First press conference

Ben Bernanke's press conference is repeatedly being described as the first press conference by a Federal Reserve Chairman in the 98-year history of the Federal Reserve. Yet I have before me the "Transcript of Press Conference with Paul A. Volcker, Chairman" on October 6, 1979. This was right after the historic meeting where the Fed changed its operating procedures to nonborrowed reserve targeting (I know, you want to know more - look it up). Is there some sense in which Bernanke's press conference is different in kind from Volcker's?

Did I say put me down for 3 percent? I meant put me down for 1.8 percent.

Looks like the pessimists were right (again), GDP grew at a 1.8% rate in the first quarter. Notable weak spots were residential investment and government spending.

The following graph is from Calculated Risk. Note the contrast between the typical movement in residential investment following recessions and the movement following this recession. Several years ago Ed Leamer wrote a paper called "Housing IS the Business Cycle" and this graph demonstrates his point. Housing investment is a big component of typical recoveries and it has been notably, abysmally absent in this one. I don't think we can expect a strong recovery until housing recovers.



In light of the weakness in the economy it's appalling that Ben Bernanke did not use yesterday's news conference to announce a third round of quantitative easing (or, as I suggested a few days ago, a negative interest rate policy). It's appalling that the President and Congress are arguing about how fast to reduce government spending rather than - what was that word we kept hearing about in the Congressional campaigns last fall? Oh yeah, I remember - JOBS.

Impossible Hamster...

Let's begin questioning our growth fetishism.

Thinking about GDP

Well who isn't? The BEA releases its report for 2011Q1 this Friday, and the forecasts aren't pretty. No one is predicting GDP growth of more than 3% or so for all of 2011 and some forecasters are going as low as 1.8% in the first quarter. Well, these people are looking at all the components of GDP based on recent data releases and probably have a pretty good idea. Nevertheless, my bird's eye view does not support such pessimism. Credit spreads are low, as shown yesterday. Also, the ISM manufacturing and nonmanufacturing surveys show a lot of strength. Even with a dip in March, the nonmanufacturing composite index averaged 58.8 in Q1 versus 55.9 in 2010Q4. Manufacturing has risen to 61.1 from 57.9. Hours worked rose at a 1.6% annual rate from 2010Q4 to 2011Q1. That's hardly blistering, but any decent rate of productivity growth gets us well above 2% GDP growth. So I'm going to go with, hmm, umm, let's see,... 2.8%. Heck, put me down for 3!

Undertaxed

Having recently done my taxes, I can report that my wife and my combined incomes put us in the highest-earning 20% of the income distribution, yet we pay only 10 percent of our income in federal income taxes. We are undertaxed. President Obama and Congress, please raise my taxes and use the proceeds to maintain and strengthen our social safety net.

I know what you're saying - if I feel that way why don't I voluntarily pay more in taxes, give Uncle Sam a little tip with my tax return? Because I know that my contribution won't strengthen our social safety net, it will have no impact whatsoever. I and the rest of the American public are in a low tax Nash equilibrium: each of us finds it optimal to pay as little as we can in taxes, given that we know that everyone else is paying as little as he or she can. I want us to all at once, together, move to the cooperative equilibrium where we all pay higher taxes and as a result live in a better country.

More evidence, if any were needed, that Republicans are woefully out of touch

Maybe Republicans don't push for tax cuts for the top 2% of the income distribution because they are in the tank for the rich; maybe it's because they are so out of touch that they don't understand that most Americans don't earn over $250,000 per year. Here's Michael Steele on the Ed Show last week. The guests were Michael Weinman, a former cop and police union official in Ohio, and Garrett Lamp, a firefighter from Florida. They're on the Ed Show to tell Michael Steele why they're switching their voter registration from Republican to Democrat. Steele defends the Republicans' efforts to keep the top income tax rate at 35% at about the 5:45 mark in the clip. Steele: "I don't know what the combined salaries of these gentlemen is, but... Gentlemen, if you're making more than $250,000 dollars, under this administration's plan you're considered rich."

