October 15, 2003
An Excellent Choice for the New York Fed President

I know Tim Geithner. I worked for two years in an office three doors down the hall from Tim Geithner. Tim Geithner is a friend of mine. Tim Geithner is no Jack Kennedy--but Jack Kennedy would have made a really lousy Federal Reserve Bank President. By contrast, Tim Geithner should do an excellent and wonderful job as President of the Federal Reserve Bank of New York. FT.com Home US: IMF policy chief to lead NY Fed | By Alan Beattie in Washington | Published: October 16 2003 0:28 | Last Updated: October 16 2003 0:28 Timothy Geithner, the head of policy at the International Monetary Fund, has been appointed president of the New York Federal Reserve. The appointment, announced on Wednesday by the New York Fed's board of governors, ends a tortuous nine-month search for a replacement for William McDonough, who announced his resignation as president in January and left in June. The president of the New York Fed, the second most senior official in the Fed system, is the central bank's representative on Wall Street and is heavily involved in financial stability issues. Mr Geithner, comparatively young for the position at 42, rose rapidly after joining the US Treasury...

Posted by DeLong at 05:07 PM

September 26, 2003
The Bush Administration Blows It Again

Stephen Roach thinks that the Bush Administration is about to make another huge economic policy mistake: Morgan Stanley: A day in Washington has seriously dampened my newfound optimism.  Cries of protectionism can be heard loud and clear in the hallowed halls of the US Congress.  America's jobless recovery has finally reached a breaking point.  Republicans and Democrats, alike, are up in arms over the steady attrition of employment in this so-called economic recovery.  Job-related distress is bad enough.  But unrelenting layoffs, together with record and ever-widening US trade deficits, are a toxic combination in this highly charged political season.  For Congress, the agenda is clear: It is now time for action against those deemed responsible for the distress of the American worker.  China is the target......

Posted by DeLong at 09:23 AM

Stephen Roach Has Hopes and Fears

Morgan Stanley's Stephen Roach likes Treasury Secretary Snow's new policy of talking down the dollar: Morgan Stanley: As expressed in Dubai, the G-7's vision of market-determined exchange rates fit the script of global rebalancing like a glove.  It promised the one shift in relative prices -- a weaker dollar -- that a lopsided, US-centric world so desperately needs.  For a world beset by massive and unsustainable external imbalances, the G-7 recipe offered the best possible endgame -- a balanced global economy.  It was the perfect ending to my bad dreams of the past four years. It's not clear why he likes it. As I've said before, there are two ways of announcing changes in exchange rate policy. The first is to announce that monetary policy will be different--say, if Chairman Greenspan were to say something like: One of the considerations impelling the Open Market Committee toward continued monetary ease for a considerable period of time is the sense that the appropriate value of the exchange rate should produce a trade balance equivalent to desired fundamental long-term capital flows; and that the current level of the U.S. exchange rate seems to be associated with a perhaps excessive inflow of short-term finance...

Posted by DeLong at 09:17 AM

September 12, 2003
Lower-Than-Expected Retail Sales

A piece of not-so-good demand news, from John Labate of the Financial Times: FT.com Home US: Expectations of a strong rebound in the US economy were called into question on Friday with disappointing reports on retail sales and consumer attitudes. US retail sales rose in August, but more slowly than expected. Sales by retailers reached $319.2bn (euro 290bn, £200bn), a rise of 0.6 per cent from the previous month and 5.4 per cent from August 2002, according to the US Commerce Department. The top-line sales figure, however, was only about half of what economists had been expecting. The second surprise came with a report suggesting that consumer sentiment had edged lower in early September from August levels. The consumer sentiment index compiled by the University of Michigan fell in its preliminary September reading to 88.2, down from the final reading for August of 89.3. Economists had expected September to be above 90. The Michigan report's measure of current views on the economy and future expectations also dropped from August levels.... Analysts said the dip in consumer sentiment reflected concerns about the sluggish employment sector. Economists asked how strong consumer spending might remain in the months ahead, if the employment sector...

Posted by DeLong at 09:08 PM

September 11, 2003
More Bad Unemployment News

More bad unemployment news: Jobless claims rise to 422,000 in latest week - Sep. 11, 2003: The Labor Department report said 422,000 people filed for benefits in the week ended Sept. 6, compared with an upwardly revised reading of 419,000 in the prior week. Economists, on average, expected 400,000 new claims, according to a Reuters poll. "These jobless claims figures strongly suggest that the any discussion of a runaway economic recovery have been greatly exaggerated," said Anthony Chan, chief economist at Banc One Investment Advisors. "Instead, what we see here is a recovery that continues to face significant headwinds emanating from the employment front." U.S. stock market futures weakened after the report, pointing to a negative opening on Wall Street. Treasury bond prices recovered from earlier losses. Though the economy's growth has clearly accelerated in the late summer and fall, the long-suffering labor market has shown few signs of recovery. Many economists now believe the economy's problems are structural rather than cyclical, that technology-driven gains in productivity have enabled manufacturers to make more goods with fewer workers. Many manufacturers, and many politicians, say competition for cheap labor from other nations, particularly China, has made it difficult for U.S. businesses to...

