Creative Destruction

Is excessive regulation choking the recovery?

2012-01-29T11:15:00.004-05:00

Republicans blame the slow economic recovery on excessive regulation under the Obama Administration. I've been looking for serious economic research that would support this claim, so far to no avail (but I'll be sure to post papers when/if I find them). Here is an analysis by the Treasury Department providing evidence against this view. The authors say that if regulations rather than insufficient demand were harming growth, we would expect to see stock prices performing worse in industries like energy and finance that are subject to lots of new regulations; that companies in these sectors would face higher costs of borrowing; that business investment would be low; that hours worked would be rising while employment and investment would be stagnant; that industrial capacity would be rising while companies hold off on investment; and that surveys would show businesses more concerned about regulation than low sales. Turns out none of these are true.

SOTU

2012-01-28T14:31:00.001-05:00

I wasn’t wild about President Obama’s State of the Union speech. To me it sounded like the product of a multitude of government agencies each lobbying to have its pet program mentioned. Some commentators likened it to Bill Clinton’s SOTU’s which were similarly long and rich on policy initiatives, and also very popular. So maybe Obama’s speech was politically astute. Still, I would have preferred to see a vigorous defense of Obama’s record of the last three years with a rousing call to stay the course.

He could have started by reminding Americans that when Obama came into office, the economy was plummeting off a cliff with the very real possibility that the entire financial system would collapse, sending us into another Great Depression. The Bush Administration had already enacted TARP, the largest program to bail out the banking system, but several large banks were still teetering on the brink of collapse. The Obama Administration made some difficult choices: rather than nationalizing the banks, which some on the left had called for, the Administration continued to make loans to the banks. The Treasury Department instituted “stress tests” for the largest US banks, publicizing the extent to which they were vulnerable to a further deterioration in the economy. When the results of the stress tests were publicized, it turned out that most of the banks were fairly strong. Private investors then poured money into the banks, helping them to recapitalize. The loans that the Obama and Bush administrations had extended were repaid, and the financial system was saved. The survival of the banks whose irresponsibility caused the recession is understandably galling, but the alternative was an even worse recession. Instead of letting the banks collapse, which would have been cathartic but destroyed our economy, the Obama Administration chose to push reforms of the banking system to make sure that such irresponsible behavior does not occur again. The result of the Administration’s efforts was the Dodd-Frank financial regulation law, which restricts the types of activities banks can engage in and requires them to prepare “living wills” that will allow them to fail in an orderly fashion next time around rather than be bailed out. Furthermore, the Obama Administration has (belatedly) begun investigations of the banks to root out individuals and companies that broke the law during the lending mania of the 2000s, with the intent of bringing criminal charges against malefactors.

But even with the financial system saved, the economy was still headed for a severe and prolonged recession. This wasn’t a recession like those of the 1970s and 1980s, which were also severe but followed by quick recoveries. The recessions of the 1970s and 1980s occurred when the Federal Reserve raised interest rates in an environment of excessive spending by business and households in order to reduce inflation. In each case, when inflation seemed to be under control the Federal Reserve reduced interest rates, and businesses and households quickly resumed their spending. This recession, like the Great Depression and the recessions that occurred earlier in American history, was caused by a collapse in consumer and business spending after a period of enormous debt accumulation. The Federal Reserve reduced interest rates in response, but spending was never going to resume at a sufficient pace until debt levels were reduced. During the 2000s household accumulated an enormous amount of debt – home mortgages, home equity loans, credit card debt, and more. Since 2008 households have cut back spending in order to pay off these loans and reduce their debt burdens. But consumer spending is 70 percent of GDP. And with consumers spending less, there is little incentive for businesses to make major investments. If consumers are cutting back on spending, which they must, there is no chance of a strong recovery.

So the Obama Administration crafted a three year plan to increase federal government spending, transfer money to state and local governments to prevent massive layoffs of public employees, and tax cuts to increase consumer spending while giving households the resources to pay off their debts. The law that Congress passed, the ARRA (the so-called “stimulus”), did help the economy. Numerous studies have shown that a few million people are employed today who otherwise would not have been. But it is clear in retrospect that the stimulus was too small. Congress would not have passed a law any larger than the $800 billion under ARRA. The Administration has made some efforts to pass further stimulus measures. Its one major success was the agreement at the end of 2010 to extend some of the ARRA tax cuts and unemployment compensation. But its other efforts such as the proposed American Jobs Act of 2011 have been killed by Republican opposition in Congress.

One argument against fiscal stimulus is that it has increased federal government debt. And this is true: declining tax revenues as a result of the recession plus the government’s spending has resulted in budget deficits of over $1 trillion per year and a mounting debt. This debt must be dealt with. But today, as the economy is struggling to recover from the recession, is not the time to cut spending and raise taxes. Other countries are trying “austerity” today, with disastrous results. Great Britain’s Conservative government implemented a deficit reduction package in fall 2010. A year later, growth has slowed to a crawl and the recession in Britain is now longer and deeper than was Britain’s Great Depression. European governments have imposed austerity packages in the last year. As a result, Europe has once again plunged into recession. If anything we need more spending and larger budget deficits now in order to help make up for weak growth in consumer and business spending. At the same time, however, we need to make plans to cut the budget deficit in the future. The Administration has been trying to do this. The health reform law, ACA, is projected to reduce the budget deficit by hundreds of billions of dollars over the next two decades by constraining costs in Medicare and Medicaid. The Administration is in the process of crafting cuts in defense spending. As the wars in Iraq and Afghanistan draw to a close, the federal government will save more hundreds of billions of dollars. Last summer the Administration proposed a “grand bargain” with Congressional Republicans: cuts in Medicare and Medicaid and increases in taxes amounting to $4 trillion of deficit reduction over the next ten years. But the Republicans balked, refusing to accept any increases in taxes.

There are signs that the economic recovery is picking up momentum. But it would be a mistake to pull back on efforts to stimulate demand, because growth remains weaker than it should be. Furthermore, if Europe experiences a financial crisis or its recession turns out to be severe, the shock could be enough to halt America’s recovery. So we need to pass the extension of the payroll tax cuts that expire at the end of February. We need to pass the other components of the Jobs Act, including transfers to states to enable them to continue to hire teachers and the infrastructure bank. We cannot pursue the path that Republicans in Congress and the Republican candidates for president have proposed: massive cuts in spending now and a tax increase on lower and middle class people. This is what Europe and Great Britain have tried, and we see the results. Our best hope for resolving our debt problem is to ensure a strong recovery now while making plans to reduce spending and raise taxes in the future when the economy has recovered.

The other major accomplishment of this Administration was reform of the health care system. The Affordable Care Act has already provided benefits to Americans: children under the age of 26 can now be covered under their parents’ insurance plans; people with pre-existing conditions now have access to affordable insurance through the Pre-Existing Condition Insurance Plan. Cost-saving programs are being implemented in Medicare and Medicaid. The federal government is beginning to exercise its powers under ACA to reduce growth in private health insurance premiums. In two years, all Americans who do not get insurance from their employers will have access to health insurance on insurance exchanges.

The ACA is not a perfect piece of legislation. There may be many things in it that need to be changed in the years to come. But Congressional Republicans and the Republican candidates for president pledge to repeal ACA entirely, leaving young people and people with pre-existing conditions uninsured and telling people who don’t get insurance from their employers that they are on their own. And that’s not all. Republicans call for repealing Dodd-Frank, which would allow banks to resume the kinds of irresponsible behavior they engaged in in the 2000s. They would eliminate environmental and safety regulations, reversing the efforts this Administration has made to protect the environment and Americans’ health. And of course their tax and spending plans would risk plunging the US into another recession. Those are the stakes in the year ahead and in the election in November. We must stay the course.

Ok, I’d have said essentially that, minus the explicit references to Republicans and the election, and sandwiched between Obama’s references to the ability of people in the military to transcend partisan differences and the bit about the flag given to him by the SEALS who killed Osama bin Laden. Wrap it up and call it a SOTU.

Greg Mankiw, free trader

2012-01-26T18:19:00.002-05:00

He comments on Obama's State of the Union speech:

I was disappointed, and even a bit surprised, that the President adopted the xenophobic approach to outsourcing and international trade. Usually, on issues of international trade, the President plays the role of grown-up and leaves it up to Congress to gin up populist ire. That is true of both parties. Recall that President Clinton pushed NAFTA through.

When President Obama bragged that his administration had substantially increased trade cases against China compared with his predecessor, it made me proud to be one of President Bush's advisers...

Is he also proud to be one of Mitt Romney's economic advisers? Because here's what Romney proposes to do about China:

CONFRONTING CHINA

... It is time to end the Obama administration’s acquiescence to the one-way arrangements

the Chinese have come to enjoy... Our first priority must be to put on the table all unilateral actions...

Improve Enforcement at the Border

... As president, Mitt Romney will allocate the necessary resources to investigating the actual point of origin for suspect products arriving on our shores and impose harsher penalties on those who would circumvent our laws...

Protect and Pursue Legal Rights

... The Office of the United States Trade Representative (USTR) in a Romney administration will be tasked with pursuing all significant claims of unfair trade practices. It will also take a far

more active role in encouraging private firms that have been victimized to raise

claims both in U.S. courts and at the WTO...

Impose Targeted Tariffs or Economic Sanctions

... if the United States identifies a Chinese firm or industry that is relying on unfair practices or misappropriated American technology for its competitive advantage, we should be in a position to impose punitive measures in response...

Designate China a Currency Manipulator and Impose Countervailing Duties

... If China fails to move quickly to bring its currency to fair value, the Department of the Treasury in a Romney administration will designate China a currency manipulator and the Department of Commerce will impose countervailing duties...

Insist on Reciprocal Government Procurement

... Until China joins and abides by the GPA [Government Procurement Agreement], a Romney administration will respond in kind by ending U.S. government procurement of Chinese goods and services.

Forget the cluster, bring on the hellix

2012-01-26T14:32:00.002-05:00

Stanford University proposes outdoing Gettysburg in the meaningless jargon department. In the sophomore year, they propose:

The Stanford Helix

Helix courses would focus on questions and concerns that influence and are influenced by multiple disciplines. Although the courses would be offered separately, they would be conceptually intertwined, providing both a structure and a heuristic for student learning . Viable as standalone courses yet united by shared overarching themes, helix courses would encourage high-order perspective and reflection, intellectual continuity across quarters, and broader interdisciplinary approaches to problem solving. In effect, they would do some of the work that IDPs do, but in a much more nimble way.

Helices would consist of three or more courses, intended by faculty to speak to one another and so identified to students. They would be flexibly administered . Taking all courses in a helix would not be mandatory, nor would taking them in a particular sequence, though students, depending on their background and interests, might find certain orders useful. Some students might use a helix to develop interests arising from their majors; others might employ them to further coherence within their breadth requirements.

Conversations with colleagues about the model elicited a host of exciting themes, all likely to be of deep interest to students . An international human rights helix could bring together courses in history, philosophy, law, and international relations to explore ongoing efforts to create norms of international humanitarian conduct in a world scarred by mass violence; a helix on water could bring together courses in environmental studies, public policy, engineering, history, and law. Some helices might focus on particular historical periods or processes—the Renaissance, the Enlightenment, the European colonization of the Americas—bringing together courses in history, literature, art, and philosophy. The digital age; sustainability and the environment; faith, self, and society—the possibilities are limitless.

Missing, of course, is a venue for student reflection on their helix.

Fact-checking Mitch Daniels

2012-01-25T20:26:00.004-05:00

TV pundits thought highly of Mitch Daniels' response to the State of the Union last night. He was applauded for his measured, moderate critique (in contrast I suppose to the bombast we've been getting from the presidential candidates). I suppose it's too much to ask the pundits to comment on the content of these addresses, but still...

I was fairly impressed by Daniels' tone, but nevertheless his speech was riddled with falsehoods. I'm beginning to think that perhaps Republicans don't care at all about the literal truth of what they say; if a claim is consistent with the narrative they're trying to peddle, that's good enough. Now I'm fine with someone making claims that are not literally true but get at a deeper truth if he's writing a sonnet to his lover; but I like my public servants to stick to the literal truth when on official business. To whit:

Daniels: The President did not cause the economic and fiscal crises that continue in America tonight. But he was elected on a promise to fix them, and he cannot claim that the last three years have made things anything but worse: the percentage of Americans with a job is at the lowest in decades. One in five men of prime working age, and nearly half of all persons under 30, did not go to work today... The President’s grand experiment in trickle-down government has held back rather than sped economic recovery. He seems to sincerely believe we can build a middle class out of government jobs paid for with borrowed dollars. In fact, it works the other way: a government as big and bossy as this one is maintained on the backs of the middle class, and those who hope to join it.

Private sector employment has risen by 3.2 million since February 2010. These are not "government jobs." Three point two million jobs over two years is not great economic performance (3.2 million over one year would be more like it), but it's certainly an improved economic environment from when Obama took office. And it's better than Bush II did in the first three years of his administration.

Daniels: In our economic stagnation and indebtedness, we are only a short distance behind Greece, Spain, and other European countries now facing economic catastrophe. But ours is a fortunate land. Because the world uses our dollar for trade, we have a short grace period to deal with our dangers. But time is running out, if we are to avoid the fate of Europe, and those once-great nations of history that fell from the position of world leadership.

Other than Greece, the nations of Europe are not facing an economic crisis because of their levels of debt. They are facing an economic crisis because over the last decade prices and labor costs have increased relative to those in Germany. The global recession requires a relative decline in prices and costs in those countries. In other countries, this could be accomplished through a devaluation of their currency, but these countries are stuck in the eurozone with a monetary policy essentially conducted by Germany. So they are forced to undergo recession and disinflation. The recession is making it hard for them to make payments on their debt, hence the debt crisis. The debt crisis gets legs from the fact that the European Central Bank has been slow to act as "lender of last resort" - making emergency loans to keep Europe's banking system afloat. The US will not face a Greek-style debt crisis not simply because the world currently accepts dollars as the main reserve currency, but because our currency can depreciate against others and because our central bank isn't shy about using its lender of last resort powers.

Daniels: Contrary to the President’s constant disparagement of people in business, it’s one of the noblest of human pursuits. The late Steve Jobs — what a fitting name he had — created more of them than all those stimulus dollars the President borrowed and blew.

I think in just about every speech President Obama makes he includes a line like this one from the State of the Union: "We don’t begrudge financial success in this country. We admire it." Other than one reference to "fat cats" (describing the heads of financial firms that drove the economy into a ditch in 2008), I don't recall a single disparaging remark Obama has made about business. I would love for someone to provide some examples of what they're talking about. In addition, as Paul Krugman notes, Apple has not created nearly as many jobs as Obama. Apple employs about 43,000 people in the US and 20,000 overseas. An additional 700,000 or so are employed overseas to produce the parts that go into Apple's products. The Congressional Budget Office estimates that in the third quarter of 2011 the ARRA funded over 400,000 full time equivalent jobs in the US. This estimate is based on reports from recipients of funds. It does not include jobs created by the tax cuts and transfers to state and local governments in ARRA, which were about 2/3 of the total package. It does not include the "multiplier effects" of the ARRA. The CBO estimates that in 2011 between 0.5 and 2.6 million people were employed as a result of ARRA; in 2010 the estimate is 0.7-3.3 million (ARRA spending peaked in that year).

Daniels: The extremism that stifles the development of homegrown energy, or cancels a perfectly safe pipeline that would employ tens of thousands, or jacks up consumer utility bills for no improvement in either human health or world temperature, is a pro-poverty policy.

"Perfectly safe pipeline" is a matter of debate, though I would argue that no pipeline is literally "perfectly safe." But "stifles the development of homegrown energy"? According to the US Energy Information Agency, US crude oil production has risen from an average of 4.95 million barrels a day in 2008 to over 5.6 million barrels a day in 2011. Natural gas production is up by a similar amount; the fracking boom has been going on for a few years now.

Daniels: The mortal enemies of Social Security and Medicare are those who, in contempt of the plain arithmetic, continue to mislead Americans that we should change nothing.

He can't be talking about Obama here, because Obama offered to make significant cuts in both programs if Republicans would accept tax increases. And Republicans attacked Obama mercilessly in 2010 for including $500 billion in cuts to Medicare as part of health reform. And the health reform law (ACA) includes a large number of cost control measures for Medicare.

Daniels: It’s not fair and it’s not true for the President to attack Republicans in Congress as obstacles on these questions. They and they alone have passed bills to reduce borrowing, reform entitlements, and encourage new job creation, only to be shot down time and time again by the President and his Democratic Senate allies.

Well the House of Representatives has passed a couple of symbolic measures like the Ryan plan to dismantle (oops, I mean reform) Medicare that Republicans knew had no hope of passing the Senate. They have not done the hard work of actually trying to get legislation passed in both houses and sent to the president. And I believe that the ARRA was a bill to encourage new job creation. I think the Republicans can fairly be considered "obstacles" to legislation to create jobs. Has Daniels forgotten already the debate over extending the payroll tax cuts?

Daniels: No feature of the Obama Presidency has been sadder than its constant efforts to divide us, to curry favor with some Americans by castigating others.

Obama? You mean the Kenyan Muslim who won't release his birth certificate, who pals around with terrorists, the socialist who takes his cues from the capitals of Europe? The one with the Hitler mustache? I am not aware of any efforts on the part of Obama to "divide us" as he claims. An example please!

Daniels: Republicans will speak for those who believe in the dignity and capacity of the individual citizen; who believe that government is meant to serve the people rather than supervise them...

So that explains why Republicans want the government to forbid consenting adults to marry people of the same sex and why they want to subject recipients of unemployment compensation to drug tests.

... who trust Americans enough to tell them the plain truth about the fix we are in, and to lay before them a specific, credible program of change big enough to meet the emergency we are facing.

Plain truth and credible programs have been notably absent from Republicans in the last few years. But that's just one man's opinion.

More on debt

2012-01-25T19:42:00.007-05:00

Here's another, cleaner, version of the graph I posted earlier. From the end of World War II to the Carter years household and business debt rose as a fraction of GDP, but federal government debt was falling as a fraction of GDP (roughly balanced budgets together with economic growth), so total debt was stable at around 125 percent of GDP. A big change occurred in the Reagan years: the growth in household and business debt accelerated (largely a real estate boom, aka "morning in America"), but this time large budget deficits meant federal debt, and therefore total debt, rose dramatically. This stopped when the real estate boom turned sour (remember the Savings and Loan crisis and banking problems in the late 1980s?) and then the economy went into recession. Total debt stabilized during the Bush I years as rising federal budget deficits offset declining private sector debt. Then in the Clinton years the economy went into a sustained boom and private debt levels rose; this time, however, a more responsible fiscal policy meant falling government debt, and again total debt levels stabilized. The Bush II years were a repeat of the Reagan years (minus the strong growth). The housing boom raised household and business debt at the same time that the government again ran budget deficits, so total debt ballooned. This has been brought more or less to a halt in the Obama years: falling private sector debt has been offset by rising federal government debt, and therefore total debt has drifted down a bit.

The graph below focuses on the 1990-2011 period. The point I want to make is that a sensible fiscal policy involves federal debt moving to offset changes in private sector debt. The reason is that debt finances spending; rising debt and excessive spending puts upward pressure on inflation (that's bad), falling debt and insufficient spending causes recession (that's very bad). Following the financial crisis of 2008, the private sector began a prolonged and painful period of declining debt, which economists call "deleveraging." Consumers tried to increase savings, drawing down credit card balances, putting off the purchase of houses; businesses put off investment projects and laid off workers. The rise in government debt - mostly due to falling tax revenues but also because of new spending associated with ARRA and other legislation - offset the private sector deleveraging in part. This was exactly the right policy. How would the economy have reacted if the federal government was not running large budget deficits? Look at what's happening in Europe as those countries resort to fiscal austerity in order to reduce government debt: in Greece the unemployment rate has risen from 7.5 percent to over 18 percent since 2008; In Italy the unemployment rate began to fall in 2010, but is now rising again toward 9 percent; in the UK the unemployment rate has risen by half a percentage point to 8.3 percent since the government implemented an austerity program in fall 2010. Look for the unemployment rate in all of these countries to rise over the next year as the recession that began this fall intensifies.

Fact checking

2012-01-24T11:24:00.000-05:00

I watched a little bit of the debate last night and caught an exchange about the origins of the housing bubble and crash. I feel obliged to state the facts for the record, though I fear people's views are by now hardwired. The Community Reinvestment Act (the law requiring banks to make a certain number of loans to underserved communities) had nothing to do with the housing bubble. The Federal Reserve deserves some of the blame for not enforcing laws against predatory lending and for keeping interest rates low for too long in the 2000s. Fannie Mae and Freddie Mac were irresponsible and poorly managed agencies operating with an implicit government guarantee, but they only began loading up on subprime mortgages around 2005, well after the housing bubble was underway. The main cause of the housing bubble was excessive lending by private mortgage lenders, prodded on by private investment banks. The main reason the housing crash led to a financial market crash was excessive borrowing and speculation by private financial institutions which were insufficiently regulated by government. The single worst government decision: in 2004 the Securities and Exchange Commission agreed to lift leverage restrictions on the largest investment banks (Lehman Brothers and its ilk). Immediately thereafter these institutions increased their borrowing from around 12 times the value of their assets to 30-50 times the value of their assets. Runner up for worst regulatory decision: the decision in 1999 or so not to regulate credit default swaps.

