The great divide

Just got back from a lunch where Susan Eisenhower spoke to White House Fellows and Gettysburg people. She spoke eloquently about her fear that America may not be up to the task of dealing with all the crises we face because we are more interested in winning political points than solving problems. She lamented that when you bring people from the right and left together to talk even about straightforward technical issues, they can't even agree on the facts.

I'm going to go out on a limb and say that these days it is our friends on the right of the political spectrum who are more factually challenged. To whit, the latest Newsweek poll, which reports that 52 percent of Republicans believe that Barack Obama "sympathizes with the goals of Islamic fundamentalists who want to impose Islamic law around the world." Seventeen percent of Democrats believe this and 27 percent of independents, so Republicans don't have a monopoly on stupidity here. Still - if a majority of Republicans believe Obama sympathizes with Islamic fundamentalists, what hope is there for a reasoned debate about the issues?

A fiscal stimulus allegory

A guy walks into the doctor's office with a splitting headache. The doctor prescribes him some painkillers, but wanting to save some money, the guy takes only half the dose. He goes back a week later and says "Doc, I've still got this splitting headache." The Doc says, well why don't you just take the full dose this time. "The painkillers didn't work last time around," the guy responds, "why don't you just hit me over the head with a hammer instead?"

What's the Fed thinking?

At the August 10 meeting the Fed was confronted with 9.5% unemployment, inflation below the 2% target, and a visibly slowing economy. The proposal on the table was to begin reinvesting proceeds from the Fed's portfolio of bonds. To recap, the Fed had purchased about $2 trillion of government bonds and mortgages in 2009-10 (creating that amount in bank reserves) in order to stimulate the economy. In March the Fed stopped new purchases, which meant that as bonds matured the Fed was turning money back to the Treasury, shrinking its holdings of bonds and reducing bank reserves. Reinvesting the proceeds instead would maintain the size of the Fed's balance sheet and therefore maintain the amount of monetary stimulus being provided.

This seems to me to be an easy call. Any tightening of monetary policy is inappropriate given the weakness in the economy, even if that tightening occurs in a passive way. But as this article by Jon Hilsenrath shows, at least seven of seventeen FOMC members were opposed to the proposal or expressed reservations. Kevin Warsh thought reinvesting the bond proceeds would send a signal to investors that the Fed was paving the way for more aggressive actions in the future, which he would not support. "Some officials" thought they needed more information about the economy before they could support such a move. Richard Fisher thought more bond purchases wouldn't do any good since banks were already flush with reserves. Charles Plosser argued that action wasn't necessary because growth projections for 2011 had not changed. And Narayana Kocherlakota argued that the economy was suffering from a problem of mismatch between available jobs and skills, which monetary policy could not resolve.

Paul Krugman rightly takes Kocherlakota to task for adhering to a primitive form of the "hangover theory" that says that recessions are needed to facilitate the movement of workers from one sector of the economy to the other. This is indeed a nonsensical argument - there's no reason workers can't be pulled into new sectors through higher wages and a booming economy instead of pushed by unemployment, and at any rate all sectors of the economy have seen declines in employment during this recession. But it seems to me that the most important cause of the Fed's reluctance to act is timidity, an excess of caution. For some reason 9.5% unemployment, declining inflation, and a falling GDP growth rate are not sufficient to imbue a significant faction within the Fed with any sort of urgency. That is very odd. The Fed should be doing everything in its power to stimulate the economy and should not stop stimulating until it sees strong growth and a declining unemployment rate.

Howard Dean's comments on the proposed Muslim community center in Manhattan's financial district

Here's the story. I've always been a big fan of Howard Dean, but he's being frightfully stupid here. Two points:

1. Rationalizing his proposal that the Muslim group find another place for its center, Dean says "That site doesn't belong to any particular religion, it belongs to all Americans and all faiths." Apparently Dean does not realize that there are already Christian churches and Jewish synagogues all around the Ground Zero site. Moving the Muslim community center would be a loud statement that the site does NOT belong to all Americans and all faiths.

