J. Bradford DeLong's Blog, page 2157

Vampire-Americans Come Out of the Coffin...

A correspondent claims:

I got this message this morning from the place where I usually donate blood, and it gave me a giggle.

Your generous blood donations through Memorial Blood Centers will help save lives and fight hunger this holiday season.

Ah! The children of the night! What music they make!

Liveblogging World War II: November 14, 1940

Coventry, from Wikipedia:

Coventry Blitz : The raid that began on the evening of 14 November 1940 was the most severe to hit Coventry during the war. It was carried out by 515 German bombers, from Luftflotte 3 and from the pathfinders of Kampfgruppe 100. The attack, code-named Operation Mondscheinsonate (Moonlight Sonata), was intended to destroy Coventry's factories and industrial infrastructure, although it was clear that damage to the rest of the city, including monuments and residential areas, would be considerable. The initial wave of 13 specially modified Heinkel He 111 aircraft of Kampfgruppe 100, were equipped with X-Gerät navigational devices, accurately dropping marker flares at 19:20.[18] The British and the Germans were fighting the Battle of the Beams and on this night the British failed to disrupt the X-Gerät signals.

The first wave of follow-up bombers dropped high explosive bombs, knocking out the utilities (the water supply, electricity network and gas mains) and cratering the roads, making it difficult for the fire engines to reach fires started by the follow-up waves of bombers. The follow-up waves dropped a combination of high explosive and incendiary bombs. There were two types of incendiary bomb: those made of magnesium and those made of petroleum. The high explosive bombs and the larger air-mines were not only designed to hamper the Coventry fire brigade, they were also intended to damage roofs, making it easier for the incendiary bombs to fall into buildings and ignite them.

At around 20:00, Coventry Cathedral (dedicated to Saint Michael), was set on fire for the first time. The volunteer fire-fighters managed to put out the first fire but other direct hits followed and soon new fires in the cathedral, accelerated by firestorm, were out of control. During the same period, fires were started in nearly every street in the city centre. A direct hit on the fire brigade headquarters disrupted the fire service's command and control, making it difficult to send fire fighters to the most dangerous blazes first. As the Germans had intended, the water mains were damaged by high explosives; there was not enough water available to tackle many of the fires. The raid reached its climax around midnight with the final all clear sounding at 06:15 on the morning of 15 November.

In one night, more than 4,000 homes in Coventry were destroyed, along with around three quarters of the city's factories. There was barely an undamaged building left in the city centre. Two hospitals, two churches and a police station were also among the damaged buildings. Approximately 600 people were killed (the precise death toll has never been established) and more than 1,000 were injured.

In the Allied raids later in the war, 500 or more heavy four-engine bombers all delivered their 3,000-6,000 pound bomb loads in a concentrated wave lasting only a few minutes. But at Coventry, the German twin-engined bombers carried smaller bomb loads (2,000–4,000 lb), and attacked in smaller multiple waves. Each bomber flew several sorties over the target, returning to base in France to rearm. Thus the attack was spread over several hours, and there were lulls in the raid when fire fighters and rescuers could reorganise and evacuate civilians. As Arthur Harris, commander of RAF Bomber Command, wrote after the war "Coventry was adequately concentrated in point of space [to start a firestorm], but all the same there was little concentration in point of time".

The raid destroyed or damaged about 60,000 buildings over hundreds of hectares in the centre of Coventry, and is known to have killed 568 civilians. The raid reached such a new level of destruction that Joseph Goebbels later used the term Coventriert ("Coventrated") when describing similar levels of destruction of other enemy towns. During the raid, the Germans dropped about 500 tonnes of high explosives, including 50 parachute air-mines, of which 20 were incendiary petroleum mines, and 36,000 incendiary bombs....

