Grasping Reality with Both Hands

How Different Was This Time?

Mike Konczal on the Obama administration:

Was This Time Different On the Economy?: Ezra Klein wrote a 7,000 word summary of what went right and wrong on economic policy during the first three years of the Obama campaign. It’s well-reported and fun to read.... I’m going to throw out some critical thoughts....

Obama is much more of a fiscal conservative than I had imagined.... Noam Schieber at the New Republic was getting word from Treasury as early as late 2009 that they thought that they needed “some signal to U.S. bondholders that it takes the deficit seriously” and “spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect.”  This naturally lead to wanting to strike “grand bargains” with the other side, a path that lead the administration down some bad roads in terms of the agenda. The flip side of this is the administration’s focus on “confidence” – financial markets, Wall Street and business community – as a way of bringing growth up and unemployment down.  This has most obviously driven policy in regards to Wall Street and the financial markets (more on that in a second), but we see this in terms of dealing with the deficit.  It has also brought in approaches emphasizing positions that are much more “supply-side” – patent reform, regulation cutting, appointing senior business leaders to key positions, a key State of the Union based on “Winning the Future” through education investments – that can’t be justified as getting us back to full employment.  By the debt ceiling fight these administration talking points were becoming a parody of right-wing talking points and Hooverism....

I’ve had staffers tell me on background that members of Congress would approach the administration in 2009 looking to build out huge, New-Deal style infrastructure as a separate track, only to be told that the recovery would be fully underway by the time it kicked in – thus wasted.  There was no response to this....

Ryan Avent has tackled the Federal Reserve problem here.  There’s a new Federal Reserve iPad app. It is pretty rad.  You can click on all the members of the FOMC.  You can also click on the two vacant seats and it says that they are vacant. Even iPad apps are mad at Obama for not being aggressive on the Fed appointments!...

Housing.... The Obama administration was either indifferent or hostile to changes in the bankruptcy code – cramdown – following this crash, even though Obama campaigned on it. Technical: cramdown isn’t about making the banks eat the loss, it’s about the loss coming from credit writedowns versus a firesale of a house in foreclosure – hence evidence that cramdown wouldn’t raise costs.  But either way,  in addition to forgetting things since Keynes, we are also in the business of forgetting things from the 19th century.... The Administration set aside $75 billion through TARP for HAMP, and to date have used $1.6 billion or so on a program that is effectively irrelevant at this point (and they have cleverly revised history to claim that it was only a $50 billion allotment, to make this look a little better). Without any need to clear Congress, the Administration had all the authority they needed to put this $75 billion to work, including the ability to punish servicers who failed to comply with guidelines….

Then, for two years, Treasury swore up and down there was nothing they could do to punish servicers who didn’t comply. Finally, a few months ago, they started withholding incentive payments for noncompliance, as if they just magically acquired the power. It turns out, as Paul Kiel from Pro Publica displayed in a story this week, that Treasury wasn’t even checking on servicer compliance for at least the first year of the program…

The truth that emerges from all of these facts is that the Administration had no interest whatsoever in using more than a token amount of the TARP authority they had already husbanded for mortgage relief and foreclosure mitigation…

Twitterstorm delong: October 14, 2011

• @mattyglesias @NeilIrwin Why would he say that? It's clearly wrong--the bond market thinks things could get a lot worse...

• RT @TPM: Fox & Friends: We prob should have clarified that our story on Obama apologizing to Japan was false http://tpm.ly/prpCe7

• RT @dismalscientist: #Brazil's central bank has reversed its earlier tightening, but will have to do more to undo the damage.

• RT @mattduss: Important to remember that, in addition to being an old racist douche, Marty Peretz is just an impressively bad writer

• RT @ThePlumLineGS: RT @kdrum When is a Jobs Plan Not a Jobs Plan? http://mojo.ly/oGruj4

• RT @JeffreyFeldman: Reuters coverage of #OWS so laced with bitterness it's entertaining... http://reut.rs/qDUurg

• RT @tomdale: It's surprising that Apple and UPS can physically deliver more phones than AT&T can load balance activation servers for.

• RT @9to5mac: "just spoke to a manager at one of my apple stores here. AT&T/Sprint servers down, VZW still up."

• RT @ppppolls: When you know the tide is turning- 52% of Nebraska Republicans support legal recognition for gay couples: http://tinyurl.com/3serq5g

• RT @owillis: Kansas City Bishop Indicted in Reporting of Abuse by Priest http://nyti.ms/pS3b6w

• RT @EricBoehlert: yeah, @Reuters is hopeless: Soros article editor says she's "unaware" of any criticism of the reporting

• RT @realUS232: @EricBoehlert yea, Reuters knows that article is indefensible! #ReutersFail

• RT @davidmwessel: White House makes it official. The long-term care insurance slice of Obama health plan is dead. http://is.gd/EMiBjn

• RT @michaelscherer: RT @MelindaDC: Wehner on Anita Perry : U know u've created God in ur own image when it turns out God hates all the s ...

