William Galston writes, “What if the Right and the Left Are Both Wrong About Why the Economic Recovery Is So Slow? A New Theory.” And the new theory is that it’s all about household balance sheets.

Gosh, why didn’t I think of that?

OK, with everything else going on in the world, lazy commentators aren’t a big deal. Still, if you’re going to write a whole article about what those foolish liberal economists haven’t considered, maybe, maybe, you should check to see what they’ve actually written. Especially if you’ve done this sort of thing before.

I mean, Brad, Mark, and I all have searchable blogs. As it happens, a post about balance sheet recessions is Brad’s lead as I write.

Also, why is it so hard for Amtrak riders to grasp the notion that if you want to hold an animated conversation, you shouldn’t sit in the quiet car?

Martin Wolf:

It is not that tackling the US fiscal position is urgent. At a time of private sector deleveraging, it is helpful. The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted. The fiscal challenge is long term, not immediate.

But how can I be a non-hysteric if I’m shrill?

Once again: if you took basic macroeconomic analysis seriously, you predicted that large deficits could and would coexist with low interest rates as long as the economy was depressed. Everyone who claimed the opposite was either ignorant of basic macro, or was making up new doctrines on the fly to justify his prejudices.

Reading Noah Smith reading John Cochrane solidified a thought I’ve been grasping at for a while: the extraordinary lengths to which the Chicago School is going to avoid a straightforward interpretation of the mess we’re in.

If you come at the current Lesser Depression from my angle, there’s no great mystery. Consistency in modeling isn’t always a virtue, but still, it’s striking how much continuity there is in the analysis of slumps: there’s a clear line of descent with only moderate modification running from Hicks 1937 to liquidity-trap models of Japan (pdf) to models that add in debt/deleveraging. The situation we’re in seems fully comprehensible.

But at Chicago and elsewhere in the freshwater universe they’re playing Calvinball (and what a good coinage that was from Mike Konczal). All kinds of novel and implausible effects — effects that weren’t in any of the models they were using before the crisis — are invoked to explain why we’re in a sustained slump; strange to say, all of these newly invented models just happen to imply the need for tax cuts and a shrunken welfare state.

But I don’t think it’s just political bias: part of what’s happening, I’m sure, is intellectual embarrassment. These people come from a movement that declared, with great arrogance, that Keynesian economics was dead – then failed to produce a workable alternative, and now finds itself in what is very recognizably a Keynesian world. Recognizably, that is, to everyone but them, because admitting that Keynesian-type thinking is useful now would just be too humiliating.

Anyway, it’s a sight to behold.

Greg Sargent tells us that the White House is promoting a Gerald Seib piece which summarizes the political strategy thus:

A big deal would reassure independents who fear the country is out of control; position Obama as the adult who made Washington work again; allow the President to tell Dems he put entitlements on sounder financial footing; and clear the decks to enact other priorities later.

[Bangs head against wall]

What I learn from political scientists is that this is all fantasy — albeit a kind of fantasy beloved of political pundits, who love to imagine that complicated psychodramas are playing out in the minds of voters. Well, here’s a little secret: most voters don’t sit around reading Clive Crook columns or debating the Bowles-Simpson plan. They have a gut sense — things are getting better or they’re getting worse — and mainly vote on that basis. They’re not paying attention at all to this stuff.

Wait, it gets worse. Even if voters were trying to make decisions based on things like fiscal responsibility, how likely are they to have remotely accurate information? Not at all if they watch Fox; but the truth is that even if they watch a reputable network, or for that matter even if they read the Times the way most people read it, getting fast impressions rather than scanning articles carefully for the nuances hidden in the 12th paragraph, they probably have only the vaguest sense of what’s going on.

How many Americans truly understand just how extreme and dangerous a game the GOP is playing with the debt limit? Surely it’s a small minority — partly because conventions of “balance” prevent most media outlets from ever saying too clearly what’s happening.

Oh, and about independent voters: if you think that they’re strong-minded, solid citizens repelled by the partisanship — well, there may be a guy like that somewhere in America. But by and large, given the vast differences between the parties these days, independent voters are basically confused, clueless people — not exactly the kind of people likely to take reassurance from Obama’s stance on entitlement programs. On the contrary, they’re the sort of people likely to be stampeded by “Obama wants to raise the Medicare age!”

When pundits talk this kind of stuff, it’s mainly funny in a tiring sort of way. But if the White House actually believes this stuff — well, that’s scary.

I obviously never had a very good opinion of Rupert Murdoch’s role in US and UK affairs. But I never expected to see the kinds of things now coming to light as the phone-hacking scandal metastasizes — hacking Gordon Brown and the Queen, bribing the police, hiring investigators to dig up dirt on the people investigating the hacking, and on and on.

