Anyone Who Doesn’t Think the Job Market is Improving… by Jared Bernstein

Obama Math: Probability of a Win Now Seventy-Five Per Cent by John Cassidy

This should lend some certainty to "job creators" and campaign contributors.

BEYOND THE MATRIX: The Wachowskis travel to even more mind-bending realms. by Aleksandar Hemon

Usually, I experience an erosion of confidence around famous people—an inescapable conviction that they know more than I do, because the world is somehow more available to them. But I got along splendidly with the Wachowskis. Seemingly untouched by Hollywood, they did not project the jadedness that is a common symptom of stardom. Lana was one of the best-read people I’d ever met; Andy had a wry sense of humor; they were both devout Bulls fans. We also shared a militant belief in the art of narration and a passionate love for Chicago. 

Eventually, I asked them to consider letting me write about the making of “Cloud Atlas.” They talked it over and decided to do it. By then, they’d sent the script to every major studio, after Warner Bros. had declined to exercise its option. Everyone passed. “Cloud Atlas” seemed too challenging, too complex. The Wachowskis reminded Warner Bros. that “The Matrix” had also been deemed too demanding, and that it had taken them nearly three years to get the green light on it. But the best the studio could do for “Cloud Atlas” was to keep open the possibility of buying the North American distribution rights, payment for which would cover a portion of the projected budget.

...
“The problem with market-driven art-making is that movies are green-lit based on past movies,” Lana told me. “So, as nature abhors a vacuum, the system abhors originality. Originality cannot be economically modelled.” The template for “The Matrix,” the Wachowskis recalled, had been “Johnny Mnemonic,” a 1995 Keanu Reeves flop. 

In the parking lot outside Hanks’s office, the Wachowskis and Tykwer shook off the bad news before going in. Hanks had read the screenplay, though not the book. “The script was not user-friendly,” he told me. “The demands it put upon the audience and everybody, the business risk, were off the scale.” But he was interested in working with the directors and intrigued by the challenge of playing six different roles in one film. Hanks was in the middle of reading “Moby-Dick” and, when the filmmakers sat down, he engaged them in a discussion of Melville’s masterpiece. Lana pointed at a poster for “2001: A Space Odyssey,” which was serendipitously hanging on the wall of Hanks’s office, and said, “ ‘Moby-Dick’ and this—that’s what we want to do.” “I’m in,” Hanks said. “When do we start?” Looking back at that meeting, Hanks told me that he had been particularly impressed that the Wachowskis “were not ashamed to say, ‘We make art!’ ” 

With Hanks on board, the directors went back to Warner Bros. to plead their case. They insisted that a project as narratively complex as “Cloud Atlas” had no precedent and therefore no template. They presented the overarching story as a tale of redemption, of the continuity of essential human goodness, whereby individual acts of kindness have unforeseeable repercussions. They broke the story down into a simple progression: “Tom Hanks starts off as a bad person,” they said, “but evolves over centuries into a good person.” Warner Bros. was convinced, and the studio was in for distribution, but with a lower offer than the directors had hoped for.

The Complete Guide To America's Jobs Crisis And The Failure Of Monetary Policy Using Animated Gifs by Mike Konczal

Is Krugman smoking some "Green Shoots"? Or is he right in agreeing with Baker?

Did Education Secretary Arne Duncan Really Leave Chicago Schools a Mess? by Dean Baker

That might be a good question for reporters to pose to Chicago Mayor Rahm Emanuel given his strong stand against Chicago's public school teachers. (It is appropriate to refer to this as a battle between Emanuel and the teachers. Almost 90 percent of the members of the bargaining unit voted to authorize a strike. This is clearly not a case of a union imposing its will on its members.) Emanuel has insisted that the schools need a major overhaul because they are badly failing Chicago's students. 

Emanual's position is striking because Chicago's schools had been run for seven and half years, from June of 2001 until January of 2009, by Arne Duncan. Duncan then went on to become education secretary for President Obama, based on his performance as head of the Chicago public school system. Apparently Emanuel does not believe that Duncan was very successful in improving Chicago's schools since he claims that they are still in very bad shape. 

There is no dispute that students in Chicago public schools are not faring well. Only a bit over 60 percent graduate high school in five years or less. However, this doesn't mean that the reforms that Emanuel wants to impose will improve outcomes, just as Duncan's reforms apparently did not have much impact, if Emanuel is to be believed. 

As Diana Ravitch, a one-time leading school "reformer" and assistant education secretary in the Bush administration, argues that charter schools on average perform no better than the public schools they replace. The main determinants of childrens' performance continues to be the socioeconomic conditions of their parents. Those unwilling to take the steps necessary to address the latter (e.g. promote full employment) are the ones who do not care about our children.

Seems like a confused article.

As Low Rates Depress Savers, Governments Reap Benefits by Catherine Rampell

some repeat videos

Barack Obama to Michael Lewis on a Presidential Loss of Freedom: “You Don’t Get Used to It—At Least, I Don’t”

It's notable that Obama as the first black President of a nation founded upon slavery and white supremacy doesn't really discuss race at all. He did move a bust of MLK to the Oval office as Lewis reports. It's also funny that Lewis's Vanity Fair article on Iceland painted a picture of Icelanders that was a caricature if not racist. Iceland, like Australia and Argentina, followed some wise macroeconomic polices that allowed its economy to bounce back well after a financial crisis/Minsky moment. Lewis should do a follow up. It does say alot that Obama allowed him access. 

