Senate Finance Committee hearings

I'm watching the Senate Finance Committee hearings on the Rockefeller amendment to include a "public option" in the Finance Committee markup. I'm kind of riveted - the level of debate is quite high, excepting Chuck Grassley. I appreciate Orrin Hatch's point of view, which he expressed eloquently, though I believe it is 100 percent wrong. So hurray for representative democracy.

But here's Kent Conrad comparing health insurance systems in the UK, Canada, France, Germany and so on, and he has to have a staffer hold up a big poster board behind him with summary notes. Why is there no computer projection system in the Finance Committee hearing room? Have these people never heard of Powerpoint?

Iran's nukes

Scott Ritter was right about WMD in Iraq. I suggest that we give him a better hearing now with Iran.

While this action is understandably vexing for the IAEA and those member states who are desirous of full transparency on the part of Iran, one cannot speak in absolute terms about Iran violating its obligations under the nuclear non-proliferation treaty. So when Obama announced that "Iran is breaking rules that all nations must follow", he is technically and legally wrong.

... It should be underscored that what the Qom facility Obama is referring to is not a nuclear weapons plant, but simply a nuclear enrichment plant similar to that found at the declared (and inspected) facility in Natanz.

... Why is this distinction important? Because the IAEA has underscored, again and again, that it has a full accounting of Iran's nuclear material stockpile. There has been no diversion of nuclear material to the Qom plant (since it is under construction). The existence of the alleged enrichment plant at Qom in no way changes the nuclear material balance inside Iran today.

Simply put, Iran is no closer to producing a hypothetical nuclear weapon today than it was prior to Obama's announcement concerning the Qom facility.

... Calls for "crippling" sanctions on Iran by Obama and Brown are certainly not the most productive policy options available to these two world leaders. Both have indicated a desire to strengthen the nuclear non-proliferation treaty. Iran's action, in declaring the existence of the Qom facility, has created a window of opportunity for doing just that, and should be fully exploited within the framework of IAEA negotiations and inspections, and not more bluster and threats form the leaders of the western world.

Grrr

So now it looks like the Democrats, rather than just telling anti-abortion people that if they want to require that insurance plans people buy using government subsidies not cover abortion they should get themselves a Congressional majority, and having compromised and compromised on the issue without the other side giving an inch, may cave in entirely. That seems to be a pattern.

Just a few notes:

1. Let the record show that our government currently subsidizes the purchase of employer-provided health insurance to the tune of hundreds of billions of dollars a year, and nearly half of these plans cover abortion.

2. Democrats offered to force insurance companies to separate funding for abortion procedures so that abortion was paid for from the individual's contribution rather than the government's. Anti-abortion people said that's no good because money is fungible, and of course they are right. But money remains fungible even if direct provision of abortion coverage is denied: every dollar individuals save on insurance through the government subsidy is a dollar that is now freed up to spend on abortion.

3. How about the pro-choice people cave on this one, then use their prodigious fund-raising abilities to establish a multi-billion dollar endowment that will pay for abortions for deserving people? I'm not a fan of abortion, but I'll pony up just to stick it to the anti-choice people.

The many layers of regulatory capture

So everyone's saying that regulators need to step up in the future to choke off bubbles before they get out of control. Brad Delong writes about this, and a commentator goes

If effective regulation won't be forthcoming--whether due to regulatory capture or because financial innovation has outpaced the political system's willingness to extend regulators' reach--the central bank might have to tighten into the bubble. I call that Second-Best Punchbowlism...

And Brad's all

This seems to me to be exactly right... Central banks would prefer an effective system of regulation, but due to capture of legislatures by the ban[k]ing sector they are unlikely to get it. Thus they are going to be driven to be always wondering whether they should be putting extra downward pressure on asset prices--with implications for employment and possibly growth. The fact that "Punchbowlism" can be implemented by central banks by themselves makes it the default option.

This is the argument that Bob Barbera and I have been making for awhile now: the Fed needs to pay more attention to risk premia. But then some crazy guy tosses in his two cents in the comments section:

Oh, weep for those poor central bankers who so desperately want effective and comprehensive regulation of the financial sector! Oh, were it not for the bitter fruit of democracy that imposes upon these wise Platonic technocrats the corruption of legislatures - bodies so easily captured by the dark forces of financial interests.

And, tragically lacking the regulatory tools they need to fulfill their proper role in the Republic, central bankers may need to use the blunt instrument of monetary policy rather than the skillfully-wielded scalpel of regulation.

