J. Bradford DeLong's Blog, page 2128

Tom Maguire Says That All the Republicans Who Have Been Claiming to Worry About the Deficit Over the Past Two Years Are Liars

Tom:

JustOneMinute: One Day, When The Times Has An Economist As A Columnist...: The idea that deficits created by tax cuts don't matter is hardly new or magical, except perhaps to Krugman and any Times readers who lean on him for economic insight. IF YOU CAN'T TRUST FOX ON THIS:  Per Fox, the Republican message has been that we have a spending problem, not a revenue problem.  Very Ricardian, and how did Krugman miss it? SO WHO HAS ALZHEIMERS NOW, MR. SMARTY-MOUTH?

Seems like Tom is a bit harsh on his fellow Republicans to me. I think a bunch of them--people like Alan Greenspan, Paul O'Neill, etc., etc.--do worry about the deficit, but have been told to fall in line and be quiet for a while.

Arabian Nights Returns to Berkeley Rep

Arabian Nights Returns to Berkeley Rep

Ezra Klein on How the Obama Administration Needs to Become More Partisan

Ezra Klein

Ezra Klein - What sort of loser should Obama be?: Recently, Jonathan Bernstein asked liberals, “As the 111th Congress winds down, what’s your biggest disappointment of the things you expected to happen?” Mike Konczal gives his answer:

I expected Obama to be a better loser, specifically to be better at losing. There were a lot of items on the table, a lot of them weren’t going to happen, but it was important for the new future of liberalism that the Obama team lost them well. And that hasn’t happened. By losing well, I mean losing in a way that builds a coalition, demonstrates to your allies that you are serious, takes a pound of flesh from your opponents and leaves them with the blame, and convinces those on the fence that it is an important issue for which you have the answers. Lose for the long run; lose in a way that leaves liberal institutions and infrastructure stronger, able to be deployed again at a later date.

I think the White House's reply would look something like this:

Successful governance is about getting 60 votes for things that move the ball forward. The people who tend to control the 55th through 60th votes on any given issue are not like you and me. They are driven by a baffling combination of raging egomania and crippling terror. They want to be treated like statesmen even as their decisions are based on a paralyzing fear of contested elections, primary challenges, Fox News and party pressure. They have few opinions on what good policy looks like, what opinions they do have on the subject change frequently, and they're not willing to risk very much on them anyway. Taking a pound of flesh from these people -- or even their allies -- would mean never getting their votes. Want to see what we mean? Look at Don't Ask, Don't Tell. In the end, it got done because Murkowski, Brown and Collins let it get done. Alienating them would've been satisfying, but unwise....

[T]he liberal reply to this would be:

Yes, you're right that these people are driven by fear. But they're afraid of the wrong thing. You have senators in states that went blue in 2008 who seem unconcerned with crossing the president or his massive list of volunteers and supporters. Instead, they're terrified of the Club for Growth, or Fox News, or they're terrified of them not because they have so much power in their state but because they're willing to use that power aggressively. If the president had been making frequent trips to Maine, he might find that Maine's senators were a little more interested in partnering with him on his agenda.

I find both arguments fairly convincing. But not at the same time. The White House's argument made a fair amount of sense given the Democratic tilt of the 111th Congress, which offered unusual possibilities for getting things done, and so made strategies that would alienate even a couple of votes fairly risky. But the liberal argument makes somewhat more sense going forward, as the mixed composition of the next Congress makes getting things done through deals and patience somewhat less likely, while the upcoming election where the president is on the ballot makes the need for an excited base more acute, and makes the consequences of crossing that base more serious for both the White House and swing senators.

Casey Mulligan Nominates Himself for This Year's Stupidest Man Alive Prize (Yes, New York TImes, Why Oh Why Can't We Have a Better Press Corps? Edition)

Utter stupidity. Utter, utter, total stupidity. Nomination and Smackdown by Menzie Chinn:

Econbrowser: Hazards in Interpreting Seasonals: Professor Casey Mulligan... observes that while retail sales are about 15-20% higher in December than in the previous three months, retail employment is only about 4% higher in December than October, thus proving that fiscal stimulus cannot be very effective at raising employment....