A remarkable graph

2012-01-24T11:07:00.004-05:00

From Paul Krugman, total (public plus private) debt in the US as a fraction of GDP:

Why have American households, businesses and government loaded up on debt, thereby mortgaging our children's future (if we are to believe the debt Cassandras)? Two answers: Ronald Reagan, George W. Bush.

Mankiw on tax reform

2012-01-22T13:02:00.003-05:00

Yes, yes, yes, Greg Mankiw has it exactly right. For years I've been arguing that a winning issue for Democrats would be promotion of tax reform built on a progressive consumption tax. President Obama would be in a much better political position today if at the beginning of 2011, rather than allowing himself to get sucked into a debate on debt and deficit reduction, he had pushed a proposal like Mankiw describes. The key elements of the proposal:

1. Eliminate a wide range of deductions and tax credits, use the savings to effect some combination of higher revenues and lower marginal tax rates. Since many of these deductions and credits, such as the mortgage interest deduction, are very popular, this would have to be handled delicately. For example, apply the mortgage interest deduction only to mortgages of say $300,000 or less; then keep the dollar value of the limit in place and let inflation reduce the value of the deduction gradually over time.

2. Tax consumption rather than income. Do this not with a sales tax, but simply by allowing taxpayers to deduct savings from their taxable income. We do this with IRAs and other types of accounts as it is; just expand the deduction to all other types of savings. Some issues need to be hammered out: I'd allow tuition for higher education to be deducted, up to a point; there'd be a battle over whether the same goes for private elementary and secondary education. I think I'd treat the down payment on a house as saving as well.

3. Maintain the progressive structure of the (modified) income tax. I'd depart from Mankiw here and actually increase the progressivity by applying a 50 percent or higher marginal tax rate to people earning extremely high incomes, say $1 million per year or more. I'd also restore a hefty inheritance tax. It's important to note that under this tax system, all income is taxed at the same rate: capital gains, dividend income, interest income is all taxed at the same rate as wages. But if you take your capital gains and plow it into more savings or investment, it's not taxed.

4. Supplement the consumption tax with a tax on carbon emissions. While we're reforming the tax code, we might as well save the planet.

Interestingly, while Greg Mankiw is one of Mitt Romney's economic advisers, Romney would undoubtedly oppose most of this plan, in particular point number 4.

Summers on the future of education

2012-01-22T12:34:00.003-05:00

Larry Summers speculates about university education in the future. His first suggestion:

1. Education will be more about how to process and use information and less about imparting it. This is a consequence of both the proliferation of knowledge — and how much of it any student can truly absorb — and changes in technology. Before the printing press, scholars had to memorize “The Canterbury Tales” to have continuing access to them. This seems a bit ludicrous to us today. But in a world where the entire Library of Congress will soon be accessible on a mobile device with search procedures that are vastly better than any card catalog, factual mastery will become less and less important.

No, no, no. I stand by my old-fashioned, cantankerous belief that one of the goals of higher education should be that students learn stuff about stuff. In the last month or so I have been exploring two areas of economics that are relatively new to me: economic history and agent-based modeling. There is an overwhelming amount of information on each of these topics out there; where does a relative novice like me begin? One needs an intermediary to filter and organize all this material. My strategy is to find economists who teach courses on this stuff and read what they put on their syllabi and thereby acquire some foundational knowledge. For example, I've been reading Douglas North on the importance of institutions in economic history. With a knowledge of North in my pocket, I can now read something like Deirdre McCloskey's Bourgeois Dignity in which she offers a critique of North, and immediately understand the context of her argument. Sure, I could read McCloskey without any foundational knowledge (but how would I know that her work is worth reading?), then look up the books by North to which she makes reference, and backward-induct the knowledge I'm looking for. But my prior study of the subject is useful in telling me which of McCloskey's arguments are particularly important, and help me work my way through McCloskey more efficiently, giving me time to go on to the next controversial reading. Being able to access and use information is surely important, but you can't get on the information superhighway without some base of knowledge in the trunk.

But I agree with Summers' point #3:

3. New technologies will profoundly alter the way knowledge is conveyed. Electronic readers allow textbooks to be constantly revised, and to incorporate audio and visual effects. Think of a music text in which you can hear pieces of music as you read, or a history text in which you can see film clips about what you are reading. But there are more profound changes set in train. There was a time when professors had to prepare materials for their students. Then it became clear that it would be a better system if textbooks were written by just a few of the most able: faculty members would be freed up and materials would be improved, as competition drove up textbook quality.

Surely it's time for professors like me to get out of the business of delivering the same stale lectures that can be delivered more effectively by other, more attractive and articulate lecturers on Youtube. I'm in favor of outsourcing testing and grading as well (ultimately our hope is that students can impress people other than their professor with their mastery of economics or whatever they are studying; why not start now?). By outsourcing lecturing, testing and grading, I could spend more time helping students apply concepts in tutorial-like sections, having discussions that are informed by the course material, and helping students with research projects. The main impediment to this style of teaching, from my experience, is the expectations of the students. For several years now I've been telling my students that it is their responsibility to learn what is in the textbook, and my job is to help them apply that knowledge; therefore they need to do the assigned readings before coming to class and not expect me to spoon-feed them all the information they need for the exams. Shockingly, however, this message does not seem to get through - they really want and expect the spoon-feeding since this is what they've gotten throughout their years of formal education.

The meaning of Newt

2012-01-22T12:18:00.003-05:00

What is Newt Gingrich's appeal to Republican voters? I'm going to suggest two things:

1. Newt captures the bilious attitude of the Tea Party wing of the Republican party. As Josh Marshall argues, he is catharsis. He is saying things about Barack Obama that resonate with the angry masses. He promises to say those things to Obama's face in a series of "three hour Lincoln-Douglas debates". The TPers very much want a candidate who will vent his spleen directly to Obama on their behalf. Newt is the Howard Dean of 2004, on steroids with an extra helping of bile and lunacy.

2. For a long time now the Republican party has been the anti-intellectual party. (When did this start? At least as far back as Richard Nixon and Spiro Agnew, the latter famous for his commentary on the "nattering nabobs of negativism" and "effete Eastern snobs".) But maybe in their heart of hearts Republicans have been embarrassed by the dim bulbs they have repeatedly offered up to the general public. Perhaps they pine for someone who can stand up intellectually to Democrats such as Bill Clinton and Barack Obama. Now they have someone who presents himself as a true intellectual, who sounds so smart (never mind that what he actually says is often so mind-numbingly stupid)! Newt Gingrich passing for an intellectual is the moral equivalent of John Kerry passing himself off as a duck hunter or Michael Dukakis as a tank commander. The joke was immediately apparent in the case of those Democratic candidates; it may not dawn on Republican voters until Newt actually goes head to head with Obama in the debates.

Department of why bother: the Republican candidates on health care

2012-01-20T10:59:00.005-05:00

A brief analysis of the candidates' positions on health care from last night's Republican debate:

All of the Republicans believe that the individual mandate in "Obamacare" is a fundamental violation of Americans' freedom. I get that, but I've never heard any of the candidates make similar criticism of say the requirement that all drivers have auto insurance. Romney, for one, approves of an individual mandate for health insurance if it is imposed by the state rather than the federal government. Paul would give wide latitude to states to do just about anything currently done by the federal government. If the objection is just that the mandate emanates from the federal government rather than state governments, then the charge that it is a violation of personal freedom rings hollow. The issue is really one of the division of responsibilities between the federal and state governments, which doesn't have quite the same zing. The Tea Party Republicans may get a charge out of the 10th Amendment, but I don't think the general American voting public has the same passion for that issue.

Other than that, I don't understand the Republicans' position on health care. If the mandate was all they objected to they could simply propose doing away with that and letting the rest of "Obamacare" stand, but they want to get rid of the whole thing. While they all want to repeal Obamacare, they get rather inarticulate when trying to explain exactly what features of the law they object to. Romney criticizes Obamacare for making $500 billion in cuts to Medicare, but he also supports the Ryan Medicare plan which would make much bigger cuts. (Plus, you would think Republicans would hate Medicare even more than they hate Obamacare since it truly is a government-run insurance program, so why object to cutting spending on it?) Romney also objects to the taxes that are imposed to finance the law, but defends the law he enacted in Massachusetts which is also funded by federal taxes (nice trick, taking credit for the law's benefits but getting someone else to take the blame for the taxes that finance those benefits). Romney proposes replacing Obamacare with a law that would prevent insurance companies from denying coverage to people with pre-existing conditions and allowing people to "own" their own health insurance by buying individual policies rather than getting insurance through their employers. Um, that's what Obamacare does. I know: let's replace Obamacare with an identical law that's a vast improvement because it's signed by a president with a different name!

Santorum claims that "Romneycare" in Massachusetts is an "abject failure." But a 2011 study by the Blue Cross Foundation suggests otherwise:

 401,000 more Massachusetts residents have health insurance coverage than did before reform.

 Massachusetts has the highest rate of insurance in the country with 98.1 percent of residents insured.

 There has been no evidence of subsidized coverage “crowding out” employer sponsored insurance, and employer offer rates have grown from 70 percent to 76 percent since implementation of reform.

 Public support for Massachusetts health reform has remained strong with two out of three adults supporting reform.

 Most employers believe health reform has been good for Massachusetts and 88 percent of Massachusetts physicians believe reform improved, or did not affect, care or quality of care.

 The cost of health care and the annual rate of increase in health care spending remains a challenge. With no intervention, per capita health care spending in Massachusetts is projected to nearly double by 2020.

Costs continue to rise, but there were no major cost control components in the plan other than creating competive markets for individual insurance policies. Since Republican proposals for health reform begin and end with letting markets control costs, this is more evidence against Republican plans than Obamacare. Santorum's plan for health insurance reform is centered on tax deductions for contributions to health savings accounts and a refundable tax credit for individuals to buy health insurance. Health savings accounts would not benefit most of the uninsured, since most people who lack health insurance don't earn enough to pay federal taxes. A refundable tax credit would do the uninsured a lot of good. It would subsidize the purchase of private health insurance just like the subsidies under Obamacare. So there's another bold proposal: everywhere the ACA says "subsidies for purchase of health insurance," scratch that out and replace it with "refundable tax credit for purchase of health insurance." Voila, you've got yourself a bold conservative plan for health reform instead of that socialistic Obama law!

Gingrich has nothing to say about what he would replace Obamacare with. His argument boils down to: if people had jobs they wouldn't need Obamacare (never mind that lack of health insurance is concentrated among employed people), and though he used to support an individual mandate, he now realizes he was wrong to do so.

Paul? Well, Paul at least is consistent. He wants to get rid of Obamacare, Medicare, and Medicaid. He believes that when he started practicing medicine in 1960, "there was nobody out in the street suffering with no medical care." I believe he is wrong on that one.

Republican presidential candidates have been incoherent on health reform since at least George H.W. Bush ran for president. They put forward half-hearted, ineffective ideas like health savings accounts mostly so they can say they have a plan for health reform. When in control of Congress as in the 1990s or in control of the White House and Congress as in the 2000s, they fail to put forward any program to reform health care. This is because there is no constituency in the Republican party for health reform except insofar as "health reform" means "reducing federal government spending on health care." Because there's no constituency for health reform, candidates and Republican-leaning think tanks do very little of the leg-work needed to come up with a meaningful reform plan. So the Republicans' incoherence on health reform is a structural problem, not a failure specific to the 2012 crop of presidential candidates. But this crop is so exceptionally weak on this issue and many others that the incoherence of the party's position on health reform is brought into particularly sharp relief.

Do the Republican candidates really believe the crap they say about Barack Obama?

2012-01-20T10:35:00.005-05:00

Here's what the candidates had to say about Barack Obama in last night's debate:

Romney: "Barack Obama is just way over his head and he's taking our country down a path that is very dangerous. He's making us more and more like a European social welfare state. He's making us an entitlement society. He's taking away the rights of our citizens. He believes government should run this country."

Gingrich: "This is, I believe, the most dangerous president of our lifetime. And if he is re-elected after the disaster he has been, the level of radicalism of his second term will be truly frightening."

Romney again: "This president's changing that. He's changing the very nature of America. He's turning us not from a merit society, an opportunity society, where people are free to choose their own course, but instead he's making us an entitlement society, where people think they're entitled to what other people have, where government takes from some and gives to others."

Santorum: "I believe in capitalism for everybody. Not necessarily high finance, but capitalism that works for the working men and women of this country who are out there paddling alone in America right now, who have an unemployment rate 2.5 times those who are college educated and feel that no party cares about them. Because you have the Democratic Party, and Barack Obama, and all he wants to do is make them more dependent, give them more food stamps, give them more Medicaid."

After seeing the Pandora's box he had opened by choosing Sarah Palin as his running mate, John McCain felt compelled to try to refute the wild criticism of Obama by some of his supporters. When a woman at a McCain rally said she was afraid of Obama because he "is an Arab," McCain rebuked her: "No ma'am, [Obama's] a decent family man, citizen, that I just happen to have disagreements with on fundamental issues." Will any of the Republican candidates this time around be able to bring themselves to make that kind of statement? Or have they gone so far down the road of vilifying the president that they won't be able to walk it back?

Rats and Republicans

2012-01-19T14:54:00.002-05:00

Bartal, Decety and Mason, in Science, December 9 2011:

Whereas human pro-social behavior is often driven by empathic concern for another, it is unclear whether nonprimate mammals experience a similar motivational state. To test for empathically motivated pro-social behavior in rodents, we placed a free rat in an arena with a cagemate trapped in a restrainer. After several sessions, the free rat learned to intentionally and quickly open the restrainer and free the cagemate. Rats did not open empty or object-containing restrainers. They freed cagemates even when social contact was prevented. When liberating a cagemate was pitted against chocolate contained within a second restrainer,rats opened both restrainers and typically shared the chocolate. Thus, rats behave pro-socially in response to a conspecific’s distress, providing strong evidence for biological roots of empathically motivated helping behavior.

The question is, if the free rat knew of the caged rat only by reading about him in the newspaper, would he still open the cage?

What to make of Haley Barbour

2012-01-18T10:07:00.005-05:00

If a Democratic governor had pardoned 200 criminals, some of whom were serving life sentences for murder, there would have been widespread political repercussions. It wouldn't have been just the governor himself who came under attack, all Democrats would have been challenged to defend themselves against the charge of being soft on crime. Crime and punishment would have become the top political issue of the day. The political center of gravity, for a time at least, would have shifted decisively right.

But that didn't happen when Haley Barbour (R-Mississippi) committed the act. It's different for Republicans. A comparable act by a Democratic governor would have fit comfortably into the "Democrats are soft on crime" meme, which would have given the story legs. The same act strikes a discordant note when committed by a Republican. "Wait a minute, Republicans are supposed to be heartless tough-on-crime types; this does not compute!" Lacking a confirming context, the story dies.

So what gives with Haley Barbour's odd decision? How do we make sense of his action? Let me offer a hypothesis. In three words: stunted moral development.

Conservatives are great at imposing a universal moral code on people in the abstract. Murderers should be executed - any qualification to this statement smacks of "moral relativism," which is abhorrent and a marker of the decay of civilization. Poor people need to be self-sufficient and not be made dependent on government handouts, no exceptions. Don't engage in homosexual sex, don't even think about claiming that your sexual orientation is on the same moral plane as mine. Abortion is just flat out wrong, whether committed by a 16 year old who was raped by her stepfather or by a scientist extracting stem cells from a fertilized embryo. There is such a thing as right and wrong, black and white. Our society needs a good dose of moral clarity.

Ahh, but suppose someone close to you has violated one of these universal moral strictures. Suppose you or a close friend has committed adultery - well then, all sorts of extenuating circumstances come into play - the offender is a Christian, he has asked for forgiveness, he's the victim of a political vendetta,... Or suppose a conservative encounters a small child with Parkinson's disease. His heartstrings are tugged, and even such a prolifer as Orrin Hatch can find himself making exceptions to the moral principle that life begins at conception. How many conservatives have backpedaled on their anti-homosexual positions when it turns out that a close family member is gay - I'm talking about you, Dick Cheney. I know of a president who came into office deeply suspicious of Russia, but when he met its leader in the flesh he was able to look him in the eye and "get a sense of his soul," and found that he was Good.

Conservatives can be very compassionate people. I know many a conservative who has gone out of his/her way to help a family member, a close friend, or even a casual acquaintance in a time of need. But somehow this compassion, or more to the point this ability to empathize, disappears when it comes to people in the abstract. For people they know personally, empathy and generosity know no bounds; for people in the abstract it's rigid rules of right and wrong and nothing but "tough love."

I call this stunted moral development. Somewhere in the course of history humans learned to empathize with family members, then with members of our tribe, then with people in our geographical region, our nation, the world. Seeing all humans as brothers and sisters and treating them accordingly, I would call that the epitome of moral development. Liberals are pretty good at that (maybe too good; a conservative could with some justification condemn some liberals for being all about humanity in the abstract but falling short of true Christian charity in concrete cases); but conservatives seem to have failed to evolve somewhere along the way.

And that's why Haley Barbour can pardon some pretty dangerous criminals. He got to know them as individuals, perhaps he was able to get a measure of their souls. And suddenly he is able to suspend all the hard-and-fast rules that he is accustomed to imposing on criminals in the abstract. In this case, the people of Mississippi would have been better served if he had stuck to his abstract principles and checked his humanity at the door - at least until he developed the moral maturity to understand the appropriate balance between the two.

Three thoughts about Martin Luther King Jr.

2012-01-16T19:26:00.004-05:00

1. Martin Luther King Jr. was the most important of probably a couple of dozen leaders of the US civil rights movement. I love Martin Luther King Jr., but it's important to remember that he was no Jesus figure, taking on the world by himself. He was the public face of a broad movement that got its energy from countless people who fought back against segregation in little ways and big. As he wrote in "Letter from Birmingham Jail":

One day the South will recognize its real heroes. They will be the James Merediths, courageously and with a majestic sense of purpose facing jeering and hostile mobs and the agonizing loneliness that characterizes the life of the pioneer. They will be old, oppressed, battered Negro women, symbolized in a seventy-two-year-old woman of Montgomery, Alabama, who rose up with a sense of dignity and with her people decided not to ride the segregated buses, and responded to one who inquired about her tiredness with ungrammatical profundity, "My feets is tired, but my soul is rested." They will be young high school and college students, young ministers of the gospel and a host of their elders courageously and nonviolently sitting in at lunch counters and willingly going to jail for conscience's sake. One day the South will know that when these disinherited children of God sat down at lunch counters they were in reality standing up for the best in the American dream and the most sacred values in our Judeo-Christian heritage.

Amen, brother.

2. MLK was an inspirational figure because of his soaring rhetoric and his use of civil disobedience. But behind that inspirational figure was a cold, calculating politician. He didn't just wake up one morning and decide it was time to march in Birmingham or Chicago. He plotted. If we march in Birmingham, how will the police respond? What are our demands? Can we win? We must win to maintain the momentum of our movement. What should be our position on Vietnam? On the War on Poverty? How do I negotiate my relationship with LBJ, allying with him on civil rights legislation but breaking with him on the war? How do I keep the nonviolent movement together in the face of pressure from Stokely Carmichael and his ilk?

3. In the end, he failed. Yes, achieved monumental civil rights legislation that changed the character of our country forever. Yes, helped tear down the wall of segregation and prejudice. But the civil rights movement broke apart with various strands of black power challenging his more mainstream movement. He couldn't stop the riots in northern cities or the white backlash against civil rights and anti-poverty programs. He couldn't stop the war. At his death the country was more bitterly divided than when the civil rights movement began. The power of love was no match for the forces of fear and hatred. Once again it was countless people who looked up to MLK and were inspired by him who in the years after his death began to heal wounds and advance the cause of justice.

Nobody's a bigger fan of Martin Luther King Jr. than I am. But I wonder if we would be better served by a holiday celebrating all the ordinary people who took the leap, challenging segregation, standing for principle, allowing their hearts to be changed, to help this country live up to its ideals.

Romney builds insurmountable lead in Republican nomination race

2012-01-11T18:32:00.002-05:00

Mitt Romney's victory in the New Hampshire primary gave him a commanding lead in the race for delegates to the Republican national convention. Romney now has 20 delegates to second place candidate Rick Santorum's 12, Ron Paul's 3 and John Huntsman's 2. With just 2,249 delegates in total and a mere 1,144 needed to win the nomination, it is becoming nearly mathematically impossible for Romney's rivals to overtake him. Santorum, for example, would need to beat Romney 1,132 to 1,068 from here on out (which would require him to garner a staggering 51.2 percent of the remaining delegates). Needless to say, Paul, Huntsman and the other candidates face even more overwhelming odds.