This seems to me a story that badly misunderstands the nature of regulatory capture and serves primarily as a myth with which central bankers far gone in fantasies of moral self-justification can comfort themselves while walking through the revolving door between the financial sector and (nominal) public service. It ignores the history of how central bankers have actually behaved when they have had regulatory power and elides even the basic arguments put forward by Galbraith to explain the NY Fed's behavior (specifically its failure to "take away the methanol-and-vodka-spiked punchbowl") in 1929.

The truth may be out there, but the lies are in your head.

And it turns out I agree with the crazy guy too! I believe, and my research suggests, that the Fed's policy choices are constrained by the political lay of the land. Not to say that the Fed takes orders from politicians or bankers; rather, the Fed does not / cannot adopt a monetary policy strategy that runs seriously counter to the agenda of powerful political interests.

Case 1: the Great Inflation. The Fed spent the decade of the 1970s figuring out ways to contain inflation. But one strategy - the only one that could possibly have been successful - was taken off the table. That was to tighten monetary policy severely enough to push the economy into a severe enough recession that inflation expectations would have been vanquished. That policy was not acceptable because Congress, the President, and the public would not have accepted a continued monetary tightening during a severe recession. The result was gradualism, price controls, reliance on fiscal policy, and the like. Only when Jimmy Carter through up his hands and gave Paul Volcker a blank check to contain inflation was inflation brought under control.

Case 2: Capture by the banking system. I wrote a paper a few years ago that had the most remarkable econometric result: before 1979, the federal funds rate was correlated with "signals" from nonfinancial interest groups like the AFL-CIO and Chambers of Commerce, and not correlated with signals from the banking industry. Nonfinancial groups always wanted a looser monetary policy, and the Fed conducted a monetary policy consistent with those wishes. From 1979 to 2001, the federal funds rate was not correlated with signals from nonfinancial interest groups, but strongly correlated with signals from the banking industry. The banking industry wanted a fairly tight monetary policy, and the Fed's policy was consistent with those wishes. One can interpret these results to mean that the Fed had adopted the preferences of the banking industry, perhaps through a form of regulatory capture. That's not all bad - capture by the banking industry could insulate the Fed from the type of political pressure it came under in the 1970s, allowing it to pursue a more cautious and stable monetary policy that brought benefits to us all.

But think about the constellation of political interests shaping monetary policy today. There is no longer a banking industry but a vast financial services sector where the mundane business of commercial banking is mixed with investment banking, wealth management, and hedge fund - type speculation. The interest of the financial sector in the mid 2000s, and one assumes today, is easy money. And so that's what the Fed is likely to deliver. Where was the political constituency that could have supported a decision by the Fed to tighten interest rates during the bubble period of 2004-07? Where is the political constituency that will do so in the future?

Get rich quick

Mirror App. A piece of software for your desktop or iPhone that turns your screen into a mirror. Someone invent this please.

Free trade

Free traders are worried that unions will push Obama to adopt protectionist policies.

And the leaders of the G-20 should take note: Mr. Gerard and his fellow labor leaders are just getting started.

While labor’s opposition to free trade is nothing new, having an ear in the White House is. The Obama administration, though it says it supports free trade, has so far seemed more aligned with labor’s trade agenda than has any administration in decades.

Let's review the charges against labor:

- The steelworkers' union pushed Obama to impose tariffs on Chinese tires. A provision of the legislation that admitted China to the WTO allows the US to do this when there is disruption in an industry. If we're not going to enforce this provision, why was it included in the legislation? Furthermore, China imposes a slew of protectionist policies that affect US goods. Shouldn't we use the tools at our disposal to get them to eliminate these provisions?

- Unions want border adjustment taxes to be included in climate change legislation. If the US adopts a cap-and-trade system to regulate greenhouse gas emissions, US manufacturers will be at a disadvantage relative to manufacturers in China, India, and other countries without such a system. This is the main reason climate change legislation generates so much opposition. Compensatory tariffs would have the effect of raising the price of imported goods by the same amount as if the producing countries had signed onto cap-and-trade. As Paul Krugman argues, this makes perfect economic sense and it is legal under WTO. Also, by imposing a system in which Chinese manufacturers are subject to high prices for carbon emissions, yet the revenue generated by those restrictions goes to the US, imposing these border adjustments may be just the tool to encourage China to sign on to a global emissions reduction system.

