J. Bradford DeLong's Blog, page 2081

Why Oh Why Can't We Have a Better Press Corps?

I had written:

Yes, Gene Sperling Really Is a Liberal - Grasping Reality with an X-11 Seasonal Adjustment Filter: Bob Woodward's The Agenda is in general not a reliable book, but its sections on Gene [Sperling]'s attempts to push Clinton administration economic policy a little further to the left are, I think, accurate...

Bob Woodward commented:

Brad: History, even economic history, should get better with time, not worse. AFter all these years and the multiple confirmations about the accuracy of The Agenda, you persist. For example, I have released transcripts of taped interviews with the late Lloyd Bentsen (wasn't he your former boss?) showing the accuracy of key incidents in the book. What are you talking about? Bob Woodward

My reply:

As I recall, when I heard you speak you gave two examples of why you thought that in general we knew less than 5% of what was going on, and of how in your career you had gotten it wrong: examples you said were "burned into my head--you are sure that this is the way it is, and it turns out to be exactly the opposite. That is very sobering." One of these examples you gave was the contrast between early Clinton economic policy as you portrayed it in "The Agenda" and as you portrayed it in "Maestro": "The Agenda," you said, focused on administrative chaos, and while you had excellent inside sources you missed the big story.

And I am reassured to be reminded over and over again that the lurkers agree with me in email. For example, here in the mailbag is yet another note from a correspondent, an old-time bipartisan senior Washington hand, reassuring me that I am not alone in my view:

I thought, even at the time, The Agenda was a dreadful, awesomely misleading book. Woodward put huge overemphasis on process, disregarding results and outcomes. The first year of the Clinton Administration was, unfortunately, the most successful on substantive economic policymaking grounds. Woodward heaped ridicule on it, not based on the decisions reached and concrete steps taken, but on the sometimes ridiculous turns that the policymaking process took.

Woodward did not recognize that apparently unlovely process can yield excellent results, as was the case here. He made the opposite error early in the Bush II Administration when he confused apparently deliberative and tidy decision making for good policymaking.  In the year after 9/11 the Bush Administration made the most foolish and reckless policy blunder of the past 40 years of U.S. decision making.

Because it was made in a less messy process than Clinton's early economic decisonmaking, however, Woodward mistakenly concluded Bush and his aides were first-rate policymakers. They were the opposite.

When Woodward’s book came out, there was a great deal of discussion of its conclusions. Journalists and political scientists present took Woodward’s conclusions seriously. Many of them seem to believe Woodward had demonstrated the Clinton Administration consisted of an amateurish gang of egoists led by the biggest, most child-like egoist of all.  It did no good to point out that the policies actually adopted (by razor-thin majorities in Congress, as I recall) were unusually sensible and sound after 12 or 20 years of policy follies.

Yves Smith: NYTs Joe Nocera Defends Failure to Bring Wall Street Execs to Justice

YS:

NYT’s Joe Nocera Defends Failure to Bring Wall Street Execs to Justice « naked capitalism: Aargh, it is frustrating to see how quickly establishment-serving shallow arguments become conventional wisdom. We get a big dose of this line of thinking from the New York Times’ Joe Nocera in an article titled, “Biggest Fish Face Little Risk of Being Caught.” Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice. But the explanation he offers is incomplete and misleading, and serves to misdirect the public from more fundamental and more troubling causes.... Nocera recounts some of the unsavory acts of Countrywide’s Angelo Mozilo.... Then he points to the decisions not to pursue criminal prosecutions of Mozilo and Cassano, and recites oft-repeated arguments. First, it’s too costly.... Second, it’s too hard.... Third, the top brass has successfully insulated itself from the really bad actions at their firms....

[Nocera's] statement, “fraudulent actions at Countrywide took place at the bottom of the food chain” suggests that it was low level employees operating on their own. Huh?... [I]nstitutionalized patterns of deception, involving senior managers, not low level employees out of control.... Nocera suggests investors knew Countrywide’s loans were drecky. That too is misleading. The bank made specific representations about the quality of the loans they were making, and now a number of court cases allege the bank violated those promises by putting far worse loans into its deals. So the idea that the investors knew what they were buying is a canard....

