Hot for Coolidge by David Greenberg

The Economic Consequences of Mrs. Merkel by David Glasner

...However, the consequences of the decision to restore the prewar [gold] parity were, at least initially, less devastating than Keynes predicted. Contrary to Keynes’s prediction, unemployment in Britain actually declined slightly in 1926 and 1927, falling below 10% for the first time in the 1920s. Hawtrey’s conjecture that the Federal Reserve, then led by the head of the New York Federal Reserve Bank, Benjamin Strong, would follow a mildly accommodative policy, alleviating the deflationary pressure on Britain, turned out to be correct. However, ill health forced Strong to resign in 1928 only months before his untimely death. His accommodative policy was reversed just as the Bank of France started accumulating gold, unleashing deflationary forces that had been contained since the deflation of 1920-21.

Fast forward some four score years to today’s tragic re-enactment of the deflationary dynamics that nearly destroyed European civilization in the 1930s. But what a role reversal! In 1930 it was Germany that was desperately seeking to avoid defaulting on its obligations by engaging in round after round of futile austerity measures and deflationary wage cuts, causing the collapse of one major European financial institution after another in the annus horribilis of 1931, finally (at least a year after too late) forcing Britain off the gold standard in September 1931. Eighty years ago it was France, accumulating huge quantities of gold, in Midas-like self-satisfaction despite the economic wreckage it was inflicting on the rest of Europe and ultimately itself, whose monetary policy was decisive for the international value of gold and the downward course of the international economy. Now, it is Germany, the economic powerhouse of Europe dominating the European Central Bank, which effectively controls the value of the euro. And just as deflation under the gold standard made it impossible for Germany (and its state and local governments) not to default on its obligations in 1931, the policy of the European Central Bank, self-righteously dictated by Germany, has made default by Greece and now Italy and at least three other members of the Eurozone inevitable.

Correcting the Correction of the Big Lie by Dean Baker

Barry Ritholz has a nice takedown of Mayor Bloomberg's claim that Congress forced the banks to make lots of money by selling bad mortgages. As Barry rightly points out, this is not a story that serious people can tell. It's like denying climate change or evolution.

However, there are two items worth correcting in Ritholz's account. First, the core problem facing the economy today is not the legacy of the financial crisis, it is the bursting of the housing bubble. While it was a lot of fun watching the banks fall like dominos in the fall of 2008, and seeing all the honchos who told us this could never happen staying up late on weekends trying to stem the crash, this is really secondary in the story of the economy's current problems.

Whatever the problems of the banking system, they are not holding down the economy. Creditworthy borrowers (by pre-bubble standards) can get mortgages at record low interest rates. The same is true for larger corporations who borrow directly on credit markets. Even few smaller businesses report access to credit as major problem.

Rather the economy's problem is that there is no source of demand to replace the consumption driven by housing bubble wealth that has now disappeared or the housing construction that resulted from hugely inflated bubble prices. We would be in pretty much the same situation today even if there had been no financial crisis. This can be seen by the example of other countries, most notably Spain, that had a much better regulated financial system. Like the United States, Spain had a huge housing bubble that burst, as a result it is still facing double digit unemployment even though it had no financial crisis.

The other item that needs correction is Ritholz's comment that Greenspan and the rest believe that leaving the market to run itself is the best way to manage the economy. In fact, Greenspan and other alleged free marketers have no interest whatsoever in the free market. They totally support explicit insurance, in the form of deposit insurance and implicit insurance in the form of "too big to fail" guarantees. The banks have taken advantage of the latter insurance in a big way in the last three years.
What we are really fighting over is not a free market, but rather whether the banks will have to pay for the insurance that they get from the government and also face restrictions on their actions as a result of this insurance. (The company that insures my house prohibits me from setting up a fireworks factory in the basement.)

It is understandable that banks, that want to get their government insurance for free, would like to pretend that they just want a free market, but people who don't share the banks' agenda should be not be fooled by this claim.

Quick Thoughts on the Obama Administration's Opposition to a Financial Speculation Tax by Baker


The End of Loser Liberalism available for free here.