Hence the media's wall-to-wall coverage of the New Hampshire and Iowa contests.

Stupid things Mitt Romney says

2012-01-11T10:31:00.003-05:00

Mitt Romney has said a number of things lately that are almost Kerryesque in their tin earness. But what bothers me more about Romney is his repeated gratuitous and unfounded slaps at Obama - the claim that Obama runs around "apologizing" for America, the claim that he wants to "replace our merit-based society with an entitlement society," and so on. The latest example is from last night:

“In the last few days, we have seen some desperate Republicans join forces with him [Obama],” Mr. Romney said. “This is such a mistake for our party and for our nation. This country already has a leader who divides us with the bitter politics of envy."

"Bitter politics of envy?" What has Obama ever done or said that would justify this characterization? If anything it is Republicans who have mastered this particular tactic, not only in their obstructionism since 2009 but ever since Richard Nixon's pitting of the "silent majority" against the nation's "elites." What better example of the "bitter politics of envy" do we have in recent years than the attack on teachers' and other public employees' unions? The common Republican attack on public employees is that while ordinary Americans have faced unemployment and cuts in wages and benefits, these privileged workers continue to enjoy good health care, pensions, and job security - they must be knocked down a peg! Most of the Republican attitude towards unions could be summarized in a bumper sticker: "What, you think you're better than me?"

"This president doesn't understand how the economy works"

2012-01-09T15:51:00.004-05:00

That's what Mitt Romney says about US economic performance in the Obama Administration, adding "President Obama's policies have slowed the recovery and created misery for 24 million Americans who are unemployed, or stuck in part-time jobs when what they really want is full-time work." Romney proposes a new direction:

Mitt Romney will rebuild the foundations of the American economy on the principles of free enterprise, hard work, and innovation. His plan seeks to reduce taxes, spending, regulation, and government programs. It seeks to increase trade, energy production, human capital, and labor flexibility. It relinquishes power to the states instead of claiming to have the solution to every problem.

In fact, Romney's economic plan - largely the product of Bush Administration economic advisor R. Glenn Hubbard - basically calls for a return to the economic policies of the Bush Administration: make the Bush tax cuts permanent, lighten up on regulation of businesses, increase production of oil, coal and natural gas, reform government programs, repeal signature achievements of the Obama Administration such as health reform,... Perhaps Romney is more serious than Bush was about reducing government spending, but that would be the only real difference. So it seems relevant to compare economic performance under the Obama and Bush Administrations - who understood the economy better, whose policies produced the better performance on jobs?

A couple of pictures tell the story. The first is payroll employment in the first term of the Obama and Bush presidencies (I've normalized employment levels to 100 in the first month of each term to facilitate comparison).

The downturn in employment was much more dramatic in the first year of the Obama administration, but the recovery in employment since then has been considerably stronger. Suppose we excuse both presidents for the first six months of economic performance on the theory that their policies only began to affect the economy in July of their first year in office (of course this is an arbitrary cutoff) and measure employment gains since then. Under Bush, payroll employment fell by 1.65 million from July 2001 to December 2003. Under Obama, payroll employment rose by 1.71 million. Score one for Obama.

But Obama's a big government liberal, hostile to and uncomprehending of the private sector's role in job creation, right? Well, here's the same graph but considering only private sector employment.

Here Obama's performance is even more impressive relative to Bush's. From July 2001 to December 2003 private sector employment fell by 2.01 million. In the comparable period of the Obama administration private sector employment rose by 2.28 million. Notice also that Bush's total employment numbers are better than private sector - growth in government employment partially compensated for the poor private sector performance. Under Obama it's the opposite: overall employment growth would look considerably better had it not been for massive government employment cuts, mostly at the state and local level.

Finally, about those marginalized workers stuck in part-time jobs that Romney is so concerned about. Here's the U6 unemployment rate, the Bureau of Labor Statistics' broadest measure of unemployment. I didn't normalize this one.

Obama inherited a much higher unemployment rate than did Bush. From January 2009 to July 2009 the U6 unemployment rate rose from 14.2 percent to 16.5; in the comparable period of the Bush presidency it rose from 7.3 to 7.8. Then from U6 unemployment rises to a peak of 17.2 percent in October 2009 before falling to 15.2 percent in December 2011: a net 1.3 percent decline from its level in July 2009. In the Bush Administration U6 unemployment continued to rise throughout 2009 and 2010, peaking at 10.4 percent in September 2011. By December 2011 it was still at 9.8 percent, a full two percentage points higher than it had been in July 2001.

So I wish someone would ask Mr. Romney: why does he believe that his policies would produce better economic performance than the Obama Administration's policies have, given the performance of the labor market during the Bush Administration under a policy regime substantially the same as what Mr. Romney is advocating?

Does Ron Paul meet regularly with white supremacists?

2011-12-29T17:08:00.004-05:00

The media and blogosphere are abuzz with tales of Ron Paul's connections to white nationalist groups: a recent New York Times story appears to be a rewrite of an article that appeared 3 years ago in Reason. Brad DeLong and Jacob Levy have chimed in as well.

I took a look at the website for Stormfront, a self-described "community of white nationalists," back when Rand Paul was running for the Senate from Kentucky, and submerged myself in it for a few moments again today. It's not for the faint of heart - afterwards I felt like I needed a hot shower and a shot of whiskey. You want a link? I'm not dignifying the site with a link, but if you must, well, there's Google after all.

There is a debate on Stormfront's forum ("Why is Ron Paul such a favorite here?") as to whether Ron Paul is really one of them or whether he is sincere in his public (though hardly passionate) disavowals of his white supremacist supporters. But the showstopper is a 2007 post from one Bill White, who calls himself the Commander of the American National Socialist Workers Party (ok, here's the link; yuck).

Comrades:

I have kept quiet about the Ron Paul campaign for a while, because I didn't see any need to say anything that would cause any trouble. However, reading the latest release from his campaign spokesman, I am compelled to tell the truth about Ron Paul's extensive involvement in white nationalism.

Both Congressman Paul and his aides regularly meet with members of the Stormfront set, American Renaissance, the Institute for Historic Review, and others at the Tara Thai restaurant in Arlington, Virginia, usually on Wednesdays. This is part of a dinner that was originally organized by Pat Buchanan, Sam Francis and Joe Sobran, and has since been mostly taken over by the Council of Conservative Citizens.

I have attended these dinners, seen Paul and his aides there, and been invited to his offices in Washington to discuss policy.

For his spokesman to call white racialism a "small ideology" and claim white activists are "wasting their money" trying to influence Paul is ridiculous. Paul is a white nationalist of the Stormfront type who has always kept his racial views and his views about world Judaism quiet because of his political position.

I don't know that it is necessarily good for Paul to "expose" this. However, he really is someone with extensive ties to white nationalism and for him to deny that in the belief he will be more respectable by denying it is outrageous -- and I hate seeing people in the press who denounce racialism merely because they think it is not fashionable.

Bill White, Commander
American National Socialist Workers Party

Now obviously a statement like this is not to be taken at face value. The responses ranged from "Bill White is a liar" to "why is Bill White spilling the beans on Ron Paul's white nationalist connections?" But if true this raises some serious questions about who Ron Paul really is.

Gettysburg gets some props

2011-12-06T16:57:00.002-05:00

Ta-Nehisi Coates:

In August, I returned to Gettysburg. My visits to battlefields are always unsettling. Repeatedly, I have dragged my family along, and upon arrival I generally wish that I hadn’t. Nowhere, as a black person, do I feel myself more of a problem than at these places, premised, to varying degrees, on talking around me. But of all the Civil War battlefields I’ve visited, Gettysburg now seems the most honest and forward-looking. The film in the visitor center begins with slavery, putting it at the center of the conflict. And in recent years, the National Park Service has made an effort to recognize an understated historical element of the town—its community of free blacks.

The Confederate army, during its march into Pennsylvania, routinely kidnapped blacks and sold them south. By the time Lee’s legions arrived in Gettysburg, virtually all of the town’s free blacks had hidden or fled. On the morning of July 3, General George Pickett’s division prepared for its legendary charge. Nearby, where the Union forces were gathered, lived Abraham Brien, a free black farmer who rented out a house on his property to Mag Palmer and her family. One evening before the war, two slave-catchers had fallen upon Palmer as she made her way home. (After the passage of the Fugitive Slave Act, slave-catchers patrolled the North, making little distinction between freeborn blacks and runaways.) They bound her hands, but with help from a passerby, she fought them off, biting off a thumb of one of the hunters.

Faulkner famously wrote of Pickett’s Charge:

For every Southern boy fourteen years old, not once but whenever he wants it, there is the instant when it’s still not yet two o’clock on that July afternoon in 1863 … and it’s all in the balance, it hasn’t happened yet, it hasn’t even begun yet … That moment doesn’t need even a fourteen-year-old boy to think This time.

These “Southern boys,” like Catton’s “people,” are all white. But I, standing on Brien’s property, standing where Mag Palmer lived, saw Pickett’s soldiers charging through history, in wild pursuit of their strange birthright—the license to beat and shackle women under the cover of night. That is all of what was “in the balance,” the nostalgic moment’s corrupt and unspeakable core.

Very cool

2011-11-30T15:56:00.002-05:00

Interactive population map from Forbes. See net migration for every county in the US. I think if you used gross in- and out-migration figures you could come up with a nice "inbredness" index.

Good employment news

2011-11-30T11:27:00.003-05:00

The ADP estimates that private sector employment rose 206,000 in November and revised up its estimates for October. I think government job losses are starting to taper off, so it's possible the BLS estimate on Friday could be in the 200,000 range as well - that would be great news. Coupled with recent data showing that initial claims for unemployment compensation have fallen below 400,000 and seem to be on a downward trend, and strong estimates of retail sales, and we could have the makings of a modest strengthening of the economy here. Only two things could derail us: Congressional Republicans refuse to extend the payroll tax cuts that were passed last year, and Europe implodes. And I wouldn't bet on either of those two things not happening.

Must read

2011-11-30T11:25:00.001-05:00

Christina Romer reviews the evidence for the effectiveness of fiscal policy. Very persuasive and accessible to the educated non-economist.

The Supercommittee's failure is probably the best we could have expected

2011-11-21T11:35:00.005-05:00

The first thing to understand about the US budget deficit problem is this figure:

If the Supercommittee disbands without proposing legislation to reduce the budget deficit, and if Congress follows the Supercommittee out the door, turns off the lights in the Capitol building and shuts down the bill-passing machine (which hasn't been working all that well anyway) for ten years, the budget deficit shrinks to a very manageable 1.6% of GDP by 2014 and 1.2% of GDP by 2021 (by coincidence this is precisely what the deficit was in 2007). Why the happy outlook? Because the Bush tax cuts expire in 2013. We can see that here:

The Republicans on the Supercommittee made headlines by proposing modest revenue increases in exchange for large cuts in entitlements. Curious thing about those revenue increases however: they involved closing tax loopholes in exchange for lowering tax rates for high income people even below those established by the Bush tax cuts. It appears that these proposals increase tax revenues only if the baseline is a continuation of current tax rates; if the baseline against which the Republican proposals were compared was current law, under which the Bush tax cuts expire in 2013, the proposals surely amount to trillions of dollars of tax cuts. In other words, we get more revenue by rejecting the Republican proposals than we would by accepting them.

It's clear that Republicans will never accept a deal that doesn't at least extend the Bush tax cuts if not lower the rates further; so what's in it for the Democrats or for anyone concerned with reducing the long-term budget deficit to accept any kind of Supercommittee deal? Sure, failure to produce a deal means large cuts to defense and Medicare as specified in last August's Budget Control Act. Funny thing about legislation however - it can always be repealed or revised. If Congress doesn't want to impose big cuts on defense and Medicare it need only pass a budget for 2013 that doesn't include those cuts. Better yet, let the defense cuts go through as scheduled. The Congressional Budget Office says the cuts would amount to $55 billion per year; I refuse to believe that there is not $55 billion that could be easily cut from defense without reducing our national security - let's start with the $4-$6 billion plutonium facility the Administration wants to build at Los Alamos.

The key to reducing the deficit over the long term is simple. Get the economy growing again; let the Bush tax cuts expire as scheduled; implement cost-saving policies for Medicare and Medicaid as specified in the Affordable Care Act of 2010. A Supercommittee deal or any deal with the Republicans for that matter will worsen the deficit situation rather than improve it.

Shorter Ted Deutch

2011-11-19T13:51:00.002-05:00

Proposed amendment to the Constitution:

Corporations aren't people fer cryin' out loud!

Who's more popular than Aaron Rodgers?

2011-11-18T11:15:00.001-05:00

Public Policy Polling wanted to find out. The answer: "Me", Abraham Lincoln, and Jesus Christ. In that order.

Boy I hope Greg Mankiw is being facetious

2011-11-15T18:57:00.003-05:00

He points out that the share of income going to the top 1 percent has risen dramatically in the UK since about 1979, and that this is true in other countries as well:

This figure, via Paul Krugman, shows the income share of the top 1 percent in the United Kingdom. The broad pattern is very similar to what U.S. data shows. The figure suggests that the explanation of growing inequality over the past several decades cannot be U.S.-specific but must have broader applicability.

You can generate more plots like this here. You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but much less so in France, Germany, Japan, and Sweden. Might the rising share of the top 1 percent be related to the increasing use of English as a global language?

Really? The English language? I think the nature of Anglo-American economic institutions may have a tad more to do with it.

Putting the US recovery in context

2011-11-14T14:37:00.002-05:00

Say what you will about the Obama Administration's economic policy failures, the fact remains that among the G-7 countries there are three - Germany, Canada, and the US - that have had unspectacular but real recoveries, and four - UK, France, Japan, and Italy - that have not. Germany's recovery has been especially strong in large part because it is the manufacturing center of Europe. It would be interesting to compare the recovery in the US manufacturing regions (say Great Lakes states) with Germany; I'd bet these areas have seen comparable growth. Canada's growth rate faltered in the last quarter while the US's accelerated. So the US is really something of a success story compared to the world's other large economies.

The financial crisis made simple

2011-11-07T13:32:00.001-05:00

Maybe the problem with monetary policy is Boehner, not Bernanke

2011-11-04T09:15:00.008-04:00

The Fed is coming under a lot of criticism from commentators and economists of a Keynesian bent (myself included) for its reluctance to take dramatic action to put the economy on the road to recovery. The economy is stuck in neutral with unemployment at 9 percent; has been pretty much so for a year and a half. The Fed has many tricks it could pull from its sleeve, most promising among them large scale purchases of mortgage backed securities to encourage refinancing under the new HARP rules or announcing a commitment to target nominal GDP or inflation backed up by large scale asset purchases. Ezra Klein says that Obama's decision to reappoint Ben Bernanke may have been a serious mistake; Paul Krugman says he used to think that Bernanke was a dove saddled with more hawkish colleagues on the FOMC, but now he thinks Bernanke just doesn't get it. Tim Duy says the Fed's inaction is "inexplicable." Brad DeLong and Mark Thoma are similarly disappointed.

But perhaps the problem is not Ben Bernanke but the political environment in which he is operating. My "political constraints hypothesis" (here's my paper applying this theory to the US Great Inflation of the 1970s) says that the Fed has two objectives:

1. Maintain its institutional independence by defending itself against political attacks.

2. Pursue the objectives of maximum employment and price stability as mandated by Congress.

In that order. Many at the Fed would deny that #1 is a significant constraint on pursuit of #2. The Fed is basically a politically-neutral, technocratic institution that pursues policies that it judges are best for the economy. I think the record of the 1970s contradicts this claim. Some at the Fed might argue that the only way to pursue #2 in the long run is to periodically make compromises to satisfy #1. I believe that is a reasonable interpretation of Fed behavior that is consistent with the record from the 1970s.

The implication of the political constraints hypothesis is that the Fed's room to maneuver on monetary policy is constrained by political forces. The stance of monetary policy measured by the federal funds rate in normal times or by changes in the size of the balance sheet in times like today moves much like market exchange rates under an exchange rate target zone regime. When well within the politically-determined bounds, monetary policy freely pursues the Fed's economic objectives. As the Fed approaches a political bound (e.g. Congress' opposition to high interest rates in the 1970s) it gets more cautious, and when the political bound is reached it abandons its economic goals. This seems to be what happened when the Fed abandoned attempts at disinflation in 1970, 1973 and 1974. The political bounds can move, requiring a Fed that was previously operating within the bounds to adjust policy as in 1970 and 1977, or permitting actions that the Fed is inclined to take but that were previously out of bounds as in 1979.

The political pressures on the Fed today are obvious. Ron Paul may pose little threat as chair of the subcommittee that oversees the Fed as long as Democrats control the White House and Senate. But there is a good chance that Republicans will sweep the 2012 elections, in which case Ron Paul becomes a serious threat to the Fed's independence indeed. One of the Republican presidential candidates has warned Ben Bernanke that further efforts to stimulate the economy would be treasonous. All have said that they disapprove of the Fed's recent policy efforts. The top Republican leaders in the Senate and House, including Mitch McConnell and John Boehner, have written an open letter to Bernanke and the other members of the Board of Governors "expressing reservations" about another round of quantitative easing. The Fed has reason to fear that its autonomy (and in the case of Bernanke, his job) would be endangered if it pursued aggressive measures today and then found itself answering to President Romney, Speaker Boehner, and Majority Leader McConnell in January 2013.

What predictions would the political constraints hypothesis make about monetary policy in the current environment? We would expect policy to become less aggressive following Republican victories in the 2010 midterms. And in fact the Fed allowed the second round of quantitative easing to expire as scheduled in spring 2011 and allowed its balance sheet to shrink despite obvious signs of a weakening economy in late spring and summer. We would expect to see the Fed deviating from policies that it would normally undertake on economic grounds. And here we have the Fed "inexplicably" choosing not to take a more aggressive stance despite reducing its growth forecasts.

Of course the Fed may in the current instance be guided by purely economic rather than political motives. Perhaps it is convinced that further quantitative easing would have little effect, or that increasing the size of its balance sheet further will make it difficult to unwind its policies when the economy begins to recover, or that buying more long-term and risky assets exposes the Treasury to too much risk. Certainly this is the type of argument that the Fed makes in public, but then you would not expect members of an institution that values its reputation for political independence to publicly acknowledge that they are responding to political pressures. It's even possible that a member of the FOMC who is disposed to change his or her policy recommendations on political grounds will be more easily convinced by the economic arguments consistent with this change, so that the members themselves may not be fully aware of the extent to which they are being influenced by political pressure.

So my hypothesis about the Fed's current behavior may be impossible to verify. Five years from now when the FOMC transcripts are released we may get a better idea, but even then the transcripts may provide evidence for both explanations of Fed behavior, as they do for the 1970s. But based on the logic of the political constraints hypothesis, I will make the following prediction. The Fed will not initiate another round of quantitative easing or take other aggressive action unless:

- there is a dramatic weakening of the economy that the political community as a whole will recognize as justifying further action, or

- the political fortunes of the Republican party weaken dramatically, assuring continued Democratic control of the Senate and White House.

I hope I'm wrong.

The Fed considers targeting nominal GDP

2011-11-02T15:46:00.003-04:00

Back in December, 1982:

MR. AXILROD. I would say, President Corrigan, that we did hold out the hope, but mostly we didn't really want to be in a position of prejudging it at this particular time. I guess we mostly felt that something was needed between the Committee and GNP. If we don't have some aggregate--I don't see much else to choose from, the others may speak for themselves--between the Committee and GNP, then in that case you might just as well start controlling interest rates depending on your best assessment of what is going to happen to GNP. That is what we were grappling with.

...

MR. WALLICH. I would like to note that if you want a survey of targeting possibilities, some are not in the paper. While I wouldn't recommend these, I think there are serious contenders. One, on the basis of the research done here at the Board, is that the use of intermediate targets is inefficient and that better and more precise results can be obtained by targeting on the real sector directly. On the other hand, there are many arguments against that, including the political one, but it is something that one ought to bear in mind as one makes these choices. Also, I note that there is nothing in the paper about exchange rates. Again, while I don't think exchange rates are a proper target for this economy, they are targets that are used in other countries, in the EMS countries for instance. That again is something to think about. I would think certainly that exchange rates might play a greater role in our targeting in the future than they have. We have a little sentence [on them] in the directive but not much attention is paid to them. Finally, there is a reference to nominal GNP. You may recall that Martin Feldstein came here a few weeks ago and gave us a talk recommending that we target on that. I think that's dangerous advice. It means playing God, and the central bank should be a humble technician administering the aggregates and not trying to say what nominal GNP is to be.

...

