murphy states that "the MMT worldview doesn't live up to its promises" and that it seems to be "dead wrong".[18] Daniel Kuehn of the Urban Institute has voiced his agreement with Murphy, stating "it's bad economics to confuse accounting identities with behavioral laws [...] economics is not accounting.""

"New Keynesian Brad DeLong has suggested MMT is not a theory but rather a tautology"

"Bill Mitchell, from the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, Australia, refers to modern Chartalism as Modern Monetary Theory in the body of work he has developed in the field."

"Cullen Roche, a California based investment manager, published one of the most widely read pieces on MMT titled "Understanding The Modern Monetary System." [28] Roche has become one of MMT's most vocal proponents and has engaged Paul Krugman in several debates on the subject of MMT."

"Hyman Minsky seems to favor a Chartalist approach to understanding money creation in his Stabilizing an Unstable Economy[32], while Basil Moore, in his book Horizontalists and Verticalists[33], delineates the differences between bank money and state money."

"James K. Galbraith supports Chartalism and wrote the foreword for Mosler's book Seven Frauds in 2010."

The DeLong quote is linked to blogpost titled "Is "Modern Monetary Theory" Modern or Monetary or a Theory?" which is a reaction to a blog post by Steve Randy Waldmann.

I really enjoyed these comments by Waldmann:
In general, the MMT community would be well served by adopting a more civil and patient tone when communicating its ideas. I’ve had several conversations with people who have proved quite open to the substance, but who cringe at the name MMT, having been attacked and ridiculed by MMT proponents after making some ordinary and conventional point. Much of what is great about MMT is that it persuasively challenges a lot of ordinary and conventional views. But people who cling to those views, even famous economists who perhaps “ought to” know better, are mostly smart people who simply have not yet been persuaded. Neither ridicule nor patronizing lectures are likely to help.

My complaint is a bit unfair. The MMT community has been sinned against far more than it has sinned, especially within the economics profession. Whether you ultimately agree with them or not, the MMT-ers have developed a compelling perspective and have done a lot of quality work that has pretty much been ignored by the high-prestige mainstream. But a sense of grievance may be legitimate and still be counterproductive.

The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.
Sometimes I tend to get abusive on the Internet in response to perceived abuse.

Krugman on MMT
Jonathan Chait on Republicans' rank dishonesty and galling hypocrisy
... Rather, it’s that a McCain presidency would, for purely political reasons, offer the possibility of greater Keynesian demand-side response.
Douglas Holz-Eakin, the chief economic advisor to John McCain in 2008 and the president of American Action Forum, a Republican agitprop group, offers a few tantalizing clues. First, he concedes that economic stimulus does in fact boost economic growth:
“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”
Holz-Eakin, like most economists, but unlike the entire elected wing of the Republican Party since 2009, understands that economic stimulus does in fact stimulate the economy and is the proper response to a disaster like the one we’re experiencing.
The one truly large-scale response to the crisis that exceeded Obama’s response may have been an attempt to shore up the housing market. This bit, from Holz-Eakin, is also tantalizing:
In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.” To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”
The politics were, indeed, hideous. But they were horrible in a way deeply aggravated by the political circumstances of the moment. You had an all-Democratic government, led by a charismatic, young, black president. Any measures to alleviate the crisis struck millions of conservatives as a terrifying redistribution of wealth, a frightful and permanent unmooring of the nation from its tradition of liberty. This helped encourage the hyper-partisan response of Republican leaders, who abandoned the belief in Keynesian stimulus that they had previously endorsed in 2001 and 2008. (Yes, Republicans passed a stimulus bill in 2008. Their turnabout against stimulus was rapid and total.)
(via Mark Thoma)

Holz-Eakin is advising Romney, as is Mankiw.

