the urge to purge

Austerians, deficit scolds, Mellonheads, the sequester, Pete Peterson, Ren & Stimpy.

How the Case for Austerity Has Crumbled by Krugman

U.S. Budget Deficit Shrinks Far Faster Than Expected by Annie Lowrey

The Facts Are In and Paul Ryan Is Wrong by Jonathan Chait

(via DeLong)

Emperor has no clothes

Wow what a week. This story in the New York Times by Jackie Calmes really struck me:

Economists See Deficit Emphasis as Impeding Recovery

When the emphasis has been the Deficit and government spending since 2010 thanks to Geithner, Obama, and the Tea Party. It's as if the boy yelled "The emporer has no clothes."

And DeLong on Moby Ben and Washington-Whale.

Powerful shit. About the hedge fund cranks (DeLong mentions in a comment that conservative economists like Marty Feldstein feel the same way.)

BERNANKE-HATERS AT THE SOHN CONFERENCE by DeLong

And Matthew Yglesias:

Hedge fund Bernanke hate: A lot of folks have remarked on the amazing outpouring of hatred for Ben Bernanke's allegedly inflationary monetary policies from the hedge fund set at the recent Sohn Conference, but I don't think anyone's really nailed it. Here's the thing about rich hedge fund guys. They're people. And like other people you may have met, they like money and don't like paying taxes. Where rich people are different is that they have a lot of money, so it's really tempting to say "hey lets take that money and give it to people who need the money more."

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.

And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

Time magazine lists Yglesias as one of 2013's best political Twitterers along with Franke-Ruta. Zero Hedge is listed for economics! WHY Zero Hedge??? Is Time trying to be seen as edgy? So Zero Hedge criticizes the banks, so what?

Can the Fed offset contractionary fiscal policy? by Ryan Avent

Monetarism Falls Short (Somewhat Wonkish) by Krugman

Washington Post Editorial Condemns Austerity in Europe! by Dean Baker

I double-checked to see that this is in fact April 28 and not April 1. This does seem to be real, a Washington Post lead editorial on Europe that calls for Germany to ease up on austerity and to allow the peripheral euro zone countries to grow again. 

I could nit-pick and point out that the editorial doesn't get everything right (nothing wrong with Germany running trade surpluses, if the surpluses were with fast-growing countries in the developing world), but we should just sit back and enjoy this one for a moment. Perhaps evidence and logic can actually have an impact on economic policy debates, even at the Washington Post.

The Urge to Purge by Krugman

The bad news is that sin sells. Although the Mellonites have, as I said, been wrong about everything, the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it.

Fed Fail Part XXIV (or opportunistic disinflation)

63 to 58 percent of the civilian population.

The Fed hasn't devalued too much so creditors retain the value of their claims. Deleveraging is done on the backs of the poor and working class, not split fairly between creditors and debtors.

Employers get a more pliant workforce with high unemployment and employees afraid to lose their jobs. However there has been downward nominal wage rigidity which probably has helped keep deflation at bay.

But news articles often report that people are taking new jobs at much lower pay levels.

Attacking the Treasury View, Again by Dean Baker

The IMF had become an unexpected opponent of fiscal austerity. Its research demolished the intellectual basis for the claim that fiscal contractions could be expansionary. It also showed that, at least in the short term, there was no basis for preferring spending cuts to tax increases to reach whatever deficit goal was set as a target.
...

Of course getting to full employment is the key question, but in principle if we get back to full employment we can hope to be able to restore the virtuous circle of the decades immediately following World War II, in which gains in productivity translated into gains in wages. This, in turn, led to increased consumption, spurring more investment, and, therefore, more productivity growth. It is important that the public understand that whether macroeconomic policy focuses on full employment or inflation-fighting, it is very much a class issue. Those placing the priority on inflation-fighting have decided to impose higher unemployment and lower wages on ordinary workers as the price of achieving their stated goal.

Unemployment Rate Without Government Cuts: 7.1% by Justin Lahart

The Labor Department’s establishment survey of employers — the jobs count that it bases its payroll figures on — shows that the government has been steadily shedding workers since the crisis struck, with 586,000 fewer jobs than in December 2008. Friday’s employment report showed the cuts continued in April, with 15,000 government jobs lost.

But the survey of households that the unemployment rate is based on suggests the government job cuts have been much, much worse.
In April the household survey showed that that there were 442,000 fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948.

Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has.
The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

Ceteris is rarely paribus, of course: If there were more government jobs now, for example, it’s likely that not as many people would have left the labor force, and so the actual unemployment rate would be north of 7.1%.

It's regressive tax on the middle and lower classes as bargaining power is reduced because of a weak labor market. Cyclical unemployment is transformed into long-term unemployment as the nation's human capital and productive capacity is degraded. It's effective class warfare in the wake of a financial crisis caused by the finanical-system-casino being left to its own devices sans regulation.

The Role of Austerity by David Leonhardt

Over the last two years, the private sector grew at an average annual rate of 3.2 percent, while the government shrank at an annual rate of 1.4 percent.

The combined result has been economic growth of 2.3 percent.

The Austerity Debacle by Krugman

Quiggin wrote

The finance minister, Rudolf Hilferding was a leading Marxist theoretician, but in matters of macroeconomic management Marxist orthodoxy coincided with the Treasury view. Hilferding argued that, while crises and depressions would inevitably bring about the downfall of capitalism in due course, in the meantime, there was nothing to do but to follow the dictates of capitalist sound money.

Brad DeLong unfinished paper on "liquidationism."