I'll be interest to see if he's on Charlie Rose and to read about Obama's decision to go into Libya. 

Fed Fail Part XXVIII

The Employment Situation by Krugman

The New Normal

The Employment Situation by Krugman

Review of End This Depression Now! and 
The Price of Inequality: How Today’s Divided Society Endangers Our Future:

What Krugman & Stiglitz Can Tell Us by Jacob Hacker and Paul Pierson

DeLong: Glasner is the second best monetary economist:

Not, mind you, that I think David is a better monetary economist than Mike Woodford--I do find I learn more from paying careful attention to Mike than to David. But I can't think of anybody else I reliably learn more from paying careful attention to… 

David Glasner:

 John Cochrane Misunderestimates the Fed

In my previous post, I criticized Ben Bernanke’s speech last week at the annual symposium on monetary policy at Jackson Hole, Wyoming. It turns out that the big event at the symposium was not Bernanke’s speech but a 98-page paper by Michael Woodford, of Columbia University. Woodford’s paper was important, because he is widely considered the world’s top monetary theorist, and he endorsed the idea proposed by the intrepid, indefatigable and indispensable Scott Sumner that the Fed stop targeting inflation and instead target a steady growth path of nominal GDP. That endorsement constitutes a rather stunning turn of events in which Sumner’s idea (OK, Scott didn’t invent the idea, but he made a big deal out of it when nobody else was paying any attention) has gone from being a fringe idea to the newly emerging orthodoxy in monetary economics. 

John Cochrane, however, is definitely not with the program, registering his displeasure in a blog post earlier this week. In this post, I am going to challenge two assertions that Cochrane makes. These aren’t the only ones that could be challenged, but it’s getting late.  The first assertion is that inflation can never bring about an increase in output. 

Mike [Woodford]‘s enthusiasm for deliberate inflation is even more puzzling to me.  Mike uses the word “stimulus,” never differentiating between real and nominal stimulus. Surely, we don’t want to cook up some inflation just for its own sake — we want to cook up some inflation because we think it will goose output. But why? Why especially will increasing expected inflation help? Because that is the aim of all the policies under discussion here — promising to keep rates low even once inflation rises, adopting “nominal GDP targets,” helicopter drops, or similar policies such as raising the inflation target. 

I don’t put much faith in Phillips curves to start with  – the idea that deliberate inflation raises output. I put less faith in the idea floating around Jackson hole that a little inflation will set us permanently back on the trend line, not just be a little sugar rush and then back to sclerosis. 

But it’s a rare Phillips curve in which raising expected inflation is a good thing.  It just gives you more inflation, with if anything less output and employment. 

Cochrane is simply asserting that expected inflation cannot increase output and employment. The theoretical basis for that proposition is an argument, generally attributed to Milton Friedman and Edward Phelps, but advanced by others before them, that an increase in inflation cannot generate a permanent increase in employment. The problem with that theoretical argument is that it is a comparative statics result, thus, by assumption, starting from an initial equilibrium with zero inflation and positing an increase in the inflation parameter. The Friedman-Phelps argument shows that a new equilibrium corresponding to the higher rate of inflation has the same level of output and employment as the initial zero-inflation equilibrium, so that derivatives of output and employment with respect to inflation are both zero. That comparative-statics exercise is fine, but it’s irrelevant to the situation we have been in since 2008. We are not starting from equilibrium; we are starting from a disequlibrium in which output and employment are well below their equilibrium levels. The question is whether an increase in inflation, starting from an under-employment disequilibrium, would increase output and employment. The Friedman/Phelps argument tells us exactly nothing about that issue. 

And aside from the irrelevance of the theoretical argument on which Cochrane is relying to the question whether inflation can reduce unemployment when employment is below its equilibrium level – I am here positing that it is possible for employment to be persistently below its equilibrium level – there is also the clear historical evidence that in 1933 a sharp increase in the US price level, precipitated by FDR’s devaluation of the dollar, produced a spectacular increase in output and employment between April and July of 1933 — the fastest four-month expansion of output and employment, combined with a doubling of the Dow-Jones Industrial Average, in US history. The increase in the price level, since it was directly tied to a very public devaluation of the dollar, and an explicit policy objective, announced by FDR, of raising the US price level back to where it had been in 1926, could hardly have been unanticipated. 

The second assertion made by Cochrane that I want to challenge is the following. 

Nothing communicates like a graph. Here’s Mike [Woodford]‘s, which will help me to explain the view:

The graph is nominal GDP and the trend through 2007 extrapolated. (Nominal GDP is price times quantity, so goes up with either inflation or larger real output.) 

Now, let’s be clear what a nominal GDP target is and is and is not. Many people (and a few persistent commenters on this blog!) urge nominal GDP targeting by looking at a graph like this and saying “see, if the Fed had kept nominal GDP on trend, we wouldn’t have had  such a huge recession. Sure, part of it might have been more inflation, but surely part of a steady nominal GDP would have been less recession.” This is NOT what Mike is talking about.

Mike recognizes, as I do, that the Fed can do nothing more to raise nominal GDP today. Rates are at zero. The Fed has did [sic] what it could. The trend line was not achievable. 

Nick Rowe, in his uniquely simple and elegant style, has identified the fallacy at work in Woodford’s and Cochrane’s view of monetary policy which views the short-term interest rate as the exclusive channel by which monetary policy can work. Thus, when you reach the zero lower bound, you (i.e., the central bank) have become impotent. That’s just wrong, as Nick demonstrates. 

