J. Bradford DeLong's Blog, page 1138

Liveblogging World War II: October 11, 1944: Bill Biega After the Warsaw Uprising

Bill Biega:

The following morning the train pulled into another siding parallel to a street with street car tracks. It turned out that we were in the outskirts of Lodz, Poland’s second largest city, only 100 miles from Warsaw. Armed SS troopers in their ominous black uniforms surrounded the train. We were loaded into waiting street cars, which took us through city streets, then out along a cobble stone road in the outskirts. We were forced to alight and enter a field surrounded by a tall barbed wire fence. Inside the compound stood rows of long wooden huts which were filthy inside; there were no beds, only dirty straw on the floor. This was obviously a concentration camp, not one suitable for wounded soldiers. I was stunned, as were my comrades. So much for honorable surrender and treatment in accordance with the Geneva Convention.

We had been naive to believe the Nazis. We sat outside in despair. Luckily, the weather was sunny and warm, otherwise the situation would have seemed even more tragic. After several hours we were told to get back into the street cars which took us along the same city streets, back to the train. I learned later that there had been a major altercation between some Army officers and the SS. We never learned what exactly happened, but, fortunately for us the Army won. Among the conditions for the surrender of Warsaw was the stipulation that: “ .. control, transportation, housing and guarding of the prisoners of war shall be solely under the jurisdiction of the Deutsche Wehrmacht (German Armed Forces).” (Paragraph H.(9) of the agreement)”

The news of our presence had spread quickly through the city. Lodz had been incorporated into the Third Reich shortly after the occupation of Poland and many Poles had been banished to the General Government. However a large part of the Polish population had been allowed to stay to work in the textile mills, so vital to the German war effort. During the return trip from the camp, people ran along the streets throwing packages containing bread, fruit and vegetables through the open windows of the street cars with little interference by the police. At the train the SS guards had been replaced with Army soldiers in their familiar gray-green uniforms. Beyond the cordon of sentries small groups of local people were standing, who had also brought food packages. Some of the more severely wounded had never been unloaded from the train as no suitable transportation had been made available. The train stood at the siding all night; finally, early in the morning it moved off westward.

We traveled slowly through the provinces of Silesia and Saxony, standing often for hours in sidings while other trains carrying troops and freight passed us. On the train we were well fed, that is we received the same rations that German soldiers would have received. Our orderly heated the food for us and dished it out on enameled metal plates. Presumably, the same was happening in the other cars of the train. Several of the critically wounded died during this journey which lasted three days. Finally, we pulled into a siding next to a pine forest. We had arrived at Stalag IVB, located near the small German village of Zeithain, a few miles east of the river Elbe, about halfway between Dresden and Leipzig.

Our welcoming party included the camp commander Stachel in the rank of Oberst Arzt, which translates as Colonel Doctor. He was a typical Prussian army officer, slim, erect, dressed in an impeccable uniform, shining riding boots and carrying what looked like a riding crop. When he saw the doctors’ families alighting from the train complete with children, cats and pet birds, he turned around and left in disgust. This was too much for a proper, German professional army officer.

See Bill C Biega: Thirteen is My Lucky Number: The Dramatic True Story of a Polish Resistance Fighter.

Weekend Reading: Daniel Davies: A Disquisition on the Nature of Debt

Daniel Davies: The World Is Squared--Episode 3: The Greek Calends--A Disquisition on the Nature of Debt: "What is debt?...

...It’s a promise to pay back a specific amount of money at a specific time. Why is it so popular--why do people always seem to end up getting into it? Why, for example, don’t people make more equity investments, buying a share of someone else’s profits and sharing their risks in the way in which Islamic banking is meant to operate?

Basically, because debt has one big advantage, and it’s the same advantage that market economies have over command economics--it’s really really efficient in terms of the amount of information that people need to gather about each other. If you’re lending money under a debt contract, all you need to think about is "Do I think this guy is good for the money?", and all the borrower needs to think about is "Can I pay this back?". If you’re trying to make an investment and share the risks, all sorts of other questions come into play: "How much could this be worth in a really good outcome? What further projects might grow out of this one? What effect will the sharing of the upside and downside have on the way the thing is managed? Am I selling my shares too cheap?".

If you’ve ever watched “Dragons’ Den” (the format was broadcast as “Shark Tank” in the USA), you’ll note that the real human drama in the series is not really when the entrepreneur is pitching his or her new invention. What people come to watch that show for is the bit where one of the investors makes an offer. The guy has said he wants £200,000 for 10% of his company, and Duncan Bannatyne or equivalent says he’ll give the money, but he wants 40%. And the entrepreneur sweats on the spot. This, in microcosm, is the stuff that gets cut out of the process when you’re dealing with debt rather than equity. David Graeber wrote a whole gigantic book, one of the messages of which was that from an anthropological view, debt contracts denatured exchange relationships and took them out of their context of cultural human interactions, but in my review, I noted that Graeber didn’t seem to appreciate the extent to which this is a collossal time saver. Having a debt relationship with someone means that they don’t really care all that much about your project as long as you pay them back, but that’s a good thing; it makes investing much less intensive in time and effort.