Posted by DeLong at 06:44 AM

September 07, 2003
Measuring Economic Growth

At least three people have written emails saying: Dear Professor De Long, I am curious about your reaction to the following article published in the FT on Friday 9/5. The author makes the point that a big fraction of reported GDP growth is an accounting mirage due to using "hedonic pricing". Could you please discuss this. Thanks a lot. The article is by Kurt Richebacher, former chief economist for the Dresdner Bank. His main point is: Investment in computers soared by $38.4bn, or 12 per cent, from $319.1bn to $357.5bn. The trouble is that much of this boom-like increase in computer investment never occurred. The apparent surge is a consequence of the hedonic deflator that US government statisticians use when measuring computer output and investment... pricing produced $32.1bn of GDP in real terms, about 43.9 per cent of the reported second-quarter GDP increase of $73.1bn. In its absence, GDP would have grown a mere $41bn, implying a growth rate of 1.68 per cent. The important thing about hedonic pricing is that it measures dollars that nobody pays and nobody receives... Briefly, I think Richebacher is mistaken: unless I am very confused, increased demand by businesses for computers accounted for only...

Posted by DeLong at 08:44 AM

September 04, 2003
WOW!

This was not unexpected, but it is still amazing to see it in print: The Bureau of Labor Statistics of the U.S. Department of Labor today reported revised productivity data-as measured by output per hour of all persons-for the second quarter of 2003. The seasonally adjusted annual rates of productivity change in the second quarter were: 7.2 percent in the business sector and 6.8 percent in the nonfarm business sector....

Posted by DeLong at 09:03 AM

Another Not-Good Week for the Labor Market

Another not-good week for the labor market. The production (and productivity) news for August is looking very, very good indeed. The employment news is looking quite bad. NewsFinder: U.S. jobless claims edge above 400,000 By Rex Nutting | WASHINGTON (CBS.MW) - Initial claims for state unemployment benefits edged above the 400,000 level for the first time in a month in the latest week, evidence that the labor market remains weak. The average number of first-time claims over the past four weeks increased to 401,500 in the week ending Aug. 30, up from 397,250 a week earlier, the Labor Department said Thursday. In the most recent week, initial claims rose by 15,000 to 413,000. It's the highest level since mid-July. The average number of workers collecting state checks over the past four weeks rose to 3.64 million in the week ending Aug. 23, the highest in five weeks. The insured unemployment rate remained at 2.9 percent....

Posted by DeLong at 08:39 AM

September 03, 2003
Econ 101b: Fall 2003: The Erosion of Okun's Law

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns. Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left...

Posted by DeLong at 04:22 PM

Will the Deficit Fall as the Economy Recovers?

Our current $500 billion annual deficit is not a problem: even with this fiscal push, employment is still far below full employment, capacity utilization is low, and production is far below potential output. But if the deficit does not fall as the economy recovers, it will start exerting a drag on long-run economic growth--a drag that my back-of-the-envelope calculations think will slow economic growth by between 0.5% and 1.0% per year, as the government's desire for cash begins to starve the economy of funds to finance investment. Figuring out what the "current policy" is--what the deficit will be unless Congressmen and the President and his cabinet change their minds (or unless we change our Congressmen and President) is not a straightforward exercise. Here OMB Watch takes its shot at the problem. Their conclusion? Contrary to what the Bush Administration claims (surprise! surprise!), the deficit is unlikely to fall as the economy recovers: OMB Watch :: Budget WebLog: Beyond the Baseline: 10 Year Deficits Likely to Reach $5.9 Trillion The Congressional Budget Office%u2019s (CBO) August 2003 Budget and Economic Update shows a baseline projection of a $401 billion deficit for 2003, and a $480 billion deficit for 2004. The 10-year baseline...

Posted by DeLong at 02:31 PM

September 02, 2003
Labor Market Forecast

A labor market forecast from briefing.com: WSJ.com -- Reports from Briefing.com: The labor market remains in transition as the last six months of payroll declines are expected to turn into small gains over the coming months.  The dismal news from manufacturing continues with a 36th consecutive month of decline summing to 2.8 mln fewer workers.  Private service sector payrolls have been bouncing on either side of flat growth.  The monthly movement is volatile due to corporate cost cutting, strong labor productivity and an economy that's not generating a strong lift in aggregate demand.  The lagging unemployment rate reached a new 6.4% high in June and will continue to follow a path higher even as payrolls return to growth.  Hourly earnings are running at a 3% pace as compensation costs are of lesser concern given weak unit labor costs (compensation offset by productivity gains).  The workweek is a key indicator of labor demand and a leading indicator of payroll growth but shows no evidence of an impending upturn.  The labor market still shows no signs of tightening up but it lags the overall economy....

Posted by DeLong at 09:21 PM

September 01, 2003
Initial Unemployment Insurance Claims

400,000 may be the weekly initial unemployment insurance claims number below which the economy is gaining rather than shedding jobs on average. But in order to reduce the unemployment rate employment must be growing at more than the 1% per year that the labor force grows at. It looks as through--in the 1990s at least--357,000 is the weekly initial unemployment insurance claims number below which the unemployment rate is falling rather than rising....

