J. Bradford DeLong's Blog, page 2143

Austerity Can Wait

Greg Ip:

Fiscal policy: Austerity delayed: FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts. Austerity will have to wait.... Barack Obama and Republican and Democratic leaders in Congress struck a deal on a massive new package of stimulus and tax cut extensions, worth some $800 billion next year alone (around 5% of GDP)....

[T]his is good news for the economy: the prospect of inadvertent fiscal tightening was the biggest cloud hanging over the 2011 outlook.... The package comes in two parts. The first is an extension of all of George Bush’s tax cuts for the next two years. Mr Obama acquiesced to an extension for the upper 2%, bowing to the reality that he did not have 60 votes in the Senate to extend only the cuts for the lower 98%. Tax credits for child care, education and for low-income wage earners are also extended for an additional year. The second part is an injection of short-term fiscal steroids: a two-percentage point cut in the Social Security payroll tax for workers for one year, worth $120 billion (that’s double what Mr Obama’s “making work pay” credit was worth), one year of complete expensing of business equipment, worth $200 billion, and a 13-month extension of emergency unemployment insurance benefits.... While the stimulative boost next year is probably worth some $800 billion, or roughly 5% of GDP, the 10-year cost is lower largely because tax deferred by accelerated business investment expensing will eventually be paid....

It is... a depressing reminder that for all the talk of a new era of austerity in America, politicians here still find it easier to give money away than to take it back.... Thoughtful economists, including those advising Mr Obama, think the ideal fiscal package would couple short-term stimulus with medium-term consolidation. We got the first in spades tonight, but there is still no sign of the second.... A debt crisis has never been likely for America, much less imminent. But it looks to me that while the odds remain low, they went up tonight. By putting off the expiration of the tax cuts to the month after the next presidential election, the negotiators have again set us up for another nail-biting collision between the economic and political calendars. Hopefully the markets will remain as tolerant as they have so far.

That the package isn't paid for over ten years is a real shame. And I have to figure out whether it is really $800 billion.

But if it is this has to count as a big win for Obama.

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

Duncan Black:

Eschaton: [Reporters] Know Even Less Than What They Say: On the twitter machine Tim Fernholz wrote:

A reporter just asked how the WH would convince Blue Dogs to vote for budget-busting tax cuts. LOL.

I suppose there's a small chance this reporter was being sneaky and trying to elicit an answer along the lines of:

The Blue Dogs don't give a s--- about the deficit, all they care about are tax cuts for corporations and rich people along with subsidies for favorite campaign donors.

But it's more likely that the reporter does not actually know that the Blue Dogs don't give a s--- about the deficit, all they care about are tax cuts for corporations and rich people along with subsidies for favorite campaign donors, and instead believes they truly care about the deficit. Which they don't.

Hoyt Bleakley on Portages

DeLong Smackdown Watch Smackdown Watch: The Deficit Hawks of OMB as Vote Counters

Hoisted from Comments: Robert Waldmann writes:

DeLong has been duly smacked down, but I'm not sure your correspondents have proven that you were unfair to the deficit hawks at the OMB. Your revision suggests "Battered but Not and Beaten" was more than fair to them.

The center block in the Senate just voted against cloture on a bill to extend only tax cuts on family income under $250,000. They did not do so, because the Baucus bill would add trillions to the 10 year deficit. They did so because it wouldn't add additional hundreds of billions (I submit that Russ Feingold is not a member of the center block).

When it's time to vote, they demonstrated that they don't give a damn about the deficit. Also OMB staffers are supposed to know about managment of budgets. They should be cautious when claiming they understand how to manage Senators. Pretending that they can communicate with Ben Nelson is like pretending that they can communicate with the dead. It isn't plausible, and they are likely to end up looking like fools.

The above paragraph should not be construed as suggesting that I believe that the honorable Senator Nelson is brain dead.

Files for December 6 Econ 1 Lecture

20101203 for 20101206 Econ 1.pdf

Liveblogging World War II: December 6, 1940

General Richard O'Connor's Western Desert Force, composed of the British 7th Armoured Division, British 16th Infantry Brigade and Indian 4th Infantry Division leaves Mersa Matruh in Egypt for a five-day raid on the Italian army that has invaded Egypt.