And this even extends into credit analysis. I once calculated, to win a bet with a client, that given the volume of banking transactions, if banks were to carry out a full credit assessment on all of their counterparties, every time they incurred a new exposure, then this would take up all of the time of every Chartered Financial Analyst ever to have got the qualification, doing nothing other than these credit checks. It’s literally impossible for the system to work without a degree of blind faith that most credits are money-good.

The conclusion of this sketch of the nature of lending is that it really is that there’s a limit to the amount of work which it was ever sensible to ask people to do in terms of imagining the kind of outcome that actually occurred. From both the banks’ and Greece’s point of view, these weren’t bad loans--they were good loans which went bad. And to be honest, even if banks and the Greek government had decided to be super cautious and ask themselves if it was really sustainable for a country to have a normal European-scale welfare state on the back of a normal US-style tax take, they would still not necessarily have got it right. Because everyone believed that when push came to shove, Greece’s debts were backed by the EU as a whole, which means they were backed by Germany.

Why did people believe this? Because the permanent government and the political system of the EU very much wanted them to. Even while promises were being made for rich-country political consumption that there was no “transfer union” in the euro, and no mutual guarantee, the financial markets were being given the fair old nod and wink that yes there was. Well into 2011, the official line from the Eurogroup was that it was “inconceivable” that any euro member state would be allowed to default, and two or three Big Schemes of varying degrees of legal and institutional ropeyness were cobbled together to try and prevent it happening. People were fooled because a lot of effort went into fooling them. Even the notorious Goldman Sachs transactions which had the effect of moving Greek obligations off balance sheet--well, people did notice them at the time. Eurostat cried bloody murder about them, and got told to shut up, in almost so many words, because they were making it more difficult to achieve Economic and Monetary Union. The real fault for the state the Greek economy is in has to be laid at the door of all those European politicians who decided, for the sake of their places in the history books, to launch a single currency well ahead of any real democratic support for doing so, and to paper over the obvious economic problems--like the lack of a lender of last resort, or the lack of a mechanism to balance the internal current account--by a combination of ignoring them, and claiming that the Stability & Growth Pact would have effects that would be literally miraculous.

All of which isn’t to say that the banks deserved to get paid back, quite the opposite. Just to say that the 70% writedowns that they took should probably be regarded as them having done their stir and received just punishment for the extent to which they were culpable. The fact is that, as I say, everyone went a little bit batty in the aftermath of the end of the Cold War and the passing of the Millennium. Finland, a country which really has no obvious reason to be in the euro at all, joined it out of sheer relief about not having to worry about being invaded by Russia any more, and more or less admits the fact today.

Everyone made decisions just as bad as the Greeks, but as I say, Greece was less able to deal with the consequences. We’re talking here about a society that was torn in two by the Second World War, further damaged by the massive ethnic cleansing that created the modern boundaries of Greece and Turkey and further damaged by the years of military rule. It’s easy to start reaching for the phrase “low trust society” to describe Greece, but that isn’t quite the flavour of it--I’ve travelled in genuinely low trust societies and they’re different. Greece is a society of tight, small networks of trust, and one in which lots of groups of Greeks seem to regard each other as enemies, for reasons that reach back fifty years and which outsiders can’t hope to understand, or even identify the groups.

What’s happened here is that if England hasn’t managed to get past the Second World War culturally yet (and, my god, we haven’t), how do you expect Greece to? France dealt with Occupation at the level of the national psyche largely by repressing and never talking about it. Germany dealt with its role basically by doing nothing but talking about it. Other European countries coped in their own ways, but you shouldn’t be surprised to see that one or two of them didn’t cope. That’s what happens with big traumas; some patients get better quickly and some don’t get better at all. Georgia has recovered from the American Civil War, but Alabama hasn’t, and that was a hundred and fifty years ago. The problems in Greek society which led to its deeply dysfunctional economic model are very deep seated and aren’t going to be solved easily, and if it hadn’t been this crisis which brought them to a head it would have been something else.

And the biggest emnity within Greek society is between the population and the state, as far as I can see. That’s why I don’t see much of a future for SYRIZA in the long term, although I might be wrong in this prediction, and if I am it will be because of the personal abilities of Kostas Tsipras, who is a genuinely gifted politician. The SYRIZA coalition draws its support from public sector workers, and from the young. In other words, from people without jobs, and the people who are keeping them out of the jobs. As long as there is Germany to blame, it’s a viable coalition, but that won’t last forever.

