J. Bradford DeLong's Blog, page 2188

In Which Megan McArdle and Arnold Kling Are Very Wrong Once Again

Megan McArdle:

Megan McArdle: It's common among programmers to say "Garbage In, Garbage Out":  your result is only as good as your data. The same could be said of economic models, except the problem is not so much the data, as the incompleteness of the models.  Arnold Kling recounts an interesting encounter:

At the unpleasant session yesterday, I did learn something interesting from Doyne Farmer of the Santa Fe Institute, while he was ranting against the state of the art in macroeconomic models. He said that in 2006, the Fed simulated a 20 percent decline in home prices in its model, and the effect was minor.

That sounds highly plausible, of course. But it just adds to my frustration about the infamous Blinder-Zandi black-box simulations purporting to show that the economy would have been much worse without TARP. Such an exercise assumes that we have precise quantitative knowledge of the feedback between real and financial variables. But the exercise that Farmer referred to illustrates just how weak an assumption that is...

It would have been an act of honesty on Kling's part to reveal that back in 2006--when Fed staffers thought that there was definitely a housing bubble and that they should try to forecast the causes of its collapse--he was writing things like:

Housing Bubble Revisited: There are two ways to look at house prices. 1. Relative to historical norms, prices are very hig.h 2. Relative to rents, prices are reasonable. Both statements are true. The first implies a bubble, and the second does not.

Historical norms are for prices to be low relative to rents. That might reflect a risk premium or a liquidity premium for owning a house. In my view, there are good reasons for a liquidity premium to have shrunk over time. The mortgage market has become more efficient, so that the cost of having money tied up in a house has fallen. This story suggests to me that the rise in prices from historical norms could be rational....

I would rate the probability of a bubble at about 20 percent...

And it would have been an act of honesty on Kling's and McArdle's part to reveal that the Federal Reserve staff was right: the collapse of the housing bubble had little effect on the economy. What caused the crash and our current near-depression was something very different from the collapse of the housing bubble--as you can see if you cast your mind back to August 2008 when it was clear how large the collapse of the housing bubble was and yet the consensus forecast was of the smallest post-WWII recession.

What caused our current crisis was the fact that banks that claimed to be running an originate-and-distribute MBS business were running an originate-and-retain business instead, and were extraordinarily exposed to housing price declines in a way that very, very few people understood in 2006.

This isn't rocket science, people. All you have to do is honestly report what you were thinking in mid-2006 and in the aftermath of the crash of the housing bubble in mid-2008. It wasn't that long ago.

Hayek's Friends Should Apologize for, Not Endorse, His Road to Serfdom

John Quiggin:

Hayek’s Zombie Idea — Crooked Timber: current sales of Hayek’s book are being driven by Glenn Beck, who claims that Britain is indeed a socialist dictatorship of the kind predicted by Hayek (or was, until the recent election), and that Obama is propelling the US along the Road to Serfdom by making medical care marginally more affordable.

Until the right went completely crazy, the most common claim in support of Hayek was that his predictions had somehow been vindicated by Thatcher’s reaction against the welfare state. Leaving aside the fact that Thatcher’s remodelling of the British economy in the image of the City of London looks a lot less appealing today than it did only a few years ago, this totally misses the point of Hayek’s book. If he had wanted to argue that social democratic policies would reduce the rate of economic growth, and to throw in a bit of hyperbole, he could have called it “The Road to Destitution” or something similar. Hayek wanted to make the much stronger claim that the attempt to implement Labor’s policies would necessarily lead to a loss of personal and political freedom.

The most plausible attempt to extract a defensible claim from The Road to Serfdom is to suggest that it applied to policies of comprehensive and centralised economic planning, which might, on an extreme reading, have been imputed to the Labour Party of 1944. Fortunately, on this account, Labour saw the folly of such ideas and did not attempt to implement them. Even on this charitable account, a book warning against hypothetical policies that might have been, but weren’t, adopted in the early postwar period, and aren’t advocated by anybody nowadays, would be of fairly marginal historical interest. But, as Ed McPhail and Andrew Farrant have shown (I’ve linked to a summary since the article seems to be paywalled) this view can’t really be defended.

