Health reform and the disfunction of the U.S. Senate

Jeff Davis at the New Republic examines the myriad roadblocks Republicans could place in the Senate to block health reform even if the Democrats try to do it through the reconciliation process. Apparently there are a dozen or more points in the process at which the Republicans could force lengthly debate by offering hundreds of amendments, requiring that each one be read out loud in its entirety (which could be very time consuming if every amendment was hundreds of pages long) and so on. He concludes:

All of the above explains how things work under the current rules, procedures and precedents. There is always the possibility that the Vice President could assume the chair, reverse previous rulings and shut off some of these avenues for delay. But that approach (similar to the “nuclear option” that has been proposed from time to time to change the filibuster rule by majority vote) would completely poison the well of bipartisan comity in the Senate and ensure that no bills, resolutions, or nominations pass the Senate by unanimous consent for the remainder of the year and making it much harder to pass the remainder of President Obama’s agenda.

Two comments:

(1) Democrats (or their sympathizers) who argue that changing rules to shorten debate would "poison the well of bipartisan comity" are like an abused wife who doesn't want to leave her husband because it would destroy her marriage. You idiots: the marriage is over, time to get on with your lives! The ability of a 41 member minority to totally gum up the works of legislation in the Senate is preventing this country from addressing serious problems. The rules have to be changed.

(2) It's ok if the reconciliation process takes months or years. Pass the Senate bill through the House now. The contentious issues like tax treatment of union-negotiated health insurance plans don't kick in for years anyway, so there's no rush in addressing them this spring. Furthermore, once the Senate bill is in place the Republicans will have as much incentive as the Democrats to push further "reform" legislation. They can try to introduce tort reform or any of their other pet interests. Strike a deal: we'll allow votes on your legislation if you'll allow votes on ours.

Shorter Paul Krugman

Two weeks of stalling initial jobless claims are an indication that the recovery has stalled and we won't see any job growth for months. 5.7 percent GDP growth in 2009Q4 is a short-term blip that is of no consequence.

Conservative pundit on the state of the Republican party

Daniel Larson has some choice words. Here:

Is the GOP in a worse position than a year ago? On the surface, no, it isn’t. Once we get past the surface, however, the same stagnant, intellectually bankrupt, unimaginative party that brought our country to its current predicament is still there and has not changed in any meaningful way in the last three years. Why would it? The party’s leaders have no clue, its pundits are reveling in the luxury of opposition, and its rank-and-file has been whipped into such a state of agitation over their own impotence that they cannot see that they are led by people who will ignore and abuse them the moment they are no longer needed to win elections. It may seem that the GOP has derailed the majority’s agenda, but in reality it is the GOP that went off the rails long ago and has yet to begin to recover.

And here:

Yesterday I said that the GOP remains just as intellectually bankrupt and unimaginative as ever, but I need to amend that in light of Pence’s comments. If possible, the GOP has somehow managed to become even worse than it was in previous years. How else can you explain the desperate bid to reframe tax credits for small business as a job-killing measure? It is tax credits similar to these that the Republicans normally advocate as a matter of course, and it was this sort of thing that Republicans were demanding more of last year during the debate over the stimulus bill. Instead of recognizing this and trying to claim that the administration has adopted one of his party’s solutions, Pence is reduced to the absurdity of claiming that possible tax reduction on businesses that hire new employees is some revival of the dreaded Carter years.

Initial claims

The Department of Labor reports that initial claims for unemployment insurance fell a bit to 470,000 in the week ending January 23. Brad DeLong sees this as an indicator that employment is going to continue to fall in January, following the rule of thumb that initial claims > 400,000 or so means falling employment. Calculated Risk makes the same argument.

This raises the question: what is the best way to use initial claims data to forecast the change in employment? Does the current month's initial claims figure capture all the relevant information about initial claims, or can one make a better forecast of employment based on the dynamic relationship between initial claims and employment? That is, does the fact that initial claims and employment losses have been trending downward provide information about the future path of employment above and beyond that of today's initial claims number?

I don't know the answer to this question, but I have been computing forecasts using a simple VAR model of initial claims and employment: 12 lags of the log of each variable, with initial claims "affecting" (in the sense of helping forecast) employment within the month, estimated over the period Jan. 1980 to Dec. 2007. The conventional wisdom (static) model is d(employment) = c1*(initial claims - ic*). When I estimate this for 1980-2007 I get ic*=321,000 (i.e. we need initial claims to go below 321,000, not 400,000 to get growth in employment) and c1=-0.0054. That is, every one percent increase in initial claims is associated with a -0.54 percent decline in employment.

If we take the most recent four-week moving average of initial claims as the January initial claims figure, then the static model predicts a loss of 248,000 jobs in January (using the 400,000 initial claims cutoff we'd get a loss of 93,000). By contrast, the VAR model predicts a gain of 135,000 jobs (see an earlier post).

Which forecast should we believe? To answer this we'd have to do a bunch of out-of-sample forecasting exercises. I did one: if you were to use each model to predict the path of employment beginning in August 2009, you would have done much better with the VAR model than the static model. But it's quite possible that I'd get different results using different forecast dates. In fact, it is probably true that the VAR model does a worse job of picking up turning points in employment simply because it is driven by past data while the static model is driven entirely by the current month's data. So if you think the economy today is on the same trajectory that it's been for the last several months, go with the VAR model. If you think something's happened in the last month that has put us on a different trajectory, go with the static model.

By the way, After the 1974-75 recession, initial claims remained above 400,000 until November 1975. From January to September 1983 employment increased by 2.5 million. After the 1981-82 recession initial claims remained above 400,000 until October 1983. From May to October 1975, employment increased by 1.1 million. After the 1990-91 recession, initial claims remained above 400,000 until October 1992. From June 1991 to September 1992 employment increased by 691,000. After the 2001 recession, initial claims hovered right around 400,000 until September 2003 while the economy steadily lost jobs.

Another "V"

The rebound in capacity utilization up to six months since the recession trough has been much stronger than in any of the last four recessions.

