Fin/Inv

Tim writes:

Rising NAIRU?: [T]he long term challenge may already be upon us.  David Altig puzzles over the implications of a shifting Beveridge curve.... He... hones in on the possibility of a skills mismatch:

Now I realize that a few anecdotes don't make facts, but I have been in more than a few conversations with businesspeople who have claimed that the productivity gains realized in the United States throughout the recession and early recovery reflect upgrades in business processes—bundled with a necessary upgrade in the skill set of the workers who will implement those processes. This dynamic suggests that the shift in required skills has been concentrated within individual industries and businesses, not across sectors or geographic areas that would be captured by our most straightforward measures of structural change.

To be honest, I hear this complaint too, but have trouble swallowing it.  I believed it in the mid and late 1990's, but now?  The eight million people dropped into unemployment are all unemployable?   Firms are willing to lose profits than do the unthinkable, on the job training, actually invest in their employees?  I also have heard the opposite story, of overeducated temporary Census workers desperate for employment, completing assignments in a fraction of the expected time, not realizing that their productivity would only be rewarded with a shorter stint of employment.   And if we are experiencing all these magical productivity gains and a shortfall of workers, then wages should be rising quite smartly.  But from one of the articles cited by Altig:

Here in this suburb of Cleveland, supervisors at Ben Venue Laboratories, a contract drug maker for pharmaceutical companies, have reviewed 3,600 job applications this year and found only 47 people to hire at $13 to $15 an hour, or about $31,000 a year.

You get what you pay for.  To put this into perspective, the average national wage for Wal-Mart was $11.24/hour in 2009.  I would hope, however, that Ben Venue Laboratories pays better benefits. I would really appreciate a good story that explained why we should be happy about high productivity growth if real wage growth is not surging.  The lack of the latter makes me question the reality of the former.... [I]f a skills mismatch is really a problem, then the solution is to ramp up activity until labor shortages raise wages and force employers to reach deeper into the barrel and in turn bring more people into the labor force to gain those missing skills.  Better to do it sooner than later.  If the productivity gains are real, the wage gains should not be inflationary.  This was the story of the 1990s. Otherwise, policymakers sit and wait as the potential structural rigidities deepen, thereby ensuring a higher NAIRU in the future.  And, driven by fear of inflation, this appears to be exactly what policymakers intend to do.

10-year Treasury at 2.91%.

I am not convinced. The U.S. economy is so large, and barriers to upper-class labor mobility across the Anglosphere so small, that I think the U.S. drags inequality trends in other English-speaking nations along after it.

Via Henry Farrell, Andrea Brandolini:

Why Is Economic Inequality Higher in English Speaking Industrialized Democracies?: What I really find conspicuous in the comparison of top income shares across rich nations is the similarity of the patterns observed in English-speaking countries as opposed to those found in continental European countries. It is striking that, after a prolonged period of moderate decline, the income share of the richest 1 percent suddenly began to rise in the mid-1980s in the United Kingdom, Canada, Ireland, Australia, and New Zealand as well as in the United States, while it exhibited no upward trend in France, Germany, the Netherlands, Spain, and Switzerland.

The difference between these two groups of countries confirms that market and technological forces cannot be the whole story, but the similarity of trajectories, including the time of the turning point, in the English-speaking countries defies an explanation based only on the national characteristics of the U.S. political process. Hacker and Pierson recognize the potential problem, but play it down by positing that the close interdependence of the markets for top executives can largely account for the common trends in English-speaking economies. Perhaps, but why should interdependence be so much stronger between London and New York than between London and Frankfurt in today’s highly integrated financial markets? Can common language be the only critical factor, or are there more fundamental reasons?

Hoisted from Comments:

vtcodger said...: Re: "Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations."

No, I'm pretty sure they don't. Moreover, they developed the Periodic Table of Elements around 1870 -- roughly 30 years before Pauli and Heisenberg were even born. Understanding of why the Periodic Table works took another 80-100 years. They did not even mention Pauli and Heisenberg in 1961 when I got my BS in Chemistry at UCLA.