- The steelmakers' union is pushing many individual trade cases. Well, China subsidizes many of its exports illegally. The Commerce Department imposes tariffs when it finds evidence of illegal subsidies.

After so many decades in which labor has taken it on the chin, I'm going to tolerate some push-back for awhile.

Tom Tomorrow weighs in on David Brooks' column

Tom Tomorrow sez:

David Brooks was out jogging on the mall and saw some teabaggers interacting with actual black people, and because no one was literally shouting the n-word or fashioning a noose, he concludes that racism plays absolutely no part in whatever it is that drives this — well, I almost wrote “political movement” but I’m not sure you can dignify it as such. It’s really more of a mass temper tantrum.

Be sure to watch the video clip at the bottom of his column. It's a little bit frightening.

David Brooks on race and the anti-Obama backlash

I expect that the left-of-center blogosphere will jump on today's column by David Brooks soon enough. Let's see if I can point out the absurdities of the column before anyone else.

Brooks says it is not racism that motivates the town hall protesters, tea partiers, and marchers on Washington opposed to "Obamacare" in particular and creeping socialism in general. His evidence for this claim is that last weekend he saw white anti-Obama protesters mixing with black African American family reunion celebrators on the Mall. Brooks believes that the protests against Obama have a more distinguished lineage that can be traced back to the dispute between Hamilton and Jefferson over the nature of the American republic:

Hamiltonians stood for urbanism, industrialism and federal power. Jeffersonians were suspicious of urban elites and financial concentration and believed in small-town virtues and limited government. Jefferson advocated “a wise and frugal government” that will keep people from hurting each other, but will otherwise leave them free and “shall not take from the mouth of labor the bread it has earned.”

And it has always had the same morality, which the historian Michael Kazin has called producerism. The idea is that free labor is the essence of Americanism. Hard-working ordinary people, who create wealth in material ways, are the moral backbone of the country. In this free, capitalist nation, people should be held responsible for their own output. Money should not be redistributed to those who do not work, and it should not be sucked off by condescending, manipulative elites.

Barack Obama leads a government of the highly educated. His movement includes urban politicians, academics, Hollywood donors and information-age professionals. In his first few months, he has fused federal power with Wall Street, the auto industry, the health care industries and the energy sector.

Given all of this, it was guaranteed that he would spark a populist backlash, regardless of his skin color. And it was guaranteed that this backlash would be ill mannered, conspiratorial and over the top — since these movements always are, whether they were led by Huey Long, Father Coughlin or anybody else.

Let's start with the third paragraph reproduced above. Did not George W. Bush lead a government of highly educated people? Were there no urban politicians, academics, Hollywood donors and information age professionals in his movement? Did he not fuse federal power with Wall Street, etc.? Except for the fact that there are probably more black faces in positions of power under Obama, I don't see a lot of demographic differences. What I do see is one administration that to some people looks black and scary and wants to do things to benefit marginalized groups, versus the previous administration that looked to those same people white, southern, and comforting, whose interest was in preserving the prevailing social order. White middle class conservatives did not rise in opposition to Bush because he was one of them - Obama represents the Other.

Now for Brooks' blinkered view of history. Can it really be true that when Brooks looks out over the crowds on the Mall or at the town hall crazies and tea partiers, he sees noble early 19th century Jeffersonian farmers rebelling against urban industrial elites? I see the reflection of grimmer historical movements: the crowds in Little Rock who didn't want the federal government telling them to integrate their schools; the white middle class voters in the 1960s who, repulsed by urban riots, led a backlash that scuttled the Great Society and brought Richard Nixon to power; the anti-busing movement in the 1970s; the militia movement in the 1990s. These movements too were grounded in a particular vision of the American republic: one in which local majorities could impose a particular social order on their communities free from the interference of the federal government. That social order, of course, was rooted in race. Time and time again in American history, the white middle class rebels when it feels its position at the top of that social order is threatened by the intercession of the federal government.

I don't believe that all, or even most of the anti-Obama protesters are explicitly racist. But the anger and fear has its origins in the long history of race relations in the U.S. Surely Brooks would see this if he looked at the symbols around which the protesters are rallying: secession, nullification, the 10th amendment. These are arguments that trace back to John C. Calhoun and Orval Faubus, not Thomas Jefferson.

Public Policy Major FAQ

I sat down with one of the sponsors of the motion to establish a major in Public Policy to ask some pressing questions. Here are his responses.