Circular firing squad department - Senate "moderates" division

Senators Lincoln, Bayh and Nelson will not support Plan B toward health care reform under which the House passes the Senate bill contingent on the Senate's passing some amendments under reconciliation procedures. Listen to their words of wisdom:

"We need to focus on things where we have a consensus," Bayh said. "Just ramming through a bill on a purely party-line vote on a strictly partisan basis will not do much to generate the kind of progress around here on other issues that we need."

And we have consensus exactly where? On the Republican agenda?

Bayh also said he doesn't understand why the Senate dropped the version of the bill passed by the Finance Committee with one Republican vote. "Maybe we should take another look at that," he said. "If Sen. Snowe was willing to vote for it, perhaps there were other Republicans who were willing to."

He's clearly on fantasy island at this point. According to what political calculus does he think a single Republican will help Democrats achieve a legislative victory here? Who does he think he's dealing with, Democrats? Furthermore, how much different is the Finance Committee bill from what was actually passed? What's more important, the content of the bill or the ability to claim that it is "bipartisan" because one Republican voted for it?

Nelson suggested abandoning comprehensive reform altogether and adopting an incremental approach. "This is one where we need to make a pie a piece at a time," Nelson said. "We've tried a comprehensive approach and it's clear that won't be possible."

Argh! The only reason it won't be possible is if you make it impossible! Fortunately, reconciliation needs only 51 votes, so the Democrats don't need any of these Senators.

Finally, a Republican politician offers constructive proposals for economic recovery

Harold Ford takes the standard Republican line. Cuts in capital gains taxes, corporate taxes, taxes on interest and dividends. Deficit reduction. Health care reform that focuses on cost-cutting rather than expanding coverage. These are idiotic ideas, but there seems to be room for negotiation with a guy like this. If there were more Republicans in the Senate like him, it might actually be possible for Congress to get something done.

Wait, he's a Democrat?

Circular firing squad department - commander in chief division

So apparently President Obama is going to propose a spending freeze starting 2011 on the $447 billion dollar part of the budget that funds nondefense discretionary programs. Brad DeLong calls it "dingbat kabuki"; Mark Thoma echoes the sentiment. One could defend the plan in a few ways:

- It's really a small amount of money, amounting to $25 billion less spending than currently planned in 2011, which will hit the economy (hopefully) at a time when the recovery is well underway.

- Some programs, like agriculture subsidies, deserve to be cut, and doing so is easier if put in the context of a spending freeze.

Well, I'm not going to dismiss those arguments out of hand. But what we really need now is not a weak-kneed concession to the anti-deficit crazies but an impassioned defense of the economic policies, including fiscal policies, that Obama pursued in the last year. Obama's policies have worked: TARP kept the financial system afloat and most of the money (outside AIG) has been repaid; the bank tax Obama proposes will recoup the rest. Helping GM and Chrysler through bankruptcy saved hundreds of thousands of jobs. Obama can point to plausible studies that estimate a million or more jobs have been "created or saved" because of ARRA. Reducing spending now when the unemployment rate is ten percent, as the Republicans want to do, would be insane. It would cost jobs. Where would they cut? Reduce road construction? How many construction workers would be thrown out of work? Aid to states? How many teachers, police officers, firefighters? Lay it out for us, Barack!

Deficits are a problem in general. But right now, a large budget deficit is doing a great deal to stimulate recovery. The deficit needs to be reduced in the medium- to long-term, and the key to doing this is to get control of health spending. The health care reform bills that the Senate and House passed are the most substantial attempt at reining in health spending ever attempted. Obama needs to call the Republicans and blue dogs out on this: you've been professing to care about the budget deficit, but you have a piece of legislation before you that reduces the growth of Medicare by $500 billion over the next ten years and puts mechanisms in place that have a shot at reducing the growth rate of spending for decades. If you oppose this bill while at the same time denouncing the deficit, you are a hypocrite.

Obama has been accused of letting his attention wander from the needs of Americans to his "pet project" of health care reform. Explain why this isn't the case. Millions of Americans are out of work or fear for their jobs - they need access to the health care system, and the bills before Congress do this. The high cost of health care is strangling businesses, increasing costs and reducing employment; the reforms are directed at this problem. Health reform is not a diversion, it's an attempt to help Americans with one of the most basic of human needs in these very difficult times. Make the case!

I was very happy with Obama's leadership up until about a week ago. Now it seems that his response to political difficulties is being pulled right out of the traditional Democratic triangulation playbook: rather than defend what you believe, capitulate on every philosophical argument. Back away from ambitious policies that might help people, substitute for these policies a watered-down version of what a Republican administration would offer. Offer targeted programs for the "middle class" that poll well but make no real impact (direct deposit for retirement accounts? are you kidding me?). Then watch Republicans roll over you in the midterm elections.

How much trouble are we in?

All the real economy indicators are currently headed in the right direction toward a reasonably strong recovery, as I've noted in previous posts. The patterns in the data, that is to say historical precedent, suggest that we are on the verge of a meaningful recovery in employment, and so I have taken an optimistic view of the economy in 2010.

But I didn't count on the bizarre political events of the last week. The Democrats lose the Massachusetts Senate seat, so health care seems to be a lost cause, so Obama switches gears to attacking the banks while Democratic senators threaten not to reappoint Bernanke to the Fed, so financial markets get spooked and stock markets plummet. Further turmoil in financial markets could undue much of the good that has been accomplished in the last year.

What good? Well, in November 2008 the yield on Baa corporate bonds was 9.2 percent. Thanks to the heroic efforts of the Fed and Treasury - the provision of massive amounts of liquidity, restoration of confidence in the banking system - the rate is 6.3 percent today. This is about where the Baa rate was at the end of 2004, when the economy started to finally grow at a healthy pace. Using the rule of thumb that a one percentage point drop in the federal funds rate causes about a quarter percent drop in long-term bond rates, the 300 basis point drop in the Baa yield through extraordinary policies is the equivalent of a 1200 basis point cut in the federal funds rate. That's a lot of stimulus, and it's the main reason (ARRA being important but secondary) the economy is recovery.