(Mankiw on the IS-LM model)
Krugman on the quasi-monetarists (QMs?):
And the diatribes against unorthodox monetary policy seem to me to come completely out of left field, not derived in any way I understand from Koo’s basic analysis. They have the feeling of arguments half-baked on the spot out of annoyance that people aren’t totally buying Koo’s insistence that fiscal policy is the answer; as you can see, I’m for fiscal policy myself, but see monetary policy as a useful supplement.
The queasy quasi-monetarists are, in a way, the mirror image of this position, so focused on the monetary solution that they rail against any suggestion that fiscal policy might play a useful role.
I would submit, by the way, that the quasi-monetarists — QMs? — have actually backed up quite a bit on their claims. They used to say that the Fed can easily and simply achieve whatever nominal GDP it wants. Now they’re more or less conceding that the Fed has relatively little direct traction on the economy, but can nonetheless achieve great things by changing expectations. That’s pretty close to my original view on Japan.
But changing expectations in the way needed is hard, especially when the Fed (a) faces massive sniping from the right and (b) has a number of hard-money obsessives among its own officials.
So my view is that we need to use everything we can — fiscal and monetary policy. And we shouldn’t let a desire to promote our pet solutions block other things that might help.
Well the Senate is blocking Obama's American Jobs Act. Bernanke needs to pull a Volcker.
Bad editorial from the New Republic on OWS and the 99 Percent Movement

Tuesday, October 11, 2011

Ivan Werning - Managing A Liquidity Trap: Monetary and Fiscal Policy

(via DeLong)

Dawes with a nice tribute to Paul Newman.

If I Wanted Someone
Could A Determined Central Bank Fail to Inflate? by Yglesias

Fed Chief Gets Set to Apply Lessons of Japan's History by John Hilsenrath

The liberal-left has long ignored monetary policy. Fiscal policy (FDR's WPA and public works programs) has long been romanticized.

The "debate" is similar to the one over health care reform. Some argued that nothing would be better than what eventually passed. See, they're hardcore and they wanted the public option. Everyone else are sellouts. Similarly, monetary policy can't do anything more. We need fiscal policy. No matter that Senate Democrats are blocking it. Getting nothing is better than trying more monetary policy.
Cyclical and Secular Trends

After saying Ezra Klein's narrative and tour d'horizon of Obama's economic policy is ultimately a white wash, I feel compelled to quote the parts which I thought were excellent. Afterwards I'll coment on David Leonhardt's essay "The Depression: If Only Things Were That Good." Leonhardt is writing for the New York Times and Klein is writing for the Washington Post so perhaps both felt the necessity to add some "balanced" comments so that their worthwhile insights don't appear too controversial or partisan. This is probably why Klein's piece ends up feeling like a white wash. Leonhardt's piece starts off shaky but gets better at the end. I'd cut the two some slack given the state of newspapers these days, but that's just me.

Let me first say I'm sympathetic to Obama and I admire the advisers he picked like Romer, Bernstein, and Goolsbee and I'm less down on Orszag, Summers, Geithner, and Bernanke than others have been.

First off, Klein is right to report that other respected forecasters were in agreement with the administration's analysis of the downturn.
But Romer wasn’t trying to be alarmist. Her numbers were based, at least in part, on everybody else’s numbers: There were models from forecasting firms such as Macroeconomic Advisers and Moody’s Analytics. There were preliminary data pouring in from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve. Romer’s predictions were more pessimistic than the consensus, but not by much.
Granted the "consensus" was all wrong about the housing bubble, but still. Klein could have pointed this out, but it would have called into question the authority of the Washington Post. 
By that point, the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan.
So the damage was $2 trillion and they were going with 800 billion which was whittled down by the Senate to 700 billion with a large part being ineffective tax cuts? What if it was an "L-shaped" recovery as in the early 1990s and early 2000s, the last two recessions? What if recovery took longer because it followed a financial crisis as shown in Rogoff and Reinhart's book "This Time It's Different"? Klein writes that everyone underestimated the amount the economy shrank:
To understand how the administration got it so wrong, we need to look at the data it was looking at.
The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; t hey didn’t know that it had been run over by a truck.
So was Romer's $2 trillion estimate off the mark? What makes Klein's story better than most is the following:
There were certainly economists who argued that the recession was going to be worse than the forecasts. Nobel laureates Krugman and Joe Stiglitz were among the most vocal, but they were by no means alone. In December 2008, Bernstein, who had been named Biden’s chief economist, told the Times, “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”
The Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish “This Time Is Different,” their fantastically well-timed study of nine centuries of financial crises. In their view, the administration wasn’t being just a bit optimistic. It was being wildly, tragically optimistic.
He'll acknowledge the existence of "Cassandras" even if he doesn't highlight how the consensus - whose figures he's citing - had been wrong about the housing bubble and deregulation, etc. Klein quotes Orszag's mea culpa:
I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category,” says Peter Orszag, who led the Office of Management and Budget before leaving the administration to work at Citigroup. "I didn’t realize we were in a Reinhart-Rogoff situation until 2010.
I like that Klein quotes critics who have been right about a lot like Stiglitz and Baker. Here they comment on Reinhart-Rogoff:
Yet even among economists who admire Reinhart and Rogoff’s work, there is skepticism.
One source comes in how Reinhart and Rogoff find the economic phenomena they’re trying to study. “There’s an identification problem,” Stiglitz says. “When you have underlying problems that are deep, they will cause a financial crisis, and the crisis itself is a symptom of underlying problems.”
Another is in their fatalism. “I don’t buy their critique in the sense that this was an inevitability,” says Dean Baker, director of the Center for Economic and Policy Research and one of the economists who spotted the housing crisis early.
Klein gets a gold star for that third paragraph. I remember very well when Bernanke was asked about Reinhart-Rogoff and he deadpanned in response "yes policy makers usually don't respond well to financial crises and their aftermath" which is why it takes a while for the economy to recover after they occur. He was probably thinking of Japan. I could be wrong but I don't believe Reinhart and Rogoff emphasized the failure of policy makers in their publicity for the book. They seemed fatalistic as Baker points out.

