Brad DeLong

UPDATE: Stimulus or Stymied? The Macroeconomics of Recessions: 10:15 AM-12:PM, January 6, 2013, San Diego, CA, Manchester Grand Hyatt, Elizabeth Ballroom F

Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)

Panelists:

• CARLO COTTARELLI (International Monetary Fund)
• PAUL KRUGMAN (Princeton University)
• VALERIE A. RAMEY (University of California-San Diego)
• HARALD UHLIG (University of Chicago)

Between 1985 and 2007--the period of the "Great Moderation"--the Federal Reserve and the rest of the U.S. government on the west edge and the central banks and institutions of the European Union on the east edge of the Atlantic Ocean provided a broadly stable macroeconomic environment within which private-sector businesses, workers and investors could make their economic plans. In the U.S., on an annual basis: the rate of nominal GDP growth dropped below 4% for only 3 of those years and rose above 7% for only 2 of those 22 years; the rate of consumer price inflation rose above 5% for only 3 and fell below 2% percent for only 2 of those 22 years; and the civilian adult employment-to-population ratio remained between 60% and 64% for that entire period. And Western Europe experienced a similar "Great Moderation" with low inflation, relatively smooth growth, and diminishing unemployment.

Then in 2008-9 the rate of nominal GDP growth in the U.S. crashed to -3%--a major, major downward surprise to anybody expecting and relying on a continuation of "Great Moderation" rates of nominal spending growth--the rate of consumer price inflation on an annual basis bottomed out at -2%, and the employment-to-population ratio dropped from 63% to between 58% and 59%, since when it has flatlined. In Western Europe the initial recession was smaller, but the subsequent labor market performance was even more disappointing, so that now the net fall relative to trend in Western European productio and employment exceeds that in the United States.

In this context, we are here to explore four questions:

1. Are their policies that the Federal Reserve and the rest of the U.S. government on the west edge and the ECB and the governments of the European Union on the east edge of the Atlantic Ocean could adopt that would quickly move the civilian adult employment-to-population ratio back toward what from 1985-2007 we thought of as "normal"--that could produce in the next couple of years rates of employment growth that are, say, within shouting distance of those the U.S. economy experienced over the Reagan boom of 1982-1989?

2. If so, what are those policies?

3. If so, are those policies desirable ones that the Federal Reserve and the rest of the government should adopt?

4. How is your view on questions (1) through (3) different today than it was six years ago?

Olivier Blanchard and Daniel Leigh: Growth Forecast Errors and Fiscal Multipliers

http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

David Drake Writes Understated Horror

David Drake:

Five Firebases: I was very pleased when I got the materials for the "Hammer’s Slammers" role-playing game…. I like the art as well, but that leads to a different question: does it look the way I meant it to? The truth is that I write from the mental pictures I formed in the field in 1970 with the 11th Armored Cavalry Regiment, and I wasn’t thinking much about US equipment then.  An M48 tank (for example) was something I rode on, having generally mounted by climbing the bow slope. I spent much more time looking from tanks than at them. Therefore I write from the viewpoint of people who don’t think much about the appearance of their own vehicles or fellow crewmen, and whose view of the surrounding landscape is primarily concerned with potential ambush sites and whether the fellow with the hoe in the rice paddy has a Kalashnikov hidden nearby….

Kauffman Foundation Economics Webloggers Forum 2012

Growthology: Economics Bloggers Forum 2012

Aimai Ventures Out of the Dunkin Donuts into the Weeds of Wingnuttery: *Our Schadenfreude Tank Is *Always* Low! Weblogging

Aimai:

No More Mister Nice Blog: In the Weeds: The Boston Globe had a long post mortem on the Romney Campaign…. [U]nless your Schadenfreude tank is low I wouldn't recommend it…. [W]hat is really quite gripping is down in the weeds, in the comment section…. [W]e can see… people who probably did vote for Romney when they thought he might win now disavowing having voted at all…. Here's "Dotcomsiren"….

As Peter Brimelow, Dick Morris, and Sean Trende have shown, Romney lost the white vote. He took white voters for granted and they didn't bother to vote. I should know, I am white and I didn't vote either. What would have been the point?

"Filibuster Jones" makes a related argument--all voters are fools and knaves and any politician who doesn't treat the that way will be rejected. Romney's voters, mysteriously being neither fools nor knaves, stayed at home:

Happy New Year from Menzie Chinn!

Menzie Chinn: Econbrowser: The Year in Review II: Yet More Fantastical Pseudo Economics:

Noted for January 3, 2013

Worth Reading:

• Mark Thoma: Some reactions to the fiscal deal

• Brad Plumer U.S. now on pace for European levels of austerity in 2013

• Paul Krugman: Is Our Austerians Learning?: "Paul Solman has a post on Greg Mankiw’s attempt at a gotcha over my views circa 2003 on the consequences of deficits. As Solman notes, not only are the situations very different, I’ve also long since acknowledged that I was wrong, and have explained how and why I modified my views as a result. Extra bonus: notice how Mankiw, faced with the failure of his gotcha, immediately tries to claim that he wasn’t actually saying what he was, in fact, saying. Anyway, as I told Joe Weisenthal, you’re supposed to change your views when events don’t pan out as you expected. The real gotchas should come on people who stick with their ideology no matter how badly it performs in practice…. But we don’t have to go to hard-liners and marginal figures to find people who refuse to learn. Basically the whole austerian movement has been wrong about everything for two and a half years — wrong about interest rates, wrong about the effects of austerity on GDP in Europe. Yet where is the reconsideration? And utter wrongness seems to be no disqualification for being considered a source of wisdom. It’s hard to top Alan Greenspan’s record these past seven or eight years: he went from denying that there was a housing bubble (or even that such a bubble was possible), to declaring the housing bust over in the fall of 2006, to declaring that US deficits would produce high inflation and interest rates (along with expressing his regret that it hadn’t happened yet). Yet there he was at the founding of Fix the Debt, apparently still considered the Maestro."

• Gavyn Davies: Another year in thrall to the central bankers

David Frum: Americans for Insurrection

David Frum: Americans for Insurrection:

In National Review Online before New Year's, Kevin Williamson explained that the Second Amendment guarantees the right of individual Americans to launch an insurrection against governments they believe tyrannical.

There is no legitimate exception to the Second Amendment for military-style weapons, because military-style weapons are precisely what the Second Amendment guarantees our right to keep and bear. The purpose of the Second Amendment is to secure our ability to oppose enemies foreign and domestic, a guarantee against disorder and tyranny.