Q: Does the motion create death panels?

A: No.

Q: How can you support a motion that creates death panels? Doesn't that make you a Nazi?

A: I do not support such a motion. I am not a Nazi.

Q: But here on page 36 of the motion it clearly states, and I quote, "Death panels will be established."

A: There is no page 36. The motion has only one page.

Q: But my point is, is there anything in the motion that guarantees that there will be no death panels in the future?

A: Um, no, but...

Q: So you admit there MIGHT be death panels?

A: Um...

Q: Didn't Adolph Hitler major in Public Policy?

A: I don't know. Er, can we move to a different topic?

Q: Sure. Tell me this, is the Public Policy major just a public policy option, or is it a public policy mandate?

A: Finally, some reasonable questions. The Public Policy major is just an option. No one will be required to major in Public Policy.

Q: But what is there to guarantee that the Public Policy major won't drive other majors out of business, so that eventually no one will have any choice but to major in Public Policy. Isn't that the real threat here?

A: In principle yes, that might be a problem. But we have intentionally designed the major to be so weak and uninteresting that most students will choose to major in something else. We estimate that only five percent of students will want to major in Public Policy.

Q: Still, isn't it true that 41 percent of the faculty representing the smallest departments on campus will refuse to support any Public Policy major, even if it is optional?

A: That is a possibility. We are exploring an alternative in which we create a large number of floating Public Policy study groups that aren't really majors but give students the illusion that they are doing something valuable with their time.

Q: Well, that's not going to fly. Sounds like socialism to me. One last question: will illegal immigrants be allowed to major in Public Policy?

A: No, the motion specifically prohibits illegal immigrants from majoring in Public Policy.

Q: You lie!

More on Obama's trade strategy

The Obama Administration's decision to impose tariffs on tires should not come as a surprise. Testimony by the U.S. Trade Representative Ron Kirk in March and the Administration's official statements of its trade policy since January suggest that the Administration would take advantage of authority it has under current trade agreements to push US trading partners on issues of concern to the US. Edward Gresser advises us not to hyperventilate about the tire decision - similar actions have been taken frequently by previous presidents and by other countries.

Each year the World Trade Organization counts 100 to 200 of them [temporary tariffs] around the world, usually imposed through the “anti-dumping” and “countervailing duty” laws many countries have passed to defend industries against predatory export practices, such as below-cost sales and government subsidies.

India is the most frequent user of these laws, imposing about 30 anti-dumping penalties a year since 2000. The United States is a bit less enthusiastic, imposing about 15 anti-dumping cases a year. China and the European Union also record about 15 cases a year. According to the U.S. Commerce Department, China now maintains penalty tariffs like these on 17 types of American goods, including tariffs ranging up to 46 percent on optical fiber, 61 percent on Spandex, and 91 percent on chloroform. And a week before the administration’s tariff decision, in fact, the Chinese Commerce Ministry renewed anti-dumping tariffs on a grade of Russian, Japanese and Korean rubber known as “styrene butadiene” used precisely to make automobile tires.

Why are free traders such cowards?

Ok, so there's a good chance that imposing a tariff on tires imported from China is bad economic policy. But for many commentators left and right, any assault no matter how trivial on the fortress of free trade brings a response ranging from hand-wringing to apoplectic. Not only is this bad for consumers - it might ignite a TRADE WAR! Oh my God, we must not do anything that might provoke retaliation! Look, China is already retaliating by talking about restricting imports of chicken products - this could lead to another GREAT DEPRESSION!

The opening of trade with China in the 1990s was a momentous act. It benefitted the U.S. in many ways, but also imposed costs on some sectors of our economy. There are good arguments for continuing to restrict trade with China in some areas - (1) while in the end free trade will benefit all, because it comes with costs the opening should be done gradually in order to give US producers time to adjust; (2) China restricts imports of US goods; we can use tariffs as a diplomatic tool to persuade them to adopt a more open trade policy, which will make us all better off in the long run; (3) China's export-driven growth strategy and the exchange rate policy that is an integral part thereof contribute to global macroeconomic imbalances; we can use tariffs as a diplomatic tool to persuade them to modify these policies.

Perhaps the tire tariffs is simply a craven move to pay off Obama's supporters in the labor movement. It might, on the other hand, be part of a strategy to force concessions from China on trade policy that would benefit the U.S. in the long run. (This testimony by Richard Trumka from a few years ago, for example, suggests there's a longer-term strategy than simply protecting jobs in dying industries.) If so, there's no need to panic when every once in awhile our government throws some elbows around. It's how one negotiates with a tough adversary.