What Else Do Econ 1 Students Need to Remember for the Final Exam? Macro

There are a number of concepts, capabilities, and observations that we do not expect you to remember and carry in the forefront of your brains long beyond the final exam. However, we do expect you to have them in the forefront of your brains at the time of the final exam.

We hope that thereafter they will live on as a neuronal ghost so that when you run across these issues again, you will say "oh yeah..."--and be able to relearn them quickly.

From the "macro" portion of the course, we would like you to be able to, on the final:

Explain the accounting system we use to assess the overall state of the economy, the National Income and Product Accounts, and use it.

Explain why real GDP per capita, the unemployment rate, and the inflation rate are economic variables of especial interest.

Explain why nominal interest rates, real interest rates, and stock prices are also key economic variables.

Explain why Jean-Baptiste Say was so confident in 1803 that a general glut--a situation in which there seemed to be deficient demand for pretty much every currently-produced commodity and excess demand for none, leading to high unemployment and idle factories--was impossible.

Explain what had made Jean-Baptiste Say change his mind and admit the possibility of a general glut of deficient economy-wide demand by 1829.

Explain the hole in Say's Law: how you can have deficient demand for pretty much every currently-produced commodity if you have excess demand for financial assets.

List the three types of excess demand for financial assets that have, historically, led to large downturns in employment and capacity utilization.

Explain how to use observations of the pattern of asset prices to understand what type of excess financial asset demand is generating any particular economic downturn.

Explain how the type of downturn determines the most effective cure--an excess demand for liquid cash money being best cured by a monetarist expansion of the money stock, an excess demand for bonds to serve as long-term savings vehicles being best cured by a Keynesian expansionary fiscal policy, and an excess demand for safety being best cured by banking policy that provides government guarantees to shaky private assets.

Explain the two parts of the "Bagehot rule" for dealing with a Minskyite excess-demand-for-safe-financial-assets downturn.

Evaluate the policies followed by the Bush and Obama administrations toward the current downturn in light of the "Bagehot rule."

Calculate the likely size of the deflationary gap produced by an excess demand for bonds in the Keynesian income-expenditure model.

Calculate the likely size of the deflationary gap produced by an excess demand for money in the monetarist quantity-theory-of-money model.

Calculate the likely size of the inflationary gap produced by an excess supply of money in the monetarist quantity-theory-of-money model.

Explain the reasons behind the Phillips Curve downward-sloping inverse relationship between inflation and unemployment.

Explain how changes in the natural rate of unemployment and expected inflation affect the position of the Phillips Curve.

List the three types of inflation expectations.

Calculate how the inflation rate will evolve over time in response to changes in the money stock under static, adaptive, and rational inflation expectations.

Explain the circumstances under which inflation expectations are likely to be static, adaptive, or rational.

Explain why, as far as the government is concerned, Milton Friedman always said: "To spend is to tax."

List and evaluate the arguments for running a government deficit and a government surplus.

Explain why the long-term budget outlook for the U.S. government looks grim.

Explain why the long-term budget outlook for the U.S. government looks a lot better after the passage of PPACA--the 2010 Health Care Reform.

Explain why the long-term budget outlook including the estimated effects of PPACA may well be overly rosy.

List the different paces of economic growth before the Neolithic Revolution, in the Agrarian Age, since the Commercial Revolution, and since the Industrial Revolution.

Explain why the pace of economic growth has sped up so much over time.

Explain why before the Industrial Revolution increases in GDP went essentially 100% into increases in population and not at all into increases in GDP per capita.

Explain why this pre-industrial pattern was broken by the Demographic Transition.

Project the population of the world forward.

Assess the relative importance of accumulation and innovation in accounting for economic growth.

Explain the sources of differences across countries in GDP per capita levels.

List factors and policies likely to accelerate economic growth.

List factors and policies likely to retard the pace of economic growth.

Why Oh Why Can't We Have a Better Press Corps? (London Economist Continues to Lose It Edition)

Brian Montopoli of CBS News:

Poll: Sarah Palin Favorable Rating Just 22 Percent: Palin is viewed favorably by just 22 percent of Americans, according to the poll - including less than half (44 percent) of Republicans.... Forty-eight percent of Americans have an unfavorable view of Palin. That includes... 22 percent of Republicans...