Klein reports that the stimulus was too small:
Critics and defenders on the left make the same point: The stimulus was too small. The administration underestimated the size of the recession, so it follows that any policy to combat it would be too small. On top of that, it had to get that policy through Congress. So it went with $800 billion — what Romer thought the economy could get away with — rather than $1.2 trillion — what she thought it needed. Then the Senate watered the policy down to about $700 billion. Compare that with the $2.5 trillion hole we now know we needed to fill.
Klein doesn't really emphasize the point, but the administration should have gone back for more or done more unilaterally or at least refrain from talking of green shoots and cutting government spending.

Some more good info Klein highlights is the Federal Reserve and inflation.
There was, however, one institution that some think could have reduced the debt overhang crushing the economy and that didn’t face such political obstacles: the Federal Reserve.
The central bank manages the nation’s money supply and credit and sits at the center of its financial system. Usually, it spends its time guarding against the threat of inflation. But in December 2008, Rogoff argued that the moment called for the reverse strategy.
“It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass,” he wrote.
Rogoff scoffs at this. “Creating inflation is not rocket science,” he wrote. “All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20 or 30 percent instead of 5 or 6 percent. Indeed, fear of overshooting paralyzed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.”
Klein could have mentioned Volcker's success. In fact we need Bernanke to get some Volckerian resolve. But at least he discusses the Federal Reserve. Usually liberals and progressives neglect to mention it.

Another good idea Klein raises is Germany's work-sharing:
Germany’s response to the recession included a work-sharing program that subsidized salaries when employers trimmed the hours of individual workers to keep more people on the job. If workers attended job training, the government gave a more generous subsidy.
The program worked. Even though Germany’s economy was devastated by the recession — declining by almost 7 percent — the jobless rate fell slightly, from 7.9 percent at the start of the recession to 7 percent in May 2010.
There are reasons to question whether work-sharing programs would have been as effective here as they were in Germany. For one thing, they work best in sectors where jobs are bound to return after a recession — such as Germany’s export sector — rather than sectors that need to be downsized after being inflated by a credit boom.
Germany also has a different labor market. Employers, unions and the government work together with an unusual level of cooperation. The culture is much more hostile toward layoffs than the United States’ is, which has caused Germany problems in the past but has been a boon throughout this recession.
But paying the private sector to save jobs was not the administration’s only option. There was also the possibility of simply paying workers to work.
For one thing, the government could have refused to fire anyone. Says Baker, of the Center for Economic and Policy Research: “We’ve lost 500,000 state and local jobs, and before that, we were creating 160,000 a year. If we hadn’t had those losses and had done more to keep creation at that pace, we would have almost another million jobs.”
It also could have started hiring. Romer, for instance, proposed to add 100,000 teacher’s aides. Imagine similar proposals: Every park ranger could have had an assistant park ranger. Every firefighter station could have added three trainees. Every city could have expanded its police force by 5 percent. Everyone between ages 18 and 26 could have signed up for two years of paid national service.
Another idea Klein could have touched on is FDR's mistaken turn towards deficit cutting in 1937. Klein could have been clearer on the numbers, too. First Romer says a $2 trillion dollar hole. How does that relate to the shrinking economy in the last quarter of 2008? Then Klein says $2.5 trillion and finally he mentions the loss of $8 trillion in housing wealth.

