Yesterday I linked to this post by Yglesias on inflation. Commenter Max made a good point:

During the 90's and the early oughts, we also had a bigtime money-printing in place. Arguably we were expanding our money supply faster during the 90's and the oughts than we were in the '70's. (And here the Austrians have the their one useful insight: banking is a license to print money, and each bank is its own little Federal Reserve.) We did not suffer anomalous increases in unit labor costs (but we did have anomalous increases in the amount of credit!). And just so not coincidentally oil supplies were steadily increasing in volume during the period. When economic growth outran the ability to support steadily increasing growth, pop went the weasel. (emphasis added)

Also, on the difference between demand-pull/demand driven and cost-push inflation, commenter Philip Pinkelton writes:

You have to track causality here. Why did the unit labour costs rise? My reading is that unions saw inflation go up that was largely driven by oil price rises. When they saw prices go up they started demanding higher wages and this led to a classic wage-price spiral.

The underlying cause was the oil embargo. The response was the wage-bargaining on behalf of the workers. Then, wage-price spiral.

Here's the inflation from the era -- note the oil embargo kicks in in Oct. 1973 and instantly causes oil prices to skyrocket, the inflation then tracks this:

http://www.econedlink.org/lessons/images_lessons/6...

So, this was NOT a case of pure demand-led inflation which might result from a government running too high deficits. This was a political crisis which triggered an institutional crisis.

This sounds right to me. Inflation went also because of the Fed reserve trying to curry favor with Nixon and Vietnam War spending. There were a lot of variables, but it got locked in because of the power of unions to negotiate wage increases in anticipation (expectation) of further price increases. And so on. So maybe some of it was demand.

Are macroeconomic methods politically biased by Noah Smith

Inflation Denialism by Yglesias

Unit labor costs are basically wages divided productivity. It's not the price of labor, in other words, but the price of labor output. If productivity is rising faster than wages, then even if wages themselves are rising unit labor costs are falling. Conversely, if wages rise faster than productivity than unit labor costs are going up. Clearly there's nothing wrong with a little increase in unit labor costs here or there. But over the long term, growth in unit labor costs needs to be constrained or else it becomes impossible to employ anyone. And you can see that in the seventies it's not just that gasoline got more expensive, we had an anomalous spate of high unit labor cost growth. That was inflation and it's what led to the regime change that's governed for the past thirty years.

The Need for a Regime Change by Yglesias

I liked that during the 2008 campaign Obama said that productivity had long risen above wages (throughout the Clinton years) and that it was unfair.

Via DeLong, a 2002 piece on Krugman by Nicholas Confessore

His first and last sojourn in Washington began in 1982, when Martin Feldstein, then chairman of Ronald Reagan's Council of Economic Advisers (CEA), invited Krugman, Lawrence Summers, and a few other whiz kids onto the CEA's staff. The early '80s recession and debt crisis had thrown Reagan's economic policy into disarray, and Feldstein had been brought in to fix things up. Working in government had two contradictory effects on Krugman. On the one hand, it induced in him a deep dislike for those he would later describe as "policy entrepreneurs"--activists and journalists, usually lacking academic credentials, who seemed to exert so much influence over economic decision-making in Washington. Feldstein was a pioneer of the supply side policies then in favor among Reaganites, who believed taxes were the most important determinant of economic growth. But unlike policy entrepreneurs such as Jude Wannisky and The Wall Street Journal's Robert Bartley, Feldstein refused to pretend that Reagan's massive tax cut could pay for itself. When Feldstein insisted on issuing accurate budget projections anticipating government deficits, and even called for a small tax increase to offset them, the administration's supply side purists attacked. (Treasury Secretary Donald Regan even urged reporters to "throw out" the council's annual report.) Like many economists, Krugman cherished his discipline's purity, and the sight of Feldstein being pummeled for not painting a rosier election-year picture was deeply disillusioning. "One thing you learn when you're working in an administration--not to mention at the Fed, where it's even more extreme--is to think three times before you speak and then bite your tongue," says Alan Blinder, the Princeton economist and former vice chairman of the Federal Reserve. "That's not how academics normally behave."

...

Very soon, however, Washington disappointed Krugman again. His writing and congressional testimony about income inequality brought him to the attention of Bill Clinton's campaign in 1992, which used some of his findings to attack the Bush administration. When Wannisky and other conservatives argued that skyrocketing income inequality was in fact a myth, Clinton's aides enlisted Krugman to help them fight the ensuing propaganda war. When he published a defense of Clinton's economic plan in the Times that August, it was widely assumed that Krugman would be Clinton's pick, should he win, as chairman of the Council of Economic Advisers.

Clinton did win. But his economic transition team was headed by Robert B. Reich, a Harvard lecturer, journalist, and author who had penned the early '90s other big policy tome, The Work of Nations. Not only had Reich tussled with Krugman over trade policy during the 1980s; he had also gone to Oxford with Clinton. Eventually, Reich became Secretary of Labor in the new administration, while Berkeley economist Laura D'Andrea Tyson was named chair of the CEA. Many other economists were drafted into top administration slots, including Krugman's colleague from the Reagan days, Larry Summers. But Krugman was passed over--largely, say former Clinton officials, because he was deemed too volatile. (After clashing with fellow attendees at Clinton's Little Rock economic summit, for example, he had appeared on "Larry King Live" to declare the meeting "useless.")