For the Weekend: Serena Ryder

Unclear and Inadequate Thoughts on Financial Stability and Monetary Policy Once Again: The Honest Broker for the Week of October 17, 2014

**Over at Equitable Growth:As I continue to try to worry--without great success--the question of just where the increases in financial instability produced by the prolonged period of past and expected future extremely low interest rates and by quantitative easing comes from...

Two sources of risk:

Sudden downward revisions in the expected future cash flows of underlying real assets that back financial assets.
Sudden upward revisions in the rate at which expected future cash flows are discounted.

To recap my thinking before now:

Over at Equitable Growth: Larry Elliott: IMF warns period of ultra-low interest rates poses fresh financial crisis threat: "The Washington-based IMF said...

...that... the risks to stability... c[o]me from the... shadow banking system... hedge funds, money market funds and investment banks that do not take deposits from the public. José Viñals, the IMF’s financial counsellor, said:

Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.... Risks are shifting to the shadow banking system in the form of rising market and liquidity risks. If left unaddressed, these risks could compromise global financial stability.

The stability report said low interest rates were “critical” in supporting the economy because they encouraged consumers to spend, and businesses to hire and invest. But it noted that loose monetary policies also prompted investment in high-yield but risky assets and for investors to take bigger bets. One concern is that much of the high-risk investment has taken place in emerging markets, leaving them vulnerable to rising US interest rates.... The IMF said there was a trade-off between the upside economic benefits of low interest rates and the money creation process known as quantitative easing and the downside financial stability risks... developments in high-yielding corporate bonds were “worrisome”, that share prices in some western countries were high by historical norms, and that there were pockets of real estate over-valuation...

I have come to the conclusion that those who say that quantitative easing has increased systemic financial-market risks have simply not thought hard enough about what quantitative easing is. In quantitative easing the central bank takes duration risk off of the private sector's balance sheet and onto the governments, that is, the taxpayers'. The ratio of risk to be borne to private-sector risk-bearing capacity falls. The presumption is that this makes financial markets less, not more, vulnerable to systemic risk. You could tell some kind of complex contrarian story with demand and supply curves that slope in non-obvious ways. But none of those who say that quantitative easing increases systemic risk make such arguments--and if they understood quantitative easing properly, they would understand that they need to and feel impelled to do so.

The argument that ultra-low interest rates and the anticipated continuation of ultra-low interest rates for a considerable time period raises systemic financial risks is less mired in the, well, mire. But it, too, is not obvious. An economy sinks into depression when households, savers, and businesses in aggregate believe that they are short of the assets they need to hold to ensure liquidity--that after subtracting off assets they are holding as savings vehicles they do not have enough cash and enough safe nominal assets that could be pledged to immediately raise cash. As a result, the aggregate of households, savers, and businesses try to cut their spending below their income in order to build up their liquid cash and safe collateral balances; but since my income is nothing more than your spending, they fail and so production, income, and spending fall until the private sector finds itself so poor that it no longer seeks to build up its liquid cash and safe collateral balances.

In such a situation the government, by trading its cash and its safe collateral liabilities for risky financial assets and four currently-produced goods and services both:

creates more of what the private sector wants to hold, and so reduces or eliminates the gap between current and desired holdings of liquid cash and safe collateral.

lowers interest rates and so increases the value of the future relative to the present, providing a direct financial incentive both to spend now on the creation of long-duration real assets and to spend now out of what are now more valuable anticipations of future income.

The first-order effects are on aggregate demand--are on resolving the disequilibrium excess demand for liquid cash and safe collateral that creates the gap between planned spending and expected income. The effects on financial stability are second-order. They are:

On the one hand, higher asset valuations and higher levels of production and income greatly reduce the risks associated with financial assets backed by real wealth of one form or another.

On the other hand, the tilting of the intertemporal relative price structure greatly increases the incentive to create long-duration financial assets--which will inherently be speculative, and some of which will partake to some degree of the unhedged out-of-the-money put or even the Ponzi nature.

Which of these effects will be larger? For small reductions in interest rates, the first-order effect on the value of existing collateral assets in making finance safer will outweigh the second-order creation of new long-duration assets in making finance riskier.

Which of these effects will be larger? To the extent that prudential regulation is effective--or even exists--the range over which reductions in interest rates will improve stability is larger.

Which of these effects will be larger? To the extent that the economy is already flush with long-duration financial assets--which it is--the range over which reductions in interest rates will improve stability is larger.

The first-class study of this I know finds no evidence of the IMF's contention that policies of ultra-low interest rates have laid the foundations for increased risks of systemic financial instability in the United States. Outside the United States? Yes, times of low interest rates in the core are times of opportunity--cheap financing is available to finance economic development--but also times of danger--are their financial markets robust enough to control and manage the hot-money fluctuations?--in the periphery. But how much weight does the argument that prudential policy in the periphery may go wrong have in militating against policies that--correctly--aim at appropriate internal balance in the core?