In his 1974 book The Ultra Secret, Group Captain F. W. Winterbotham asserted that the British government had advance warning of the attack from Ultra: intercepted German radio messages encrypted with the Enigma cipher machine and decoded by British cryptanalysts at Bletchley Park. He further claimed that Winston Churchill ordered that no defensive measures should be taken to protect Coventry, lest the Germans suspect that their cipher had been broken. Winterbotham was a key figure for Ultra; he supervised the "Special Liaison Officers" who delivered Ultra material to field commanders.

However, Winterbotham's claim has been rejected by other Ultra participants and historians who argue that while Churchill was indeed aware that a major bombing raid would take place, no one knew what the target would be. Peter Calvocoressi was head of the Air Section at Bletchley Park, which translated and analysed all deciphered Luftwaffe messages. He wrote "Ultra never mentioned Coventry... Churchill, so far from pondering whether to save Coventry or safeguard Ultra, was under the impression that the raid was to be on London."

Hoisted from the Archives: Greg Clark: The Secret History of the Industrial Revolution

Greg Clark:

The modest productivity growth rates of the Industrial Revolution owed mostly to productivity gains in one sector, textile manufacture. It was accidents of demand, demography, and trade that allowed innovations in this sector to have a much bigger impact than previous innovations of similar magnitude in terms of [aggregate economy-wide] productivity gains.... The southern two thirds of England saw almost no growth in output per capita or productivity growth in the Industrial Revolution.... Other places in Europe in the years 1200 to 1760 saw similar episodes of productivity growth that were as substantial as those in England from 1760 to 1860. Thus between 1550 and 1650 the Netherlands saw significant productivity advance.

The appearance that the Industrial Revolution in England represented a decisive break from the past is largely a product of the unusual demographic experience... demographic growth would have spurred industrialization absent any productivity advance... by driving up land rentals and creating urbanization... [spurring] enclosure of common lands, improvements in transportation, the expansion of coal mining, and perhaps also the fall in interest rates...

[...]

The aggregate productivity growth rate is just the sum of the productivity growth rates of individual sectors weighted by their share in national outputs.... The cotton textile industry experienced very rapid productivity growth in the Industrial Revolution era.... The estimated total factor productivity in spinning and weaving cotton cloth increased 22 fold from the 1770s to the 1860s, implying an annual productivity growth rate of 3.1% per year... cotton, and the associated industries of linen (assumed to have the same productivity growth as cottons) and woolens to overall TFP growth... of 0.26% out of 0.40%. Thus nearly two thirds of the productivity growth rate can be explained by essentially one set of innovations, and by industries that employed less than 10% of the labor force in 1851. The great mass of the economy, including agriculture, construction, services, and most manufacturing saw very little productivity increase. The gains in income per capita were thus the result of a lucky technological advance in one area....

Even with a textile revolution the effects of productivity growth in textiles on the TFP of the whole economy crucially depended on the ability of Britain to export these products on a large scale. Even though the share of cottons and woolens was never large, this share was only attained because of very substantial exports of cotton and woolen goods. Thus by the 1860s at least two thirds of English cotton goods output was exported, and about one third of woolens. These exports were traded in world markets for foods and raw materials demanded by England’s rapidly growing population. Had these industries produced only for the home market then the productivity growth rate from 1765 to 1865 would have dropped by a third....

[T]his ability to export textiles was a purely adventitious thing. Textile products were tradable, and the growing population of Britain required large imports of food and raw materials which had to be paid for by manufacturing exports....

[T]he effects of individual technical advances on aggregate productivity depend crucially on such accidental factors as the size of the sector affected and the price elasticity of demand. The nature of technological advance is generally that some new idea leads to a long period of productivity advance in an industry as the consequences of the new technique are played out. If demand is price inelastic then reductions in prices created by the early phase of a technological advance will limit or even reduce the share of expenditure on the good, so reducing the general productivity gains from further advances. Advances in cotton textiles in the Industrial Revolution had big impacts because textiles were a substantial share of expenditure by the 1760s and demand was price elastic....