However, if you read between the lines, it's quite a good article all in all, not perfect, but thorough.


Leonhardt's piece comparing the Great Depression with today is shorter but good also. Leonhardt starts off comparing the 1930s with today.
Economists often distinguish between cyclical trends and secular trends — which is to say, between short-term fluctuations and long-term changes in the basic structure of the economy. No decade points to the difference quite like the 1930s: cyclically, the worst decade of the 20th century, and yet, secularly, one of the best.
It would clearly be nice if we could take some comfort from this bit of history. If anything, though, the lesson of the 1930s may be the opposite one. The most worrisome aspect about our current slump is that it combines obvious short-term problems — from the financial crisis — with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care.
Together, these problems raise the possibility that the United States is not merely suffering through a normal, if severe, downturn. Instead, it may have entered a phase in which high unemployment is the norm.
I just don't agree with this. Christina Romer doesn't and I don't believe Leonhardt himself does either.
On Friday, the Labor Department reported that job growth was mediocre in September and that unemployment remained at 9.1 percent. In a recent survey by the Federal Reserve Bank of Philadelphia, forecasters said the rate was not likely to fall below 7 percent until at least 2015. After that, they predicted, it would rarely fall below 6 percent, even in good times.
Well they've been wrong before. Leonhardt discusses education:
Despite the media’s focus on those college graduates who are struggling, it’s not much of an exaggeration to say that people with a four-year degree — who have an unemployment rate of just 4.3 percent — are barely experiencing an economic downturn.
Maybe Obama is less concerned about unemployment than he ought to be because all of the states that voted for Obama in 2008 had high levels of college graduates, especially the new purple states like Virginia. (This is why they took out no insurance after passing the stimulus.) They are counting on these states to win in 2012. (Granted Obama is more concerned than Republicans. Plus median incomes have fallen 10 percent or so since the beginning of the recession. That should hurt Obama's prospects. The one downside in an Obama victory will be the analyses of those who argue high unemployement doesn't matter.)
Economic downturns do often send people streaming back to school, and this one is no exception. So there is a chance that it will lead to a surge in skill formation. Yet it seems unlikely to do nearly as much on that score as the Great Depression, which helped make high school universal. High school, of course, is free. Today’s educational frontier, college, is not. In fact, it has become more expensive lately, as state cutbacks have led to tuition increases.
Beyond education, the American economy seems to be suffering from a misallocation of resources. Some of this is beyond our control. China’s artificially low currency has nudged us toward consuming too much and producing too little. But much of the misallocation is homegrown.
In particular, three giant industries — finance, health care and housing — now include large amounts of unproductive capacity. Housing may have shrunk, but it is still a bigger, more subsidized sector in this country than in many others.
This is the Leonhardt I've grown to admire. These are the long-term "structural" problems with the U.S. economy.
Health care is far larger, with the United States spending at least 50 percent more per person on medical care than any other country, without getting vastly better results. (Some aspects of our care, like certain cancer treatments, are better, while others, like medical error rates, are worse.) The contrast suggests that a significant portion of medical spending is wasted, be it on approaches that do not make people healthier or on insurance-company bureaucracy.
In finance, trading volumes have boomed in recent decades, yet it is unclear how much all the activity has lifted living standards. Paul A. Volcker, the former Fed chairman, has mischievously said that the only useful recent financial innovation was the automated teller machine. Critics like Mr. Volcker argue that much of modern finance amounts to arbitrage, in which technology and globalization have allowed traders to profit from being the first to notice small price differences.
IN the process, Wall Street has captured a growing share of the world’s economic pie — thereby increasing inequality — without doing much to expand the pie. It may even have shrunk the pie, given that a new International Monetary Fund analysis found that higher inequality leads to slower economic growth.
The common question with these industries is whether they are using resources that could do more economic good elsewhere. “The health care problem is very similar to the finance problem,” says Lawrence F. Katz, a Harvard economist, “in that incredibly talented people are wasting their talent on something that is essentially a zero-sum game.”
In the short term, finance, health care and housing provide jobs, as their lobbyists are quick to point out. But it is hard to see how the jobs of the future will spring from unnecessary back surgery and garden-variety arbitrage. They differ from the growth engines of the past, which delivered fundamental value — faster transportation or new knowledge — and let other industries then build off those advances.
Obamacare and Frand-Dodd are good steps in the right direction but not enough. The housing bubble was deflating on its own and jobs were moving to other sectors until the financial crisis hit.
The rate at which new companies are created has been falling for most of the last decade. So has the pace at which existing companies add positions. “The current problem is not that we have tons of layoffs,” Mr. Katz says. “It’s that we don’t have much hiring.”
If history repeats itself, this situation will eventually turn around. Maybe some American scientist in a laboratory somewhere is about to make a breakthrough. Maybe an entrepreneur is on the verge of creating a great new product. Maybe the recent health care and financial-regulation laws will squeeze the bloat.
For now, the evidence for such optimism remains scant. And the economy remains millions of jobs away from being even moderately healthy.
What is needed is more government spending to help with aggregate demand and for Bernanke to get some Volckerian resolve. Inflation will help with deleveraging and inflation will get those sitting on money to invest and spend. It will boost the velocity of money.