I am now more inclined to view worries that ultra-low interest rate and quantitative easing policies raise risks of future financial instability as the last-gasp argument of the austerians--as one more attempt to find an argument, any argument, to justify universal bankruptcy and the war on the Keynesian Mammon of Unrighteousness.

So should I rethink this?

In conversation, the wise young whippersnapper Gabriel Chodorow-Reich assigns me to the camp of the "institutions" view: that the danger is that systemically-important financial institutions become severely distressed; that conventional stimulative open-market operations give them more reserves to back loans; that stimulative quantitative easing takes duration risk off the private sector aggregate balance sheet; and neither of those obviously raises the risk that systemically-important financial institutions become severely distressed--rather the reverse, because without truly perverse demand curves systemically-important financial institutions should hold some of those increased reserves, and part with some of the assets with duration risk that quantitative easing takes off the table.

I agree with this characterization. As I see it, first-order risk is risk to the underlying, and the more QE, the less risky underlying the private-sector holds, and the more forward guidance, the larger the expected pool of reserve assets to keep financial institutions out of distress. Second-order risk is the risk not of a fall in underlying cash flows but of a big upward move in the market discount applied to risky cash flows--a sudden fall in the risk-tolerance of the market that overwhelms VAR limits. Why should QE that reduces the pool of risky assets and forward guidance that raises the expected pool of reserves raise the variance of risk-tolerance innovations. Third-order risk is when institutions reaching for yield have demand curves that slope the wrong way--the lower the spread, the more risky assets they hold. But this seems to require that QE and extended guidance have triggered an enormous wave of risky-asset issue if institutions are going to end with riskier portfolios.

But, he points out, there is also a "spreads" view, which as I interpret it seems to be:

Long-term risky interest rates mean revert to normal.
Stimulative monetary policy--present and expected future--lowers long-term risky interest rates.
Quantitative easing lowers long-term risky interest rates too.
Thus when long-term risky interest rates revert to their normal, they must undertake a larger jump.
And that larger jump upon normalization causes greater losses and so creates more of a risk of severe financial distress.

And on this I have three thoughts:

I. It is not obvious to me what this "normal" that interest rates mean-revert to in the long run is. Looking at the nominal:

and at the real, with assumed adaptive inflation expectations:

perhaps you could argue for a 2.5%/year real Treasury 10-Year rate "normal" in the 1960s, and perhaps you could argue for a 3.75%/year real Treasury 10-Year rate "normal" from 1985-2000. But since 2000? Before 1980? And it is not at all obvious that the magnitude of the increase in long-term interest rates--nominal or real--in a business cycle recovery bears any relationship at all to the deviation from whatever you had previously thought of as "normal".

The underlying argument really does seem to be: "expansionary policy, extended guidance, and quantitative easing have pushed long-term interest rates down below normal, and they are coming back to normal, and when they do come back they will come back one basis point for each basis point the Fed artificially pushed them down, and it will be bad." The assumption seems to be either the policies are completely unwound--either by the Federal Reserve or by the market in some way--so that the Federal Reserve actions have no long-term permanent effect on the intertemporal price and risk structure and no medium-term transition-path effect on the speed of return to whatever the new normal turns out to be.

And I continue to find it impossible to put this argument into any kind of asset market demand and supply framework. And that makes me gravely suspicious.

There have been a number of arguments made in macroeconomics since 2006 that have been correct. There have been a number of arguments made in macroeconomics since 2006 that have been wrong but not implausible. And there have been a number of arguments--expansionary austerity; the 90% of annual GDP debt-limit cliff; quantitative easing necessarily and rapidly leading to debasement, de-anchoring of inflation expectations, and eventually hyperinflation, the zero fiscal multiplier--that seemed to me to be neither correct nor plausible but wrong but simply to lack any empirical or theoretical support whatsoever and to be the product of people who simply:

had not done their homework,
were grasping at straws for any argument that would support a previously-arrived at knee-jerk policy preference, and
had very low intellectual standards.

The question is: what keeps the argument that quantitative easing and extended forward guidance are greatly increasing the risks of financial instability from falling into this third category? I am waiting for an answer. And I am not finding one.

In short, I am demanding that those who see quick unwinding of balance sheets and quick raising of interest rates as policies that would reduce rather than increase the risks of financial distress open up their black box and at least make an argument about what lies inside.

The stakes are large indeed. Let me turn over the microphone to the very smart Joe Gagnon:

Joe Gagnon: Yellen vs. the BIS: Whose Thesis Makes Better Sense?: "Janet Yellen is right to resist diverting monetary policy...