Jared Bernstein has a blogpost about Baker's new book.

As Dean sees it, conservatives are not at all the free market advocates they claim to be.  You’ll be hard pressed to find Adam Smith’s invisible hand anywhere in the story he tells, but you’ll see conservatives’ thumbs on policy scales throughout the economy.

There’s the anti-inflation bias at the Fed, which puts more weight on price stability than on low unemployment, thus providing greater protection to the assets of the wealthy than to the livelihoods of working families.  There are the strong dollar and trade policies that put our manufacturing workers at a comparative disadvantage to our competitors.

There’s anti-union bias, the government bailout backstopping the biggest banks, government-provided patent monopolies, corporate liability protections, favorable tax rates for non-labor income, and housing policies that disperse the biggest benefits to the richest homeowners.

In every case, the wealthy have used their money, power, and clout to tweak the politics and the market in ways that make money float up.  Yet their rhetoric is all free markets, with lots of deep caterwauling against liberals and their socialist ways.

Dean’s argument is not, however, that liberals should embrace true free market ideology.  While he wants the market to work out the details around those issues that markets handle most efficiently—pricing commodities, for example—he has no beef with structuring market returns.  He just wants them structured on behalf of the broad middle-class on down to the poor.

Double dip recession? Years of rising unemployment? Time for a good old fashioned riot.



Mental Health Break a la Andy Sullivan:

Great...

The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.

The Federal Reserve Needs to do so now.

DeLong in alarmist mode.

I enjoy a good frisson as much as the next person, but still....

The Military Keynesian Fairy

Krugman blogged here about Steve Randy Waldman and Secular Stagnation.

After WWII there was concern that the economy would fall back into a slump again after demobilization but inflation helped deleverage wartime debts and military spending increased again with the onset of the Cold War. So military Keynesianism has always been a stimulus for the post war economy.

@SandraBernhard live-tweeting the Republican debates (I find myself unable to watch them):

rick perry has old west hair

@Sam_Levinson jim cramer is a carnival barker sam.

joh huntsman you just blew 10 seconds of your 30 feigning surprise you only had 30 seconds to respond

Neil Irwin tweets:

On the day @mattyglesias leaves Paris, EUR-USD is down 2.1%. COINCIDENCE?!?!?!

Okay little Matty, as Mad Max Sawicky used to call him, is now officially a member of the neoliberal-Georgetown-hipster establishment.

Manohla Dargis's review of Clint Eastwood's J.Edgar reminded me of this piece by Hitchens on Republican Senator Larry Craig. Dargis:

Later, Tolson applies for a job at the F.B.I. and is eagerly hired by Hoover, inaugurating a bond that became the subject of titters but that Mr. Eastwood conveys matter-of-factly, without either condescension or sentimentality. Before long Tolson is helping Hoover buy his suits and straightening his collar, and the two are dining, vacationing and policing in lock step.

Tolson becomes the moon over Hoover’s shoulder, a source of light in the shadows. Even the ashcan colors and chiaroscuro lighting brighten. In these scenes Mr. Hammer gives Tolson a teasing smile and the naked face of a man in love. Mr. DiCaprio, by contrast, beautifully puts across the idea that the sexually inexperienced Hoover, while enlivened by the friendship, may not have initially grasped the meaning of its depth of feeling.

Mr. Eastwood does, and it’s his handling of Hoover and Tolson’s relationship that, as much as the late-act revelation of the pathological extent of Hoover’s dissembling, lifts the film from the usual biopic blahs. Mr. Eastwood doesn’t just shift between Hoover’s past and present, his intimate life and popular persona, he also puts them into dialectic play, showing repeatedly how each informed the other. In one stunning sequence he cuts between anonymous F.B.I. agents surreptitiously bugging a bedroom (that of the Rev. Dr. Martin Luther King Jr., a resonant, haunting presence seen and heard elliptically and on TV) and Tolson and Hoover walking and then standing alone side by side in an elevator in a tight, depthless, frontally centered shot that makes it look as if they were lying together in bed.