But this latest sequence of events - yikes. The Obama Administration needs to right the ship and restore order and confidence fast, or the recovery could be scuttled. Four things: (1) Pass the Senate health reform bill through the House, pass some fixes through reconciliation, but get the stink of this whole issue behind you. (2) Go down to the Senate and tell them they must confirm Bernanke now. There's no upside to replacing him, and a huge downside to just the uncertainty of the reappointment. (3) We need financial reform with teeth, and I'm glad to see the Administration is finally listening to Paul Volcker. But Obama has to convince the financial sector that he's not going to go all Huey Long on them for the rest of 2010. (4) Get behind the House's jobs bill. States need relief, though I'm not wild about the tax credit for new jobs (seems there are too many ways that could be gamed). Some kind of stimulus for business investment would be a nice addition. The package doesn't have to be huge, but there should be something.

Please Barack, don't screw this up.

Open letter to Democratic leadership

Harold Pollack has circulated an open letter from a long list of prominent health experts to Nancy Pelosi and other Democratic leaders to pass the Senate health bill now. I'd add my name to the list if I were asked, and if I were an expert instead of just a fan.

I'd add this to the authors' list of consequences should the Democrats not pass health reform now. Democratic candidates this November are going to need Democratic party activists to raise money, work phones, put up yard signs, go door to door to get out the vote, etc. Who is going to do those things if the Democrats walk away from health reform now? I can't imagine myself trying to persuade an undecided voter of the benefits of voting Democratic. Vote for the Democrat, keep the Democrats in power, and we'll deliver... What exactly? Would you believe any assurance from a Democrat about what they would deliver if they won? How could I convince an undecided voter that it makes a bit of difference whether Democrats or Republicans control Congress?

The letter:

22 January 2010

Congresswoman Nancy Pelosi
Speaker of the House of Representatives
235 Cannon House Office Building
Washington, DC 20515

Congressman Charles Rangel
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Congressman Henry A. Waxman
Committee on Energy and Commerce
2204 Rayburn House Office Building
Washington, D.C. 20515

Congressman George Miller
Committee on Education and Labor
2205 Rayburn House Office Building
Washington, DC 20515

Dear Speaker Pelosi and Chairmen Rangel, Waxman, and Miller:

For nearly three-quarters of a century, Presidents and Congressional leaders have tried to enact legislation that would make health care accessible to Americans. Although pieces of this dream have been realized—health care for the elderly, the disabled, and children in low-income families—universal coverage itself has proved beyond reach.

We are now on the cusp of realizing this goal. Both houses of Congress have adopted legislation that would provide health coverage to tens of millions of Americans, begin to control health care costs that seriously threaten our economy, and improve the quality of health care for every American. These bills are imperfect. Yet they represent a huge step forward in creating a more humane, effective, and sustainable health care system for every American.

We have come further than we have ever come before. Only two steps remain. The House must adopt the Senate bill, and the President must sign it.

While the House and Senate bills differ on specific points, they are built on the same framework and common elements—eliminating health status underwriting and insurance abuses, creating functioning insurance markets, offering affordability credits to those who cannot afford health insurance, requiring that all Americans act responsibly and purchase health insurance if they are able to do so, expanding Medicaid to cover all poor Americans, reforming Medicare payment to encourage quality and control costs, strengthening the primary care workforce, and encouraging prevention and wellness.

Some differences between the bills, such as the scope of the tax on high-cost plans and the allocation of premium subsidies, should be repaired through the reconciliation process. Key elements of this repair enjoy broad support in both houses. Other limitations of the Senate bill can be addressed through other means.

The Senate bill accomplishes most of what both houses of Congress set out to do; it would largely realize the goals many Americans across the political spectrum espouse in achieving near universal coverage and real delivery reform.

With the loss of Edward Kennedy’s Senate seat, Democrats no longer enjoy a filibuster-proof Senate majority, though they still enjoy the largest Senate majority any party has achieved in the past generation. The loss of this one vote does not require Congress or the President to abandon Senator Kennedy’s life work of health care reform. A year of political infighting, misleading debates about death panels and socialized medicine, and sheer inaction has left Americans exhausted, confused, and disgruntled. Americans are also bearing the severe consequences of deep recession and unemployment. Still, a majority of Americans support the elements of the Senate bill.

The House of Representatives faces a stark choice. It can enact the Senate bill, and realize the century-old dream of health care reform. By doing so, it can achieve a historic milestone while freeing itself to address other national problems such as joblessness and mortgage foreclosure that affect millions of Americans. Differences between the House and Senate bill can be negotiated through the reconciliation process.

Alternatively, Congress can abandon this effort at this critical moment, leaving millions more Americans to become uninsured in the coming years as health care becomes ever less affordable. Abandoning health care reform—the signature political issue of this administration—would send a message that Democrats are incapable of governing and lead to massive losses in the 2010 election, possibly even in 2012. Such a retreat would also abandon the chance to achieve reforms that millions of Americans across the political spectrum desperately need in these difficult times. Now is the moment for calm and resolute leadership, pressing on toward the goal now within sight.

Some have proposed dividing the bill or starting anew with negotiations to produce a less comprehensive bill. From the perspective of both politics and policy, we do not believe this is a feasible option. We doubt that the American public would welcome more months of partisan wrangling and debate. We doubt that the final product would match what has already been achieved. Indeed we doubt that any bill would reach the President’s desk should congressional leaders pursue this misguided course.

We, the signatories of this letter, come from a variety of different perspectives. Some of us are long-standing advocates of progressive causes. Some of us are nonpartisan or identify as political moderates.

From these differing perspectives, we agree on one thing: the current choice is clear. Pass the Senate bill, and improve it through reconciliation.