• RT @aterkel: RT @daveweigel: Ughhhhh RT @thegarance: Anita Perry: We know pain of unemployed because our banker son quit his job bit.ly/ ...

• RT @owillis: somehow i get the feeling the perry campaign will begin limiting access to anita perry going forward #notreadyforprimetime

• RT @BetseyStevenson: If this was 1911 replace college w/ high school & same debate RT @ezraklein: Do too many kids go to college? A deba ...

• RT @ggreenwald: Nothing excites reporters like palace intrigue and royal court gossip: http://is.gd/EbMnDr

Fiscal and Monetary Policy in a Liquidity Trap Now and Then

Paul Krugman:

Why Believe In Keynesian Models?: [W]hat evidence makes me believe that Keynesian economics is broadly right, given the relative absence of experience with large fiscal stimulus programs?...

First, we’re talking about a model.... So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?... Keynesianism isn’t just about sticky prices, but it does generally assume sticky prices — and there is overwhelming evidence, from a variety of sources, that prices are indeed sticky. Also: there’s plenty of evidence that monetary policy can move output and employment — and it’s very hard to devise a model in which that is true that doesn’t also say that fiscal policy can be effective, especially when you’re up against the zero lower bound.

Second, while we don’t have a lot of postwar experience with fiscal stimulus, we do have a lot of experience with anti-stimulus, that is, austerity — and that turns out to be reliably contractionary. Again, it’s hard to think of a model in which austerity is contractionary but stimulus isn’t expansionary.

Finally, there is evidence from fiscal expansions in the 1930s, which actually did lead to economic expansion too.

Mainly I’d stress the first point. We have a model... an implication of that model is that fiscal stimulus will work under conditions like those we face now. If interest rates had soared, if the rise in base money had led to rising GDP and/or soaring prices despite the zero lower bound, I would have sat down to reconsider what I thought I knew about macroeconomics. In fact, however, my preferred model has passed the test of events with flying colors, while the other guys’ models have been totally wrong.

---

Miguel Almunia, Augustin S. Bénétrix, Barry Eichengreen, Kevin H. O’Rourke, and Gisela Rua: 18 November 2009:

The effectiveness of fiscal and monetary stimulus: There is one important source of information on the effectiveness of monetary and fiscal stimulus in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion that has not been fully exploited: the 1930s.... [W]here fiscal policy was tried, it was effective.

The Keynesian argument for expansionary fiscal policy – whether right or wrong – was not known in this pre-Keynesian era. Hence there was relatively little variation in fiscal stance, with conservative policies being the default option. The aggressive use of discretionary monetary policy was also relatively unusual, as central banks were wedded to gold-standard ideology. But there were exceptions. Japan’s aggressive use of monetary policy under Takahashi was one, Italy’s large budget deficits under Mussolini another. And there were good – exogenous – reasons for this variation. Fiscal impulses were generally governed by forces other than immediate economic conditions; Italy’s war in present-day Ethiopia, Hitler’s rearmament, the approach of World War II. Who responded to the crisis with monetary stimulus depended heavily on prior monetary experience; counties that had suffered high inflation in the 1920s tended to be reluctant to abandon the gold standard in the 1930s.

Cross-country comparisons can thus help us untie the Gordian Knot and move the debate from the realm of ideology to that of evidence. Our project therefore focuses on assembling annual data on growth, budgets and central bank policy rates, mainly from League of Nations sources, for 27 countries covering the period 1925-39....

We use panel vector autoregressions (VARs) with conventional assumptions about the “ordering” of the variables (whether a variable affects the others contemporaneously or only with a lag). We consider alternative orderings, and also run panel VARs with defence expenditure entering the equations as an exogenous variable. We run panel instrumental variables regressions using defence spending as an instrument for fiscal policy and gold standard membership as an instrument for monetary policy. And we run alternative panel regressions looking at the impact of fiscal and monetary shocks, the latter calculated by running simple autoregressions and extracting the residuals.

The details of the results differ, but the overall conclusions do not. They show that where fiscal policy was tried, it was effective. Our estimates of its short-run effects are at the upper end of those estimated recently with modern data; the multiplier is as large as 2 in the first year, before declining significantly in subsequent years....