Ed Luce Calls on All Americans to Vote Against the Republican Party

Ed Luce:

Flaws in GOP’s pledge to balance budget: In the build-up to the UK election in May, David Cameron’s Conservative party made little bones about the fact that Britain was heading into an “age of austerity”. In his “contract with voters” that Mr Cameron issued before polling day, he observed: “We know how unhappy you are and how doubtful you are that anyone will achieve anything or change anything.”

The contrast with the Pledge to America the Republicans issued last week as the basis for their midterm election campaign could not be sharper. One party offered the 21st century equivalent of “blood, sweat and tears” – admittedly watered down as polling day approached. The other parodied Pangloss’s hope that “all will be for the best in the best of all possible worlds”.

Nowhere in the Republican pledge was there acknowledgement of the painful decisions that all Americans must confront.... Nor was there even a hint of admission that Republicans bore at least equal responsibility.... Instead of medicine, there was sugar.

This is how the pledge begins:

With this document, we pledge to dedicate ourselves to the task of reconnecting our highest aspirations to the permanent truths of our founding by keeping faith with the values our nation was founded on, the principles we stand for, and the priorities of our people.

Such was the mood music. But the real contrast was in the substance. Although Mr Cameron’s Conservatives fudged the extent of spending cuts as the election approached, they stuck firmly to the line that there could be no tax cuts if Britain were to restore its budget to balance. In contrast, John Boehner, the Republican leader in the House of Representatives, flanked by the “Young Guns”, only one of whom is younger than Mr Cameron, promised to maintain all the tax cuts that George W. Bush instituted, never raise any taxes again in any shape or form, and do all this while restoring America’s budget to balance. All of which might have been plausible were it to have spelt out the draconian spending cuts that would therefore be necessary to bring the budget back to surplus. But it declined to do so. Instead it ring-fenced more than three-quarters of the US federal budget – social security, Medicare and defence spending – and promised to impose caps on the remaining, “discretionary” portion of it.

In numerical terms, the $320bn the party has specified in spending cuts over the next decade is dwarfed by the $4,000bn in tax cuts that it promises – all on top of the current double digit budget deficit....

If the polls are right, the Republicans are on course to capture the House on November 2. At their head are leaders who voted for every spending measure George W. Bush requested, including the unfunded $600bn expansion of prescription drugs for seniors, which was probably the most egregious instance of corporate welfare in modern US history, as well as the unfunded $260bn highways bill that included the infamous “bridge to nowhere”.

These are the same lawmakers who inherited the largest budget surplus in modern US history, when Mr Bush came to office in 2001, and bequeathed the largest ever peacetime deficit to Barack Obama in 2009. Like the Bourbons, they appear to have learnt nothing and forgotten nothing. For the sake of America’s economic future, and everyone else’s, friends of the US must hope its voters have not forgotten their recent history.

The Reanimation of the European Debt Crisis

Ryan Avent muses on Ed Hugh:

European debt worries: You can't keep a good crisis down: EDWARD HUGH has written a long post that seems to have refocused blogospheric attentions on the developing crisis situation in Europe. It's worth reading, though I tend to be slightly more optimistic about the situation than Mr Hugh. To catch you up briefly, those who asserted that Europe's spring debt crisis was over were wrong—as, I think, most people recognised at the time. The solutions adopted earlier this year bought time for troubled countries, and especially Greece, to begin closing their fiscal gaps while the global economy recovered. But they did not solve the underlying problems, and it is no surprise that fears have returned.

While bond yields have risen in a number of countries, the action has been concentrated in Ireland and Portugal. Ireland's troubles stem from the poor state of the economy. Continued contraction has been hard on Irish businesses, which has been bad for Irish banks, which has been bad for Ireland's fiscal situation, which has been bad for Irish bond yields. In Portugal, the problem is largely political. Unlike Greece and Ireland, Portugal has had trouble identifying ways to trim its fiscal gap. With rising yields have come new concerns that a crisis moment may loom—an announcement of default or departure from the euro zone that could significantly impact financial markets and drag down other euro zone economies.