Sincerely,

Henry J. Aaron, The Brookings Institution
Gerard Anderson, Johns Hopkins University
Ronald Anderson, UCLA
Dean Baker, Center for Economic and Policy Research
Ronald Bayer, Columbia University
Anna Burger, Secretary-Treasurer, SEIU
David Cutler, Harvard University
Linda C. Degutis, Yale University
Eric Feldman, University of Pennsylvania
Thomas Fisher, University of Chicago
Brian R. Flay, Oregon State University
David Grande, University of Pennsylvania
Thomas Greaney, St. Louis University
Colleen Grogan, University of Chicago
Jon Gruber, MIT
Mark A. Hall, Wake Forest University
Jacob S. Hacker, Yale University
Jill Horwitz, University of Michigan
James S. House, University of Michigan
Peter Jacobson, University of Michigan
Timothy Jost, Washington and Lee University (organizer)
Theodore Joyce, CUNY
George A. Kaplan, University of Michigan
Jerome Karabel, University of California at Berkeley
Mark A.R.. Kleiman, UCLA
Paula M. Lantz, University of Michigan
Simon Lazarus, NSCLC
Arleen A. Leibowitz, UCLA
Theodore Marmor, Yale University
Lynda Martin-McCormick, NSCLC
Michael L. Millenson, Northwestern University.
James A. Morone, Brown University
Jonathan Oberlander, University of North Carolina at Chapel Hill
Karen Pollitz, Georgetown University
Harold Pollack, University of Chicago (organizer)
Daniel Polsky, University of Pennsylvania
Sara Rosenbaum, George Washington University
Meredith Rosenthal, Harvard University
Lainie Friedman Ross, University of Chicago
William Sage, University of Texas
Theda Skocpol, Harvard University
Paul Starr, Princeton University
William Terry, Brigham and Women's Hospital
James A. Tulsky, Duke University
Alexander C. Wagenaar, University of Florida
Joseph White, Case Western Reserve University
Celia Wcislo, 1199-United Healthcare Workers East, SEIU

(Institutional affiliations listed for identification only).

cc. Senator Harry Reid

President Barack Obama

Circular firing squad department

So now Russ Feingold and Barbara Boxer have announced that they will not support Ben Bernanke's reappointment as chair of the Federal Reserve, putting his reappointment in jeopardy. No good can come out of this, none at all.

Bernanke screwed up during the bubble years but has since then performed heroically. He has ticked people off by being coy about the Fed's future stimulus efforts - maybe the Fed will keep rates low as the economy recovers, maybe it'll start raising rates this year when the economy heats up. The possibility that the Fed would tighten significantly before we get a meaningful recovery is a real concern. And maybe Bernanke has been too cozy with banks.

But Bernanke is not the problem here, it's the Fed as an institution and the hypersensitivity of financial markets to every utterance that comes from the Fed. Any plausible candidate for the job will be equally reticent about keeping the spigots open while the economy recovers. You simply cannot be taken seriously at the Fed or in the financial markets if you take a relaxed attitude toward inflation.

What are the upsides and downsides of appointment someone else to take Bernanke's place? On the upside, you might get a guy who is marginally more willing to keep interest rates low than Bernanke. Maybe he (more likely she - Sheila Bair at FDIC is probably on Democrats' short list) may take a slightly tougher line as bank regulator. But the upside seems pretty modest to me.

The downside, on the other hand -- hoo boy! I do not want to see the Dow fall 500 points on concerns about leadership at the Fed or the Fed's independence from Congress. I do not want to see bond yields jump a hundred basis points. I do not want to see the dollar plunge in foreign currency markets. I do not want everyone in the world wondering why the hell they put Democrats in charge of running the country.

Just confirm Bernanke, for God's sake.

Initial claims and employment, redux

Initial claims for unemployment insurance rose by 36,000 to 482,000 in the week ending January 16, according to the Department of Labor. The four-week moving average rose by 7,000 to 448,250. What does this mean for employment in January?

The usual benchmark is that employment starts to rise when the four-week average of initial claims goes below 400,000. By that standard, January should be another month of slightly negative job growth. But my crude forecasting model based on a 12-lag vector autoregression gives a different prediction: January payroll employment +135,000, surpassing +200,000 per month by April and surpassing +300,000 per month by August. Here's hoping.
How about unemployment? My VAR with the unemployment rate and continuing claims predicts an unemployment rate of 9.8% in January, falling to 8.4% in December 2010. Again, that would be very good news.

Politicians

Many of us in the liberal camp are quite discouraged at recent political events. Frustrated that the American voters are so easily swayed by liars and crackpots. Angry at the Republicans for waging holy war against the Democrats rather than trying to play a productive role in the process of governing. Angry at the news media for so lazily adopting the story line handed to them by the savvy political pros in Washington. And most of all, disgusted and disenchanted at the Democrats, from the lowliest Congressman to Barack Obama himself, for being such feckless, unprincipled, undisciplined cowards.

In the depths of my despair I ran across (when Bob had his secretary fax it to me that is) a piece on politicians by H.L. Mencken that was first published in 1934 and then republished in the New York Times in 1980. It helps put things in perspective.

WHY NOBODY LOVES A POLITICIAN
by H.L Mencken

Next to kidnappers, politicians seem to be the most unpopular men in this great Republic. Nobody ever really trusts them. Whatever they do is commonly ascribed to ignoble motives. The country is always glad to see them humiliated, as when Congress is forced to dance as the White House whistles.

I fear I must add, as a moral theologian of 30 years' practice, that this ill fame is pretty well supported by the known facts. It may not be deserved in all cases, but it is surely deserved in most. Politicians as a class radiate a powerful odor. Their business is almost as firmly grounded on false pretenses as that of the quack doctor or shyster lawyer. What really concerns them first, last, and all the time is simply their own jobs. Get close to them, and they will admit this frankly.

Imagine a professional politician in a very tight place, with 100 votes standing between him and his job, and then imagine him getting news that 110 voters on the other side have suddenly turned cannibal, and are full of enthusiasm for their new fad. What will he do? He will begin to see cannibalism in a new light, and to find a lot of good in it. I do not say that he will take the stump for it - at least not so long as it polls only 110 votes - but certainly he will not take the stump against it. And neither will his opponent.

The American people learned a great deal about politicians during the Prohibition Reign of Terror. To be sure, there were some dry politicians who were actually dry; but the votes that maintained the Anti-Saloon League in Power at both ends of Pennsylvania Avenue came largely from men who cheated at every chance, and some of them ranked among the most assiduous lushers ever seen in Washington, a town always eminent for a hundred years for its passionate guzzling.