MR. MORRIS. I think we need a proxy--an independent intermediate target-- for nominal GNP, or the closest thing we can come to as a proxy for nominal GNP, because that's what the name of the game is supposed to be. If we have to target something that is not predictably related to GNP, which M1 has not been in the past two years, one of two things can happen. One is that we can do as we did in 1981 and say the M1 shift adjusted, which was our target, is coming in too low and we are just going to let it come in low--we're not going to use it as a target de facto. I think that was the right decision. If we had tried to hit our targets for M1 in 1981, we obviously would have put too much money into the system. I think the targets have misled us this year. That is, up until October when we finally caught up with it, it seems to me that the monetary aggregates misled this Committee into following a much more restrictive policy than we intended. And that is reflected in a nominal GNP growth this year, which we're now estimating at 3.6 percent, that I don't think any of us a year ago would have [favored] as a target for nominal GNP. It seems to me that the best proxy for nominal GNP in this world of enormous change is the rate of growth of debt. Now, that may not be a perfect proxy, either. But we certainly don't want to go back to interest rate targeting. Politically, I don't think we could adopt a nominal GNP targeting approach even though theoretically that is what we ought to be doing. I don't think we can do it. We need a proxy for nominal GNP.

CHAIRMAN VOLCKER. What is that political objection?

MR. MORRIS. Well, let's say the President comes out in January and says we are going to have 12 percent nominal GNP growth, and you go up before the congressional committee in your Humphrey-Hawkins testimony the next month and say we're going to finance a 9 percent nominal GNP growth. It seems to me it is not well suited to the needs of the central bank to be that far out on a limb.

CHAIRMAN VOLCKER. How far do you think we can go in that regard by saying we're going to project a 9 percent credit growth or 9 percent M2 growth or something that is inconsistent with the 12 percent [nominal GNP growth]?

MR. MORRIS. I would merely submit that we've been getting away with this on the money supply for a number of years. I'm quite amazed that we have. But I think it's very clear that the intermediate target should not be politically sensitive. And the wonderful thing about the rate of growth in the money supply, for all of its problems, is that it was never a politically sensitive item such as the unemployment rate, or interest rates, and so on. Nominal GNP, if we were to use that as a target, would be a politically sensitive target, and we ought to avoid it for that reason. But we need a proxy for it.

...

MR. CORRIGAN. Just a simple case: Assume that we have not only a central tendency but a tremendous convergence that says nominal GNP is going to grow by 9 percent; prices will rise by 4 percent and real GNP by 5 percent to make it nice. Then we say we think M2 and M3 and total credit will look like X, Y, and Z. But then this central tendency [puts our forecasts] in a different light than the old forecasts if, as we get into the year, there's a marked departure in actual performance of the economy from the central tendency even though the Ms and whatever else we use in our steering devices look all right. The question is: Do you contemplate any more of a direct linkage between what we would do with the steering devices or targets and that central tendency forecast?

CHAIRMAN VOLCKER. Well, I'm not sure; my instinctive answer would be that I'd try not to make the central tendency all that prominent in terms of what is desirable. But I think we are going to be forced into precisely what you are saying, after some statement. It probably will be viewed more against the Administration forecast or some congressional forecast. They will say: We think a minimum adequate growth is X and if it's below that, are you going to ease?. And if X is low enough, our answer might have to be yes. I don't know how to state it or fuzz that up, but at some point that's precisely what I would expect to happen.

MR. WALLICH. I might have to state the associated increase in inflation.

CHAIRMAN VOLCKER. Well, you can't tell. Suppose after all the different permutations and combinations, the inflation rate is high and the real growth rate is low; we'd have a different answer than if real growth is low and inflation is low. One can [consider] any other combination of those. I'd try to talk my way around it. I think the Administration is going to have a low real [GNP forecast], as a matter of fact, because Mr. Feldstein is so preoccupied with not overestimating. But where I'm a little afraid of getting trapped is this: If they have high inflation and high real growth and the Congress says that's just fine, we're glad to live with 5 or 6 percent inflation and we want 5 percent real growth--that's not what the forecast is going to be but suppose it were--we would say that's much too much inflation and we're satisfied with much less real growth. Then we'd have a real problem, I think.

MR. PARTEE. Yes, if we get a high nominal, then we really have trouble. However it adds up, 11 or 12 percent is a problem.

CHAIRMAN VOLCKER. I could picture that the happy staff optimism on inflation is right and it is coming in around [their forecast], but the real growth isn't doing very well. They might say: My word, you're doing much better on inflation than you're supposed to be doing in some sense and you're not doing very well on real growth, so you obviously have to ease up. That, I think, is going to be a big problem. And it's going to be more so in that connection [depending on] what we say is the central tendency.

(FOMC transcript, December 1982)

Brad DeLong and others have been extolling the potential benefits of the Fed's targeting nominal GDP. And I think that economically speaking, that is the way to go. But my Political Constraints Hypothesis says that the Fed does not want to put itself into a position where its policy decisions will subject it to political pressure that threatens its independence. "The intermediate target should not be politically sensitive" makes a lot of sense from a political economy perspective.

It will be interesting to see from the Minutes of this week's meeting whether the Fed considered GDP targeting or other aggressive options. Today's policy statement doesn't make mention of it - the committee essentially chose to hold pat. A very disappointing decision:

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

Did Fannie and Freddie and CRA cause the housing bubble and crash?

2011-11-02T11:52:00.004-04:00

I'm sure you've heard that this is so. The Community Reinvestment Act forced Fannie Mae and Freddie Mac to buy huge quantities of subprime mortgages. Barney Frank used his enormous power as a minority member of the House Financial Services Committee to prevent the reforms that would have solved the problem. Michael Bloomberg is the latest to make this charge. The implication is that government screwups, not market failure, were responsible for the housing catastrophe, and therefore that less government involvement in housing and financial markets, not more regulation, is what we need today.

This argument is absolutely, positively wrong. The housing bubble was made on Wall Street by private lending institutions. Mike Konczal has the most thorough debunking of the "made in Washington" theory I've seen yet. It's worth reading carefully in preparation for the political debates over who's to blame in the coming election season.

If you have any doubt that the financial wizards of Wall Street can do incredibly dumb things without any help from the US gummint whatsoever, look under "Corzine, Jon."

Study break

2011-11-01T18:42:00.002-04:00

We have a deal

2011-10-27T13:06:00.003-04:00

Apparently the Europeans have reached an agreement on actions to stave off a collapse of their banking system. Banks accept a 50 percent writedown on Greek debt, the EFSF is enlarged by 1.3 trillion euros (though there's still no agreement on where that 1.3 trillion euros is coming from; in related news, I have decided to spend $5 million on a beach house in the Hamptons - source of funding to be determined later).

My sense is that what the Europeans are doing is saving the banking system but throwing the real economy to the wolves. Six months from now the wolves will be hungry again and the banking system will need to be saved again. Tim Duy has an excellent analysis explaining why we should be pessimistic about the European deal, the core of his argument being that the lack of participation by the European Central Bank dooms these efforts to failure.

The ECB (read: Germany) is reluctant to turn on its printing presses to solve this problem because of fears of inflation. As is well known, Germans still bear the scars from their bout with hyperinflation in the 1920s. But here's a message for the Germans: the 1920s hyperinflation was not the worst thing that happened to Germany in the first half of the 20th century.

Sweet spot

2011-10-27T09:45:00.002-04:00

The BEA reports that according to its advance estimate, GDP rose by 2.5 percent in the third quarter. That is the sweet spot. Another sub two percent reading would keep alive the fears that the economy is slumping toward recession. Anything above 3 would have led policymakers to believe that recovery was firmly established and relieve them of some of the urgency of taking action. Two point five percent, however, tells us that the economy is stuck in neutral and needs to be unstuck. The president's interest in passing jobs legislation is undiminished. The Federal Reserve has no excuse not to support the strengthened HARP program by announcing a program to buy mortgage backed securities to drive down mortgage rates.

Dans ce meilleur des mondes possibles, tout est au mieux.

Refi Madness

2011-10-26T17:01:00.003-04:00

We have two reports now on the likely effects of the Obama Administration's revised HARP program that will allow a large number of people who were previously ineligible to refinance their mortgages at today's mortgage rates.

Mark Zandi and Cristian Deritis say that at current mortgage rates we could expect 1.6 million more refinancings through 2013 than under the old program. Refinancing acts like a tax cut because it lowers people's interest payments. This could amount to several billion dollars in effective tax relief, adding a small but meaningful boost to the economy.

Joe Gagnon is more optimistic. He assumes, and he may very well be right, that the Federal Reserve will cooperate by buying massive amounts of mortgage backed securities and drive the mortgage rate down to as low as 3.5 percent. If so, Gagnon says that we could see a 2 percentage point boost to GDP and 4 million jobs. That would be a significant turnaround.

The key is that the Federal Reserve must support the Administration's program with a new round of quantitative easing focused on mortgage backed securities. And it must be big. If anyone in Washington knows what they're doing, this quid pro quo has already been agreed to implicitly at least. The FOMC meeting scheduled for Nov. 1-2 should be very interesting.

No hope for Europe

2011-10-26T06:47:00.003-04:00

If at 8:00 this morning the European Central Bank were to announce it's commitment to buy unlimited quantities of Italian and Spanish debt at a price implied by German interest rates (or maybe just a smidge more), by 8:02 the European financial crisis would be over. It's that simple. The fact that Europe cannot agree on this very simple solution tells me that they will not be able to agree on any real solution. Best case scenario: Europe cobbles together a fund that keeps the banking system afloat for another few months but does not relieve Italy and Spain from having to pay panic-induced interest rates on their debt. Austerity measures are imposed on Italy that bring the government down, throw the Italian economy and Europe as a whole into recession but do not help reduce Italy's budget deficit. Europe survives until the next wave of panic next spring.

Menzie Chinn eviscerates the "Real American Jobs Act"

2011-10-20T16:40:00.002-04:00

Here's his analysis. I will just add that it is remarkable that Republicans keep coming up with "jobs plans" that do not contain a single affirmative policy that would actually create jobs.

Distributional consequences of Herman Cain's 9-9-9 tax plan

2011-10-20T14:25:00.003-04:00

What's more disturbing: that Herman Cain, now the frontrunner in the race for the Republican presidential nomination, never thought his plan through very carefully; or that he did and is fine with the distributional consequences?

Here's the Tax Policy Center's analysis via Brian Highsmith via Jared Bernstein:

I am plugged

2011-10-19T16:17:00.004-04:00

David Beckworth chimes in on an issue that Brad DeLong has been writing about on his blog: the inadequacy of the IS-LM model we teach in intermediate macroeconomics courses and the need for an alternative framework to teach undergraduates. David writes:

An IS-LM Model That Almost Has It All

... Well Brad, there actually is such an undergraduate IS-LM model that fufills most of these criteria. It is developed by Charles L. Weise and Robert J. Barbera in this paper here. It incorporates the short-term policy rate, the natural interest rate, the long-term risky real interest rate, the term premium, the risk premium, and the term structure of interest rates. The model has an IS curve, an AS curve, and a TS or term structure curve. The model can also be easily drawn in (r, Y) space. The big drawback is that money and its importance for recessions--money is the one asset one every market and thus the one asset that can disrupt every market--is ignored. Still, the Weise-Barbera IS-LM model is still a vast improvement over the standard undergraduate IS-LM. Do take a look.

Thanks for the plug! Sometimes when I teach this model I substitute the TS component with a graph of the supply and demand for risky versus safe assets (the safest asset of course being money). DeLong used this graph in some blog posts awhile back. Maybe that's enough to get Beckworth to remove the "almost" qualifier from his headline?

Scene from Wednesday's Principles of Macroeconomics class:

2011-10-19T10:55:00.002-04:00

Char: Good morning students. Let me ask you a question. Over the last week or so, has any of you experienced an intellectual epiphany, a moment in which you saw something, read something, heard something, thought of something, that was new, interesting, changed the way you looked at the world or at least some issue? Have you encountered a new idea, a different perspective on an issue that caused you to say "hmm, I never thought about that before"? Anyone?

Students: Silence.

Crickets outside the window: Chirp! Chirp!

Char: Anybody? Anything?

A student: The Giants don't suck as bad as I thought.

Char: Well, that's something, but I was thinking on a more elevated plane. Any intellectual idea you might have encountered by reading a newspaper, or one of those ... what do you call them ... "books"? Anyone? C'mon people, you're at one of the finest liberal arts colleges in the land, surrounded by intellectual ferment and people who have devoted their lives to the pursuit of knowledge. We live in an age where newspapers, magazines, blogs bring you ideas from great thinkers around the world at the touch of a screen. Anything?

Coyotes in the hills off campus: Awhooooo!

So I have given my students an extra credit assignment. On a 3x5 index card, write down one new intellectual thought you have had or idea you have encountered in the last week that has had an impact on you. No sports, and "I didn't realize my roommate was such an idiot" does not count.

I wonder what I will get...

Mitt Romney's economic plan

2011-10-18T19:55:00.003-04:00

I've finally read Mitt Romney's economic plan. He is, after all, going to be the Republican nominee for president, and quite possibly our next president, so we might as well know what he has in store for the American economy. Some quick reactions:

- As a campaign document it is very good. It is a strong attack on Barack Obama's policies. If Barack Obama has done it, it is bad and Mitt Romney will reverse it. I fear its political impact.

- As an economic analysis it's plausible by the standards of Republican Party thinking (see Herman Cain's 9-9-9 plan) but woefully unsubstantiated. This is largely the work of Glenn Hubbard and, I think, Greg Mankiw, and they are smart economists. But they rarely back their claims up with even references to scholarly literature. They claim, for example, that Obama's environmental policies are retarding investment, but the only evidence they provide is an industry-provided inflated cost estimate of the ozone regulations that the Obama Administration overruled last month.

- For the most part the plan is to return the US to the status quo ante that prevailed under George W. Bush. Keep the current marginal tax rates, eliminate the "death tax," pull back on regulation - all of the things that created the wonderful economic environment that served us so well in 2008. So, no, that doesn't appeal to me much.

- Romney panders to Republican primary voters. Everything associated with Obama will be repealed: the ACA, Dodd-Frank, any "excessively costly" regulation, etc. If the theory is that uncertainty about health care, financial regulation and so on is preventing businesses from hiring, I can't see what benefit comes from re-opening these debates from square one. He seems to approve of many elements of Dodd-Frank like increased capital requirements - if he was honest with himself and with Republican primary voters he would argue for amending the act rather than repealing it outright.

- There are some whoppers in the plan. Currently when regulatory agencies propose new regulations they do a cost benefit analysis, adopting them if the benefits exceed the costs. Not so in Romney's first term. He would adopt a policy of no net increase in regulatory costs, period. So suppose the FDA finds that increasing the frequency of meat inspections would cost $1 billion but would generate $10 billion in benefits due to fewer deaths and illnesses due to contaminated food. Under Obama, we get the inspections. Under Romney, the $10 billion in benefits is irrelevant - if it costs $1 billion, it doesn't get done, unless the FDA finds another regulation that currently imposes costs equal to $1 billion and eliminates it. So if we want fewer deaths due to contaminated meat we have to accept more deaths due to, I don't know, poorly-labeled products containing peanuts.

- And Romney wants to start a trade war with China! Sober business-types and their likeminded allies in the press have been tut-tutting about the Democrats' effort to impose tariffs on China unless China revalues its currency. Romney wouldn't wait for Congress - he'll declare that China is unfairly manipulating its currency and impose compensatory duties right away. I'm waiting for the Very Serious People of the world to come down on Romney like a ton of bricks. I'm waiting...

- Overall, of course, the plan does almost nothing to address the main economic problem facing the US today: lack of effective demand. The plan hinges on the assumption that once regulations are removed, there's a plan to balance the budget, and corporate taxes are reformed, businesses will be overcome with confidence, open up their wallets, and start hiring and investing. Gosh it would be nice if that were to happen, but again there is no evidence whatsoever that the reason they aren't doing this now is because of too much regulation, too high taxes, etc. There is abundant evidence that corporations aren't hiring because people aren't buying their stuff. And Romney's plan doesn't give anyone the means to start buying stuff, so I don't see how it can do any good.

- And of course you can kiss goodbye any thought that this country will one day deal with our addiction to fossil fuels, try to address the problem of income inequality, or try to give workers a fighting chance to organize for higher wages and better working conditions. Those ideas will be off the table entirely. We can just rewind the clock to 2001, thank you very much.

So in summary: not a fan.

Count the errors

2011-10-17T16:56:00.003-04:00

Here is Steve Forbes on Fareed Zakaria's show yesterday, sparring with Paul Krugman about the Federal Reserve and Obama Administration's economic policies:

FORBES: The whole notion that government, by that way, can jump start the economy is a false one. Where do they get that trillion dollars from? It does not come from heaven, what it comes from borrowing or printing money, which is a form of taxation, or taxation itself. So remove resources from the private sector--where it could be put into productive use—perpetuates a lot of things that should not be perpetuated. Again, if you let the private sector…
ZAKARIA: The private sector is saving right now because it has a cloud over it.
FORBES: Because of the weak dollar, sending private capital overseas, uncertainty about the tax code, massive new regulations coming on health care and the financial sector, those are real headwinds. If the government…if President Obama had done nothing when he took office, he’d be a genius today.

In that brief exchange I count three logical or factual falsehoods, two unsubstantiated (and unsubstantiatable) charges, and one bizarre conclusion.

Falsehood #1: The trillion dollars comes from mobilizing resources that are currently unemployed. Does Forbes believe that no economic benefit would arise if General Electric spent a billion dollars to build a new factory in upstate New York because that billion dollars was simply pulled away from some other productive private sector activity? Then he has no business saying that money that the government spends has no effect. This is basic macroeconomics. I just taught it to my Econ 104 students last week.

Falsehood #2: The dollar is not "weak". The trade-weighted exchange rate against major currencies is now precisely where it was when the recession began in early 2008. Today the dollar is precisely where it was against the euro in summer 2007, stronger than it was when the recession began in early 2008.

Falsehood #3: Capital has not been sent overseas. Every time there is an increase in uncertainty anywhere in the world capital floods US financial markets. This is why US interest rates are so low and why the dollar has not depreciated against major currencies.

Unsubstantiated charges #1 and #2: There is no evidence that uncertainty about health care regulations, financial regulations, taxes, and so on are a major "headwind" for the economy. None at all. Zip.

Bizarre conclusion: Can Steve Forbes really believe that doing nothing was a reasonable response to the financial crisis and recession from 2009 to the present? If so, why does anyone ever invite him on their tv show?

Goldman Sachs wants to go nuclear - this time in a good way

2011-10-17T11:24:00.002-04:00

Goldman Sachs economist (and U-Wisconsin Ph.D one or two years behind me) Jan Hatzius wants the Federal Reserve to "go nuclear" - institute a massive new round of quantitative easing while announcing that it is targeting nominal GDP. The fundamental problem with this policy is credibility - if we're in a liquidity trap where monetary policy doesn't have the effects it usually has, then who would believe the Fed could be successful in trying to increase nominal GDP? So the policy has to be accompanied by something like a new round of fiscal stimulus, which does not seem likely to happen. So:

- Get whatever can be got out of the Jobs Act - if it's just tax cuts, so be it.

- Vow not to let up on Republicans until they vote for infrastructure spending and support for states

- Institute "Refi Madness" - anyone can refinance his/her Fannie Mae - Freddie Mac home mortgage regardless of the amount of equity they have in the house and waiving fees. This would be the equivalent of a massive tax cut and requires no Congressional action.

Sims and Sargent win the Nobel Prize in Economics

2011-10-10T13:28:00.003-04:00

Christopher Sims and Thomas Sargent are this year's Nobel winners. Their contributions are described in detail here. The Nobel committee cited their contribution to empirical macroeconomics, which was indeed important. Sims' main contribution was creating the vector autoregression (VAR) technique to estimate dynamic simultaneous equations models. I torture my senior seminar students with this technique every year. Sargent's main contribution in the 1970s, which is the basis for his Nobel, was in applying the assumption of rational expectations to time series macroeconometric modeling. Hence Sargent was one of the rational expectations revolutionaries who attacked Keynesian economics along with people like Robert Lucas, who won the Nobel in 1995 (give or take a year). Yet I'm a big fan of Sargent, because his recent work has explored alternative types of expectations formation that fall in the broad category of "bounded rationality." Sims has been engaged in this kind of work as well. So rather than being satisfied simply with having destroyed the empirical foundations of Keynesian economics, these economists have been hard at work modifying the rational expectations paradigm that replaced Keynesianism. I think that their interest in pushing beyond rational expectations makes them a much more interesting and useful species of "fresh water" macroeconomists than people like Lucas who seem to be more interested in enshrining the rational expectations, market clearing approach to macroeconomics as a new religious orthodoxy.

Occupy DC poster

2011-10-10T10:50:00.004-04:00

I spotted this one at the Occupy DC protest this weekend. One must admire the awareness of the intricacies of Dodd-Frank even while condemning the numerous spelling errors. This reminds me of the "16:1" signs that delegates were waving at the 1896 Democratic National Convention.