At this point it’s starting to look as if News Corp is better viewed as a criminal enterprise than as a media organization.

Jonathan Chait is puzzled by the behavior of the anti-deficit lobby, which persists in blaming Democrats for the failure of Republicans to act responsibly:

The anti-deficit lobby is a powerful force in American political life. The lobby consists of a loosely aligned network of think-tanks, institutions (many funded by Pete Peterson), and allied journalists. Of course, the anti-deficit lobby does not always win — indeed, it usually loses,as its basic mission runs in opposition to the general tendency of politicians to avoid unpopular choices as well as the specific ideology of the modern Republican Party (“Reagan proved deficits don’t matter”), which refuses to accept the notion that revenue levels ought to bear any relation to spending. The anti-deficit lobby has had extraordinary success, though, in making the deficit the top item on the Washington agenda.

…

But this strange analytical tic is perfectly reflective of the anti-deficit lobby’s style. You have one side embracing its proposal, and the other side rejecting it, and the instinct of the anti-deficit lobbyist is… to urge the former to embrace its position. Aside from the bizarre disconnect from political reality, this simply highlights a huge problem with the incentive structure. Aren’t you supposed to reward politicians who agree with you, and impose some cost on those who oppose you?

As he says, it makes no sense — unless you consider the possibility that the anti-deficit lobby doesn’t really care about deficits. If you believe that its real agenda (not always consciously) is to dismantle the welfare state, with deficit fears as the excuse, then the seemingly bizarre positioning makes perfect sense. Democrats trying to preserve the essence of the New Deal and the Great Society are always deemed insufficiently committed, never mind the numbers, while Republicans eager to tear the whole thing down are serious people, never mind their obsession with budget-busting tax cuts.

You can’t make any sense of American political discourse if you give everyone credit for really wanting what they claim to want. My sense is that there are very few true deficit hawks; the vast majority of those who claim that title are really just using the deficit to pursue the goal of a more unequal society.

OK, David Brooks has what amounts to a reply. I don’t want to get into a tit for tat. But I do want to take on the claim that believing that simple actions can bring big improvements in the economy amounts to belief in magic.

The key point here is the difference between raising the economy’s long-run growth rate, which is very hard, and increasing demand when the economy is operating below potential, which isn’t hard at all.

Look: under normal conditions, when interest rates are well above zero and there’s room for conventional monetary policy to operate, we actually take it for granted that the Fed can produce dramatic acceleration of short-run growth. When Paul Volcker decided in 1982 that the economy had suffered enough, he loosened the reins — and it was Morning in America.

Now, of course,the Fed funds rate is already zero, so Bernanke can’t just slash the rate. But the same logic through which looser monetary policy can produce a rapid economic turnaround now applies to fiscal expansion.

Stroking your chin and saying, well, I don’t believe in magical solutions because experience shows that raising growth is hard sounds serious, but it’s actually silly. It’s like saying that it’s really hard to extend the human lifespan, so it’s foolish to believe that an infection can be quickly cured with a dose of antibiotics.

But haven’t we tried a huge fiscal expansion? No, we haven’t. The ratio of spending to GDP is up because GDP has fallen and safety net programs like unemployment insurance and Medicaid are covering more people — that is, what we’re looking at isn’t stimulus, it’s the consequences of the slump.

The point is that realizing that there’s a lot you can do to reverse a short-term slump isn’t magical thinking — it’s what basic macroeconomics, what we learned through hard thinking and hard experience, tells us. Rejecting all that may sound judicious, but it’s actually an act of intellectual amnesia.

Where by “he” I mean Obama, and by “you” I mean Democrats, and everything they stand for:

Obama Offered To Raise Medicare Eligibility Age As Part Of Grand Debt Deal

Terrible policy, disastrous politics. Perfect!

Obama’s press conference wasn’t as bad as it could have been; he actually more or less said that stimulus should be sustained, except it isn’t politically possible. But he also invoked the confidence fairy – and introduced another fallacy, showing that he and his advisers still don’t get the essence of macroeconomics in a liquidity trap:

I do think that if the country as a whole sees Washington act responsibly, compromises being made, the deficit and debt being dealt with for 10, 15, 20 years, that that will help with businesses feeling more confident about aggressively investing in this country, foreign investors saying America has got its act together and are willing to invest. And so it can have a positive impact in overall growth and employment.

OK, so that’s the confidence fairy at the beginning. But the “foreign investors” thing is actually worse.

Think about it: U.S. interest rates are low; there’s no crowding out going on; we are NOT suffering from a shortage of saving.