These babies, as every one will recall, turned a series of magnificent flipflops when the wet cyclone hit them. Their rubber knees and shockproof backbones worked perfectly, and they landed squarely on their feet, panting and lathering for repeal. I could give you a list of them, with statistics of their speed and tankage. They were mainly so stupid or so far gone in liquor that they didn't see the cyclone coming, and when it struck them suddenly at Chicago, where they had gathered for the national conventions, they were thrown into such a panic that some of them actually sobered up. They came to town hiccuping for law enforcement and they left 10 days later hiccuping for repeal.

Such dizzy somersaults are all in the day's work of a politician. The Democratic professionals at Washington, not to mention many of the Republicans, got converted to the New Deal overnight, and they will be unconverted with the same expedition when it blows up.

One hears sometimes of politicians who claim to have lost something by ''entering the public service.'' Usually they say they could have made more money outside and led happier lives. But this is true once or twice in a blue moon. The typical politician does far better in politics than he could have done at anything else. Now and then, of course, a man of genuine ability and integrity blunders into a governor's chair, or into Congress, or into some other political place, but he seldom lasts very long. The average American Congressman is about on a level, intellectually and morally, with a bartender in a second-rate saloon or a head barber in a third-rate shop. As for the governors, they are so low-down that two or three of the 48 are always being impeached for grave crimes and misdemeanors and there is always at least one who is on his way to the hoosegow. During the past 15 years no less than 20 governors have been charged with downright felonies, and four or five have actually gone to prison. The rest, though maybe honest enough, are mainly only demagogues and mountebanks. It would be hard to find any other class of presumably reputable men who show so high an average of rogues and charlatans.

The most nearly decent fellows in politics, in all probability, are the fanatics - at least at the start of their careers. But even the fanatics, if they last long enough usually turn into professional politicians.

The picture that I draw is a dark one, and there may be some who will protest that it is too sad. If so, then I can only reply that they do not know politicians. Every one who has actually lived with politicians, including all those members of the fraternity who have reformed and are trying to lead honest lives, will tell you substantially what I tell you. It is precisely such men as I have described who make and execute the laws of this imperial nation and are the lords of us all. No one in his sober senses would trust them in any other place of responsibility calling for sound skill and common decency. A doctor who was so plainly a suspicious character would lose all his patients, and a lawyer on the same level would have only thieves for clients. Yet we not only hand over our lives and property to their keeping; we also pay them handsomely for robbing and betraying us, and give them higher honor than we give to any other class of men.

What ails them? Why are they so ornery? Plainly enough most of them are recruited from a somewhat inferior stratum of the population. The typical newcomer at the trade is a young man of cloudy background and equivocal standards, whose yearning to live easily far outruns his ability to earn an honorable living.

This young man tries politics because it offers him a good job quickly. The talents that push him ahead are not those of a diligent and able man; they are those of a cheap-jack. The tricks that he has to master are the tricks most useful to a corn doctor at a county fair. The most dangerous thing he can do is to tell the truth.

I haven't the slightest doubt that many a youngster makes his first venture into politics full of laudable resolve to avoid all this buncombe and skullduggery. But if he has as much as a single electron of cerebral tissue in his head, he discovers very quickly that all the virtues he dreams of practicing are handicaps to him, and that he must either purge himself of them or give up all thought of a political career.

In brief, the rules and hazards of the game run implacably against indulgence in any such rectitude. It is a luxury for rich men's sons who crave only a term in the legislature between Harvard and despair - not a diet fit to nourish professionals. The beginner who really wants to get on must grasp the bitter fact that votes are never won in any substantial numbers by the devices taught in Sunday schools. They are won by far more realistic artifices, of which two are salient. The first is to go out into the highways and byways and there flatter and enchant the boobs with blah. The second is to come to terms with the herdsmen who keep droves of boobs in corrals ready to be knocked down to the highest bidder.

What is to be remembered is that virtually all the politicians in the United States have wallowed in their time in those two mud holes; if they hadn't they wouldn't be where they are today. They have all talked balderdash from the stump, they have all throbbed to the huzzas of morons, they have all promised what they knew they couldn't deliver, and they have all connived at more or less open corruption. If there is an exception in all this broad land, than I apologize to him most humbly. But I never met him and never heard of him.

Try to imagine what would happen to a doctor who had to get his patients by scratching their backs, and kissing their babies, and attending all their raffles and birthday parties, and marching in all their parades. Certainly the effect upon his professional integrity would hardly be salubrious. Now imagine him obliged to go to the saloon keeper at the corner for permission to practice at all, and giving the saloon keeper, in return for his permit, the right to dictate his prescriptions. Surely it would be asking too much of human nature to expect him to remember his Hippocratic oath. If he kept out of jail he'd be doing enough.

Well, every politician, whether large or small, is in that boat, or has been in it in the past. Even the mightiest of them, frowning down on the world from his glittering balloon, has yielded his neck to some boss in his day, whether openly or behind the door, and done his share of fawning over idiots, and discharged his five million words of hooey. In so far as he is a man of any sense whatever, he has got on by flattering and fooling his inferiors. A suspicious character from the start, by virtue of his trade, he has gradually bent himself this way and that to fit every suspicion, and so he emerges at last as a kind of chartered public enemy, safe from the police so long as he is reasonably careful, and living on the troubles of the people.

How are we to improve him - or get rid of him? The first, I believe is a sheer impossibility. So long as we want to enjoy the excitement of democracy we must be prepared to endure its curses, and one of them is the fact that when two men stand up before a mob, the one honest and the other a fraud, the mob always prefers the fraud. He is always longer on promises and readier with soothing, and hence can be more charming to persons incapable of thought. Years ago I proposed a way out that got no attention at the time but maybe had some merit. It was based on a question: Why should there be any politicians at all? Why should we hand over our affairs to men so palpably dubious and chosen so ridiculously? Why should we assume that the capacity to enchant and hoodwink ignorant and credulous people is the capacity to serve the whole community? Why not get rid of the difficulty by abolishing politics altogether and choosing our rulers by lot? Why not take away all the rewards of public office and make the holding of it not a privilege but a duty?

