Relevant and even prescient commentary on news, politics and the economy.

Is the the policy for the ‘Long Depression’ in place?

Paul Krugman is direct and to the point this morning:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

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Told Him So

Robert Waldmann

told Paul Krugman so

About 21 months ago Paul Krugman had a question

lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?

I proposed an answer

there are two puzzles in Obama’s proposals
1) How does he plan to pay for both health care reform and his middle class tax cut ?
2) Why is he raising the social security tax even though it is probably not needed to pay old age and disability pensions ?

I think the two questions answer each other. I think that Obama is planning to pay for health care reform with the donut FICA increase (taxing individual labor income over $250,000).

Now we know. Yes most of the money for health care reform came from planning to have the CMS squeeze hospitals and nursing homes, then much from eliminating the Medicare advantage boondoggle (not eliminating the program just paying private insurance companies the same per policy holder as the CMS spends), then from the tax on expensive health plans.

However, when cutting that unpopular tax, expanding subsidies, making the special deal for Nebraska universal and making the special deal for collectively bargained health insurance benefits universal, Obama was short a few hundred billion. So in the Obama compromise proposal (the first proposal from the Obama administration) the donut tax returned.

The bill imposes new taxes on wealthier people. Individuals making more than $200,000, and families making more than $250,000, will have to give up more of their paycheck to the Hospital Insurance payroll tax. Instead of paying 1.45 percent like most workers, they’ll pay 2.35 percent. And a new 3.8 percent tax will be added to income from interest, dividends, annuities, royalties, and rents.

OK so it’s described as an increase in the Medicare plan A tax not the social security old age and disability pension tax. It starts at income of 200,000 or family income of 250,000. It applies to capital income too. The rate is lower than I guessed way back then (I just assumed it was 6.25%). Still I now type “I told you so.”

It was always there in his mind in case it was needed.

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Not the Cheeriest Way to Start the Day: Bernanke Part 1 of 2

It’s bad enough to violate Brad DeLong’s first rule (which, I hasten to rationalize, was posted when DeLong himself was disagreeing).

It’s worse when the opposition to Krugman is coming from…the WSJ editorial page. (Or, as Barry Ritholtz correctly describes it, “the comics section.” Just less funny, and more likely to make the two-drink minimum unnecessary.)

This seems to be a direct violation of reality.

But compare the Krugman “endorsement”:

But — and here comes my defense of a Bernanke reappointment — any good alternative for the position would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy.

Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation, many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation.

with the WSJ:

No matter how it plays out, Ben Bernanke’s bruising confirmation battle has damaged the U.S. Federal Reserve’s clout and perceived independence.

Mr. Bernanke is more than the Fed’s chief decision maker. Fed officials see him as their brand, a smart, honest and stoic voice best able to defend decisions of the past two years to a skeptical Congress and public. Even if the Senate backs Mr. Bernanke this week, he won’t speak with the same authority, and the Fed will have a harder time casting itself as above partisan politics.

Fortunately for the Fed, the hard call about when to raise interest rates doesn’t need to be made now. Fortunately for Mr. Bernanke, his support inside the Obama administration, and even more so inside the Fed, is solid. But the longer the battle drags on, the more it could interfere with the Fed’s ability to communicate convincingly. And no matter what, the Fed will have less sway as Congress debates whether to rein in its powers.

Oh, wait. That’s a news article. The editorial page throws a few random facts:

Mr. Bernanke continues to deny any Fed monetary culpability for creating the mania. Shortly after the New Year, even with his nomination pending, Mr. Bernanke issued an apologia that was striking for its willingness to play to the Congressional theory of the meltdown by blaming bankers and lax regulators. [note: lax regulators includes the Fed itself.]

with semi-credible analysis:

Others argue that any alternative to Mr. Bernanke could be worse, and that is certainly a risk. Mr. Geithner and White House economic adviser Larry Summers couldn’t be confirmed, even in a Democratic Senate. In the short term if Mr. Bernanke is defeated, Vice Chairman Donald Kohn might run the Open Market Committee, and he shares Mr. Bernanke’s contempt for Fed critics. President Obama could also select San Francisco Fed President Janet Yellen, but she thinks the Fed should be even easier. [Oh, the evil of Ms. Yellen, who immediately replaces Laura D’Andrea Tyson as my pick to run the Fed.]

with sheer insanity:

We agree that the Fed needed to ease money precipitously when the financial markets suffered their heart attack in late 2008, and we praised Mr. Bernanke for that at the time and since. But the issue for the next four years is whether the Fed can extricate itself from its historic interventions before it creates a new round of boom and bust. We already see signs that it has waited too long to move.

Yes, because—along with more obvious indicators—Durable Goods orders have been down two months in a row. Anyone betting January will be up? I fear they have used “real” tea leaves to make their tea.