That's important, because it is one of many demonstrations that you can do useful science and successful prediction without understanding exactly why things work. Darwin and Wallace didn't know about genetics but still managed to work out evolution. They didn't do a half bad job. Gregor Mendel did know quite a lot about genetics by the time he died in 1884, but he did not know anything about DNA. (Neither would the knowledge have helped him much if it were somehow revealed to him).

If anything this supports your argument. You don't have to know how economics works to know that fiscal austerity during downturns and fiscal profligacy during booms are both bad ideas.

Economics: Is America facing an increase in structural unemployment?

I think the answer is "yes"...

David Altig of the Federal Reserve Bank of Atlanta http://macroblog.typepad.com/macroblog/2010/07/a-curious-unemployment-picture-gets-more-curious.html has just convinced me that the answer to this question is "yes": given the large recent increase in vacancies in the past two quarters, the U.S. unemployment rate ought to have started to fall. It did not.

That means that the chances are now very high that our cyclical unemployment is starting to turn into structural unemployment, as businesses that seek to hire and have the cash flow to hire still find that the currently-unemployed applying for jobs don't fit inside their comfort zones.

The solution? The last time the U.S. was in such a situation was at the end of the 1930s. Mobilization for total war cured the incipient structural unemployment problem with ease. The solution is to rapidly boost aggregate demand: quantitative easing, raising the Federal Reserve's inflation target, banking policy to take more risky assets onto the government's balance sheet, and fiscal expansion. Time is of the essence. For the odds are now better than 50-50 that two years from now we won't have the ability to quickly and cheaply reduce unemployment to normal levels through boosting aggregate demand.

Numerology is not a science. And there is no reason to think that 21% is a particularly auspicious number.

Matt Miller--like me, part of the sensible, technocratic bipartisan center--looks at what is coming out of the Obama deficit-reduction commission, and is as horrified as I am:

A spending goal too small for aging America: I don't want to overreact. I'd hate to prematurely diss President Obama's National Commission on Fiscal Responsibility and Reform, which held its fourth public meeting Wednesday. But the commission's Democratic co-chair, Erskine Bowles, may have already blown it.... Bowles suggested that the long-term goal the commission should adopt for federal spending should be 21 percent of gross domestic product. This sounds like a bookkeeping matter. But... federal spending under Ronald Reagan averaged 22 percent of GDP. Under Bowles's view, therefore, the outer limits of the Democratic Party's 21st-century aspirations would be to run government at a size smaller than did a 20th-century conservative icon. What's more, Reagan ran government at this size at a time when 76 million baby boomers weren't about to hit their rocking chairs. In 1988, 32 million retirees received Social Security and 33 million were on Medicare, our two biggest domestic programs. By 2020, about 48 million elderly Americans will receive Social Security, and 62 million Americans will be on Medicare (then the numbers really soar).... [Total] health costs in the Reagan era were around 10 percent of GDP, while they're now 17 percent, headed toward 20. Obviously we need a national crusade to make health-care delivery more efficient. But until there's progress on this front, the 21 percent goal would be tantamount to Democrats agreeing that Uncle Sam should handle health care, pensions, defense and little else.

And that's before factoring in the odds that corporate America will come to its senses in a few years and ask government to relieve it of its crazy health-cost burden, at which point the 4 percent of GDP that big companies now spend on health care might sensibly shift to public ledgers....

So what was Bowles thinking?

Perhaps he wasn't....

Let me be clear: I'm all for ending ineffective programs and reallocating the cash; trimming the bloated Pentagon; and reforming tax subsidies for mortgage interest and charitable contributions....

This fall we'll have a phony debate about extending the Bush tax cuts, when it's inevitable that taxes will rise as the boomers age.... If Bowles's Democratic colleagues don't make him walk back his blunder, the great debate this commission should spark about how to marry prudent public finance with America's values and aspirations will be lost before it's even begun.

We are live at Project Syndicate: John Stuart Mill vs. the European Central Bank:

One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.

Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.

Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.