Rather than restate Nick’s argument, let me add some historical context. The discovery that the short-term interest rate set by the central bank is the primary tool of monetary policy was not made by Michael Woodford; it goes back to Henry Thornton, at least. It was a commonplace of nineteenth-century monetary orthodoxy. Except that in those days, the bank rate, as the English called it, was viewed as the instrument by which the Bank of England could control the level of its gold reserves, not the overall state of the economy, for which the Bank of England had no legal responsibility. It was Knut Wicksell who, at the end of the nineteenth century, first advocated using the bank rate as a tool for controlling the price level and thus the business cycle. J. M. Keynes and Dennis Robertson also advocated using the bank rate as an instrument for controlling the price level and the business cycle, but the most outspoken and emphatic exponent of using the bank rate as an instrument of macroeconomic control was Ralph Hawtrey. Keynes continued to advocate using the bank rate until the early 1930s, but he then began to advocate fiscal policy and public works spending as the primary weapon against unemployment. Hawtrey never wavered in his advocacy of the bank rate as a control mechanism, but even he acknowledged that could be circumstances under which reducing the bank rate might not be effective in stimulating the economy. Here’s how R. D. C. Black, in a biographical essay on Hawtrey, described Hawtrey’s position: 

It was always a corollary of Hawtrey’s analysis that the economy, although lacking any automatic stabilizer, could nevertheless be effectively stabilized by the proper use of credit policy; it followed that fiscal policy in general and public works in particular constituted an unnecessary and inappropriate control mechanism. Yet Hawtrey was always prepared to admit that there could be circumstances in which no conceivable easing of credit would induce traders to borrow more and that in such a case government expenditure might be the only means of increasing employment. 

This possibility of such a “credit deadlock” was admitted in all Hawtrey’s writings from Good and Bad Trade onwards, but treated as a most unlikely exceptional case. ln Capital and Emþloyment, however, he admitted “that unfortunately since 1930 it has come to plague the world, and has confronted us with problems which have threatened the fabric of civilisation with destruction.” 

So indeed it had, and in the years that followed opinion, both academic and political, became increasingly convinced that the solution lay in the methods of stabilization by fiscal policy which followed from Keynes’s theories rather that in those of stabilization by credit policy which followed from Hawtrey’s. 

However, a few paragraphs later, Black observes that Hawtrey understood that monetary policy could be effective even in a credit deadlock when reducing the bank rate would accomplish nothing. 

Hawtrey was inclined to be sympathetic when Roosevelt adopted the so-called “Warren plan” and raised the domestic price of gold. Despairing of seeing effective international cooperation to raise and stabilize the world price level, Hawtrey now envisaged exchange depreciation as the only way in which a country like the United States could “break the credit deadlock by making some branches of economic activity remunerative.” Not unnaturally there were those, like Per Jacobsson of the Bank for International Settlements, who found it hard to reconcile this apparent enthusiasm for exchange depreciation with Hawtrey’s previous support for international stabilization schemes. To them his repiy was “the difference between what I now advocate and the programme of monetary stability is the difference between measures for treating a disease and measures for maintaining health when re-established. It is no use trying to stabilise a price ievel which leaves industry under-employed and working at a loss and makes half the debtors bankrupt.” Here, as always, Hawtrey was faithful to the logic of his system, which implied that if international central bank co-operation could not be achieved, each individual central bank must be free to pursue its own credit policy, without the constraint of fixed exchange rates.  [See my posts, "Hawtrey on Competitive Devaluations:  Bring It On, and "Hawtrey on the Short, but Sweet, 1933 Recovery."] 

Cochrane asserts that the Fed has no power to raise nominal income. Does he believe that the Fed is unable to depreciate the dollar relative to other currencies? If so, does he believe that the Fed is less able to control the exchange rate of the dollar in relation to, say, the euro than the Swiss National Bank is able to control the value of the Swiss franc in relation to the euro? Just by coincidence, I wrote about the Swiss National Bank exactly one year ago in a post I called “The Swiss Naitonal Bank Teaches Us a Lesson.”  The Swiss National Bank, faced with a huge demand for Swiss francs, was in imminent danger of presiding over a disastrous deflation caused by the rapid appreciation of the Swiss franc against the euro. The Swiss National Bank could not fight deflation by cutting its bank rate, so it announced that it would sell unlimited quantities of Swiss francs at an exchange rate of 1.20 francs per euro, thereby preventing the Swiss franc from appreciating against the euro, and preventing domestic deflation in Switzerland. The action confounded those who claimed that the Swiss National Bank was powerless to prevent the franc from appreciating against the euro. 

If the Fed wants domestic prices to rise, it can debauch the dollar by selling unlimited quantities of dollars in exchange for other currencies at exchange rates below their current levels. This worked for the US under FDR in 1933, and it worked for the Swiss National Bank in 2011. It has worked countless times for other central banks. What I would like to know is why Cochrane thinks that today’s Fed is less capable of debauching the currency today than FDR was in 1933 or the Swiss National Bank was in 2011?

Obama gives up on demand by Yglesias

Dean Baker Reduces Uncertainty

Clinton's Surpluses Were Due to the Stock Bubble by Dean Baker

The huge surpluses of the last Clinton years were the result of a boom that was driven by a stock bubble. The boom was great. Millions of people got jobs who would not have otherwise. We also saw real wage gains up and down the income distribution for the first time since the early 70s.

