J. Bradford DeLong's Blog, page 2155

Crying "Fire! Fire!!" in Noah's Flood Watch

The speed and extraordinary casualness with which the Pointless Pain Caucus is throwing overboard two hundred years of monetarist insights that proper macroeconomic policy is for the central bank to intervene strategically in financial markets to keep the flow of nominal spending on a stable path--that is amazing.

That it comes about as every day brings us more news of aggregate demand shortfall is mind-blowing.

Alan Rappeport:

Core US inflation falls to record low: Living costs in the US have been held down by a weakened economy in the past year, with prices for most goods and services recording their smallest annual rises on record in October. Signs of weak inflation will buttress the argument made by the Federal Reserve that it has leeway to engage in more quantitative easing without causing prices to overheat.... Labour department figures showed on Wednesday that the “core” consumer price index, measuring prices for US goods and services excluding food and energy, rose just 0.6 per cent year on year in October. That was weaker than economists had expected and marked the smallest such increase since records began in 1957.

“Today’s CPI report feeds into growing concerns that inflation is stabilising at a level too low for the comfort of the Fed,” said Michael Woolfolk, analyst at BNY Mellon Global Markets. From September to October, core prices remained unchanged for the third consecutive month. Falling prices for cars, trucks and clothes kept costs in check as businesses were forced to offer deep discounts to clear inventory. Overall, the CPI rose by 0.2 per cent in October and was up 1.2 per cent compared with the same month a year ago. The rise was fuelled by a 2.6 per cent monthly increase in energy costs, which have been inflated by higher petrol prices. Adding to price pressures was a tepid increase in housing costs. Rents account for about 40 per cent of the CPI and only rose by 0.1 per cent in October.

In another sign of trouble for the US housing market, the commerce department reported that new home construction fell to its lowest level in 18-months, as a glut of homes already on the market weighed on building activity. Housing starts fell by 11.7 per cent to an adjusted annual rate of 519,000 last month. That was the lowest level since April 2009 and left starts down by nearly 2 per cent compared with the same month the previous year...

Attempted Adam Smith Smackdown Watch: Truck, Barter, and Exchange

Hoisted from Comments: Kevin Quinn writes:

Seminar: Matt Ridley: How Prosperity Evolves - Grasping Reality with Both Hands: Like James C. I find it prima facie puzzling that Smith appeals to what he clearly means to be a "disposition to truck and barter" for its own sake. Why isn't self-interest plus differences in opportunity costs across people enough to get the ball rolling? Here is what I think is the answer: Smith sees most of the differences between people in productive ability to be the result of, not the pre-condition for specialization. I become good st x by specializing in x as you become good at y by specializing in y. So Smith wants, in effect, to rule out the sub-optimal equilibrium in which no one specializes, so there are no significant differences between us, so there is no incentive to specialize. That's what a non-instrumental propensity to truck and barter does - or so it seems to me.

Smith appeals to a natural propensity because he believes in a natural propensity.

"Self interest plus differences in opportunity cost" doesn't get the butcher providing you with meat in exchange for money: it gets the butcher slaughtering you, selling you as long pig, and then bribing the policeman to look the other way with an order of ribs.

And what "self interest plus differences in opportunity costs" gets you from the barber does not bear thinking about...

No, Obama's Problem Is Not that He "Focused Obsessively" on Policy, It is that He Got the Policy Wrong

Duncan Black on the Obama Administration:

Eschaton: If Things Were Better They'd Be Better: There is a weird unwillingness to admit that maybe they got the policy wrong too. It's one thing to argue that they got the best they could get out of Congress, though I think that's a dubious claim too, but I think if I traveled back in time to January of 2009 and explained to them where the economy would be in November of 2010 and projected to be in December of 2011 they probably would have done some things differently.