Posted by DeLong at 08:55 AM

August 31, 2003
Third Quarter Growth Forecasts

Andrea Hopkins of Forbes writes about expectations for faster U.S. growth: Forbes.com: U.S. recovery is here -- we mean it this time: ...Often burned but never shy, economic forecasters have ramped up predictions for growth for the rest of 2003 and into 2004, certain -- once again -- that America has turned the corner on the 2001 recession. "All the data's saying the same thing: this quarter is going to be a cracker," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets, predicting gross domestic product growth will hit a 6 percent to 7 percent annual rate this quarter. He's not alone. A raft of positive economic news in recent weeks has many economists hiking third-quarter growth forecasts as high as 7 percent -- more than double the 3.1 percent annual growth rate notched in the second quarter... And this leaves me looking at the labor market and scratching my head: if workers are becoming so much more productive so fast, why aren't firms hiring more of them. I have no special reason to doubt either the output or the work hours figures, but this business-cycle configuration is very, very unusual indeed......

Posted by DeLong at 10:04 PM

August 26, 2003
And More Good News

Good news about consumer confidence as well: WSJ.com - Consumer Confidence Bounced Back in August: The Conference Board reported Tuesday that its consumer-confidence index rose to 81.3 in August from a revised 77 in July. The expectations index jumped to 94.4 from 86.3, while the index measuring attitudes on present conditions slipped to 61.6 from 63. Labor-market concerns continued to dominate. The share of consumers who found jobs "plentiful" inched up to 11.1% from 10.7%, but there was a far larger increase in those who said jobs were "hard to get" -- to 34.1% from 32.7%. In terms of expectations six months from now, 18% expected more jobs, up from 16.6%, while 18.6% expected fewer jobs down from 19.6%......

Posted by DeLong at 07:40 AM

More Good Business Cycle News

Good news this morning about spending on durables: New orders for durable goods in July were $174 billion, up 1.0% from June. Shipments were $181.4 billion, up 2.6% from June. And inventories were $263.9 billion, down 0.9% from last month......

Posted by DeLong at 07:34 AM

August 18, 2003
By Contrast, Morgan Stanley Is More Than Bullish...

By contrast, Morgan Stanley is more than bullish on America. It is positively aurochish on the likely rate of economic growth in the current quarter. Let me give the mike to Richard Berner: Morgan Stanley: ...There's no mistaking the gathering momentum in U.S. economic activity, however.  Incoming data depict a rapidly accelerating economy: From just 1.4% in Q1, it now appears that growth could touch 5% in the current quarter.  And the strength is broadly-based, suggesting genuine staying power.  Upside surprises in both consumer and business capital spending have paced the improvement in demand.  Responding to tax cuts and the ongoing benefits from lower debt service costs, consumers stepped up spending sufficiently on vehicles and a variety of soft and hard goods in July so that even modest gains in August and September would likely yield a 4½% real pace in the third quarter.  Fuelled by rising profitability, a broad-based replacement cycle, and stepped-up tax incentives for investment, businesses appear to be committing to increased capital spending.  While third-quarter data aren't yet available, sharp June gains in shipments and, more important, in advance bookings, hint at real gains in the high single digits... A 5% annual real GDP growth rate...

Posted by DeLong at 10:47 AM

August 15, 2003
Good Industrial Production News for July

A surprisingly large jump in industrial production in July--especially considering that manufacturing employment fell by half a percent, by 71,000 in July: from 14.68 to 14.61 million: FT.com Home US: US industrial production rose at its fastest pace since January last month, adding to the evidence that economic growth is accelerating. Output rose by a robust 0.5 per cent over the month, its third consecutive gain and well ahead of expectations of a 0.2 per cent rise. The figure was boosted by a steep rise in utility output - which economists said reflected the greater use of air conditioning - and strong car sales, which have been helped by a new round of incentives. But the rise in output was relatively broad-based, with a particularly strong 4.2 per cent rise in home electronics... "This will increase confidence that we have a recovery on our hands," said Mark Cliffe, chief economist at ING. "There is now a fighting chance of getting growth of above 4 per cent by the end of the year." It's only one month, and manufacturing is not the same thing as industrial production, but it's interesting to see industrial production rising at a 6% per year rate...

Posted by DeLong at 09:26 PM

Little Fear of Accelerating Inflation in Europe

More bad news about the pace of economic growth in the euro zone. It leaves me, once more, scratching my head and trying to figure out what the ECB thinks that it is doing. WSJ.com - German Economy Shrank 0.1% In Quarter, Confirming Recession: FRANKFURT -- The euro zone, collectively the world's second-largest economy, stagnated during the second quarter, highlighting its relative weakness against the U.S. and even perennial laggard Japan. Although economists say the worst may be over, several major European nations -- Germany, Italy and the Netherlands -- saw their economies shrink, the European Union's statistics agency said. For Germany, it was the third straight quarter of contraction; Europe's largest economy is in its second recession in two years......