Although Hoover and Tolson’s closeness was habitual grist for the gossip mill, the lack of concrete evidence about their relationship means that the film effectively outs them. Certainly a case for outing Hoover, especially, can be made, both because he was a public figure who, to some, was a monster and destroyer of lives, and because he was a possibly gay man who hounded homosexuals (and banned them from the F.B.I.). But this film doesn’t drag Hoover from the closet for salacious kicks or political payback: it shows the tragic personal and political fallout of the closet. And Mr. Eastwood and Mr. Black’s expansive view of human frailties means that it’s Hoover’s relationship with Tolson — and the foreboding it stirs up in Hoover’s watchful mother (Judi Dench) — that greatly humanizes him.

Hitchens:

I knew it was all over for Sen. Larry Craig when he appeared with his long-suffering wife to say that he wasn't gay. Such moments are now steppingstones on the way to apology, counseling, and rehab, and a case could be made for cutting out the spousal stage of the ritual altogether. Along with a string of votes to establish "don't ask, don't tell" and to prohibit homosexual marriage, Craig leaves as his political legacy the telling phrase "wide stance," which may or may not join "big tent" and "broad church" as an attempt to make the Republican Party seem more "inclusive" than it really is.

But there's actually a chance—a 38 percent chance, to be more precise—that the senator can cop a plea on the charge of hypocrisy. In his study of men who frequent public restrooms in search of sex, Laud Humphreys discovered that 54 percent were married and living with their wives, 38 percent did not consider themselves homosexual or bisexual, and only 14 percent identified themselves as openly gay. Tearoom Trade: Impersonal Sex in Personal Places, a doctoral thesis which was published in 1970, detailed exactly the pattern—of foot-tapping in code, hand-gestures, and other tactics—which has lately been garishly publicized at a Minneapolis-St. Paul airport men's room. The word tearoom seems to have become archaic, but in all other respects the fidelity to tradition is impressive.

The men interviewed by Humphreys wanted what many men want: a sexual encounter that was quick and easy and didn't involve any wining and dining. Some of the heterosexuals among them had also evolved a tactic for dealing with the cognitive dissonance that was involved. They compensated for their conduct by adopting extreme conservative postures in public. Humphreys, a former Episcopalian priest, came up with the phrase "breastplate of righteousness" to describe this mixture of repression and denial. So, it is quite thinkable that when Sen. Craig claims not to be gay, he is telling what he honestly believes to be the truth.

Nominal GDP Targeting Plus: Answering Doug Henwood's Question with a: "Yes, Expansionary Fiscal Policy Would Be Good" by DeLong

Over at the Twitter Machine Doug Henwood complains:

@DougHenwood: @delong Will someone explain to me just how "targeting" NGDP will change anything? What more could the Fed do without fiscal help?

Well, if the Federal Reserve supports its nominal GDP level target by--as Goldman Sachs's Jan Hatzius wants--buying $100 billion of long-term bonds a day for cash over the next month, then the Federal Reserve will have freed up some risk-bearing capacity and banks will be willing to loan more to finance business investment and aggregate demand will rise.

So it would do something. Enough to make its target NGDP growth path automatically credible? God only knows.

That's why I'm in the "print money and buy stuff" camp.

Expansionary fiscal policy may be necessary to make monetary expansion effective--a Jacob Viner thought it was back in 1933.

Currently, I am rereading William Greider's excellent Secrets of the Temple which was published in 1987. The subject of nominal GDP comes up a few times. It's February 1982 and the Fed is tightening but confused over the effects it's targeting of M-1 was having on the economy.

[non-monetarist Boston Fed President Frank] Morris proposed that the Fed instead base its policy decisions on other indicators - the growth of all liquid assets or total debt in the real economy or even a broad goal for the size of nominal GDP. If the confusing mystique of the Ms was discarded in favor of more familiar economic guideposts, the public (and the politicians) would at least have a better grasp of what the Federal Reserve was actually doing - regulating overall credit and growth for the entire national economy, "One advantage of the nominal GDP as a goal is that it would upgrade the quality of the dialogue on monetary policy," Morris said.