The “right” conclusions depend on which of two types of economist you are. One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization’s voters, bureaucrats, and politicians as they slouch toward utopia.

Not surprisingly, I believe that only the second kind of economist has anything useful to say. So what lessons does history have to teach us about our current global economic predicament?

In 1829, John Stuart Mill made the key intellectual leap in figuring out how to fight what he called “general gluts.” Mill saw that excess demand for some particular set of assets in financial markets was mirrored by excess supply of goods and services in product markets, which in turn generated excess supply of workers in labor markets.

The implication of this was clear. If you relieved the excess demand for financial assets, you also cured the excess supply of goods and services (the shortfall of aggregate demand) and the excess supply of labor (mass unemployment).

Now, there are many ways to relieve excess demand for financial assets. When the excess demand is for liquid assets used as means of payment – for “money” – the natural response is to have the central bank buy government bonds for cash, thus increasing the money stock and bringing supply back into balance with demand. We call this "monetary policy."

When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is twofold: induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend, thus bringing the supply of bonds back into balance with demand. We call the first of these “restoring confidence,” and the second “fiscal policy.”

When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets. We call this “banking policy.”

Of course, no real-world policy falls cleanly into any one of these ideal types. Right now, the European Central Bank worries that continued expansionary fiscal policy will backfire. Yes, it argues, having governments spend more money and continue to run large deficits will increase the supply of bonds, and thus relieve excess demand for longer-term assets. But if a government’s debt emissions exceed its debt capacity, all of that government’s debt will become risky. It will have relieved a shortage of longer-term assets by creating a shortage of high-quality assets, and so be in a worse position than it was before.

The ECB contends that the core economies of the global North – Germany, France, Britain, the United States, and Japan – are now at the point where they need rapid fiscal retrenchment and austerity, because financial markets’ confidence in the quality of their debt is shaken, and may collapse at any moment. And policymakers are falling into line: in late July, Peter Orszag, Director of the US Office of Management and Budget said that the coming fiscal consolidation in the US over the next three years will be the country’s deepest retrenchment in 60 years.

Yet, as I look at the world economy, I see a very different picture – one in which markets’ trust in the quality of government liabilities of the global North’s core economies most certainly is not on the brink of collapse. I see production 10% below capacity, and I see unemployment rates approaching 10%. More importantly for near-term economic policy, I see a world in which investors have enormous confidence in core economies’ government debt – for many, the only safe port in this storm.

Paul Krugman directs us to Heather Boushey:

his Has Been An Equal Opportunity Recession When It Comes To Job Losses Across Industries: Economist Paul Krugman highlights Raghuram Rajan arguing in today’s Financial Times that the Federal Reserve should begin raising interest rates because “the US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily.” Essentially, Rajan is arguing that monetary tightening is necessary to shift resources out of the too-large housing and car sectors. Krugman points out that this makes no sense.... Let me add a bit more meat to this story... the Great Recession has been more of an “equal opportunity” recession than other recent recessions....

Certainly, construction has lost a significant chunk of jobs, but other industries — manufacturing, professional and business services, transportation and warehousing, financial activities, leisure and hospitality, and information services — have all lost a larger share. Much of financial activities could be considered tied to the run-up and bust of the housing market, but all the others? This Great Recession has had fairly broad, widespread job losses across industry, which contradicts the idea that there’s one or two sectors that U.S. workers need to transition out of.

Ryan Avent reads Alex Tabarrok:

Aggregate demand: Think of the unemployed houses: THIS is an interesting thought experiment, courtesy of Alex Tabarrok, who notes that America's housing vacancy rate is at record highs and writes:

House prices may be sticky but they have fallen a lot--maybe not enough--but they have fallen a lot more than have wages.  On the other hand, house prices rose a lot more than wages. Maybe house prices are sticky relative to the required variation in market clearing levels.... Is the problem structural?  It does seem that we have too many houses in the South and the West where the boom was concentrated.  If we think of the unemployment rate as a measure of where there are too many houses then the following figure shows that there is a positive correlation between the home vacancy rate and the unemployment rate.  It's not as tight as one might expect, however.  California, for example, has a high unemployment rate but a home vacancy rate slightly below the national average and many states such as Wisconsin have plenty of unemployment but a very low home vacancy rate.