Suppose that prior to the Industrial Revolution innovations were occurring randomly across various sectors of the economy - innovations such as guns, spectacles, books, clocks, painting, new building techniques, improvements in shipping and navigation – but that just by chance all these innovations occurred in areas of small expenditure and/or low price elasticities of demand. Then the technological dynamism of the economy would not show up in terms of output per capita or in measured productivity.

Thus... consider the introduction of the printed book by Gutenberg in 1445, again in the period where we can find no evidence of aggregate productivity growth, at least in England.... Output per worker increased by roughly 30 fold from manuscript production in the fourteenth century till the early nineteenth century... greater than the productivity advances achieved in the cotton textile industry over the Industrial Revolution period, though it took place over a much longer period. But the impact of these productivity gains in printing on the economy as a whole was unmeasurably small because the share of the economy devoted to printing always remained small... in 1851 only 0.8% of the population was employed in the paper making and printing businesses....

Another dramatic change in the years before 1600 was improvements in shipping and navigation which allowed access to the East by an all sea route. This was reflected in a dramatic fall in the sixteenth century in the price of eastern spices.... The price of pepper relative to English farm output prices fell to about one fifth its earlier level between 1570 and 1660. Yet again though this decline represented a host of technical and organization changes the economic impact was negligible given the dietary habits of the English....

If we want to locate the Industrial Revolution as the beginning of the era of sustained productivity growth then the [sixteenth-century] Dutch have as good a case as the British. If we want to locate it in the era of very widespread productivity growth affecting large sectors of the economy, then the US in the after the 1870s is the best candidate....

[...]

[T]he conclusion is that there was little productivity growth in the Industrial Revolution era beyond that explained by the technological revolution in textiles... the accident that textiles were exported on a large scale by 1800, explained by the need to import large quantities of food and raw materials given English population growth after 1760, accounts for a substantial fraction of the gains in productivity. The Industrial Revolution becomes very narrow. It can then be interpreted as just another isolated technological advance as European economies had been witnessing since at least the fifteenth century.

England had low transport costs to France and the Netherlands even in the middle ages... wages and output in England will be determined not by the land/labor ratio in England, but by the land/labor ratio in Europe as a whole. The English land/labor ratio will predict real wages and real output only in so far as it moves in sympathy with the European land/labor ratio. Otherwise if England ends with more labor compared to land than other European economies it will not experience a decline in output per worker with a constant technology, but will trade labor intensive products in exchange for land intensive products from elsewhere....

In the years 1300 to 1750 there is a remarkable concordance in the population movements across Western Europe, and English wages, output per head and population [appear to be] linked. But the Industrial Revolution was notable for England’s rapid population growth compared to the rest of Europe, and in particular compared to the Netherlands and France.... English population increased by 187% between 1770-9 and 1860-9 while a wide group of other European countries saw population increase by only 79%....

At the same time the addition of the acreage of North America, and improvements in the transport system that brought grain and timber from the East and South to Western Europe effectively expanded the land base of the whole continent.... The population fed and clothed by English agriculture did not expand from 7.5 million to 21 million between 1760 and 1860... but instead grew from 7.5 to 9.6 million... even this calculation does not take into account the effect of the expansion of the coal industry in substituting for the use of land to produce energy in the pre-industrial economy through growth of wood and furze. In combination imports and the coal industry effectively tripled the land area of England by the 1860s....

Thus England's economic growth looked so spectacularly different from the past after 1760 for three reasons: the demographic accident of the differential movement of population in England relative to the rest of Europe, the expansion of the land area effectively available to all of Europe through the opening up of the American Midwest and of the eastern Europe, and the expansion of the domestic coal industry...

Why Do I Feel So Much Better After a Transcontinental or Transoceanic Airplane Flight When I Have Been Sitting Up in the Front of the Plane?

I mean, the free mimosas, the extra space, and the extra degrees of recline in the seat shouldn't do really be enough to do it, right?