Either the Fed can ease more or it can't. Bernanke say they can if inflation drifts lower. Minneapolis Fed President Kocherlakota say they could "put downward pressure on long-term market interest rates in at least two ways. First, it could buy more long-term Treasury securities or securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac. Second, the Committee could extend its prediction for how long it will keep its target short-term interest rate exceptionally low. So, tools—and choices—remain." Philadelphia Fed President Plosser argues against inflation (pay wall) so presumably he feels they can inflate.

If I were Charlie Evans I would point to the swirling European Feedback Cycle of Doom to bolster my argument for additional policy accommodation.

Yglesias tweets "mattyglesias Fed needs to let Italy reorganize as a Bank Holding Company with access to the discount window."

Obama effectively replaced Daley with Rouse as chief-of-staff.

Jonathan Chait discusses Obama's year-three misteps

(via DeLong)


What Political Compromises Could Create Jobs? by Dean Baker

1. Work sharing

2. Right to rent

3. Pushing the Fed

4. Lowering the value of the dollar

Voters Defeat Many G.O.P-Sponsored Measures 

Taken together, Tuesday’s results could breathe new life into President Obama’s hopes for his re-election a year from now. But the day was not a wholesale victory for Democrats. Even as voters in Ohio delivered a blow to Gov. John R. Kasich, a Republican, and rejected his attempt to weaken collective bargaining for public employees, they approved a symbolic measure to exempt Ohio residents from the individual mandate required in Mr. Obama’s health care law.

Ohio Turns Back a Law Limiting Unions’ Rights

Someone alert David Brooks! He's always trolling the east and west-coast Blues staters about how Americans are conservative and don't like unions and government.

Regarding Obama's Affordable Care Act, Health Law Survives Test in Court of Appeals:

A federal appeals court in Washington upheld the Obama administration’s health care law on Tuesday in a decision written by a prominent conservative jurist. 

he decision came as the Supreme Court is about to consider whether to take up challenges to the Affordable Care Act, a milestone legislative initiative of the administration.

Of four appellate court rulings on the health care law so far, this is the third to deal with the law on the merits, and the second that upholds it.

European Feedback Cycle of Doom (part due)
(or "Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah's Flood.")


As the rates of Italian ten year bonds pass 7 percent (after a brief pause at 6.66 (what's up?!?! Just stopped to say hi)) Krugman comments:

I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what’s needed to avoid that failure. Irresistible force, meet immovable object — and watch the explosion.

DeLong provides an explanation for the blissfully ignorant:

Italy's debt is sustainable if Italy must pay 4%/year in interest to borrow. If Italy must pay 7%/year in interest its debt is not sustainable: the Italian government must then com cup[sic] with an extra €60bn/year to appease the bondholders--that's an extra 4.3% of GDP in taxes.

And if nothing has done to convince bondholders that extra 4.3% of GDP tax increase dedicated to compensating them for default risk is coming, next year what will be needed will be not 4.3% of GDP but 8.6% of GDP.

Burlesque-oni looks to be on his way out as the bond vigilantes (and the German cult of 2 percent inflation) accomplish what numerous sex scandals could not.

John Quiggin* on the European Central Bank, crisis enabler.

But Mr. Draghi needs to do even more if he is to avoid becoming the first central banker in recent history to preside over the collapse of the currency he was appointed to manage.

The crucial step is to announce that the central bank will stand behind the sovereign debt of euro zone members, if necessary at the expense of the 2 percent inflation target. This would give governments the financial resources they needed to recapitalize banks. Since the crisis is largely one of confidence, it is likely that bond markets would stabilize without the need for large-scale bond purchases, once there was a credible commitment to intervene where necessary.

In his first news conference as the central bank’s president, Mr. Draghi gave mixed signals. Rhetorically, he emphasized consistency with the failed policies of the past. But in practical terms, he announced a cut in interest rates, effectively admitting that the last increase, only five months ago, was a mistake.

The opportunity for him to take a new path will not last long. If current policies are pursued, the European Central Bank will end up by destroying the euro in order to save it from (largely hypothetical) inflation.

-----------------------------
*author of the infamous 6-6-6 plan.

