Inflation: "Empiricists" versus "Theorists" by Christina Romer

By 1933, short-term interest rates were near zero -- just as they are today. As I described in a 1992 academic article, Franklin D. Roosevelt took the United States off the gold standard in April 1933, and rapid devaluation led to huge gold inflows and a large increase in the money supply. Roosevelt also made it clear that the monetary expansion would not be reversed. Expectations of deflation, which had been enormous, abated quickly. As a result, with nominal rates at zero, real interest rates (the nominal rate less expected inflation) plummeted.

The first types of demand to recover were ones that were sensitive to interest rates. Automobile production, for example, jumped 42 percent from March to April in 1933. Inflation did pick up somewhat in the mid-1930s, in part because of other New Deal measures like the National Industrial Recovery Act. But the inflation was modest, and after the crushing deflation of the early 1930s, widely celebrated.

THE triumph of hawkish views on inflation means that there is no appetite today for a Roosevelt-style, inflationary monetary policy.

Bubblenomics

Dean Baker:

The collapse of the bubble in 2000-2002 gave the country what was at the time the longest period without job growth since the Great Depression. The economy only recovered from that slump as a result of the growth generated by the housing bubble. 

Foreign Investment Ebbs in India

Foreign direct investment in India fell more than 31 percent, to $24 billion, in 2010 even as investors flocked to developing nations as a group.

And in the last two months, foreign investors took $1.4 billion out of the Indian stock market, helping drive the country’s Nifty 50 stock index down 17 percent from the record high it set in early November.

Libya's Legacy by Michael J. Totten

When suits challenge the Defense of Marriage Act, the 1996 law barring recognition of same-sex marriages, federal lawyers will now tell judges it should be struck down.

Beating up on Brad DeLong by Dean Baker

(via ... DeLong)

Why Budget Cuts Don't Bring Prosperity by Leonhardt

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

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

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

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

Fighting Near Tripoli

TOBRUK, Libya -- Col. Muammar el-Qaddafi of Libya kept his grip on the capital on Wednesday, but large areas of the east of the country remained out of his control amid indications that the fighting had reached the northwest of the country around Tripoli.

Libyans fleeing across the country’s western border into Tunisia reported fighting over the past two nights in the town of Sabratha, home of an important Roman archeological site 50 miles west of Tripoli. Thousands of Libyan forces loyal to Colonel Qaddafi have deployed there, according to Reuters.

"The revolutionary committees are trying to kill everyone who is against Qaddafi," said a doctor from Sabratha who had just left the country, but who declined to give his name because he wanted to return.

There were also reports of fighting in Misurata, a provincial center 130 miles east of the capital. A witness said that messages being broadcast from the loudspeakers of local mosques were urging people to attack government opponents, following Colonel Qaddafi’s defiant television address Tuesday night calling for ordinary citizens to assist in eliminating opponents, promising that the "cockroaches" would be tracked and killed "house by house."

Eat the Future by Krugman

Pew also asked people how they would like to see states close their budget deficits. Do they favor cuts in either education or health care, the main expenses states face? No. Do they favor tax increases? No. The only deficit-reduction measure with significant support was cuts in public-employee pensions -- and even there the public was evenly divided.

The moral is clear. Republicans don’t have a mandate to cut spending; they have a mandate to repeal the laws of arithmetic.

How can voters be so ill informed? In their defense, bear in mind that they have jobs, children to raise, parents to take care of. They don’t have the time or the incentive to study the federal budget, let alone state budgets (which are by and large incomprehensible). So they rely on what they hear from seemingly authoritative figures.

And what they’ve been hearing ever since Ronald Reagan is that their hard-earned dollars are going to waste, paying for vast armies of useless bureaucrats (payroll is only 5 percent of federal spending) and welfare queens driving Cadillacs. How can we expect voters to appreciate fiscal reality when politicians consistently misrepresent that reality?

A Tunisian-Egyptian Link That Shook Arab History

Just a few months later, after a strike in the Tunisian city of Hawd el-Mongamy, a group of young online organizers followed the same model, setting up what became the Progressive Youth of Tunisia. The organizers in both countries began exchanging their experiences over Facebook. The Tunisians faced a more pervasive police state than the Egyptians, with less latitude for blogging or press freedom, but their trade unions were stronger and more independent. "We shared our experience with strikes and blogging," Mr. Maher recalled.

For their part, Mr. Maher and his colleagues began reading about nonviolent struggles. They were especially drawn to a Serbian youth movement called Otpor, which had helped topple the dictator Slobodan Milosevic by drawing on the ideas of an American political thinker, Gene Sharp. The hallmark of Mr. Sharp’s work is well-tailored to Mr. Mubark’s Egypt: He argues that nonviolence is a singularly effective way to undermine police states that might cite violent resistance to justify repression in the name of stability.

The April 6 Youth Movement modeled its logo -- a vaguely Soviet looking red and white clenched fist -- after Otpor’s, and some of its members traveled to Serbia to meet with Otpor activists.