Am I really such a dominance junkie that getting picked out of the herd and being told that I am special for seven hours makes that much of a difference?

Ryan Avent vs. Kevin Drum

Ryan Avent attempts to Kevin Drum smackdown:

Budget deficits: Austerity and reform: KEVIN DRUM critiques the recommendations of the chairmen of the deficit commission.... I don't think this holds water.... [O]ne good way to approach the deficit in a fashion that's relatively agnostic about the role of government is to reform the tax system to make it more efficient.... Now, the chairmen have left themselves open to criticism... they failed to include some obvious potential improvements in the efficiency of the tax code, like adoption of a carbon tax... they used much of the gains from their tax system reforms to cut rates. Mr Drum is right to say that a deficit commission should primarily be interested in applying whatever savings it finds to reduction of the deficit....

But the principle that tax reform is a healthy part of deficit reduction is a sound one...

I score this for Kevin Drum, 15-0. Tax reform is not deficit reduction. Tax reform is tax reform. Deficit reduction is deficit reduction. To put on the table an option for making the distribution of income worse by cutting the EITC and using the revenue raised to fund a reduction in high-income tax rates without putting on the table equivalent options for making the distribution of income better--well, Simpson and Bowles just did not do their job, and attempts to defend them are unconvincing.

Paul Krugman on Simpson-Bowles:

The Soft Bigotry of Low Deficit Commission Expectations: those who are defending the deficit commission on the grounds that there are some potentially good ideas in there are missing what the purpose of the commission was supposed to be.... [T]he commission... was supposed to produce a package that Congress would give an up and down vote. To do this... it would have to produce a package good enough to accept as is. And it didn’t do that.

Instead, it produced a package that may have had some good things in it, but also, remarkably, introduced a whole slew of new bad ideas that weren’t even in the debate before. A 21 percent of GDP limit on revenues? Cutting the top marginal rate to 23 percent? Sharp reductions in the government work force without, as far as anyone can tell, a commensurate reduction in the work to be done? Instead of cutting through the fog, the commission brought out an extra smoke machine....

[T]he commission was supposed to provide a finishing point for discussion. Instead, it produced a PowerPoint that is one part stuff that has long been on the table, one part conservative wish-list, and one part just weirdly ill-considered.

Winston Churchill Blogs About November 13, 1940

Winston Churchill:

After supper at the Soviet Embassy there was a British air raid on Berlin. We had heard of the conference [and of Molotov's visit to Berlin] beforehand, and though not invited to join in the discussion did not wish to be entirely left out of the proceedings....

When in August 1942 I first visited Moscow I received from Stalin's lips... an account.... "When Molotov," said the Marshal, "went to see Ribbentrop in November of 1940 you got wind of it and sent an air raid." I nodded.

When the alarm sounded Ribbentrop led the way down many flights of stairs to a deep shelter sumptuously furnished. When he got inside the raid had begun. He shut the door and said to Molotov: "Now that we are alone together, why should we not divide?"

Molotov said: "What will England say?"

"England," said Ribbentrop, "is finished. she is no more use as a Power.'

"If that is so," said Molotov, "why are we in this shelter, and whose are these bombs that fall?"

Neoliberal Economists Agonistes

Felix Salmon shifts ground from Charles Ferguson's Larry-Summers-Is-Corrupt to the alternative Larry-Summers-Has-Been-Intellectually-Captured-by-Wall-Street interpretation:

Summers’s incentives: But this misses the point: Summers had already been captured when he was Treasury secretary, and he was hired by DE Shaw partly because he was captured. Being captured is not some kind of intellectually dishonest overt bribe, where you truly believe A but profess to believe B because doing so makes you rich. It’s much more subtle than that, based partly in the wealth and success and sterling reputations of those (like your mentor Bob Rubin, perhaps) who believe B. And it’s a survivorship-bias thing, too: if you don’t believe B, you’ll never rise to the kind of position where your opinions matter as much as Larry’s do and did.... Summers has a pretty unique way of perceiving, analyzing, and solving problems. Many policymakers, including Barack Obama, value his particular insights. But the fact is that most of the time Summers seems to end up doing and proposing exactly what Wall Street would most want him to do. Pace Brad, he might well be fully aware of the problems with Wall Street. But yes, by using words like “Luddite”, he does dismiss those concerns, or persuade himself that the costs of acting on them are greater than the benefits...