The scheme may sound crazy at first sight; but if we are content to choose men at random and against their will to go into a jury box and decide the gravest matters of life and death, they why shouldn't we be willing to trust the same men with other matters? If they are fit to execute the laws, they why aren't they fit to make them? That making laws requires any special knowledge is surely not a fact, for it is done today mainly by amateurs, and the professionals intermingled with them are more often than not incompetent or dishonest. The only real difference between the amateurs in a jury box and those in a legislature is that the former have no private interest in the case before them.

I offer my plan to the Brain Trust. If it is adopted before Congress meets in January the professors will have a much easier time than they now seem likely to have.

Copyright c 1934 Liberty Publishing Corporation Copyright c 1980 Liberty Library Corporation

I've often thought it would be better to pick our representatives by lot rather than by election so I'm glad to know that the idea has been batted around before. But there's another lesson I think we can learn (or relearn) from the health reform fiasco, which is that it is pointless and pathetic to count on any politician, Barack Obama included, to be a courageous leader. Politicians are by nature slavish sycophants who suck up to the "herdsmen who keep droves of boobs in corrals." If liberals want health reform, we will not get it by relying on Obama, Pelosi, or Reid, but by becoming the biggest, meanest herdsmen with the largest number of boobs in our corrals.

The reason health reform failed, ultimately, is that nobody in Washington was afraid of liberals. Every Republican knew that if he or she worked with the Democrats he or she would be faced with a primary challenge from the right. Every Democrat knew that moderate swing voters could be persuaded to vote Republican if they perceived that the party had gone too far. Every politician in both parties was scared to death of the health insurance, pharmaceutical, medical lobbies. By contrast, nobody for a moment thought that there would be a negative consequence for turning on their liberal supporters. And so they turned.

A comparison of five recoveries

Take a look at the graphs below, covering up the legend. The graphs show the behavior of some monthly economic data series around the troughs of the last five recessions (including the current one). In each graph, period 0 is the month of the trough of the recession as identified by the NBER; for the current recession I've assumed the trough is June 2009.

Question: based on these series, how would you categorize these recoveries? For example, does it look like you could group some of the recoveries together as "strong" recoveries and some as "weak"? Go ahead, I'll wait.

The data aren't crystal clear, but I think you'll agree that in each case the blue and red lines show a strong recovery and the green and purple lines show a weak recovery. The black line? Well, for the second and third graphs it looks like you'd have to group it with blue and red, and in the other two graphs it looks like it's somewhere between the two groups.

Now look at the legends. Blue and red are the strong recoveries beginning in 1975 and 1982; green and purple are the weak recoveries beginning in 1991 and 2001. Black is the current recovery. Doesn't the data seem to give you more confidence that the current recovery is unfolding more like a typical strong recovery than the two recent jobless recoveries?

But wait. What about employment data? Here's a graph of aggregate hours worked:

Aha, there's the problem. Here the black line looks an awful lot like the jobless recoveries in green and purple.

Ok, now be an economist. Why do you suppose output-related data series like industrial production have been growing at a fast pace (and GDP is going to rise by 4-5% in 2009Q4), but employment is lagging? Do you think there's been a structural change in the labor market whereby employers have figured out how to permanently eke several percentage points more output from a smaller workforce? What do you suppose that discovery was? Why did firms discover it in 2009 and not, say, 2008 or 2007? If they figured out how to economize on labor in 2009, can they do the same in 2010, 2011, year after year? Is productivity growth really that easy?

Hmm, maybe that's not it after all. Economists have been trying to figure out how to raise the rate of productivity growth for decades with no success. Surely productivity is going to grow around a trend path, not keep rising at the pace of the past year. Well then, it follows that strong growth in the fourth quarter and perhaps a couple of quarters following will eventually (probably in the current quarter) begin pulling employment up at a healthy pace. At that point, all the stars are aligned and talk of a "jobless recovery" becomes soooo 2009.

Plan D

The House passes the Senate bill and it is signed into law by President Obama. Republicans and pundits howl about the abuse of process. Obama, Harry Reid, and Nancy Pelosi, in a grand gesture of bipartisanship and reconciliation, announce that they will allow the Republicans to bring any legislation amending the bill that they want to the House and Senate floor. We are open to change, our door is open, let's have a good honest debate about health care. But we're going to do it in a context in which the status quo is a system with expansive coverage and tighter regulation on insurance companies, not the crappy system we have now.

Ruh roh

For several months economists have been warning that China is experiencing an asset bubble, and that if the People's Bank of China responds by restricting credit the result could be a recession and trouble for the U.S. Well, today the Financial Times reports:

China tells banks to halt lending

Chinese regulators have told some banks to temporarily halt lending amid growing fears of asset bubbles and inflation.

The renewed efforts to rein in credit growth follow a burst of frantic lending activity by Chinese banks that have raised concerns about overheating in the Chinese economy...

A state-run newspaper on Wednesday cited unnamed banking sources as saying some banks had been told to stop all lending for the rest of January and that Bank of China, which has been the most aggressive lender among the large state banks, had switched off its internal electronic loan approval system...

Analysts said Beijing had also raised the required amount of capital some banks must hold in reserve with the central bank, leaving them less money to hand out as loans.

US exports to China were $71.5 billion in 2008, so a recession in China could do some damage to demand in the US. More importantly, I think, is that China is now such an important node of the global manufacturing economy that a disruption there could create a major supply shock for the rest of the world. Then there's finance: who knows what kind of ramifications an unwinding of China's asset bubble have for financial markets in the rest of the world.

Plan C? I'll tell you what Plan C is!

Plan A is, pass a compromise health reform bill through the Senate on the strength of Martha Coakley's 60th vote.

Plan B is, the House passes the Senate version of health reform so that Scott Brown and the Republicans can't filibuster.

Plan C is, if Brown wins narrowly: Martha Coakley demands a recount, sues in state court, drags the certification of the election results out until June, preventing Brown from taking his seat. Frankenize him!

Adam Smith on the purposes of a liberal arts education

I wonder if we could change Gettysburg College's mission statement from the soaring rhetoric in its publications to something a wee bit darker, like this passage from The Wealth of Nations (Book V, Chapter 1):

A man without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed, the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable, and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.