The Peltzman Effect (or risk homoeostasis)

Keynes versus Modern Macroeconomics by Robert Waldmann

Mike Kimmel in the comment section:

The Peltzmann EfFect:(sic)  the more effective the satefy net is perceived to be, the more risks people will take.    Yes, it is micro, but I suspect applied to macro it explains a heck of a lot.  It explains why real economic growth rates in this country hit peaks in the 1930s and 1940s, and again in the 1960s, and have been going downhill since. 

Steve Roth comments on his comment:

Very interesting. I've been pondering the idea that widespread economic security is a public good, with positive externalities in encouraging "good" risk-taking and allocation of investment. (See the latest at interfluidity.) Ironically, this involves using the Peltzmann Effect to argue for positive outcomes, rather directly contrary to Peltzman's examples.

Kenyan Socialists would agree with Roth. The strong economic performance of the 50s and 60s was due to the safety net and creation of the middle class via the New Deal and GI Bill, etc. In the 1970s things went sideways as Japan and Germany came online and the inflation of the 70s brought on a Thermidor by the ruling class such as Doug Henwood has discussed. We've been living with the consequences ever since.

Starter Savings Accounts by Steve Randy Waldman

These “starter savings accounts” would be a popular vehicle for ordinary people who want convenience and safety with as little entanglement as possible in casino finance.

But the real benefit would be macroeconomic. “Market monetarists”, MMTers, and old-fashioned Keynesians love to squabble with one another, but they have a great deal in common.

By whatever combination of monetary and fiscal policy, in a depression, all these groups agree that some manner of expansionary intervention should be pursued to maintain spending and effective demand. But any such policy increases the risk of inflation, and so is opposed by people holding debt or fixed-income securities. The people with the most to lose from inflation are the very wealthy, who hold a disproportionate share of financial claims. But middle-class savers value their small nest eggs just as dearly, and make common cause with multibillionaires to oppose inflation. By providing means for small savers to protect themselves from inflation when intervention is called for, we can stop the very wealthy from using middle-class retirees as human shields, and thereby create political space to adopt expansionary policy.

Kenyan Socialists would support this. We're all about the positive externalities! Let's make the dismal science a little less dismal.

Crisis we should have had

Ygelsais coined the concept "the crisis we should have had" in the context of all the obsession with deficits and the idea that the U.S. is Greece. (If we were Greece, our problems would be easy to fix. We'd just raise taxes.)

Here's another Friedman column on runaway spending. Nowhere does he mention the Bush tax cuts, the housing bubble and financial crisis. Government spending went up because of the crisis so maybe we should concentrate on preventing asset bubbles and financial crises or at least respond will in the aftermath.

Bonds Backed by Mortgages Regain Allure

Others in the industry are also bullish, pouring money back into mortgage securities. Trading has surged in recent weeks. Prices have risen more than 15 percent in the first two months of 2012, after dropping by as much as 40 percent last year.

“There was a lot of money waiting on the sidelines because yields were starting to look very attractive,” said Jasraj Vaidya, a strategist at Barclays Capital. “Lots of it seems to have come out now.”

...

The mortgage bond market is a very different creature than it was before the financial crisis. For one, it is much smaller: very few residential mortgage-backed securities have been issued since the crisis. The market, at $1.3 trillion, is half the size it was at its peak and shrinks by an estimated $10 billion every month.

Should We Slow Efficiency Growth by Dean Baker

The NYT had a very good piece from Barry Schwartz, one of my former college professors, asking this question. The context is whether the Bain Capitals of the world should be allowed to downsize without any consideration for workers or the community.

The United States is the only wealthy country that allows companies to dump long-serving workers at will. It might be reasonable to require some amount of severance pay when they fire long-serving workers (e.g. 2 weeks per year of work). This would nor prevent downsizing where there are large efficiency gains, however it may prevent some cases where the gains are marginal.

Kenyan Socialism supports this policy proposal as something doable which we can work towards. Policies other wealthy nations employ can be good guideposts. Conservatives prefer not to make international comparisons.

Sino-Americana by Perry Anderson

The Abbey That Jumped the Shark by James Fenton

Our English stupidity is a point of pride for us. P.G. Wodehouse, whose spirit haunts the corridors of Downton, had the fundamental comic insight, when he made the manservant Jeeves well-read, cultivated, and sly, and his master Bertie Wooster genial, candid, and dim. So that, when Bertie occasionally rises to an apt Shakespearean adage—“And thus the native hue of resolution is sicklied o’er with the pale cast of thought”—he will always add the modest disclaimer: “Not mine—Jeeves’s.” The clever servant had been a stock figure in comedy way back in antiquity, but the master had never been so completely the servant’s creation as Bertie Wooster was.

Mr. Carson, the butler at Downton (Jim Carter), has a Jeevesian conservatism and sense of the decorums of country house life. Unfortunately, he is not blessed with the Jeevesian gift of total success at thwarting all comers. His master, the Earl of Grantham (Hugh Bonneville), commits the fundamental error of choosing his former batman from the Boer War, John Bates (Brendan Coyle), as his valet. In doing so, he has allowed his heart to influence his head. Bates has a limp and is therefore—as the rivalrous servants almost unanimously believe—unsuitable for the job.