Although the holiday spending surge is clearly associated with a high level of employment, it also shows how spending is a rather indirect way of creating jobs. That holiday spending of roughly $90 billion more in December is associated with about 500,000 additional jobs for a month -- that amounts to $180,000 per job per month! Both Christmas and the fiscal-stimulus act increase demand, but the fiscal-stimulus act depresses supply, because many of its major programs -- the unemployment-insurance extension, the food-stamp program expansion, the home buyer tax credit and more -- are directed at people with low incomes....

This figure (as well as Professor Mulligan's) is irrelevant.... [T]he employment that is relevant is the total employment associated with Christmas-goods production and distribution (in addition to retail employment)... the activity variable that is relevant is not sales, but US related value-added. So not: Δ(sales)/Δ(employmentretail) But: Δ(value added)/Δ(employment)

The value of retail sales incorporates the value added from retail services, plus the value imbedded in the goods themselves. Those goods were produced over the entire year (i.e., not all Christmas ornaments are made in December).... [T]he relevant numerator is smaller, and the relevant denominator bigger, implying the relevant ratio is smaller than Professor Mulligan purports....

There are many valid approaches to critiquing the idea of fiscal stimulus efficacy (e.g., CBO (Nov. 2010). This is not one of them...

And bonus "Laffer Curve" blogging from Menzie Chinn as well:

By the way, this article highlights the hazards of over-interpreting seasonal effects. The canonical example occurred forty years ago, when Arthur Laffer interpreted the seasonal correlation of GDP and money as a causal relationship [4] (critique here). (This episode is not written down in any textbook as far as I know, but is passed down by word-of-mouth as a cautionary tale.)

Hooray!

Ruth Mantell:

U.S. weekly jobless claims drop 34,000 to 388,000: WASHINGTON (MarketWatch) -- The number of U.S. workers filing new applications for jobless benefits fell 34,000 to a seasonally adjusted 388,000 in the week ended Dec. 25, hitting the lowest level since July of 2008, the Labor Department reported Thursday. Economists polled by MarketWatch had expected initial claims of 413,000. The four-week average of new claims, which is smoother than the weekly data, fell 12,500 to 414,000, also reaching the lowest level since July of 2008. The level of claims helps observers to analyze the health of the labor market, and economists say claims would have to remain below 400,000 before there's a substantial gain in hiring. Analysts also note that claims are difficult to seasonally adjust near the holidays..

Deeming the Budget Resolution

Robert Greenstein and James R. Horney of CBPP:

House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts: Current House rules include a pay-as-you-go requirement that any tax cut or spending increase for a mandatory (i.e., entitlement) program must be offset by cuts in other mandatory spending or increases in other taxes, in order to avoid increasing the deficit. [1] Current rules also bar the House from using budget “reconciliation” procedures — special rules that facilitate speedy action on specified budget legislation — to pass bills that would increase the deficit. The new rules would alter and greatly weaken these commonsense measures:

The new rules announced December 22 would replace pay-as-you-go with a much weaker, one-sided “cut-as-you-go” rule, under which increases in mandatory spending would still have to be paid for but tax cuts would not....

The new rules would stand the reconciliation process on its head , by allowing the House to use reconciliation to push through bills that greatly increase deficits as long as the deficit increases result from tax cuts, while barring the use of reconciliation in the House for legislation that reduces the deficit if that legislation contains a net increase in spending (no matter how small) that is more than offset by revenue-raising provisions....

Moreover, measures to scuttle the current, even-handed pay-as-you-go rule and to allow use of the reconciliation process to increase the deficit are even more indefensible today than such steps were in 2001....

Another aspect of the proposed rules also seems at odds with promises made in the campaign about what a new Republican majority would do. There was much talk about increasing the transparency of the legislative process....

[T]he new rules also include a stunning and unprecedented provision authorizing the Chairman of the Budget Committee elected in the 112th Congress, expected to be Representative Paul Ryan of Wisconsin, to submit for publication in the Congressional Record total spending and revenue limits and allocations of spending to committees — and the rules provide that this submission “shall be considered as the completion of congressional action on a concurrent resolution on the budget for fiscal year 2011.” In other words, in the absence of a budget resolution agreement between the House and the Senate, it appears that Rep. Ryan (presumably with the concurrence of the Republican leadership) will be allowed to set enforceable spending and revenue limits, with any departure from those limits subject to being ruled “out of order.”