Visit msnbc.com for breaking news, world news, and news about the economy

Ok, maybe it's I who am out of touch, but I'm pretty sure firefighters and local union officials earn a lot less than $250,000 a year.

Is the economy slowing down?

There's a growing suspicion that the economy has begun to slow down since the end of 2010, perhaps as a result of rising oil prices, turbulence in the Middle East, renewed stresses in European financial markets, and budget cutting at the state, local and federal levels. I don't want to dismiss that possibility - all of those factors could very well have the effect of slowing the economy down - but my favorite economic indicator tells a different story. The Baa-Aaa credit spread, a measure of the risk-taking proclivity of corporate borrowers, has fallen since January and remains at quite low levels. We are not seeing the kind of upward bump that we saw last summer when the economy really did slow down and everyone was worried about a "double dip." So I shall remain cautiously optimistic for now.

Time to go negative

All right, I'm going to start trying to post regularly again. See if anyone's still reading.

Today's NY Times reports that "Stimulus by Fed is Disappointing, Economists Say." Let me quickly point out two problems with the article. First, the title. It's not really the passive voice, but it's in the classic circumlocutory style of the news media that I find annoying. I'd go with "Fed's Stimulus Disappoints Economists." Saves on newsprint too. Second, the article is very thinly sourced. On the Keynesian end of the spectrum we have Mark Thoma, on the RBC end we have Charles Plosser, and that's pretty much it. Add to that two finance professors from Northwestern and an economist from Bank of America. Not exactly a summary of the profession's opinion. And the article leaves the crucial question unanswered: does the fact that the Fed's efforts have not been tremendously successful mean that it should do more or less in the months to come? One could write a very interesting article surveying economists on their response to that question.

Put me in the "more" camp. Another round of fiscal stimulus, this time focused on aid to states to prevent them from continuing slashing budgets, would be the best policy. That's obviously not going to fly politically in Washington (nor, it has occurred to me these last few months, in the states - it now seems clear that Republican governors have found the fiscal crisis to be a very convenient pretext for pursuing their political objectives, beginning with smashing public employee unions). The Fed should certainly not end its bond purchasing program in June as scheduled, but it will face considerable political pressure to do just that, so I don't see much hope of any further quantitative easing.

That leaves one other policy response: imposing a negative interest rate on bank reserves. A number of economists have proposed this before. The idea is to penalize banks who hold excess reserves, force them to use those reserves to make loans or buy securities (which would have the effect of lowering interest rates, exactly like quantitative easing would do). Banks would also try to pass costs onto their customers by charging interest on checking deposits, so people with money in banks would have the incentive to spend rather than accumulate bank balances. The problem with this proposal is that faced with negative interest rates on checking deposits, customers might instead simply withdraw money from the banking system and hoard it in big piles on their dressers. After all, cash pays a zero percent interest rate which would be better than you could get at the bank.

Greg Mankiw half-seriously proposed imposing a negative interest rate on cash by once a year drawing a number between 0 and 9 by lot, and all currency with a serial number ending in that digit would no longer be useable as legal tender. This would in effect impose an expected rate of return of negative ten percent on all money holdings. (Incidentally: Greg Mankiw is a wonderful guy, a gracious host, a riveting speaker. But I find it highly ironic that this co-founder of the branch of macroeconomics known as New Keynesian economics had to have Silvio Gesell's proposal for stamped money, which Keynes cites approvingly in the General Theory, brought to his attention by Alan Taylor. Apparently Mankiw has not read the General Theory!)