This business, by the way, of officers giving employment to their batmen, their personal military servants, in later civilian life—this is or was a well-known cover for homosexual attachments. One went into the army and formed a passionate liaison with a man from another class. The war over, one brought the batman home, under pretext of valeting requirements. And while we have as yet (at the end of the second season, with a third already promised) no proof of any impropriety in the relationship between Bates and the earl—no eve-of-battle indiscretion on the veldt, no cuddles on the High Karoo—nonetheless we ought to treat with suspicion the bare story that, in some unspecified way, Bates saved the earl’s life in what was referred to as the African War.

Higher Gas Prices and Obama

Doable policy goals of Kenyan Socialism:

1. reclaim productivity from rent-seekers like the textbook cartel (via means like the new Apple Author app, etc.)
2. follow Germany's lead on worksharing. It probably helped with their budget deficit and helped to counteract the European Central Bank's tight monetary policy
3. Bank of Japan is targeting one percent inflation. The Fed recently stated that it is targeting two. Why not target higher inflation rates briefly or target trend line NGDP growth? According to rational criteria, Bernanke is wrong and current Fed policies are not working.
   

Unrealistic goals:

1. massive fiscal spending while Republicans control the House of Representatives
2. creation of workers paradise where people have lots of leisure time.

Ideally Kenyan Socialism would have policies that add to aggregate demand and close the output gap by more ways than just via the banking sector.

Employing the banking sector as the main way to add AD allows the financial sector to fight back politically against regulation and taxation.  This would help when interest rates are at the zero bound.

Kenyan Socialism would look at ways to head off asset bubbles rather than just by raising interest rates during times of deflationary pressures. 

Kenyan Socialism would look at ways to deal with global imbalances with Germany and China.

The financial crisis of 2008 didn't start with Lehman but rather started with the implosion of the subprime mortgage market. It was a mistake for regulators like Bernanke to think of it as contained. The bailed out Bear Stearns but let Lehman go unaware that there would be a bank run in the repo market.

Hopefully the Troika (European Commission, European Central Bank, and the International Monetary Fund) realizes that a disorderly Greek exit from the Euro could cause a panic.

Christina Romer on Learning from the Great Depression

What we learned from the Temin and Wigmore paper is that one way out of a recession at the zero lower bound is by changing expectations. To do that, often what is needed is a very strong change in policy – something economists call a “regime shift”. The most effective way to shake an economy out of a terrible downturn when we’re at the zero lower bound is an aggressive change in policy that makes people wake up, say “this is a new day” and change their expectations. What the Fed has done since early 2009 is much more of an incremental change.

I think that what the Fed needs instead is a regime shift. A number of economists have suggested that the Fed adopt a new framework for monetary policy, like targeting a path for nominal GDP. If the Fed adopted such a nominal GDP target, they would start in some normal year before the crisis and say nominal GDP should have grown at a steady rate since then. Compared with that baseline, nominal GDP is dramatically lower today. Pledging to get back to the pre-crisis path for nominal GDP would commit the Fed to much more aggressive policy – perhaps more quantitative easing and deliberate actions to talk down the dollar. Such a strong change in the policy framework could have a dramatic effect on expectations, and hence on the behavior of consumers and businesses.

(via Thoma)

Motor Vehicle Output and Sales, Three Years after the Deluge by Menzie Chin

Economic Reports Show a Brightening Outlook

E-Commerce Sales Up 5.8 Percent, Best Quarter In Five Years by Yglesias

Using @AtlantaFed’s Deflation Probabilities to Make Two Snarky Comments About Liberals by Mike Konczal (Rortybomb)

It looks like QE2 was a reflection of deflation expectation going up in the Spring of 2010 and that it succeed as deflation expectations came back down. This isn't airtight proof but it's suggestive. Good catch by Konczal about something of which I wasn't aware.

CBO Says Weak Demand Is Causing High Unemployment by Yglesias

Doug Elmendorf, on the CBOBlog: "Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO’s judgment."

This is correct. Strangely the subsequent discussion completely neglects monetary policy as relevant to demand. The Federal Reserve is supposed to conduct monetary policy independently, but that doesn't mean that other arms of government are supposed to pretend it's not there.

Playboy (!) interview with Krugman

Reversing Local Austerity by Krugman

In Ryan Lizza's article about Obama's mishandling of the economy - by listening to the advice of Orszag, Emanuel, Plouffe, Geithner/Bernanke, the VSPs - he linked to Summers famous 2008 memo. The memo says somewhere - but I can't find it - that the most effective part of the Bush 2003 stimulus package was aid to the states.

So, what would your plan for Greece be? by Daniel Davies

Germany vs.the Rest of Europe by Floyd Norris

The German labor system, with its incentives to move workers to part time rather than lay them off, does appear to have been critical in keeping the country’s unemployment rate from rising more than it did during the credit crisis.