So the WSJ came to the right conclusion for all the wrong reasons, while Krugman comes to the wrong conclusion for the right reasons.

How did we get here? in the next post.

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Get Ready to Throw Momma from the Train

It’s coming closer:

Once the tax expires, those inheriting estates after Dec. 31 will have to pay capital gains taxes on any asset sold. The cost will be based on the original price of the property, which could mean record-keeping headaches and bigger tax bills for some people.

“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Baucus argued on the Senate floor.

Fortunately, unlike Health Care “Reform,” this only affects a few people:

The estates of about a quarter of 1 percent [0.0025 — ken] of Americans would be subject to the tax under the House bill, according to the the Brookings Institution-Urban Institute Tax Policy Center.

I guess someone hasn’t blown Joe Lieberman enough this week.

(Title Reference)

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I Tend to Describe this as "Unwarranted Optimism"

The Shrill One (tm – Brad DeLong) as Optimist:

The result, then, will be high unemployment leading into the 2010 elections, and corresponding Democratic losses. These losses will be worse because Obama, by pursuing a uniformly pro-banker policy without even a gesture to popular anger over the bailouts, has ceded populist energy to the right and demoralized the movement that brought him to power.

Despite all this, the midterms probably won’t give Republicans the majority in the House. But the losses will be big enough to deny Obama a working majority for any major initiatives in the rest of his first term. (My guess is that he’ll be reelected thanks to the true awfulness of the Republican nominee). Since Republicans are dead set against any of the things I think could help pull the economy out of its rut, this means more economic stagnation.

Can anyone point to any evidence of either of the bolded statements being likely to be true? (I’ll pre-emptively conceed that the Republican nominee may well be awful—probably a 75% probability, since the current Best Case Scenario is Mittens. But adjust you expectations by what you would have expected the Democratic Party nominee to be in late 2005.

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Seasonal Posting: NYTFail, Part 2

First, David Leonhardt argued that this recession was good for workers.

Now, Floyd Norris apparently has decided to mix and match data. (I wonder if the fact many NYT employees who are looking at their 45-day severance offers is having an effect on its economic coverage.)

One of the standard “economist jokes” is about the one who died because he forgot to “seasonally adjust” his pool. In that tradition, Norris declares:

The adjustments are for seasonality. For some reason, October is the month with the largest seasonal adjustment down in jobs. So the increase in the unemployment rate does not reflect people actually losing jobs. It reflects the belief that seasonal factors should have added more jobs than they did.

All this may be very reasonable, and there is no way I can think of to test whether the seasonal adjustments are reliable. [emphases mine]

Gosh, I wonder why October would have a larger seasonal adjustment, and whether there is any BLS data to support that adjustment?

Apparently, employers traditionally hire a lot of people in October for “the Holiday Season.” And while it’s possible that they will be doing all that hiring in November this year, it hasn’t been the way to bet during this millennium.

Norris continues:

But I suspect seasonal factors are less important this year, when the economy may be changing directions, than they normally are.

It was with such optimism that Napoleon went to Russia, people bought VA Linux at $100 a share, and the Bush/Cheney/Rumsfeld axis decided to run a two-front war in Afghanistan and Iraq. With statements similar to Norris’s:

In reality, the government report says unemployment rates remained steady at 9.5 percent. And the number of jobs actually rose, by 80,000. And the number of jobs for college-educated Americans rose more than in any month in the last six years.

Well, the number of jobs rose (as one would expect, given the Holiday Sales push) but Table B-1 is closer to 40,000 than 80,000:

Where we do see an 80,000 job increase is in the private sector, which is more than 500,000 workers lower than it was in August. If you want to play a non-seasonally adjusted, private-sector only game with the data, you should at least be honest about it.

More vitriol and data below the break.

The details of that 80,000 look even worse: declines in all Goods-producing areas (except about 200 new jobs in primary metals, 300 in “miscellaneous manufacturing,” and 1,100 in motor vehicles and parts; cash for clunkers, anyone?) which are balanced by the Service sector, most notably the 63,500 new Retail jobs. Can you say “seasonal employment”? Floyd Norris apparently cannot.

The rest of the Non-Seasonally Adjusted figures are even less encouraging. Table A-8 of the report shows more than 100,000 people added to “not on temporary layoff”:

while Table A-9 is depressing: a larger number of unemployed at all durations, with the median duration of unemployment increased by more than one month (in a month):

And while the BLS has not updated their Job Openings data for October, the graphic through September isn’t exactly pointing to a decline in that median (or a robust recovery):

Is there a recovery in process? Maybe, though I’m not convinced, since most of the positive data seems, as Paul Krugman noted, “unrepresentative.”

But things are not so good as Floyd Norris wants to pretend, even (or especially) using the data he chooses to highlight.

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Simple Answers to Simple Questions, CRA edition

Dear Barry:

The need for posts such as this one recurs because the large majority of economists are idiots. (Multiple exceptions noted—but not enough to change the truth of the initial statement.)