To deliver the rebuttal, we welcome guest blogger Abraham Lincoln. In his first message to Congress, July 4, 1861, the sixteenth president explained:

Our popular government has often been called an experiment. Two points in it, our people have already settled,--the successful establishing and the successful administering of it. One still remains,--its successful maintenance against a formidable internal attempt to overthrow it. It is now for them to demonstrate to the world that those who can fairly carry an election can also suppress a rebellion; that ballots are the rightful and peaceful successors of bullets; and that when ballots have fairly and constitutionally decided, there can be no successful appeal back to bullets; that there can be no successful appeal, except to ballots themselves, at succeeding elections. Such will be a great lesson of peace; teaching men that what they cannot take by an election, neither can they take it by a war; teaching all the folly of being the beginners of a war.

Andrew Sullivan and His Daily Dish Go the Full Utopian...

Let me say that I will never, never, never forgive Andrew Sullivan for what he hired Charles Murray to do to the New Republic--or, for that matter, for any other of his manifold sins against the Holy Ghost.

Nevertheless, he and his myrmidons are always worth reading, and definitely worth funding now that they go Full Utopian on us:

New Year, New Dish, New Media: So it's over to you. We're in your hands. The meter won't start until February 1, but you can become a member now. It takes two minutes tops. All you need is a credit card and a zip code - and you're done. The more of you who decide to contribute more than $19.99 the deeper and richer and more ambitious a Dish we will be able to provide. We have no marketing, no ads, no corporation behind us now. We only have you.

The link is here. Join us and keep the Dish alive and ad-free here.

And change the media world just a little - for the better.

So everybody go to http://www.tinypass.com/andrewsullivan/ and pony up your $19.99. Pony up twice!

"Fiscal Cliff" Deal Does Very Little

Obama, at his point of maximum leverage, gets… very little done:

Zachary Goldfarb: The agreement… fails to defuse the prospect of a catastrophic national default two months from now… does not raise the debt ceiling…. Nor does the package do anything to address stubbornly high levels of unemployment, with 12 million Americans out of work. Instead… [b]y allowing the payroll tax cut to expire, the deal takes money out of the hands of many Americans, sucking it out of the economy and slowing economic activity. And, finally, the deal is too modest to fundamentally tame the government’s soaring debt.

The Obama Tax Cuts: Now It Is Time to Think About Funding Them…

Joe Weisenthal:

[I]ncome taxes are lower for everyone today than they would have been if the American Taxpayer Relief Act hadn't gone into effect. While top marginal rates are rising for those making over $400K, those earners still get a cut on their income up to $400K.

The difference between the [2013] Obama Tax Cuts and the [2001] Bush Tax Cuts? Obama's are permanent.

And now on to our big long-run problem:

Unfunded tax cuts are, in the long run, bad juju. We cannot make policy on the expectation that the U.S. will always be able to borrow at negative real interest rates. And we should make policy aiming for a low debt-to-GDP ratio, because emergencies will arise in which we will want to boost federal spending quickly and substantially to attain important national purposes.

Obama needs a policy to fund these tax cuts--not in the short-term or (probably) in the medium-term but in the long run. What is that policy going to be? Carbon tax? Include health and other benefits in the tax base? Cut defense spending? Lower the top bracket amount down to $100K?

Inquiring minds would like to know...

Liveblogging World War II: January 2, 1943

American and Australian troops capture Buna in New Guinea:

Enemy is reduced in numbers, short of ammunition, food and supplies, whilst our Air Force and PT boats are preventing any large reinforcements or delivery of supplies. He is weak in artillery, has no tanks and has suffered a series of defeats. He has been attacked by our Air Force and artillery and has no adequate countermeasures.

He has had over six weeks to develop his defences and along all good approaches we can expect timber pill-boxes in depth which can only be located by actual contact. He is a determined defensive fighter and fights to the death, taking a heavy toll of attacking troops. He has used guns and Molotov cocktails in the jungle effectively against our tanks.

Current-Law Debt Projected by 2023 Would Go Up By $3,900,000,000,000 Under Cliff Deal...

 

I Do Not Understand the Obama Administration...

The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP--in order to avoid renewed recession.

But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be.

That isn't enough to make it worthwhile to make a deal before the new congress. After Boehner's reelection as Speaker and after the expiration of the Bush tax cuts eliminates the U.S.'s structural deficit, the politics become very different...

Liveblogging World War II: January 1, 1943

Italian Sergeant Mario Rigoni Stern, on the Don River line in southern Russia:

Then, towards midnight, the fireworks came. Suddenly tracers split the sky, machine-gun bullets passed mewing over our strong-point and the 152 mms burst in front of our trenches; immediately afterwards the 75/13mms and Baroni’s 8mm mortars split the air and the fishes in the river. The earth shook and sand and snow fell from the trenches.

The White House Really Needs to Commit Now to the Platinum Coin or the Constitutional Option on the Debt Ceiling

Jared Bernstein: The Cliff Deal in the Offing:

So, here’s my first blush response to this deal.  The thing that worried me most in the endgame is that the WH would be so intent on a deal that they’d lock in too few revenues with no path back to the revenue well, and that they’d leave the debt ceiling hanging out there.  Remember, the ultimate goal of Repubicans here is still to “starve the beast”–to shrink government by hacking away at both sides of its ledger–receipts and outlays.

Those fears will be realized unless the President really and truly refuses to negotiate on the debt ceiling and is willing to blow past those who would stage a strategic default.  If he is not, and if this cliff deal passes, then I fear the WH may have squandered its hard won leverage.

Matthew O'Brien: The Estate Tax Is a Huge Giveaway in the Fiscal Cliff Talks

The Estate Tax Is a Huge Giveaway in the Fiscal Cliff Talks

Paul Krugman and Noam Scheiber: Obama Makes Another Strategic Mistake

Paul Krugman:

Conceder In Chief?: OK, I’ve had my own sorta-kinda briefing on the apparent fiscal cliff deal, and I’m pretty much with Noam Scheiber. Viewed on its own, it’s a bad and upsetting deal but not as terrible as initial rumors had it. But the strategic consequences are likely to be very bad indeed, and in very short order too.