I'll just make a couple of points about all of this. First, it remains the case that it is within Europe's powers to handle the crisis. Stronger European economies, and especially Germany, have the werewithal to keep struggling neighbours afloat while they fix their fiscal issues. The IMF, too, has more ammunition to contribute. The only question is whether political agreements can be reached on additional support. And it's there that some tricky decisions must be taken. Germany would prefer to prop up financial markets while most of the burden of adjustment falls on the struggling economies. But the patience with austerity may be growing thin on Europe's periphery. Labour protests are wracking the continent. Given the current position of euro zone monetary policy, new austerity measures imply a long and painful period of slow or negative growth.

So the issue will come down to how much more in the way of cuts and contraction places like Ireland and Greece can swallow. While it's sorted out, markets will worry. And I suspect this process will play out several times over the course of the next few years.

James Fallows on the Whinging Rich, as Exemplified by University of Chicago Law Professor Todd Henderson

They are all good. Selections::

More on the Wealthy Poor and a "Fair" Society - James Fallows - National - The Atlantic: The report I'm about to mention has been actively discussed in other parts of the online world, so by my normal triage rules I shouldn't say anything about it. But I hadn't heard about  it until yesterday, and on the chance that's true for others, I'll point it out. The context is the previous discussion, here and here, about the capacity for feeling short-changed and ill-treated, even among some of the most materially-fortunate people ever to live on Earth. No doubt it's a primal human trait, but for various reasons (as explained here) the ever-polarizing distribution of wealth and income in America has allowed more people to feel bad about their own situation by looking at the handful who are stratospherically better off. To some extent this is an "information" problem: people don't know where they really stand...

Mauve Gloves & Madmen, 2010 Version: Self-pity is the great vice. Or entitlement, to give it another name. It's socially un-useful, in making people grasping and uncharitable. And it's personally bad too, in focusing attention on what's not there rather than what is. One of many things I enjoy about modern China is that the average self-pity level there is pretty low. The occasion for this homily is a modern counterpart to Mauve Gloves & Madmen. Thirty-plus years after I first read it, I vividly remember that short story of Tom Wolfe's. Its set-up was a stylish and popular and liberal-chic writer going through his checkbook and revealing his life through the deposits and the canceled checks. After the jump, a sample passage. Mauve Gloves was in the tradition of great realist or naturalistic fiction that presents character through material circumstances. And now we have an unintentional modern counterpart, a law professor at the University of Chicago who has (unwisely) taken to the internet to explain why, on a household income that must be substantially above $300,000, he is feeling put-upon and strapped...

The Self-Pity of the Harvard 'Poor': Context is the ongoing discussion provoked by 21st Century America's Marie Antoinette, the University of Chicago law professor who worried how his family would survive if taxes on income above $250,000 went up. Original entry here and main update here. A graduate of Harvard College and Harvard Law who has chosen a comfortable-but-non-big-bucks career path writes in to say: "Seems to me that one of the chief reasons that Whiny Law Professor has such a skewed view of his appropriate peer group has to do with a post-Carnegie* meritocratic brand of ethics, with intelligence substituted for business savvy, that is distressingly common. So it was interesting, and consistent, to see that the wealthier groups were OK with more inequality..."

Now, More Criticism of the Self-Pitying Wealthy Poor: Yesterday I posted some comments in defense of the "Whiny Law Professor" -- and similar families at the top of the US income distribution who find it hard to make ends meet. Now, for the other side of the story, a few of the (many) dissents. A reader writes: "Why does every defense end up showing how out of touch these people are? The sympathy list they always go through are the costs of private schools, elite private universities, large mortgages, and large loans for graduate schools (I note the lack of large loans for undergraduate).  This just isn't even a concern for 97% of Americans.  And to say life is difficult if you send your kids to a nice public school in a nice suburb, go to a non-Ivy school, live in 10-20% less of a house or live without a graduate degree, is quite simply crazy and just goes to prove all the stats about how happiness doesn't increase with income..."