But the decline of unemployment since then has more to do with the fact that Germany — perhaps unintentionally but certainly effectively — has managed to assure that its currency is undervalued, both relative to that of its neighbors and to much of the rest of the world. That has helped the country’s exporters and brought more business to the country.
...

The impact of currencies could be seen earlier this month on successive days when Nissan, the Japanese automaker, and Daimler, the German maker of Mercedes cars, announced profits. Nissan moaned about the yen, which makes it very difficult to make money exporting cars from Japan, while Daimler forecast strong earnings if the euro stays where it is. The euro has lost a third of its value against the yen since the credit crisis began.

The O.E.C.D. report is worth reading for its explanation of labor policies that other countries should consider. In good times, many German workers work overtime but are not immediately paid for it. Those hours are credited to their account, and when times get rough they go on part time but are paid full-time wages, with the difference coming out of the account. Another government policy allows companies to reduce hours with the government making up two-thirds of the lost pay.

Those policies no doubt reduce hiring when times are good, but also hold down layoffs when times are bad.

Not all is rosy in the German labor market. Felix Hüfner, an O.E.C.D. senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have “fixed-term contracts,” which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a “two-class society,” with most older workers in a protected group and most younger ones outside of it.

Eppur si muove

Thoughts on Potential Output, Monetary Policy, and Economic Weblogging: A Comment on Scott Sumner's Comment on Bullard and Duy by DeLong

It's like when Christina Romer wrote an editorial in support of NGDP level targeting or when NYTimes journalist Binyamin Appelbaum asked Bernanke at a press conference if the Fed was considering it.

The Cold Winds Are Rising

Argentina Collapsed Before Default by Dean Baker

Ezra Klein's WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina's 20 percent decline in 1998 to 2002 and Latvia's 24 percent decline in the current crisis.

The piece is a bit sloppy on one point, saying that Argentina's decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina's economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002.

                            Source: International Monetary Fund.

This matters in the current context since many people are asking what alternatives Greece has to following the austerity path being demanded by the IMF, the ECB, and the EU. While there are reasons that a default would be more difficult in Greece's case than Argentina's (most importantly Argentina had its own currency), the post-default experience of Argentina suggests that it probably chose the better route.

For The First Time Ever, Bank of Japan Says It Wants Inflation by Yglesias


Big News: Japan Targets Higher Inflation by Dean Baker

Japan's central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.

The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.

This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.

Again with Potential Output by Tim Duy

In Bullard's model, the housing bubble popped, and millions of people who were employed are no longer employed, nor should we expect them to be employed (or to reenter the labor force) as there is no way to do so absent another bubble. This seems to me an obvious place for fiscal policy and monetary policy to step into the breach and compensate for the lost demand. That millions of people's labor and output be lost simply because they no longer believe that housing prices don't always rise is a gross waste of resources.

You can tell a story in which that bubble-driven demand was necessary to compensate for negative equilibrium interest rates for risk free assets (driven by excessive saving by Asian central banks and aging demographics in the developed world). Rather than wait for another asset bubble to come along and lift demand, or twiddle your thumbs hoping another recession doesn't hit while you are at the zero bound, you could pull out the old-Bernanke playbook and implement an even more aggressive mix of fiscal and monetary policy to compensate for the lost demand and flood the world with risk free assets.

Mind the Gap by Menzie Chin

Bullard On Duy On Bullard On Potential Output by Barkley Rosser

Duy on Bullard on Duy on Bullard on Tinker to Evers to Chance by Krugman

It seems to me that Bullard has shifted his position. In the first version, which I discussed here, Bullard seemed to be arguing that the wealth loss from the burst bubble represented a real destruction of economic capacity. Now he seems to be making a quite different case: that the economy in 2005-2007 was operating at an unsustainably high rate of capacity utilization, driven by the bubble.

I don’t buy this version either.

One reason not to buy it is the reason Duy cites: if the economy was so overheated in the mid-naughties, where was the inflation? Where were the labor shortages?

But there’s another reason I don’t believe it: demand in the mid-naughties was not, in fact, at fever pitch.

Yes, we had very residential construction and high consumer spending. But we also had record-high trade deficits, so that overall demand wasn’t that vigorous, after all....

Link from yesterday, Ben Bernanke and the Zero Bound by Laurence Ball

In his Tokyo speech in May 2003, Bernanke was still urging aggressive policies at the zero bound. By July 2003, as we will see, he was ignoring most of his previous ideas and proposing more cautious policies. What explains this sudden change? The obvious answer, at one level, is that Bernanke was influenced by the FOMC meeting of June 24.

At the time of this meeting, Japan had been stuck at the zero bound for four years, and the United States was experiencing its deflation scare. In that setting, the meeting began with abriefing by Vincent Reinhart, Director of the Board’s Division of Monetary Affairs, called “Conducting Monetary Policy at Very Low Short-Term Interest Rates.” Reinhart outlined possible policies to “provide impetus to the economy” if the federal funds rate reached zero. After Reinhart spoke, Dino Kos, head of the trading desk at the New York Fed, described some details of implementing Reinhart’s ideas. A week earlier, FOMC members had received outlines of the Reinhart and Kos briefings in bullet-point form. [emphasis added.]