Mr Tabarrok concludes, "My guesstimate is 50% AD, 25% sticky prices, 25% structural." There are plenty of ways to play around with this version of the underemployed resources scenario, and I encourage you all to do so. But I have to say, I'm rather partial to this explanation, from Mr Tabarrok's comment section:

Houses have increased their preference for leisure.

Paul Krugman:

The Work Of Depressions: OK, I actually haven’t taken cars into account; someone with more time can do that. But let’s look at the role of job losses in construction versus other sectors.... If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble. Yes, as a percentage job losses have been much larger in construction; but nothing in Rajan’s argument explains why we shouldn’t be using policy in an attempt to prevent vast job losses in parts of the economy that aren’t overblown.

I’d add that even if you think structural unemployment has gone up, it clearly hasn’t risen enough to stop a slide toward deflation — and if it has risen, the slump is arguably a cause, not an effect, of that rise.

Anyway, to go back to the beginning: it’s amazing, and depressing in multiple senses, that we’re having to replay all these old debates.

The way Robert Hall puts it, until mid-2008 we had an autos-and-construction recession--the problem was one of expanding other sectors to soak up labor that had previously been employed in autos and construction. Since the fall of 2008 we have had something very different...

John Quiggin's Zombie Economics: How Dead Ideas Still Walk among Us... is scheduled for release on October 5, just in time for Halloween...

Paul Krugman sends us to Catherine Rampell's chart:

The ARRA was--I thought--supposed to be only one of three big stimulative policy moves that was going to be undertaken in 2009. The ARRA, use of the TARP money to fund a very large risky asset purchase program by the Treasury, and quantitative easing by the Federal Reserve in order to restor confidence that there was no chance of deflation. Only the first of these happened at any scale.

And we were unlucky.

Paul Krugman:

How Did We Know The Stimulus Was Too Small?m: Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization... But the... answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009:

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things. To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.... [T]he Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

In practice, it was even worse, because one of the key elements of the plan — aid to state and local governments — was cut back sharply in the Senate. We ended up with only about $600 billion of real stimulus over that two-year period.

So this wasn’t a test of fiscal stimulus, even though it has played out that way in the political arena: the whole thing was obviously underpowered from the start.

David Leonhardt writes:

The Impact of Another Kind of Stimulus: On Wednesday, Alan Blinder, the Princeton economist and former Federal Reserve vice chairman, and Mark Zandi, chief economist of Moody’s Analytics, will release a new analysis of the federal government’s response to the Great Recession. As far as I know, it’s the first serious attempt at analyzing the effect both of the stimulus programs passed by Congress and of the various financial-market policies put in place by the Fed, the Treasury and Congress....

We find that the effects on real GDP, jobs, and inflation are huge, probably averting what would have been called Great Depression 2.0. For example, we estimate that, without the policy responses, GDP in 2010 would be about 6½% lower, payroll employment would be about 8½ million jobs lower, and the nation would now be experiencing deflation.

When we divide these effects into two components, one attributable to the various rounds of fiscal stimulus and the other attributable to the panoply of financial-market policies (including the TARP, the bank stress tests, and the Fed’s quantitative easing), we estimate that the latter are substantially more powerful than the former. Nonetheless, our estimated effects of the fiscal stimulus policies alone are very substantial: In 2010, real GDP that is about 2% higher, an unemployment rate that is about 1½ points lower, and almost 2.7 million more jobs...

As Mr. Blinder and Mr. Zandi note, their estimates of the fiscal stimulus are similar to the estimates of others — including the Congressional Budget Office. The program has had a very large, and positive, effect on the economy. And the effect of the the policies aimed at financial markets seems to be even larger.