Self-Pitying Wealthy Poor: The International Perspective!: From another reader: "In the mid-'80s, a couple years out of college, my girlfriend and I spent 7 months in Mexico and Central America (including 3 months in one city, teaching English part-time) and hardly a day goes by when I don't think back to that time. But of course one of the things that struck me was how well off we 'poor' ex-students (no longer in school, but mentally and emotionally students) were relative to 99% of the people we saw. So here's what I would propose: send the whiny rich to a less prosperous country where they can a) feel fabulously wealthy, and/or b) gain a little broader perspective on their own (and their own country's) place in the world. It's a win-win: they get to live like royalty, and we don't have to put up with their incessant whining."

I am still struck by--and marvel at--seven things about University of CZhicago Law Professor Todd Henderson:

Henderson's eagerness to engage in class war against those richer than he is: his anger at the "super rich [who] don’t pay taxes... hide in the Cayman Islands or use fancy investment vehicles to shelter their income..." who include his own more senior colleagues at the University of Chicago Law and Business Schools.

Henderson's eagerness to engage in culture war against Barack Obama: "I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning.... [L]ike many Americans, we are just getting by despite seeming to be rich. We aren’t.... [T]he president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay..."

Henderson's ignorance about American government policy. He talks about "the vast expansion of government [Barack Obama] is planning..." But if you look at the laws that Barack Obama has lobbied for and gotten Congress to pass, in the long run they don't expand but shrink the government relative to what it would otherwise be. Quantitatively, the biggest legislative initiative by Obama so far has been very large long-run cuts in Medicare spending. Henderson is either so ignorant that he does not know this, or so mendacious that he doesn't want his readers to know this. I bet on ignorance.

Henderson's lack of standing to complain about the fact that taxes are going up. He was a big supporter of George W. Bush, whose two major initiatives were to expand federal spending via his wars of choice and the unfunded Medicare Part D. As the late Milton Friedman liked to say, to spend is to tax: once you spend you must then tax, and you can tax smart or you can tax stupid, but tax you must. Once again, I don't know whether Henderson knows that to spend is to tax and is simply mendacious in trying to keep his readers from thinking about the consequences of the Bush policies he supported, or whether he is so ignorant that he doesn't know that to spend in the past. Here I bet on mendacity.

Henderson as an unreliable narrator. On the one hand, he says that his income exceeds the $250K/year threshold "but not by that much"; on the other hand, he says that his taxes will go up "significantly" and that his current annual tax bill is "nearly $100K". Those are grossly inconsistent. If his household income is near $250K/year, his taxes are not now $100K/year and they will not go up significantly. If his taxes are now $100K a year and will go up significantly if the about-to-expire lower top marginal rate is not reenacted, then his income is way more than $250K/year.

Henderson's insistence that the things he spends money on--a 4700 sq ft house in Hyde Park with a lawn big enough to need a gardener, private schools, house cleaners, etc.--aren't things that only rich people buy.

Henderson's insistence that he is "just getting by" with a household income that I compute (if his claims about the taxes he pays are accurate) at about nine times American median household income.

Henderson's insistence that he "can't afford" to pay higher taxes--even though he has no problem with raising taxes on those richer than him, and had no problem supporting a president (Bush) whose policies created the necessity for general tax increases because, after all, to spend is to tax.

I genuinely do not understand why Henderson has his job.

Let me explain that last at greater length.