Posted by DeLong at 03:55 PM

Output and Hours Since 1960

Some more two-year centered moving averages since 1960: this time it's nonfarm business real output and nonfarm business total hours worked. Once again (and unsurprisingly) we are outside the bounds of previous experience in the modern American economy: The little twig on the left side of the figure shows the moving-average data for 2000-2002. Never in any two-year period in the modern American economy's experience have hours fallen so fast. Given what has happened to hours in the recent past, the standard historical pattern would lead you to expect output to be falling at 2.5% per year or more--and you would expect productivity growth to be negative, not positive and in excess of 4% per year. We are indeed in uncharted waters. Not that we should mind--extraordinarily rapid productivity growth is a wonderful gift. But it does pose different problems for economic management to solve than the ones we had gotten used to......

Posted by DeLong at 10:43 AM

More Good GDP (and Productivity) News About the Second Quarter

News about the economy in the spring released since the initial estimate of second-quarter GDP growth tells us that the second-quarter growth rate is likely to be revised upward significantly--from a 2.4% annual growth rate to perhaps a 3.0% annual growth rate. This is excellent news for production and productivity: Forbes.com: Analysts see U.S. 2nd quarter GDP upward revision: Merchandise trade data out on Thursday showed exports rose a healthy 2.4 percent in June, while in real terms, which is what matters for gross domestic product, the trade deficit narrowed sharply to $47.23 billion from $50.04 billion in May. The [trade] deficit was much smaller than that assumed by statisticians in the advance measure of GDP released on July 31, suggesting trade subtracted less from growth than the 1.56 percentage points initially estimated. The trade news comes hot on the heels of significant upward revisions to retail sales figures for both May and June. On Wednesday the Commerce Department unexpectedly upped its June estimate of sales to a rise of 0.9 percent from 0.5 percent, while May now shows a gain of 0.5 percent when it was flat before. The sudden discovery that consumers spent a lot more than first...

Posted by DeLong at 09:54 AM

August 13, 2003
The Economist Is Unhappy at the U.S.-E.U. Trade "Deal"

Better than nothing, but not much better than nothing, is what the Economist says. I find this infuriating. The AFL-CIO provides a large share of funding for the Democratic Party. The AFL-CIO was scarred for life when the Reagan deficits of the 1980s pushed up the value of the dollar and devastated many union-heavy manufacturing industries. The AFL-CIO now fears free trade greatly--and this makes making progress on free trade very, very difficult when a Democrat is president. Nevertheless, Bill Clinton worked hard and made a lot of progress toward a better world. By contrast, building momentum for freer trade in a Republican administration should be as easy as falling off a log. But the Bush Administration can't even fall off a log reliably: Economist.com: LATE on Tuesday night, bleary-eyed trade negotiators from the European Union and the United States claimed to have sealed a pact for reforming agricultural trade.... But the text of this latest deal is a classic of the genre, full of fuzzy language, fussy jargon and fudged commitments. It calls for reforms, cuts and caps without putting figures on any of them.... The text offers a commitment to eliminate subsidies, over time, on those products of...

Posted by DeLong at 06:58 PM

August 12, 2003
"Sustainable Growth"

Bonds fell after today's FOMC meeting--possibly because the Fed dropped from its statement the phrase in which it worries about the economy's ability to deliver "sustainable growth": WSJ.com - Fed's Message Boosts Stocks: Stocks jumped and bonds fell after the Federal Reserve left its interest-rate targets unchanged, as hope spread among investors that an economic recovery is under way. Despite the Fed's effort Tuesday to reassure bond investors by saying that it doesn't plan to raise interest rates "for a considerable period," investors focused mainly on the prospects for economic growth. That meant that stock investors, who seek profit growth, were more pleased than bond investors, who prefer the prospect of falling rates. The Fed's statement, issued after its policy meeting Tuesday, was strikingly similar to one provided after the previous meeting, in June. But analysts noted that the Fed tinkered in small ways that suggested an improving picture. This time, for example, Fed policy makers no longer expressed worry about the economy's inability to show "sustainable growth"... IMHO, the Fed should still be worrying about the economy's inability to show "sustainable growth". The economy's "sustainable growth rate" looks to be something north of 3.5% per year: it's not clear...

Posted by DeLong at 08:07 PM

The Job-Loss Recovery

The Economist notes the large wedge between output growth and employment growth in America today: Economist.com: AMERICA'S economy is now supposedly on the road to recovery, but somebody forgot to tell the labour market. Non-farm payrolls fell by another 44,000 in July. Since the recession began in early 2001, 3.2m jobs have disappeared in the private sector. If the early-1990s' upturn was the jobless recovery, this, says Merrill Lynch, is "the job-loss recovery". In the first 20 months of previous post-war recoveries, employment rose by an average of almost 6%. The latest recession officially ended in November 2001, but in the 20 months since then employment has fallen by almost 1% (see chart). It is true that unemployment fell slightly in July, to 6.2% of the labour force. But the jobless figures are currently misleading, because the labour force has shrunk as discouraged workers have stopped looking for work. America's GDP growth seems to have picked up (see article), so why are firms still not hiring? One reason is that this has been America's slowest recovery in modern history. Real GDP has increased at an annual pace of only 2.6% since the recession ended.... In addition, faster productivity growth means...