Apparently the threat of forcible implementation of the Volcker Rule was a major concern of DC security officials: the Federal Reserve buildings were surrounded by cops yesterday.

Occupy Wall Street poster

2011-10-07T11:22:00.002-04:00

From Paul Krugman:

My guess is this person thought of this poster some time after 1990-92, when the Fed did pursue a strategy of opportunistic disinflation, and vowed that the next time we had a big recession he'd put the poster together and be famous. Then in 2001-03 he was too busy working on his dissertation to protest, but now that he's an underemployed economics Ph.D (perhaps driving a cab in Madison, Wisconsin or Berkeley, California) he's got a lot of time on his hands and his years in graduate school have not completely squashed his spirit. Not yet anyway.

Too many English professors on the APPC

2011-10-05T14:23:00.001-04:00

That's the only explanation I can come up with for these instructions on the Proposal Form for New Courses.

1. COURSE DESCRIPTION

The maximum length should be 80 words, including the title. Please begin the first sentence with a noun, or one modified by an adjective; the first sentence should be a fragment. Keep to the present tense; avoid the future tense. Avoid first person pronouns as well. Do not include reading list.

Bon mots

2011-10-05T14:17:00.001-04:00

Ken Rogoff via Brad DeLong on the importance of the European Central Bank's getting its head out of its ass:

Similarly, the fact the European Central Bank has not already cut interest rates to zero reflects far more the need to preserve a semblance of independence than a sober calculation of the balance of risks. If the eurozone ultimately becomes unglued, will anyone care that during euro’s brief life, inflation expectations remained firmly anchored about 2 per cent?

My question for the Faculty Finance Committee this Thursday

2011-10-04T20:11:00.002-04:00

Dear members of the Faculty Finance Committee,

I always look forward to the annual report on compensation. I’ve been through about eleven of these now, however, and they’ve become fairly predictable. Though the college has always had the goal of offering compensation that is competitive with those at similar institutions, every year we learn that we are not meeting those goals. This year, if I am reading the Excel spreadsheet on Moodle correctly, I learn that I could be making almost $15,000 more per year if I worked at one of the Group 1 colleges (Bates, Bucknell, Colgate,…). The annual rate of salary increase for continuing faculty for the last five years has been almost a percentage point lower than the average of the other 18 colleges that we are comparing ourselves to, so we are falling further behind. In 2009-10 starting salaries for assistant professors with no experience were significantly lower than at colleges like Franklin and Marshall and Dickinson, with which we compete for talented new faculty. That’s a bunch of bad news. We’ll be reminded that the numbers don’t take into account the age distribution of the faculty and differences in cost of living, but we don’t know whether correcting for those problems would improve or worsen the comparison. The President or Provost will acknowledge the problem and let us know that they really want to rectify it (and I know they’re sincere when they say this), but budgets are tight so we can’t expect miracles.

Several years ago under our previous president, the faculty asked for a report on administrative expenses at Gettysburg relative to our own history and the colleges in our reference group. We were wondering whether perhaps one reason that money was not available to raise faculty salaries was that too much of the College’s scarce resources were being spent on administration. As I recall the administration responded to our question by giving us a couple of presentations breaking down the budget. What I remember from those presentations was that it is very difficult to distinguish between spending on “academics” versus “administration” (where does academic advising fit for example, or the library?) and therefore the numbers did not really speak strongly to the question.

In light of the bad news in the current salary report, I’d like to reframe the question and ask it again. I recently read an interesting book by Benjamin Ginsberg called The Fall of the Faculty: The Rise of the All-Administrative University and Why It Matters (Oxford University Press, 2011). The book is long on anecdote and short on data, but one piece of data that it does report is that at American colleges and universities between 1975 and 2005, while the number of students per full-time equivalent faculty was roughly stable (falling from 16 to 15 over that period), the number of students per FTE administrator fell from 84 to 68 and the number of students per FTE professional staff fell from 50 to 21. That’s a pretty big increase in administration relative to faculty. The book also notes that the size of college administrations varies a lot across institutions, singling out schools like Vanderbilt and Rochester for having very large administrations while others like Wisconsin have very efficient administrations.

So my question is, can we (the faculty) get some information about the number of professional staff and administrators (and/or “managers and staffers”) at Gettysburg, how this number has changed over the years and how we compare to colleges in our reference group? At the same time can we get a salary comparison for administrators across time and across institutions? I know this might sound confrontational but I don’t mean it in that way. We frequently have discussions about the faculty salary issue, but the faculty only has information about a portion of the College’s budget and I think that the discussions would be more informed if we had a more complete picture. If it turns out that the administration at Gettysburg is absorbing more resources than at the institutions that offer higher salaries than we do, then that points to a possible solution to the faculty salary problem. If it turns out that we have a leaner administration that is paid less than at comparable institutions (and I know that the administration has taken the lion’s share of budget cuts during this recession), then that might be a problem as well. At least that would give the faculty some consolation in knowing that their predicament is shared up and down the College.

Thanks for reading. I look forward to the presentation on Thursday.

Char

***

Oops, I inverted my fractions in the original. I made the corrections above. Thanks MRW.

Strategic planning

2011-09-30T10:14:00.004-04:00

From Chapter 2 of Benjamin Ginsberg, The Fall of the Faculty:

Given the enormous burden of attending meetings, retreates, and conferences, to say nothing of the need to devote at least some attention to their normal college duties, it might seem unlikely that administrators and staffers have time to undertake any other assignments. This perception, however, is false because it ignores a form of administrative activity that can occupy managers and staffers for years at a time. This is, of course, the development and continual revision of the school's strategic plan.

... Today... virtually every college and university in the nation has an elaborate strategic plan. Indeed, whenever a school hires a new president, his or her first priority is usually the crafting of a new strategic plan. In a macabre imitation of Orwell's 1984, all mention of the previous administration's plan, which probably had been introduced with great fanfare only a few years earlier, is instantly erased from all college publications and websites. The college president's first commandment seems to be, "Thou shall have no other plan before mine."

... The growth of planning has a number of origins. University trustees are generally drawn from a business background and are accustomed to corporate plans. Accreditors and government agencies, for their part, are enamored of planning... More generally, though, the growth of planning is closely tied to the expansion of college and university administrations. Their growing administrative and staff resources have given schools the capacity to devote the thousands of person-hours generally required to develop and formulate strategic plans.

... At the same time, the strategic plan serves several important purposes for administrators. First, when they organize a planning process and later trumpet their new strategic plan, senior administrators are signaling to the faculty, to the trustees, and to the general community that they are in charge. The plan is an assertion of leadership and a claim to control university resources and priorities... A second and related purpose served by planning is co-optation. A good deal of evidence suggests that the opportunity to participate in institutional decision-making processes affords many individuals enormous psychic gratification. For this reason, clever administrators see periodic consultation as a means of inducing employees to be more cooperative and to work harder... In a similar vein, the university planning process entails months of committee meetings, discussions, and deliberations during which the views of large segments of the faculty and staff are elicited. For the most part, those involved in the process... tend to buy into the outcome and, more important, tend to develop a more positive perception of the administration's ideas, priorities, and leadership... Still another way in which strategic planning serves administrators' intersets is as a substitute for action... [U]niversity leaders' political dexterity and job-hunting skills are often somewhat stronger than their managerial and administrative capabilities, inevitably leading to disappointment on the campus after they take charge. Indeed, the disparity between their office-seeking savvy and actual leadership ability probably explains why many college and university presidents move frequently from school to school. By the time the campus has become fully aware of their strengths and weaknesses, they have moved on to another college. Thus, for many administrators, eighteen months devoted to strategic planning can create a useful impression of feverish activity and progress and may mask the fact that they are frequently away from campus seeking better positions at other schools.

... The documents promulgated by most colleges and universities... lack a number of these fundamental elements of planning. Their goals tend to be vague and their means left undefined. Often there is no budget based on actual or projected resources. Instead, the plan sets out a number of fund-raising goals. These plans are, for the most part, simply expanded "vision statements." As one college president said at the culmination of a year-long planning process that engaged the energies of faculty, administrators, and staffers, "The plan is not a specific blueprint, but a set of goals the college hopes to meet. The college has not yet determined how the initiatives will be implemented and the plan is subject to change." Obviously what was important here was not the plan but the process.

... Plans are usually forgotten soon after they are promulgated. My university has presented two system-wide strategic plans and one arts and sciences strategic plan in the last fifteen years. No one can remember much about any of these plans but another one is in the works. The plan is not a blueprint for the future. It is, instead, a management tool for the present.

Assessment

2011-09-29T16:14:00.004-04:00

Hey, I just came across Gettysburg College's "Assessment Plan for Learning Outcomes," issued in June 2003. There seems to be a plan in place for introducing a "culture of assessment". The report ends with a clarion call for action:

Liberal arts colleges have generally been slow to embrace the shift in focus from teaching to learning, the development of a “climate of evidence” for educational goals and marketing claims, and the implementation of systematic assessment of learning. Gettysburg College has long engaged in various forms of assessment that have often reformed and improved practice in each of the four levels described above. However, it is our intention through this plan to develop a more structured and self-conscious program of learning assessment in all its aspects – goal articulation, regular assessment with appropriate means, and use of results as feedback for our deliberate employment.

Does anyone know what happened to this plan? Did we ever implement its proposals? Is the "conversation" we're having about assessment now, eight years later, an outgrowth of this plan or is it an entirely new conversation? Is there any guarantee that eight years hence we will have acted on the things we're "conversing" about today?

Regulatory uncertainty

2011-09-29T13:36:00.003-04:00

Lawrence Mishel of the EPI debunks the claim that "regulatory uncertainty" rather than lack of aggregate demand is the cause of our slow recovery. Mishel is assisted in his analysis by recent Gettysburg College grad Nick Finio. I'm sure it was Nick's contributions that made this the convincing piece that it is.

We can summarize Mishel and Finio's argument thusly: If companies aren't hiring because they're worried about being strangled by red tape in the future, causing their profits to crumble in front of them, then why are they investing in equipment and software at such a breakneck pace? In fact, why is this the strongest equipment-and-software recovery in recent memory? If companies aren't hiring because of regulatory uncertainty, then why is employment growing at the same pace as it did in the post-1991 recovery and faster than in the post-2001 (the Bush regulation-free recovery)? If demand is adequate but firms are nervous about hiring new employees (maybe because of health reform?), then why aren't they increasing average weekly hours of current employees instead? Finally, if firms aren't hiring because of regulatory uncertainty, then why do they keep saying in surveys that they aren't hiring because of weak sales?

Why indeed?

Every time I read something about Europe I get very depressed.

2011-09-28T17:06:00.001-04:00

Ezra Klein interviews Desmond Lachman.

Laurence Kotlikoff: Five ways to end the recession

2011-09-28T13:39:00.003-04:00

On Bloomberg's website, Laurence Kotlikoff downplays the likely impact of new fiscal and monetary policy measures and instead offers five low-cost ways of stimulating the economy:

1. Stop paying interest on bank reserves.

2. Get workers to invest in jobs.

3. Compel corporate America to invest.

4. Get prices and wages unstuck.

5. Achieve fiscal sustainability

I don't share his pessimism about fiscal and monetary policy. Passing the American Jobs Act (and adding to the infrastructure component) and another round of quantitative easing on the part of the Fed seem like no brainers to me.

But I like that Kotlikoff is throwing ideas out there, because we definitely need more ideas. There are some interesting ones here, but most are pretty questionable. I don't see how "achieving fiscal sustainability" does any good for the present situation, though of course it is a laudable goal in its own right. Paul Krugman takes Kotlikoff to task for suggesting that reducing wages (#4) would stimulate the economy. Krugman argues that in a liquidity trap, lower wages adds to deflationary pressures and therefore reduces output rather than increasing it. #2 and #3 have a strangely socialist quality that I wouldn't expect from Kotlikoff. Yes, if the government ordered companies to hire more workers (in exchange for workers voluntarily accepting lower wages) and ordered companies to invest, that would do some good. But hire the workers to do what? invest on what? Still, it's worth a shot.

I would expand on Kotlikoff's first suggestion. Lowering the interest paid on reserves from 0.25 to 0.0 (#1) might do a bit of good but probably not a lot. We could go further:

(1) Make the rate on bank reserves negative. This would give banks a strong incentive to lend rather than sit on their reserves. Banks would have to match the charge on reserves by charging customers for checking deposits. Wouldn't everyone withdraw money from banks and stash it under their mattresses? Not if the Fed charged banks for the purchase of currency from reserves. Banks would pass this charge on to customers - yes, you can convert your deposits to cash, but you'll have to pay the same fee we charge you for keeping your money in your checking account. This would provide a strong inducement for people to spend (I imagine there would be a lot of ticked off bank customers however - tough luck).

(2) Bank regulators (Fed, FDIC, Comptroller of the Currency, etc.) could strongly encourage banks to make loans to anyone who would qualify under ordinary credit conditions. Strongly encourage, like force them to do so. Any individual bank would be reluctant to do this by itself because with the economy so bad the credit risk is too great. But if all banks did it together (and if other stimulative policies were pursued) the economy might improve enough that the loans turn out to have been good bets in the first place.

But the point is, it's time to pull out the stops. Brad DeLong tells us that Nouriel Roubini has already called the double dip (by Tweet - can he put that on his CV?). No more dicking around already!

Did supply-side economic policies end the Great Depression?

2011-09-27T17:22:00.004-04:00

No, but conservatives have been peddling this theory for a few years now. When I saw Cole and Ohanian's piece in the Wall Street Journal making this argument, I was suspicious. In fact, more than suspicious - based on what I know of Cole and Ohanian's research on the Great Depression and the Wall Street Journal's editorial standards, I was certain that C&O were playing fast and loose with economic data to "prove" that expansionary demand-side policy did not end the Great Depression. In fact, I flagged this paragraph:

But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board's Index of Industrial production rose nearly 50% between the Depression's trough of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year.

I thought, when I get a moment I'm going to look at the data to see if that's right. Because every graph of macroeconomic data during the Great Depression that I've seen - GDP, prices, industrial production, employment - has a distinct "V" shape with the point of the V poking March 1933 when FDR took office. Well, I needn't have spent my valuable time hunting down the data, because Brad DeLong directed me to Paul Krugman who directed me to Mark Thoma who directed me to Uneasy Money who did look at the data, and confirmed that C&O are absolutely 100 percent wrong on this point: industrial production began to rise in summer of 1932 but fell immediately thereafter, so that the sustained increase in IP began only in spring 1933. And prices (at least PPI) were not falling during the period of recovery but rising.

Uneasy Money does acknowledge that C&O were correct in stating that the National Industrial Recovery Act was a monumentally stupid piece of legislation that stopped the recovery in its tracks until the Supreme Court declared it unconstitutional:

Nevertheless, not everything Cole and Ohanian say is wrong. They properly criticize New Deal policies that slowed down the spectacular recovery from April to July 1933 to almost a crawl. What stopped April to July recovery almost in its tracks? The answer is almost certainly that FDR forced his misguided National Industrial Recovery Act through Congress in June, and by July its effects were beginning to be felt. Simultaneously forcing up nominal wages in the face of high unemployment (though unemployment started had falling rapidly when recovery started in April) and cartelizing large swaths of the American economy, the NRA effectively shut down the recovery that was still gaining momentum. As shown in the chart representing industrial production, industrial production resumed its rapid expansion almost immediately after the NIRA was unanimously struck down by the Supreme Court in May 1935. The aborted recovery was a tragedy for the American economy and for the world, but the premature end of (or extended pause in) the recovery tells us nothing about whether an economy can recover from a depression with no increase in aggregate demand.

It's pretty clear to me that what turned the economy around in 1933 was a massive monetary expansion triggered by FDR's decision to devalue the dollar (in effect going off the gold standard), coupled with the expectation that the decision to devalue was just one element of a dramatic change in the macroeconomic policy regime that included more expansionary fiscal policy, banking reform to put an end to stabilize the financial sector, and an overall commitment to do whatever it took to generate recovery rather than being worried about the price of gold, the rate of inflation, balanced budgets, and what have you. Inept policies may have offset some of the recovery and their removal may have helped the situation, but the recovery was due to expansionary demand-side policies.

I suggest that those who want to know how the US economy recovered from the Great Depression read Peter Temin's book Lessons From the Great Depression and Christina Romer's "What Ended the Great Depression?" for starters, and ignore anything that Cole and Ohanian write on the subject.

Gettysburg College in the News

2011-09-27T15:15:00.002-04:00

Famous and obscure at the same time! From Gregg Easterbrook:

Obscure College Score of the Week": Susquehanna 56, Gettysburg 55. Scoring to pull within one in the first overtime, Susquehanna went for the deuce and ended a contest that saw an Arena-League-like 16 touchdowns. Gettysburg is averaging 49 points per game, but is only 2-2. Located in Gettysburg, Pa., Gettysburg College started classes on Aug. 29 and on Oct. 21 holds Fall Honors Day for just nine weeks of work.

Best play I've ever seen

2011-09-26T15:02:00.003-04:00

I hate to say it but the Chicago Bears pulled off the best play I've ever seen in a professional football game in yesterday's game against the Packers. Fortunately it was nullified by a holding penalty.

http://www.nfl.com/videos/auto/09000d5d8228f7c4/The-punt-return-that-never-was

The administrative university

2011-09-17T09:47:00.002-04:00

I just finished reading Benjamin Ginsberg's book, "Fall of the Faculty: The Rise of the All-Administrative University and Why It Matters." Ginsberg, a political scientist at Johns Hopkins University, argues that administrative bloat is threatening the viability and integrity of higher education in the United States. I'll string together some passages from Chapter 1:

"Today, institutions of higher education are mainly controlled by administrators and staffers who make the rules and set more and more of the priorities of academic life... [T]oday's full-time professional administrators tend to view management as an end in and of itself... For many of these career managers, promoting teaching and research is less important than expanding their own administrative domains. Under their supervision, the means have become the end... Every year, hosts of administrators and staffers are added to college and university payrolls, even as schools claim to be battling budget crises that are forcing them to reduce the size of their full-time faculties. As a result, universities are filled with armies of functionaries - the vice presidents, associate vice presidents, assistant vice presidents, provosts, associate provosts, vice provosts, assistant provosts, deans, deanlets, deanlings, each commanding staffers and assistants... [A]dministrators have been able, at most schools, to dispense with faculty involvement in campus management and, thereby to reduce the faculty's influence in university affairs. At some schools, the faculty has already surrendered and is hoping that the Geneva Convention will protect it from water boarding... [T]he question of who controls the university has a direct and immediate impact on institutional quality... Controlled by its faculty, the university is capable of producing not only new knowledge but new visions of society. The university can be a subversive institution in the best sense of that word, showing by its teaching and scholarship that new ways of thinking and acting are possible. Controlled by administrators, on the other hand, the university can never be more than what Stanley Aronowitz has aptly termed a knowledge facotry, offering more or less sophisticated forms of vocational training to meet the needs of other established institutions in the public and private sectors..."

This is a pretty good book - not great, but pretty good. It's light on data, heavy on anecdote (but there are some excellent anecdotes!). What data there is documents the increasing top-heaviness of American colleges and universities since the 1970s and 1980s. For example: from 1985-2005, while the number of student enrollments grew by 56% and faculty grew by 50%, the number of administrators grew by 85% and staff grew by 240%. In 1975 the number of full time equivalent students per FTE faculty member fell from 16 to 15. In the same time period the number of students per administrator fell from 84 to 68 and the number per professional staff fell from 50 to 21.

The anecdotes seem to be drawn from published sources like the Chronicle of Higher Education, the author's personal experiences dealing with the Johns Hopkins bureaucracy, and what I take to be late night gripe sessions between the author and colleagues at other universities. I imagine beer was involved. Sometimes the author adopts an overly sarcastic tone, which adds to one's reading pleasure but subtracts from the scholarly impact of the book. The anecdotes are believable to me, but it would be nice to verify with data whether these episodes are representative of broad trends. Such data probably do not exist - do we know, for example, the frequency with which colleges and universities produce strategic plans, the resources involved in their development, and the extent to which the action plans therein are actually implemented before the next strategic plan is developed? Probably not.

From time to time the author demonizes administrators just a bit (he apologizes in the preface to two administrators at JHU with whom he has a good relationship: "Sarah and Judy - this book is not about you." That's unfortunate. But the book has a powerful theme concerning the logic that drives administrative decisions in higher education. As I was reading it I thought about "Academically Adrift," a similarly flawed but thought-provoking critique of higher education. Gettysburg does not have nearly the same level of crazy in the upper echelons of its administration as the institutions discussed in the book. But the book offers an interesting perspective from which to view a lot of what goes on here, including three recent initiatives concerning assessment, advising, and "internationalization." Without passing any judgment on the merits of these initiatives, they can be seen as the outcome of the unique logic of the administrative university.