As background, it’s important to understand what Obama clearly could have gotten just by going over the cliff. Basically, he could have gotten the whole of the Bush high-end tax cuts reversed, which would mean close to $800 billion in revenue over the next decade. What he couldn’t get, or at least couldn’t count on getting, were various spending items…. So what Obama appears to have done is trade away part of the revenue from high-income taxpayers in return for some of the spending items he wanted. Extended unemployment benefits for a year, and the refundables either extended in perpetuity or for 5 years…. If you want think about the longer-term implications here, they’re ambiguous. The deficit is no problem right now, but there will eventually be a collision between the rising costs of social insurance programs and the inadequacy of the revenue base. Something will have to give.

There were two big risks, from a progressive point of view, in Obama’s eagerness to get a Grand Bargain. One was that he would allow the Bush tax cuts to be locked in, making it very hard to get additional revenue; the other was that he would give in on fundamental benefit cuts. Well, he did #1, partially, but didn’t do #2 at all. This sets up a future confrontation: it will be very hard for progressives to raise taxes, but also very hard for conservatives to cut those social programs….

OK, now for the really bad news. Anyone looking at these negotiations, especially given Obama’s previous behavior, can’t help but reach one main conclusion: whenever the president says that there’s an issue on which he absolutely, positively won’t give ground, you can count on him, you know, giving way — and soon, too. The idea that you should only make promises and threats you intend to make good on doesn’t seem to be one that this particular president can grasp.

And that means that Republicans will go right from this negotiation into the debt ceiling in the firm belief that Obama can be rolled...

Noam Scheiber:

Democrats' Cliff Compromise Is Bad; But The Strategic Consequences Are Disastrous: I’ll be blunt: I hate the fiscal-cliff compromise that Mitch McConnell and Joe Biden are hammering out today, which will make the Bush tax cuts permanent on income below $450,000, renew the current, relatively generous, level of unemployment benefits for a year, along with some low- and middle-income tax credits, and grant the GOP a reprieve on the scheduled reversion of the estate tax to its Clinton-era setup. I think the president made a huge mistake by negotiating over what he’d previously said was non-negotiable (namely, the expiration of the Bush tax cuts on income over $250,000). Then the White House compounded that mistake by sending Biden to “close” the deal when Harry Reid appeared to give up on it. As a practical matter, this signaled to Republicans that the White House wouldn’t walk away from the bargaining table, allowing the GOP to keep extracting concessions into the absolute final hours before the deadline….

My far bigger gripe with the whole fiscal-cliff exercise has always been the strategic dimension—how it affects the next showdown with the GOP, and the one after that. Coming into the negotiation, Obama had two big problems: First, no matter how tough he talked, Republicans always assumed he’d blink in the end, for the simple reason that he pretty much always had. (This is one of the major themes of my book about his first term.) Second, despite the results of the most recent election, in which Obama won a fairly commanding victory on a platform of raising taxes on wealthy people, the GOP continued to believe that public opinion was mostly on its side…. [T]he fiscal cliff offered Obama a chance to solve both these problems. He could afford to be unyielding because the economic consequences of going over the cliff for a few days or weeks would be relatively minimal and almost entirely reversible. And doing so would immediately demonstrate to the GOP that public opinion was emphatically not on its side….

Instead, the emerging deal will reinforce the convictions that have made the GOP such a toxic presence in Washington. If Obama will cave even when he’s got all the leverage, when won’t he cave? Never, the Republicans will assume. If Obama’s too scared to stop bargaining and let the public decide who’s right in this instance, when the polls appear to back him, then he must think our position is more popular than he lets on. Suffice it to say, these are not sentiments you want at the front of Republicans’ mind as they prepare to shake him down over the debt limit in another two months…

And Ezra Klein Says That Republicans Think This Is a Good and Senate Democrats Think This Is a Bad Deal

The key point appears to be that Obama has no plan to avoid having to cave when debt ceiling time comes around.

Ezra Klein says Senate Democrats are unhappy:

Why the White House thinks it’s winning the ‘fiscal cliff’: ”The direction they’re headed is just absolutely the wrong direction for our country,” said Sen. Tom Harkin, a Democrat from Iowa, on the Senate floor today. A top Senate staffer… heard the McConnell-Biden deal was in the range of $660 billion. That’s “$940b below the President’s initial position, $340b below Boehner’s last offer, and $140b below the $800b the President told Boehner he gets for free,” he griped.

Nor is there much confidence that the White House will be willing and able to stick to a dollar-to-dollar match in the next round of negotiations. “Politics-wise, this was the moment of maximum leverage, not the debt ceiling talks. If you are trying to get $1.6t total, getting less than half now--when the most factors are on your side–seems to severely hurt your chances,” said the Senate staffer….

Assuming the details of this deal remains fairly similar to what I’ve outlined here, the question of whether the White House outfoxed the Republicans or capitulated too early won’t be answerable until we know the outlines of the next deal…. [I]f, as Republicans believe and some Democrats fear, the White House folds when confronted with the debt ceiling… this deal will be seen as the moment when the White House blinked and traded away the guaranteed revenue of the fiscal cliff for a lowball offer from the GOP…

And Ezra Klein says Republicans are happy:

Why Republicans think they’re winning the ‘fiscal cliff’: Consider the ongoing “fiscal cliff” negotiations from the Republican Party’s perspective…. First, there was the fiscal cliff…. But after the fiscal cliff comes the debt ceiling…. The question for Republicans has always been how to get to the debt ceiling while giving up the minimum in tax increases. Many of them figured that they’d at least have to give on the Bush tax cuts for income over $250,000…. To the GOP’s delight… the White House offered to raise the threshold from $250,000 to $400,000….

The White House plans to insist that it won’t negotiate over the debt ceiling at all. Republicans I’ve spoken to laugh at this bluster. Obama is already negotiating over the debt ceiling, they point out….

All this raises the tantalizing prospect for Republicans that they could end these negotiations having given up less tax revenue than they ever thought possible--less tax revenue than Boehner offered Obama, even--but still getting their entitlement cuts. Oh, and because there was never a big deal, they won’t have to agree to much stimulus, either. All in all, a pretty big win, and it wouldn’t have been possible without the White House’s baffling inability to stick to a negotiating position.

Scott Lemiuex, Jonathan Chait, and Tim Noah Say: Over the Fiscal Cliff We Should Go

Scott Lemieux:

Tight-Weak Is No Way To Negotiate With Republicans: What Chait and Noah said about the deal that hopefully won’t happen. As always, it’s not that I’m opposed to any possible deal that makes concessions on tax rates, but I’m certainly opposed to concessions when the Republicans aren’t actually offering much of anything in return. And, since apparently it can never be pointed out enough, I cannot endorse more strongly what Reeve says about the idea that $250K isn’t an upper-class income bracket. Again, living in a desirable urban area is something you’re getting with your money — if you want to use your high income for more vacations or ivory backscratchers move to the suburbs and put the kids in public school.