The results for monetary policy are less robust but point in the same direction. A positive shock to the central bank discount rate leads to a fall in GDP... [that] just misses statistical significance at conventional levels.... This result is notable, given the presumption, widespread in the literature, that monetary policy is ineffective in near-zero-interest-rate (liquidity trap) conditions. On the contrary, in the 1930s it appears that accommodating monetary policy helped, by transforming deflationary expectations (Temin and Wigmore 1990) and by helping to mend broken banking systems (Bernanke and James 1991). Given the prevalence of both problems circa 2008, we suspect that the results carry over...

Why Oh Why Can't We Have a Better Press Corps?: Yet Another Washington Post Reporters Not Undertanding Any Economics Edition

Ryan Avent does the pickup:

Business cycles: Things could actually get a lot worse: "NEIL IRWIN has written a piece in the Washington Post today on the case for optimistic pessimism. Things are now so bad, he writes, that they're unlikely to get much worse…. [T]his seems like a fundamentally flawed view of the economy:

The U.S. economy has been through a lot in the past few months — an unprecedented downgrade of the government’s credit rating, a debt crisis in Europe that threatens to spread across the Atlantic, and a steep decline in financial markets. Yet most economic indicators have pointed to continued, albeit slow, growth.It isn’t the resilience of the U.S. economy. Rather, it’s a sign of how bad things have already become. Many of the key sectors that usually cause economic contraction, including housing and durable goods such as automobiles, are already at such low levels that they don’t have much more room to fall….

Instead, America typically finds itself in recession because there is a drop in demand. There are lots of things that might trigger a demand shortfall. The Fed might signal its intention to induce a recession to fight inflation. Instability in financial markets might lead to a surge in money demand. An intense bout of political brinksmanship over debt default could conceivably have the same effect. In all these cases, the source of the recession is a sudden decision across the economy to simultaneously increase saving….

As far as I can tell, there's almost no one who assigns primary blame for the deep drop in output in late 2008 and early 2009 to that slowdown in the auto industry. They blame the panic-induced drop in demand associated with the October financial crisis…. Falling auto output didn't cause the recession. It was symptomatic of a gut-wrenching decline in demand.

In considering the path of future output, the question is: what's demand likely to do? My sense is that it's likely to rise slowly, at or just below real potential growth plus an inflation rate around 2%…. But we have no guarantees about that, and we certainly can't take much comfort in the low level of sales in housing and durable goods. They'll grow as quickly as the Fed allows. Should the Fed make an error of some sort, they'll fall….

When systematic policy error results in low demand, it's as likely that the error will be sustained or compounded as it is to be rectified. In such cases, every bottom is ephemeral, and there is no darkness that can't grow darker still.

Husband Kimmel Liveblogs World War II: October 14, 1941

PACIFIC FLEET CONFIDENTIAL LETTER NO. 2CL-41 (REVISED):

From: Commander-in-Chief, United States Pacific Fleet.
To: PACIFIC FLEET.
Subject: Security of Fleet at Base and in Operating Areas….

(2) The security of the Fleet, operating and based in the Hawaiian Area, is predicated at present, on two assumptions:

(a) That no responsible foreign power will provoke war, under present existing conditions, by attack on the Fleet or Base, but that irresponsible and misguided nationals of such powers may attempt

(1) sabotage, on ships based in Pearl Harbor, from small craft.
(2) to block the entrance to Pearl Harbor by sinking an obstruction in the Channel.
(3) to lay magnetic or other mines in the approaches to Pearl Harbor.

(b) That a declaration of war may be preceded by;

(1) a surprise attack on ships in Pearl Harbor,
(2) a surprise submarine attack on ships in operating area,
(3) a combination of these two.

(3)The following security measures are prescribed herewith, effective in part in accordance with enclosure (B) or in their entirety as may later be directed by the Commander-in-Chief, U. S. Pacific Fleet, or the Senior Officer Present Afloat in the Hawaiian Area...

Things Counterparties Is Not Linking to...

Counterparties: Megan McArdle wonders why people aren't hiring more servants...

Rick Perry's Wife Anita Perry Is Not Sane...

Lon Harris (Lons) on Twitter:

@owillis Amazing. "My poor son lost his job! Well, actually, he quit to join his father's presidential campaign. Just like you folks!"

AT&T; FAIL Once Again

MacRumors:

AT&T Activations Servers Overloaded with iPhone 4S Launch: AT&T's activation servers are having problems with the large influx of activations with the iPhone 4S launch. A quick search of Twitter shows many having problems activating their AT&T iPhone 4Ss due to server issues. A discussion thread in our forum also mirrors the complaints. With the iPhone 4S launched now across the entire U.S., we are at the peak of simultaneous AT&T iPhone 4S activations. AT&T has had similar issues in previous launches. Japanese carrier Softbank was reported to have similar issues during their launch this morning.