The greatest minds in the economics profession had assured us that the unemployment rate could not get below 6.0 percent without touching off accelerating inflation. However the boom pushed the unemployment rate down to 4.0 percent as a year-round average in 2000. Guess what? There was no story of accelerating inflation. (Fortunately for economists, continued employment, and even standing in the profession, does not depend on performance.) 

But the key point is that the surplus came from a boom that was not sustainable. Here's the key chart that shows you how we went from the deficit of 2.7 percent of GDP that the Congressional Budget Office had projected in 1996 for 2000 to the surplus of 2.4 percent of GDP that we actually saw in 2000.

This was not a story of tax increases and budget cuts, those had already been on the books by 1996. This was pure and simply a story of the bubble-based boom pushing the economy much further than CBO had expected. (Greenspan deserves a huge amount of credit for allowing the unemployment rate to fall. His Clinton appointed collegues, Lawrence Meyer and Janet Yellen wanted to raise interest rates in 1996 to keep unemployment from falling much below 6.0 percent.)

[(EDITED: Baker mentions 1996 which I somehow missed. The Russian default was in 1998 so I must be confused about this.) Supposedly Greenspan lowered rates because he wanted the Fed to act as the lender of last resort during the Russian default. The hedge fund Long-Term Capital Management failed because of the default. The international scene was a mess even if the U.S. had 6 percent unemployment. N.O.]

Anyhow, when the bubble burst, the surplus was destined to vanish. The Bush tax cuts and even the wars helped to stimulate the economy and maintain employment. There were much better ways to boost the economy, but it is absurd to imagine that the economy somehow would have been better off without this spending.

To repeat a post from last week, the real tragedy of both conventions is that policy is so obsessed with the deficit....

You’re on Your Own vs. We’re In This Together by Jared Bernstein

Clinton Tries To Bring Medicaid Into Focus by Yglesias

Is the Economy on the Mend? by Krugman

Between debt repayment, defaults, and — since recovery began in mid-2009 — rising income, the US has made a lot of progress in deleveraging. Add in the fact that we’ve worked off the excess construction from the Bush years, and there’s a pretty good case that the stage has been set for a much stronger recovery over the next few years. 

Even if that’s true, by the way, inadequate stimulus and debt relief have inflicted huge, gratuitous suffering. But the case that we have been healing all the same is pretty good.

Might be a better jobs report tomorrow. The ADP Employment Report had a good number today.

The Untold Story Of How Clinton's Budget Destroyed The American Economy by Joe Weisenthal

(via Yglesias)

DEPARTMENT OF "HUH?!": WILLIAM WHITE MISINTERPRETS WICKSELL DEPARTMENT by DeLong

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.

New York Times lead editorial today:

Mr. Bernanke’s Next Task 

It will be another week — at a meeting of the Federal Reserve policy-making committee on Sept. 12 and 13 — before anyone knows for sure what Ben Bernanke thinks the Fed should do, if anything, to stimulate the weak economy. What is known is that, without more help, the economy is likely to remain weak, or grow weaker, through the rest of this year.
In his speech on Friday at the annual meeting on monetary policy in Jackson Hole, Wyo., Mr. Bernanke said that past Fed interventions had been a plus for the economy, raising growth enough to add an estimated two million jobs, but that economic conditions are still “obviously far from satisfactory.” Then he said that more help would be forthcoming “as needed.”  

But, by his own analysis, help is needed now. 

Mr. Bernanke said that national unemployment, at 8.3 percent, is unacceptably high and that much faster growth will be needed to bring that number down. But the economy, instead of accelerating, has slowed, from 4.1 percent in the last quarter of 2011, to 2 percent in the first quarter of 2012 and to 1.7 percent in the second quarter. 

Mr. Bernanke also stressed that persistently high unemployment risks bringing on irreversible economic damage as the long-term unemployed become the permanently unemployable. Even as overall unemployment has declined from a peak of 10 percent in October 2009, the share of jobless workers out of work for more than six months has remained stubbornly high. 

According to Mr. Bernanke, the economy is being held back by a sluggish housing market; counterproductive fiscal policy, as both the federal government and the states cut spending in the face of weak growth; and the euro crisis, which hurts the United States because of trade and financial links to Europe. 

All this is true and reflected in slumping consumer confidence, heightened business uncertainty and a recent slowdown in manufacturing. Unfortunately, meaningful progress on housing and fiscal policy requires Congress to act. Congressional Republicans, however, have long resisted efforts to revive growth on the theory that a weak economy will help them regain the White House. As for the euro crisis, there is nothing much that American policy makers can do. 

That leaves the Fed the only entity with the autonomy and the power to take action. Admittedly, its tools — various ways to reduce borrowing costs and spur lending — are not ideal for the problems that Mr. Bernanke has identified. It would be better, for example, for lawmakers to bolster federal spending in the near term to create jobs than for the Fed to indirectly attempt to boost activity through more lending. It would also be better for Congress to provide more debt relief for underwater homeowners, as the Fed keeps mortgage rates low for new buyers. 

But that is too logical for these times. Mr. Bernanke has laid out the problem, including the economic drag caused by political dysfunction. But he has also risked becoming part of the dysfunctional dynamic, exhorting and waiting for others to act when they are clearly unable or unwilling to do so. 

Here’s hoping that will change at the Fed meeting next week. And here’s hoping that any help is not too little, too late.

So if it were up to Dan Kervick and others critical of the blogosphere's focus on the Fed, the economy would be down 2 million jobs.