Imagine if the same attitude were taken in national security policy. What, Obama has criticized Iran's leaders for its treatment of protesters? MY GOD, WHAT IF THE IRANIANS RETALIATE? THIS COULD MEAN WAR!! CALL OFF THE ATTACK DOGS AND APOLOGIZE!

Crazies, then and now

Obamacare and illegal immigration

Froma Harrop argues that contrary to the right's paranoid rantings, mandating individual coverage will reduce illegal immigration. Nice turn of phrase:

We should examine what's really behind the right's argument that universal health coverage would draw more illegal immigrants. It's an assumption that if you keep America's low-wage workers miserable enough, undocumented foreigners won't want to join them.

Socialism

Thousands marched in DC this weekend to protest the Obama Administration's supposed "socialist" policies. Let's review the record.

It was the free market, laissez-faire policies of the Reagan, Bush, Clinton and Bush administrations that created a bloated, hyper-aggressive, wildly unstable financial system. Private mortgage lenders and investment banks (not, as is sometimes argued, Fannie Mae, Freddie Mac, and the Community Reinvestment Act) were responsible for the push to expand subprime lending. It is our predominantly private-run health care system that has created escalating costs and left 50 million people uninsured. Not to mention the energy market, where reliance on the free market has left us dependent on oil imports from the most unstable regions of the world and perched on the precipice of environmental catastrophe. We have experienced market failure on a grand scale.

Given the mess to be cleaned up, what is remarkable about the Obama Administration's policies is how minimalist they have been. The banks were not nationalized, though many economists from the right and the left recommended doing so. The nationalization of Fannie Mae and Freddie Mac merely formalizes what had previously been an informal relationship between these agencies and the government. The government will not "take over" the health care industry - the public plan, if it comes to pass, will be available only to people without employer-provided health insurance and is expected to enroll only about 5 percent of Americans. Though the government now owns stock in GM and Chrysler (had it not done so, those companies would no longer exist and the economy would be in much worse shape than it is now), it has committed not to using that power to direct the day-to-day affairs of the companies. The managed bankruptcy proceedings were a model of efficient government action. And in dealing with the global warming problem the Administration has not mandated that we all put solar panels on our houses; it has proposed creating a vast financial market in which permits to emit greenhouse gases will be traded.

The Federal Reserve has been much more aggressive in "socializing" finance - according to this article, the Fed has been buying up virtually every new mortgage-backed security issued by Fannie Mae and Freddie Mac. It has been purchasing commercial paper, propping up mutual funds, and taking other extraordinary actions. But these are surely temporary - as the economy recovers we can expect to see a fairly rapid pull-back in all of these areas.

Thinking people on the right have reacted to the economic meltdown by revising their views of the ability of markets to stabilize themselves. What government interventions, they ask, are most likely to improve the functioning of markets in financial services, health care, and so on? The marchers in Washington and their organizers have somehow managed to emerge from the markets' mayhem with their ideological worldview completely unaltered. Their ire is focused on the people who have taken it upon themselves to clean up the mess rather than on the people who created the mess in the first place. But at the end of the day, isn't the opposition going to have to say what they are for rather than just what they are against? And what will they have to say?

What the hell is wrong with Kent Conrad and Max Baucus?

Apparently you can get these two "moderate" Democrats to jump through hoops merely by calling the president a liar during a joint session of Congress. From Time:

The controversy over Republican Representative Joe Wilson's shouting "You lie!" at the President over his claim that illegal immigrants wouldn't benefit from health-care reform apparently sparked some reconsideration of the relevant language. "We really thought we'd resolved this question of people who are here illegally, but as we reflected on the President's speech last night, we wanted to go back and drill down again," said Senator Kent Conrad, one of the Democrats in the talks after a meeting Thursday morning. Later that afternoon, Baucus said the group would add a proof-of-citizenship requirement for participation in the new health exchange — a move likely to inflame the left.

If the article has characterized this correctly, Baucus and Conrad's response to Wilson's baseless charge about the bill's treatment of illegal immigrants caused them to go back and eliminate coverage for legal immigrants. Who are they trying to appease with this change? Even Wilson doesn't seem to object to legal immigrants receiving subsidies.