2. On MSNBC last night Dean called for a dialogue between supporters and opponents. They should talk to each other, he said, hear each other out, come to some kind of understanding. Well, precisely that has been happening in Manhattan already. The local Community Board held a meeting in May at which people on both sides of the issue spoke for four hours. Families of 9-11 victims, firefighters, local Muslim leaders, priests and ministers, Tea Party members, all had their chance to express their views. The Community Board voted to approve the project. The project's organizers say the community center will be open to people of all faiths and pledge to use the facility to continue the dialogue.

An allegory

A black family wants to move into my neighborhood. The problem is, awhile back I was mugged by a black man and the experience was pretty traumatic. Now I know the family has every right to live wherever they want to, but I think it's pretty insensitive of them to move into my neighborhood, considering the lingering trauma I'm still experiencing, so they really ought to move somewhere else. Don't get me wrong. I'm no bigot. This isn't about race or people's constitutional rights, it's about being sensitive to other people's feelings.

O.k., I may have misled you on a couple of points here. First of all, it wasn't me who was mugged, but I've known white people (or at least known of white people) who were mugged by black men, and I can imagine the experience is very traumatic for them. Furthermore it's not technically my neighborhood that the black family wants to move into, but another neighborhood where there are white people, some of whom may suffer from lingering trauma. And while those people themselves seem to be perfectly happy that the black family is moving into their neighborhood, still the black family is being pretty insensitive to white people in other neighborhoods, who have had traumatic experiences with black people, or have known of people who have had traumatic experiences. So I think some compromise needs to be reached where the black family moves instead into a neighborhood that doesn't have quite so many white people in it.

Again, this isn't about race, it's about sensitivity. I'm not a bigot. Really, I'm not.

Pic of the day

I find this pretty remarkable, though it's somewhat unfair to assign credit or blame to a president for the macroeconomic performance that occurs on his watch. Still...



For the record, Obama is currently at -2.3%, but +1.0% in 2010. I know you would have guessed that G.W. Bush would have the worst record of private sector job creation, but would you have picked Carter for the best?

The seasonal job surge

Casey Mulligan has a provocative piece in the NY Times (here, here). He shows that teenage employment surges in the summer when school lets out as shown in the graph below. This isn't really an astounding finding, but it does seem to imply that a shock to labor supply (the school year ends, making kids available for employment) can affect employment even in the middle of a severe recession. This implies that if government efforts to stimulate demand come with impediments to labor supply they may end up being ineffective or counterproductive. Mulligan makes exactly this claim about ARRA, though what these restrictions are isn't exactly clear.

The argument is interesting, but there's an obvious demand-side explanation for the surge in teen employment during the summer. Summer brings demand for lifeguards, amusement park ride operators, lawn care workers, house painters and other types of jobs typically taken by teenagers. Mulligan's a smart guy, surely he could figure out how much of the surge is due to the opening up of this type of employment in the summer months and how much is due to the release of workers.

[Note: Ryan Avent makes the same argument as me here, with some data.]

Obama on the Muslim community center

Last night on CNN David Gergen criticized President Obama's statement regarding plans to build a Mulsim community center near Ground Zero in Manhattan. Said Gergen,

But there was a quality about this that I think a lot of people concluded wasn't just about the merits of the issue, but there was a sense that this is another example of people thinking he doesn't understand me. He's not like me. He sees the world through different glasses than I do... Well, I thought in Philadelphia during the campaign, that was a masterful speech because he gave voice to alternative perspectives and was respectful of them. In this situation, he stated one point of view, but for lots of lots of other people who oppose this, he showed no sympathy for what they're going through and why the public is...

Rowland Martin responded that there really is only one legitimate point of view, and that is what the U.S. Constitution says. But a better response would have been - Obama did too show sympathy for people who hold the opposing view. Read the damn transcript!

Recently, attention has been focused on the construction of mosques in certain communities -- particularly New York. Now, we must all recognize and respect the sensitivities surrounding the development of Lower Manhattan. The 9/11 attacks were a deeply traumatic event for our country. And the pain and the experience of suffering by those who lost loved ones is just unimaginable. So I understand the emotions that this issue engenders. And Ground Zero is, indeed, hallowed ground.