J.W. Verret wrote:

Todd Henderson will be missed: I am saddened that our co-blogger Todd Henderson is putting up his blogging hat.  He leaves us with an academic reputation that is unsurpassed, unfortunately I can’t say that the reputation of everyone involved has held up very well in light of the very personal nature of attacks.... I do think, however, that this is a good opportunity to focus the world on the wide range of scholarly work from Professor Henderson.... Here are a few papers of his on ssrn worth reading (this certainly won’t be the last time we link to his work at TOTM):

In "Insider Trading and CEO Pay," Prof. Henderson examines the effectiveness of insider trading as a compensation device using a study of 10b5-1 trading plans.  His findings are in line with Henry Manne’s original thesis from nearly 40 years ago that insider trading didn’t diminish firm market value on net and may serve a useful purpose as an executive compensation device to motivate managers to maximize the value of the firm...

To which my first reaction is simply: Huh?!

And my second reaction is: No! No! No! Ten-thousand times no! That is simply wrong.

Giving firm managers the freedom to use information they privately have as a result of their jobs to decide when to buy and sell shares of stock does not motivate managers to manage the firm in the interest of shareholders.

If managers free to engage in insider trading know that the next piece of news to be released will cause the stock price to rise, they will buy. If they know that the next piece of news to be released will cause the stock price to fall, they will sell and then buy back later. They don't care whether the news is good or bad--either way they will profit, and either way they will profit equally.

What the ability to engage in insider trading does is that it gives managers an incentive to make the price of the stock vary--they don't care which way. Thus it cannot "serve a useful purpose as an executive compensation device" and cannot "motivate managers to maximize the value of the firm" to shareholders.

Insider trading makes executives' portfolios' long not the company but long the volatility of the company. And shareholders don't want executives making decisions that make the value of companies they own more volatile: stock market investments are risky enough as it is without giving executives reasons to boost the volatility pot.

This claim that freedom to engage in insider trading aligns executives' interests with those of shareholders is so basically wrong, so obviously erroneous, so simply stupid that--well, words fail me.

Eleanor Roosevelt Liveblogs World War II: October 1, 1940

Eleanor Roosevelt:

My Day by Eleanor Roosevelt, October 1, 1940: Though it is a gray day today, I have just come in from a ride through the woods, where the colors are becoming more and more beautiful every day. Across our brook there are some trees that have turned a brilliant scarlet, next to them are some deep green pines and a yellow tree. They all reflect in the smooth surface of the water and make a most beautiful picture from the window where I write.

It is curious to be able to sit here and write you about these quiet pleasures, and to have listened to the radio this morning with news of the nightly bombing in London with scarcely a respite before the morning raids began. The British seem to raid quite as often and as steadily, but their objectives do not seem to be entirely concentrated on a city like London, or, as reported this morning, such smaller cities as Aberdeen and Edinburgh.

There seems to be a difference in objectives. On the one hand, the Germans seem to be trying to break the morale of the people by attacking the places where humanity is concentrated. The R. A. F., on the other hand, seems to put more emphasis on attacking the oil supplies or factories and Channel ports where shipping and supplies may be massed for an effort to land in England. I suppose the Germans make an effort to do this too, but perhaps it is harder to find such scattered objectives.

The English are a curious people. They criticize each other and their government freely in times of peace. They are individualistic as any people in the world, from the duchess who dresses always as the fashions were in her youth, even though she may be eighty years old to the woman who will run a London flat for you and try to run your life as well. She will apparently know all about you and yet never intrude, and will do her job according to its traditions, never doing more nor less than she thinks they require.

Yes, they are an individualistic people, and I don't think anything could draw them together more solidly and make them act as a unit more surely than continued attack. They have whatever it takes to stand up under long drawn out pressure.

University of Chicago Professor Todd Henderson Rears His Head Yet Again...

A lot of--very bad--comments on my old posts about University of Chicago Professor Todd Henderson this morning. Apparently there is a--quite bad--article on the New York Times about the issues.