...from its primary objective of stabilizing economic activity and inflation: Everyone agrees that it is essential to fix the flaws in financial regulation and supervision... Governments need... to place limits on leverage and... raise capital standards. [But] setting monetary policy on any basis other than the stabilization of employment and inflation is more likely to harm financial stability than to help.... Even if it were clear that loose monetary policy feeds asset bubbles (and my colleague Adam Posen has argued convincingly that it is not), it does not follow that tighter monetary policy is necessarily the right response to a bubble. The damage caused by a bursting bubble arises from the deadweight costs of bankruptcy and the panic engendered.... The solution is to reduce debt and increase equity... and to ensure that systemically-important financial institutions are well capitalized.

During the housing bubble, restrictions on leverage needed to be tightened.... [But] to prevent the economy from falling into recession, the Fed would have needed to lower interest rates, not raise them, in order to encourage firms and households with healthy balance sheets to spend more. BIS economists point to historically low interest rates as a sign that policy is dangerously loose. However, there are many reasons why returns on safe instruments should be low or even negative now in real terms.... When the equilibrium required return on assets is at a historical low, then asset prices of necessity will be historically high. This does not imply that we are experiencing a risky bubble. Sweden recently provided a clear test of the dangers of diverting monetary policy from its primary function to fight a perceived bubble.... Its policy tightening may have been counterproductive even in terms of its original financial-stability motivation.

2234 words

Noted for Your Morning Procrastination for October 10, 2014

Over at Equitable Growth--The Equitablog

Talking Points: Modern Capitalism: Growth and Equality: Friday Focus for October 10, 2014 - Washington Center for Equitable Growth
Evening Must-Watch: Heather Boushey et al.: Challenges of Job-Rich and Inclusive Growth - Washington Center for Equitable Growth
Morning Must-See: Super-Typhoon Vongfang - Washington Center for Equitable Growth
Where Is the Wage Growth?: (Late) Thursday Focus for October 9, 2014 - Washington Center for Equitable Growth
Morning Must-Read: Martin Wolf: An Extraordinary State of ‘Managed Depression’ - Washington Center for Equitable Growth
Morning Must-Read: Gavyn Davies: Germany Is Stalling - Washington Center for Equitable Growth
Morning Must-Read: Dean Baker: Great Mystery at the Washington Post - Washington Center for Equitable Growth
Nick Bunker: Is infrastructure spending a free lunch? - Washington Center for Equitable Growth

Plus:

Things to Read on the Morning of October 10, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

Paul Krugman: In Defense of Obama
Mario Draghi: Germany Should Start Spending More
Gavyn Davies: Germany Is Stalling* Martin Wolf: An Extraordinary State of ‘Managed Depression’* Super-Typhoon Vongfang:
Heather Boushey, Nancy Birdsall, Jose Antonio Ocampo, Alonso Segura, Laura Tyson, and Justin Wolfers: Challenges of Job-Rich and Inclusive Growth: Sharing the fruits of growth
Dean Baker: Great Mystery at the Washington Post, Why are People Without Jobs Unhappy About the Economy?

And Over Here:

Over at Equitable Growth: Talking Points: Modern Capitalism: Growth and Equality: Friday Focus for October 10, 2014 (Brad DeLong's Grasping Reality...)
Liveblogging World War II: October 10, 1944: Eleanor Roosevelt (Brad DeLong's Grasping Reality...)
Over at Equitable Growth: Where Is the Wage Growth?: (Late) Thursday Focus for October 9, 2014 (Brad DeLong's Grasping Reality...)
A Heartbeat--or Less--Away from the Presidency: Live from Caribou Coffee the Peet's at 17th & Penn (Brad DeLong's Grasping Reality...)
Liveblogging the American Revolution: October 9, 1776: San Francisco (Brad DeLong's Grasping Reality...)

Gavyn Davies: Germany Is Stalling: "Extremely weak German industrial production figures... for August have come an awkward time for the German government.... The official German line heading into these meetings is that the recovery is proceeding well, both in Germany and in the euro area as a whole, implying that the recent marked weakening in both GDP and inflation data is just a temporary aberration. There is no sign that the Merkel administration is ready to change its longstanding formula for economic success in the euro area: member states should stick to the fiscal targets in the Stability and Growth Pact, and should accelerate structural reforms, so that the expansionary monetary stance provided by the ECB can bear fruit.... This could change, however, if the German economy itself continues to weaken significantly. But how likely is this to happen?... The Fulcrum 'nowcast' models... activity growth rate has slowed from about 2.6 per cent in late 2013 to 0.9 per cent now.... It has not fallen yet into negative territory on an underlying basis, but it is certainly not acting as a powerful locomotive for the European economy. Far from it.... The Q2 official GDP growth rate of -0.6 per cent was already worse than had been expected.... The central estimate of the latest 'nowcast' for Q3 is that the GDP growth rate will rebound to 1.4 per cent annualised... about a 28 per cent probability [of a second negative number]."