It is very nice to see that they are attempting this. The hard part of it, of course, is figuring out what would have happened to the flow-of-funds through financial markets in the absence of TARP, of quantitative easing, and of other extraordinary financial policy interventions. That they were, collectively, about twice as big as the ARRA smells right to me, but the only pieces of information I have to support that are even shakier than back-of-the-envelope calculations.

They provide yet another set of reasons why it would be good for all of us if we were to dry it up and let it blow away right now:

Beware of Scorched-Earth Strategies in Climate Debates: [C]onservative Republicans... should resist demonizing market-based approaches to environmental protection and reverting to pre-1980s thinking that saddled business and consumers with needless costs.... [M]arket-based policies should be embraced, not condemned by Republicans.... Ronald Reagan’s Environmental Protection Agency successfully put in place a cap-and-trade system to phase out leaded gasoline... at a savings of some $250 million per year.... George H. W. Bush... a cap-and-trade system to cut by half sulfur dioxide emissions... has cut sulfur dioxide emissions by 50 percent, and has saved electricity companies... some $1 billion per year compared with a conventional, non-market approach.... If some conservatives oppose energy or climate policies because of disagreement about the threat of climate change or the costs of those policies, so be it. But in the process of debating risks and costs, there should be no tarnishing of market-based policy instruments....

Conventional approaches advanced as “painless alternatives’’ — a plethora of standards, special-interest technology subsidies, and tax breaks — won’t do the job, and will be unnecessarily expensive.... A price on carbon is the least costly way to provide meaningful incentives for technology innovation and diffusion, reduce emissions from fossil fuels, and drive energy efficiency.... Demonizing cap-and-trade in the short term will turn out to be a mistake with serious long-term consequences...

Robert Waldmann:

David Altig Says That Our Cyclical Unemployment Has Started to Turn Structural: Shorter Brad DeLong:

Terrible news, there are lots more job openings in the USA than there were a year ago.

Huh? I'd say that job openings are good news. Would you rather there were fewer? One might imagine that high unemployment and high vacancy rates are, as you directly state, a bad sign as high unemployment combined with high vacancies lasts longer -- that the combination is a sign of hysteresis from a) deteriorated jobs skills, or b)deteriorated work habits, or c) irrational stigma due to employers assuming a or be or d) missmatch. I recall such a graph. It was the terrifying UK Beveridge curve from 1988-9 (look it up). The word (from among others Layard) was that unemployment had become almost impossible to fight as the long term unemployed were discouraged. Then employment took off.

The Beveridge curve is the lower envelope of a slightly more complicated dynamic with counterclockwise cycles above the curve.... My reading is that when the market crashed in 87, Thatcher panicked and allowed the (not independent) bank of England to stimulate. So the economy took off. It took a while to into work down the huge stock of unemployed, but there was no sign of a bad tradeoff. Just further proof that her insane policies (until she missinterpreted the crash of 87 as the crash of 29) were the problem.

Krugman shares your view and he does tend to be right, but still, I'm tempted to make a prediction...

This is bad news: very bad news:

macroblog: A curious unemployment picture gets more curious: Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade. Tuesday's report indicates that the anomaly only deepened in the first two months of the second quarter.

From: Brad DeLong brad.delong@gmail.com
To: Fall 2010 UC Berkeley Econ 1 Students
Subject: Summer Assignments for Econ 1, UC Berkeley Fall 2010

Before you show up here in the fall for Econ 1, please read:

1. The whole book of Partha Dasgupta, Economics: A Very Short Introduction (ISBN #: 0192853457 Publisher: Oxford) http://www.amazon.com/Economics-Very-Short-Introduction-Introductions/dp/0192853457

2. The "Introduction" and chapters 1 through 5 of Book I (i.e., I:1-5) of Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (available for free on the web or free for Amazon Kindle or Apple iBooks; you can also buy a copy) http://www.gutenberg.org/files/3300/3300-h/3300-h.htm

3. Pp. 1-31 of Paul Seabright, In the Company of Strangers: A Natural History of Economic Life (ISBN #: 978-0691146461 Publisher: Princeton) http://www.amazon.com/Company-Strangers-Natural-History-Economic/dp/0691146462/

4. Pp. ix-69 of Milton Friedman and Rose Director Friedman, Free to Choose (ISBN #: 978-0156334600 Publisher: Mariner) http://www.amazon.com/Free-Choose-Statement-Milton-Friedman/dp/0156334607/

Yes, there will be a quiz.