Fact: number of people in poverty falls during periods of economic growth

Exhibit A: new data from the U.S. Bureau of the Census



See, the number in poverty sometimes drops a lot such as during the 1960s and 1990s. Sometimes the decline is more modest (the 80s, the early and late 70s). But the number of Americans in poverty never, ever rises during periods of economic growth, right? Er, wait a minute, let me look at that graph again...

The right is ok with tyranny, just not Obama's brand of tyranny

Jonathan Weiler at Huffington Post argues that what fuels the right wing's opposition to all things Obama is not a concern with government intrusion into our lives ("tyranny") per se, but the specific form of intrusion that aims at redistribution from the privileged to the less so. With a tinge of race anxiety to boot.

In this crazy political season, when stay-in-school speeches are transformed into demonic efforts at socialist indoctrination, expanding health care is viewed as the step just before the gas chamber and raising taxes on the wealthy is the open door to the Gulag, it's worth remembering this: the rabid right, as expressed by its leading organs, whether congressional Republicans or the talking heads Limbaugh, Beck and so on, is not concerned about tyranny per se, but only a very specific type of it. These high organs of the right cheered on eight years of significant erosions of civil liberties - warrantless wire-tapping, torture and the demonizing of anyone who had the temerity to criticize a "war president."

The profoundly anti-democratic (that's small "d" for those scoring at home) character of contemporary right-wing ideology is too plain to dispute and, as Marc Hetherington and I show in our new book - Authortarianism and Polarization in American Politics - is especially pervasive precisely among authoritarian-minded individuals who have, in turn, become the base of the Republican Party.

The point may seem obvious, but every time you hear another right-wing ring leader, whether it's the aforementioned Limbaugh or Beck, or Michelle Bachmann or Sean Hannity lament the loss of freedom and the imminent imposition of tyranny, it's important to remember what galls the modern American right about Obama is not the loss of freedom itself, but the extent to which he represents, in their collective imagination, the loss of prerogative (what folks used to call "status anxiety.") They believe that Obama's redistributionism means less for them and their kind - the true, deserving "real" Americans - and more for those who should know their place rather than despoil America with their grubby insistence on government entitlements. Whether it's illegal immigrants, gays, or brown-skinned people more generally, the modern right may have some sympathy for individuals in need, but as collective groups, it's an outrage that government wants to help them at the expense of the real Americans.

Has the Fed bought the economics profession?

Ryan Grim of the Huffington Post says it has.

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found...

One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll -- and the rest have been in the past...

When dissent has arisen, the Fed has dealt with it like any other institution that cherishes homogeneity. Take the case of Alan Blinder. Though he's squarely within the mainstream and considered one of the great economic minds of his generation, he lasted a mere year and a half as vice chairman of the Fed, leaving in January 1996. Rob Johnson, who watched the Blinder ordeal, says Blinder made the mistake of behaving as if the Fed was a place where competing ideas and assumptions were debated. "Sociologically, what was happening was the Fed staff was really afraid of Blinder. At some level, as an applied empirical economist, Alan Blinder is really brilliant," says Johnson. In closed-door meetings, Blinder did what so few do: challenged assumptions. "The Fed staff would come out and their ritual is: Greenspan has kind of told them what to conclude and they produce studies in which they conclude this. And Blinder treated it more like an open academic debate when he first got there and he'd come out and say, 'Well, that's not true. If you change this assumption and change this assumption and use this kind of assumption you get a completely different result.' And it just created a stir inside--it was sort of like the whole pipeline of Greenspan-arriving-at-decisions wasdisrupted." It didn't sit well with Greenspan or his staff. "A lot of senior staff...were pissed off about Blinder -- how should we say? -- not playing by the customs that they were accustomed to," Johnson says.

And celebrity is no shield against Fed excommunication. Paul Krugman, in fact, has gotten rough treatment. "I've been blackballed from the Fed summer conference at Jackson Hole, which I used to be a regular at, ever since I criticized him," Krugman said of Greenspan in a 2007 interview with Pacifica Radio's Democracy Now! "Nobody really wants to cross him." An invitation to the annual conference, or some other blessing from the Fed, is a signal to the economic profession that you're a certified member of the club. Even Krugman seems a bit burned by the slight. "And two years ago," he said in 2007, "the conference was devoted to a field, new economic geography, that I invented, and I wasn't invited." Three years after the conference, Krugman won a Nobel Prize in 2008 for his work in economic geography.