This rule change has immediate, far-reaching implications. It means that by voting to adopt the proposed new rules on January 5, a vote on which party discipline will be strictly enforced, the House could effectively be adopting a budget resolution and limits for appropriations bills that it has never even seen, much less debated and had an opportunity to amend. (There is no requirement for Representative Ryan to make his proposed spending and revenue limits available to Members or the public before the vote on the new rules.)... This imposition of budget limits without debate or votes hardly seems consistent with the promised increase in transparency in the legislative process, much less with sound — or fair — budget practices.

The new rules also specifically empower the Budget Committee Chairman to exempt from budget enforcement rules the fiscal effects of repealing the health reform law. The Congressional Budget Office has estimated that the health reform law will reduce deficits by more than $100 billion over the first ten years and by roughly $1 trillion or more over the second ten years. Its repeal would increase deficits by those amounts...

And Stan Collender emails:

From my experience, this new rule would be close to unprecedented in terms of the power it assigns to a single member of Congress [Paul Ryan] ... at least as far as the budget is concerned. The way it's supposed to work is that, once the budget resolution conference report has been approved by both houses, the House Budget Committee as a whole has to vote on and approve what are known as the 302(A) allocations -- basically, how much the appropriations committee has to spend. The Ryan rule eliminates both the need for an agreement between the House and Senate on overall spending (i.e., a budget resolution) and the need for the House Budget Committee to approve the allocations. No debate in committee or on the House floor either.

It sets up a real Perils of Pauline situation when the CR expires in March assuming that Ryan comes up with allocations that cut spending to the 2008 levels. The House will be prohibited from considering legislation that would cause spending to be higher than those greatly reduced levels. The Senate, meanwhile, will likely have no comparable requirement and presumably will be unable or unwilling to approve a CR (or omnibus, or individual approps) for the rest of FY11 at those levels. So the House won't be able to consider what the Senate wants and the Senate won't approve what the House wants.

The House could always ignore or change its own rules, but I doubt it will want or be able to do that with what is likely to be the first big challenge on spending that occurs next year. The tea party will go nuts if they do.

And given that this will be happening 6-7 months into the fiscal year, the only way to get the savings the spending levels will be to fire thousands of federal employees virtually immediately.

As I keep saying, the mantra next year on anything having to do with the budget should be "gridlock, stalemate, shutdown."

I Hear Ron Paul Is Hiring Buce of Underbelly and Roger of Salisbury to do Federal Reserve Oversight

Buce:

Underbelly: That Bernanke Fella is One Brave Dude: Underbelly's Minnesota bureau reports that some people take their money seriously:

In this year, before Christmas, king Henry sent from Normandy to England, and commanded that all the moneyers that were in England should be deprived of their members; that was the right hand of each, and their testicles beneath. That was because the man that had a pound could not buy for a penny at a market. And the bishop Roger of Salisbury sent over all England, and commanded them all that they should come to Winchester at Christmas. When they came thither they were taken one by one, and each deprived of the right hand and the testicles beneath. All this was done within the twelve nights; and that was all with great justice, because they had fordone all the land with their great quantity of false money which they all bought.

The Anglo-Saxon Chronicle, p. 221 (year 1125). (Edited, with a Translation, by Benjamin Thorpe, Vol. II (London: Longman, Green, Longman,and Roberts, 1861))

I Confess I Find It Hard to Know What to Do with This...

Chris Bertram writes:

What “lump of energy” fallacy?: Brad DeLong has just posted a couple of links to articles that attack an article by David Owen in the New Yorker [subscription required]. Owen’s article relied heavily on the claim that increased energy efficiency doesn’t really deliver the hoped-for environmental benefits, because of something called the “rebound effect”. Here’s an explanation of that effect by James Barrett in one of the linked pieces:

In essence the rebound effect is the fact that as energy efficiency goes up, using energy consuming products becomes less expensive, which in turn leads us to consume more energy. Jevons’ claim was that this rebound effect would be so large that increasing energy efficiency would not decrease energy use...

Owen’s critics say that although the rebound effect is real, whether it is large enough to have the effects Owen claims is an empirical matter, and they are sceptical. Basically, they argue that the increase in energy consumption is not just down to lower prices but also to greater wealth, house size, etc. and so without greater efficiency, we might be consuming a whole lot more energy than we actually are. Basically: it all depends on the facts, and the jury’s out.