This is, I think, a considerable improvement.

But "intellectually captured" does not capture it. It brings up images of that awful Star Trek episode where the gigantic disembodied brains bet on cage matches between Enterprise crew members with thrall collars on their necks.

Let me suggest a better metaphor: one of those bear traps that closes around the ankle. Not "captured," but rather "trapped"--something you could escape from by gnawing off a limb. And Larry was never trapped by belief in the efficient market hypothesis. Instead, he (and I) were trapped by belief in what I might as well call "Greenspanism."

He (and I) never were believers in the efficient markets hypothesis. How could we be? Look around: there are idiots! The market's prices are the results of a wealth-weighted voting mechanism: the more money you have, the bigger is your weight in the market's average. People who have done well in the recent past thus have more weight than people who have done badly. But those who have done well me be irrational trend-chasers who have been lucky and those who have done badly may be sober-sided fundamentalists whose time has simply not yet come. The questions of the degree to which the limited amount of risk-averse smart money can leverage itself and profit from all this noise in the market by reducing it is a fascinating and subtle one. But nobody thinks that the answer is that the noise simply does not matter, is ironed out into insignificance.

But let me switch to what I am really interested in. Let me talk about me. After all, my mind is what I know best. And it is the case that the most powerful lobe of my brain is the one that is always running an instantiation of the Larry Summers thought emulation module on top of its native wetware code:

What we did believe? We believed that the Federal Reserve could handle whatever financial crisis the markets could throw at it. We believed that the Federal Reserve had the policy tools, the risk management skills, and the incentives to firewall the real economy from financial dislocations, and to clean up whatever financial messes were left behind. There were solid reasons for these beliefs: they were called 1987, 1991, 1997, 1998, and 2001. In all of those episodes--some of them involving financial losses much greater than those of the initial subprime mortgage crisis--the Federal Reserve had successfully firewalled the real economy off from financial turmoil.

Once we had concluded that the Federal Reserve had the tools and the competence  to absorb financial shocks, the jaws of the trap snap shut. Leverage then appears to be a positive good rather than a danger. Why? Because if the past two centuries of financial market history prove anything, it is that the markets are woefully short of patent capital willing to bear risks. The financial rich are overwhelmingly the patient risk-bearers. The financial poor are those who sought safety, or who were unwilling or unable to hold their positions and wait for fundamentals to reassert themselves. Leverage then becomes a way of taking the money of the risk-averse of whom the market has too many--for that is what low long-term returns on "safe" portfolios tell us--and putting it too work in the hands of the too-few who will use it to take the long-term risks that the market, historically, has always handsomely rewarded. And financial sophistication becomes a way of concentrating and amplifying the rewards of risk-bearing to call forth additional risk-bearing capital to bolster the numbers of the too-few.

The argument is bullet-proof and correct--as long as Greenspanism is true doctrine, as long as the Federal Reserve does in fact have the policy tools, the risk management skills, and the incentives to firewall the real economy from financial dislocations, and to clean up whatever financial messes were left behind.

Here it is worth stressing that these intellectual commitments are not the result of being hypnotized by the princes of Wall Street. They are the result of disciplined and concentrated analysis of the historical patterns of asset prices and returns. They are the result of confidence in the intellectual power of the discipline of monetary economics as applied through the policy instrumentality of the Federal Reserve. And they are the result of the economists' insight that whenever there is an area of economic activity that pays huge, outsized rewards the odds are that we need more of it done.