As the regulatory reform report notes (quoted by PK at the last link above):

In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.

But the truth should never be allowed to get in the way of Economic Theory.

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I Agree with Hank Paulson, not Paul Krugman

Ken Houghton notes that no one has stolen my ID or shifted my sense of politics or the economy.

Brad DeLong has been running excerpts from the February 2009 Vanity Fair “Oral History” of the Bush White House. Time and priorities being what they are, I didn’t get a chance to read the whole piece until today—coincidentally, right after Paul Krugman said that Larry Summers

“is right” in his assessment that the sense of the economy falling of the table was likely ending.

Now, Krugman went on to qualify this, in the same manner, though with less clear terms, as he did on his blog last Wednesday:

Many will herald this as the end of our problems. But they’ll be wrong, for reasons I laid out during an earlier false dawn, back in early 2002 (the unemployment rate continued to rise for more than a year after that point)….[long, well worth reading but not anywhere close to excerptable for “fair use” example omitted]… I wanted to include a graph to go with this post, illustrating what happened in 2002. And guess what: that surge in output in early 2002 has been revised out of existence.

So Krugman may believe that this is a “false dawn,” but affirms that the worst is probably over.

Contrast that with Hank Paulson’s comment in the Vanity Fair piece:

This’ll be the longest we’ve gone in recent history without there being turmoil, and given all the innovation in the private pools of capital and the over-the-counter derivatives and the excesses around the world, we figured that when there was turmoil, and these things were tested for the first time by stress, it would be more significant than anything else.

I said at the time, I have a concern that every rally we’re going to have in the financial markets will be a false rally until we break the back of the price correction in real estate. And these things are never over until you have a couple of institutions go that surprise everyone. Bear Stearns can hardly be a shock.

But having said that, it’s one thing to see it intellectually and it’s another to see where we are.[italics mine]

The “couple of institutions” to “go” still hasn’t happened.

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Barro on Keynes Barro and Grossman

Robert Waldmann

Robert Barro wrote an op-ed in The Wall Street Journal. The substance of the op-ed is to report an estimate of the Fiscal multiplier 0.8 which is less than one. Thus, according to Barro, a stimulus will partially crowd out of investment, consumption or net exports and not just reduced leisure. Paul Krugman took Barro to task for using the huge WWII stimulus in his estimates, since the economy was at full employment during WWII. So have Matthew Yglesias using his Harvard BA in philosophy from Harvard and Kevin Drum using his BA in Communications from The California State University in Long Beach.

I might want to reassess Long Beach State, but I think the reason that Yglesias and Drum immediately make the same argument is Krugman is that Yglesias and Drum don’t know about modern econometrics. Barro is using an instrumental variables regression in which wartime military spending is considered to be an exogenous variable which is correlated with government consumption. The implicit assumption is that we can safely assume that the fiscal multiplier today is identical to the fiscal multiplier during World War II, because the economy is basically similar. Without training in modern econometrics it is simply impossible to assume something that stupid.

There is also a severe gap in economic theory, at least as remembered by Robert Barro. Wouldn’t one think that there must be some model in which correlations vary depending on the general conditions of the economy — say like whether at current prices there is excess demand for goods or excess supply of goods.

Of course, no one could expect Barro to know that there is a vaguely Keynesian model, which differs from the neoclassical model only because of rigid nominal wages and prices, in which the economy can be in one of three different regimes, Keynsian (with insufficient aggregate demand), Classical (firms can sell as much as they want but real wages are too high so workers are unemployed) and repressed inflation (excess supply of labor and goods).

I’m mean who’s ever heard of the Barro-Grossman model (A General Disequilibrium Model of Income and Employment Barro, Robert J.; Grossman, Herschel I.; American Economic Review, March 1971, v. 61, iss. 1, pp. 82-93 [stable JSTOR link added for those with access])? Certainly not Robert Barro.

The passage quoted by Krugman about what Keynes thought is inconsistent with The General Theory. However, it can be corrected easily. The accurate description of the history of economic thought is “John Maynard Keynes Robert Barro and Herschel Grossman thought that the problem lay with wages and prices … will mean that wages and prices do not have to fall.”

Look I sympathise. Like Barro, when I was young and reckless I did embarrassing things which I have tried to cancel from my memory. I really wish I could do that as well as he has.

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This is why Krugman Makes the Big Bucks

The Quote of the 21st Century:

And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument.

Either that, or it’s a description of everything that is wrong with the field of Economics today.

Not that it can’t be both.

UPDATE: As usual, Mark Thoma was there first, and includes Mankiw’s disingenous response and Thoma’s spot-on analysis of the accompanying loss of reputational capital that response requires:

Declaring that you might post things that support your agenda without any comment at all, even when you have questions about how the conclusion was derived, is a license to mislead.

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