A Critique of Fed Policy by Binyamin Appelbaum

Michael Woodford may have written the year’s most important academic paper. Here’s why. by Dylan Matthews

The Good News and the (Very) Bad News about Bernanke’s Speech by David Glasner

[T]he good news from Bernanke’s speech is that he argued that… there is empirical evidence showing that the previous rounds of quantitative easing had a modest stimulative effect. Bernanke maintains that quantitative easing has increased GDP by 3% and private payroll employment by 2 million jobs compared to a scenario with no QE…. Now for the bad news — the very bad news – which is that the arguments he makes for the effectiveness of QE show that Bernanke is totally clueless about how QE could be effective. If Bernanke thinks that QE can only work through the channels he discusses in his speech, then he might as well pack his bags and go back to Princeton…. He is useless, and his tenure has been waste of time.
Consider how Bernanke explains the way that the composition of the Fed’s balance sheet can affect economic activity.

In using the Federal Reserve’s balance sheet as a tool for achieving its mandated objectives of maximum employment and price stability, the FOMC has focused on the acquisition of longer-term securities–specifically, Treasury and agency securities…. Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets…. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. 

Bernanke seems to think that changing the amount of MBSs available to the public can alter their prices and change the shape of the yield curve. That is absurd. The long-term assets whose supply the Fed is controlling are but a tiny sliver of the overall stock of assets whose prices adjust to maintain overall capital market equilibrium Affecting the market for a particular group of assets in which it is trading actively cannot force all the other asset markets to adjust accordingly unless the Fed is able to affect either expectations of future real rates or future inflation rates. If the Fed has succeeded in driving down the yields on long term assets, it is because the Fed has driven down expectations of future inflation or has caused expectations of future real rates to fall…. 

Because he completely misunderstands how QE might have provided a stimulus to economic activity, Bernanke completely misreads the evidence on the effects of QE…. [T]he only way in which QE could have provided an economic stimulus was by increasing total spending (nominal GDP) which would have meant rising prices that would have called forth an increase in output. The combination of rising prices and rising output would have caused expected real yields and expected inflation to rise, thereby driving nominal interest rates up, not down. The success of QE would have been measured by the extent to which it would have produced rising, not falling, interest rates…. 

Bernanke views the risk of an unanchoring of inflation expectations as a major cost of undertaking QE. Nevertheless, he exudes self-satisfaction that the expansion of the Fed’s balance sheet over which he has presided “has not materially affected inflation expectations.” OMG! The only possible way by which QE could have provided any stimulus to the economy was precisely what Bernanke was trying to stop from happening. Has there ever been a more blatant admission of self-inflicted failure?

(via DeLong)

Who’s Fighting for Workers? by Jared Bernstein

When Capitalists Cared by Hedrick Smith

From 1948 to 1973, the productivity of all nonfarm workers nearly doubled, as did average hourly compensation. But things changed dramatically starting in the late 1970s. Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time, according to government data analyzed by the Economic Policy Institute. 

At the same time, corporate profits were booming. In 2006, the year before the Great Recession began, corporate profits garnered the largest share of national income since 1942, while the share going to wages and salaries sank to the lowest level since 1929. In the recession’s aftermath, corporate profits have bounced back while middle-class incomes have stagnated.

'Anthony Bourdain: No Reservations,’ the Final Season by Mike Hale

Staying Power. review of ‘Mortality,’ by Christopher Hitchens by Christopher Buckley

Debating Bernanke by Robert Waldmann

Fed Chairman Makes Case, in Strong Terms, for New Action by Binyamin Appelbaum

Woodford on Monetary Policy (Sort of Wonkish) by Krugman

So what should the Fed be doing? Woodford concludes that it needs to make a change in its basic policy pronouncements, so as to make them “history-dependent” — that is, it needs to promulgate a view of its intentions that would lead it to be slower to raise rates following a big slump than it would in other circumstances. And let me repeat the past tense: following a big slump, not just when you’re in it. 

How to do this? Nominal GDP targeting would be one answer, because it would give the Fed a reason to hold off for a long time on rate hikes. Other schemes might also do the trick.

A Flow Chart For Ben Bernanke by Yglesias

150,000 Jobs Per Month Is Not Robust Growth by Dean Baker

Okay, some cheap WAPO bashing this morning, an article on Bernanke's speech as Jackson Hole, described a rate of job growth of 150,000 a month or more as "robust." Sorry, that isn't close to right. 

The economy is down by more than 9.5 million jobs from its trend path. We need roughly 100,000 jobs per month to keep pace with the growth of the labor force. This means that at 150,000 jobs per month, we are making up the jobs shortfall at the rate of 50,000 a month. At this pace it will take us close to 16 years to get back to the economy's trend job growth path. A rate of job creation that gets us to full employment in 2028 is not robust. 

For the young uns out there, or those with bad memories we created 250,000 jobs per month over the last four years of the Clinton administration, and that was starting with an unemployment rate below 6.0 percent. We should not subject our economic policymakers to the soft bigotry of low expectations.

Self-Induced Paralysis and "Rooseveltian Resolve"

Fed Watch: Bernanke at Jackson Hole by Tim Duy

Michael Woodford Makes The Case For NGDP Targeting by Yglesias

Bernanke in the Hole by Krugman

Jackson Hole, that is. 