Martin Wolf: An Extraordinary State of ‘Managed Depression’: "In the US, UK and the eurozone, output has fallen far below what virtually everybody expected eight years ago. The same is true of Japan, though the trend in question ended two and a half decades ago. Yet, contrary to what we might also have expected, we do not observe accelerating deflation.... When we look at the high-income economies in this way, we must recognise that they are in a truly extraordinary state. The best way to describe it is as a managed depression: aggressive monetary policies have been sufficient to halt accelerating deflation, but they have been insufficient to produce a strong expansion. This is particularly true of the eurozone.... Recent suggestions by the ECB’s president, Mario Draghi, that the eurozone needs a radical shift in policy regime, is the self-evident truth. Yet the powers that be in the eurozone--notably, the German government--plan to do nothing about it.... We can, at last, see some reasons for optimism about the US and UK... though confidence... cannot be strong. More radical alternatives, such as higher inflation targets and debt restructuring, may yet be needed. In the eurozone and Japan, however, the picture looks more uncertain..."

Super-Typhoon Vongfang:

Heather Boushey, Nancy Birdsall, Jose Antonio Ocampo, Alonso Segura, Laura Tyson, and Justin Wolfers: Challenges of Job-Rich and Inclusive Growth: Sharing the fruits of growth: "Rising income inequality across economies is a significant concern, not least because countries with higher inequality tend to have growth that is lower and also less durable. This panel discusses how to promote growth that is more equally shared..."

Dean Baker: Great Mystery at the Washington Post, Why are People Without Jobs Unhappy About the Economy?: "Steven Mufson uses a wonkblog piece to speculate on why it is that even though we have been in a recovery for more than five years people are still not happy about the economy. He tells us that President Obama has the same problem as President Bush (I), who got trashed on the economy even though revised data show it had been growing rapidly at the start of 1992. While Mufson seeks out expert analysis to try to resolve this paradox, he might try looking at the data for a moment. No one sees the economy. They don't what the rate of growth is unless they read about it in the newspaper. What they do know is whether they have a job, whether their job is secure, and their pay is rising. If you ask about these questions the only mystery is why Mufson is wasting our time. In 1992 the employment to population ratio was still 1.5 percentage points below its pre-recession level. That would translate into roughly 3.2 million fewer people having jobs in today's labor market. The current employment to population ratio is down by close to 4.0 percentage points from pre-recession levels, translating into more than 9.0 million fewer people with jobs. (Some of this is due to retirement of baby boomers.) Wages for most workers have been stagnant or declining in the last five years as was the case in 1992. So the real question here is why any serious people would have any question about why the public is sour on the economy. People care about their living standards and security."

Should Be Aware of:

Marcus Tullius Cicero Marci filius Marci nepos Cornelia tribu: In Catilinam Prima
Ryan Cooper: What we can learn from Abraham Lincoln's greatest mistake
Gavyn Davies: It’s Draghi versus Weidmann on ECB QE

Liveblogging World War II: October 10, 1944: Eleanor Roosevelt

MY DAY by Eleanor Roosevelt, October 10, 1944:

I merely mentioned the fact yesterday that Ethel Barrymore had come to tea the other day. I want to say that it was a joy to see her again, and that her charm and beauty have grown with the years.

I went to Hyde Park Saturday afternoon, taking a friend and two small boys with me. It was a busy, but very pleasant weekend. Dr. and Mrs. David Levy came to luncheon on Sunday, and we visited the Wiltwyck School at Esopus, N.Y. Otherwise, our time was spent in walking through the woods and rejoicing in this opportunity to be in the country.

Today I am back in New York City to keep several engagements and to see a number of people, which is what usually happens whenever it is rumored that I am to be here. Both in New York and in Washington, I can always fill up an hour or two listening to interesting problems that are brought to me.

A friend of mine has been sending me editorials written by Miss Ruth Taylor. They are largely on questions of tolerance and understanding between different groups of people. They are extremely well written, and since they go, I understand, to various labor papers and to the newspapers of various racial groups, I think they must be an influence for good.

A new radio series, known as "Eternal Light," and sponsored by the Jewish Theological Seminary in cooperation with the National Broadcasting Company, was inaugurated on Sunday. It is unique in that it is the first broadcast religious program which is not a religious service. The premiere revolved around the story of the famous Touro Synagogue founded in pre-Revolutionary days. It was to this synagogue that George Washington wrote his famous letter, in 1790, promising religious freedom to the Hebrew congregation of Newport, R.I. I can quote only a little of that letter here, but it is one which I think we should all reread.