Any scheme of stamped money or money-extinguishing lotteries is likely to be difficult to impose in practice. But there's an alternative. Hoarding money in response to negative interest rates on checking deposits is only possible if the Fed supplies currency perfectly elastically. This happens to be the Fed's current policy: if customers go to their banks in large numbers to withdraw money in cash from their checking accounts, the banks ask the Fed for more currency, and the Fed gives them as much as they want, exchanging the banks' reserves at the Fed for currency at par. But suppose the Fed simply exchanged reserves for currency at a discount (I suppose equal to the negative interest rate charged on reserves)? Banks would pass this charge on to customers: if you wanted to withdraw $100 of cash from your checking account where it was earning -5% interest, you'd have to pay a $5 fee for the privilege. The only way to avoid the charge would be to spend the money in your checking account in some way: buy groceries, a new car, a fine Easter bonnet; or if not that, put your funds into a money market account or retirement account where it ends up being used to purchase stocks, bonds, commercial paper, and other assets, thus driving the prices of those assets up and their yields down.

This proposal has the virtue of not requiring the Fed to purchase any more assets. In essence, the Fed forces the banking system and bank customers to engage in quantitative easing on its behalf. There may of course be practical difficulties. For one thing, the Fed would have to implement this plan (at least the fee for currency purchases) by surprise, because otherwise there would be a massive withdrawal of cash from the banking system in anticipation of the new fees. But the Fed employs thousands of very clever economists, I'm sure they could find their way around these problems.

The end of the 1980s

Race relations in the 1980s-90s: A Wikipedia montage

A partial compendium of race-related issues in the late 1980s to early 1990s. Text cobbled together from various Wikipedia entries. Comments, corrections, and additions welcome!

1987: Tawana Brawley, a 15-year old African American girl from Wappinger New York, received national media attention when she accused six white men, some of whom were police officers, of having raped her. The accusations soon earned her notoriety, which was inflamed by Brawley's advisors (including the Reverend Al Sharpton and attorneys Alton Maddox and C. Vernon Mason), the statements of various public officials, and intense media attention. After hearing evidence, a grand jury concluded in October 1988 that Brawley had not been the victim of a forcible sexual assault and that she herself may have created the appearance of an attack. The New York prosecutor whom Brawley accused as one of her alleged assailants successfully sued Brawley and her three advisers for defamation.

1988: In the 1988 presidential race, Republican George H.W. Bush made an issue of Democrat Michael Dukakis' decision while governor of Massachusetts to grant a furlough to a black murderer named Willie Horton. While on furlough Horton raped a white woman and brutally assaulted her fiance. The Bush campaign used the Willie Horton episode to portray Dukakis as "soft on crime." Bush's campaign manager, Lee Atwater, vowed that "by the time this election is over, Willie Horton will be a household name." The campaign produced an inflammatory television ad showing prisoners entering and leaving a prison through a revolving door. The Bush campaign was accused of using the Willie Horton incident to stoke racial tension in order to secure the white vote. In 1991, dying of brain cancer, Lee Atwater wrote an article for Life magazine expressing regret for the hard-knuckle style of politics he had used in a number of campaigns in the 1980s. He expressly apologized to Michael Dukakis for the "naked cruelty" of the 1988 presidential campaign.

1989: A white woman, Trisha Meili, was raped and brutally assaulted while jogging in Central Park in an incident that became known as the Central Park Jogger case. It was alleged that a large group of young black men were engaged in what was called "wilding," rampaging through Central Park robbing and assaulting passers by. The incident aggravated racial tensions in New York and complicated the mayoral race that pitted Rudi Giuliani, who was white, against a black candidate, David Dinkins. Five black teenagers were arrested and convicted of the crime. Lawyers and family members of the convicted teenagers charged that their incriminating statements had been coerced by the police officers who interrogated them. The convictions were vacated years later when another man was found to have committed the crime alone.

1989: The hip hop group Public Enemy released "Fight the Power," one of the most influential songs in hip hop history. The song was the theme for Spike Lee's movie, "Do the Right Thing." Hip hop and the related style of "gangsta rap" were widely criticized in the white community for exhalting inner-city violence and opposition to the police. Public Enemy's logo was a figure that looks like a police officer in crosshairs.

