J. Bradford DeLong's Blog, page 2165

October 30, 2010

A Response to Justin Fox...

Earlier this month, I wrote "It Does Not Seem to Me That Charles Ferguson Has Gotten It Right..." in response to Charles Ferguson's attempted take-down of Larry Summers because--well, because it did not seem to me that Charles Ferguson had gotten it right.

Now Justin Fox joins the conversation, and I believe that I am the "strangely touchy economist" whom Justin refers to in this:

Economists respond to incentives: Here’s my short take, following on Barbara’s post Wednesday, on economists:

The single most valuable and durable lesson of economics is that incentives matter. Monetary incentives don’t always matter more than other motivations, and sometimes people’s behavior regarding money is a little nutty. But as an organizing principle for a social science, incentives matter is pretty good.

Economists respond to incentives, too. Real and potential financial awards affect what they choose to study, how they go about it, and what conclusions they draw. This doesn’t mean all economists are evil sellouts. It means they’re human beings.

For people who purport to believe that incentives matter, economists can be strangely touchy when anyone brings up point No. 2.

So since I am the strangely touchy economist here, let me reiterate my points.

When Charles Ferguson writes:

Summers rose up from the audience and attacked [Raghu Rajan], calling him a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector...

he has gotten the mood and some of the substance of the discussion wrong.

I know.

I was there--not only for the formal session recorded in the transcript, but for the patio-coffee and the lunchtime and dinnertime conversations that followed.

Larry http://www.kansascityfed.org/publicat/sympos/2005/pdf/GD5_2005.pdf did not "dismiss" Raghu concerns. He said that in a modern economy with sophisticated financial markets we were likely to have more and bigger financial crises than we had before, just as the worst modern transportation accidents are worse than the worst transportation accidents back in horse-and-buggy days. He said that Raghu's "paper is right to warn us of the possibility of positive feedback and the dangers that it can bring about in financial markets." Indeed, for twenty years one of Larry's conversation openers has been: "You really should write something else good on positive-feedback trading and its dangers for financial markets."

What he complained about was that he thought Raghu was setting forth the wrong cures for the disease. Raghu suggested the job could be done by (a) reform of compensation schemes to give financiers not just skin in the game but vital organs in the game, and (b) by viewing financial innovation with grave suspicion. Larry pointed out that (a) hobbling financial innovation does have serious costs as well, (b) plain-vanilla banking systems do not seem to be any less vulnerable to getting wedged through financial crisis, (c) the LTCM crisis is just the latest episode telling us that reforming financial compensation won't do the job because more often the problems are overleveraged institution or herd groupthink, and (d) transparency and exchanges so that people know what each other's positions are is a better road to pursue.

If you think that the published comment or Larry's other remarks represent a "dismissal" of Raghu's concerns, you do not understand what the word "dismiss" means.

And if you think that Larry pulled his punches in August 2005 on the importance of reforming compensation schemes because fourteen months later he was going to take a job at the hedge fund of D.E. Shaw, you attribute an extraordinarily degree of precognition--back in August 2005 I thought Larry had weathered the storms at Harvard and would be president until 2010 or so.

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Published on October 30, 2010 10:07

October 29, 2010

Liveblogging World War II: October 30, 1940

Nation's Draft Lottery Held, 1940/10/30 : Free Download & Streaming : Internet Archive: Washington, DC: Historic scenes as the first peace-time draft in the U.S. gets underway! Secretary of War Stimson draws out the first number, No. 158, and as Pres. Roosevelt broadcasts a message to the country, America's youth prepares to answer the call to arms!" (2) "Philadelphia, PA: Exclusive pictures of the metal drum used as a draft lottery bowl during the Civil War. It was unearthed along with old recruiting posters." (mostly silent except speech sound) (partial newsreel)

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Published on October 29, 2010 21:26

Doug Henwood Has Ronald Reagan's Inaugural Addresses on His iPod?

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Published on October 29, 2010 14:00

Tim Geithner Needs to Gain Control Over His Building

This is not what should be happening. Not at all.

Zach Carter:

Are Treasury’s Knives Coming Out Against Elizabeth Warren?: On Oct. 12, Politico ran a piece featuring this anonymous nugget (among others):

Some at Treasury grumble that Warren, in her early memos, spent much time detailing what press she was going to do . . . rather than the nuts and bolts of setting up an agency.

Then yesterday, in Politico’s Morning Money column:

NEW PAINT JOB – We also hear that while Warren is out west, her Treasury office is getting a makeover (Warren will have digs both at Treasury and the CFPB’s L Street headquarters). That’s something of a rarity for Treasury officials, who usually leave their offices as-is. There is much internal debate as to exactly what color it is that is going up on Warren’s walls. One person called it “Arizona sunset,” another “terra cotta.”