Jonathan Chait:

Why Is Obama Caving on Taxes?: In the months before the election, and in the weeks after his victory, Obama had a clear position: The Bush tax cuts for income over $250,000 were ending. He would not sign any extension…. Now, by all accounts, Obama is prepared to extend the Bush tax cuts up to $400,000 a year. Or maybe more. As of Friday, Obama had told Republicans they could have the tax cuts extended on income up to $400,000 if they would accept the estate tax rising from its Bush-set rates. As of last night, Democrats were conceding the estate tax plus the higher exemption on tax rates, which had risen to $450,000. And Republicans still hadn't agreed to it! Why would they, when Democrats keep hurling money at them? By midnight, Republicans might be getting the Saturday Night Live version of Obama's offer ("a 1% raise on the top two Americans — just two people").

The erosion signals not only a major substantive problem in its own right, but it also raises disturbing questions about Obama’s ability to handle his entire second term agenda. To begin with, the $250,000 a year threshold was too high to begin with….

It’s surely true that the historical desire of many Senate Democrats to position themselves in the center of any debate, irrespective of substance, and associated desire not to upset their rich fundraising base posed a strategic problem for Obama. But if Obama fears trying to hold a line that Senate Democrats have abandoned, it’s just as likely they fear the same about him. Obama’s history of foolish negotiating with the Republican Congress gave Democrats every reason to fear he might fail to hold firm on his own line…. Now, the Obama offer to Boehner was not a full extension of tax cuts under $400,000. The plan was to get higher revenue on income below that level by reducing tax deductions rather than raising rates. But the news reporting cast the offer as simply moving up the threshold, and Obama did nothing to correct that impression…. Worse, exposing Obama’s willingness to move his seemingly unmovable demand emboldened Republicans to demand even more…. The negotiating style Obama has displayed in these instances is what poker players call “tight-weak.” A tight-strong player avoids throwing in his chips, saving them for a big hand, which he plays aggressively in hopes of a huge win. A loose-weak player plays lots of hands, bluffing frequently. Tight-weak is the worst of all worlds — when you have a weak hand, you lose, and when you have a strong hand, you fail to maximize your position….

[Obama] is allowing Republicans to whittle down the sum by essentially threatening to shoot themselves in the head. And this is the most ominous thing about it. The big meta question looming over Obama’s term is whether he has learned to grapple with Republican political hostage-taking. Hostage-taking is not simply aggressive or even irrational negotiating. It is the specific tactic of extracting concessions by threatening to withhold support for policies you yourself endorse, simply because your opponent cares more about the damage…. Obama claims, and seems to genuinely believe, that he won’t let Republicans jack him up over the debt ceiling again. But if Republicans could hold the middle class tax cuts hostage, they’ll try to hold the debt ceiling hostage. Indeed, they will probably discover other areas of traditionally routine policy agreement that can be turned into extortion opportunities. Obama may think his conciliatory approach has helped avoid economic chaos. Instead, he is courting it.

Tim Noah: Kill This Pre-2013 Deal

Tim Noah: Kill This Deal:

Dear House and Senate Democrats,

Your president has sold you out.

A deal will likely be announced today canceling the scheduled income-tax increase on all family income below $450,000. It will also extend unemployment benefits and what my colleague Jon Cohn calls the "refundables," i.e., tax credits for lower- and middle-income people, and it will cancel Milkageddon, which is all good. But it isn't clear what it will do about the automatic cuts in the "sequester," and the deal doesn't appear to include extension of the payroll tax cut, which even Bill Kristol wants to extend. Also, the Democrats caved on letting the inheritance tax rise. Oh, and the deal gives Republicans carte blanche to take America hostage all over again in a month or two over raising the debt limit.

Please vote against it so we can greet the new year on the far side of the fiscal cliff, which, notwithstanding the hysteria that the Washington Post is doing its best to spread (with an assist from the Senate chaplain!), is not the Slough of Despond. It is the Promised Land, a place where Democrats will have considerably more leverage than they have today to compel a quick deal far more to their liking.

The White House means well, but it has bargained incompetently. As Jonathan Chait points out, any worry on the White House's part that it will be undercut by Senate Democrats too eager to make an even-worse deal is matched by a well-founded fear on the Senate Democrats' part that the White House won't hang tough. And anyway, the president has veto power, for crying out loud! Ezra Klein reports that the Democrats think they can make a deal now, force another tax increase later, and still get Republicans to back down on the debt ceiling. This is delusional. Any Republican who at this point believes Democratic threats to hang tough must be judged a fool.

You can change this calculus by demonstrating the fortitude that has abandoned President Barack Obama and Vice President Joe Biden. Do not "come together." Stay apart. Until it's 2013.

Sincerely,

Timothy Noah

P.S.: Tell your Republican friends that any vote for a deal before Jan. 1 is most definitely a tax increase, while any vote for a deal after is most definitely a tax cut. You might remind them that the Club For Growth thinks so, too.

"Liquidate Labor, Liquidate Stocks, Liquidate the Farmers, Liquidate Real Estate!… Even a Panic Is Not Altogether a Bad Thing" Weblogging

Robert Murphy says that in the absence of Bernanke's excessive inflationary policies we would now be undergoing deflation at a rate of 10%/year.

But he does not understand "why [predicting] price inflation (and interest rates) are the decisive criteria for whose model and hence policy recommendations are right."

And, in his view, Bernanke's policies remain bad and impious: we would have been better off without the expansion of the Federal Reserve's balance sheet from $700 billion to $3 trillion, and with 10%/year deflation right now.

And Jon Hilsenrath of the Wall Street Journal Gets One Wrong...

Jon Hilsenrath: >Fed's Computer Models Pose Problems:

When the Federal Reserve said in December that it would keep short-term interest rates near zero until the unemployment rate falls to 6.5%, it was backed by… [the] computer-modeling programs the central bank uses…. In December…. Fed officials decided to announce they would keep interest rates near zero until the unemployment rate drops to 6.5%. The models told them such a commitment would help nudge unemployment lower—it was 7.7% in November—and wouldn't risk a big burst of inflation.

But here is the problem: The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years. Could they fail the Fed again?… Despite all their complexity and sophistication, they have long been plagued by gaps in how they read and project the economy. One of the biggest is that they have ignored the nuances of the financial system—one of the primary channels through which Fed policy works….