He is commenting on Matthew Yglesias:

Yglesias » Obama’s Obsessive Focus: What I find more troubling is Obama’s remark about his obsessive focus on policy in his first two years in office. Politicians say things that aren’t true all the time, but what you really need to worry about is when they start believing those things. And this is the kind of self-pitying half-truth that I worry people in the White House actually believe.... The way this narrative goes is that the country was struck by a terrible economic crisis in late 2008. That crisis required measures that were unpopular but successful and the President is now paying the price for their unpopularity. There’s some truth in all of that, but the more important truth is much more simple if economic conditions today we good or rapidly improving, then the President would be popular and his anti-recession measures would be seen as vindicated. But conditions aren’t good, they’re not rapidly improving, and the President isn’t popular.

What’s more, whatever Obama was personally focused on “obsessively” it’s just not the case that the policy outputs of the Obama administration reflect an obsessive focus on improving the economic situation. The American Recovery and Reinvestment Act was deeply shaped by a desire to avoid politically damaging accusations of waste, fraud, and abuse rather than shaped to get maximum stabilization bang for the buck.

The administration forgot to appoint anyone to Fed vacancies for over a year.

And the Affordable Care Act is providing zero (if not negative) short-term stimulus out of a politically motivated desire to achieve a deficit-negative 10-year CBO score.

Duncan and Matthew are right. The Obama Administration was blindsided by the seriousness of the economic situation--their Plan A was OK given what they did not know in December 2008, but two months later it was clear that a Plan B was needed, and then a Plan C and a Plan D. And the Obama Administration never came out with any Plan B, C, or D for the macroeconomy other than "hope we get lucky."

Why Friends Don't Let Friends Vote Republican, Ever

Ezra Klein watches newly-elected Republican House member Andrew Harris (R-MD) demonstrate why he should immediately resign his post and let himself be replaced by somebody who is more intelligent:

GOP legislator frets over 28 days without insurance -- but what about 30 million he'd leave uninsured?: It's worth dwelling for a moment on the reaction of Rep. Andy Harris, an incoming legislator who staunchly opposes the new health-care law and ran promising its repeal, to news that he'd had to wait a month for his government-funded health-care benefits to kick in:

Republican Andy Harris, an anesthesiologist who defeated freshman Democrat Frank Kratovil on Maryland’s Eastern Shore, reacted incredulously when informed that federal law mandated that his government-subsidized health-care policy would take effect Feb. 1 – 28 days after his Jan. 3rd swearing-in. “He stood up and asked the two ladies who were answering questions why it had to take so long, what he would do without 28 days of health care,” said a congressional staffer who saw the exchange. ... “Harris then asked if he could purchase insurance from the government to cover the gap,” added the aide.

The point is... Harris's fear at being uninsured... whatever else you think of the health-care law, it really does keep people from being uninsured...

Have I Somehow Missed All the Non-Crazy Reality-Based Republican Economists Backing Ben Bernanke on Quantitative Easing?

We Don't Have a Medium-Run Deficit and Debt Problem--Unless, of Course, Congress Creates One

Ezra Klein reproduces a three-year old graph from the CBPP. It was from before the financial crisis--so that the level from which the debt-to-GDP ratio starts is some 25% higher than in the graph--burt a similar graph constructed today would otherwise look much the same:

At the far right of the graph we can see our long-run deficit problem, out beyond 2040. That is caused by rising projected government health-care spending and only by rising projected government health care spending. That is fixed by health-care reform and only by health-care reform.

In the short run, the deficit is not a problem but an opportunity. We want deficit spending now with so much slack in our economy and so many people unemployed.

In the medium run... well, as the chart shows, we don't have a deficit problem unless congress creates one by extending the Bush-era tax shifts without PAYGO.

Thus our medium-run deficit is easily dealt with: Obama promises to veto any bill that hits his desk that does not conform to PAYGO--that does not leave the national debt at least unchanged after a decade; and then Obama keeps his promise.

He can do it. He has the power. All it takes is a stroke of the pen.

Overheard Leaving Moffitt Library...

"They did the mutagenesis. They created the mutant mice. But then they forgot to label the cage..."

That is all.