Yglesias links to Steve Randy Waldman's post on negative interest rates. A commenter at interfluidity writes:

“Land owners at full gluttony can eat no more than a small fraction of potential output, and they cannot store the surplus. Technology and population are stable, but land owners face negative real interest rate. There are laborers who would be glad to borrow the surplus bread, but they have no capacity to repay. The real interest rate on the bread lending market would be -100%.’

SRW, this observation seems too close to Marx’s prediction that capitalists capturing more of the surplus value will eventually experience falling profit, while workers become more exploited. It seems the world has been in this place before, and we need to save capitalism from destroying itself.

Good post by a guy who worked for Ronnie Raygun, Jack Kemp and Ron Paul. Krugman worked in the Reagan administration. Doug Henwood was a young Republican in college. Often the left's smartest members are turncoats and class traitors.*

Can the Fed Stimulate Growth or Only Inflation? by Bruce Bartlett

But conservatives want nothing to do with N.G.D.P. targeting. Amity Shlaes, a columnist with Bloomberg News and a former Wall Street Journal editorial writer, denounced the idea in a Nov. 2 column, calling it “a license to inflate.”

Her view is that if a recession causes growth to fall, unemployment to rise and home prices to crash, people should just suck it up and learn to live with it. Allowing prices to rise from wherever they are, even if there has been a deflation that caused them to fall, opens the door to stagflation and even hyperinflation. It’s a risk too great to take. The risk of continuing the status quo is, apparently, nothing to be concerned about.

It’s tiresome to read such rationalizations for doing nothing about the second-greatest economic crisis in our history, especially from someone like Ms. Shlaes, who is well versed in the history of the Great Depression.

Then, too, there were those just like her, like Henry Hazlitt, an editorial writer for The New York Times, and Benjamin M. Anderson, an economist with Chase National Bank, who also said people should just suck it up, that unemployment was only caused by excessive wages and greedy workers and that inflation was a cure worse than the disease, even as the price level fell 25 percent from 1929 to 1933.

Amity Shlaes, welcome to my rogues gallery!
-------------------------
*like Hugo Stiglitz --- video montage of Stiglitz scenes

 

"The sense of entitlement carried by savers in our society would put any welfare queen to shame."
(or a Balance of Payments Problem / Global Savings Glut)


Krugman blogs about a Randy Waldman post and they are both getting at what I've been trying to describe by way of a Grand Unified Theory (GUT) of "late capitalism." Krugman writes:

He then argues that the”natural” real rate of interest — the interest rate that would match savings and investment at full employment — has been negative for quite a while, and that we’re only seeing this now because various bubbles and deregulatory schemes have masked the reality.

What he doesn’t say, but immediately strikes anyone who knows some of the history here, is that this amounts to a return of the “secular stagnation” hypothesis that was popular in the early postwar years; the hypothesis was that there was a fundamental excess of desired savings over desired investment, and that this would require government intervention on a sustained basis to achieve full employment.

That hypothesis proved wrong at the time, but that doesn’t mean it couldn’t be true now. And I’m somewhat sympathetic to the view that it might indeed be true.

Waldman goes on to suggest that high income inequality is what’s driving this — he has a little parable involving bakers and bread that ultimately comes down to the rich being satiated while the poor cannot afford to buy.

OK, I like little parables. But I have a problem with this one, for one simple reason: any such story, basically an underconsumptionist story, would seem to depend on the notion that rising inequality has led to rising savings. And you just don’t see that. Here’s private saving as a share of GDP:

Obviously it jumped up after the housing bust, but until then it was actually declining, and even now it’s below historic highs. I just don’t see how to make the underconsumption story work.

But then the question is, why do we find it so hard to achieve full employment even with saving somewhat low by historical standards. And the answer seems clear: it’s the trade deficit. America in the 70s and 80s could have high savings, not hugely strong investment, but still have full employment because trade deficits weren’t as large compared with the economy as they are now.

And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.

Do you sort of see why I’m a hawk on China policy?