The financial gaps in the models worry Nathan Sheets, a Citigroup C -0.62% economist who was Mr. Bernanke's top international adviser at the Fed from 2007 to 2011. Mr. Sheets points to 1994 as an example of why. Back then, small increases in short-term interest rates by the Fed led to a surge in long-term interest rates. The models didn't foresee the financial chaos that would ensue, including the collapse of investment bank Kidder Peabody & Co., the bankruptcy of Orange County, Calif., and the Mexican peso financial crisis…

I was just last week going through my notes from 1994. Yes, the Federal Reserve's model (and other models) "failed": they all forecast that the 1994 raise in the Federal Funds rate from 3%/year to 6%/year would carry with it an increase in long-term nominal Treasuries from 6%/year to 6.75%/year; instead, long-term Treasuries peaked at 8%/year because of (a) an absence of forward interest rate guidance by the Fed and (b) unexpectedly-large endogenous moves in the duration of MBS.

But the unexpectedly-adverse reaction of the bond market in 1994 did not cause the Mexican peso crisis: an extra 1% rise in U.S. bond interest rates is not big enough to cause the Mexican peso to lose 75% of its value. Neither Orange County nor Kidder Peabody had any business holding a portfolio that would be bankrupted by a 10% fall in the value of the long-term Treasury bond. And it is not the business of the Federal Reserve to make sure that nobody holding an over leveraged portfolio goes bankrupt. The "financial chaos" of 1994 had no effect on the real economy in the United States: there was no recession in 1995, but rather the beginnings of the great dot-com boom.

The point of Hilsenrath's article appears to be that something bad may

happen when Fed officials raise interest rates…. The models make predictions about unemployment and inflation, but Mr. Sheets worries they might not foresee new financial shoes poised to drop. "They've really internalized these models and that's very risky," Mr. Sheets said…. in a lower interest rate, and Ferbus spits out predictions of how much growth and inflation should follow. Punch in some other event—like a sudden contraction in government spending or a jump in tax rates—and it spits out predictions of how the economy should respond…. The fingerprints of Ferbus and its friends are all over the Fed's latest interest-rate decisions…. [G]iven the unknowns about unconventional Fed policies, Mr. Sheets's warning warrants attention.

Mr. Sheets's warning certainly warrants attention if you are a hedge fund or an investment bank thinking of replicating Kidder Peabody's or Orange County's portfolio--but you should have already known not to do that.

But should Mr. Sheets's warnings have led the Federal Reserve to do something different than it has done? In retrospect the Federal Reserve certainly wishes that it had given more guidance at the start of 1994 as to the likely shape of its interest-rate tightening cycle and that it had at the start of 1994 incorporated the endogenous duration of MBS into its models in the way that it had incorporated them by the end of 1994. However, if the employment and output recovery evolves going forward as the recovery of the 1990s evolved in 1994 and thereafter, the Federal Reserve will be not dismayed but ecstatic.

Liveblogging World War II: December 31, 1942

The Battle of Barents Sea:

By the Spring of 1942, Hitler had convinced himself that the Allies were planning an attack on Nazi-occupied Europe and that this attack would come through Norway. The increasing number of commando raids on Norway helped to persuade Hitler that he was correct. He therefore needed a plan to counter this attack. He had no intention of moving any troops from Russia, so he ordered the German Navy to send a powerful fleet of warships to Norway which would then be used to attack any planned amphibious raid by the Allies via the North Sea to Norway. As a result, the 'Prinz Eugen', 'Scharnhorst' and 'Gneisenau' were ordered to move from Brest in France to Norway. They joined the 'Hipper', 'Admiral Scheer' and 'Köln' that were already based in Altenfjord, Norway. Therefore, there was a formidable presence of large German warships based in Norway. There was also one problem regarding their use. Hitler had specifically ordered that the ships could not be used for any other purpose than to attack any invading force and that he would not accept any "undue risk" to the ships there. Therefore, the use of these powerful ships against convoys was forbidden by Hitler as clearly the convoys were not an invading force.

Noted for December 31, 2012

• EconoSpeak: E. Cary Brown on Recent Fiscal Policy

• Dan Rodriguez smacks down Stephen Bainbridge: PrawfsBlawg: Scapegoating: "Bainbridge takes up the cause of faculty in his own way by a post with the ill-conceived title 'Dean Dan Rodriguez Thinks Making the Faculty Work Harder is the Solution'.  Uh, no, not exactly.  But I'll leave y'all to decide whether my various posts suggesting ways of getting a handle on the too-high costs of legal education can be read as such…. Now, to those insistent that administrators are the main (sole?) problem here.  The claim that law schools are filled with 'administrator bloat' is not an argument, it is a slogan.  Responsible analysis of our current situation requires information and perspective…. [L]et us take a step back and look at what the increase in law school administration over, say, the past quarter century has brought us: (1) Student services….(2) Techology…. (3) Career services…. (4) Alumni relations & development.  One commenter noted that NYU has 32 individuals devoted to ARD. I don't know whether that number is correct, but I do know that they were able to increase their endowment by over one half a billion dollars in the past few years…. [T]he notion that any serious law school leader would suggest that budgets should be balanced and even reduced on the back of faculty members while administrators run riot is a foolish one.  That is not my point."

• Mark Thoma sends us to Simon Wren-Lewis: Is academic macroeconomics flourishing?

• MS: The fiscal cliff: How can Republicans change their minds?: "Hardline conservative and nationalist parties in many countries often maintain or intensify their commitment to catastrophic policies, even as those policies lose majority support. For the constituents of such parties, criticism from opponents tends to be irrelevant: they believe their cosmopolitan, effeminate, ethnically/sexually/religiously/ideologically deviant adversaries have always been united in a conspiracy against them. Fresh attacks from the out-group tend to merely confirm their pre-existing insular biases, and the fact that the out-group appears to be growing often inspires them to visions of Spenglerian decline rather than prompting them to ask whether there might be a good reason why they're turning people off…. How, I asked my friend, can organisations like this change their minds? The more they get pounded down by the response to their actions, the more hardened they get. 'You've seen this kind of thing play out', I asked my friend, who grew up in Serbia. 'How does it end?' 'It ends when certain very powerful people and institutions decide they can no longer do business with these people', she said. The text of the Business Roundtable's letter from December 11th, supporting both tax hikes and spending cuts, is here. The day after the Roundtable sent this letter, Dave Camp, the Republican chair of the House Ways and Means Committee, dismissed this group of CEOs representing $7.3 trillion in annual revenues in insulting terms: 'Big business may support raising tax rates on small businesses, but I do not'…. [I]t's clear who is standing in the way of the kind of deal corporate CEOs want. I can't see the GOP changing its mind on taxes because of any change of heart on the part of Republican voters, but at the point where Republican politics meet the policy preferences of American business, I could imagine a lot of action starting to happen soon."