Ok, so now let’s do a little substitution in that sentence quoted earlier.

In essence the rebound effect is the fact that as labor efficiency goes up, using labor consuming products becomes less expensive, which in turn leads us to consume more labor. [The] claim was that this rebound effect would be so large that increasing labor efficiency would not decrease labor use...

The amended claim reads as the response those same economists might make to Luddites everywhere. “Don’t worry, the new technology will not put you out of work!” Or perhaps, more honestly, “even if the new technology puts some people out of work for a bit, it will not reduce and may even increase demand for labour, and people will be better off.”... [W]hy do [at least some] economists respond to the claim about energy efficiency with “its an empirical matter”, whilst chanting “lump of labour fallacy!” at people who worry that technological change will cost jobs? Why is one a matter of looking at the evidence, whilst the other is determined more or less a priori?

Bertram seems to go from a real world in which Barrett and Kahn criticize Owens, to a counterfactual world in which Barrett and Kahn "might" say something about technology and demand for labor, and then come back to a real world in which he sees "economists... [dismiss] worry... that technological change will cost jobs... more or less a priori."

Let's be clear: to the best of my knowledge--and I have looked--neither of "those same economists"--the two people I cite, Jim Barrett nor Matt Kahn--says to Luddites or to anybody else: "Don't worry! New technology will not put you out of work!" They simply do not say what Bertram says they "might" say. It is true in the subjunctive that if your grandmother were to have wheels then she would be a bus. But it is much more important that it is true in the indicative that your grandmother does not, in fact, have wheels. Let's stick to what people do say in this one.

I say that--at least among those economists I speak too, whether of the left, of the center, or of the right--it is simply not the case that one set of issues is settled by examination of history and evidence and the other settled by a theoretical a priori argument. Both are settled by examination of history and evidence.

In the case of the effect of new technology on the demand for labor, at a price this afternoon of $0.14/pound a pound of potatoes costs thirty seconds' work at the average wage for people in America today and cost two hours' work for the Daly branch of my ancestors in pre-Potato Famine Ireland, suggesting that all the new technologies invented and all the capital formation undertaken since the 1840s have in aggregate multiplied the bargaining power of labor when buying potatoes by a factor of 240. Ever since the catastrophic downfall of the handloom weavers that you are in big trouble if your skills are substitutes for the capabilities of new technology (and in clover if your skills are complements). But in general it has not been wise to bet that new technology will reduce the bargaining power of and so immiserize labor.

In the case of the effect of energy efficiency-improving technologies on energy consumption, both Kahn and Barrett have things to say about this that are grounded in evidence. They do not say: "it all depends on the facts, and the jury’s out." They say: it all depends on the facts, and the jury is in.

First Kahn:

Kahn: For products that require our time to use (such as driving) or for which we have limited demand (refrigerators), I do not believe that the rebound effect is an important issue.  Consider another example,  building energy codes. In California, new construction has faced more stringent energy efficiency standards. In this case, there is no “rebound effect”.   No Don Trump builds a bigger building because energy efficiency per square foot has increased. There are certainly cases in which David Owen is right. Consider the washing machine for clothes and dishes. As washing machines become more efficient and cheaper to operate, people do more loads of wash. This technology saves us time and people have a very high demand for clean underwear! Consider a central air conditioning system. There are people who would love to set their thermostat at 65 degrees on a hot summer day. In the past, when AC units were inefficient this would have cost a fortune. As air conditioning units become more energy efficient, some people may choose to lower their summer thermostat reading. While such diversity exists, the average person will choose to have a lower energy bill. My bottom line is that energy efficiency improvements will shrink our carbon footprint.

Now Barrett:

Barrett: [T]he rebound effect is real. The theory behind it is sound: Lower the cost of anything and people will use more of it.... The problem with knowing how far to take things like this is that... the real world is complicated and trying to disentangle everything that’s going on is very difficult. Owen cleverly avoids this problem by not trying to disentangle anything.

One supposed example of the Jevons paradox that he points to in the article is air conditioning.... Owen notes that between 1993 and 2005 air conditioners in the U.S. increased in efficiency by 28% but by 2005 homes with air conditioning increased their consumption of energy for their air conditioners by 37%. Owens presents this as clear and obvious proof of a Jevons effect. Case closed.