Let’s work back to Nocera’s second argument, that these cases are hard to win and the failed Bear hedgie case proves it. Yes, financial fraud litigation is hard to win. But a single data point proves very little.... [A] separate issue: the weakened state of the various offices that ought to be chasing banking industry crooks. But using current bad performance to say it’s inevitable is also lame.... And he also has the wrong implicit standard. The goal is not to win every case, or even most cases. It’s to win enough to be a threat and not to lose them in the embarrassing fashion of the Bear case. And prosecutions that fail can still be powerful deterrents. They put information in the public domain that private litigants can use to mount civil cases....

Let’s finally turn to Nocera’s first reason: it’s too costly, and the successful effort during the S&L crisis depended on the FBI throwing a lot of horsepower at the problem.... But the S&L crisis is not the right model. These cases are much more like Enron, where a number of executives were in cahoots in both creating questionable products and presenting a misleading picture to the outside world. And the Enron case did not start at the top. It used the same model that prosecutors have perfected with the Mafia and drug rings: go after the foot soldiers, get them to turn state’s evidence in return for immunity. For financial crimes, that also vastly lowers the cost of prosecution. The cooperating insiders provide the road map and enable the prosecutors to do much more focused discovery, as well as potentially serving as witnesses.

But why could prosecutors take that approach with Enron? Because it had already failed. We are back to fundamental mess the officialdom has created by leaving the management and boards of bailed-out companies in place.... The overly generous terms of the TARP, and the failure of Team Obama to force management changes on the industry in early 2009 was a fatal error. It has embedded and emboldened a deeply corrupt plutocracy...

Catherine Rampell: G.D.P. Data Show How Smaller Government Is a Drag on Growth

CR:

G.D.P. Data Show How Smaller Government Is a Drag on Growth - NYTimes.com: My colleagues Motoko Rich and David Streitfeld and I had an article today focusing on how rising oil prices are threatening America’s fragile economic recovery. But we could just have easily written another 1,000 words on the perils shrinking governments now present to the economy. Item No. 1 is today’s revised report on gross domestic product for the last quarter of 2010. Output last quarter grew more slowly than initially reported, according to the Bureau of Economic Analysis: an annual rate of 2.8 percent rather than 3.2 percent. One of the main reasons for the downward revision was that state and local governments cut their spending at a 2.4 percent annual pace. That was a much sharper decline than the 0.9 percent first estimated. The drop was also faster than what the country had experienced in the previous two quarters, reflecting the fact that state and local budgets are in more trouble than ever.

A decline in state and local spending — and the layoffs that are likely to be involved — can have dangerous reverberations throughout the economy. So would the cut in federal spending that many Congressional Republicans have been threatening. Besides chucking even more workers into the pool of the unemployed, such cutbacks would also take away services supporting the many Americans trying to get back on their feet. This in turn hurts their ability to spend, threatening the bottom lines of the businesses they patronize, potentially leading to even more layoffs in the private sector. And so on.

In other words, government cutbacks during a weak economy affect much more than just government payrolls.

Liveblogging World War II: February 26, 1941

Mogadishu is taken by the British forces after an advance of over 230 miles in the past three days.

Ronald Reagan on Union Membership as One of the Most Elemental Human Rights

Zaid Jilani:

ThinkProgress » FLASHBACK: Ronald Reagan Called Union Membership ‘One Of The Most Elemental Human Rights’: Reagan was the only president in American history to have belonged to a union, the AFL-CIO affiliated Screen Actors Guild. And he even served six terms as president of the organized labor group. Additionally, Reagan was a staunch advocate for the collective bargaining rights of one of the world’s most famous and most influential trade unions, Poland’s Solidarity movement.... December 23, 1981....