For some perspective, James Fallows sends us to the Global Rich List. If we take Todd Henderson seriously when he says that Obama's proposed failure to reenact the 2001 temporary tax cut on the upper bracket when it expires will raise his taxes "significantly," where "significantly = $10,000/year, then we learn that Professor Henderson and his family are:

UPDATE: And Jonathan Chait says that the New York Times story (to which I won't link: they don't deserve the Google rank) by David Kochienowski is as bad as I had feared:

Jonathan Chait:

The Times Wages Class War: The New York Times story about the plight of families in the top 2% of the income distribution who don't "feel" rich seems to be based entirely on a misunderstanding about how the tax code works:

As the political battle drags on, however, [the tax cut debate] has also veered into a more basic matter of fairness, whether a person who earns more than $200,000 a year should be taxed at rates similar to those who make $5 million. President Obama has proposed preserving the cuts for middle-class Americans and letting them expire for the top 2.5 percent of taxpayers — individuals who make more than $200,000 a year and families whose income exceeds $250,000. But others in Congress have questioned why ending what Mr. Obama frequently calls “tax cuts for millionaires and billionaires” should also raise taxes on families making $250,000. With the Senate unlikely to vote on the matter until after the midterm elections, some Democrats are pushing for a compromise that would leave the cuts in place for those higher up the income scale.

The article delves into the question of just who counts as rich. I think it's a silly question. Rich is a relative question. It doesn't mean you can buy everything you want. If you're in the top 2% of the income distribution, then you are, relative to 98% of the population, rich. You are more able to bear the cost of higher taxes. But put that aside. The main problem with the article is that it presupposes that individuals making $200,000, or couples earning $250,000, will pay higher taxes. They won't. The tax hike only applies to income over that threshold. When you go from $250,000 to $250,001, you only pay a higher tax rate on that one extra dollar. Your taxes will go up by a few cents. If you earn $300,000, you will pay a slightly higher tax rate on the last $50,000 of your income -- less than a couple thousand dollars.

Even people making half a million dollars a year won't be "taxed at rates similar to those who make $5 million," because only half their income will be taxes at the top rate....

Newspapers have characterized the Democratic plan as consisting of tax cuts "for the middle class," when in fact... everybody up to and including Bill Gates would get a tax cut under their plan. Part of this is due to reporters not understanding basic facts about the tax code. But I also wonder if the unconscious class bias of the media is at work. While people who earn more than $250,000 are a tiny, tiny proportion of the population, their plight has commanded an inordinate share of attention among reporters, not to mention members of Congress.

And John Scalzi says that enough is enough:

New Rule For the Internets, Six-Figure Income Division « Whatever: It is:

If you make a six-figure income, you are not allowed to argue on the Internets that you are poor.

You are not allowed to argue that you feel poor, which as we all know is just like being poor.

You are not allowed to posit the argument that if you hang around with people who make more than you, then you are allowed to have your wee little heart sing the Poverty Song because, after all, you make less than all of them and your life is sad.

You are not allowed to use your own poor money management skills as evidence of how challenging life is for those, like you, with six-figure incomes.

You are not allowed to use New York City, San Francisco or Los Angeles as an excuse for your piteous cries.

If you do any of the above, individually or severally, when the Internets call you out for being clueless, entitled, ignorant and an embarrassment as a human being — and they will — you will not then complain how your words were misunderstood and/or taken out of context and/or that people missed the real point of your argument.

This rule applies equally to any defending the right of those with six-figure incomes to mewl about their awful lot in life.

Note to the Internets: This new rule is effective immediately. Please feel free to enforce it. Direct all complaints here. They will be dealt with appropriately.

Parrotnomics

We are live at Project Syndicate with Economics for Parrots:

BERKELEY – It is said that the early nineteenth-century British economist J.R. McCulloch originated the old joke that the only training a parrot needs to be a passable political economist is one phrase: “supply and demand, supply and demand.” Last week, US Federal Reserve Chairman Ben Bernanke said that McCulloch’s economics – the economics of supply and demand – was in no way discredited by the financial crisis, and was still extraordinarily useful.

It’s hard to disagree with Bernanke’s sentiment: economics would be useful if economists were, indeed, like McCulloch’s parrots – i.e., if they actually looked at supply and demand. But I think that much of economics has been discredited by the manifest failure of many economists to be as smart as McCulloch’s parrots were.