:-)

Sincerely Yours,

J. Bradford DeLong
Professor of Economics

Why oh why can't we have a better press corps?

Is there any respect--any respect--any respect at all in which the New York Times would not be a better publication if Ross Douthat were removed, and replaced by David Leonhardt?

I cannot think of any.

Here's David Leonhardt explaining why what the New York Times prints from Ross Douthat on its op-ed page is worse than tripe:

Armageddon Wars: I — like many others, I imagine — would be thrilled if [global cooling] were what the future held. But I think there are two big reasons to doubt that... The first is basic economics. When the problem is resource scarcity, companies and individuals have a powerful incentive to become more efficient. It keeps their costs down. Mr. Simon understood this, and it’s the fundamental reason he won the [resource price trend] bet [with Ehrlich]. But global warming is different. The fact that carbon emissions are warming the planet doesn’t make it more expensive to produce those emissions. So companies do not have an ever-increasing incentive to emit less — the way they would if the problem were, say, a lack of oil. Global warming doesn’t solve itself the way that resource scarcity does.

The second reason is the accumulation of evidence. Almost as soon as Mr. Ehrlich and Mr. Simon made their bet in 1980, Mr. Simon’s prediction started looking good.... In recent years, though, anyone who had bet against global warming would look as wrong as Mr. Ehrlich did. The Greenland and Antarctic ice sheets are shrinking at an accelerating rate. Scientists have recently revised upwards their predictions of sea-level rises. The planet’s 10 hottest years on record, according to NASA, are: 2005, 2007, 2009, 1998, 2002, 2003, 2006, 2004, 2001 and 2008. This year is on pace to displace 2005 as No. 1.

The ultimate goal of climate legislation — be it the bill that the House passed last year or the bill that died in the Senate last week — is to align the incentives better, so human ingenuity can be harnessed to fight global warming. The bills would increase the cost of emitting carbon, thereby giving companies reason to emit less. Absent that, the best bet seems to be that emissions will keep rising and the planet will keep getting hotter.

As Tim Harford says, "my new maxim is never to stand in the middle of a fight between Niall Ferguson and Niall Ferguson." This is a thing of beauty:

Matthew Yglesias and Ryan McNealy: Niall Ferguson Debates Himself: I’ve been known to remark on the conservative movement’s strong adherence to Keynesian arguments as a justification for tax cuts in the wake of the mild 2001 recession, adherence that seems puzzling in light of their contrary rhetoric in the wake of the cataclysmic 2008-2009 downturn. Brad DeLong observes that one particularly hilarious example of this is historian-turned-pundit Niall Ferguson who wrote a December 12, 2003 article on the Bush administration that’s in considerable with his contemporary take on things. DeLong requests a Ferguson v Ferguson debate, and with assistance from Ryan McNeely I’m prepared to unveil one. 2003 Ferguson is in boldface, 2010 Ferguson is in italics:

Certainly. Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation.

But the United States has broken the guns or butter rule before. Under President Ronald Reagan, substantial increases in military spending coincided with comparable increases, relative to gross domestic product, in personal consumption — that proportion of G.D.P. that the public, as opposed to the government, spends. The crucial point, of course, is that in the short term at least, fiscal policy is not a zero-sum game.

But this doesn’t respond to long run inflationary fears. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations.

But, as Keynes remarked, in the long run we are all dead! Aren’t these “inflationary expectations” priced into the markets?

New York Times columnist Paul Krugman, who likens confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off.

But this will not be the kind of inflation experienced in the 1970’s and 1980’s. So powerful are the deflationary forces today (notably in the second and third biggest economies, Japan and Germany) that Washington can splurge on its military and social services with only a modest impact on expectations of inflation.

