Richmond Fed President Jeff Lacker speech: 

A key part of any forecast is inflation. In 2011, we were reminded that inflation can rise despite elevated unemployment. In 2010, the inflation rate was 1.4 percent.³ In the first 11 months of 2011, inflation has averaged 2.5 percent at an annual rate. Obviously the run-up in energy and food prices earlier this year played a big role in this increase. But the pickup in inflation last year was broad based. Core inflation ― which strips out food and energy prices ― was 0.9 percent in 2010, but averaged 1.7 percent in 2011 through November. This higher inflation rate in 2011, despite unemployment averaging 9 percent, undercuts the hoary notion that "slack" in the labor market can be counted on to keep inflation contained. This lesson is of course not new; we learned this all too well during the 1970s.

Despite last year's run-up, I believe the inflation outlook is reasonably good right now. Recent price trends have been quite favorable, and indeed, headline inflation has been quite low in recent months. The most likely outcome this year, in my view, is for overall inflation to average close to 2 percent. A rate noticeably below 2 percent is possible, particularly if global growth should soften enough to further ease pressures on commodity prices. But I still view the risks to inflation as tilted to the upside. A comparison of 2011 with the experience of 2004 through 2007, for example, suggests that an upswing in inflation at this stage of the business cycle is typically long-lasting.

Awful. Remember Godfather pizzaman Herbert Cain was a Fed vice president and Missouri has 2 Fed banks.

John Quiggin for NGDP level targeting

(via Yglesias)

How Larry Summers' memo hobbled Obama's stimulus plan by Dean Baker

DeLong writes the ur-blog post on the ur-text of Obama economic policy.

According to Suskind's book Summers was pushing for a second stimulus.

I agree with Delong when he writes:

1. not raising its estimates of the desired size of the Recovery Act as the economy and the forecast deteriorated between December 8, 2008 and inauguration day.
2. not setting up an alternative, Reconciliation-process track to create the option to do a second Recovery Act fiscal boost in late 2009 with a simple Senate majority should forecast revisions in fact be negative.

and

the premature rhetorical switch away from macroeconomic recovery to long term fiscal balance in January 2010, based not on a plan but simply on the hope that there would not be a jobless recovery.

Cochrane: Just don't call it "stimulus"! by Noah Smith

Cochrane blogs: "But many advocates, like Krugman and Delong, want more government spending even for times and for countries (Greece) with high interest rates."

I think they have a more nuanced answer. Austerity won't solve Greece's problems for many, many years.


David Brooks' Ignorance is Showing Again by Dean Baker

In his column today David Brooks provided a brief discussion that purports to show that the growing inequality is attributable to a mix of globalization and technology and the moral failings of the working class. A little reflection would lead people to reject both parts of this explanation.

John Cocharen welcome to my Rogues Gallery! Brooks is a longstanding member of good standing.

Yglesias tweets: "Alternate 2009: Obama nationalizes insolvent banks and appoints turnaround specialist Mitt Romney to reorganize them."

Most shocking thing in the Lizza article is the following (for me at least):

On February 5, 2009, just as Obama was negotiating the final details of the stimulus package, Summers and Timothy Geithner, the Treasury Secretary, drafted a memo to the President outlining a plan to save the collapsing banks. TARP, they believed, wouldn’t be enough. Seventy per cent of Americans’ assets were in four banks, three of which were in serious trouble. If the situation worsened, Obama might need to nationalize one or more institutions that were “at the doorstep of failure.” Indeed, “there is a significant chance that Citigroup, Bank of America, and possibly others could ultimately end up in this category.” Nationalization would expose the government to enormous financial risk and political peril. Obama would be forced to take “actions to get the government a dominant ownership position,” and the banks would then “be subject to substantial restructuring and government control including the replacement of long-standing top management and long-standing directors.” It was unclear whether such a takeover was legal. Moreover, there was a “real risk” that seizing control of banks could, in fact, destroy them.

Obama would need congressional support if he pursued nationalization. Geithner and Summers recommended that, if necessary, the F.D.I.C., which provides deposit insurance to millions of Americans, be used to take over the troubled banks. The F.D.I.C. was partly funded by small community banks, which garnered more sympathy than Wall Street firms.

They warned Obama, “We may, by being proactive, be blamed for causing the problems we are seeking to preempt. Further, there is the risk that by attempting a program of this kind, we will pull the ‘band-aid’ off a wound that we lack the capacity to sterilize and thus exacerbate problems.”

The plan was dropped in mid-March after a scandal erupted over lucrative bonuses paid to executives at A.I.G. At a pivotal meeting, according to the notes of someone who participated, Emanuel warned the President of “sticker shock” in Congress, and, he said, “There’s just no appetite for more money.” Obama, whose approval rating was still above sixty per cent, was more confident than his aides in his abilities to change public opinion and persuade Congress he needed the resources. “Well, what if we really explain this very well?” he asked. But the judgment of the political advisers prevailed. In hindsight, the case for nationalization was weak, but even if Obama had wanted to pursue it he couldn’t have. For the second time in as many months, a more aggressive course of action on the economy was thwarted by fears of congressional disapproval.