Consider the claims – rampant nowadays in the US – that further government attempts to alleviate unemployment will fail, because America’s current high unemployment is “structural”: a failure of economic calculation has left the country with the wrong productive resources to satisfy household and business demand. The problem, advocates of this view claim, is a shortage of productive supply rather than a shortage of aggregate demand.

But it should be easy – at least for an average parrot – to tell whether a fall in sales is due to a shortage of supply or a shortage of demand. If a fall in sales is due to a shortage of demand while there is ample supply, then, as quantities fall relative to trend, prices will fall as well. If, on the other hand, the fall in sales is due to a shortage of supply while there is ample demand, then prices will rise as quantities fall.

Which do we see now? There are no places in the US economy where wages or product prices are rising more rapidly than expected. There are no places where a shortage of qualified labor or of available capacity is sufficiently great to induce managers to pay more than they have been used to paying for good hands or useful machines.

McCulloch’s parrot would call this conclusive. The coexistence of high unemployment with falling inflation and no bottleneck-driven price or wage spikes tells us that “structural” supply-side explanations of America’s current high unemployment are vastly overblown.

Or consider the claims – also rampant these days – that further government attempts to increase demand, whether through monetary policy to alleviate a liquidity squeeze, banking policy to increase risk tolerance, or fiscal policy to provide a much-needed savings vehicle, will similarly fail. These measures, too, are supposedly doomed because they all involve increasing governments’ liabilities, and financial markets are at a tipping point with respect to sovereign debt. If governments that have already tapped-out their debt-bearing capacity now issued more debt or money or guarantees, they would deal a mortal blow to confidence.

Once again, an adequately trained parrot, unlike many economists nowadays, would ask whether the economic problems that current levels of government debt are causing reflect too much public debt supplied by governments or too much public debt demanded by the private sector. If the problem were that supply is too great, then new emissions of government debt would be accompanied by low prices – that is, by high interest rates. If the problem were that demand is too great, then new emissions of government debt would be accompanied by high prices – that is, by low interest rates.

Guess which one the US and many other countries have? For a parrot, that’s a no-brainer: the public-debt problem is not that governments have issued so much debt that investors have lost confidence, but that governments have issued too little debt given the enormous private-sector demand for safe places to park wealth. The problem, the parrot would say, is that households and businesses are still trying to build up their stocks of safe, high-quality assets, and are switching expenditures from buying currently-produced goods and services to increasing their shares of an inadequate supply of government liabilities.

When economic historians examine the Great Recession, their overwhelming consensus is likely to be that its depth and duration reflected governments’ refusal to try to do more, not that they tried to do too much. They will agree with the parrots that falling inflation showed that the macroeconomic problem was insufficient demand for currently produced goods and services, and that the low level of interest rates on safe, high-quality government liabilities showed that the supply of safe assets – whether money provided by the central bank, guarantees provided by banking policy, or government debt provided through deficit spending – was too low.

The question that will be a mystery to them is why so many economists of our day did not know how to say: “supply and demand, supply and demand.”

links for 2010-09-30

Procrustrean Economics (Wonkish) - NYTimes.com







CEA Chair Austan Goolsbee Explains the Tax Cut Fight







Bill Easterly: World Bank President starts brawl about development economics research







Brad Johnson: McCain Has Become A Climate Conspiracy Theorist







Barry Eichengreen: From currency warfare to lasting peace







Depression Economics Needs to Become a Regular Part Macroeconomics - CBS MoneyWatch.com

When Speech Recognition Software Attacks!

What he said:

Hi Brad, it's Mike. I had a lunchtime appointment go long and I am bolting back to Evans. I'll be there shortly. See you soon. Thanks.

What Google Voice heard:

That it's mike. I had a list of women go a long and I am old thing. Back evidence. I'll be there for me to you soon. Thanks.

The interesting thing is that it got 17 out of the 26 words right--but those 17 words convey almost none of the information in the message...