Health care reform even if Brown wins

Pundits are saying the Democrats must abandon health care reform if Scott Brown (R) defeats Martha Coakley (D) in Massachusetts' special senatorial election. David Brooks, for example:

Many Democrats, as always, are caught in their insular liberal information loop. They think the polls are bad simply because the economy is bad. They tell each other health care is unpopular because the people aren’t sophisticated enough to understand it. Some believe they can still pass health care even if their candidate, Martha Coakley, loses the Senate race in Massachusetts on Tuesday.

That, of course, would be political suicide. It would be the act of a party so arrogant, elitist and contemptuous of popular wisdom that it would not deserve to govern. Marie Antoinette would applaud, but voters would rage.

A little perspective is in order. If the Republicans take Massachusetts' senate seat, the Democrats will have a 59-41 majority in the Senate. There is no reason on earth that a party with substantial majorities in both houses of Congress and control of the presidency should not make good on the most important item on its legislative agenda. And plenty of reasons not to abandon the effort. As Jonathan Chait argues:

The difference between the parties is that Republicans ignore the establishment’s advice. After Obama’s election, conventional wisdom insisted that the GOP would have to move to the center. Instead the party moved further right. And whatever the policy merits, it has worked politically. If Republicans had cooperated more with Obama, it would have given him bipartisan accomplishments and made him even more popular.

The GOP’s ability to ignore establishment nostrums in the face of defeat is its great electoral strength. Democrats, by contrast, have a congenital tendency to panic. Abandoning health care reform after they’ve already paid whatever political cost that comes from voting for it in both houses would be suicide. Even if Coakley loses, the House could pass the Senate bill as is, avoiding the need to break a filibuster, and tinker with it in a reconciliation bill that can’t be filibustered. The only thing preventing the Democrats from following through would be sheer panic.

Abandoning health care at this point would only prove that the Democrats are comically, pathetically incapable of governing. Who in his right mind would want to keep the party in power after that clown show?

Economic crisis in Venezuela

Back in 1991, Rudiger Dornbusch and Sebastian Edwards wrote a book called Macroeconomic Populism in Latin America. Left-leaning Latin American governments, they found, typically come to power in an environment of extreme frustration over low growth and rising inequality. They adopt expansionary fiscal policies to stimulate growth and raise incomes of the poor. They argue that the constraints on policy that face normal governments do not apply in this case because of the tremendous amount of slack in the economy and the availability of foreign exchange. The populist experiment typically goes through four phases:

Phase 1. In the first phase, the policymakers are fully vindicated in their diagnosis and prescription: growth of output, real wages, and employment are high, and the macroeconomic policies are nothing short of successful. Controls assure that inflation is not a problem, and shortages are alleviated by imports. The run-down of inventories and the availability of imports (financed by reserve decumulation or suspension of external payments) accommodate the demand expansion with little impact on inflation.

Phase 2.-The economy runs into bottlenecks, partly as a result of a strong expansion in demand for domestic goods, and partly because of a growing lack of foreign exchange. Whereas inventory decumulation was an essential feature of the first phase, the low levels of inventories and inventory building are now a source of problems. Price realignments and devaluation, exchange control, or protection become necessary. Inflation increases significantly, but wages keep up. The budget deficit worsens tremendously as a result of pervasive subsidies on wage goods and foreign exchange...

Phase 3. Pervasive shortages, extreme acceleration of inflation, and an obvious foreign exchange gap lead to capital flight and demonetization of the economy. The budget deficit deteriorates violently because of a steep decline in tax collection and increasing subsidy costs. The government attempts to stabilize by cutting subsidies and by a real depreciation. Real wages fall massively, and policies become unstable. It becomes clear that the government is in a desperate situation.

Phase 4. Orthodox stabilization takes over under a new government. More often than not, an IMF program will be enacted; and, when everything is said and done, the real wage will have declined massively, to a level significantly lower than when the whole episode began. Moreover, that decline will be very persistent, because the politics and economics of the experience will have depressed investment and promoted capital flight.

Or as my undergraduate economics professor once said, "First the Yanks, then the Banks, then the Tanks."

By my calculation, Venezuela is now firmly in Phase 2.

Schumpeter on the debate over Say's Law

From History of Economic Analysis, p. 624-25:

"So it gets down to this. A man of the name of J.B. Say had discovered a theorem of considerable interest from a theoretical point of view that, though rooted in the tradition of Cantillon and Turgot, was novel in the sense that it had never been stated in so many words. He hardly understood his discovery himself and not only expressed it faultily but also misused it for the things that really mattered to him. Another man of the name of Ricardo understood it because it tallied with considerations that had occurred to him in his analysis of international trade, but he also put it to illegitimate use. Most people misunderstood it, some of them liking, others disliking what it was they made of it. And a discussion that reflects little credit on all parties concerned dragged on to this day when people, armed with superior technique, still keep chewing the same old cud, each of them opposing his own misunderstanding of the 'law' to the misunderstanding of the other fellow, all of them contributing to make a bogey of it."

So what do I say about Say's Law to my History of Economic Thought students?

What happened during the Great Inflation?

Download now or preview on posterous

Political Constraints on Monetary Policy During the Great Inflation, 10-09 final.pdf (388 KB)

Levin and Taylor have a new paper arguing that the Fed’s stop-go policies were the main cause of rising inflation during the 1970s. They argue that political factors are the most likely reason for these policies. I explore the political constraints facing the Fed in this paper.

Response to the critics

Mark Thoma had some critical comments on Bob's and my Financial Times piece:

They're not even willing to "endorse" their own forecast? They do implicitly define a forecast since they say the optimistic and pessimistic outcomes are equally likely. So why does a 50-50 chance that there will, in fact, be a intolerably slow recovery in the job market mean we should stand by and do nothing while we hope the coin comes up heads rather than tails? The average of the two forecasts - the most likely outcome by their reckoning - is not very rosy for labor and calls for something to be done.