A Balance of Payments Problem (BOPP)

Financial Big Lies by Krugman

Barry Ritholtz has a fine piece in the WaPo taking off from Michael Bloomberg’s recent venture into the rewriting of history. And I think Ritholtz’s Big Lie framework is just perfect.

After all, the way to understand the “Barney Frank did it” school of thought about the crisis is that it’s an attempt to turn a huge defeat for conservative ideas into a win. The reality of the financial crisis was that deregulation — which was part of a broader rightward shift in policies that played a large role in creating rapid growth in income inequality — led to an economic catastrophe of the kind that just didn’t happen during the 50 years or so when we had effective bank regulation.

So the right’s answer is to claim not just that the government did it, but that it caused the crisis by its attempts to reduce inequality! It’s kind of a masterstroke, in an evil way.

And I think it’s important to recognize the motives here. By all means let’s debunk the claims on substantive grounds, which Mike Konczal does very well. But they’ll just keep spouting these claims, and make up new ones, so you need to understand the fundamental bad faith that is driving the whole debate.

I agree but Ritholz writes:

Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).

There was also Bernanke's Global Savings Glut. Is there a problem with a system where low interest rates used to counter deflationary pressures cause bubbles? What if those low interest rates were used to invest in productive enterprises?

Somewhat related, Krugman blogs about a Gavyn Davies piece:

Gavyn Davies has a very good piece today offering another way to think about the euromess. I say “another way to think” advisedly — his analysis of the basics is, as far as I can tell, identical to mine, but he offers a different angle of approach that may be better than the route the rest of us have been taking. Here’s Davies:

It is normal to discuss the sovereign debt problem by focusing on the sustainability of public debt in the peripheral economies. But it can be more informative to view it as a balance of payments problem. Taken together, the four most troubled nations (Italy, Spain, Portugal and Greece) have a combined current account deficit of $183 billion. Most of this deficit is accounted for by the public sector deficits of these countries, since their private sectors are now roughly in financial balance. Offsetting these deficits, Germany has a current account surplus of $182 billion, or about 5 per cent of its GDP.

The euro problem can then be defined a finding a way (1) to finance these imbalances in the short run (2) end the imbalances over the medium run.

It’s also worth noting that we’re not talking about imbalances that have been going on forever.The internal imbalances of Europe are a recent development, coinciding with and almost surely caused in large part by the creation of the euro itself (GIPS is Greece, Italy, Portugal, Spain):

So how are these imbalances to be closed? European leaders have been completely unwilling to confront that question. Yesterday’s big Times piece offers a portrait of leaders — Trichet in particular — engaged in furious denial. It wasn’t just the insistence on Trichet’s part that no default could ever happen. The European Central Bank also went all in for the doctrine of expansionary austerity, aka belief in the confidence fairy.

And what Davies’s post drives home is that implicitly at least European leaders went in for the doctrine of immaculate transfer — in effect, they wanted to believe that the huge payments imbalances could be ended without major changes in relative prices.

So what’s happening instead is forced austerity in the deficit countries, not matched by expansionary policies elsewhere, in a low aggregate inflation environment — the ECB actually raised rates! — that makes adjustment almost impossible. The result is a eurozone headed for recession, and one in which a breakup of the euro itself is looking ever more possible.

Awesome.

The Politics of Austerity by Thomas Edsall

The economic collapse of 2008 transformed American politics. In place of shared abundance, battles at every level of government now focus on picking the losers who will bear the costs of deficit reduction and austerity. ...

The new embattled partisan environment allows conservatives to pit taxpayers against tax consumers, those dependent on safety-net programs against those who see such programs as eating away at their personal income and assets.

In a nuanced study, “The Tea Party and the Remaking of Republican Conservatism,” the sociologist and political scientist Theda Skocpol and her colleagues at Harvard found that opposition to government spending was concentrated on resentment of federal government “handouts.” Tea Party activists, they wrote, “define themselves as workers, in opposition to categories of nonworkers they perceive as undeserving of government assistance.”

In a March 15 declaration calling for defunding of most social programs, the New Boston Tea Party was blunt: “The locusts are eating, or should we say devouring, the productive output of the hard working taxpayer.”