So if foreign investors decide they love us, what does it do? It drives up the value of the dollar, which reduces exports, which leads to fewer jobs.

Does this sound familiar? It’s closely related to the reasons Chinese accumulation of dollar reserves unambiguously hurts the US economy when we’re in a liquidity trap. And what we just learned is that the White House still doesn’t get it.

Mind you, this failure to comprehend is minor compared with what’s going on across the aisle. But it’s still disappointing and depressing.

Paul Ryan’s drinking companions identified. A bit about one of the two amigos in my Keynes lecture.

A good question from some commenters. But it’s a question I’ve written about before:

Specifically, the reason Greece (and Ireland, and Portugal, and to some extent Spain) are in so much trouble is that by adopting the euro they’ve left themselves with no good way out of the aftereffects of the pre-2008 bubble. To regain competitiveness, they need massive deflation; but that deflation, in addition to involving an extended period of very high unemployment, worsens the real burden of their outstanding debt. Countries that still have their own currencies don’t face the same problems.

We had dinner last night with Margaret Ray and Dave Anderson, the authors of the AP adaptation of our textbook (which is terrific, by the way). Over our $350 $22 bottle of wine, we talked about various issues involved in trying to explain economics — and everyone agreed that monetary economics is where people are most likely to get not only confused, but furious.

There’s something about money, it turns out, that sends many people into blind rage — usually of the kind Margaret described as “Ron Paul plus”, but there are other versions too, some of them coming from the left.

So what is it about money? I don’t have a full explanation, but here’s a thought: monetary economics is inherently about market imperfections. In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed. We’d just have Arrow-Debreu complete markets in everything.

Monetary theory — and monetary policy — are, then, all about dealing with an imperfect, frictional world. As a consequence, sensible policy is based around trying to figure how to reduce the costs of these frictions and imperfections; thus floating exchange rates may be a good idea (and how sensible Milton Friedman now looks!) to deal with the reality that it’s hard to change nominal prices.

So why the rage? I suspect that it’s because a certain sort of person wants more purity than the real world is willing to supply. They want to believe in perfect markets, delivering perfect outcomes if only the government would stay out of the way. And so they want to believe that money too can be perfect if only we take it out of human hands, and make it good as gold, literally.

And when you point out that it doesn’t work that way, that money is a social convention meant to deal with an imperfect world, and that dealing with that imperfect world sometimes means that central banks need to take exceptional action, they fly into a rage.

I’ve been relatively sanguine about Italy, in a depressed sort of way: the debt level is high, but the deficits have been fairly modest, so I thought the Italians could limp along for a long time.

I may have been wrong:

Italy 10-year

This could get very interesting, in the worst sense. The chances of a real euro breakup (as opposed to one or more small peripheral economies falling off) are still small, but no longer negligible.

Update: That’s the interest rate on Italian 10-year bonds.

A number of people have been telling me about David Brooks and Ruth Marcus agreeing that there’s not much government can do about short-run economic performance, that we need to focus on long-run solutions. It’s a common sentiment inside the Beltway.

And it’s also utterly, utterly backwards. Changing the economy’s long-run growth rate is hard. We’ve had almost 25 years of “new growth theory” research, with every possible regression run, looking for the keys to faster growth; my sense is that we’ve basically come up dry.

Meanwhile, policy can have huge short-run effects. Monetary policy for sure, in normal times. In a liquidity trap, that’s harder — but fiscal policy does indeed work, if tried. Bear in mind that every paper showing that fiscal contraction is, indeed, contractionary is also, necessarily, showing that fiscal expansion is expansionary.

Politically, stimulus turns out to be hard to do. But commentators who spread fatalism are part of the problem.

Somehow I missed the BEA’s very useful page tracking the Recovery Act and how it is translated into taxes and spending. (Thanks to the commenter who mentioned it). It’s especially useful for thinking about what the Obama stimulus really involved — and what it didn’t.

Look at the peak quarter of stimulus (pdf), which was the first quarter of 2010. I’m going to rearrange the categories a bit. Here’s how I read it: at annual rates (in other words, actual numbers in the quarter were only 1/4 as large), the total budget impact was $357 billion. Of that, we had:

Tax cuts and refundable tax credits: $151 billion
Aid to individuals (mainly unemployment insurance and food stamps): $70 billion
Aid to state and local governments: $103 billion
Everything else: $33 billion

Note that the aid to individuals was basically safety net, and the aid to state and local was about mitigating spending cuts rather than spending expansion. Basically, this was at best an attempt to beef up automatic stabilizers.

So much for “we tried Keynesian policies and they didn’t work.”