The full article is worth reading. I suspect that the dominance of the Fed's worldview is more a product of groupthink than coercion. Fed economists are indeed everywhere. They are generally smart and they have access to resources - data, research assistants, co-authors and sounding boards, time for research - that most of us outside the Fed would kill for. (Really, I'd be willing to kill for it - call me.) I imagine that inside the Fed, as in any large organization, there are powerful social pressures to conform to the party line (perhaps in addition to more overt forms of pressure). As a consequence, research coming out of the Fed tends to focus on technical issues and shies away from theoretical approaches that lie outside the neoclassical or New Keynesian mainstream. There typically are serious blind spots, the Fed economists' inability to find evidence of a housing bubble in 2004-06 being front and center. Macroconomists outside the Fed want to be taken seriously by this smart and influential group of economists, and there is surely therefore a tendency to follow the party line to some extent.

I've experienced a bit of the social pressure in recent years when I've tried to peddle my theory that for the most part the Fed's failure to control inflation in the 1970s was due to the Fed's unwillingness to tighten in the face of a political environment that would not tolerate high unemployment. When I've presented this argument to economists at small institutions, the responses are usually favorable. If a current or former Fed economist is in the audience, the reception gets quite chilly. Fed people, by and large, dismiss out of hand the possibility that the Fed has ever caved in to political pressure (despite a lot of evidence straight out of transcripts from FOMC meetings that this is precisely what happened). They are more comfortable with the argument that back in the 1970s the Fed made honest mistakes due to the poor data or theoretical models they had to work with. I've always sensed that the resistance I have seen to the political explanation is an emotional, defensive reaction independent of logic and evidence.

No one's pointed a gun at my head and told me to bury my paper. But I don't have high hopes of having it published in a highly-ranked journal, in part because it pushes a point of view that does not fit the dominant worldview. (Of course, it's quite possible that the paper legitimately sucks as well, so I'm not going to view any rejection as evidence of ideological bias!)

Victories for civilization

British Court Convicts Three in Plot to Blow Up Airliners Court? Convicts? What, no need for torture in secret detention facilities?

Prime Minister of Taiwan Quits Over Typhoon Response Wow, they do that in Taiwan? Might be a good system to adopt here. Next time a typhoon hits, or a financial system collapses, or a war turns out to have been sold on false pretenses...

Sudan Court Fines Woman for Wearing Trousers But she was spared the 40 lashes!

How big is the multiplier?

Is the stimulus act (ARRA) having a noticeable effect on the U.S. economy? Greg Mankiw says not really, citing Volker Wieland's analysis on VoxEU:

Proponents of discretionary fiscal stimulus hope for a Keynesian multiplier effect... A government-induced increase in total spending then raises income and boosts private consumption, which in turn raises total spending further... President Obama’s advisers Christina Romer and Jared Bernstein estimate that 1% of government spending would generate a 1.6% increase in GDP. They give much weight to the type of traditional macro models used by some forecasting firms. As a result, they believe the ARRA stimulus is good for 3% to 4% additional growth by end of 2010. A robustness analysis with New-Keynesian models conducted by Cogan, Cwik, Taylor, and Wieland (2009) indicates only about one-sixth of this effect. Our analysis suggests government spending quickly crowds out private consumption and investment, because forward-looking households and firms will consider eventual increases in future taxes, government debt, and interest rates...

Our findings confirm the earlier analysis with models of the US economy. Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009). These models include extensive Keynesian features such as price and wage rigidities, but also employ up-to-date microeconomic foundations. The model of EU Commission researchers is especially interesting because it is recently estimated and one-third of its households do not care about the future and follow a traditional Keynesian consumption function.

It's important to understand that Wieland is not citing empirical evidence for the size of the multiplier. Rather, he is running simulations of various theoretical models in the New Keynesian tradition (that is, they are general equilibrium, rational expectations models with a real business cycle "core" extended to include rigidities in wages and prices) and reporting the range of multipliers he finds. The results are entirely driven by the theoretical assumptions on which these models are based, chief among which is the assumption that when consumers see the debt the government incurs when it raises spending or cuts taxes, they calculate their expected future tax liability and reduce their consumption proportionately. If you believe that's how consumers behave, then you will put some stock in Wieland et al.'s estimates of the multiplier. If you think consumers are not that foresighted, then you'll believe Romer, Bernstein et al.'s estimates.