But "captured" is the wrong word. "Trapped" is much better. And not trapped by the efficient market hypothesis. Trapped, instead, by confidence in modern central banking.

And while these intellectual commitments are certainly fueled by too-close attention to and admiration for central bankers, they are not especially closely tied to contacts with or worship of the princes of Wall Street.

Keynes and the FT

Robert Skidelsky says that when Keynes lectured at Cambridge about monetary theory, he would begin by reading an article from the FT (or occasionally tje Economist), and then ask: "What is the theory that lies behind this argument? Is it coherent? Could it be correct? How can we find out?" And that is how he would teach monetary theory at Cambridge.

What Should Macroeconomics Do?

What is wrong with American macroeconomics? In a nutshell, when 2007-9 came along every single macro textbook (including mine) and every single macro course (save possibly Perry Mehrling's) was of little or no use in helping people who had read or taken them to read publications like the FT as they chronicled the downturn or understand the policy debates hosted by the FT.

At the very minimum, a macro course should teach people enough about the macroeconomy that they can then read the reporting of the FT. And it should teach people enough about the theoretical approaches that underpin policy advocacy that they can then understand and evaluate the policies proposed in contributions to the FT.

What would such a macroeconomics course look like?

It would, I think, teach the five still-live theories of the causes of economic downturns that underpin people's analyses:

The theory that high unemployment is produced by real wages stuck at too high a level for a full-employment economy to sustain. It must be suffered.

The theory that high unemployment today is the unavoidable consequence of past overinvestment. It must be suffered.

The monetarist theory that a downturn is the result of a shortage of liquid cash money which induces people desperate to build up their cash balances to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the money supply or increasing velocity and so reducing money demand.

The Keynesian--or is it Wicksellian?--or is it a Hicksian?--theory that a downturn is the result of a shortage of bonds, of vehicles that savings can use to transfer purchasing power into the future which induces people desperate to build up their assets to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of bonds or reducing savings.

The Minskyite theory that a downturn is the result of an overspeculation-caused panic that generates a shortage of safe high-quality assets, of vehicles that people to park their wealth and be sure it will not melt away while their backs are turned, which induces people desperate to build up their safe asset holdings to try to switch their spending away from currently-produced goods and services. It is fixed by expanding the supply of safe assets or restoring confidence and so diminishing the demand for safety.

All five of these theories need to be taught sympathetically, yet critically. They all make claims about how the world works that might be true--indeed, there are surely times and places when and where they are true--and that can and should be evaluated.

All five of these theories are best taught sympathetically by being taught historically: as long traditions of thought that smart people have used to try to understand a changing and confused world. Thus Minskyism from its nineteenth century roots with Walter Bagehot or perhaps Adam Smith grappling with nineteenth-century financial crises, Keynesianism from its roots in Knut Wicksell's studies of disturbances to the flow-of-funds, monetarism from its roots in John Stuart Mill trying to understand the first industrial downturn in England in 1825, overinvestment theories from their roots in Karl Marx grappling with the crisis of 1848, high-real-wage from its roots in Nassau Senior's examinations of technological unemployment in the pre-1850 Midlands--all tussling with a set of problems first raised by Jean-Baptiste Say and Thomas Robert Malthus.

That would be a macro course that would turn out graduates who could read the FT--and who would be of great value to all the employers who need people to process information from the FT.

Practical Politics for Dummies

Matthew Yglesias:

Results, Not Words: “[B]lame Republicans for failing to pass plan to fix the economy” is [not] a close substitute for “fix the economy.”... [T]he evidence that fixing the economy would help Democrats politically is overwhelming... he evidence that the plan/block/blame strategy would work is non-existent. People like me and Atrios would feel better about President Obama and his team if they made public statements that indicated that he roughly agrees with our take... [but] our emotional state has very little political relevance.... The things you would do to outline a bold progressive approach to fixing the economy are very different from the things you would do to try to get the GOP votes you need to pass economy-fixing legislation.