My quick summary:

1. Things are really, really bad.
2. The damage is cumulative; the longer this goes on, the worse the prospects for the future.
3. The Fed has the power to do a lot to help the economy.
4. While you can argue that there are costs to action, the case for major costs is quite weak, and in particular much weaker than the case for major benefits.
5. Therefore, what we at the Fed will do is, um, sit on our hands some more, and think very seriously about maybe, someday, doing something.

The Key Points From Ben Bernanke's Jackson Hole Speech by Yglesias

Here's what you need to know:

— The basic point of the speech was to defend past acts of quantitative easing.

— A secondary theme is to create some rationale for future acts of QE.

— But Bernanke continues to insist that there are hard-to-quantify and not-well-explained downside risks to QE, which mean that at the zero bound we need to tolerate larger output gaps than we would otherwise tolerate.

— The logical implication, which Bernanke does not draw, is that a 4 percent long-term inflation target would lead to fewer and shorter recessions and more real output over the long term.

— In general, Bernanke simply refuses to acknowledge the existence of the NGDP targeting line of criticism even though it's been embraced by a growing chorus of voices that includes the president of the Chicago Fed, former CEA Chair Christina Romer, and many voices in the press.

— Bernanke says fiscal austerity is currently a drag on the economy and will be an increasing drag going forward and claims that he "cannot neutralize the fiscal and financial risks that the country faces."

— A related point is that he simply fails to acknowledge that the country's primary macroeconomic stabilization institution might bear some responsibility for the biggest failure of macroeconomic stabilization in 70 years.

The Fed is suffering from self-induced paralysis. What the Fed needs is some "Rooseveltian Resolve." The problem is that the Central Planners at the Fed are looking after the institution's interest at the expense of the nation's.

Fear-of-China Syndrome by Krugman

How is it possible that we’re borrowing much less from foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging, having moved into massive surplus as consumers try to pay down debt and corporations hold back on investment in the face of weak consumer demand. All those government deficits have only partly offset this move, so that overall national borrowing from overseas is down, not up. 

But what would happen if the private sector stopped deleveraging? The answer is, we’d have a strong economic recovery, which would among other things greatly reduce the budget deficit. A side implication of this point, of course, is that for the time being that deficit is a good thing, helping to support the economy while the private sector unwinds its excessive leverage. 

So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)

The last hyperlink sends one to:

Chinese Bond Purchases by Krugman

September 10, 2010

Regular readers may remember that I’ve spent more than a year trying to knock down the idea that the United States dare not get tough with China, because we need them to keep buying our bonds; as I wrote way back in May 2009, given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports. 

I’ve failed, despite repeated attempts, to get through with this point here — but the Japanese get it. They’re complaining to China about its purchases of yen-denominated bonds, which they argue — correctly — hurts Japan by strengthening the yen. 

Quick update: I should also link to this post, and quote Dean Baker again: China has an unloaded water pistol pointed at our head.

Rogues Gallery

Casey Mulligan's Reality on Unemployment Insurance and Reality for the Rest of Us  by Dean Baker

In a blogpost yesterday Case Mulligan told readers:

"in reality, cutting unemployment insurance would increase employment, as it would end payments for people who fail to find work and would reduce the cushion provided after layoffs."

Unfortunately Mulligan provides no evidence to back up his version of reality. By contrast, Jesse Rothstein, an economist at Berkeley, looked at the behavior of unemployed workers. He found that at most, the supply-side effect from the extended duration of unemployment benefits in this downturn increased measured unemployment by 0.1-0.5 percentage points, 

Furthermore, most of this increase was due to keeping workers looking for work and therefore being counted as unemployed. (When a worker stops looking for work, they are no longer counted as being unemployed.)

Rothstein's calculations are only designed to pick up the incentive effect that Mulligan focuses on in his blogpost. Since the benefits gave workers tens of billions of dollars that they would not have otherwise, they undoubtedly had a large demand side effect. The Congressional Budget Office estimates the multiplier for unemployment benefits as being 1.6, meaning that the $40 billion a year in extended benefits (roughly the amount at stake) would lead to an increase in GDP of $64 billion or more than 0.4 percent of GDP. If the increase in employment is proportionate, it would imply 560,000 additional jobs. This would swamp the negative supply side effect that Rothstein found in his research.

Twitter may be helpful in coping with the insanity of the campaign season.

Added Sarah Silverman - 3,296k followers - who twatted: "Let us pray for the billions of tiny fallen Republicans lost in hookers' assholes this week #RNC"

Confessed 4 Life

Bridget Regan tweets "Almost 30,000 followers what!"

Like Firefly, Legend of the Seeker was one of those highly entertaining shows which was underrated at the time.

I resorted my arbitrary list of tweeters by number of followers.

At this time the - rounded - count is

Wilde      631.5k
Regan       30k
Leonhardt       21.5k
Franke-Ruta     14.5k
Kliff      13k
Appelbaum      9k
Davies       2.5 k

Along with Krugman's new book End This Depression Now! and Ahmed's Lords of Finance, I'd give Baker's End of Loser Liberalism to a young person interested in macroeconomics.

The Food Here is Poison and the Portions Are So Small (Paul Krugman Edition) by Baker


Hard-Hit Cities Show a Housing Rebound

DEPARTMENT OF COGNITIVE DISSONANCE: HOUSING EDITION by DeLONG

No, this is not what a "housing rebound" looks like...

One of the bad things about blogs are the word games. There appears to be a turn-around in housing. DeLong seems to be saying it's not very strong so is not in fact a "rebound." But I'm not sure. You don't want to overstate the extent of the turnaround but there appears to be a "bottoming out" which could lead to a virtuous circle.