REAGAN: The Polish government has trampled underfoot to the UN Charter and Helsinki accords. It has even broken the Gdańsk Agreement of 1980 by which the Polish government recognized the basic right of free trade unions and to strike...

[And:]

REAGAN: Ever since martial law was brutally imposed last December, Polish authorities have been assuring the world that they’re interested in a genuine reconciliation with the Polish people. But the Polish regime’s action yesterday reveals the hollowness of its promises. By outlawing Solidarity, a free trade organization to which an overwhelming majority of Polish workers and farmers belong, they have made it clear that they never had any intention of restoring one of the most elemental human rights—the right to belong to a free trade union...

Menzie Chinn: Expansionary Policy Is Expansionary, Contractionary Policy Is Contractionary

Menzie Chinn:

Econbrowser: CBO on the Stimulus Package, and Still No Expansionary Fiscal Contraction in UK: A couple days ago, CBO released its most recent evaluation of the impact of the American Recovery and Reinvestment Act (ARRA). Using Table 1, I obtain the following implied values for GDP in the absence of the stimulus, assuming low and high values for multipliers. Even with conservative values for the multipliers, the estimates imply that in the absence of the stimulus package, output would still be about $145 billion Ch.2005$ lower than the 2008 peak; under the high range values, approximately $450 billion....

Crossing the Atlantic, one finds that the (short term) evidence in favor of an incipient expansionary fiscal contraction (see here for previous post) is getting weaker and weaker, even for an open economy like the UK. The 2010Q4 estimate for UK GDP was revised down from -0.5% (q/q) to -0.6% (essentially -2.6% on an annualized basis). Hence, the possibility that the negative reading was due to mis-estimation of the impact of bad weather has been largely ruled out, since the estimated impact has been held at negative 0.5 ppts. If one is hoping that at least firms are anticipating positive effects from the coming spending cuts, the behavior of gross fixed capital formation (investment) is not promising. In 2010Q4, this series was declining 2.5% q/q (-9.7% on an annualized basis), contributing -0.4 ppts of the overall 0.6 ppts q/q decline in GDP.

In a commendably understated assessment:

Economist James Knightley at ING said the declining GDP was "fairly worrying given we know about the wave of fiscal austerity that is now starting to hit the U.K. economy. We will soon be starting to see negative figures for this component.

Apparently financial sector economists are not expecting a expansionary fiscal contraction either.

Jonathan Chait: Lori Montgomery of the Washington Post Needs to Lay Off the 'Shrooms

JC:

Peter Orszag As Macho Texan | The New Republic: The Washington Post posits this highly bizarre personality contrast between Budget Director Jacob Lew and his predecessor Peter Orszag:

Though tall and dark like his predecessor, former budget director Peter Orszag, Lew, 55, shares none of Orszag's cowboy-booted, marathon-running swagger. A lawyer by training, Lew exudes a calm geniality. 

Swagger? Peter Orszag? And then the implication that "calm geniality" represents a sharp contrast with his personality style? That is... really weird.

Winston Churchill Liveblogs World War II: February 25, 1941

WSC:

Noahpinion: Is Free Trade Really "Efficient"?

Noahpinion:

Noahpinion: Is trade really always efficient?:
I'm a bit late to the party on Greg Mankiw's column about trade.... Mankiw's case for trade is the textbook one.... Trade is good because it is a voluntary exchange, and voluntary exchanges benefit the people who do them (or else they would not have chosen to carry out the exchange). Hence, trade liberalization is always good, Q.E.D.... [P]eople seem to agree (and agree with Mankiw) on one basic point: The efficiency of trade is not in question. Only the distributional effects of trade are in question. But to me, this seems highly non-obvious....

The question is: Since trade is a voluntary exchange,why would a country choose to trade if it were harming itself by doing so?