When they deign to discuss the bubble and financial crisis, conservatives point to Fannie and Freddie or point to Greenspan keeping rates too low too long. Well in 2003 they are facing deflation! Bernanke seems concerned about avoiding deflation rather than maintaing full employment.

I can find only one occasion between 2004 and 2009 when Bernanke discussed policies at the zero bound. His comments were a response to a written question from Senator Bunning of Kentucky during Bernanke’s 2005 confirmation hearings. Bunning was the only Senator to vote against Bernanke’s first confirmation as Fed Chair. Bunning’s question is motivated by Bernanke’s reference to “helicopter drops” in his 2002 speech on deflation. Bunning notes that Bernanke has earned the nickname “helicopter Ben” and asks, “Would you like to elaborate on your comments on deflation?” In answering, Bernanke recalls the 2002 speech:

I noted that one possible tool for combating deflation, a money-financed tax cut, was essentially equivalent to a theoretical construct used by Professor Milton Friedman, a “helicopter drop” of money. Of course, the “helicopter drop” metaphor is purely a pedagogical device to help explain money’s role in the economy, not a practical policy tool. A key message of my speech was that, contrary to some views that were being expressed at the time, the central bank still has the tools to address deflation even if the short-term interest rate reaches zero.

Bunning was one of the dumbest Senators around. Mitch McConnell hated him.

Game of Thrones Season 2

A James Bullard Valentine to Tim Duy

(via Thoma. Nice shout-out to Thoma from Krugman.)

Whit Stillman’s First Movie in 14 Years Looks Pleasantly Familiar by David Haglund

Ben Bernanke and the Zero Bound by Laurence Ball

(via Yglesias)

Bubblicious!

It's Worse Than You Think by Tim Duy

Three Views of the State of the Economy by Stephen Williamson

The neoclassical growth model,

also known as the Solow–Swan growth model or exogenous growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics. Neoclassical growth models attempt to explain long run economic growth by looking at productivity, capital accumulation, population growth and technological progress.

As Duy writes, "The backbone of the CBO's estimates is a Solow Growth model".

Even Critics of Safety Net Increasingly Depend on It by Binyamin Appelbaum and Robert Gebeloff

Bubbles and Economic Potential by Krugman

Asset Prices and Potential Output by DeLong

The Daily Douchehat:

Can the Working Class Be Saved? by Ross Douthat

The Output Gap versus the "Wealth Shock"

Missouri gets two Federal Reserve Banks. One is in St. Louis, the other in Kansas City. James Bullard is the President of the St. Louis Bank. (Pizzaman and Lothario Herman Cain had worked at the Kansas City one.) Via Yglesias, Cowen, Thoma, and MacroMania, here is a speech Bullard gave in Chicago on inflation targeting.

The key to the large output gap story is the use of the fourth quarter of 2007 as a benchmark for where we expect the economy to be today. The idea is to take that level of real output, assume the real GDP growth rate that prevailed in the yearsprior to 2007, and project out where the “potential” output of the U.S. should be. By that type of calculation, we are indeed stunningly far below where we should be, perhaps 5.5 percent below, using data through the fourth quarter of 2011.

Is this really the right way to think about where the U.S. economy should be? I do not think it is a defensible point of view. Let me give you some of my perspectives. What is more, we have made little progress in closing the gap defined in this way, because real GDP has only grown at modest rates since the recession ended in the summer of 2009. And furthermore, using current GDP forecasts from, say, the Blue Chip consensus, we have little prospect for closing the gap any time soon.

As I understand it, the trend growth rate used by the Fed, the CBO and Blue Chip private forecaster consensus DOES NOT start in 2007 but starts back many years and even decades. If this is true the economic illiteracy demonstrated by Bullard is both shocking and galling. Or is he a fraud?

Most analysts seem to agree that the middle part of the 2000s was characterized by a “bubble” in the housing sector. Housing prices were high and rising fast compared to nominal GDP. It is not prudent to extrapolate a bubble into the indefinite future and claim that such a calculation provides a good benchmark. Yet, that is what we are doing when we extrapolate fourth quarter 2007 real GDP. Furthermore, we normally have the good sense not to do this in other economic situations.

But they aren't extrapolating from the bubble are they?

For those who take the “large output gap” view, the expectation is for real GDP to grow rapidly after the recession comes to an end, as the economy catches up to its potential. It is like a rubber band, there is supposed to be a bounce back period of rapid growth. In fact, most analysts have been looking for exactly this effect since the summer of 2009. It has not happened. This has led to a lot of analysis concerning special factors and headwinds that might be inhibiting the “bounce back” effect.

The wealth shock view puts a different expectation in play. The negative wealth shock lowers consumption and output. But after the recession ends, the economy simply grows from that point at an ordinary rate, neither faster nor slower than in ordinary times. It is more like an earthquake which has left one part of the land higher than another part. There is no expectation of a “bounce back” to a higher level of output after the recession ends. This is closer to what has actually happened since mid-2009. Output has grown at a moderate rate, but not a rapid rate, since the recession ended.

In the wealth shock view, there is no “large output gap” rationale for keeping interest rates near zero. There is only an economy growing at normal rates following a large shock to wealth.

