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Eichengreen on the E.U.'s Irish Disaster: Another Mild-Mannered Bipartisan Technocrat Joins the Shrill... | A Plea to Howard Gleckman: Please Don't Give More Free Gasoline to the Budget Arsonists! | A Platonic Dialogue on the Failure of Economics Education | Milton Friedman Supports Ben Bernanke on Quantitative Easing | Foreign Policy: The Four Horsemen of the Teapocalypse | Battered but Not and Beaten

Alan Simpson and Erskine Bowles Are Budget Arsonists Wearing Firemen's Hats

This is worse than I had thought, even though I thought this was going to be very bad.

Matthew Yglesias:

Bowles-Simpson vs Current Law: Surely the strangest thing about the Bowles-Simpson debt reduction plan is that, relative to current law [and relative to the Alternative Fiscal Scenario], it... increases the public debt load over the next ten years....

[W]ouldn’t it be easier politically to stick with current law than to do Simpson-Bowles’ huge series of unpopular changes? After all, the American political system has a ton of veto points. Barack Obama saying “I will veto any laws that increase the deficit relative to current law” would do more to reduce the debt over the next 2 or 6 years than would adopting Simpson-Bowles.

As Napoleon said: "If you plan to take Vienna, then take Vienna." People who really want to see the public debt in ten, twenty, or thirty years reduced will vote against and veto any bill that increases the public debt in ten, twenty, or thirty years.

Eichengreen on Ireland: Another Mild-Mannered Bipartisan Technocrat Joins the Shrill...

Wow:

Barry Eichengreen on the Irish bailout: The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.

It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position.

The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

Nor is the situation economically sustainable. Ireland is told to reduce wages and costs. It must engage in “internal devaluation” because the traditional option of external devaluation is not available to a country that lacks its own national currency. But the more successful it is at reducing wages and costs, the heavier its inherited debt load becomes. Public spending then has to be cut even deeper. Taxes have to rise even higher to service the debt of the government and of wards of the state like the banks.

This in turn implies the need for yet more internal devaluation, which further heightens the burden of the debt in a vicious spiral. This is the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.

For internal devaluation to work, therefore, the value of debts, expressed in euros, has to be reduced. This would have been particularly easy in the Irish case. A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other. The third representing the debts of the Irish banking system could have been restructured. Bondholders could have been offered 20 cents on the euro, assuming that the Irish banks still have some residual economic value. If those banks are insolvent, the bondholders could – and should – have been wiped out.

Irish public debt would then have topped out at maybe 100% of GDP. And the Irish program would have had a hope of working. As it is, the program will have to be revisited, perhaps as soon as next year. Investors know this, which is why Irish spreads have barely budged.

In fact, this is exactly what the IMF, which at least knows how to add, has been pushing for over the last week. But the Fund was unable to overcome the objections of the Commission, the ECB and the German government.

One can interpret the intransigence of the German government and its EU allies in two ways. First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”

Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.

But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”

As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling.” In Europe today, recent events make clear, leadership is in short supply.

Labor Market Getting Worse More Slowly Watch

Ruth Mantell:

U.S. Nov. ADP employment up 93,000: Private-sector employment rose 93,000 in November, the largest gain in three years, according to Automatic Data Processing Inc.'s employment report released Wednesday. Employment in the service-producing sector gained 79,000, while the employment in the goods-producing sector rose 14,000. On Friday the government will report on employment for November, and economists polled by MarketWatch expect a gain of 155,000 for nonfarm payrolls, and for the unemployment rate to remain at 9.6%.

An average monthly pace of 93K seasonally-adjusted net private sector jobs still is not quite enough to keep the unemployment rate from drifting upward,

And I am not sure where the 62K seasonally-adjusted net public sector jobs are supposed to come from. So I will bet on the under on this one.

Econ 1: December 1, 2010: Christina Romer on Economic Policy

A good deal of every Econ 1 course is aimed at making you better citizens: better-informed voters as you go to the polls and choose the civil servants who as they administer our government make the economic policy decisions that are roughly half of what our government does.

But Econ 1 courses are inevitably too concerned with theory, and not enough concerned with practice. Hence I am very grateful that our own Professor Christina Romer, newly back here at Berkeley from two years in Washington DC serving as President Barack Obama's chief economist in the cabinet-level appointment of Chair of the President's Council of Economic Advisers, has agreed to join us today to tell us about how the rubber met the road on the macroeconomic side over the past two years.

Are you worried that you do not know enough--having only taken Econ 1--to do your job as voters judging economic policies?

Don't be.