One of the good things about blogs are coinages like Matthew O'Brien's "The Age of Niallism."

Martin Amis interviewed by Jacob Weisberg

The Nervous Breakdown of the GOP

Still Talking to Hitch: Author Martin Amis on coping with the loss of his best friend Christopher Hitchens.

The Problem With Porn

SCHMOOZE OR LOSE: Obama doesn’t like cozying up to billionaires. Could it cost him the election? by Jane Mayer

WHAT ECONOMISTS CAN LEARN FROM EVOLUTIONARY THEORISTS by Krugman 

via

Neo Fights (Slightly Wonkish and Vague) by Krugman

I just read Krugman's End This Depression Now! and consider it to be the book to give to younger folks inquisitive about economics. It is very, very good. Also I'd hand them Liaquat Ahmed's The Lords of Finance for a little history.

Warlow and Season 6

Some Thoughts on Global Risks and Monetary Policy by Charles Evans

...In June we decided to continue our Maturity Extension Program, which puts downward pressure on long-term interest rates by extending the average maturity of the Federal Reserve’s securities portfolio. I thought that was a useful step. However, I believe it is time to take even stronger steps, such as the purchase of more mortgage-backed securities, to increase the degree of monetary support for the recovery. As suggested recently by my colleagues Eric Rosengren and John Williams, these could be open-ended purchases, meaning that they would continue at a certain rate until there was clear evidence of improvement in economic conditions. To me, one example of clear evidence would be a resumption of relatively steady monthly declines in unemployment for two or three quarters. Once this momentum was confidently established, the Fed could stop adding to our balance sheet but keep the funds rate at zero.

(via Mark Thoma)

True Blood’s finale climaxes in a tornado of vampire true death by Meredith Woerner

A PLATONIC DIALOGUE ABOUT QUANTITATIVE EASING, OR, SUMMONING THE INFLATION EXPECTATIONS IMP

 by DeLong

We Need Inflation-Tolerance, Not Inflation by Yglesias

That's the situation I think American monetary policy is in. It's not that three or four percent inflation is such a wonderful goal. It's that extreme aversion to three or four percent inflation is causing the Federal Reserve to persistently "shoot too low" in terms of aggregate demand. Ben Bernanke's acting as if someone's holding his daughter hostage. Specifically, the reigning dogma is that if inflation were to go from 2 percent to 3 or 4 percent that long-term expectations might become "unanchored" and drift higher and higher, undermining the "hard won gains" of the Volcker years. But there's no empirical evidence that this is true, and no particularly strong theoretical reason to believe that the worst-case scenario if inflation tolerance goes wrong is worse that the current strategy of grinding the recession out by letting America's long-term productive capacity collapse.

The Age of Niallism: Ferguson and the Post-Fact World by Matthew O'Brien

Housing Recovery: It's Better Than the NYT Thinks by Dean Baker

Housing's Slim Recovery by NYTimes editorial

Many at Fed Ready to Act if Necessary by Annie Lowrey

Since Lowrey's report, St. Louis Fed President Bullard said the data has gotten better since the last meeting, dashing hopes.

Update: Baker again:

Housing Sales Are Back to Trend

Both the NYT and USA Today have convinced themselves that house sales are well below their trend level, with the latter telling us that a 5.5 million annual sales rate of existing homes considered healthy. In fact, we are pretty much back to trend levels of sales. In the mid-90s before the bubble began to distort the market, sales averaged about 3.5 million a year. A simple adjustment for the 15 percent population growth over this period would imply an annual sales rate of 4 million existing homes. That is somewhat below the current 4.5 million sales rate.

The gap between the current sales rate and the trend more than makes up for the continued weakness in new home sales. So, what are these folks talking about?

Westeros' Uneven Level of Technological Progress by Yglesias

What Daenerys Targaryen Needs To Know About Occupational Licensing by Yglesias

A couple other good scenes in a Song of Ice and Fire on economics:

In book one, the new Hand of the King learns that his friend King Robert Baratheon has buried the kingdom in debt. At his first small council meeting he argues against the tournament being thrown in his name. He says its an extravagance they can't afford, whereas Littlefinger, Varys and Renly argue that he doesn't understand the paradox of thrift and the tournament would provide a good economic stimulus and distraction.

At a later small council meeting - in book two - they receive a white raven from the Citadel in Oldtown. It means the maesters have determined Fall has arrived and a lengthy Winter is coming. Master of Coin Lord Petyr Baelish announces they have enough grain to last a 4 - or 5? - year winter but if it lasts longer, well, they'll have fewer peasants. 

This is a nice example of the "hard choices" elite policy makers have to make to gain "street cred" with their fellow international elite. Yglesias himself once used the example of Bill Cowen of Fianna Fail. If Littlefinger had any peasant friends or family members of course he might err on the side of caution and set aside enough grain for 6 years.

lolwut?

Pregnant Woman Relieved To Learn Her Rape Was Illegitimate

Tampa Bay Gay Prostitutes Gearing Up For Flood Of Closeted Republicans

Republicans Condemn Akin's Comments As Blemish On Party's Otherwise Spotless Women's Rights Record

Yglesias sides with Baker against DeLong (?)

Cautious Moves on Foreclosures Haunting Obama by Binyamin Appelbaum

Is Bad Housing Policy Really the Key to the Recession? by Yglesias

Yglesias links to:

Still Getting the Housing Bubble Wrong by Baker

Suppose we had instantly written off all underwater mortgages, would that have kept construction going? That's hard to see, since the enormous oversupply of homes would still be there. 