I'll post some passages from the book later. In the meantime, everyone should buy it.

Globaloney

2011-09-16T11:20:00.004-04:00

At yesterday's faculty meeting someone asked whether there was a better word than "internationalization" to describe the College's (new?) focus on emphasizing international initiatives. I think the word he's looking for is "globaloney." In economics this term was used to characterize grandiose claims about the effects (positive and negative) of globalization. Here I would define it as the tendency to fetishize all things international.

To clarify in advance, I am not opposed to incorporating international issues in our curriculum or students' lives. I am a proud graduate of Georgetown University's School of Foreign Service, so I spent my undergraduate years studying things international, and my experience in college led me to go overseas after graduation and to study (among other things) the economics of developing countries in graduate school. But another thing happened to me in college. A friend of mine asked me to help out at a homeless shelter in DC, so I started doing that. Later I worked at a tutoring program for Cambodian refugees. I got out into the city and became familiar not only with the monuments and museums but the neighborhoods like Dupont Circle, Adams Morgan, and Mount Pleasant. I lived off campus and became a resident-citizen of the Georgetown area. Through those experiences I developed an interest and concern for local issues that I carry with me to this day, transplanted to Gettysburg. And I saw how the community in which I lived was part of the big world that I was studying in the SFS. I connected the local and the global, and that was great.

So the contact with my community was of great intellectual and moral value for me. But it was kind of coincidental. As far as I know Georgetown did not offer a class in, say, the Politics of the DC City Council, and I probably would not have taken it if it was offered. I could have spent my whole time at Georgetown on campus in campus housing, venturing no further than Wisconsin Avenue on weekend nights and the occasional downtown restaurant or museum. I needed to be pushed, but once I was given a little push a whole world opened up for me.

Some of our students get pushed in the direction of the local every once in awhile. A number of our students do work in the community with the Center for Public Service. Some classes incorporate service learning, some classes have projects that get students out into town or the surrounding area. But most of our students, I'll wager, stay snuggly within the Gettysburg Bubble. We apparently have decided to re-up our emphasis on the international, at least rhetorically. That's fine, as I said I've got nothing against making international connections. But where did this idea come from? Is it connected to a vision of what makes for a good undergraduate education? Specifically, did anyone consider whether it was a good idea to direct resources to "international" initiatives rather than local ones, or other important issues such as diversity or - and I know I'm being radical here - teaching really good classes in a lot of subjects?

And that's the rub. From the information we got at the meeting, it looks like real resources are being spent here. I did not know we had "a full time administrator to lead and coordinate internationalization." I did not know that we had "sponsored research programs [to] bring international researchers to the campus" - is the presumption that the visit of a well-regarded US-based researcher would not get the same priority? I did not know that we thought it was particularly important relative to other objectives to included "specific learning goals related to international and global awareness" in course syllabi. Real resources being spent on this internationalization initiative mean fewer resources on other priorities. That's a fact of life. I think many departments would like to know whether faculty positions that have been denied them could have been funded but for financial commitments we've made to internationalization.

Again, if we've decided that internationalization is really our top priority and we've given careful consideration to how resources devoted there do more good than resources devoted elsewhere, that's fine. But I suspect we've never really had that conversation. I suspect, rather, that we chose to focus on internationalization because it sounds sexy and cool. Saying we offer a "global education" looks good in an admissions brochure. Saying we're going to do a real good job teaching your kids, or make them good citizens of the community they live in, less so. If that's the case, then you call it what you want, I call it globaloney and I say the hell with it.

Inflation

2011-09-15T13:57:00.004-04:00

According to the BLS, inflation remained above the Fed's two percent target in August despite the slowing economy. The graph below is the six month average inflation rate for the last two years.

The core inflation rate (blue and purple lines) are the series to focus on. In 2009-10 the economy faced a serious threat of deflation. That threat seems to have disappeared in the last year. The reversal was clearly driven by the increase in food and energy prices in late 2010 to spring 2011; commodity prices have started to moderate, which should lead to lower inflation in coming months.

Still, it's kind of remarkable that inflation could rise at all at a time when the unemployment rate is 9.1 percent. Why have energy and food prices had such a large effect on core inflation? Why have energy and food prices increased so strongly when the world economy is so weak? Two hypotheses:

- Commodity prices are being driven higher by the strong emerging market economies (China especially). This is an adverse terms of trade shock that ordinarily would result in a depreciation of the dollar relative to emerging market currencies. But there's that pesky Chinese policy of fixing the yuan-dollar exchange rate again.

- Commodity prices are being driven higher by speculators. This leads to an uncomfortable question: suppose we have a recession, the Fed responds in traditional form by lowering interest rates, but instead of lower rates being used to finance higher levels of investment all they do is fuel speculation in commodities markets, which drives inflation up? That's yet another mechanism (as if we needed one) that weakens the effects of monetary policy.

Either way, the Fed should not use inflation at slightly above 2 percent as a reason not to fight unemployment. Unemployment is problem number one, and we should be willing to see inflation rise even several percentage points higher than 2 percent if that's what it takes to bring the unemployment rate back to normal.

Going big

2011-09-15T09:54:00.002-04:00

That didn’t take long, did it? After months of futile wrangling over the debt ceiling and with incoming economic data and the worsening European debt crisis raising the specter of another slide into recession, policymakers were finally going to turn their attention to job creation. Well, that was last week. This week a group of over 60 business leaders and former government officials released a letter calling on Congress to “go big” on deficit reduction. “We believe,” the letter states, “that a go big approach that goes well beyond the $1.5 trillion deficit reduction goal that the Committee has been charged with and includes major reforms of entitlement programs and the tax code is necessary to bring the debt down to a manageable and sustainable level, improve the long-term fiscal imbalance, reassure markets, and restore Americans’ faith in the political system.” President Obama, for reasons that are crystal clear politically but difficult to fathom in economic terms, has added his voice to the call.

The renewed interest in deficit reduction makes no economic sense. The Congressional Budget Office projects that under current law, if the commission established in August meets its target of $1.5 trillion in deficit reduction and if Congress simply declines to extend the Bush tax cuts and postpone deficit reduction measures already written into law, the budget deficit will shrink to a manageable 1.2 percent of GDP by 2021 and the federal debt will stabilize at just over 60 percent of GDP. So where is the fiscal crisis? The argument is often made that a credible plan to reduce the deficit will restore business confidence and help stimulate growth in the near term. But the standard way that lower future deficits could help the economy is by lowering long-term interest rates. With the interest rates on ten year Treasury bonds currently below two percent – and inflation-indexed bonds actually offering a zero or negative rate of return – interest rates cannot go much lower. We are left with the hope that cutting future deficits will restore business “confidence” – but how? The thing that worries businesses most about budget deficits is the future tax increases and spending cuts that will be necessary to close them. How would it restore business confidence to lock those tax increases and spending cuts into law today? Finally, the “go big” letter hints at another avenue: businesses might increase spending and hiring if they are assured that Washington is capable of dealing with a vexing political problem. But if Washington is to prove its chops by tackling a vexing political problem, wouldn’t it be best to pick the real problem that is staring us in the face rather than the mostly imagined problem that will hit us a decade or more from now?

The business executives and former government should have called for Congress and the President to “go big” not on deficit reduction, but on job creation. There are a lot of ideas out there and I don't agree with every single one. But it would have been helpful for a group of centrist leaders to make proposals that run the gamut of sensible policies. For starters, our political leaders could be asked to form a supercommittee including the Democratic and Republican leaders of both houses of Congress, the President, former government officials, and business and labor leaders. The supercommittee would be assigned the task of developing proposals to restore growth and reduce unemployment. Rather than the $4 trillion deficit target that the letter writers apparently have in mind, the supercommittee should be given the target of developing policies that will increase growth of GDP to a minimum of four percent per year in 2012 and beyond, as certified by the Congressional Budget Office and macroeconomic forecasting firms.

The supercommittee should be prepared to enter into a “grand bargain” on growth that includes policies favored by Democrats and Republicans alike. Such policies could include (again, I don't and you don't have to agree with every one of these): passing President Obama’s jobs bill; corporate tax reform; an expansion and streamlining of government loans through the Small Business Administration; use of the government’s regulatory authority to encourage* banks to make loans to household and business borrowers who would meet lending standards in normal times; a vast expansion of the Administration’s mortgage refinancing program; a temporary moratorium on new government regulations except for those related to the health reform and financial reform laws; and accelerated spending on infrastructure projects.

The Federal Reserve should undertake more aggressive efforts to stimulate the economy. Specific measures could include lowering the interest rate on bank reserves to zero; initiating another round of quantitative easing; and announcing its willingness to see inflation rise above its implicit two percent target until the economy has recovered.

If the letter writers were bold they could address their concerns to the nations of Europe as well. The European nations need to set aside political divisions and resolve the banking crisis once and for all. The European Central Bank needs to lower interest rates and signal its willingness to tolerate a reasonably high rate of inflation for a time.

Our nation’s leaders need to end their obsession with budget deficits and turned their attention to the critical economic problems that confront us today. With the economy on the precipice of a second recession we need a full court press to get the economy moving again.

* I mean "encourage" in the sense that Tony Soprano "encourages" a construction contractor to hire his brother-in-law for a make-work job.

Lost decade(s)

2011-09-14T15:11:00.005-04:00

A macroeconomist's greatest fear is that the current recession could linger for years, giving the US a "lost decade" like Japan experienced in the 1990s. (Actually, since Japan's situation has hardly improved in the 2000s it's time we started referring to their experience as the lost - what would it be, "eikosiad"?)

But in light of the new Census report on income and poverty, people have begun to argue that by many measures America's lost decade actually began around 2001. Paul Krugman displays some disturbing data from the report: the number of people in "deep poverty" has been on a pretty much continuous upward march, and real income for working-age households and the percent of workers getting health insurance from their employers on a relentless downward march, since 2000. Look at Krugman's graphs, look at the report: it's depressing.

How about for a change we try NOT leaving $500 bills on the sidewalk?

2011-09-13T14:03:00.002-04:00

Last week President Obama rejected a proposed EPA rule to reduce ground-level ozone emissions. The EPA had proposed reducing allowable ozone emissions from 75 parts per billion to 65 ppb, a change that would save up to 12,000 lives (mostly from complications related to asthma) and have other benefits that amount to tens of billions of dollars per year. There are costs associated with reducing ozone emissions - it would cost billions to install equipment on manufacturing facilities and take other measures, and so industry groups objected vociferously. Still, the EPA determined that the benefits most likely would exceed the costs. In this economic and political climate, however, the Obama Administration thought it prudent to stick with the current standard.

Ok, I see the point. But in the current economic environment (9.1 percent unemployment), the social cost of using unemployed workers and factories to produce pollution abatement equipment and install it in areas of the country with high ozone levels is close to zero. So forget the EPA rule: as long as Obama is asking Congress for money for infrastructure, teachers and so on, why not ask them for a few billion more to reimburse local governments and industry for the cost of installing equipment that would reduce ozone emissions to 65 ppb? Name an infrastructure project that has benefits on the scale of this one. What argument would Congress use to reject this spending: that they'd rather see 12,000 people die?

Steven Pearlstein eloquently dissects the Republican economic world view

2011-09-12T14:46:00.004-04:00

Steven Pearlstein in the Washington Post. A choice passage:

My favorite, though, is a proposal, backed by nearly all the candidates along with the U.S. Chamber of Commerce, to allow big corporations to bring home, at a greatly reduced tax rate, the more than $1 trillion in profits they have stashed away in foreign subsidiaries.

“Repatriation,” as it is called, was tried during the “jobless recovery” of the Bush years, with the promise that it would create 500,000 jobs over two years as corporations reinvested the cash in their U.S. operations. According to the most definitive studies of what happened, however, most of the repatriated profits weren’t used to hire workers or invest in new plants and equipment. Instead, they were used to pay down debt or buy back stock.

But fear not. In a new paper prepared for the chamber, Republican economist Douglas Holtz-Eakin argues that just because the money went to creditors and investors doesn’t mean it didn’t create jobs. After all, creditors and shareholders are people, too — people who will turn around and spend most of it, in the process increasing the overall demand for goods and services. As a result, Holtz-Eakin argues, a dollar of repatriated profit would have roughly the same impact on the economy as a dollar under the Obama stimulus plan, or in the case of $1 trillion in repatriated profit, about 3 million new jobs.

It’s a lovely economic argument, and it might even be right. But for Republican presidential candidates, it presents a little problem. You can’t argue, at one moment, that putting $1 trillion of money in the hands of households and business failed to create even a single job, and at the next moment argue that putting an extra $1 trillion in repatriated profit into their hands will magically generate jobs for millions.

Indeed. In fact, think of the $1 trillion stashed inaccessible overseas as the equivalent of money kept in government bonds. Repatriation allows individuals (the ones who own shares in the companies) to convert those 'bonds' to cash. It's as if the Federal Reserve had just bought $1 trillion in bonds, creating currency to finance the purchase. When quantitative easing of this kind is done by the Fed, Republicans call it ineffective, inflationary, and possibly treasonous. But when the same quantitative easing is done by American corporations, it's the key to economic recovery. Amazing!

Rick Perry doesn't realize that he is Pope Urban VIII

2011-09-08T09:37:00.003-04:00

Scene from last night's Republican debate:

Jon Huntsman: Listen, when you make comments that fly in the face of what 98 out of 100 climate scientists have said, when you call into question the science of evolution, all I'm saying is that, in order for the Republican Party to win, we can't run from science....

Rick Perry: Well, I do agree that there is -- the science is -- is not settled on this. The idea that we would put Americans' economy at -- at -- at jeopardy based on scientific theory that's not settled yet, to me, is just -- is nonsense. I mean, it -- I mean -- and I tell somebody, I said, just because you have a group of scientists that have stood up and said here is the fact, Galileo got outvoted for a spell.

Boy, you couldn't make this stuff up. Recall that Galileo was hounded by the Catholic Church, who objected to his scientific theory because it conflicted with their religious ideology. Catholic Church, meet the 21st century Republican Party and the American Petroleum Institute. Pope Urban VIII, meet Rick Perry.

President Obama, send Charles Evans some help now!

2011-08-30T18:21:00.003-04:00

Brad DeLong links to FRB Chicago president Charles Evans calling for more aggressive monetary policy actions to reduce unemployment - including letting inflation rise above the Fed's 2 percent target in the near term. Apparently the FOMC is sharply divided between the "doves" like Charles Evans and the "hawks" like Naryana Kocherlakota who believe that a more expansionary monetary policy would let loose the dogs of inflation. There are two vacant seats on the Board of Governors. President Obama, fill them with economists who think like Charles Evans!

The tragic fate of a slow-footed, dim-witted macroeconomist with a heavy teaching load

2011-08-29T14:04:00.002-04:00

The paper I planned on writing eventually, "Monetary Policy Rules, Fiscal Policy Drools," has already been written, by Eric Leeper, under the title "Monetary Science, Fiscal Alchemy". His paper is excellent but I like my title better.

Good reads

2011-08-26T15:38:00.004-04:00

This paper by Christiano, Ilut, Motto and Rostagno from last year's Symposium (back when Fed economists seemed to care about whether they could do anything to help pull the world out of recession) is very interesting. Cliffs Notes version: Contrary to conventional wisdom, stock market booms are generally associated with low inflation. This is because anticipated increases in productivity which fuel stock market booms (think the internet bubble) also imply reduction in costs for producers, meaning lower future inflation. Forward-looking price-setters will put off price increases or cut prices today in anticipation of lower future prices. If the Federal Reserve conducts monetary policy using an inflation target (as is its current practice), it will lower interest rates when it sees inflation fall. This causes the economy to accelerate and exacerbates the stock market boom, destabilizing the economy. Instead the Fed should raise interest rates when expected productivity increases spark stock market booms. The optimal policy can be approximated by including a measure of credit in the Federal Reserve's monetary policy reaction function (that is, the Fed raises rates when unemployment falls, inflation rises, or total credit rises). Christiano et al. demonstrate this elegantly in a standard New Keynesian model.

Paul Krugman and others are skeptical that inflation could ever be a problem with the economy in as deep a recession as we currently are, and therefore are very critical of the Federal Reserve's reluctance to get more expansionary in light of recent increases in inflation. The Christiano et al. paper sheds a little light on this argument. Flip the paper's logic around. An anticipated decrease in productivity - could be due to anything, but let's say concerns about excessive government regulation, higher taxes, or deterioration of skills among the long-term unemployed - causes asset prices to fall. It also causes firms to anticipate higher inflation in the future. They therefore start increasing prices now, causing inflation to rise. Boom - standard economic theory (which one should acknowledge Krugman is not wild about) suggests you can have inflation even during a deep recession.

However, standard economic theory, articulated in Christiano et al., also says that the Fed should lower, not raise interest rates in response to this upward pressure on inflation. The Fed should be setting the market interest rate to track the natural rate, which falls when productivity falls. Krugman's wrong that there is no coherent argument that inflation can rise during a severe recession, but correct in his criticism of the Fed's monetary policy.

Bernanke and the Symposium

2011-08-26T15:21:00.004-04:00

I didn't think that in his speech at the Jackson Hole Symposium Bernanke would drop any hints about more aggressive monetary policy actions to come, and in that sense he did not disappoint. I am nonetheless awestruck that with the unemployment rate stuck above 9 percent for two years now, GDP at a standstill, financial markets in panic, and evidence of renewed contraction in manufacturing and housing, the Federal Reserve seems content to sit on its hands. People, if you believe that further monetary policy action would be ineffective, tell us so and maybe also tell us what nonmonetary policies might be helpful. If you believe that a more expansionary monetary policy would help spur the economy, and nevertheless do not plan on undertaking such policy, then tell us what freakin' objective function your policy is designed to maximize. What does the weight on the inflation parameter have to be to justify doing nothing when the unemployment rate is 9 percent and inflation is 2.5 percent? Is that weight consistent with the preferences of the typical American?

The program for the Symposium is similarly disheartening. Papers on long-run growth in emerging markets, managing natural resources, and so on. Nothing on the sputtering economy. Didn't someone think to organize the conference around questions like "what's next for monetary policy" or "can we have growth and fiscal contraction at the same time" or "the dangers of excessive sovereign debt" or "can Europe survive"? I get the sense that they're all just too exhausted from their efforts at putting out the fires of the last four years and have decided to pretend that the flames that are consuming the world economy just don't exist.

A-List

2011-08-26T10:16:00.004-04:00

Here are the economists and policymakers attending this year's Jackson Hole Economic Policy Symposium. Not enough bloggers - how are we ever going to get the inside skinny on what everyone's saying behind closed doors?

[Oops, that's last year's list. Still, it's interesting to see who central bankers are listening to.]

Finally, interesting conservative ideas on health care

2011-08-24T09:48:00.002-04:00

David Frum says the way to reduce health costs is to exploit the market power of insurance companies. Regulate insurance companies at the federal level to prevent insurers from reducing the quality of insurance through lifetime limits and so on; eliminate state-level barriers to allow consolidation of the insurance industry on a national level; rely on the resulting small number of large companies to force cost reductions by health providers.

One way this differs from Obama's system is that under ACA the federal government tries to reform health care delivery practices whereas under Frumcare that job is done by large companies in competition with each other. There's a chance that Frum is right here - I'd guess that the government would do a poorer job of reducing costs of household items than Walmart.

I don't see how Frumcare could be implemented without an individual mandate or some other guarantee of universal access however. The same adverse selection problem would apply: if insurers can't discriminate against people with pre-existing conditions then they can't prevent healthy people from opting out of the system and opting in only when they get (expensively) sick.

I don't know if Frum's idea is preferable to ACA, but I appreciate that it is an actual idea from an actual conservative. I will start reading FrumForum more regularly.

Earthquake blogging

2011-08-24T09:15:00.002-04:00

Can't seem to get this song out of my mind (unfortunately).

Why people hate the Wall Street Journal

2011-08-19T22:12:00.004-04:00

Because they consistently print opinion pieces that they must know are total nonsense. Jonathan Chait takes down today's piece by Stephen Moore. To add to what Chait says, first the truly crazy part of Moore's article:

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production.

Mr. Moore: the Soviet Union was a communist, centrally-planned, non-market economy! Keynesian theory is a theory of market economies such as ours. The Keynesian argument says that firms respond to incentives, so when they see customers lining up they increase production in order to get more profits. That obviously wasn't going to happen in the Soviet Union since the central planners didn't really give a rat's a** about customers standing in line. It is equally true that lines of shoppers in the Soviet Union did not cause prices to increase - does this disprove neoclassical economics?

Now the merely ignorant:

Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical "multiplier"—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars.

But ignorant in a big way. Moore is basically dusting off the British Treasury view of the 1930s and employing it as if Keynes had not decisively demolished it in the General Theory. Ok, here's the logic. Suppose I decide to spend $10,000 to have a new roof put on my house. That creates a job for the roofer, does it not? Why wouldn't it?