Posted by DeLong at 06:30 PM

August 11, 2003
Federal Reserve Policy

I find it extremely odd that Alan Greenspan is finding it hard to convince the bond market that he will be patient, and not raise the short-term Federal Funds interest rate for quite a while. Back in 1992-1993 Greenspan was incredibly patient. In order to avoid undermining Congress's shaky will to start reducing the deficit, he kept from raising interest rates until the spring of 1994--long past the date at which I would have started raising them, had I been in his shoes. I would have raised them the previous fall... WSJ.com - The Federal Reserve Faces A Challenge in Its Message: WASHINGTON -- The question facing Federal Reserve Board policy makers at their meeting Tuesday isn't whether to change interest rates -- they almost certainly aren't going to -- but rather how to convince markets they aren't going to raise them any time soon. Since its May 6 meeting, the Fed has amply indicated that the world has changed and, unlike in previous recoveries, it is going to be extraordinarily patient about raising rates. That is because underlying inflation, at just above 1%, is at risk of going too low, whereas for most of the prior 50 years, the...

Posted by DeLong at 07:01 PM

Some Optimism in the Forecasts

Forecasters are beginning to expect that higher corporate profits will lead to more investment spending. Unfortunately, forecasters seem to see no declines in the unemployment rate until next summer... WSJ.com - Spending by Corporations May Give Economy a Jolt: Though wary from rallies that never materialized and economic bright spots that quickly faded, economists are beginning to feel more confident: They have raised expectations for third-quarter growth, and say a rebound in corporate profits should prompt companies to finally boost capital spending and investment. "All through the downturn I've felt that all that we have seen are false starts. But for the first time, I have to say, I think we're headed into the real thing," said Allen Sinai, chief global economist at Decision Economics in New York. The average forecast of the 54 economists who participated in The Wall Street Journal Online's economic survey this month put growth for the current quarter at an inflation-adjusted annualized rate of 3.6%, up from the 3.5% average forecast in a survey conducted in June. Expectations for an acceleration in growth late this year and early next year were unchanged. In the second quarter, gross domestic product -- the broadest measure of economic...

Posted by DeLong at 07:49 AM

August 10, 2003
Long-Run Fiscal Train Wrecks

The Wall Street Journal's Al Hunt writes about the Bush-caused future fiscal train wreck. The problem is not this year's deficit or next year's deficit--big deficits in a time of near-recession and falling employment are a good idea. The problem is the deficits that will stare us in the face five, ten, twenty, et cetera years in the future: deficits that will slow economic growth and create the risk of turning our politics in an Argentinean direction. WSJ.com - Politics & People: Sensible alternatives, such as presidential candidate Bob Graham's proposal this week to restore fiscal sanity by eliminating some of the scheduled tax cuts for the wealthiest Americans, are attacked as general tax increases; this would bring the top rates basically to where they were during the Clinton boom. Former House GOP leader Dick Armey, now co-chair of the inappropriately named Citizens for a Sound Economy, charges this would cause "economic stagnation." This is the same Dick Armey, hailed by the right as a former economics professor, who 10 years ago claimed the Clinton tax increases on the rich would be a "job killer." The reality: The unemployment rate dropped to 6% from 7.6% in the year after those...

Posted by DeLong at 08:09 AM

August 03, 2003
Greg Ip on the Fed's Inflation Doves

Greg Ip writes about how the example of Japan has multiplied the number of no-longer lonesome inflation doves at the Fed: WSJ.com - At the Fed, Inflation Doves Aren't Lonesome Anymore: What changed to make deflation so much scarier? In a word: Japan. Since 1999, the Bank of Japan has cut rates to zero and printed money furiously, but prices keep falling because Japan's banks can't or won't lend new money. This repudiation of textbook economics frightens central bankers around the world. Mr. McTeer says the Fed has learned from Japan's mistakes, which is why it won't "nickel and dime" its response to a stagnating, postbubble economy. Mr. Greenspan doesn't need much convincing. He may not think deflation is as fierce as its current reputation, but he doesn't want to find out for sure. "We need a much wider firebreak because we know so little about it," Mr. Greenspan says. Until Japan figures out how to beat deflation, count him as a dove, too....

Posted by DeLong at 09:16 PM

20-20 Hindsight

Paul Blustein of the Washington Post has a nice article (washingtonpost.com: Argentina Didn't Fall on Its Own) on Argentina, the inflow of foreign capital, and its recent collapse. I do, however, think that he overplays the "poor investors" and the "poor Argentinian government" line: Wall Street firms touted Argentina as one of the world's hottest economies as they raked in fat fees for marketing the country's stocks and bonds. Thus were sown the seeds of one of the most spectacular economic collapses in modern history, a debacle in which Wall Street played a major role. The fantasyland that Argentina represented for foreign financiers came to a catastrophic end early last year, when the government defaulted on most of its $141 billion debt and devalued the nation's currency. A wrenching recession left well over a fifth of the labor force jobless and threw millions into poverty. An extensive review of the conduct of financial market players in Argentina reveals Wall Street's complicity in those events. Investment bankers, analysts and bond traders served their own interests when they pumped up euphoria about the country's prospects, with disastrous results... Argentina's politicians were told at extraordinary length by their own economic advisers, by the...