Ideally, we would have a 21st century WPA program which could be modeled on the way the National Science Foundation doles out grants.
Steve Jobs' 10 favorite albums:
  1. Rolling Stones "Some Girls"
  2. Grateful Dead "American Beauty"
  3. Cat Stevens "Tea for the Tillerman"
  4. Peter, Paul and Mary "Around the Campfire"
  5. Jackson Browne " Late for the Sky"
  6. John Lennon "Imagine"
  7. Glenn Gould "Bach: The Goldberg Variations"
  8. Miles Davis "Kind of Blue"
  9. Bob Dylan "Highway 61 Revisted"
  10. The Who "Who's Next"
Adam Serwer: Conservative Pundit Says "Get A Job Hippies!"
    "L" not "V" shaped recovery 
    (or Obama was smokin' some of that Hawaiian green shoots)

    DeLong : More Evidence That Obama Tacked in the Wrong Direction at the End of 2010...
    … and replaced a team where at least some key senior players knew what they were doing with one in which nobody in the inner circle did.

    I'm sorry, but no. Even if you think in 2009 that there will be a "V"-shaped recovery, you take steps in 2009 so that you can do the needed policy in 2010 if the "V"-shaped recovery does not materialized. You:
    • Make sure the chair of the Federal Reserve does not regard the avoidance of absolute deflation as a reason to sit on his hands.
    • Make sure the Fed chair is backed up by governors who understand the Federal Reserve's dual mandate.
    • Prepare to do quantitative easing via the Treasury by using TARP authority money as mezzanine financing.
    • Prepare to do infrastructure investment via the Treasury by using TARP authority money as mezzanine financing.
    • Prepare to intervene in the housing market on a very large scale by getting Fannie and Freddie in shape to do so.
    • Pass a budget resolution early in 2010 so that you can do expansionary policy via Reconciliation later on if you need to.
    Those are six things you do in 2009 (and at the start of 2010) to prepare for an "L"-shaped recovery. Obama did zero of them.
    Tim Duy (via Mark Thoma):
    "Sure, we can argue that Republican intransigence is the core policy problem. But at the same time, the Administration had no back-up plan for an L-shaped recovery, joined the fiscal austerity parade, and continued to place faith in reaching a "Grand Bargain" on the debt rather than focusing on the issue at hand - the unemployment crisis."

    Recessions, you can see, happen when total nominal spending growth dips. But it normally bounces back. During 2009, however, we had an unprecedented collapse in total nominal spending. What’s more, the 2010 “recovery” year was just as bad as normal recession years. So now look at the large and growing gap between the actual path of total nominal spending and the 5 percent trend growth rate:
    This is what’s not accounted for in the Bernstein/Romer projection. There is no X-Force driving convergence to the long-term trend. The failure of the X-Force to materialize has nothing to do with the fact that the Commerce Department initially underestimated the depth of the recession. The existence of the X-Force was a modeling assumption, not an empirical calculation. And I think it’s an assumption that’s best understood as an assumption about the stance of the Federal Reserve—a view that the Fed, with its words and deeds, would push us back up to the trend leaving Congress with the responsibility for safeguarding human welfare during the transition. It’s an assumption that I think anyone familiar with Ben Bernanke’s academic work would have shared, so I understand why Romer especially (who shares my view of the situation) espoused it. But of course she’s gone, and I’m not sure that references to “headwinds” from Europe fully accounts for the depth of the problem here.