Peter Brown:

An ABC/Washington Post poll taken last month found that Republicans were split 47% to 46% on whether she was up to serving as president...

Lexington of the Economist:

Lexington: The qualities of Sarah Palin: In contrast, a recent poll found that the obverse of Mrs Palin’s stellar ratings among Republicans...

44-22 favorable-unfavorable and 47-46 qualified to be President simply are not "stellar" ratings. They aren't.

Lexington should not pretend that they are.

What Do Econ 1 Students Need to Remember Third Most from the Course

Suggestions?

What Do Econ 1 Students Need to Remember Second Most from the Course?

What is the second most important thing for you come one student remember? It is how stringent the requirements for any form of "market efficiency" are: how many ways a market economy can go wrong and go badly wrong. I count seven ways that market economies can and do go badly wrong:

First, the market will go wrong if the wealth distribution is wrong. The market judges value by willingness to pay, and the rich are much more willing to pay them the poor, and those without wealth or income have no willingness to pay at all. If your wealth and income are zero, then the market literally does not care whether you live or die--it is of no interest to it at all.

Second, the market will go wrong if commodities do not have the proper characteristics. Remember: rivalry, excludability, and also information--people have to know what they are buying. An absence of or imperfect rivalry--increasing returns to scale in production or consumption of any sort--and the market will go wrong. An absence of or imperfect excludability--free-rider problems of any sort, or any failure of property rights definition or enforcement--and the market will go wrong. An absence of good information about exactly what you are buying or selling--adverse selection or moral hazard problems of any sort--and the market will go wrong.

Third, the market will go wrong if market agents do not take the prices at which they buy and sell as given but rather have some control over the prices at which they transact. The belief that the market is efficient hinges on the absence of market power--as well as on the proper income distribution, and on the proper characteristics of commodities.

Fourth, the market will go wrong if prices do not equalize quantities supplied and quantities demanded at every moment. "Price stickiness" for any sociological or psychological reasons disrupts the market's ability to function.

Fifth, the market will go wrong if Say's Law breaks down. If there is substantial downward pressure on spending on currently-produced goods and services because of an excess demand for financial assets of a kind that the private sector cannot immediately and instantaneously generate on a large scale, then the market will go wrong and we will have a downturn and a depression. If there is substantial upward pressure on spending on currently-produced goods and services because of an excess supply of financial assets of a kind that the private sector cannot immediately and instantaneously shed, then the market will go wrong and we will have a burst of inflation that will disrupt the functioning of the price system.

Sixth, the market will go wrong whenever its prices function as forecasting mechanisms. A proper forecasting mechanism would weigh each individual's opinion by the precision of his or her knowledge. A market tends on the contrary to weigh each individual's opinion by his or her wealth. This means that whenever economic processes tend to revert to seem average level that the market is likely to get things wrong, for when prices rise above average those who are optimistic become richer and their opinions carry more weight and so prices tend to rise further above their likely long-run fundamental values. Bubbles and crashes, manias and panics, are thus built into the system.

Seventh, the market will go wrong whenever individuals are bad judges of their own long-term interests--note that I say when, not if. Humans are very bad at assessing and dealing with risk. Humans are not that great at appropriately weighting different conflicting pieces of information. And humans are absolutely horrible at dealing with substances or patterns of behavior that can be addictive.

Whenever the system falls into any one of these seven arenas of psychological, behavioral, or institutional myopia and market failure, the market will go wrong. A good government will put its thumb on the scale in order to offset all of these seven forms of market failure. A great government will have foresight and take care to structure political-economic institutions to make these seven arenas of myopia and market failure as small as possible.

Remember this too. Keep it as an active process running on your wetware always. Lay up this idea in your heart and in your soul. Bind it for a sign upon your hand, that they may be as frontlets between your eyes. Teach it to your children when thou sittest in thine house, when thou walkest by the way, when thou liest down, and when thou risest up. And write them upon the door posts of thine house, and upon thy gates: that thy days and the days of thy children--or at least the commodities they own--may be multiplied.