But let me be clear. As a citizen, and as President, I believe that Muslims have the same right to practice their religion as everyone else in this country. And that includes the right to build a place of worship and a community center on private property in Lower Manhattan, in accordance with local laws and ordinances. This is America. And our commitment to religious freedom must be unshakeable. The principle that people of all faiths are welcome in this country and that they will not be treated differently by their government is essential to who we are. The writ of the Founders must endure.

We must never forget those who we lost so tragically on 9/11, and we must always honor those who led the response to that attack -- from the firefighters who charged up smoke-filled staircases, to our troops who are serving in Afghanistan today. And let us also remember who we're fighting against, and what we're fighting for. Our enemies respect no religious freedom. Al Qaeda's cause is not Islam -- it's a gross distortion of Islam. These are not religious leaders -- they're terrorists who murder innocent men and women and children. In fact, al Qaeda has killed more Muslims than people of any other religion -- and that list of victims includes innocent Muslims who were killed on 9/11.
So that's who we're fighting against. And the reason that we will win this fight is not simply the strength of our arms -- it is the strength of our values. The democracy that we uphold. The freedoms that we cherish. The laws that we apply without regard to race, or religion, or wealth, or status. Our capacity to show not merely tolerance, but respect towards those who are different from us -- and that way of life, that quintessentially American creed, stands in stark contrast to the nihilism of those who attacked us on that September morning, and who continue to plot against us today.

If you're paid to be a tv pundit and you know you're going to be talking about Obama's speech, you really need to actually read the whole thing, not just the excerpts in this morning's newspaper, before you open your trap.

GDP versus final sales

Bob Barbera tells me there is information in the data on "final sales to domestic purchasers." Final sales to domestic purchasers is GDP minus net exports and inventory investment. It measures demand for goods and services from US households, businesses and government, regardless of whether those goods and services are imported or domestically produced. GDP, by contrast, measures demand for US-produced goods and services, regardless of whether that demand is from foreigners or US residents. Here's a graph of quarterly growth rates of real GDP and final sales:

The GDP numbers show a weakening of growth, from 5% in 2009Q4 to 3.7% in 2010Q1 to 2.4% in 2010Q2 (the latter number likely to be revised further downward). But the final sales figures show the opposite: growth in demand accelerated from 0.2% in 2009Q4 to 1.3% in 2010Q1 to 4.1% in 2010Q2.

What does this mean? It means that the slowdown in GDP growth is due to a dramatic rise in imports - the BEA's report on 2010Q2 GDP says that import growth reduced GDP growth by 4 percent in the quarter. People - most importantly, businesses - are buying, but they're buying imported goods rather than domestically-produced goods. The result is little feedback to domestic employment. If I had to guess, I would guess that the problem is that weakness in the housing sector means lower than normal demand in sectors heavy on domestic production. Business investment in equipment and software has been leading growth the last few quarters, and much of this stuff is probably imported.

Negative interest rates?

[I've been out of town and feeling lazy lately, hence the pause in blogging. Time to get back in the swing.]

A number of commentators are suggesting that the Fed reduce the interest it pays on reserves below zero. That is, whereas currently the Fed pays banks an interest rate of 0.25 percent on excess reserves (and banks now hold about a trillion dollars in excess reserves), the Fed could in principal reduce that to zero or negative whatever it wanted. Penalized for holding money idle, banks would have a strong incentive to make loans. There are two problems however:

1. It's not clear whether the Fed has the legal authority to do this. The law says the Fed can pay interest on reserves, but it does not explicitly say the Fed can charge interest. The Fed might be able to get around a prohibition on negative interest by charging banks "fees" that act like interest, but this would have to be cleared through legal, as they say.

2. If the Fed charged an appreciable amount of interest banks would choose to store their reserves as "vault cash" rather than their deposits at the Fed. The Fed might be able to counteract this move by including vault cash in the measure of reserves to be charged interest, but again it's not clear if this is legal. (I'm told that the Fed's mandate to provide an "elastic currency" would get in the way of this action.)

Discussing these options with a friend at the Fed I mentioned that the Fed needs to hire some more bankers. Bankers are very good at finding ways to screw their customers with hidden fees, which is just what the Fed needs to do to banks right now. "That's funny," he said, but I thought I detected a hint of melancholy in his voice as he said it.