Both of these represent the kind of meaningless, issue-free pseudo-news that serves as Politico’s bread-and-butter.... [L]ook at the frame Treasury is putting on the stories. In both, Warren is portrayed as an ego-centric fluff-monger, not a serious policymaker. Look at fancy Elizabeth Warren painting her office! Our humble boss Timothy Geithner would never do such a thing! Just days before an election, it’s somewhat astonishing that Treasury officials would be working the media to smear Warren instead of, say, talking about the economy. And it’s certainly counterproductive for Treasury to be creating these distractions for the new, can’t-be-independent-soon-enough agency...

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Published on October 29, 2010 11:25

Liveblogging World War II: October 29, 1940

William Shirer:

Twenty-four hours after Italy’s wanton aggression against Greece, the German people are still deprived of news by their rulers. Not a line in the morning papers or the noon papers. But Goebbels is carefully preparing his public for the news. This morning he had the press publish the text of the outrageous Italian ultimatum to the Greek government. It was almost an exact copy of the ultimatum which the Germans sent to Denmark and Norway, and later to Holland and Belgium. But the German public may have wondered what happened after the ultimatum, since it expired yesterday morning.  
LATER.-The news was finally served the German people in the p.m. editions in the form of the text of today’s Italian war communique. That was all. But there were nauseating editorials in the local press condemning Greece for not having understood the “new order” and for having plotted with the British against Italy. The moral cesspool in which German editors now splash was fairly well illustrated by their offerings today. After several years of it I still find it exasperating.

Also today, the usual Goebbels fakes. For example, one saying that the Greeks disdained even to answer the ultimatum, though the truth is that they did. They rejected it.  >There is certainly no enthusiasm among the people her for the latest gangster step of the Axis.

German military people, always contemptuous of the Italians, tell me Greece will be no walk-way for Mussolini’s legions. The mountainous terrain is difficult for motorized units to operate in and moreover, they say, the Greesk have the best mountain artillery in Europe. General Metaxas, the Premier, and quite a few Greek officers have been trained at Potsdam, the Germans tell me.

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Published on October 29, 2010 11:19

This Is Not a Strong GDP Report

Economist_s View_ Real GDP Grows at 2 Percent in the Third Quarter.png

Mark Thoma:

Economist's View: Real GDP Grows at 2 Percent in the Third Quarter: Positive growth is better than negative growth, but this is a loss relative to trend growth, and the fact the inventories are driving growth is of concern. Dean Baker puts it into perspective:

It may not be immediately obvious quite how weakly the economy is growing.... When an economy gets out of a steep recession, it should be soaring.... In the first four quarters following the end of the 1974-75 recession, growth averaged 6.1%. In the four quarters following the end of the 1981-92 recession, growth averaged 7.8%. The growth rate averaged just 3.0% in the four quarters following the end of this recession. But the actual picture is even worse. Most of this growth was driven by the inventory cycle.... If inventory fluctuations are pulled out, growth in demand averaged just 1.1% over the four quarters following the end of the recession. Final demand growth was down to just 0.6% in the most recent quarter.... Inventories grew at the second fastest rate ever in the last quarter. Growth is certain to slow in future quarters, meaning that inventories will be a drag on an already slowing economy. Instead of accelerating, we are likely to see growth just scraping along near zero.

I've been expecting a long, slow, agonizing recovery, in part because there's little chance that fiscal policy authorities will give the economy the boost it needs to recover faster... full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.

The San Francisco Fed is also expecting a slow recovery... even that might be optimistic given that they are forecasting an average growth rate for 2010 of 2.5% and today's estimate came in below that.

This is not a strong report. As Calculated Risk notes above, this won't derail quantitative easing. However, I don't expect another round of quantitative easing to have a large impact on the growth rate of GDP. Thus, while this won't derail QEII the problem is that it won't move fiscal policymakers to action, and fiscal policy is, in my opinion, the best way to help the economy recover faster.

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Published on October 29, 2010 11:17

Liveblogging World War II: October 29, 2010

Time:

ARMY: The Problem - TIME: From Memphis' Beale Street to Harlem's Lenox Avenue, the U. S. Negro press last week suddenly took fire. It blazed up over the Army's No. 1 social problem: what to do with Negro officers and Negro enlisted men. A War Department statement, issued fortnight ago after Franklin D. Roosevelt had talked over The Problem at the White House with Negro leaders, fanned the flames. The policy: that Negroes will get the same kind of military training as whites, but they will get it in separate Negro outfits.

Even Harlem's pro-Roosevelt Amsterdam News joined in the outraged hubbub. Jim Crow Army Hit, ran its page 1 banner over a story denouncing the Army's policy.