America Cannot Be Great Again Until the Republican Party as We Know It Disappears

Greg Sargent:

Economist: Senate GOP jobs plan wouldn’t help economy in short term, and could even hurt: Yesterday, Senate Republicans released an economic plan called the “Jobs Through Growth Act.” Senator Rand Paul said it would create five million jobs without specifying a time frame. Though the plan repackaged previous GOP ideas we’ve heard before, Republican Senators argued that releasing the ideas as a plan would restore business confidence, leading to investment, growth, and job creation. The GOP unveiling of the plan was widely treated as major news, and Republicans are challenging Obama to respond to their plan — a challenge that’s also garnering widespread coverage.

But an economist I spoke to just now said there isn’t enough information in the plan to evaluate whether it could even achieve its goals as Republicans themselves have defined it. He said it won’t help the economy in the short term, and could even make matters worse. “I don’t have enough detail to evaulate how many jobs this would create,” Gus Faucher, the director of macroeconomics at Moody’s Analytics, told me. “I could say, `My plan is to do nothing, and it will create five million jobs.’ And it could work, particularly if I don’t say over what time period.”

Moody’s recently estimated that Obama’s jobs plan, if passed, would add two percentage points to economic growth next year, add 1.9 million jobs, and cut unemployment by a full percentage point. By contrast, the Senate GOP plan wouldn’t help the economy in the short term, Faucher said….

Senate Republicans said the release of the new plan — by repackaging previous ideas in one place and pushing them in public — would create certainty and confidence and lead ultimately to five million new jobs. Faucher said he had no way to evaluate the idea that the release of the plan itself could create confidence and certainty. “That’s not an economic argument,” he said. “I do think the lack of confidence is a problem, but again, the way to get over that problem is by having strong near term growth, and this proposal isn’t focused on that.”

Fauscher also said the Senate’s plan inclusion of a Balanced Budget Amendment could hurt the economy in the near term. “Putting the emphasis on balancing the budget now is likely to push the economy back into recession,” he said. “We’re seeing the impacts of that in Europe, where governments are undertaking fiscal austerity and their economies are struggling.”

Quote of the Day: October 14, 2011: Abraham Lincoln the Politician

"I will say then that I am not, nor ever have been, in favor of bringing about in any way the social and political equality of the white and black races, [applause]-that I am not nor ever have been in favor of making voters or jurors of negroes, nor of qualifying them to hold office, nor to intermarry with white people; and I will say in addition to this that there is a physical difference between the white and black races which I believe will forever forbid the two races living together on terms of social and political equality. And inasmuch as they cannot so live, while they do remain together there must be the position of superior and inferior, and I as much as any other man am in favor of having the superior position assigned to the white race.

"I say upon this occasion I do not perceive that because the white man is to have the superior position the negro should be denied every thing. I do not understand that because I do not want a negro woman for a slave I must necessarily want her for a wife. [Cheers and laughter.] My understanding is that I can just let her alone. I am now in my fiftieth year, and I certainly never have had a black woman for either a slave or a wife. So it seems to me quite possible for us to get along without making either slaves or wives of negroes.

"I will add to this that I have never seen, to my knowledge, a man, woman or child who was in favor of producing a perfect equality, social and political, between negroes and white men. I recollect of but one distinguished instance that I ever heard of so frequently as to be entirely satisfied of its correctness-and that is the case of Judge Douglas's old friend Col. Richard M. Johnson. [Laughter.]

"I will also add to the remarks I have made (for I am not going to enter at large upon this subject,) that I have never had the least apprehension that I or my friends would marry negroes if there was no law to keep them from it, [laughter] but as Judge Douglas and his friends seem to be in great apprehension that they might, if there were no law to keep them from it, [roars of laughter] I give him the most solemn pledge that I will to the very last stand by the law of this State, which forbids the marrying of white people with negroes. [Continued laughter and applause.]

"I will add one further word, which is this: that I do not understand that there is any place where an alteration of the social and political relations of the negro and the white man can be made except in the State Legislature-not in the Congress of the United States-and as I do not really apprehend the approach of any such thing myself, and as Judge Douglas seems to be in constant horror that some such danger is rapidly approaching, I propose as the best means to prevent it that the Judge be kept at home and placed in the State Legislature to fight the measure. [Uproarious laughter and applause.] I do not propose dwelling longer at this time on this subject…."

--Abraham Lincoln, Fourth Debate with Stephen Douglas