- Well, maybe the roofer was booked solid so that to do my roof he has to cancel a job for another customer. In that case there's no employment effect.

- Or perhaps to buy the roof I had to cancel my plans to buy a car. In that case the roofer's employment is offset by unemployment in the auto industry.

- Or (and this is a little convoluted) perhaps when I took money out of the bank to pay for the roof, that caused the bank to be somewhat short of cash to lend out, so it raised the interest rates on loans and my neighbor who wanted to borrow to buy a car decided it was too expensive; there again unemployment in the auto industry offsets the new job for the roofer.

In a recession, none of those caveats apply. The roofer is not booked solid - he's spending long hours at home waiting for the phone to ring, and my job crowds out his time spent watching Nascar rather than someone else's roof job. I didn't have plans to spend the money on a car; in a recession people hoard money rather than spend it, so the money comes from savings rather than from spending on other goods. The bank didn't have to raise the interest rate on loans because the Federal Reserve is keeping interest rates fixed at near zero; the bank can acquire reserves from the Fed in essentially unlimited quantities to make all the loans it wants to at that rate.

Or as Keynes put it, the resources for the purchase of the roof come from idle savings and idle labor. No fairy is required: with 20 million or so people unemployed or underemployed, there are plenty of free resources to be drawn upon to finance purchases of whatever the government wants to buy. So it should do so.

Class warfare

2011-08-19T14:53:00.002-04:00

John Stewart says much smarter things about the budget battles than I ever could. Please Republicans, PLEASE make raising taxes on the 50 percent of Americans who don't earn enough to pay federal income taxes a centerpiece of your platform in 2012!

Privatize the liquor stores!

2011-08-12T11:48:00.003-04:00

This Forbes article about opposition to the bill moving through the Pennsylvania legislature to private the state liquor stores was reprinted in the Gettysburg Times this morning. I'm a well-known card-carrying liberal (except during my primary challenge to Todd Platts), but I'm enough of an economist to know BS when I see it. To whit:

A proposal to turn over Pennsylvania's state-controlled sale of liquor and wine to private business would drive up prices, limit the selection of products and leave many rural residents without a nearby liquor store, critics warned lawmakers Thursday.

The effect on prices and selection will come as news to the hundreds of people in the Gettysburg area who regularly drive down to Maryland to buy their wine and liquor.

Conti said a standard state store carries nearly 2,500 types of liquor and wine, and that the board maintains stores in rural areas, even when they are not profitable, as a matter of fairness for consumers, which may not be the case under privatization.

"The bill cannot force a grocery store to bid for a license," said Dale Horst, the PLCB's director of retail operations. "If the PLCB can't make any money because the sales volume is simply not there, these areas may not be served at all."

Please. By that logic the state should also run grocery stores, Walmarts and movie theaters. Look, the benefit of living in an isolated rural hamlet is the pastoral beauty and ability to escape the hurly-burly of city life. The cost is that you have to drive a ways to buy groceries and liquor.

I don't know enough about the details of the Turzai bill (but I'm going to start reading Lew Bryson's blog regularly for all my liquor privatization news), but here's my vision for Pennsylvania:

- I get to buy beer, wine and liquor in grocery stores, pharmacies, WalMart, wherever.
- I can buy my beer by the bottle, case, or six pack - I do not have to buy an entire case every time!
- There are no restrictions on the varieties of beer, wine and liquor available to me; any retailer in Pennsylvania can order any brand from any supplier anywhere in the world
- Alcoholic beverages are taxed at a reasonable rate, comparable to the rate charged by other states, that provides the state with a decent amount of revenue
- Workers at the establishments that sell alcohol are free to join a union and earn a decent living.

Ta-Nehisi Coates visits Gettysburg

2011-08-11T14:46:00.002-04:00

He dreads his visit:

At this point, I've toured quite a few battlefields -- the Wilderness, Petersburg, Shiloh, Fort Donelson. I have, for several reasons, been dreading a trip to Gettysburg. I should say a return to Gettysburg, because I came here in middle school on a field trip. I remember liking it a great deal, but having no deliberate sense of the Civil War in relationship to slavery, or Gettysburg in relationship to slavery. I certainly didn't know that Confederate Armies had kidnapped free blacks during the campaign. Of course, once you understand that the South seceded to preserve an economy built on enslaved black people, the act doesn't seem that shocking.

but in the end sees that we're not all that bad after all:

I can't go much further, because I risk giving up my article. But the point I'm driving at it's very tough to consider Gettysburg, as its commonly rendered in the American imagination, when you're black. And yet in point of fact, perhaps more than any other battlefield in the country, the folks at Gettysburg have done a really good job in making clear that the war was about slavery. What struck me more than anything was the film in the visitor center. It was narrated by Morgan Freeman. There were quotes from Frederick Douglass. You really couldn't watch it and think the Civil War was about anything else.

and he's still here!

And yet still, I had that weird feeling. I never feel more "outside" than when I'm visiting battlefields. I have one more day here, and a lot more to think about.

I wish he'd stopped by the College to say "hey" and to find out how we overwhelmingly liberal overwhelmingly northerners get by in a town that fetishizes the gallantry of the Confederate invaders. Maybe he did stop by but nobody told me. Where are you now Ta-Nehisi? Wanna get a beer?

London's burning

2011-08-10T11:30:00.004-04:00

The riots are the result of a lot of different factors, but surely the global economic crisis has something to do with it. Small signs of the unraveling of our society under economic pressures brings John Maynard Keynes' 1938 essay My Early Beliefs to mind. In it Keynes reflected on how poorly his and his cohort's pre-war beliefs held up against the reality of World War I, the Great Depression, the rise of Communism, Nazism, and lesser Fascisms, and the looming menace of World War II:

"We were the last of the Utopians, or meliorists as they are sometimes called, who believe in a continuing moral progress by virtue of which the human race already consists of reliable, rational, decent people, influenced by truth and objective standards, who can be safely released from the outward restraints of convention and traditional standards and inflexible rules of conduct, and left, from now onwards, to their own sensible devices, pure motives and reliable intuitions of the good...

"In short, we repudiated all versions of the doctrine of original sin, of their being insane and irrational springs of wickedness in most men. We were not aware that civilisation was a thin and precarious crust erected by the personality and the will of a very few, and only maintained by rules and conventions skilfully put across and guilefully preserved. We had no respect for traditional wisdom or the restraints of custom. We lacked reverence, as [D.H.] Lawrence observed and as Ludwig [Wittgenstein] with justice also used to say - for everything and everyone. It did not occur to us to respect the extraordinary accomplishment of our predecessors in the ordering of life (as it now seems to me to have been) or the elaborate framework which they had devised to protect this order... As cause and consequence of our general state of mind we completely misunderstood human nature, including our own...

"And as the years wore on towards 1914, the thinness and superficiality, as well as the falsity, of our view of man's heart became, as it now seems to me, more obvious....

"If, therefore, I altogether ignore our merits - our charm, our intelligence, our unworldiness, our affection - I can see us as water-spiders, gracefully skimming, as light and reasonable as air, the surface of the stream without any contact at all with the eddies and currents underneath. And if I imagine us as coming under the observation of Lawrence's ignorant, jealous, irritable, hostile eyes, what a combination of qualities we offered to arouse his passionate distaste; this thin rationalism skipping on the crust of the lava, ignoring both the reality and the value of the vulgar passions, joined to a libertinism and comprehensive irreverence, too clever by half for such an earthy character as Bunny [David Garnett], seducing with its intellectual chic such a portent as [Lady] Ottoline [Morrell], a regular skin-poison. All this was very unfair to poor, silly, well-meaning us. But that is why I say that there may have been just a grain of truth when Lawrence said in 1914 that we were 'done for.'"

We could use a few good people skilfully to put across some rules and conventions and guilefully to preserve them right about now. More broadly (and somewhat apart from Keynes' point in this particular essay, but consistent with his other writings): Managing the economy is important. We need growth and economic opportunity to keep our social structure from becoming unhinged. Expect more of what we're seeing in the UK as long as this economic crisis continues.

It's a government recession

2011-08-09T15:39:00.002-04:00

It started out as a construction / financial / manufacturing recession. Now employment in every sector of the economy is stagnant or growing. Only the government is shedding jobs. Here's the net change in employment by sector, July 2010 - July 2011, from the BLS:

Total nonfarm: +1.258 million
Total private: +1.805 million
Mining and logging: +89,000
Construction: +32,000
Manufacturing: +165,000
Trade, Transportation and Utilities: +342,000
Information: -23,000
Financial activities: -15,000
Professional and Business Services: +512,000
Education and Health Services: +405,000
Leisure and hospitality: +212,000
Other services: +86,000
Government: -547,000
Federal: -207,000
State: -90,000
Local: -250,000

Since March 2010, when overall employment started rising, nonfarm payroll employment has increased by an average of 109,000 per month - an anemic rate that is a bit under the level necessary to keep the unemployment rate steady. Hence the unemployment rate has increased a smidge. If government employment had increased by 18,000 per month during that period, the average rate of increase under the Bush administration, the average monthly increase in payroll employment would have been 158,000 - too low but not totally disheartening - and the unemployment rate would be drifting down slowly. Had government employment grown at its Bush-era rate, total employment would be 776,000 greater right now. And that is not taking the multiplier effect of government employment into account.

Faced with these facts, what are policymakers doing? Trying as hard as they can to reduce government employment at the federal, state, and local level. Brilliant!

And the Fed's response to the slowdown?

2011-08-09T14:31:00.004-04:00

The Fed today took the minimum possible step toward a more expansive policy, changing the wording of its statement to stress that it will maintain interest rates near zero "at least through mid-2013" rather than "for an extended period". It also says it will monitor the size of its asset holdings and consider the full range of policy options in case the economy weakens further.

I think this statement should have been made about three months ago, and today's action should have been to actually announce another round of asset purchases. But like last year, it looks like the Fed is going to be about six months late (and perhaps several trillion dollars short) with its policy response.

Note: I don't like to read too much into stock price movements, but it looks like the market was rallying this morning on rumors that the Fed was going to take some action. The Dow has fallen about 200 points since the Fed released its statement at about 2:18 and is now back to where it was at the beginning of the day. Nice job guys!

Update: Dow is up 429 for the day and Treasury yields are down. Looks like the stock market liked the Fed's statement after all. But I still think it's too weak.

A plan to reinvigorate the economy

2011-08-09T14:17:00.002-04:00

I approve of Joe Gagnon's approach:

- The Fed launches a new $2 trillion round of quantitative easing with a commitment to further action if the economy remains weak

- The Fed lowers the interest paid on reserves to zero

- The Obama Administration instructs Fannie Mae and Freddie Mac to allow all homeowners current on their mortgage payments to refinance regardless of loan-to-value ratio

- The Obama Administration makes a strong effort for mortgage modifications for distressed mortgage borrowers

- The Treasury renounces its "strong dollar" policy, allowing a broad-based depreciation.

I endorse Paul Krugman's caveat: the Fed should not reassure markets that it will switch course if inflation rises above 3 percent. In fact, the Fed should promise that it will continue to make purchases as long as inflation is below 3 percent for a few years.

I also support the establishment of an infrastructure bank in legislation attached to the highway bill that is under consideration in Congress, and an extension of the payroll tax holiday and unemployment compensation.

Everything but the last three proposals can be done by the Obama Administration and Fed alone, without having to go through Congress. For the last three, Obama needs to be much more specific and forceful than he was in his speech yesterday. The message ought to be, if Congress does not act on jobs, it - not he - will be held responsible for continued high unemployment in 2012. If you can't get the legislation, take the issue.

Outsourcing grading

2011-08-09T14:08:00.002-04:00

From the Chronicle:

Professors Cede Grading Power to Outsiders—Even Computers
By Jeffrey R. Young

The best way to eliminate grade inflation is to take professors out of the grading process: Replace them with professional evaluators who never meet the students, and who don't worry that students will punish harsh grades with poor reviews. That's the argument made by leaders of Western Governors University, which has hired 300 adjunct professors who do nothing but grade student work.

"They think like assessors, not professors," says Diane Johnson, who is in charge of the university's cadre of graders. "The evaluators have no contact with the students at all. They don't know them. They don't know what color they are, what they look like, or where they live. Because of that, there is no temptation to skew results in any way other than to judge the students' work."

Western Governors is not the only institution reassessing grading. A few others, including the University of Central Florida, now outsource the scoring of some essay tests to computers. Their software can grade essays thanks to improvements in artificial-intelligence techniques. Software has no emotional biases, either, and one Florida instructor says machines have proved more fair and balanced in grading than humans have...

Better still, grading could be outsourced to countries like India or Turkey that have large numbers of excellent academics willing to work for lower salaries than US instructors. Some of my colleagues have elaborate grading rubrics that they use to efficiently plow through 30 term papers a semester. But if the rubric is that good, surely it could be used by a contract worker instead of the instructor! For that matter, why do I write my own exams? I could download the final exam from some past intermediate macro class at an Ivy League university and send it to India to be graded - think of the time savings!

The debt deal

2011-08-01T08:16:00.002-04:00

Paul Krugman is apocalyptic this morning. "Disaster," "catastrophe," "abject surrender." I think we need to keep a few points in mind.

1. One way or another there needs to be spending reductions over the next ten years. I don't have the exact figures on me, but at the current pace of spending the federal government will spend something like 45 trillion dollars over the next decade. The promised cuts (relative to that baseline) are about $2.5 trillion, or just under 5 percent. Significant but not catastrophic.

2. the first round of cuts supposedly consists of programs identified by the Biden group that were uncontroversial. If we're talking about ethanol subsidies and other agricultural subsidies and the like, then liberals have nothing to complain about here.

3. The cuts don't start happening until 2013 (I believe; we don't have all the details), so they don't do significant damage to the economy right now. Hopefully the economy will be stronger by then and able to absorb the cuts with little pain.

4. It's unlikely that the Congressional commission that is supposed to propose further deficit reductions in November will propose significant tax increases. However, as I understand it the commission will use "current law" as the baseline for it's recommendations. Current law is that all of the Bush tax cuts expire at the end of 2012, increasing revenue by $3.5 trillion or so over the next decade. So if the commission fails to make any recommendations for tax increases, revenues will rise by that amount, more than the total amount of spending cuts. Theoretically the Commission could propose keeping the tax cuts at the low end but letting the high end cuts expire (liberals' preferred outcome) and this would be scored as a tax cut by the Commission!

5. So I don't think the agreement is terrible. The worst that can be said about it is that it does not include any tax cuts or spending increases to create jobs this year. Obama indicated in his speech that he is still committed to pushing a continuation of the payroll tax cuts imposed in December and an infrastructure bank, legislation for which is working it's way through Congress. I don't know how the agreement affects those efforts, but if we can now turn our attention to jobs, that's a good thing.

Ezra Klein answers Brad Plumer's question

2011-07-29T16:36:00.002-04:00

First Brad Plumer asks: "Why won't Obama just declare the debt ceiling unconstitutional?" Ezra Klein follows with "Whom will the public blame for debtageddon?" concluding that while the debacle isn't helping Obama, it is killing the Republicans. So Obama's just following the old piece of political advice, when you're opponent is being an ass, don't interrupt him. (Or something like that.)

Golly this is funny

2011-07-29T16:04:00.000-04:00

Courtesy of Moveon.org via Ralph.

Government spending

2011-07-29T14:59:00.003-04:00

A little perspective on the debate over government spending. In Fiscal Year 2011 federal government spending is about $3.7 trillion, or roughly 24.7 percent of GDP. That's high - the average for 1971-2010 is about 21 percent. This is why Republicans are making such a fuss about getting spending under control.

At the same time, tax revenues are currently $2.2 trillion or 14.8 percent of GDP. That's low - the average for 1971-2010 is about 18 percent. So it's ridiculous for Republicans to say "we don't have a revenue problem, we have a spending problem." We have both problems.

Why has spending increased so much during the Obama Administration? Well, most of the increase was a result of the recession and financial crisis: TARP, unemployment compensation, food stamps, etc. have all contributed. But I think that when Republicans talk about runaway spending they're thinking of the government programs that fall in the category of "nondefense discretionary" spending. Roads, education, environment, all of those special programs that were part of ARRA like green technology investments. But let's look at that spending. Here's the data from the Congressional Budget Office:

The red line is nondefense discretionary spending from 1990 to 2012 (the 2012 figure is from the President's 2012 budget proposal). From 1990 to 2008, nondefense discretionary spending rose at an average rate of 5.3 percent per year. The solid green line on the graph shows this trend. Spending jumps above trend under the Obama administration. But all of the increase is in 2009 and 2010 and reflects the temporary spending under ARRA. Nondefense discretionary spending in 2011 was only $3 billion higher than it was in 2010, and the President's budget calls for no increase in 2012. By FY 2012, if Congress were to pass the President's budget as proposed (not very likely), spending would be just about back to the 1990-2008 trend line (the dashed part of the green line).

This actually overstates the spending increase under Obama because the 2009 budget was passed in 2008 when Bush was president. I've attributed it to Obama here because some of the spending under ARRA went in the FY 2009 budget, but some of the increase in 2008-09 was probably Bush's doing, not Obama's.

So where's the spending crisis? As Paul Krugman shows, a big chunk of the increase is in the category of "income security" - food stamps, unemployment compensation, and so on. But Republicans have wisely, I think, framed their arguments in terms of spending in general, not programs like food stamps. I don't imagine that threatening to default on our debt unless Democrats agree to cut spending on food stamps would poll very well.

Of course there's also the issue of entitlement spending (Medicare, Medicaid, Social Security). But the increase in spending on those programs is not Obama's doing, it's a decades-old structural problem. It's important to do something about these programs, but I'm going to suggest it's not a good idea to cobble together a solution four days before a government shutdown.

The platinum option

2011-07-29T10:27:00.003-04:00

In addition to declaring the debt ceiling unconstitutional under the 14th Amendment, Jack Balkin at Yale University Law School suggests two ways that President Obama could work around the debt ceiling in the event that an agreement isn't reached by next week.

One:

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

This seems right to me, with the caveat that there is no legal limit that I am aware of on the amount of paper currency that can be in circulation. Maybe he means to refer to the amount of Treasury bonds issued? To the extent that the Fed issues reserves by purchasing mainly Treasury securities, and banks buy paper currency with reserves, this puts a practical limit on the amount of currency in circulation. But it's not a legal limit. Anyhoo, the Treasury does have an account at the Fed from which it pays its bills, and if it deposited $2 trillion in platinum doubloons into that account it would be good to go.

Two:

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

Sure, why not? The Fed is a powerful agency, with extraordinary powers it can deploy in an emergency (see 2007-09). If the Fed can make loans to Bear Stearns or AIG in an emergency, why not the Department of the Treasury?

But of course the time for the Administration to drop hints that it was considering doing this kind of thing was months ago, not the weekend before debtmaggedon. Doing so months ago would have deprived the Republicans of the soap box that they've used to take over the political debate and would have assured financial markets and businesses that the government wasn't going to throw nails onto the road to recovery.

Again: the issue is the economy, not default

2011-07-29T09:58:00.003-04:00

Two important events with importance to financial markets have occurred in the last 24 hours. Last night John Boehner pulled his debt ceiling bill for lack of Republican votes. This event adds to the chaos surrounding the debt ceiling and increases the chance that no agreement will be reached by Tuesday, when Treasury borrowing hits the legal ceiling. This morning the Bureau of Economic Analysis reported that GDP grew only 1.3 percent in the second quarter, following a miserable 0.4 percent gain in the first quarter (in normal times with full employment we want something like 3 percent growth; to get out of our current recession in a reasonable amount of time we need something like 5 percent for awhile).

So what did the financial markets do? So far, stock prices are falling while Treasury bond prices are rising. Wait, rising? That means yields are falling. Let me check that - yep, interest rates on ten-year Treasury bonds fell from 2.95 to 2.88 percent this morning. I thought that the prospect of default was supposed to drive bond yields up because no one wants to lend to a government that doesn't seem to want to pay its bills. That's odd.

Well, it really isn't odd. Everyone knows that the Treasury is going to continue to make payments on its debt. Even if the debt ceiling is reached on Tuesday with no agreement, the Treasury will have enough money coming in from tax revenues to make those payments. At risk is the rest of the budget: Social Security payments, payments to government contractors, federal government employee salaries, electric bills for government agencies, and so on. If that spending is curtailed it will be incredibly damaging to the American economy. The total amount of spending cuts amount to something like 10 percent of GDP. Given that GDP growth is already perilously close to zero, it almost certainly would push us back into another recession. That's why the stock market is dropping. And if the economy weakens further the Federal Reserve is likely to begin another round of quantitative easing to push interest rates down - that's why bond rates are falling now.