Answer #1: Externalities. As Angus so pithily points out, "People, the United States is not a person!" Trades are undertaken not by countries, but by individuals within those countries. Negative externalities, as every Econ 101 student knows, happen when an exchange between two people causes harm to a third. In the case of trade, the third person who is harmed may be in one of the countries that is engaging in trade.... [T]here would have to be some pretty big externalities for protectionism to actually be better than free trade in the aggregate. But certain types of trade could easily lead to reductions in overall economic efficiency. Unless every country could be persuaded to tax or otherwise mitigate the externality, liberalizing these types of trade could be a mistake, regardless of distributional effects.

Answer #2: Dynamic Inconsistency.... For most individual decisions, it seems unlikely that dynamic inconsistency outweighs the benefits of voluntary exchange. Addictive drugs are one of only a handful of plausible exceptions. But again, a country is not a person. A country's decision-making process may be far more prone to dynamic inconsistency than an individual's. This could throw a wrench into the "trade is always good" argument....

Notice that neither of these exceptions are arguments for autarky, or even for across-the-board trade restrictions. They are arguments that certain instances of trade liberalization may cause efficiency losses.

Mankiw does not address either of these theoretical possibilities. As far as he is concerned, the case for trade's efficiency is iron-clad in all cases.... I am against giving this sort of free pass. The supposed consensus that trade is always efficient to me smacks a bit of golden-age-ism and false consensus. You hear again and again that trade (or, at least, the efficiency aspect) is the one issue that economists have settled. But if a consensus exists, it is a result of politics and opinion, not because economic theories make an iron-clad case for the efficiency of trade. Theoretical exceptions do exist, and to ignore this fact (as we do) probably just makes people less trustful of economists in general.

Alan Blinder: The Economic Silly Season

AB:

Alan Blinder: The Economic Silly Season Is Upon Us: 'Debt ceilings' and 'job killing' spending are two dumb ideas. Obsessing on the deficit while unemployment is at 9% is another:

Our country seems mired deeply in the silly season.... The silliness comes in at least four parts. The first is the debate over raising the national debt ceiling.... The increase in the debt each year is simply the difference between total expenditures and total receipts, both of which come from the annual budget. If Congress wants a smaller national debt, it must either spend less or tax more.... [N]either party can just command the national debt to stop growing. Some people see the debt ceiling as a way to force spending cuts that Congress would otherwise refuse to make. Maybe. But it's a clumsy and risky way that, among other things, could endanger the credit-worthiness of the United States government if our inability to float new debt made it impossible to raise needed cash. And for what purpose? To accomplish something that Congress has the power to do anyway?

The second element of silliness is the belief that the American public stands solidly behind rapid and large budget cuts. Sure, and they also want better weather.... The public wants smaller deficits, lower taxes and less spending in the abstract. But when it comes to specifics, it finds few spending cuts that it likes....

The necessity to choose among various spending cuts and tax increases brings me to the third element of silliness—the one that seems to afflict only Republicans. How many times have you heard Speaker of the House John Boehner (and others) refer to "job-killing government spending"? That phrase has become an official GOP mantra, on a par with "death taxes" and "death panels"—and it's just about as truthful.... [T]he government should be a smart steward of the public's money.... [But] when there is so much unused capacity and so many unemployed people hungry for work, "job-killing government spending" is oxymoronic. Virtually any type of spending, public or private, will create jobs.

The final element of silliness is... the popular notion that we need deficit reduction urgently, right now, even though the unemployment rate is still 9%.... The federal budget deficit is on an irresponsibly unsustainable path.... We need to both restrain spending and raise more revenue—and by large amounts. But not right this minute, because doing either would shrink the economy. Despite recent increases, Treasury borrowing rates remain low. There is no evidence that investors are fleeing the dollar. Our economy is still in desperate need of more demand. Each of these facts argues for waiting.... Congress is tied up in knots over some $60 billion in immediate spending cuts. That number, while draconian in the short run (only half the fiscal year is left), is chump change in the long run. And while Congress is consuming itself in partisan acrimony over the $60 billion, it is doing essentially nothing about the multitrillion dollar long-run deficit—which, as everyone should know by now, hinges on The Big Four: Social Security, medical care, defense and taxes.

As I said, it's the silly season.