Everybody's waiting for the man to come down from the tower.

Anna Faris and Chris Pratt of Parks and Recreation fame are married in real life. The actress Teresa Palmer reminds one of Kristen Stewart.


Video for NWA's "Straight Outta Compton"

Wired and Shrewd, Young Egyptians Guide Revolt

"When people have been killed, from time to time you feel guilty," Mr. Lotfi said. "But after the war that night, we felt more and more that our country deserves our sacrifice."

A few days later, seven members of the group were abducted by the police after leaving a meeting at Mr. ElBaradei’s house and detained for three days.
... 

Most of the group are liberals or leftists, and all, including the Brotherhood members among them, say they aspire to a Western-style constitutional democracy where civic institutions are stronger than individuals.

The young Google exec was abducted by the police and held incommunicado for 12 days before being released.


Iran Presses Opposition to Refrain from Rally

Iran’s authorities have increased pressure on the country’s political opposition days before a rally proposed by opposition leaders in support of the popular uprisings in Tunisia and Egypt.

Fed Governor Kevin Wash resigns to "go work in the private sector"

Now Obama can nominate a governor who actually cares about the large output gap in the economy.

Meanwhile, Republican Senator(s) is(are) holding Noble Prize winner / Bernanke teacher Peter Diamond in limbo.

Dean Baker on Jacob Lew

Jacob Lew, the head of President Obama's Office of Management and Budget, had a column in the New York Times that should really scare the American people. While the purpose of the column was ostensibly to tell the American people that there are few easy budget cuts left, the scary part is that Mr. Lew seems to have little understanding of the economy.

Lew boasts about the huge budget surplus at the end of the Clinton administration. He shows no understanding of the fact that these surpluses were largely the result of a stock bubble, which was inevitably going to burst. The story of the economy's growth at that point was that the $10 trillion stock bubble fueled a consumption boom, which led to strong economic growth.

Of course the bubble was not sustainable, when it burst, the consumption it supported also disappeared. We only recovered from the recession when the housing bubble created enough demand to replace the demand lost from the collapse of the stock bubble.
The underlying problem was the over-valued dollar. This was a conscious policy of the Treasury Secretary Robert Rubin, who actively pushed a "strong dollar" policy. This policy effectively gave a large subsidy to imports and imposed a large tax on U.S. exports. The result was a huge U.S. trade deficit.

Given a large trade deficit, the economy needs either large government deficits or very low private savings to sustain high levels of employment. This is not a partisan issue; it is an accounting identity.

Mr. Lew shows no understanding of this basic point. Either this top Obama official is ignorant of basic economics or he is not being honest with the American people. Either way, it is an incredibly scary column.

The IMF's Epic Fail on Egypt by Yves Smith

Needless to say, there has also been a great deal of consternation as to how the West’s supposedly vaunted intelligence apparatus failed to see this one coming. This lapse is as bad as the inability to foresee the collapse of the Soviet Union (it’s arguably worse: a lot of people profited from the Cold War, and they’d have every reason to fan fears and thus look for evidence that would support the idea that the USSR was a formidable threat...

(And there was the CIA's George Tenet on the "slam dunk" of finding WMD's in Iraq)

If this isn’t bad enough, other sections of the report are downright embarrassing. The IMF does acknowledge that poverty is a bit of a problem, and look at the remedies it suggests:

Reforms for Sustained Growth
9. Continuing the reform momentum and reducing fiscal vulnerabilities remain the key medium-term challenges. Rapid growth is crucial to tackling poverty and the high level of unemployment. In this context, reinvigorating the structural reform agenda should help raise productivity and reinforce Egypt’s competitiveness.

Prioritizing reforms that promote macroeconomic stability and improve the investment climate will support the resumption of foreign direct investment. As noted, the planned fiscal adjustment and tax reforms are an important element of generating confidence, improving the business environment, and ensuring space for the private sector. Resumption of privatization and development of public-private partnerships (PPPs) will help mobilize private sector financing and know-how. Contingent liabilities associated with PPPs, however, should be monitored closely.

Reinforcing financial soundness and promoting financial sector deepening will help mobilize savings needed to finance private sector-led growth. The stability of the financial sector during and since the crisis is a testament to reforms since 2004. Staff supports the continuation of reform efforts with the CBE’s Phase II agenda. Introducing Basel II standards and supporting financial sector development will help facilitate intermediation of savings and increase private sector access to credit. Staff supports plans to adopt additional prudential measures to contain vulnerabilities that will arise with greater integration with the global economy and the introduction of new asset classes. Close coordination between the new nonbank supervisory authority and CBE will be a priority, and consideration should be given to introducing forward-looking risk management and developing global standards on liquidity and leverage.

Strengthening data quality and transparency will help improve the policy debate and business environment, and enhance Fund surveillance. The need for greater transparency and higher frequency data was underscored by the global financial crisis, and enhancements would help ensure that data availability is on par with other emerging markets. In particular, there is a need for more robust CPI and GDP deflators, and for publishing higher-frequency aggregate financial soundness indicators (as planned), and encouraging banks to make available detailed performance and soundness indicators.