The growth rates are determined by government policy. They're a political decision. The long term potential growth rate is not a political decision. It's a function of technology, organization, population growth, etc.

But the government determines credit conditions, fiscal stimulus, monetary stimulus, inflation rate, etc. They can bring us to our full potential growth rate more quickly or they can stagnate us at a lower equilibrium.

[I have to take a break. I can't keep reading Bullard's tripe right now.]

Obama's 2012 relection campaign playlist.

Wilco and Arcade Fire. Earth, Wind and Fire. E.L.O. REO Speedwagon. I like this one by the little-known Portland band AgesandAges:

Obama has good taste. His favorite character on The Wire was Omar Little, a gay vigilante. And his Firebagger critics on the Left always argue he wasn't tough enough. He's liberal on cultural issues and I suspect the positions he takes as a candidate and President are sort of politically calculated regarding gays and women's rights.

Noam Scheiber on Obama's Worst Year.

It's a replay of FDR in 1937 with Obama mistakenly listening to the advice of Orszag, Daley, Plouffe, Emanuel, and Geithner/Bernanke. He should have listened to Romer and Summers.

(Via DeLong)

Greta Gerwig will be in Whit Stillman's new movie Damsels in Distress.

She's in the new movie the Dish & the Spoon:

Rose’s description of Thanksgiving and the relationship of the Pilgrims to the Indians is probably a first for a fiction feature: “We gave them smallpox on purpose, and then we continued to sort of systematically kill them, but what we celebrate is the meal that we had before any of that happened, when everything was good.”

Ms. Gerwig, who has been called the queen of mumblecore, creates a slightly unnerving portrait of a vulnerable, high-strung woman on the edge. Rose is first seen sobbing her eyes out as she drives through a tunnel clad in her pajamas. Stopping at a convenience store, she buys doughnuts and a six-pack of beer but has only enough change to pay for five bottles. Upon discovering the boy, she insists on driving him to a hospital. She changes her mind en route, and they end up camping out in her parents’ vacant summer house.

Stillman wrote and directed Barcelona:

DeLong has put up his class materials on his blog for a little while now and recently put stuff up on iTunes. Krugman put up some stuff today on the welfare state.

What Does Wealth Have to Do with Output? by Yglesias

Sympathy for Bernanke by Ryan Avent

BINYAMIN APPELBAUM reports today from a meeting of the Senate Budget Committee, which played host to Federal Reserve Chairman Ben Bernanke:

“It seems to me that you care more about unemployment than about inflation,” said Senator Charles E. Grassley, Republican of Iowa.

“I want to disabuse any notion that there is a priority for maximum employment,“ Mr. Bernanke responded.

Instead, he told another questioner, Senator Patrick J. Toomey, Republican of Pennsylvania, that the Fed’s approach to its dual objectives is “fully balanced and symmetrical.”

Mr. Toomey responded that that was exactly what he had expected Mr. Bernanke to say, but he did not seem pleased about it.

The most that core consumer prices have risen in a 12-month period since Mr Bernanke took over is just 2.9%—and that was in 2006, when he'd had less than a year in the top job. Since the financial crisis of late 2008, core prices have risen no faster in a 12-month span than 2.2%. During the second half of 2010, annual inflation stood at its lowest level in over half a century. Unemployment, by contrast, peaked at 10.0%. Only once in the post-war period did the jobless rate rise above that level. Only twice in the postwar period has the country experienced a recession that brought the unemployment rate above its current level, at 8.3%—the downturns of 1973-75 and 1981-82. I'm left to muse that Mr Grassley must say good-bye when he enters a room and hello when he leaves, and wears his shoes on his head. 

Of course, Mr Toomey would be justified in being displeased with Mr Bernanke's "fully balanced and symmetrical" remark. It's wrong; for nearly four years the Fed has been at or below its inflation target while unemployment soared above the natural rate and stayed there. The Fed is failing to meet its dual mandate and deserves to be criticised. Yet these gentlemen aren't unhappy about the actual failures of Fed policy; they're angry about the statistics in some bizarre alternate reality in which the Fed has allowed inflation to run out of control in an effort to maximise employment. They might as well threaten to hold hearings on his troubling habit of hunting down and dining upon unicorns; it would make as much sense.

Onion review of the new Van Halen album.

Oh yes I will be going to the show at the end of the month.

Time for QE3 by Yglesias

Soul Train Host Don Cornelius Dies at 75 by Belle Warring

bad blog post by Krugman where he links to Digby, a biased critic of Obama. Comment section was closed after many smart comments made about the questionable scale used by Poole. Nixon was pretty liberal. Clinton deregulated the financial sector with dismantling Glass-Steagal, while Obama re-regulated with Dodd-Frank and the Consumer Financial Protection Bureau which Obama had Elizabeth Warren set up, even though Geithner didn't like Warren. I see this as Krugman pandering to the ultra-Firebagger left.

Good blog post by Krugman on non-existent Inflation.

Diapers and Deflation

Procter & Gamble Co.’s failure to raise the price of Cascade dishwashing soap shows why investors are buying Treasuries at the lowest yields in history, giving the Federal Reserve more scope to boost the economy.