Duncan Black Tells Us That the Forecast Deteriorates Further

Atrios:

Eschaton: Grim: Philly Fed Survey of Professional Forecasters:

Seminar: Matt Ridley: How Prosperity Evolves

We are very happy to have Matt Ridley here, to talk about what I think is the foundational issue in economics. The very first paragraph of the second chapter of Adam Smith's Wealth of Nations says that economic prosperity rests on the:

division of labour... not originally the effect of any human wisdom... [but] the necessary... consequence of a certain propensity in human nature... to truck, barter, and exchange one thing for another...

The fact that human group sociability and solidarity is based on exchange rather than, as with chimpanzees, grooming each other or, as with dogs--well, I don't think I should go there--has, Adam Smith thought, extraordinary consequences. I think Smith was right. So does Matt Ridley. He is here to tell us about them.

Guardian review of The Rational Optimist:

Then we modern humans arrived, and within 100,000 years or so not only devised fish hooks and farming, but steam engines, cellophane and one-click buying. What makes us so different? Why have we come so far so quickly when our hominid predecessors were stuck in a rut for thousands of generations? Matt Ridley has a simple answer. Trade. As he sees it, we owe the forward march of humankind to the benefits of barter. Homo erectus had a large brain and probably a rudimentary language. But they never saw the point of making things they could swap. Once we cottoned on to this trick, there was no stopping us. I am dexterous but weedy. You are strong but clumsy. I make the hooks and you catch the fish – and together we achieve something that neither of us could manage on our own.

Ridley makes a strong case for this thesis. He takes us from the hunter-gatherers who first ventured out of Africa up to the modern moguls of Silicon Valley, and shows how humanity has built innovation on innovation in its never-ending search for new gizmos that people will want to buy. From this perspective, specialisation is the essence of humanity, and self-sufficiency a misguided myth. If you really had to make everything yourself, you would be back in the stone age, scrabbling around with hand axes. Far better to work at one thing and let the market supply the rest...

Economists (and Non-Economists) Behaving Very Badly Indeed Watch

The problem with our economy is not that something bad happened to our productive capacity while the flow of nominal spending continued to blip along, it is that something bad happened to the flow of nominal spending and that carried real production and employment down with it. At the moment our flow of nominal spending at $14.7 trillion per year is some 12% below its pre-2008 trend. And in the absence of any 12% decline in prices and wages, that shortfall in spending has to produce our current macroeconomic distress: there is not enough "money" to support enough of a flow of spending to chase all the goods we could produce. We don't have a deficiency of real supply (for whatever reason). We have a deficiency of nominal demand.

That's what John Walter Bagehot would say. That's what Irving Fisher would say. That's what Jacob Viner would say. That's what Milton Friedman would say.

And they would say that it is a central bank's business to intervene in asset markets to boost the flow of nominal spending back to what everybody expected it to be and counted on it being

But now we have a bunch of economists and non-economists behaving very badly: saying not only that the government shouldn't boost its spending but that the central bank shouldn't buy bonds for cash either.

Paul Krugman does the intellectual garbage collection

Liquidationists of the World, Unite!: OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either. This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings... then declared in 2007 that there was no reason to worry about the credit market?

But the real question is, what is their model of the mess we’re in?... I know what my model is.... Obviously, these guys disagree. But what is their model? How do they think we got into a crisis that has depressed employment all around the advanced world? I don’t think they have an answer; I think all they have are wild stories about how Obama’s Sharia-law Marxism has unnerved business, or something, with the effects mysteriously spreading to Spain and Latvia.

And in the name of whatever it is they believe, they’re doing their best to ensure that the slump goes on.

Indeed. It is amazing.

Now Cliff Asness, Richard X. Bove, Jim Chanos, Nicole Gelinas, James Grant, Roger Hertog, Seth Klarman, William Kristol, David Malpass, Dan Senor, Amity Shlaes, Paul E. Singer, Peter J. Wallison, and Geoffrey Wood never bothered to learn the economics of Irving Fisher, Jacob Viner, and Milton Friedman, so they don't know any better,

But those who certainly do know better include Michael J. Boskin, Charles W. Calomiris, Kevin A. Hassett, Gregory Hess, Douglas Holtz-Eakin, Ronald I. McKinnon, and John Taylor certainly do know better.

And John F. Cogan and Niall Ferguson certainly ought to have learned enough by now to know better...