This is all neoclassical trickle down twattle. People are hungry and can’t find work, and what does the IMF have in its toolkit? "Public private partnerships".

However Tunisia was a relatively wealthy Arab country and the Egyptian protesters were inspired by the successful Tunisian revolt.

The Shame Factor: When will dictators learn not to treat their people like fools? by Hitchens

Report From Cairo by Nicholas Kristof

How Much Is Too Much? by Benjamin Kunkel

The real test of Harvey’s 1982 theory of crisis is how well it serves in the face of the thing itself. The Enigma of Capital can be read as an effort to meet the challenge. Naturally, its success or failure depends on whether it can offer a more comprehensive and persuasive account than rival theories. On the score of comprehensiveness there can be little doubt that Harvey’s work and that of other Marxists goes beyond the alternatives. 'The idea that the crisis had systemic origins is scarcely mooted in the mainstream media,' Harvey writes, and that might be extended to include even the trenchant work of the neo-Keynesians. The crisis, after all, is that of a capitalist system, and no account of it, however searching, can be truly systematic if it neglects to consider property relations: that is, the preponderant ownership of capital by one class, and of little or nothing but its labour power by another.

Paul Krugman, discussing Roubini’s book in the New York Review of Books, agreed with him that what Ben Bernanke called the 'global savings glut' lay at the heart of the crisis, behind the proximate follies of deregulation, mortgage-securitisation, excessive leverage and so on. Originating in the current account surpluses of net-exporting countries such as Germany, Japan and China, this great tide of money flooded markets in the US and Western Europe, and floated property and asset values unsustainably. Why was so much capital so badly misallocated? In the LRB of 22 April 2010, Joseph Stiglitz observed that the savings glut 'could equally well be described as an "investment dearth"', reflecting a scarcity of attractive investment opportunities. Stiglitz suggests that global warming mitigation or poverty reduction offers new 'opportunities for investments with high social returns'.

The neo-Keynesians’ 'savings glut' can readily be seen as a case of what a more radical tradition calls overaccumulated capital. But it is the broader and more systematic Marxist perspective that ultimately and properly contains Keynesianism within it, and a crude Marxist catechism may be in order. Where does an excess of savings come from? From unpaid labour -- for example, that of Chinese or German workers. And why would such funds inflate asset bubbles rather than create useful investment? Because capital pursues not 'high social returns', but high private returns. And why should these have proved difficult to achieve, except by financial shell-games? Keynesians complain of an insufficiency of aggregate demand, restraining investment. The Marxist will simply add that this bespeaks inadequate wages, in the index of a class struggle going the way of owners rather than workers.

In The Enigma of Capital, Harvey coincides with other Marxists in locating the origins of the present crisis in the troubles of the 1970s, when the so-called Golden Age of capitalism following the Second World War -- blessed with high rates of profitability, productivity, wage growth and expansion of output -- gave way to what Brenner named 'the long downturn' after 1973. Brenner argued in The Economics of Global Turbulence  that this long downturn, with deeper recessions and weaker expansions across every business cycle, reflects chronic overcapacity -- another variety of overaccumulation -- in international manufacturing, a condition brought about by the maturation of Japanese and German industry by the end of the 1960s, and later compounded by the industrialisation of East Asia. As competition to supply export markets increased faster than those markets expanded, the price of international tradeables naturally fell, reducing both the profits of manufacturers and the wages paid to workers. Such impaired profitability moreover discouraged further investment in production, so that finance capital turned increasingly to speculation in asset values. Yet this view, however formidably presented, doesn’t appear to have won general assent. Harvey, content to follow Brenner elsewhere, inclines towards a more conventional profit-squeeze explanation of the crisis of the early 1970s.

(via Yglesias)

Krugman: A Cross of Rubber

Can We Take Away Alan Greenspan's Pension? by Dean Baker

He discusses Joe Nocera's column on the F.C.I.C.'s report.

Commodities: This Time It's Different by Krugman

Now, what about food prices?

Not much evidence of hoarding, as far as I can tell. So this is straightforward supply and demand. Demand may be up to some extent because of that emerging-market boom. But if you look at the FAO reports it becomes clear that the key thing for cereals prices is that production is down in advanced countries, largely owing to terrible weather. And yes, it’s likely that climate change has played a role.

Oh, and what about Ben Bernanke? Well, to the extent that emerging markets are insisting on a fixed exchange rate against the dollar in the face of obvious overvaluation, that contributes to the boom and hence to demand. But I don’t think it’s reasonable to demand that the Fed stop fighting US unemployment in order to keep Chinese currency manipulation from leading to cotton hoarding by Chinese farmers.

So the story on commodity prices is somewhat different from the story during the last spike. As always, though, it’s crucial to keep your eye on the bale -- that is, whatever your logic, it must translate into actions that affect the physical supply and demand for raw materials.