"It is now no more that toleration is spoken of," wrote Washington:

as if it was by the indulgence of one class of people, that another enjoyed the exercise of their inherent rights. For happily the Government of the United States, which gives to bigotry no sanction, to persecution no assistance, requires only that they who live under its protection should demean themselves as good citizens, in giving it on all occasions their effectual support.

One other significant line in the letter should be spread abroad to the world. Washington said: "There shall be none to make him afraid." Let us hope that will be true in the future for every man as regards his religion.

Over at Equitable Growth: Talking Points: Modern Capitalism: Growth and Equality: Friday Focus for October 10, 2014

Over at Equitable Growth: J. Bradford DeLong: Talking Points for IIF: Modern Capitalism: Growth and Inequality”: 4:00-4:50 pm, Friday October 10, 2014, Ronald Reagan Building

I am going to talk mostly about the U.S. and somewhat less about the North Atlantic, and say only one thing about the world as a whole.

The one thing about the world as a whole: After the Qingming Festival of 1976, the rulers of China recognized that they had lost whatever legitimacy they had ever possessed, that Hua Guofeng and his allies could not manage the situation, and that they needed to adopt the successful-mouse-catchers development strategy, the world has become a more equal place because China and secondarily India have done well. But a continuation is not guaranteed for the next two generations. It may not even be ore likely than not.

The United States primarily and the rest of the North Atlantic to a lesser degree are losing the race between technology and education. We do not need to slow technology; we do need to accelerate education if we are to ever reduce the gap between those at the 20th and 80th income percentiles to a magnitude that does not shame us.

We may not be able to do so with our current educational technologies: we know how to get 1/3 of our populations reaching adulthood a useful college education--but the same educational strategies may well be much less effective for those outside our luckiest 1/3.

A good deal of the rise in inequality outside of the 80-20 education-and-technology factor is also due to our technologies' creation of winner-take-all contests within our economy. It is not clear to me why the economy of 1900 and the economy of 2000 did this, while the economy of 1960 did not.

The rest of the rise is due to a feedback loop by which the rich use their wealth to acquire more political influence to secure the rents that make them even richer so that they can use their wealth to an even greater extent to acquire still more political influence to secure even more rents. We do stand in great danger of building a latifundista society, which will in due course bring with it our Perons, our Pinochets...

Martin Wolf, J. Bradford DeLong, Mohamed El-Erian, Jason Furman Lawrene Summers.

Over at Equitable Growth: Where Is the Wage Growth?: (Late) Thursday Focus for October 9, 2014

Over at Equitable Growth: Nick Bunker picks up the slack left when Reuters pulled the plug on its noble and very useful Counterparties:

Nick Bunker: Where is the wage growth?: "The lack of wage growth is on everyone’s mind...

...Catherine Rampell at The Washington Post considers a variety of reasons for this slow wage growth... but finds one more convincing... a considerable amount of slack in the labor market.... Justin Wolfers presents a related puzzle... at the historical relationship between the unemployment rate and average wage growth.... Jared Bernstein looks at the relationship between wage growth and... [a] labor market slack [measure] developed by... Andrew Levin... [and] finds that the... relationship between slack and wage growth has weakened.... Tim Duy... thinks that Wolfers’s puzzle... isn’t all that puzzling.... The meager wage growth of recent years is just a continuation of a long-term trend highlighted by The New York Times’ David Leonhardt...

Also worth putting on your must-read view is the Bruegel weekly Blogs Review by Jeremie Cohen-Setton... READ MOAR

I remember Robert Solow saying 35 years ago that the assumption that business cycles were stationary symmetric fluctuations around a trend that to first-order evolved independently of the cycle was analytically very convenient but was also quite possibly completely wrong, and that a good economist with know when it was time to throw that assumption overboard.

Looking at nominal wage growth since 1985:

And looking at the difference between nominal wage growth and the core CPI since 1985:

allows you to see the stakes at issue here: was there something going on on the supply-side that made 1997-2010 the only time period of positive real wage growth since the Carter administration?

Or does the positive real-wage growth arise because Greenspan after the 1992 and 2003 unemployment-rate peaks is interested in producing a high-pressure economy and in doing whatever it takes in a way that Volcker and Bernanke/Yellen have not been? How much do social conventions of what real wages ought to be shape labor-market supply and demand in the medium- and the long-run, and how much do episodes of labor-market depression and labor-market boom shape those social conventions of what real wages ought to be?

You think that, having been in this business for 35 years, I would know--or at least have strong opinions that I regard as evidence-based...