Ezra Klein Points Out How Big a Fool Obama Would Be to Agree to Republican Demands This Year

Ezra Klein:

The Republican Party in one tweet:

Today’s Republican Party thinks the key problem America faces is out-of-control entitlement spending. But cutting entitlement spending is unpopular and the GOP’s coalition relies heavily on seniors. And so they don’t want to propose entitlement cuts. If possible, they’d even like to attack President Obama for proposing entitlement cuts. But they also want to see entitlements cut and will refuse to solve the fiscal cliff or raise the debt ceiling unless there are entitlement cuts. You can see why these negotiations aren’t going well.

Mark Thoma: Obama Finally Realizes Who Today's Republicans Are

Economist's View: The Republican's 'Biggest Priority': Is Obama finally figuring it out?:

“They [Republicans] say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” he said. “That seems to be their only overriding, unifying theme.”

Seems to be?

David Brooks, Get a Clue: Relative to Today's Republicans, Democrats Are From a Morally Superior Civilization!

Snorted out loud. RT @politico: David Brooks: Obama governs 'like a visitor from a morally superior civilization' politi.co/12YamAZ

— Lisa McIntire (@LisaMcIntire) December 30, 2012

Noted for December 30, 2012

• Isaac Newton: Observations on the Prophet Daniel and the Apocalypse (1733)

• Eight Immortals Beget China Capitalism From Citic to Godfather of Golf

• Prarie Weather: You think the Republican party is a disaster? Wait till you meet the drought.: "Those of us who live in the central plains are well aware of the damage. Cracking soil, dead trees, sagging fence posts, cattle going to market years early, feed prices rising -- we thought we'd left all that behind us when some rain fell earlier in the year.  Now it's been months since we've had more than a drifting drizzle.  Here the low water in the river is mostly a symptom.  Up along the Mississippi it's a full-blown disaster."

Liveblogging World War II: December 30, 1942

Eleanor Roosevelt:

WASHINGTON, Tuesday—One of the most interesting points in Vice President Wallace's speech is the realization that education in the aggressor countries must be watched in the future. Implicit, however, in that acknowledgement is the fact that education must be watched everywhere.

If we are going to live in a world ruled by true democracy, then it is essential that every human being receives the kind of education that will best develop his faculties. In addition, each and every one of us must become conscious of the fact that we have an obligation to think for ourselves so that we may function as citizens. We must base our actions on facts and use them to determine what type of action we want taken by our representatives in government.

The importance of all education lies far more in the training of minds than in any facts which may be absorbed, for trained minds will ascertain the facts as they need to know them. Having learned to reason and to weigh the information they discover, people with such minds will be more nearly educated than any amount of cramming of definite facts into their heads will make them.

If we look at education not as something to end at any special point, but as a preparation whereby we can attain the means to acquire whatever we need in life, we shall have a truer perspective on what we want to achieve through our educational system.

In the early grades the tools must be provided. We must learn to read, write and figure. After that, it depends on the individual. Some people develop better mentally through the use of their hands. To others, a classic type of education brings the greatest satisfaction. To others, scientific studies make a greater appeal. Once you have your tools in hand, then the development should be along individual lines.

I am going to New York City this morning in order to speak this afternoon on the radio for the Federation of Protestant Welfare Agencies, and then to attend the dinner for Senator Norris, where I am to have the honor of presenting him the bust made by Mr. Jo Davidson. I am anxious to see this bust, because I think no artist has a greater gift for catching and reproducing the real personality of his subject. I shall be back here for breakfast tomorrow morning.

Robert Murphy's Bet That Inflation Was Just Around the Corner Has Gone Absolutely Horribly Wrong

Terrifying to see:

Robert Murphy: October 2011: Update on My Inflation Bets: I know that a while ago I made two inflation bets… [with] David R. Henderson… [the] terms:

At any point between now and January 2013, if there is a year/year increase in seasonally adjusted CPI that is at least 10%, then [Henderson pays Murphy] at that time $500.

If we get to January 2013, and there has not been any 12-month stretch in which the above happened, then [Murphy pays Henderson] $500 at that time….

I made the above bets in December 2009. Things are obviously not progressing on the timetable I had thought…. If it weren’t for the crisis in Europe (which is pushing people to flock into dollars), I would still be fine [as of October 2011[!!!!]] with [the bet with Henderson], but it may turn into a nail biter…

The most terrifying thing of all is that being completely, comprehensively, unmistakably, fundamentally, fatally, totally wrong has not led Robert Murphy to rethink or modify any of his analytical positions or ideological beliefs by even one iota.

I mean, one would expect an announcement on his weblog like: "I have been totally wrong, about everything. I am closing down this weblog for five years to avoid misleading readers while I intellectually retool. You will find me sitting at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment."

Not gonna happen...

Liveblogging World War II: December 29, 1942

Brad DeLong: Why Next to No Political Reaction to the Second Gilded Age?

CENTER FOR LATIN AMERICAN STUDIES, UC BERKELEY: INEQUALITY: DIALOGUES FOR THE AMERICAS, FALL 2012: OCTOBER 15, 2012 http://www.clas.berkeley.edu/Events/series/inequalityfall2012/index.html

• Full cleaned-up transcript
• Video

---

Oh dear, that's really tough.

I want to sharpen that question and give it historical context.

During the Gilded Age of the 1890s and 1900s you had strong political movements saying "something is going remarkably wrong with this, this isn’t the country we thought we were going to live in". The way that the historian--I'm blanking--Ray Ginger?

Harley Shaiken: Yes, Ray Ginger.

Brad DeLong: Ray Ginger put it in two absolutely brilliant books--Altgeld’s America and The Age of Excess--even the Republicans thought that they wanted to live in Abe Lincoln’s America, where when you are young you split wood into fence rails and go to law school at night and when you are middle-aged you become a lawyer and get rich and when you are old you enter politics and save the union and free the slaves. They wanted to live in that kind of world, of upward mobility, in which opportunity is wide open even to the son of a penniless and not very successful rural farmer.