Zombie banks? Have they been a problem for the recovery? It's always Emanuel and Congress.

E-Textbooks should be free textbooks by Yglesias

But the potential for a true game-changer is out there in the form of Apple’s new iBooks Author software. The software is available for free to Mac owners and should make it relatively easy to put snazzy new digital textbooks together. This opens up the possibility that textbooks could be made the way they probably should have been made all along—by philanthropic institutions or government agencies rather than profit-seeking corporations. Freed from the need to physically manufacture, store, transport, and distribute books, it could become feasible for a university, a foundation, or even a large school district to simply hire someone to write the book.

Will anyone do it? Your guess is as good as mine. But they should. As it stands, K-12 education philanthropy in the United States is a game with hundreds of millions of dollars in play each year, even before you consider the universities. Freeing school districts from the costs of book acquisition by paying for the creation of high-quality free alternatives would be an excellent investment. Of course any philanthropist would hesitate to produce an Apple-exclusive product, but surely the Gates Foundation could be tempted to team up with its benefactor’s old rival Apple to break the textbook cabal. The good news is that the much-criticized user agreement associated with iBooks Author explicitly exempts books distributed for free from any restriction. In the short-term, of course, savings from free textbooks would be clawed back by the price of tablets. But schools are already spending bundles on computers, often with little to show for it. More to the point, the price of electronic gadgets falls steadily each year while textbooks keep getting more expensive. Apple’s technology plus a relatively modest investment from credible outsiders could not so much transform the $8 billion K-12 textbook market as destroy it altogether.

From Lizza's piece on Obama:

Summers informed Obama that the government was already spending well beyond its means. Yet in the coming months Obama would have to sign, in addition to a stimulus bill, several pieces of legislation left over from the Bush Administration: a hundred-billion-dollar funding bill for the wars in Afghanistan and Iraq; perhaps three hundred and fifty billion dollars more in funds from Bush’s TARP program, to prop up banks; and a four-hundred-and-ten-billion-dollar spending bill that was stuck in Congress. Obama would need resources to save G.M. and Chrysler, which were close to bankruptcy, and to address the collapsing housing market, which he was told would be hit with five million foreclosures during his first two years in office. Summers cautioned Obama, who had run as a fiscal conservative and attacked his Republican opponent for wanting to raise taxes, that he was about to preside over an explosion of government spending: “This could come as a considerable sticker shock to the American public and the American political system, potentially reducing your ability to pass your agenda and undermining economic confidence at a critical time.”

Obama was told that, regardless of his policies, the deficits would likely be blamed on him in the long run. The forecasts were frightening, and jeopardized his ambitious domestic agenda, which had been based on unrealistic assumptions made during the campaign. “Since January 2007 the medium-term budget deficit has deteriorated by about $250 billion annually,” the memo said. “If your campaign promises were enacted then, based on accurate scoring, the deficit would rise by another $100 billion annually. The consequence would be the largest run-up in the debt since World War II.”

There was an obvious tension between the warning about the extent of the financial crisis, which would require large-scale spending, and the warning about the looming federal budget deficits, which would require fiscal restraint. The tension reflected the competing concerns of two of Obama’s advisers.

Christina Romer, the incoming chairman of the Council of Economic Advisers, drafted the stimulus material. A Berkeley economist, she was new to government. She believed that she had persuaded Summers to raise the stimulus recommendation above the initial estimate, six hundred billion dollars, to something closer to eight hundred billion dollars, but she was frustrated that she wasn’t allowed to present an even larger option. When she had done so in earlier meetings, the incoming chief of staff, Rahm Emanuel, asked her, “What are you smoking?” She was warned that her credibility as an adviser would be damaged if she pushed beyond the consensus recommendation.

Peter Orszag, the incoming budget director, was a relentless advocate of fiscal restraint. He was well known in Washington policy circles as a deficit hawk. Orszag insisted that there were mechanical limits to how much money the government could spend effectively in two years. In the Summers memo, he contributed sections about historic deficits and the need to scale back campaign promises. The Romer-Orszag divide was the start of a rift inside the Administration that continued for the next two years.

Since 2009, some economists have insisted that the stimulus was too small. White House defenders have responded that a larger stimulus would not have moved through Congress. But the Summers memo barely mentioned Congress, noting only that his recommendation of a stimulus above six hundred billion dollars was “an economic judgment that would need to be combined with political judgments about what is feasible."

and

On May 5, 2010, Orszag, Summers, and Phil Schiliro, Obama’s director of legislative affairs, informed the President that he needed to settle the dispute over whether the centerpiece of his economic plan was jobs or the deficit. His aides laid out the history of their indecision, using an automobile as a metaphor. “This year, the Administration has strongly pushed two distinct messages on fiscal policy,” they wrote. The first was “providing more ‘gas’ ” to help the recovery; the second was demonstrating fiscal discipline by cutting spending, or “stepping on the ‘brake.’ ”