But it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of the federal debt in public hands – worry about some kind of future default.

But the United States has a unique advantage over all other sovereign borrowers: central banks and other institutions around the world need to hold dollars as the currency most frequently used in international transactions. While this is true, America can count on selling large amounts of dollar assets, like 10-year Treasury bonds, to foreigners — very large amounts.

But for how long? The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll published in the FT, 45 per cent of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”. Surveys of business and consumer confidence paint a similar picture of mounting anxiety.

The only imminent danger is that the dollar could slide sharply against Asian currencies, as it has against the euro. But the chief losers then would be the Asians. And those who panicked about the debt under President Reagan failed to see how manageable it was. It’s even more manageable today.

Hogwash. It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians!

Indeed!

Now, oh Lord, lettest thou thy servant depart in peace, for mine eyes have seen the salvation of the Lord!

Buce writes:

Underbelly: The Shadow Government: I've known Elizabeth Warren (not well) for something like 30 years now. Like almost everyone who ever met her, I've enjoyed her company: she's enthusiastic, energetic, warm-hearted and mostly on the side of the angels. And she has done me the occasional favor. I haven't weighed in on the great Warren Kerfuffle because I am too far out of the action to count...

But does she have the administrative chops to successfully start an agency? It's a hard thing to do--I know that I don't have them...

I am not sure that "interesting" is the word, Ryan.

Ryan Avent:

Fiscal policy: When does fiscal stimulus work?: Greg Mankiw has produced an interesting assessment of fiscal policy in National Affairs. He is perhaps a little unkind toward last year's stimulus package. Contra his assertion, tax cuts played a significant role in the stimulus package, and the models used by administration economists called for a larger bill than subsequently passed. It also seems odd to knock the Obama Administration for not taking into consideration the negative effects of stimulus on long-term interest rates, when long-term interest rates remain at rock bottom levels...

"But," Ryan goes on to say:

his broader point is one worth thinking about...

Mankiw's broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse--and hence have the government stand back and wash its hands of the situation.

However, even a minor and hasty acquaintance with the Great Depression teaches that the belief that the government should stand back and wash its hands because the self-regulating market quickly returns to full-employment equilibrium is the most arrogant belief possible.

And even a minor and hasty acquaintance with the Great Depression teaches that having the government stand back and wash its hands is the most risky strategy conceivable.

It would be a mitzvah if somebody took:

http://delong.typepad.com/sdj/2010/07/department-of-complete-180-degree-intellectual-reversals.html

and:

http://www.ft.com/cms/s/0/270e1a6c-9334-11df-96d5-00144feab49a.html

and cut-and-pasted them into a Niall Ferguson vs Niall Ferguson debate...

UPDATE: Matthew Yglesias and Ryan McNealy have answered the call: http://yglesias.thinkprogress.org/2010/07/niall-ferguson-debates-himself/. Now that's what I call message coordination!

From http://www.nfib.com/Portals/0/ProblemsAndPriorities08.pdf:

That's why we tried to do health care reform in the Clinton Administration, remember?

Mark Thoma is, politely, puzzled:

Reverse Psychology?: Instead of a series of op-eds by Christina Romer, Larry Summers, Jared Bernstein and other members of the administration making a strong, strong case for more stimulus -- particularly that devoted to job creation -- along with the president himself making the case to the nation, the appearance of key administration officials on Sunday talk shows to bolster the effort, and so on, the administration has decided to try and sell a recovery that hasn't yet taken hold.

Thus, instead of a much needed and impressive effort to move Congress to action, or at least make clear to voters who is and who isn't trying to help those struggling with the recession, here's Timothy Geithner saying it's time for the government to back off because a solid recovery is underway:

Treasury Secretary Timothy Geithner said the economy has now recovered sufficiently for government to begin to make way for private business investment.... Mr. Geithner’s comments on Sunday, which echo previous sentiments expressed by President Barack Obama, reflect a turning point in the government response to the worst economic downturn since the Great Depression, a period marked by deep federal intervention in the financial, housing, auto and other industries...