Posted by DeLong at 08:45 AM

August 01, 2003
Still More Bad Unemployment News

Bad unemployment news for July. *Sigh*: Employment Report: The Labor Department's report Friday painted a picture of a job market that remains stubbornly sluggish and continues to frustrate people looking for work. The economy lost 44,000 jobs in July.... the exodus of 470,000 discouraged people [from the labor force] who abandoned job searches because they believed no jobs were available.... In July, there were 2 million out-of-work people [who had been] looking for a job for 27 weeks or longer.......

Posted by DeLong at 06:53 AM

July 31, 2003
Yes! Good GDP News!

Yes! The second quarter (April-June) showed significantly faster real GDP growth than I (and everybody else) had been expecting: GDP grew at a 2.4% per year annual rate (meaning that second-quarter real GDP was 2.4%/4 = 0.6% higher than first-quarter real GDP. Now IIRC, average hours worked were down 0.2% in the second quarter vis-a-vis the first quarter, and employment was down in the second quarter by 0.2%, meaning that Americans worked 0.4% fewer hours in the second quarter than the first quarter--that labor input shrank at a 1.6% per year annual rate. Combine a 2.4% per year rate of growth of real GDP with a -1.6% per year rate of growth of labor hours, and you have a 4.0% per year rate of growth of labor productivity. That's a very impressive number for the long run. But in the short run it drives a big wedge between the (relatively good) production news and the (relatively bad) employment news. GDP growth accelerates in 2Q - Jul. 31, 2003: Gross domestic product (GDP), the broadest measure of economic activity, grew at a 2.4 percent annual rate in the quarter after growing at a sluggish 1.4 percent rate in the first quarter,...

Posted by DeLong at 11:46 AM

July 30, 2003
Divergent Expectations

MSN's Jim Jubak worries about the striking divergence between the (relatively pessimistic) expectations of consumers and the (relatively optimistic) expectations of Wall Street analysts. He seems to come down on the side of consumers: he thinks that the confirming numbers one would expect to see if analysts' forecasts of a strong second-half recovery were coming true are hard to find: MSN Money - Jubak's Journal: ...So why such different reads on the future from consumers on Main Street and analysts on Wall Street? The conventional explanation is that consumers are pessimistic because their emotions are so heavily influenced by the continued high level of unemployment.... Wall Street tends to dismiss the jobs worry. Unemployment is a lagging indicator.... But that explanation sells consumers short. Looking around, consumers can see that companies are still in the last stages of announced cost-cutting and the next six months will bring additional layoffs. Wall Street analysts have their own data problem. There's nothing in second-quarter results or company guidance for the third quarter that shows the long-anticipated second-half recovery will arrive on schedule.... Look at the technology sector. Earnings per share gains of 21% in the second quarter have come on revenue gains of...

Posted by DeLong at 10:03 PM

July 29, 2003
D---!

Bad news this morning about the U.S. business cycle: Consumer confidence plunges - Jul. 29, 2003: The Conference Board, a business research group based in New York, said Tuesday that its closely watched index of consumer confidence fell to 76.6 from 83.5 in June. Economists, on average, expected confidence to rise to 85, according to a Reuters poll. The Conference Board's "expectations" index, which measures how consumers feel about the future, fell to 86.4 from 96.4 in June. The "present situation" index dropped to 61.9 from 64.2. "The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "Expectations are likely to remain weak until the job market becomes more favorable."... Yeah. And the job market will not become more favorable until after expectations become strong. This is disappointing....

Posted by DeLong at 09:30 AM

July 28, 2003
The Wedge Between Output and Employment Growth

Alan Beattie of the Financial Times writes about the productivity-boom generated wedge between output growth and employment growth. I would be surprised if there were any employment growth at all in America over the next year unless real GDP growth exceeds 3.5% per year... FT.com Home US: After two years in which the American economy has faltered and sputtered, there is renewed hope in the administration of President George W. Bush that it is at last accelerating towards cruising speed. More than goods or services, the improvement he and his team want to see most as a result is in jobs. Like his father, Mr Bush has presided over a jobless recovery. Two years after the 2001 recession, private sector employment has fallen by more than 2.5m. The unemployment rate, at 6.4 per cent, is more than 2 percentage points higher. Larry Mishel, president of the left-leaning Employment Policy Institute, calls it "the greatest contraction in private sector employment since the Great Depression".... While the lack of a recovery of employment superficially resembles what happened during the climb out of recession in the early 1990s, the root cause is a little different. Then, companies were slower than expected to hire...

Posted by DeLong at 09:23 PM

Locking the Barn Door

Will this do any good? Will this make Wall Street less willing to play along the next time an Enron appears? I don't know... WSJ.com - JP Morgan, Citigroup to Pay $255 Million in Enron Case: NEW YORK -- JP Morgan Chase and Citigroup agreed Monday to pay a total of $255 million for their roles in Enron's manipulation of its financial statements. Morgan will pay $135 million and Citigroup will pay $120 million as part of the settlement, the Securities and Exchange Commission said. The SEC said most of the money would go to victims of Enron's massive corporate fraud -- the first in a string of scandals that have tainted corporate America since 2001. The government had accused Morgan and Citigroup of helping Enron design complex transactions that allowed it to underreport its debt. "If you know or have reason to know that you are helping a company mislead its investors, you are in violation of federal securities laws," SEC enforcement chief Stephen Cutler said in a statement. In December, Citigroup and J.P. Morgan Chase officials told an investigative panel of the Senate Governmental Affairs Committee that they believed they were engaging in lawful deals with Enron. Citigroup's...