A Heartbeat--or Less--Away from the Presidency: Live from Caribou Coffee the Peet's at 17th & Penn

The Caribou Coffee at 17th and Penn NW has become a Peet's? O tempora, o mores! Senatus haec intellegit. Consul videt; hic tamen vivit. Vivit? immo vero etiam in senatum venit, fit publici consilii particeps, notat et designat oculis ad caedem unum quemque nostrum. Nos autem fortes viri satis facere rei publicae videmur, si istius furorem ac tela vitemus. Ad mortem te, Catilina, duci iussu consulis iam pridem oportebat, in te conferri pestem, quam tu in nos [omnes iam diu] machinaris...

Ahem...

That John McCain is still regarded by anybody as anything other than a dangerous clown is the thing about American politics that amazes me beyond belief:

Jeanne Devon: Palins Vindicated! Just Ask Them: The Mudflats: "I’ve learned that I cannot ignore the Palins’ drunken rumpus...

But in light of the fact that our friends at Wonkette have taken the newly released Anchorage Police Department report and run with it as only they can, I’m just gonna put this right here to give you a little taste.... You’ll be happy to know that we stand by our original illustration of the event, and that t-shirts remain available for purchase HERE. Remember, Christmas is coming and nothing says Peace on Earth, Good Will to Man like ripping your shirt off and giving someone the bird. And you’ll never believe THIS… Despite the drunken debauchery, the blood, the stinking drunkenness, the multiple assaults, the alleged stealing of sandals, and Bristol Palin’s fists of fury, no charges will be filed. I’m shocked, shocked I say. There goes our court coverage… sigh

https://malialitman.files.wordpress.com/2014/10/palin-family-brawl-police-reports.pdf

Ahiza Garcia: Palin Clan Brawl: Seven Amazing Moments Revealed By The Police Report: "It may have been the fight of the decade...

...at least in Alaska.... Some of the highlights....

The Palins Tried To Start Another Altercation After Cops Arrived: Witnesses previously said the Palin family got in their stretch Hummer limousine and left the house party before the police arrived. But... officers described a moment where Todd Palin and his daughter Willow apparently got involved in yet another altercation with the owner of the house, Korey Klingenmeyer, while police were watching. "Todd Palin came walking back to the driveway confronting [K]orey asking him if he called his daughter a 'bitch'.... Willow Palin walked up and also got involved flipping Corey off and getting loud. We eventually separated everyone and the Palin family ended up leaving."

Officers Thought The Palins Tried To Hide Track From Them: One officer wrote that... people were walking with a bloodied man toward the limo and, according to the officer, "pushing him in as I approached, appearing intent on keeping him away from me." The bloodied man turned out to be Track Palin, according to the report. "He appeared heavily intoxicated and he acted belligerent at first but I was able to get him to step out of the car and a female who turned out to be his mother, told him to talk to me," an officer wrote. "He came out of the car to talk and was in the presence of his father, Todd Palin, mother, Sarah Palin, and he identified himself as Track Palin."

'Heavily Intoxicated' Bristol Described Being Dragged By Her Legs: Bristol Palin, the family's eldest daughter, was seen by witnesses punching the owner of the house, Korey Klingenmeyer, multiple times.... She appeared to be "heavily intoxicated and upset"... described the situation in a far different way.... "She stated she didn't know who [K]orey was and then said that Korey had drug her across the lawn by her legs and was calling her a cunt and a slut. She said the guy with the red shirt was dragging her. When asked how it started, she said that her little sister told her that a girl had hit her so she walked up and asked what 40 year old was pushing her sister and that's when some guy walked up and pushes her on the ground. And starts dragging her on the lawn and calling her names. She says that she walks out into the cul de sac and they took her sandals and sunglasses. She says she then saw Track getting attacked so she tried to help him out. She said she didn't know what else happened and didn't have a clue whether she hit him or not.

'The Entire Event Was On Camera'.... But if any did exist, police said they were never able to get a copy....

Police Made No Mention Of Interviewing Sarah Palin....

Willow Told Cops Other Party Guests Were Saying 'Fuck The Palins': Another one of the Palin daughters, Willow, apparently expressed frustration at the way police were handling the incident. She said her sister Bristol had been attacked and that people seemed to be ganging up on the Palin family, according to the report. "Willow Palin was extremely agitated saying she did not understand why we let the people walk away that were involved," one officer wrote. "She then started talking about how Corey assaulted her sister Bristol and that several guys were on top of her sister when she was on the ground. She alleged that an older lady pushed her and that people were saying things like 'Fuck the Palins.'"

Track Palin Apparently Tried To Pick A Fight With His Father: Officers talked to a witness, Brian Horscel, who said that earlier in the evening he had seen yet another altercation involving the Palins. He almost tried to stop it, he told the police, until he realized who was involved. From the report: "He said that earlier he did see Track trying to start a fight with his dad, Todd, and he was about to step in until he found out that it was Todd's son that was trying to fight him."

Morning Must-See: Super-Typhoon VongFang