By 1890 they discovered that they weren’t living in Abe Lincoln's America at all.

Hoisted from Comments: Thoughts on Lincoln

Brad DeLong: Kate Masur Works Remarkably Hard to See a Different "Lincoln" Than I Saw--and, I Would Argue, a Different "Lincoln" than Spielberg and Company Made:

Harold said...

Masur and Robin also saw Mrs. Keckly gazing up adoringly and gratefully at the Lincolns whereas the film saw her glaring angrily at the Lincolns and other white people and pointing out that she gave up her son as the Lincolns are frantically trying to prevent their own son from sacrificing himself.

J. Bradford DeLong said in reply to Harold...

Touché... Once again, the sense that they are trying much too hard to see a different movie than the one in front of their noses...

Ed B. said...

The structural problem here is the inability of history as a profession over the last thirty years to figure out how to deal with political activity, including political leadership. The mandate for rendering visible the effects of history made from below has been transformed into an incapacity to admit that political decisions made from "above" can 1) have positive effects 2) be made in any degree out of independent agency. The #1 flashpoint of these contradictions in the study of US history is surely the figure of Abraham Lincoln. Many historians so routinely seek ways to undermine the myth of Lincoln as Great Emancipator that they erase distinctions between him and the fifteen who proceeded him in the Presidency. Yet only Lincoln used the power of the federal government to promote emancipation, even before 1862. Any President could have sought emancipation in the District of Columbia. Only Lincoln did this. And that was only the beginning.

Bloix said in reply to Ed B....

This comment captures my reaction to the Robin post much better than I was able to say it, even to myself.

J. Bradford DeLong said in reply to Ed B....

Nicely put...

You could have two different narrative lines running--the high-politics one, and the lived-experience one of how high politics shapes life on the ground and how what is happening on the ground shapes high politics. And Spielberg and company do do a little bit of that. Were I King of the World, I would have made them do considerably more...

Ben Bernanke's Secret Message to Congress: More Stimulus, Please

Matt O'Brien:

Ben Bernanke's Secret Message to Congress: More Stimulus, Please: The Fed is already buying $85 billion of bonds a month on an open-ended basis and has promised not to raise rates before unemployment falls below 6.5 percent or inflation rises above 2.5 percent.

But it still thinks inflation will remain subdued, despite its bond-buying.

In other words, the Fed is telling us it will tolerate a bit more inflation, but it won't create it. That's as good an invitation as Congress is going to get to cut taxes or increase spending, at least until inflation is around 2.5 percent. Now, the Fed might buy fewer bonds than it otherwise would if Congress does more, but we know it won't raise rates--there's little guessing how much fiscal stimulus the Fed will allow. The multiplier is big now.

It's right out of Ben Bernanke's playbook. As Tim Duy, a professor at the University of Oregon, points out, Bernanke's often cited "helicopter drop" speech about how to stop deflation -- the idea was you could drop money from the sky as a last resort -- did not say a central bank could do this on its own. Bernanke said a "determined government" could "always generate higher spending and hence positive inflation," emphasis on the word government.

Bernanke wants Congress to help him, and he's doing everything he can to let them know.

DeLong Smackdown Watch: Duncan Black on the Unwisdom of Clinton Administration Budget-Balancing Policies

Duncan Black:

But They Will Always Smash It On The Floor http://www.eschatonblog.com/2012/12/but-they-will-always-smash-it-on-floor.html: DeLong:

Remember the context: Mankiw loved the Bush-era fiscal policies to create long-run structural budget deficits, and worked hard to implement them--the unfunded war and unfunded tax cut and unfunded entitlement policies that did so much to create our structural deficit. Mankiw did his best to join in the process of taking the work that we in the Clinton administration had done in the 1990s to restore America's fiscal balance--work that was very well done, very important, and work that we were and are very proud of--and casually smashing it on the floor.

But Republicans will inevitably see a balanced budget as an opportunity to give money to rich people (tax cuts and crony capitalism).

The reward for liberals for "this well done very important work" [of raising taxes and cutting back spending in order to balance the budget]? Tax cuts for rich people and unpaid for disastrous wars.

Liberals should spend their time in office figuring out how to implement a sticky liberal agenda, one which is hard to dislodge, not figuring out how to create a pot of money for Republicans to steal when it is their turn [in power].

At Least Ten Years too Late, Budget Arsonist Veronique de Rugy Is Sorry…

Budget arsonist Veronique de Rugy:

Salon (2003): With bipartisan opposition to the [new Bush tax cut] plan already evident, there is some question about how much of this [tax cut] proposal will actually survive the legislative centrifuge. For now, though, the die-hard supply-siders are thrilled. One of those happy tax cutters is Veronique De Rugy, an analyst with the libertarian Cato Institute based in Washington. She says she has been critical of administration proposals in the past — such as bills to boost education spending and federal farm subsidies — but she couldn’t be happier with the latest White House proposal. “I wasn’t expecting something so bold,” she says. “No one was expecting them to come with such a big cut in the tax on dividends”…

says now that she is sorry:

The Corner - National Review Online (2012): I have been saying for a while that the kind of fiscal deal it looks like the president and Speaker Boehner want may avoid broad-based tax hikes, but it won’t address our fundamental fiscal problems…. I understand that no one likes to pay more taxes. I also understand the negative consequences of raising taxes on everyone or  on higher income taxpayers only. However, there is a point at which Americans are going to have to make a choice between paying for the big government they claim they want or cutting spending. If we want a big government and the services it provides, we will have to pay for it or at least to pay more for it than we do now. And make no mistake, if we choose to maintain a big government, raising taxes on the rich alone won’t be enough. Taxes will have to go up for everyone, and they will have to go up much beyond a simple return to Clinton levels… 

Noted for December 29, 2012

Worth Reading:

• Erik Loomis: The White Race Cannot Survive Without Dairy Products

• Matthew Yglesias: Chinese hours worked: Some people like long hours, others don't: Restricting Hours Makes Some People Sad But Most People Happy: "Some minority of workers, Stakhanovites, just has a totally genuine preference to maximize their income by working 80 hour weeks. Then there's another large bloc of workers who feels torn between a desire to limit their hours and a desire to be considered hard workers…. Restricting hours to 40 hours a week will make the Stakhanovite minority (and the factory owners) sad, but most people will be happier. I take it that's why you basically always see some kind of hours regulations in democracies. It's not that the rules aren't bad for someone—the Stakhanovites—it's that what happens in a democracy is you arrange things to suit majority tastes and most people don't like the Stakhanovite lifestyle. The problem is that it's hard to know what limits to put on this kind of logic."