Would that have sustained house prices? It's hard to see how or why, the problem is that the bubble had raised prices far above any level that could be justified by the fundamentals of the housing market. House prices today are pretty much in line with their long-term trend as we can see from the real Case-Shiller house prices index.If house prices are basically right, why should we expect more consumption than we are now seeing. In fact, consumption remains unusually high, not low, relative to disposable income as shown below. (Adjusted disposable income has to do with the statistical discrepancy for those nerds out there.)

If consumption isn't low, then what is the story of how rescuing underwater homeowners would have saved the economy? There are some economists who argue that the consumption of underwater homeowners has a hugely disproportionate impact on the economy. That seems a bit hard to imagine. 

Let's try some simple numbers. The total amount of underwater equity is estimated at around $700 billion. Suppose that we wiped that out tomorrow. If our underwater homeowners spent 15 percent of their equity each year, more than twice as large as the wealth effect more generally, this new equity would generate $105 billion a year in additional consumption, about 0.7 percent of GDP. That's helpful, but not close to enough to get us back to full employment.
Furthermore, this impact is probably not even realistic. Let imagine someone with a median home, worth roughly $180k. We'll give $60,000 a year in income, roughly 20 percent more than the overall median. (Homeowners have higher income on average.) 

Let's assume that they are 25 percent underwater, which means that they have a mortgage of $225,000. We now wipe that out, in effect giving them $45,000 of additional equity. If they spend 15 percent of this equity, it would translate into $6,750 a yearin additional consumption. Did this family earning $60,000 a year have $6,750 in annual savings that they now can divert to consumption since we set their mortgage above water? That seems unlikely. Perhaps they will borrow to support additional consumption, but how much and for how long? On average, people do have to save over their working lifetime if we expect them to have anything other than their Social Security in retirement. (Paying down a mortgage counts as savings.) 

The story is even more dramatic if we give them a loan to value ratio of 150 percent. Then their mortgage is $270,000 and they are $90,000 underwater. if we write that one off and expect them to spend 15 percent of their new equity it comes to $13,500 a year. That doesn't seem very likely. 

In short, the story of underwater homeowners holding up the recovery doesn't hold water. It is a tragedy for homeowners facing the loss of their homes and foreclosures can devastate communities, but it is not the story of the recession. 

The simple story is that we need a new source of demand to fill the gap left by the collapse of the housing bubble. In the short term that can only be the government. In the longer term it will have to be trade, which means a reduction in the trade deficit. That means first and foremost getting the value of the dollar down, but macho politicians in Washington don't talk about a lower valued dollar. The folks on Wall Street don't like it. 

I had linked to DeLong's post on the lack of recovery in the housing sector.

I'm still not clear on the debate. DeLong seems to be saying if housing recovered as it has in past recoveries overall demand would be much better. Baker seems to be saying that the recent housing bust recession was different from normal recessions. Are there any historical analogies. The Great Depression?

Obama should have fired Bernanke a long time ago by John Cassidy

Advised by Treasury Secretary Tim Geithner, who had worked closely with Bernanke, Obama ended up giving Bernanke another four years. With the markets and the economy still fragile, it seemed the sensible thing to do. In retrospect, it looks like a mistake. By putting Bernanke in charge for the run-up to the 2012 election, Obama jeopardized the recovery and put at risk his own reelection prospects. As the economy has sputtered badly over the past six months, the Fed chairman has failed to do anything about it. Even today he continues to equivocate. Looking back, Obama should have canned Bernanke when he had the chance.

(via Yglesias)

The key evidence is that Bernanke is hardly the only member of the Federal Reserve's Open Market Committee who Obama has appointed, and none of his appointees are calling for monetary expansion. Instead the strongest voices at the Fed for expansionary policy are regional bank presidents—Charles Evans of Chicago has been the champion, followed by Eric Rosengren of Boston and John Williams of San Francisco. 

Christina Romer, Alan Blinder, Joe Gagnon, Olivier Blanchard are other respected economists calling for more Fed activism.

True Blood starts a Fairy War… in Eric’s pants by Meredith Woerner

sums up the Republican Party of the 21st Century

commenter Joe Smith at DeLong's Grasping Reality with Both Invisible Hands: Fair, Balanced, and Reality-Based: A Semi-Daily Journal post on Yglesias on Paul Ryan:

MATTHEW YGLESIAS (2010): WHY WE SHOULD FEAR THAT PAUL RYAN TALKS TO JOHN COCHRANE…

Matthew Yglesias (2010):

Paul Ryan's Monetary Economics: Paul Ryan says that “monetary policy was always my first love” but he doesn’t seem to know very much about it: “There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said. Just as harmful, Ryan warns, is that the proliferation of newly printed dollars inevitably unleashes inflation and throws the economy out of kilter in other ways. “Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes,” he said. “Name me a nation in history that has prospered by devaluing its currency.” [...]

So to sum up, right now inflation is running lower than it was in the 1990s and 2000s. What’s more, in the 1990s and 2000s it was running lower than it was in the 1980s. And what the Fed is trying to do is to bring inflation back not to the levels of the Ronald Reagan Era, but to the rate we enjoyed in the 1990s and 2000s. Maybe Ryan’s a madman rather than a hypocrite…

Joe Smith said... "Ryan was sharing $350.00 bottles of wine with Cochrane and a hedge fund manager."