The world’s largest consumer-products company rolled back prices after an 8 percent increase lost the firm 7 percentage points of market share. Kimberly-Clark Corp. (KMB) started offering coupons on Huggies after resistance to the diapers’ cost. Darden Restaurants Inc. (DRI) raised prices at less than the inflation rate as patrons order more of Olive Garden’s discounted stuffed rigatoni than it anticipated.

This is basic economics; prices tend to fall, or at least slow their rise, when there is vast excess capacity and weak demand. But where’s my hyperinflation?

Conservatives have been crying wolf over inflation for 4 years.

Things Are Not O.K. by Krugman

So, about that jobs report: it was genuinely good, certainly compared with the dreariness that has become the norm. Notably, for once falling unemployment was the real thing, reflecting growing availability of jobs rather than workers dropping out of the labor force, and hence out of the unemployment measure.

Furthermore, it’s not hard to see how this recovery could become self-sustaining. In particular, at this point America is seriously under-housed by historical standards, because we’ve built very few houses in the six years since the housing bubble popped. The main thing standing in the way of a housing bounce-back is a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can’t afford to move out. Let enough Americans find jobs and get homes of their own, and housing, which got us into this slump, could start to power us out.

That said, our economy remains deeply depressed. As the Economic Policy Institute points out, we started 2012 with fewer workers employed than in January 2001 — zero growth after 11 years, even as the population, and therefore the number of jobs we needed, grew steadily. The institute estimates that even at January’s pace of job creation it would take us until 2019 to return to full employment.

And we should never forget that the persistence of high unemployment inflicts enormous, continuing damage on our economy and our society, even if the unemployment rate is gradually declining. Bear in mind, in particular, the fact that long-term unemployment — the percentage of workers who have been out of work for six months or more — remains at levels not seen since the Great Depression. And each month that this goes on means more Americans permanently alienated from the work force, more families exhausting their savings, and, not least, more of our fellow citizens losing hope.

Dean Baker on Robert Rubin:

This article also includes a bizarre quote from former Treasury Secretary and Citigroup honcho Robert Rubin on financial crises:

"But he [Gene Sperling] has a deeply internalized sense of the severe risk that an unsound fiscal regime presents with respect to markets and financial crises.”

Given that Robert Rubin's high dollar policy, coupled with a commitment to unregulated financial markets laid the basis for the economic collapse of the last decade, and that he personally pocketed more than $100 million from the excesses of the bubble years in his tenure at Citigroup, he would seem to be a strange person to quote as an authority on financial crises.

It Is Safe to Resume Ignoring the Prophets of Doom ... Right? by Adam Davidson.

Another lame installment by Davidson, but at least he mentions Krugman and Dean Baker in passing.

I've never heard of Richard Wolff.

Tyler Cowen pushes Real Business Cycle Theory (RBC theory) - from Wikipedia:

According to RBC theory, business cycles are therefore "real" in that they do not represent a failure of markets to clear but rather reflect the most efficient possible operation of the economy, given the structure of the economy. RBC theory differs in this way from other theories of the business cycle such as Keynesian economics and Monetarism that see recessions as the failure of some market to clear.

RBC theory is associated with freshwater economics (the Chicago school of economics in the neoclassical tradition).

The article links to a 1986 piece by Larry Summers titled: Some Skeptical Observations on Real Business Cycle Theory.

Tyler Cowen pounces on Keynesianism by Noah Smith

Jobs Report, First Impressions by Jared Bernstein

As he writes, "The trend is our friend."

Economists in Love: Betsey Stevenson and Justin Wolfers

U.S. Economy Added 243,000 Jobs

Republicans Sharply Question Bernanke for Fed’s Focus on Job Market

“I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar,” said Representative Paul Ryan, the Wisconsin Republican who is chairman of the House Budget Committee.

“The prospect of all three,” Mr. Ryan said, “is adding to uncertainty and holding our economy back.”

Mr. Bernanke was calm and careful in his responses, but he did not back down. He told the committee that the economy, and the housing market in particular, would need help for years to come from the Fed and Congress.

Writers at the Ramparts in a Gay Revolution by Dwight Gardner

It’s hard to believe that this story — about the tangled lives of men like Gore Vidal, Tennessee Williams, Allen Ginsberg, James Baldwin, Truman Capote, Edward Albee, Edmund White, Armistead Maupin, Tony Kushner and Mr. Kramer — has not been combed and braided into a single narrative before. Lesbian literature is not dealt with here; Mr. Bram is probably correct to suggest that “it needs its own historian.”

This country’s gay revolution, Mr. Bram notes, “began as a literary revolution,” far more so than did the civil rights or women’s movements. America’s literary past is filled with brilliant, closeted gay and very possibly gay writers: Henry James, Walt Whitman, Willa Cather, Hart Crane. But the story Mr. Bram sets out to tell commences in the late 1940s.

“Before World War II,” he says, “homosexuality was a dirty secret that was almost never written about and rarely discussed.” The year everything changed, he persuasively argues, was 1948. That year the first of the Kinsey Reports appeared. So did two groundbreaking gay-themed works of fiction: “The City and the Pillar,” by Mr. Vidal, and “Other Voices, Other Rooms,” by Capote. The men would become bitter rivals.