Posted by DeLong at 10:22 AM

July 27, 2003
More Good Business-Cycle News

Well. It's starting to look good--as if we may finally get a healthy recovery, in production at least: Forbes.com: WRAPUP 2-U.S. June factory orders, new-home sales up: WASHINGTON (Reuters) - Orders for costly U.S. manufactured goods shot up in June at the fastest rate in five months while sales of new homes hit a record, reports showed Friday, boosting optimism the recovery is gaining speed. The surprisingly strong signs of economic revival gave investors a jolt of energy that sent stock prices higher, but some analysts cautioned it will take some time to gauge whether a quicker economic pace has taken hold. A housing industry group suggested the recent uptick in long-term interest rates may be casting some gloom on the hot sector. In addition, economists noted the durable goods report is often volatile and subject to sharp revision, especially with many factories shutting down for retooling in July. The Commerce Department said orders for durable goods -- items like cars and refrigerators designed to last three years or more -- climbed 2.1 percent to a seasonally adjusted $172.5 billion last month after being flat in May......

Posted by DeLong at 10:31 AM

July 24, 2003
Yay! Good Employment News!

The first not-bad news about employment in five months. Of course, it's still bad news for the unemployment rate: 390,000 new unemployment claims a month is not consistent with employment growing fast enough to take care of all the new entrants into the labor force, let alone reduce the numbers of unemployed. But it's still better employment news than we have had in a long time. FT.com Home US: US weekly jobless claims hit five-month low | By Peronet Despeignes in Washington | Published: July 24 2003 14:06 | Last Updated: July 24 2003 14:06 Demand for new unemployment benefits in the US sank last week to a five-month low, according to an official report likely to bolster hopes that the economic recovery is strengthening. The Labor Department said on Thursday that first-time unemployment insurance claims had fallen to 386,000 last week - the lowest level since mid-February and well below economists' expectations for a reading around 420,000. They dropped from a revised 415,000 the previous week. The move below the key 400,000 level is preliminary evidence that the job market is improving, but the figures are volatile and affected by summer seasonal adjustment problems associated with auto factory shutdowns....

Posted by DeLong at 09:48 AM

July 23, 2003
Looking Forward to Fast GDP Growth and a Lousy Labor Market

Bernanke, McTeer, and Greenspan worry that even the relatively strong GDP growth they hope emerge will be accompanied by a lousy labor market, and perhaps downward pressure on inflation and prices. Why? Because they (like me) think that the rapid productivity growth of the new economy is still burbling away inside the economy's foundations, and driving a big wedge between output growth and employment growth. Dark linings in the economic clouds - Jul. 23, 2003: Then Fed Governor Ben Bernanke said Wednesday that gross domestic product (GDP), the broadest measure of the nation's economy, could grow at a 3 percent rate the rest of this year and a 4 percent rate next year, but he added that the unemployment rate would still be as high as 6 percent by the end of 2004. What's more, Bernanke said stronger GDP growth would do nothing to stop a recent slide in inflation that's alarmed many economists. The worry: that the economy could get hit by deflation, an unstoppable drop in prices that has hounded Japan's economy for much of the past decade. "Even if the economy recovers smartly for the rest of this year and the next, the ongoing slack in the...

Posted by DeLong at 07:43 PM

Federal Reserve Now Thinks It Still Has Running Room

The Federal Reserve now appears to believe that it still has more room to cut short-term interest rates--that the old argument that it would be unhealthy to cut the Federal Funds rate below 1% per year does not really apply: Blog - ArgMax.com: Fed Gov. Bernanke sees rates as low as zero if need be - Jul. 23, 2003: Federal Reserve Governor Ben Bernanke said on Wednesday that the central bank would be prepared to cut interest rates all the way to zero if necessary to prevent a fall in inflation. Speaking to a university audience, Bernanke said if the Fed were to reduce overnight borrowing costs to zero, it would look at so-called nontraditional methods of trying to spur growth, such as buying long-term bonds. He expressed confidence that those methods would work if the Fed needed to turn to them. But policymakers still appear focused on using their central tool of controlling short-term interest rates for now....