Here is where Owen gets lazy: A few key facts disprove the point.... Real (inflation adjusted) per capita income increased by just over 30% over that time period. All else being equal, when people have more money, they buy more stuff, including cool air. The average size of new homes increased... over 16%. More square feet means more area to cool and more energy needed to cool it. In 1993, of homes that had A.C., 38% only had room units.... By 2005, 75% of air conditioned homes had central units.... Finally... the efficiency of the average central air unit in service in 2005... [was] about 11.5% more... than... in 1993....

All of the increase in energy consumption for air conditioning is easily explained by factors completely unrelated to increases in energy efficiency. All of these things would have happened anyway. Without the increases in efficiency, energy consumption would have been much higher....

It’s easy to be sucked in by stories like the ones Owen tells. The rebound effect is real and it makes sense. Owen’s anecdotes reinforce that common sense. But it’s not enough to observe that energy use has gone up despite efficiency gains and conclude that the rebound effect makes efficiency efforts a waste of time, as Owen implies...

James Surowiecki: Our Structural Unemployment Has Not Yet Risen (Much)

James Surowiecki:

Persistent unemployment and the jobless recovery : The recession has been over for more than a year now, but so many people are out of work that it doesn’t feel like much of a recovery.... Why have new jobs been so hard to come by? One view blames cyclical economic factors: at times when everyone is cautious about spending, companies are slow to expand capacity and take on more workers. But another, more skeptical account has emerged, which argues that a big part of the problem is a mismatch between the jobs that are available and the skills that people have.... The structural argument sounds plausible: it fits our sense that there’s a price to be paid for the excesses of the past decade; that the U.S. economy was profoundly out of whack before the recession hit; and that we need major changes in the kind of work people do. But there’s surprisingly little evidence for it. If the problems with the job market really were structural, you’d expect job losses to be heavily concentrated in a few industries, the ones that are disappearing as a result of the bursting of the bubble. And if there were industries that were having trouble finding enough qualified workers, you’d expect them to have lots of job vacancies, and to be paying their existing workers more and working them longer hours.

As it happens, you don’t see any of those things. Instead, jobs have been lost and hiring is slow almost across the board. Payrolls were slashed by five per cent or more not just in the bubble categories of construction and finance but also in manufacturing, retail, wholesale, transportation, and information technology. And take hiring: one of the industries that have been most cautious is the hotel and leisure business. Needless to say, there’s no shortage of people with the skills to be maids or waiters; there just isn’t enough work. Another sure sign of weak demand is that people with jobs aren’t deluged with overtime; hours worked have barely budged in the past year.

Believers in the structural argument refer to something called the Beveridge Curve.... But a careful analysis of Beveridge Curve data by two economists at the Cleveland Federal Reserve shows that it’s behaving much the way it has in previous recessions: there are as few job vacancies as you’d expect, given how desperate people are for work. The percentage of small businesses with so-called “hard-to-fill” job vacancies is near a twenty-five-year low, and open jobs are being filled quickly. And one recent study showed that companies’ “recruiting intensity” has dropped sharply, probably because the fall-off in demand means that they don’t have a pressing need for new workers.

Don’t expect the structural argument to go away, though. It’s a perennial: nearly every recession leads pundits to proclaim that the job market is facing structural challenges, and that higher unemployment is here to stay. During the 1981-82 recession, now seen as a classic cyclical recession, the economist Barry Bluestone warned that, as a result of structural issues, there might not be “much recovery in terms of overall employment in the United States.” Yet, by 1984, unemployment was back to where it had been before recession hit. A 1964 survey of economists found that more than half believed structural issues were playing a significant role in limiting the number of jobs; three years later, unemployment was below four per cent. And, during the Great Depression, even F.D.R. thought that unemployment might well be stuck at a permanently higher level. Recessions are, among other things, crises of confidence, and one manifestation of lack of confidence is the conviction that this time we’re not going to be able to climb our way out.