    Monday, October 10, 2011

    comments from Jared Bernstein on Ezra Klein's narrative

    But I’ve come to view the deleveraging point as only one part of the problem, and one that’s actually hard to parcel out from the lousy jobs market, which is the main constraint on consumers.  The Fed’s debt service ratio—the share of income households are spending to service their debt—is the lowest it’s been since the mid-90s (though the fact that it’s still falling suggest the deleveraging cycle isn’t over).

    I think the bigger problem is in the banks, and it’s born of that extremely combustible combination: debt and psychology.  When an equity (as opposed to a debt) bubble pops, markets move quickly to mark down the asset inflation born of speculation.  A share of stock in some worthless fad that was worth $1,000 on Monday can be worth $1 by Friday.
    Debt bubbles don’t work that way.  Debt-based assets don’t get “marked-to-market” in the same way as stocks.  De-nile ain’t just a river, and banks who hold such assets can engage in “extend and pretend” in a way they can’t when an equity bubble pops.  This is especially the case in a housing bubble.  Holders of non-performing mortgages that are deeply underwater—and more than half of the 11 million underwater mortgages are more than 25% below sea-level—convince themselves that these assets turned liabilities will resurface and sail again someday.
    And in fact, some will.  But many won’t and to admit that and mark them down means the bank needs to find more capital to keep its balance sheet in shape.  Basically, a debt bubble injects human nature into the problem, and our nature is to cross our fingers and engage in magical thinking about zombie assets coming back life.
    First, the fact that we failed to recognize the depth of the recession was not at the heart of the problem.  Other trusted voices—Klein mentions Krugman and Stiglitz (I’d add Dean Baker and Larry Mishel)—were warning that things were going to be worse than our forecast, and we heard them.  I myself, as quoted in Ezra’s piece, told the NYT in December of 2008: “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”  (And see footnote 1 in Romer/Bernstein, e.g.)
    We wanted to the largest package we could get and that was arguably what we ended up with.  Moreover, the damn thing worked pretty much like we thought it would.   Our mistake was failing to follow up on the initial success.

    As Carmen Reinhart herself says in the piece, the Recovery Act prevented recession from morphing into depression.  The engine was racing in reverse, and our actions and those of the Fed shifted it into neutral, where we’ve been stuck ever since, and stuck at an unacceptably high level of under-capacity.

    What kept us from doing more?  In fact, we did do more, but again, not enough.  We extended unemployment benefits, the first time homebuyers credit, the Hire Act, the payroll tax holiday, a small business lending bill, and more.
    So part of our problem is that nobody does counterfactuals—what would have occurred absent the intervention.  That’s understandable, and we should have tried harder to communicate that issue to the public.  Still, I’m not sure if we could have made a difference.  I do know that talking about green shoots didn’t help (I remember some critic at the time suggesting that we must be smoking green shoots).

    But I actually think the “green shoots” mistake is an important hint.  One reason to go there is because if you believe things are truly getting better—if you really think that soon the private sector can pick up the growth baton—then you can pivot away from spending toward deficit reduction.  And the internal desire to do that is always strong in the White House—at times like this, too strong.
    This isn’t just an Obama issue.  FDR did the same thing.
    In other words, one of the reasons we historically under-react to economic downturns is an irrational fear of temporary deficit spending.  The main question we want to ask both back then and right now is not “is the deficit getting too large” but “is it large enough?”  As long as the economy is operating under capacity and the spending is temporary—think Recovery Act, not Bush tax cuts—to do too little in the name of deficits, bond vigilantes, and Treasury rates (which are now at historic lows), is to condemn millions to unnecessary unemployment, declining living standards, and even, in the case of the young, permanent scarring.

    I’ll have a lot more to say about this in an article coming out soon in the journal Democracy, and it’s but one of many dynamics that contributes to the immunity that Klein discusses.  And, yes, for many in Congress it’s a tactic—they don’t care about the deficit other than its use a cudgel against doing something to help someone other than their funders.  But as long as we fail to understand the dynamics of deficits—their need to expand as much as necessary in bad times and contract in good ones—we will never be able to meet the market failures we face now or in the future.
    (And I deleted the Yglesias CAP blog link in the right column because of his shitty comment system. Bye Matt. Best of luck.)
    article on Hitchens by Charles McGrath

    Sunday, October 09, 2011

    Ezra Klein's narrative is better informed than most, but ultimately a white wash.

    Here's a Krugman post from January, 2009.
    So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.
    One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am.
    Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.
    Krugman comments on Klein's analysis

    Dean Baker comments