He misunderstands. Bob's the one in the forecasting business. His forecast, which makes sense to me, is 3.8% GDP growth in 2010, implying average monthly jobs growth of 240,000. This would ordinarily be consistent with an unemployment rate of around 8.5% by the end of 2010, but the unemployment rate is a goofy variable that's difficult to forecast. The dramatic plunge in the labor force participation rate in recent months could mean that even an impressive rate of employment growth would have little impact on the unemployment rate. It is possible that growth will be slower or faster; much slower growth means a jobless recovery, faster growth leads to the forecast that we won't endorse. Both seem to us equally likely, but the probability is not 50-50 - the mass of the distribution of likely outcomes, we think, is in the range described above. Even a very optimistic scenario with employment growth of 300,000 per month leaves labor markets in bad shape in 2010-11. But I don't think any combination of policies would be capable of significantly improving on that rate of growth (and I'm sure the Fed doesn't think so either), so trying to stimulate growth beyond that would be fruitless.

There are lags between policy changes and changes in employment, and that means it's much easier to back off of action initiated now if things turn out to be better than expected than it is to do something later if the optimistic scenario fails to materialize. That is, the risks of failing to do anything and then realizing the pessimistic high unemployment outcome are much larger than doing something now and then having things turn out better than expected. Even on their own terms, I don't think their conclusion that we shouldn't devote any resources to job creation (other than protecting jobs through "modest" help for state and local governments) follows.

Well, modesty is in the eye of the beholder. Meaningful support to state budgets could easily require federal government loans or expenditures in the area of $50-100 billion. Continuation of income support to the poor and unemployed, continuation of ARRA, the effect of automatic stabilizers, continued monetary expansion - this is an incredibly stimulative macroeconomic policy package. I don't think that we need to add on top of this tax credits for new employment or similar exotic jobs-related proposals that are floating out there. We don't need ARRA 2.0. Long-term we need more spending on infrastructure, energy R&D, etc., but this is a separate issue.

In any case, Dean Baker countered the part of the argument related to productivity before it was even made. Here's his response to similar claims about robust job growth:

Silliness on Productivity, by Dean Baker: In discussing the December jobs report the Post repeated some of the silliness about productivity that is currently circulating among people who imagine themselves to be knowledgeable about the economy. It told readers that:

Employers slashed positions more dramatically in the past two years, squeezing more productivity out of remaining workers. That has led many analysts to expect a substantial increase in the number of jobs in the early months of 2010, as companies must hire again just to keep up with demand for their products.

Actually, productivity growth averaged 2.6 percent annually over the last two years. This is somewhat more rapid than the growth rate over the prior two years but it is below the 2.9 percent average annual growth rate in the decade from 1995 to 2005. In other words, there is nothing extraordinary about the recent rates of productivity growth so there is no special reason for believing that a burst of hiring is imminent.

I almost always agree with Dean Baker. In this case, I don't know what he's talking about. In the four quarters leading up to 2009Q3 (that is, from the financial crisis to the recovery), productivity growth was 3.9 percent. Productivity growth in 2009Q2 and Q3 was 6.7% and 7.8% respectively. The historical pattern is, in the early stages of recovery there is always a productivity surge because companies expand production before expanding hiring. The surge is always followed by a return of productivity to trend and an increase in employment.

Economists have been very critical of "new paradigm" thinking during booms. We all recognize, with the benefit of hindsight, that the idea prevalent in the 1990s and 2000s booms that there had been a fundamental break with the past, that "things are different now" - productivity growth will forever be high, housing prices will never fall, Dow 36,000 - was tragically mistaken. There are regularities in the economy; history does repeat itself. Bob and I believe that economists should be equally reluctant to conclude that the current recovery is different from recoveries of the past, that there has been some fundamental change that makes history irrelevant in this case.

The essence of our argument in the FT piece is: do you believe in empirical regularities such as Okun's Law or trend productivity growth? Then you must believe that the current levels of unemployment and job growth are unsustainable. Furthermore, there is an enormous amount of data out there suggesting that the current recovery is similar, qualitatively and quantitatively, to the recoveries following the 1982 and 1975 recessions (I'll include some in future posts). That evidence should not be dismissed.

Some of the commenters to Mark's post suspected that Bob and I are conservatives with a vested interest in sticking our heads in the ground (or elsewhere). Not so. I would argue (and have on this blog!) that the strength of the recovery is evidence that the Obama Administration's policies have been successful. I'm afraid that all the pessimistic talk about the strength of the recovery, the insufficiency of the fiscal stimulus, the timidity of financial reforms, etc. will make it difficult for liberals to make the case six months from now that Democratic policies were the key to recovery. In the midst of the 1982 recession Ronald Reagan remained confident in his ideology and urged Americans to "stay the course." This stance paid tremendous political dividends once the economy turned. Obama's failure to vigorously promote his policies and liberals' downplay of their likelihood of success may deprive us of a similar benefit.

Conventional wisdom, confirmed

A paper arrives by email:

Cahit Guven, Claudia Senik, Holger Stichnoth, "You Can't Be Happier Than Your Wife: Happiness Gaps and Divorce."

This paper asks whether the gap in subjective happiness between spouses matters per se, i.e. whether it predicts divorce. We use three panel databases to explore this question. Controlling for the level of life satisfaction of spouses, we find that a higher satisfaction gap, even in the first year of marriage, increases the likelihood of a future separation. We interpret this as the effect of comparisons of well-being between spouses, i.e. aversion to unequal sharing of wellbeing inside couples. To our knowledge, this effect has never been taken into account by existing economic models of the household. The relation between happiness gaps and divorce may be due to the fact that couples which are unable to transfer utility are more at risk than others. It may also be the case that assortative mating in terms of happiness baseline-level reduces the risk of separation. However, we show that assortative mating is not the end of the story. First, our results hold in fixed-effects estimates that take away the effect of the initial quality of the match between spouses: fixed-effects estimates suggest that a widening of the happiness gap over time raises the risk of separation. Second, we uncover an asymmetry in the effect of happiness gaps: couples are more likely to break-up when the difference in life satisfaction is unfavourable to the wife. The information available in the Australian survey reveals that divorces are indeed predominantly initiated by women, and importantly, by women who are unhappier than their husband. Hence, happiness gaps seem to matter to spouses, not only because they reflect a mismatch in terms of baseline happiness, but because they matter as such.

Empirical support for something every married man knows intuitively.