Obama had been bold on health care. But, as Summers had noted in a previous memo, there wasn’t enough “bandwidth” to pass many other priorities. Eighteen months into his Presidency, his economic advisers offered him essentially three paths: an ambitious new jobs package that he could personally advocate as an “emergency expenditure”; “a fiscally significant (several hundred billion dollars over ten years) deficit reduction package”; and an array of “new policies that have greater symbolic than deficit-reducing impact.” The ambitious options were seen as impractical. Congress was unwilling to pass “nearly as much fiscal stimulus” as Obama wanted. A deficit-reduction package would be “a very difficult undertaking that would entail resurrecting ideas you rejected in the budget process” and could “engender substantial political opposition, set up members of Congress for hard votes, and, possibly, produce a legislative defeat for the Administration.” Obama decided against both of the more ambitious ideas. He was left with “smaller, more symbolic efforts” that “are less politically risky,” like reforming federal travel and cutting military spending on congressional junkets. “The challenge here is to break through message-wise and convince the media, financial markets, and the public at large that these measures signify real efforts to restrain spending,” Obama’s economic team wrote.

If I had been president I would have discussed only closing the output gap and creating jobs. I wouldn't have talked about deficit-reduction or fiscal discipline.

When FDR went off the gold standard his economics advisers were horrified but he was re-elected twice.

Jared Berstein on the Dec. 2008 memo an Ryan Lizza's piece

(via Krugman)

Department of Huh?!?!

Moron blogger at "Tiny Revolution" twatted in reference to Lizza's Obama piece that "Krugman wasn't illusioned or ever a real ally. And on any non-crazy ideological spectrum, he's actually not especially liberal."

Krugman calls his blog "Consience of a Liberal." And the moron blogger Jon Schwartz wrote a stupid post about Hitchens, bin Laden, and the Palestinians, basically stupid lefty rationalizations and "contextualization" for the terrorist attacks. His type just brings our side down and should be frowned upon even if they'll cry "hippy puncher!"

Atrios sort of echoes Schwartz which is why I don't like "ultras," and Firebaggers who believe Obama's health care reform was a sell out or that Obama just bailed out the banks.

Lizza writes:

He offered the President four illustrative stimulus plans: $550 billion, $665 billion, $810 billion, and $890 billion. Obama was never offered the option of a stimulus package commensurate with the size of the hole in the economy––known by economists as the “output gap”––which was estimated at two trillion dollars during 2009 and 2010. Summers advised the President that a larger stimulus could actually make things worse. “An excessive recovery package could spook markets or the public and be counterproductive,” he wrote, and added that none of his recommendations “returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions—which would likely not accomplish the goal because of the impact it would have on markets.”

Paul Krugman, a Times columnist and a Nobel Prize-winning economist who persistently supported a larger stimulus, told me that Summers’s assertion about market fears was a “bang my head on the table” argument. “He’s invoking the invisible bond vigilantes, basically saying that investors would be scared and drive up interest rates. That’s a major economic misjudgment.” Since the beginning of the crisis, the U.S. has borrowed more than five trillion dollars, and the interest rate on the ten-year Treasury bills is under two per cent. The markets that Summers warned Obama about have been calm.

Summers also presumed that the Administration could go back to Congress for more. "It is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus," he wrote. Obama accepted the advice. This view—that Congress would serve as a partner to a popular new President trying to repair the economy—proved to be wrong.

At a meeting in Chicago on December 16th to discuss the memo, Obama did not push for a stimulus larger than what Summers recommended. Instead, he pressed his advisers to include an inspiring "moon shot" initiative, such as building a national "smart grid”—a high-voltage transmission system sometimes known as the “electricity superhighway,” which would make America’s power supply much more efficient and reliable. Obama, still thinking that he could be a director of change, was looking for something bold and iconic—his version of the Hoover Dam—but Romer and others finally had a “frank” conversation with him, explaining that big initiatives for the stimulus were not feasible. They would cost too much, and not do enough good in the short term. The most effective ideas were less sexy, such as sending hundreds of millions of dollars to the dozens of states that were struggling with budget crises of their own.

Lizza seems to be saying the facts showed that Krugman was right. These inside reportage tend to give a better view of Obama. He wanted a "moon shot" or to nationalize Citibank.

Obama should have done what the insouciant FDR when it came to going off the gold standard and blowing off his advisers who were horrified when he finally did it. Instead Obama listened to Summers, Orszag, and according to the memo to "Senior Federal Reserve" officials meaning probably Bernanke and Geithner. They warned that too big of a stimulus would "spook" the public.

In China they didn't worry about spooking the public, they just went ahead and did it.

Doug Henwood in SoCal

The Obama Memos by Ryan Lizza

Original December 2008 memo to President-elect Obama by Larry Summers

Summers and "Senior Federal Reserve Officials" (Bernanke and Geithner?) recommended that the stimulus not be too big or else it would "spook" the public. Obama's mistake was to listen to them.

However I'd cut Obama slack. In the midst of disaster I'd probably have kept those guys on since they were in the process of saving the economy.