Wikipedia article on Hilferding

Wikipedia is pretty weak on "liquidationism." In its article on the Great Depression, it has:

The crisis had many political consequences, among which was the abandonment of classic economic liberal approaches, which Roosevelt replaced in the U.S. with Keynesian policies. These policies magnified the role of the federal government in the national economy. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state.

Bloggling the Zombies by John Quiggin

DeLong on the Great Crash, Great Slump and "Liquidationist" ideology

(via Krugman)

From the WSJ:

Economists expect Thursday’s GDP report from the Commerce Department will show the economy grew at a 2.7% annual rate in the third quarter. That would still leave economic output 6.7% below what the Congressional Budget Office estimates its potential is.  In other words, in a world where employment and economic activity were as high as they could be without the economy running into inflationary trouble, the U.S. would be producing about $900 billion more in goods and services a year than it is now.

Would it have been 2.7% without QE1 and 2?

(via Mark Thoma)

Krugman on Casey B. Mulligan an economics professor at the University of Chicago

If Mulligan wants to argue that point, fine -- but he presents as "the New Keynesian position" something that is just what he imagines, on casual reflection (or, again, maybe after talking to some guy in a bar) to be the New Keynesian position.

OK, so from now on I’ll assert that the Chicago position on unemployment is that we can cure it by sacrificing goats. Hey, I heard that somewhere -- no need to actually read anything they say, right?

Inflated Worries by Laurence Meyer


The Austerity Delusion by Krugman

Flirting With a Repeat of a Stunted Recovery by Leonhardt

On the positive side, exports and consumer spending are up, and the job market finally seems to be improving. If anything, last week’s jobs report probably undercounted recent gains. That often happens early in an economic recovery because the Labor Department has a hard time keeping track of newly started businesses.

On the negative side, oil prices have risen more than 40 percent since September, and every level of government is considering spending cuts and layoffs.

All in all, the situation is uncomfortably reminiscent of last spring. Back then, companies were just starting to hire again, before a combination of events -- including Europe’s debt crisis and the fading of the stimulus program here -- spooked them and cut short the recovery. It’s easy to imagine how energy costs and government cuts could do the same this year.

Why Budget Cuts Don't Bring Prosperity by Leonhardt

"It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively," says Ian Shepherdson, a Britain-based economist for the research firm High Frequency Economics, "and relative to Germany, which is tightening more modestly." Mr. Shepherdson adds that he generally opposes stimulus programs for a normal recession but that they are crucial after a crisis.

The trick is finding the political will to end the stimulus when the time comes. That is not easy, especially for Democrats, given that stimulus programs tend to include policies they favor. But the wave of recently elected Republicans, in Congress and the states, will no doubt be happy to help summon that political will.

For the sake of the economy, the best compromise in coming weeks would be one that trades short-term spending for medium- and long-term cuts. Beef up the cost-control measures in the health care overhaul and add new ones, like malpractice reform. Cut more wasteful military programs, like the F-35 jet engine. Force more social programs to prove they work -- and cut their funding in future years if they don’t.

By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying.

Why Jobs Haven't Come Back

Verizon Deal May Expose iPhone Flaws by Joe Nocera

Arsenal of Democracy

Dean Baker points us to an editorial at the Washington Post.

Nor is Mr. Obama or his economic policy to blame for the economy's inability so far to resume robust, job-generating growth. The economy faces a painful, protracted process of deleveraging. Households and companies must work off a huge overhang of debt built up during the boom, and they can't resume spending and investing in the meantime. That deleveraging will hamper growth for -- well, for as long as it takes. Government efforts may ease deleveraging, but to the extent they succeed, it is generally by postponing the day of reckoning and making it more expensive when it inevitably arrives. 

Baker also notes that those calling for sacrifice failed to foresee the $8 trillion housing bubble which caused the overleveraging of debt. As Krugman argues, we can work off the debt cleanly or ugly. In the meantime the government could boost aggregate demand to utilize excess capacity until the private sector recovers. 

Here Krugman blogs about a new paper which shows that fiscal stimulus worked during the prewar buildup to World War II.

What Gordon and Krenn point out is that we actually have more information than a simple comparison between the depressed peacetime economy and the war economy after Pearl Harbor: there was a period of more than two years when the United States was gearing up for war but not yet engaged in combat -- the Arsenal of Democracy era. Rationing was not yet in effect, and for at least part of this period the economy still had excess capacity despite a very large rise in government spending.

...in the prewar buildup you had a clear-cut expansion of federal spending on the order of 14 percent of GDP. That’s a real experiment with the economy. And the results were clearly Keynesian.

The editors at the Post seems to the think the stimulus bill worked to help prevent another Great Depression - actually it was negated by the "50 little Hoovers" at the state level - but they don't advocate more to get us to full employment and full capacity usage.

It seems to the editors at the Post were a little too complacent about the housing bubble and are currently too complacent about high unemployment, slow growth and disinflation.

Interesting bit from a commenter at Baker's blog:

From Keynes's The General Theory of Employment, Interest, and Money: Chapter 21 - Trade Cycle - Section III:

"Furthermore, even if we were to suppose that contemporary booms are apt to be associated with a momentary condition of full investment or over-investment in the strict sense, it would still be absurd to regard a higher rate of interest as the appropriate remedy. For in this event the case of those who attribute the disease to under-consumption would be wholly established. The remedy would lie in various measures designed to increase the propensity to consume by the redistribution of incomes or otherwise; so that a given level of employment would require a smaller volume of current investment to support it."