The conservative agenda, in a climate of scarcity, racializes policy making, calling for deep cuts in programs for the poor. The beneficiaries of these programs are disproportionately black and Hispanic. ...

Less obviously, but just as racially charged, is the assault on public employees. “We can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots,” declared Scott Walker, the governor of Wisconsin.

For black Americans, government employment is a crucial means of upward mobility. The federal work force is 18.6 percent African-American, compared with 10.9 percent in the private sector. The percentages of African-Americans are highest in just those agencies that are most actively targeted for cuts by Republicans...

(via Mark Thoma)

WAPO Book Section Reviews Michael Brown on Disaster Relief and Bill Clinton on the Economy by Dean Baker

Given where we are today, Bill Clinton should be the second to the last person in the world (after Alan Greenspan) to be offering advice on the economy. During his presidency he set in motion the forces that led to the economic disaster that we are living through today.

Clinton gloried in the stock market bubble that led to a massive consumption boom (i.e. discouraged savings). News Flash! Bubbles burst, and the collapse of the stock market bubble gave us the recession in 2001. In terms of job creation, this was at the time the worst hit to the economy since the Great Depression. We didn't pass the pre-recession level of employment until February of 2005.

The other part of this mix was the massive trade deficit created by the Rubin-Clinton high dollar policy. The value of the dollar is the overwhelming determinant of the trade balance. The trade agreements and "competitiveness policies" that DC-types spend all their time on don't amount to a hill of beans by comparison.

By saddling the country with an over-valued dollar, Clinton guaranteed a large trade deficit. This trade deficit in turn guaranteed that we would have either large budget deficits or negative private savings. We had the latter in a big way in 2004-2007 with near zero household savings and a bubble driven building boom. And now we are living with the fallout.

Of course President Bush cannot escape blame since he had plenty of opportunity to turn the economy from this course and instead looked the other way. However it is remarkable that the Post could review Bill Clinton's book without ever noted the disastrous outcome from policies he promoted while in office. Undoubtedly Michael Brown looks forward to the Post's review of his book. Heckuva job Post!

The Inherent Ambiguity Of Inflation by Yglesias

Virginia Postrel writes about the difficulties of doing quality-adjustments for the purposes of calculating the Consumer Price Index. Something that I think often goes missing in these discussion is that this is fundamentally not a measurement problem. It’s a deep conceptual problem that’s totally unsolvable. Consider cases of quality deterioration. Nowadays to get the best prices in a supermarket, you need to swipe your loyalty card. This seems to bother Kevin Drum a lot and it bothers me not at all. So who’s “right” about this? Neither of us, obviously, and there’s thus no “right” answer to how the quality disamenity should be measured.

By the same token, something as seemingly quantifiable as a change in available legroom on airplanes turns swiftly turns into a series of ill-defined idiosyncratic preferences. How tall are you? For what purposes are you flying? What’s the state of your joints? The best way to think about CPI calculations is as an effort to solve a very practical problem. Social Security benefits (and the like) need some kind of annual adjustment that neither breaks the bank nor guarantees ever-falling living standards for elderly people. So we have an effort to construct a statistical series that will meet those goals. And it works pretty well. But don’t reify the concept of an inflation rate and then worry about whether or not the government is “really” calculating the “real” one. Things change in a lot of ways, preferences are heterogeneous and aggregating it all up into a single number is inherently wrong. It’s just that the programs need a single number.

I think this is something that should be kept in mind as the NGDP targeting debate continues. Because the phrase “real GDP” contains the word “real” and because inflation targeting is customary, it’s easy to think of NGDP as something weird that’s constructed of real output plus inflation. The truth is the reverse. Nominal output is something that’s directly measurable. Inflation is a product of a bureaucratic process. And “real” GDP is just nominal GDP minus the output of the bureaucratic process. If bulk commodities (oil, coal, wheat, rice, corn) constituted the bulk of economic output, you might say this isn’t the case. You can measure the quantities of commodities produced and also the prices charged. But the actual American economy isn’t like that. There’s not a fact of the matter about whether the more expensive hairstylist is “really” better than the other one.

Emphasis added.