1991: David Duke, a former Grand Wizard of the Ku Klux Klan and avowed "white nationalist," ran as a Republican for Louisiana governor against Edwin Edwards, a Democratic former governor who had a reputation for corruption. The Louisiana Republican party repudiated Duke but his candidacy attracted support from racist groups around the country. Opponents of Duke responded with bumper stickers appealing to voters to reject Duke in favor of Edwards: "Vote for the Crook: It's Important," and "Vote for the Lizard, Not the Wizard." Duke won 55 percent of the white vote but Edwards won the election. Duke ran for the Republican nomination in the 1992 presidential primaries but failed to attract significant national support.

1992: In an effort to bolster his "anti-crime" credentials, Democratic presidential candidate Bill Clinton took a break from his primary campaign to fly back to Arkansas to witness the execution of a black man, Rickey Ray Rector, who had been convicted of killing a police officer in 1981. Death penalty opponents had pleaded with Clinton, then the governor of Arkansas, to spare Rector's life because he had suffered brain damage in a suicide attempt during his surrender to police that left him unable to understand the charges against him. But Clinton had vowed not to repeat the mistakes made by previous Democratic candidates like Michael Dukakis whose opposition to the death penalty had allowed opponents to paint them as "soft on crime." At his last meal before his execution, Rector was careful to save his dessert to eat later.

1992: Rodney King was stopped by police officers in Los Angeles for a traffic violation. He was taken out of his car and beaten severely. The beating was videotaped and broadcast around the country. Four LAPD police officers were charged with the crime but a jury of ten whites, an Asian and a Latino found them not guilty. The news of acquittal triggered riots in Los Angeles. By the time the police, the US Army, the Marines and the National Guard restored order, the casualties included 53 deaths, 2,383 injuries, more than 7,000 fires, damages to 3,100 businesses, and nearly $1 billion in financial losses.

During the riots, a white truck driver named Reginald Denny who stopped at a traffic light was dragged from his vehicle and severely beten by a mob of local black residents as news helicopters hovered above, recording every blow, including a concrete fragment connecting with Denny's temple and a cinder block thrown at his head as he lay unconscious in the street. The police never appeared, having been ordered to withdraw for their own safety. Denny was rescued by an unarmed African American civilian named Bobby Green Jr. who, seeing the assault live on television, rushed to the scene and drove Denny to the hospital in the victim's own truck.

On May 1, 1992, the third day of the riots, Rodney King appeared in public before television cameras to appeal for peace, asking "People, I just want to say, you know, can we all get along? Can we get along?"

1992: Democratic candidate for president Bill Clinton, seeking to distance himself from former presidential candidate Jesse Jackson and civil rights advocates in the Democratic party, criticized African American hip hop artist Sister Souljah in a speech to Jackson's Rainbow Coalition. Following the LA riots, Sister Souljah had been quoted in the Washington Post interview saying "If Black people kill Black people every day, why not have a week and kill white people?" In one of her music videos she said "If there are any good white people, I haven't met them." Clinton spoke out against these statements to Jackson's group, noting that Americans would be outraged if Sister Souljah was white and referring to blacks in that way. Clinton's remarks caused a riff between him and Jackson and sparked criticism from many blacks - precisely what Clinton intended as he courted the white vote.

1994: Former football star and actor O.J. Simpson allegedly murdered his wife, Nicole Brown Simpson, and a friend, Ron Goldman. As Simpson's lawyers encouraged him to turn himself in, Simpson led police on a "low speed chase" through Los Angeles that was covered live by over 20 helicopter news teams. Simpson eventually gave himself up to police. His trial turned into a circus ("if the glove doesn't fit, you must acquit!") and Simpson was acquitted. The incident sparked a national "conversation" about race, since Simpson was black and the two victims were white. One of the defense's main arguments was that one of the key witnesses against Simpson, police officer Mark Fuhrman, was motivated by racial hatred. Fuhrman confessed to numerous cases of police brutality. During the trial a tape was played in which Fuhrman used the "N word" 41 times. Simpson's acquittal was met with disbelief by white America (87 percent of whom thought he was guilty according to an NBC poll) and celebration in parts of the African American community (only 27 percent of whom thought he was guilty).