I think that one of Christie Romer's predecessors as CEA Chair, Stanford economist and Republican Mike Boskin, says it best. Being Chair of the CEA and advising all the political appointees in the White House is, he says, a lot like teaching Econ 1 at Stanford. Only at Stanford your students do their reading, pay attention, and ask deeper and more thoughtful questions.

And yes, there will be a question about her talk on the final exam...

Therefore let us welcome the Honorable Christina D. Romer, former Chair of the President's Council of Economic Advisors and National Economic Council Principal. Her topic is: "Fiscal Policy in the Obama White House:  Reasoning, Results, and Challenges Going Forward”

A Plea to Howard Gleckman: Please Don't Give More Free Gasoline to the Budget Arsonists!

Howard Gleckman is perplexed.

He says that he does not know which budget baseline to use. Is it best to use the "current law" baseline--what would happen if congress went home right now, or at least stuck to PAYGO by not passing things that increase the deficit--in evaluating the budget impact of laws and policies? Or is it best to use the current "policy baseline," according to which congress passes laws to keep tax rates what they are and spending programs on their current growth trajectories? Should extending the Bush tax cuts be thought of as something that increases the deficit because it changes current law in a way that makes the deficit bigger? Or should extending the Bush tax cuts be thought of as a nothingburger for the deficit because it would, after all, only continue current policy?

Here is what I believe is the best way to think about it:

The people now arguing for use of the "current policy" baseline and for treating extension of the Bush tax cuts as a nothingburger--as something that would not make our long-term fiscal situation worse because we would not, after all, be doing anything we are not doing now--were pretty much all of them around a decade ago at the start of the Bush administration. What were they all saying then? Back then they were saying that the proposed Bush tax cuts did not blow a huge long-run multi-generational hole in America's budget. Hence, they said, the Bush tax cuts should not require the special super-majority in the Senate required for policies that would blow a huge long-run multi-generational hole in America's budget. It was perfectly kosher, they said, to pass them through the Reconciliation process. And they did.

Why didn't the tax cuts blow a huge long-run multi-generational hole in America's budget? They did not, today's advocates of the "current policy" baseline said then, because the tax cuts were explicitly only temporary: they would expire at the end of 2010. How could something that expired in 2010 increase the deficit out beyond 2010?

That is what they are saying then.

Now, of course, they are saying that extending the Bush tax cuts does not blow a huge long-run multi-generational hole in America's budget. Why not? Because it was understood all along that the tax cuts would be extended when they expired.

Thus if we now adopt the "current policy" baseline we will have performed a neat trick. We will have reduced taxes permanently without that permanent reduction ever having had any effect on the long-run deficit. They did not increase the long run deficit they were passed in 2001 because they were explicitly temporary. They will not increase the long-run deficit should they be extended now because they are part of current policy.

If you simply take a little step back, the big point is that the long-run deficit cost of these policies should enter the political-economic-legislative calculus at some point. The cost did not enter the political-economic-legislative calculus in 2001. Therefore it should enter it now. Therefore Howard should use the "current law" baseline to evaluate them now.

If he does not--if Howard Gleckman should adopt the "current policy" baseline and say that extending the Bush tax cuts does not transform the long-run fiscal picture in a doubleplusungood way--then he is giving free gasoline to the budget arsonists.

Macroeconomics Is About Technocratic Management: It Is Not a Theatre for a Morality Play

Karl Smith:

You Can’t Overwork Yourself By Smoking Joints and Watching Too Many Episodes of Jersey Shore: [P]eople are confusing cyclical prosperity with personal luxury. In your personal life you might feel like you are doing well because you have a new house or a new car, etc. However... we measure the cyclical wealth of nations... by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff.... [I]t makes no sense to say that a recession is inevitable because we overconsumed. Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought?...

The overconsumption theory... says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. Its balance. Steve Waldman says I shouldn’t tell people that economics is not a morality play. How about this then.... On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.

If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation, then there would be no recession. There is a recession because fewer factories are being built. There is a recession because less work is being done.

Let me be very clear about this. I am not saying that it might seem as if the world works according to common sense but when you study hard and look at lots of equations then you will see that in some abstract way it is wrong.

No, not at all.

I am saying the overconsumption view is completely at odds with what is in front of our faces. It doesn’t even make basic logical sense. The morality play is one without any morals...

The Deepest Mystery of Creation Is...

...The Born Probabilities.

Let me just say that Eliezer Yudkowsky is a bad man for writing almost-comprehensible weblog posts about them...

Google Sees All...

Jeebus! Write one post--just one--with the word "therapy" in it, and what does Google start serving up?