Somewhere in my files I have a paper Robert Lucas wrote in the early 1970s mocking Keynesian economists for the kind of sloppy reasoning I suspect is going on with Wieland and Mankiw. Lucas claimed that predictable changes in the money supply would have no effect on the economy. Keynesians responded, that's nonsense, all our models say it would have an effect. Lucas came back at them with, what kind of idiot interprets results from theoretical models assuming his worldview to be the truth as empirical evidence in favor of his worldview?

Employment situation

Today's employment report from the BLS was much as expected: 216,000 jobs lost (net) and unemployment up to 9.7%. Though the economy is probably growing, the labor market's still going to be lousy for awhile. Bob Barbera in his weekly newsletter says that employment growth will rise to zero by the end of the year and turn positive by the first quarter of 2010. We shall see.

Meanwhile, the unemployment rate, even at 9.7%, kind of understates the terrible state the job market is in. Unemployment was higher in the 1981-83 recession, so what's all this talk about Great Depression #2? We can get some information about the intensity of the unemployment experience by looking at the median duration of unemployment. These figures are startling. I mean, just look, the picture tells the story!

Conservatives on health care reform

The New York Times reports that the debate over red herrings such as "death panels" is frustrating conservative health economists who want a real substantive debate on health care reform.

... many leading conservative health care policy experts said in recent interviews that the dynamic was precluding a more robust real-world debate while making it nearly impossible for them to inject their studied, free-market solutions into the discussions... “There are serious questions that are associated with policy aspects of the health care reform bills that we’re seeing,” said Gail Wilensky, a veteran health care expert who oversaw the federal Medicare and Medicaid programs for the first President George Bush and advised Senator John McCain in his presidential campaign last year.

Well, it's pretty late in the game to begin a muscular advocacy of alternative approaches to health care reform. 1994 would have been a good time to inject some ideas. Be that as it may, what are those substantive objections to the Democrats' health care proposals? The Times leads with this one:

Like many of his conservative peers, Dr. [Scott] Gottlieb [AEI] said he was concerned that the administration’s plan would fail to control costs adequately while increasing demands for services. The result, he said, is that Medicare, Medicaid and any new government insurance program would be forced to deny payment for procedures deemed unnecessary... [The Administration argues that] they can find that money with real efforts to decrease redundant procedures due to poor record keeping — causing a doctor, for instance, to prescribe an expensive test a patient has already had — and the correction of similarly exorbitant inefficiencies throughout the system... But, starting out with a general distrust of government solutions, even conservatives who agree that tens of billions of dollars are wasted annually are dubious about the government’s ability to find significant savings without eventually affecting care negatively. They argue that the government is incapable of making such cuts fairly or competently.

Well that's an interesting twist on an old canard. Not only is government inherently incapable of spending your money wisely, as conservatives usually claim - now government is also inherently incapable of reducing wasteful spending! I seem to recall previous Republican administrations and Republican Congresses proposing what they advertised as reasonable cuts to Medicare and other government programs, claiming that they were merely trimming the fat rather than cutting essential services. Now we can't trust government to distinguish fat from meat - I'll have to remember to pull that one off the shelf the next time a Republican advocates spending cuts to reduce the budget deficit!

What is the proposed alternative to letting the government find ways to cut spending?

“We profoundly disagree with this notion of a large, centralized restructuring of the health system,” said Stuart M. Butler, a vice president of domestic and economic policy studies at the Heritage Foundation, a conservative research group. “You’ve got to devise a system that starts to change underlying incentives — the policy incentives — and allow a gradual change in the system over time.”

Ah, so while government can't recognize wasteful spending in its own budget, it is capable of devising incentives that align private and public interests through adroit restructuring of the tax code. This fact has been demonstrated frequently in the past, for example in the way that the government has used the tax code adroitly to stimulate the ethanol industry, subsidize employer-based health insurance, increase the private savings rate,...

The Times then drops this little nugget:

That is not to say that there is much of a consensus among conservative health care policy analysts, who face an intellectual conflict on health care: many proven ways of saving money have tended to result from the sort of centralized decision-making that they have traditionally abhorred.

Yes, intellectual conflict. I too feel the pangs of intellectual conflict when the facts turn out to contradict my deeply held beliefs. I call it "being wrong."

Conservative health economists have important things to say about health care reform. Their problem is that they've never had a political party behind them that has taken a real interest in the subject. Until the Republican party takes health care reform seriously instead of using proposals like medical savings accounts merely to score political points during elections, the conservative economists are going to continue to be frozen out of the debate.