• Bill Black: Deprogramming Progressives Indoctrinated into Supporting Austerity « naked capitalism

• Bruce Sterling on Why It Stopped Making Sense to Talk About 'The Internet' in 2012: Five simple reasons: Apple, Google, Amazon, Facebook, and Microsoft.

• jwz: Welcome to Life: the singularity, ruined by lawyers

Historic, Touristic, Lawrence Kansas

The "What Would John Brown Do?" t-shirts are awesome!:

Disappointed that the Free State Hotel--built in 1855, sacked and destroyed by U.S. Senator (D-MO) Davey Atchison and his border ruffians in 1856, rebuilt by Colonel Shalor Eldridge and Company in 1857, sacked and destroyed by Copperhead William Quantrill and his terrorist guerrillas in 1863, rebuilt in 1865, rebuilt again in 1926, and then thoroughly renovated in 1985--is now called the Eldridge Hotel rather than the Free State Hotel.

I mean, Shalor Eldridge was a good man, a hero, well worth remembering--but I want to stay at the Free State Hotel, particularly in Room 506 with its portal to the Spirit World…

Duncan Black: There's Another No Work Option: Laid Off

Eschaton: There's Another No Work Option: Laid Off:

Ed Glaeser writes a lot of words dancing around the obvious issue:

I believe that recipients of the [SSDI] aid are typically in pain, but many have a choice between suffering at work and going on disability. In boom times, the work option may seem more attractive, but as labor options contract, a steady check from the federal government can seem the better choice. The recession surely explains much of the 24 percent increase in the number of people receiving Social Security disability insurance since 2007.

It's an economist way to think about things, that someone being in the labor force means they're choosing the "work option." But in recession the options for some are no work and no money (otherwise known as "homelessness") or managing to qualify for disability (average monthly payment about $1100, max benefit about $2500). If you have some form of disability, you might be able to work if you have a job and employer that can accommodate you, but lose that job and you're probably going to be out of luck.

This isn't really mysterious stuff. Someone is 61, has a moderate disability, and loses his/her job. There is no work option.

Liveblogging World War II: December 28, 1942

As Over the Cliff We Go…

Over the Cliff We Go by J. Bradford DeLong - Project Syndicate: BERKELEY – Unless something unexpected happens, the United States’ many legislated reductions in taxes over the past 12 years – all of which have been explicitly temporary – will expire simultaneously at the start of 2013. American tax rates will revert overnight to their Clinton-era levels.

Some of these reductions were implemented to fight what was seen four years ago as a temporary downturn. Although their supporters wanted to make them permanent, claiming that they were temporary allowed for the circumvention of procedural requirements in the legislative process that Democrats had created in a vain effort to guarantee fiscal sanity.

The immediate increase in tax rates is only part of the story. At the same time, automatic reductions in the defense budget and “discretionary” domestic spending – agreed to by both Democrats and Republicans in the summer of 2011 – will take effect.

Couple these tax increases and spending cuts with the provisions of “Obamacare,” the US health-care reform championed by President Barack Obama, and, as of January 1, 2013, America’s  long-run structural budget deficit disappears. The restored tax rates will, for the foreseeable future, be sufficient to support the US defense establishment, the growing US social-insurance system, and a moderate – albeit inadequate and suboptimal – amount of other “discretionary” federal spending. The US national debt/GDP ratio will be on track to fall from its current level of 75% to 50% by 2035. Moreover, the US will begin running primary budget surpluses – the fiscal balance minus interest payments on existing debt – by 2015.

Herbert Hoover: "The White Race Cannot Survive without Dairy Products!"

The White Race Cannot Survive Without Dairy Products

Brad DeLong : The Online World of J. Bradford DeLong

Brad DeLong : The Online World of J. Bradford DeLong:

DeLong Smackdown Watch: Paul Krugman vs. Invisible Bond Vigilantes Weblogging Edition

Paul Krugman:

Bond Vigilantes and the Power of Three: The popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece… is incoherent…. Think of a simplified world in which there are three kinds of assets: short-term securities, long-term government bonds, and foreign assets…. Individual investors can shuffle their portfolios…. [T]here are three prices… short-term interest rates, long-term interest rates, and the exchange rate. At any given time, however, one of these is fixed, leaving it up to the other two to do the adjusting. Which two? That depends on the monetary regime….

The United States has independent monetary policy and a floating exchange rate. The Fed uses its independence to set the short-term interest rate… long-term rates and the exchange rate do the adjusting…. If you think short-term rates are heading up [because the Fed thinks the depression is about to end]… long-term bonds become less attractive; better to park your money and wait for better yields…. In such a case long-term rates rise--but because this rise is driven by greater optimism about the future, it's hard to see how it can have a contractionary effect on the economy.

Incidentally, this seems to me to be a big problem with the story Brad DeLong tells about bond vigilantes in the very early 1990s. He argues that the wide gap between short-term and long-term rates reflected market expectations that deficits would eventually cause higher inflation…. But why would such expectations be a drag on the economy? Yes, nominal rates would be higher than otherwise; but real rates would, if anything, be lower. It's not at all easy to tell a coherent story in which the effect of future expected deficits on today's interest rates is contractionary….

Why Haven't the Republican SuperPAC Donors Told Boehner and McConnell: "Ending the Estate Tax and Keeping the Super-Low Rate on Dividends Is Much More Important than the >$250K Bracket: Deal with Obama Now Before They Vanish"?

 

Which Technological Advances Are Bad?: Over at Crooked Timber, Chris Bertram Comes Out Against Literacy **UPDATE** and Musical Instruments too!

No. I'm not going to give him a link. UPDATE: Chris Bertram asks for a link http://crookedtimber.org/2012/12/27/noah-smith-had-me-going-for-a-minute-there/ and promises "this post was a dig at generalized uncritical tech-enthusiasm, a more nuanced post is in preparation." /UPDATE

Chris Bertram: Noah Smith had me going for a minute there:

I just love econobloggers, with their capacity for Swiftian satire. Dry as dust, yet clearly having a laugh, they aim to reel in the poor saps who are take them seriously, but they are big enough to continue to play along, making as if they really mean it. Until now, I’d thought of Tyler Cowen, Bryan Caplan and, perhaps, even Arnold Kling as being the true masters of the genre. But I’m pretty sure that Noah Smith surpasses them all with a new blog on eyeglasses and literacy.