It's quite likely that the chaos over the debt ceiling was a contributor to the slowdown in the second quarter and this month. News reports claim that businesses are putting off purchases and hiring to hoard cash in case of a disruption of payments or an economic slowdown. Go back a few posts to see what this does to the economy: more demand for money means less demand for goods and labor. The solution is for the Fed to add reserves to the banking system to satisfy people's desire for money. If it does this by buying long-term bonds of various kinds it reduces interest rates enough to encourage people to stop hoarding and start spending. But QEII ended in June - the Fed is keeping reserves constant for now.

So this looks to be another strategic blunder on the part of the Obama Administration. Months ago the administration should have made it clear that it would not default on the debt, that it would not let Congress' failure to pass a debt ceiling bill prevent it from paying its bills. It could have been coy about how it was going to do this - invoke the 14th Amendment? the platinum option? surely there are enough creative minds in the White House Counsel's office to come up with a way around the debt limit. I guess the reason the Administration did not do this was that it thought that by generating a sense of crisis it could force Republicans to sign onto a budget deal that would resolve some long-term fiscal issues. Turns out that is not the case, and now we're left with the crisis without the deal. Well played!

The Bush Administration: the gift that keeps on giving

2011-07-28T14:52:00.002-04:00

With the tax cuts, wars, regulatory failures, Katrina, US Attorney scandals, and so on, I thought I had a complete picture of all of the disastrous policy decisions that were made by the Bush Administration. Ah, but I'd forgotten about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Thinking back to those halcyon days, I recall that the BAPCPA seemed to me a gratuitous slap at consumers by the financial industry (and their tools in Congress and the Bush Administration). Consumers are running up huge balances on their credit cards, said the big credit card issuing banks. Let's make it more difficult for them to squirm out of these debts if they ever get in over their heads (not "let's stop sending 15 year olds multiple credit card offers with teaser introductory rates," but rather "let's make sure they're totally screwed if they keep taking the money we're sending them").

So the BAPCPA changed the bankruptcy laws to tighten restrictions on who may file for Chapter 7 bankruptcy. If I declare Chapter 7 bankruptcy, my credit card and other unsecured debt is discharged, freeing money up so that I can continue to make payments on secured debt like my home mortgage. The BAPCPA prevented people whose pre-bankruptcy income exceeded the state median from declaring Chapter 7 bankruptcy and imposed other impediments. As a result, more people who declare bankruptcy now must do it under Chapter 13. The key difference between Chapter 13 and Chapter 7 is that when I file under Chapter 13 I must continue to pay off my credit card debt, which means that I have less money available to keep up with my mortgage.

Hmm, I wonder if the BAPCPA increased the number of homes under foreclosure due to the more stringent treatment of credit card debt? Well, it turns out that Donald Morgan, Benjamin Iverson, and Matthew Botsch at the New York Fed have run the numbers. What did they find?

The estimated impact of BAR on subprime foreclosures is substantial. For a state with average home equity exemptions, the average subprime foreclosure rate over the seven quarters after BAR was 11 percent higher than the average rate before BAR. This translates to about 29,000 more subprime foreclosures nationwide per quarter attributable to the reform.

And in a footnote:

BAR may have indirectly contributed to foreclosures via lower home prices. To the extent that cash-flow-constrained borrowers were forced to sell their homes in lieu of filing Chapter 7, the downward pressure on home prices would contribute to foreclosures by leading to underwater” mortgages.

Oh, the creative ways the banks and Republicans find to screw up our economy never ceases to amaze me.

Where's my carbon tax again

2011-07-26T16:13:00.004-04:00

Matthew Yglesias also notes the bizarre disappearance of a carbon tax from the debate over the debt ceiling.

This is another Democratic failure. The Democrats should be holding to the line that our number one concern now is jobs, not deficit reduction. They should trade stimulus now for future spending cuts. A carbon tax ought to be part of their long-range plan for what to do with the tax code - surely in a sane world we could all agree that as long as we're taxing people to finance our government, we should be taxing consumption instead of labor, and consumption of fossil fuels most of all.

Austerity

2011-07-26T13:25:00.004-04:00

A likely outcome of the debt negotiations is large cuts in government spending to reduce the debt burden. How would this affect the economy? Well, in fall 2010 the conservative government of the UK announced a program of austerity intended to reduce the government's debt load and restore business confidence so that businesses would start to hire and invest again (sort of what Republicans argue will happen if the US reduces spending). How's that worked out so far? See for yourself:

Caution: you never want to attribute every squiggle in the data to a single event. Lots of stuff contributes to movements in GDP. Still...

What's motivating Obama and the Democrats?

2011-07-25T11:25:00.003-04:00

President Obama is once again stirring up the ire of liberals for his handling of the debt ceiling mess. Paul Krugman is calling him "President Pushover," echoing Elizabeth Drew's critique that Obama has decided that ruling like a moderate Republican is the key to winning the independent vote in 2012. That may very well be true. Obama has put up no struggle as Republicans have turned the economic debate from creating jobs to reducing spending. His proposals for resolving the debt embroglio are heavily weighted toward big spending cuts. It does indeed seem crazy, as Krugman writes, for Obama to be pinning his reelection hopes on a set of programs that seem to guarantee continued high unemployment going into the 2012 election while forcing Democrats to share the stain of cutting Medicare with Republicans.

But what explains Harry Reid and Nancy Pelosi? In their current negotiations with John Boehner they are apparently offering spending cuts in exchange for lifting the debt ceiling with no guaranteed increase in taxes. As David Kurtz says, "Dems to GOP: If we give you everything you want, will you finally raise the debt ceiling?" I don't see how their position is any better than Obama's.

It seems to me there are three possible interpretations. (1) The Democratic Party in general is just as hapless as Obama. They've all bought into the arguments of what Krugman calls the Very Serious People who think that deficit reduction is good for the economy; they are all pushovers before the Republicans' scorched earth tactics. (2) Reid and Pelosi believe that the independent vote is also key to their maintaining / regaining control of their respective houses in 2012. (3) Reid and Pelosi, like Obama, are simply calling the Republicans' bluff. They know the Republicans won't take yes for an answer so their offer of significant spending cuts is so much cheap talk. They also know that they have an ace in the hole - it will require legislation to extend the Bush tax cuts, and without such legislation they're guaranteed big revenue increases.

My money is on (2) or (3). At any rate, all of the criticism of Obama seems misplaced to me. Senate and House leaders have not acquitted themselves any better than Obama since the health care fiasco of 2009-10 and the failure to pass a budget in 2010. Obama's missteps are not the product of his own unique failings - they are either symptomatic of problems in the Democratic Party as a whole, or are actually not missteps at all but shrewd political gamesmanship on the part of all of the major players in the party.

Let's not make a deal

2011-07-21T16:32:00.002-04:00

It's probably time to acknowledge that no deal - no deal favorable to Democratic political or economic interests at any rate - is going to arise from the current negotiations on the debt ceiling. It's clear that Republicans will not at this time agree to one penny's worth of tax increases. Part of the reason for this is because of the anti-tax religion that has swept over the party. But there's a pragmatic reason as well: Republicans at some point will be willing to close tax loopholes and special preferences like the tax break for corporate jets, but they plan to use that concession to finance reductions in marginal tax rates in a coming round of tax reform. At any rate there's really no sense in continuing to hope and bargain. The only agreement that seems plausible is one where Democrats agree to some modest spending cuts and Republicans structure the agreement so that we have to go through this same ordeal several more times before the 2012 election.

In that case, I think it's time for Barack Obama to say that negotiations have collapsed and he's going to take a nice long vacation in Hawaii. When he gets back he expects to see a no-strings-attached bill to lift the debt ceiling that carries us through the 2012 election on his desk. In the same breath he can say that he is committed to carrying out negotiations with Republicans int he context of the FY 2012 budget using the Bowles-Simpson / Gang of Six framework as a starting point. He can make the point that the debt ceiling debate was never the proper forum for these negotiations anyway: Congress passed a budget resolution, which the President signed, that committed the US to a certain amount of borrowing during FY 2011. If Republicans don't want the government to borrow more, they should pass a budget that doesn't require it to. Until then, I think everyone can agree that the government should pay for what it buys.

Will the Republicans balk? Yes they will. On August 2 Congress will fail to pass the resolution lifting the debt ceiling. The DJIA will then fall 700 points and the Federal Reserve will announce that it will essentially guarantee the US debt by purchasing any amount anyone wants to sell. Congress will then meet again and pass the resolution, resolving the crisis. I think this is probably what's going to happen anyway, but with a bill that cuts spending and worsens the recession. Under my plan, we get the same day of total panic but none of the harmful spending cuts.

That's not to say that spending doesn't have to be cut sometime. I don't think it will be the end of the world if the government decides to save a few hundred billion dollars on Social Security by using the chained CPI instead of the current CPI to index payments. But if we do that, it should be in the context of a serious budget deficit reduction program that includes meaningful tax increases. We don't cave on that issue in exchange for a closing of the tax break on corporate jets. With time, perhaps Congress and the Administration can actually come up with a sensible multi-year fiscal plan. The plan should absolutely include a carbon tax (Brad DeLong notes its strange disappearance from the debate, something I've been wondering about myself). President Obama has a strong hand to play in negotiations over a real deficit agreement. Without some legislation to the contrary, the biggest of the Bush tax cuts expire in 2012 and rates go back to what they were in 2000. The expiration of these tax cuts will do more than any proposal out there to restore long-term balance to the budget. If the Republicans want some of the current tax rates to stay in place, they will have to deal or make it a campaign issue in 2012.

One more strategic consideration. If the Democrats get a deal on the budget now, the budget declines as an issue in 2012. And then what will the campaign be about? It'll be about the fact that the unemployment rate is still 9%. If there's no deal, then the 2012 campaign is all about Medicare, taxes, and the budget - I think the Democrats will be pleased if that's the case. I'm willing to sacrifice the Democrats' electoral interests for a good budget deal, but not the lousy kind I think we're likely to get if we try to agree to something in time for a lifting of the debt ceiling.

And now for something completely different:

2011-07-20T16:55:00.001-04:00

Male Organ and Economic Growth: Does Size Matter?

Tatu Westling
University of Helsinki
Discussion Paper No. 335
July 2011
ISSN 1795-0562

Abstract
This paper explores the link between economic development and penile length between
1960 and 1985. It estimates an augmented Solow model utilizing the Mankiw-Romer-Weil
121 country dataset. The size of male organ is found to have an inverse U-shaped
relationship with the level of GDP in 1985. It can alone explain over 15% of the variation in
GDP. The GDP maximizing size is around 13.5 centimetres, and a collapse in economic
development is identified as the size of male organ exceeds 16 centimetres. Economic
growth between 1960 and 1985 is negatively associated with the size of male organ, and it
alone explains 20% of the variation in GDP growth. With due reservations it is also found
to be more important determinant of GDP growth than country's political regime type.
Controlling for male organ slows convergence and mitigates the negative effect of
population growth on economic development slightly. Although all evidence is suggestive
at this stage, the `male organ hypothesis' put forward here is robust to exhaustive set of
controls and rests on surprisingly strong correlations.

Job-killing spending cuts

2011-07-20T11:26:00.003-04:00

During the debt ceiling battle the Republicans have shown once again how much better they are than Democrats at the rhetorical aspect of politics. When Republicans talk about government debt, they never fail to claim that reckless spending is costing jobs, whereas the Democrats' proposals for "job-killing tax hikes" on "families" and "job creators" will just make matters worse. Democrats weakly counter that cutting spending during a recession will slow down the recovery, but their words lack the force that comes from endlessly repeating phrases like "job-killing tax hikes", "failed economic stimulus", and so on. I recommend that from now on, no Democrat ever mentions spending cuts without attaching the modifier "job-killing".

To bring the matter home: this spring President Obama, caving into pressure from Republicans for spending cuts, slashed funding for community action programs. These federal budget cuts and similar cuts at the state level have forced the South Central Community Action Program, which provides social services in Adams County, to terminate some important programs. Most crucially, Wee Care, my kids' day care center which also serves a lot of low income people in Gettysburg, is closing at the end of the summer. They need something like $100,000 a year to operate, and they're no longer going to get it from the state and federal government. So they close - and with their closing, a dozen or so hard-working, patriotic Americans who have devoted their lives to educating our children, will lose their jobs. Jobs killed by our politicians' obsession with cutting spending and unwillingness to raise taxes even a little bit to preserve essential programs. To quote Charlton Heston: "Damn you! Goddamn you all to hell!"

This episode is really a microcosm of what's happening all over this country. The recession is grinding the life out of low income communities while the well-healed protect themselves from the pain. Over the next few years I suspect that the class divide in this country is going to be more and more obvious, and eventually too toxic to ignore. Let's put this in perspective: Gettysburg College is gearing up for another fund-raising campaign with a goal of raising something over $100 million dollars. I wish us luck. That kind of money will allow us to continue to (start to?) pay competitive salaries for faculty, offer new programs for our students, and overall sustain the quality of our college. But an endowment of just $2 million or so - the kind of generous donation Gettysburg gets every year or so - would save the SCCAP programs permanently and, I'd argue, do much more good at the margin than anything Gettysburg College is going to do with this money. Will anyone step up? Will anyone even think of asking? No, I'm afraid Gettysburg College and society's upper crust in general will continue to get along just fine while the bedrock beneath us crumbles away.

I think the biggest risk is recession, not financial crisis

2011-07-11T11:31:00.002-04:00

So on August 2, if no deal has been reached to lift the debt ceiling, the US government has to start deciding which bills to pay and which to delay or renege on. My guess is that the Treasury will announce unequivocally that it will honor the debt. Otherwise there will be another financial collapse and horrible recession. The long term consequences for the terms on which the US can borrow and the role of the dollar as the world's main reserve currency would also be severe. I'd also expect the Federal Reserve to buy US government securities in whatever amounts are needed to prevent a major spike in interest rates.

Consequently, I think the main danger posed by a funding crisis is what happens if the Treasury stops making payments to other claimants on the government budget -- Social Security checks, reimbursements to doctors and hospitals for Medicare and Medicaid, payments to government contractors, etc. The total impact is estimated to be about 10 percent of GDP -- enough to throw the economy into another major recession. Of course, that is also about what the effect would be of a resolution of the crisis on Republican terms.

The bright side

2011-07-08T12:51:00.003-04:00

The bright side of June's dismal employment report is that perhaps the obvious signs of stagnation will strengthen Obama's hand in pushing for new stimulus measures as part of the debt ceiling agreement. John Boehner at last seems to recognize the problem:

In a political role reversal Friday, House Speaker John Boehner (R-OH) warned that Congress risks severely harming the economy and exacerbating the unemployment crisis if it fails to raise the national debt ceiling in the next four weeks.

"While some think we can go past August 2nd, I frankly think it puts us in an awful lot of jeopardy, and puts our economy in jeopardy, risking even more jobs," Boehner told reporters at his weekly Capitol briefing.

By contrast, I think if the employment report had shown growth in jobs around 150,000 as expected, the mood in Washington would have been that the recovery, while not as strong as we would want, is self-sustaining and we can continue on our merry budget cutting way.

Issue Paper #3: Climate Change

2011-07-06T10:54:00.003-04:00

It is not “conservative” to ignore the clear scientific evidence that global temperatures are increasing at least in part due to the burning of fossil fuels by people and businesses. There is, however, a great deal of uncertainty about the severity of the problem and the effects of reducing carbon emissions now. In light of that uncertainty, it is prudent to take measured actions to begin reducing carbon emissions. These actions should phase in gradually to minimize the economic costs. The measures we take should allow us to accelerate emissions reductions as evidence of humankind’s contribution to global warming strengthens, and be reversible in case new scientific evidence shows that humans are not a major cause of global warming.

The Obama Administration has proposed strict new regulations on carbon emissions from electrical utilities that threaten to raise costs and hurt the employment prospects for millions of American workers. At the same time, the Administration is following the example set by the G.W. Bush administration in introducing costly government subsidies for untested technologies such as ethanol, wind power, and solar power. This amounts to a radical industrial policy under which government is tasked with picking winners and losers. It is a vast intrusion into private business decisions that violates time-honored conservative principles. The Administration’s proposed new mileage standards for automobiles is industrial policy on steroids. If elected I will push for a reversal of these programs and their replacement with a more sensible approach to dealing with the problem of climate change.

My approach reduces carbon emissions by relying on private enterprise and the prudent decisions of American households working through markets. Basic economic theory tells us that if the price of emitting greenhouse gases rises, businesses and households will find the most efficient ways of reducing emissions. All government needs to do, then, is to impose a tax on carbon emissions (or, equivalently, to require companies and households to purchase permits to emit greenhouse gases and then let them purchase these permits through auctions). The tax or “cap-and-trade” system will raise the price of emissions. Businesses and households, faced with higher costs of emissions, will make the changes required to reduce their emissions that are best for them, as opposed to the current “one size fits all” industrial policy approach. At the same time, I will support the elimination of all of the green technology subsidies and regulations on carbon emissions that the Obama Administration has imposed.

Under my proposal, the tax on carbon emissions will be phased in gradually over a ten year period. This will allow us to avoid wrenching changes now that will slow the recovery. It will also provide an incentive for businesses to invest in new technologies such as electric cars and solar power that will be profitable when the taxes are fully phased in, stimulating growth. A tax on the carbon content of all products bought and sold in the US will apply equally to goods imported from countries like China, so American manufacturers will not be put at a disadvantage relative to foreign competitors. If in the years to come new scientific evidence emerges showing that carbon emissions are not a major cause of global warming, the taxes can be reduced or eliminated.

Pricing carbon emissions through taxes or a cap-and-trade system is the conservative solution to problems like climate change. A cap-and-trade system was applied successfully to the problem of sulfur dioxide emissions under the G.H.W. Bush administration in the early 1990s. The market-based solution has been endorsed by many conservative economists, including Gregory Mankiw, the Chairman of the Council of Economic Advisors under George W. Bush. It is an efficient approach to a serious environmental problem and accomplishes its objectives with as little government interference in private business decisions as possible.

Issue paper #2: Health care

2011-07-04T15:14:00.005-04:00

It has long been a principle in our society that people should not be denied health care simply because they cannot pay. Doctors are required by oath to give emergency care to anyone who comes to them. Hospitals are required by law and by basic principles of Judeo-Christian morality to do the same. Having made the commitment to provide people with medical care, the question is how to do this in the most efficient manner.

As a conservative Republican, I believe that to the greatest extent possible we should leave the allocation of resources to markets rather than government. In general markets are the most efficient mechanism to accomplish this. Economic theory and years of experience demonstrate that when markets are competitive, government interference only leads to inequity and inefficiency.

Markets for health care and health insurance, unfortunately, are unlike other markets. Consumers are not willing or able to weigh costs and benefits of treatment, especially in emergency situations. Health insurance markets are plagued by the problems of moral hazard and adverse selection. As a result, a free, unregulated health care market delivers excellent care for the majority of people, but young people and people with low incomes typically do not get coverage. When they get sick and require care, the cost of care is borne by those with insurance. This raises the cost of health insurance, raises costs for business, and makes our economy less competitive.

To deal with these problems, liberals have long advocated a system of universal health care modeled on Medicare. But government-run health insurance will inevitably fail to control costs. The most popular measures to control costs under Medicare, such as placing price controls on pharmaceuticals and forcing doctors and hospitals to accept lower reimbursement rates, merely shift costs to health care providers and in the long run will destroy the incentives to invest and innovate.

Republicans have a better plan. In Massachusetts, Republican governor Mitt Romney implemented a system under which government provides vouchers to individuals to buy health insurance from private insurance companies. Insurance policies were made more uniform and are sold on "exchanges" that closely approximate competitive markets. As a result, almost all residents of Massachusetts are now covered by health insurance, and the plan remains popular. A version of this plan has been proposed by Republican Congressman Paul Ryan to transform Medicare. The voucher system is similar to conservative proposals for reform of public schools. Given the success in Massachusetts, I propose applying this plan nationwide.

Now, Democrats passed a health care plan modeled on the Massachusetts experiment in 2010. In this case, Democrats were adhering more closely to conservative principles than my fellow Republicans. However, the Democratic plan included a smorgasbord of taxes and fees on things like medical devices that represent a harmful and unnecessary intrusion into private enterprise. I propose eliminating these onerous taxes and fees and other regulations contained in the bill (though the elements of the law forbidding insurance companies from setting lifetime limits for coverage and denying care to people with pre-existing conditions need to stay). The Democrats' law also did not include tort reform. I will insist that Congress amend the law to ensure that there is a predictable system of compensation for medical malpractice that is fast and efficient, treats like cases in the same way, and provides meaningful incentives for doctors and hospitals to maintain high quality without imposing excessive costs on them.

Reform of our health care system did not end with the passage of ACA in 2010. Republicans need to be at the table when the new system is modified, as it must be, in the years and decades to come. We need to resist costly add-ons to the system while maintaining the market emphasis of the legislation and ensuring that states have the flexibility to experiment with alternative arrangements. Republicans can best accomplish this if they are active participants in reform rather than taking the nihilistic approach of the current Republican leadership. I pledge, if elected, to be such a positive voice for reform.