How to Fight the Man by David Brooks

On thing to notice about gays and "fighting the man" that many brilliant gays were on the Left and fighting for civil rights and democracy like Bayard Rustin. The rightwing and fascism often contained manly, closeted gays who bashed homosexuality in public and were/are sadistic and mentally unstable. See J. Edgar Hoover or Roy Cohn. (By the way there's a weird, factually incorrect meme out there that the German Nazi Party was created by masculine gay men although it did include some.)

But to Brooks's broader points:

If I could offer advice to a young rebel, it would be to rummage the past for a body of thought that helps you understand and address the shortcomings you see. Give yourself a label. If your college hasn’t provided you with a good knowledge of countercultural viewpoints — ranging from Thoreau to Maritain — then your college has failed you and you should try to remedy that ignorance.  

Effective rebellion isn’t just expressing your personal feelings. It means replacing one set of authorities and institutions with a better set of authorities and institutions. Authorities and institutions don’t repress the passions of the heart, the way some young people now suppose. They give them focus and a means to turn passion into change.

Kenyan Socialism (need link) is embedded in the tradition of fighting for democracy and economy justice. This includes the recently successful civil rights and feminist movements.

What Brooks doesn't acknowledge in his columns is the tradition of the left in fighting for gains that today people take for granted.

Collateral Crises by Gary Gorton and Guillermo Ordo˜nez

(via Thoma)

The Logic of Recovery Winter by Yglesias

Recovery Winter Arrives With HUGE 243,000 Increase in Payroll Employment by Yglesias

Hooray! First Genuinely Good Employment Report of the Recovery! by DeLong

Bad news for my Rogues Gallery:

Greg Mankiw (who was skeptical of stimulus according to the Larry Summers memo)

Tyler Cowen

CBO budget and economic outlook

CBO expects economic activity to quicken after 2013 but to remain below the economy’s potential until 2018.

In CBO’s forecast, the unemployment rate remains above 8 percent both this year and next, a consequence of continued weakness in demand for goods and services. As economic growth picks up after 2013, the unemployment rate will gradually decline to around 7 percent by the end of 2015, before dropping to near 5½ percent by the end of 2017.

Fed fail.

Nial Ferguson pulls a Johnny Cochrane, "Krugman and the dreaded Keynesians were right." By Henry Blodget.

Should The U.S. Take A Harder Stance On China's Currency? (Part II) by Joe Gagnon

Federal Reserve Chairman Ben Bernanke recently said that Chinese currency manipulation "is blocking what might be a more normal recovery process." In fact, the problem goes beyond China to include many other emerging economies and even a few advanced economies. All together, governments in these economies are spending about $1.5 trillion per year on currency manipulation.

Currency manipulation occurs when governments purchase foreign currency in order to hold up its value relative to their own currency. Manipulation makes a country's exports cheaper and imports more expensive, artificially raising the trade balance. The evidence suggests that currency manipulators jointly have increased their trade balances by about $1 trillion relative to where they would have been in the absence of manipulation. Europe and the United States have suffered the corresponding decline in trade balances.

(via Thoma)

American Republicans (and Fed board members like Lacker), the Chinese Communist Party, and German conservatives are the Axis of fools, all denying the American economy full employment and adequate demand to close the output gap. Germany however is mostly damaging Europe, though. The Chinese are screwing their consumers.

DeLong gives an early sketch of the Brookings paper he's working on with Larry Summers, titled "Fiscal Policy in a Depressed Economy".

Persistent high transitory cyclical unemployment is transforming itself into permanent structural unemployment as the labor market recovery continues to delay its appearance.

Government polices by the American, Chinese and German governments are actively delaying its appearance. Its not choosing to be fashionably late itself.

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

Fannie and Freddie don’t deserve blame for bubble by Mark Zandi

There is plenty of blame to go around for the U.S. housing bubble, but not much of it belongs to Fannie Mae and Freddie Mac. The two giant housing-finance institutions made many mistakes over the decades, some of them real whoppers, but causing house prices to soar and then crater during the past decade weren’t among them.

The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study.

Reflections on the Current Disorder by Doug Henwood

Lest you think that this analysis, tying debt growth to increased inequality, is just the fevered product of a radical mind, let me assure you that it recently got support from a very orthodox corner. A bit over a year ago, the International Monetary Fund—normally thought of as a bastion of economic orthodoxy—published a working paper with the provocative (by IMF standards) title “Inequality, Leverage and Crises.”

In any case, in the paper, IMF economists Michael Kumhof and Romain Rancière wondered aloud whether the increase in inequality we’ve seen over the last few decades contributed anything to the causes of our economic crisis. They attempt to model, in rigorous mathematical fashion, the perception that poor and middle-income households borrowed aggressively to maintain or expand their standard of living while wages and employment were growing only weakly, at the same time that rich households had more money than they knew what to do with, so they sought profitable opportunities to lend all that spare cash to those below them on the income ladder.

Kumhof and Rancière draw parallels between the recent period and the 1920s. In both periods, the share of income claimed by the top 5% rose dramatically, and by similar magnitudes. And during the 1920s and the recent period, roughly the last 25 years, the ratio of household debt to underlying incomes doubled.

piece on Camila Vallejo

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.