The message is that the administration is pulling back, and maybe even starting to balance the budget because good times are just around the corner:

“We need to make that transition now to a recovery led by private investment,” Mr. Geithner said Sunday on NBC’s “Meet the Press.” Mr. Geithner hit two Sunday talk shows, delivering the Obama administration’s message that the economy was recovering...

I don't understand this strategy. The election is not that far way. If unemployment continues to be a problem, and it looks like it will, saying that things are fine and recovery is just around the corner will backfire.

I would put it much less politely: have Tim Geithner and Barack Obama lost their minds? The Administration's mid-session review--released last week--projects that the unemployment rate will rise in the next several months and will be at 9.3% in February 2011. It projects that Q4/Q4 real GDP growth will be 2.9% this year--and I don't see how we are going to get there with a 2.7% growth rate in the first quarter, a likely 2.0% growth rate in the second quarter, and with the tracking third-quarter growth aret at 2.9%. We would need 4.0% growth in the fourth quarter of this year. Nor do I understand where the 1.7% decline in unemployment over 2011 is supposed to come from: a simple Okun's Law coefficient of 2 would suggest that we need 2 x 1.7 + 2.6 = 6% real GDP growth to generate such a decline.

According to Mark Zandi, in the fourth quarter of this year the phase-out of the ARRA is likely to shave 0.3% off the real GDP growth rate. in 2011, the contractionary effects of the ARRA phase-out on the quarterly growth rates are likely to be -0.8%, -1.2%, -0.7%, and -0.2%.

It sure ain't morning in America. Maybe I need to go back and read Geithner's transcripts from this morning to see if the MSM is misrepresenting what he said...

Like Paul Krugman, Martin Wolf is (almost) always right. And as in the case of Paul Krugman, given that Martin Wolf is (almost) always right I really really really wish he would be a little more optimistic. Perhaps if he drank more expensive wines at dinner?

Here Martin makes the case that America's future depends on the rapid destruction of the Republican Party and its replacement by an alternative opposition party to the Democrats:

Martin Wolf: I want to examine what is going on... inside the Republican party.... My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts.... Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control....

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.... Supply-side economics... allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?... [T]he Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective....

[T]he theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts.... Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows:

I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.

Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas....

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter.... But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not.... So, when Republicans assail the deficits under President Obama, are they to be taken seriously?... Yes, they are politically interested in blaming Mr Obama for deficits.... But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. Indeed, this is precisely what John Kyl (Arizona), a senior Republican senator, has just said:

[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans

What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts). Second, the White House will probably veto these cuts, making itself even more politically unpopular. Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it. Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

Nowhere. He is not wrong.

Paul Krugman:

Keynes In Asia: In early 2009, the IMF estimated the size of stimulus programs.... [I]n the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch.... Korea and China both engaged in much more aggressive stimulus than any Western nation — and it has worked out well.

Part of the reason Asians felt empowered to do this was the fact that during the good years they did what you’re supposed to do. Keynesian economics is often caricatured as a policy of deficit spending always; but as I’ve tried to explain, deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down. Pilling:

The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves. Such “prudence” meant, rather bizarrely, that poor countries such as China were foregoing spending and investment in order to facilitate rich foreigner’ binge-buying. But it also meant that, when the crunch came, they had the wherewithal to spend.

So that was the fiscal sin of the Bush years: deficits continued even when times were good; there was no effort to prepare for future shocks.

And don’t say “what can you expect from politicians”. The ratio of federal debt to GDP (pdf) fell from 49 percent in fiscal 1993 to 33 percent in fiscal 2001; it could have continued on that downward path. But candidate George W. Bush declared that if the government is running a surplus, it means that it’s collecting too much in taxes; Alan Greenspan told Congress that we had to cut taxes to avoid paying off our debt too fast; then came an unfunded war, and the rest is history.

Despite all that, we actually did have enough room to take strong fiscal action. But we didn’t. And we’ll spend at least the next decade paying the price for the combination of irresponsibility when times were good and irresolution when they were bad.