Charge White House Trickery, yammered the Republican Pittsburgh Courier. Roosevelt Charged With Trickery in Announcing Jim Crow Army Policy, shrilled the Kansas City Call. Along with the War Department's statement many a paper printed the demands made on President Roosevelt fortnight ago by his White House visitors: Secretary Walter White of the National Association for the Advancement of Colored People; President A. Philip Randolph of the Sleeping Car Porters' union; T. Arnold Hill, an assistant in the N. Y. A. Division for Negro Affairs. For the Army's solution of The Problem had brusquely rejected the pivotal demand in the Negroes' seven-part memo to the President, that "existing units of the Army and units to be established should be required to accept and select officers and enlisted personnel without regard to race."

If U. S. Negroes really expected to see the U. S. Army agree to put black and white in the same outfits on an equality basis, they reckoned on a thumping overturn of precedent. Only four Negroes have ever graduated from West Point (none from Annapolis) and today the Army has only two regular Negro line officers: Colonel Benjamin Oliver Davis, commanding officer of Harlem's 369th Coast Artillery (National Guard), and his West Pointer son, Lieut. B. O. Davis Jr., military instructor at Tuskegee Institute. Before 1940's emergency the Army had only four Negro regiments of regulars (two cavalry, two infantry); all are officered by white men. Since July 1, 17 other Negro outfits have been formed (including a regiment of engineers, one of field artillery, twelve truck companies), and some may be officered by men from the 353 Negro reserve officers now on Army lists.

In World War I, only 10% of the 404,000 Negroes drafted and enlisted for the Army saw service in overseas combat outfits. Except for a few separate regiments (like the 369th 376th 371st and 372nd). their record was undistinguished. Some Army men today think Negroes are as good fighting men as whites, but also think they will never be able to prove it until they go into action led by Negro officers, show once & for all that they do not need white leadership.

But to Negro leaders proof of that point was less important last week than establishing the equality of the races in the U. S.'s new Army. So concerned were they with the Jim Crow issue that they subordinated another point, somewhat less than frank, in the War Department's statement.

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Published on October 29, 2010 00:01

October 28, 2010

Liveblogging World War II: October 28, 1940

Mussolini's fascist Italy attacks Greece:

Benito Mussolini:

The Italian Government has repeatedly noted how, in the course of the present conflict, the Greek Government assumed & maintained an attitude which was contrary not only with that of formal, peaceful, good neighborly relations between two nations, but also with the precise duties which were incumbent on the Greek Government in view of its status as a neutral country. On various occasions the Italian Government has found it necessary to urge the Greek Government to observe these duties and to protest against their systematic violation, particularly serious since the Greek Government permitted its territorial water, its coasts and its ports to be used by the British fleet in the course of its war operations, aided in supplying the British air forces and permitted organization of a military information service in the Greek archipelago to Italy's damage.

The Greek Government was perfectly aware of these facts which several times formed the basis of diplomatic representations on the part of Italy to which the Greek Government, which should have taken consideration of the grave consequences of its attitude, failed to respond with any measure for the protection of its own neutrality, but, instead, intensified its activities favoring the British armed forces and its cooperaticn with Italy's enemies.

The Italian Government has proof that this co-operation was foreseen by the Greek Government and was regulated by understandings of a mllitary, naval and aeronautical character.

The Italian Government does not refer only to the British guarantee accepted by Greece as a part of the program of action against Italy's security but also to explicit, precise nengagements undertaken by the Greek Government to put at the disposal of powers at war with Italy important strategic positions on Greek territory, including air bases in Thessaly and Macedonia, designed for attack on Albanian territory.

In this connection the Italian Government must remind the Greek Government of the provocative activities carried out against the Albanian nation, together with the terroristic policy it has adopted toward the people of Ciamuria and the persistent efforts to create disorders beyond its frontiers.

For these reasons, also, the Italian Government has accepted the necessity, even though futilely, of calling the attention of the Greek Government to the inevitable consequences of its policy toward Italy. This no longer can be tolerated by Italy.

Greek neutrality has been tending continuously toward a mere shadow. Responsibility for this situation lies primarily on the shoulders of Great Britain and its aim to involve ever more countries in war.

But now it is obvious that the policy of the Greek Government has been and is directed toward transforming Greek territory, or, at least permitting Greek territory to be transformed, into a base for war operations against Italy.

This could only lead to armed conflict between Italy and Greece, which the Italian Government has every intention of avoiding.

The Italian Government, therefore, has reached the decision to ask the Greek Government, as a guaranty of Greek neutrality and as a guaranty of Italian security, for permission to occupy with its own armed forces several strategic points in Greek territory for the duration of the present conflict with Great Britain.

The Italian Government asks the Greek Government not to oppose this occupation and not to obstruct the free passage of the troops carrying it out.

These troops do not come as enemies of the Greek people and the Italian Government does rot in any way intend that the temporary occupation of several strategic points, dictated by special necessities of a purely defensive character, should compromise Greek sovereignty and independence.

The Italian Government asks that the Greek Government give immediate orders to military authoritles that this occupation may take place in a peaceful manner. Wherever the Italian troops may meet resistance this resistance will be broken by armed force, and the Greek Government would have the responsibility for the resulting consequences