Structural issues aren’t irrelevant, of course; there are certainly plenty of construction workers who are going to have start plying a new trade. But what defined the recent recession was the biggest decline in consumption and investment since the Depression. Dealing with that is the place to start if we want to do something about unemployment. The structural argument makes government action seem irrelevant. But if we don’t do more to get the economy back up to speed, it won’t be because stimulating demand won’t work. It will be because we’ve chosen not to do it. If we can’t find the way, it’s because we don’t have the will. ♦

Mickey Kaus's Nomination for This Year's Stupidest Human Alive Award

Nomination and smackdown by Will Wilkinson:

: DID you know that nation-level income inequality would drop if the government herded all the poor people onto boats and dropped them off on a distant island? Newsweek's Mickey Kaus, apparently excited by this sort of logic, proposes something similar as a winning solution to America's alleged inequality woes. The difference is that Mr Kaus proposes to keep relatively poor people out in the first place:

If you're worried about incomes at the bottom, though, one solution leaps out at you. It's a solution that worked, at least in the late 1990s under Bill Clinton, when wages at the low end of the income ladder rose fairly dramatically. The solution is tight labor markets. Get employers bidding for scarce workers and you'll see incomes rise across the board without the need for government aid programs or tax redistribution. A major enemy of tight labor markets at the bottom is also fairly clear: unchecked immigration by undocumented low-skilled workers. It's hard for a day laborer to command $18 an hour in the market if there are illegals hanging out on the corner willing to work for $7. Even experts who claim illlegal immigration is good for Americans overall admit that it's not good for Americans at the bottom. In other words, it's not good for income equality.Odd, then that Obama, in his "war on inequality," hasn't made a big effort to prevent illegal immigration--or at least to prevent illegal immigrration from returning with renewed force should the economy recover.

This is badly misleading. A move to United States is an upwardly mobile move for almost all low-skilled immigrant workers, and it tends to reduce inequality on the whole. As a matter of description, Mr Kaus' conclusion follows only if we grant him the premise that the trend in inequality is best measured by looking at the set of people inside a country's borders at one point in time and then comparing it to the set of people inside the country's borders at a later point in time. I propose we reject this premise.... [I]f we seek to measure how people fare, as opposed to how fenced-in national populations fare, the correct measure is what they call "income per natural". On an income-per-natural basis, almost nothing reduces inequality more dramatically than the migration of low-skilled workers from a poorer country to a richer country. 

The only reason to make the within-borders population of a nation-state our analytical touchstone is a prior commitment to the idea that the nation-state is the correct unit of normative evaluation... an unacknowledged commitment to moral nationalism.... We are interested in inequality in large part because most of us believe, rightly or wrongly, that levels and trends in inequality function as a rough measure of our society's justice.... [M]oral nationalism... not only blinds us to the way immigration dramatically reduces poverty and inequality, but also creates the illusion that immigration worsens what we assume to be a form of injustice.

Historically, the most vicious forms of inequality and injustice are based on coercive exclusion, and this is precisely what Mr Kaus proposes ramping up....

[Moreover, i]t turns out that low-skilled immigration doesn't actually hurt the native poor. As Francisco D'Amuri and Giovanni Peri write:

Despite popular belief, often based on anecdotes and bodged analysis, there is hardly any evidence that immigrant workers have a negative effect on the wages of native workers (see for instance Card 2009 and Glitz 2007) or that they crowd-out other jobs in the US (Card and Di Nardo 2000) or Europe. On the contrary, some authors emphasise the existence of a potentially positive effect of immigrants on the demand for native workers.

This is admittedly counterintuitive. Here's how Messrs D'Amuri and Peri account for the puzzling pattern found in the data:

Our hypothesis is that immigrants, who often do not speak the language and do not master the culture and norms of the host country, are concentrated in more manual-routine tasks (especially among less educated groups). The inflow of immigrants thus increases the supply of manual skills relative to the supply of abstract skills with two effects:

Due to the complementarity between these types of skills, the increase in the supply of manual tasks boosts relative compensation for complex skills, making them better paid.

Exploiting their comparative advantage, natives move to occupations requiring a relatively higher level of these skills.
This positive reallocation and the complementarity of tasks can explain the lack of negative employment effects as well as the potential positive wage effects of immigration on native workers.

So here's how it all shakes out. Low-skilled immigration reduces economic inequality when we set aside nationalist assumptions and focus on people instead of populations. Even if we cling to analytical and moral nationalism, low-skilled immigration doesn't happen to increase measured inequality. On the contrary, complementaries between the skills of migrant and native workers can leave natives better off than they would have been with less immigration.