Posted by DeLong at 07:26 PM

Optimism About Europe

For once, the Economist is relatively optimistic about continental Europe's structural reform efforts: Economist.com: BY MANY standards, the health-care reforms unveiled by Germany’s government on Monday July 21st, with the vital support of the opposition, are far from revolutionary. The levy on companies for their employees' health care is set to fall from 14.4% to a still-hefty 13% by 2006, and the overall national health bill is not expected to decline: the new plan simply transfers costs by making individuals pay for things like dentures. The health minister, Ulla Schmidt, was forced to drop more dramatic proposals, like allowing health funds to have contracts with individual doctors, rather than collective agreements with doctors' associations. Even so, the reform is radical by German standards, and Ms Schmidt hopes that increased transparency will cut down on fraud and increase efficiency. Moreover, the government’s success in getting even this measure of reform enacted is a sign of a new realism in Germany about the extent of the country's economic malaise. Germany is not alone. In neighbouring France, the centre-right government of Jean-Pierre Raffarin has succeeded in driving through unpopular pension reforms that had brought hundreds of thousands on to the streets in protest....

Posted by DeLong at 09:38 AM

July 22, 2003
Panic in the Bond Market?

Morgan Stanley's Stephen Roach sees a bond-market panic driven by depressed "animal spirits" on the part of bond traders. The Federal Reserve needs to keep long-term interest rates low to spur investment and recovery. How it can do this if it is indeed the case that long-term bond interest rates are now being set by panicked traders rather than forward-looking economists is a mystery: Morgan Stanley: ...There are a number of alternative explanations to this dramatic sell-off in the bond market.  There are those, of course, who claim that signs of incipient economic recovery have turned the bond market inside out.  While I'm hardly objective on that point, even the diehard growth optimists concede that the evidence remains mixed at this point and that the vigorous recovery call is still a forecast (see Dick Berner’s July 18 dispatch, "Recovery Signs").  Others have argued that the rapidly deteriorating federal budget deficit is the culprit, sparked by the administration’s midyear confession that the budget shortfall is likely to hit $455 billion in the current fiscal year.  While I would be the last to minimize the significance of this development, it hardly qualifies as the singular surprise that can explain the bond market’s...

Posted by DeLong at 12:53 PM

July 20, 2003
Bullishness...

Richard Berner of Morgan Stanley sounds very bullish on the American economy: Morgan Stanley: ...There are encouraging signs for our recovery call.  Consumer demand is improving, and with relatively lean inventories, production has begun to play catch-up.  As a result, some improvement in growth from the tepid 1.5% pace of the past nine months seems to be in train.  Make no mistake, however; it is too soon to proclaim an acceleration to 4%-plus growth.  That's still only a forecast, and key risks remain.  Among them: Labor markets are still soft, as companies are reluctant to hire.  Global growth is weak, and there is no obvious non-U.S. engine of growth.  And energy prices are still high, with crude quotes well over $30/bbl and gasoline prices edging back up in July.  Even these risks, however, may be abating.  Are the signs of recovery sustainable? And will the evidence of peaking risks continue?  Yes, in both cases, in my view.  Here's why. First, let's quickly review the analytics.  Five factors lie behind our call for stronger growth: Post-bubble headwinds are fading; for example, in the ratio of capital spending to depreciation, I see some signs of building pent-up demand (see "Higher Rates Will...

Posted by DeLong at 02:08 PM

July 17, 2003
Location, Location, Location

One of the most bizarre (from my perspective at least) aspects of the late-1990s high-tech boom in America was its extraordinary concentration in Silicon Valley. With technologies that for the first time allowed a sufficient density of communication that you could do your work and still be well-connected and well-plugged in anywhere with a power socket and a phone line, the premium to being within driving distance or bicycling distance of the Sand Hill Road offramp to Interstate 280 rose to extraordinary and amazing levels. Why? And will things be different in the "next time" as the next wave of high-tech development accelerates? : CONSIDER three snapshots of the IT industry today. First, look at the centre of the business at the turn of the century--Silicon Valley. Parts of this high-tech region to the south of San Francisco, which were buzzing with activity only three years ago, are coming to resemble an industrial wasteland populated by squirrels, racoons and "for lease" signs. In the city of Santa Clara, where almost half of all office space is vacant, rents run at around $1 per square foot, compared with $6.50 in late 2000. Some larger tenants in the city are even...

Posted by DeLong at 12:41 PM

Dating the Business Cycle

The NBER's Business Cycle Dating Committee has decided that the last business-cycle trough took place in November of 2001. More interesting, they seem to have dropped employment from their list of principal monthly indicators. Their report puts income first, industrial production and sales second, and refers to Macroeconomic Associates's estimates of monthly GDP: Release: For these reasons, the committee refers to a variety of monthly indicators to choose the exact months of peaks and troughs. It places particular emphasis on real personal income excluding transfers and on employment, since both measures reflect activity across the entire economy. The committee places less emphasis on the industrial production and real sales series, which mainly cover the manufacturing and goods-producing sectors of the economy. The committee also looks at estimates of monthly real GDP prepared by Macroeconomic Advisers. There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process... IIRC, it used to be that employment, incomes, sales, and industrial production were more-or-less all given equal weight. It also used to be that those four series tended to have peaks and troughs that were very tightly clustered together. It is...

Posted by DeLong at 09:39 AM

Mankiw vs. Greenspan

Greg Mankiw: Deficits And Economic Priorities (washingtonpost.com): The administration's budget update, released yesterday, shows the economic recovery is picking up steam. It also shows a budget deficit for 2004 of $475 billion.... [U]nder the president's proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008. The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending. Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic... Alan Greenspan: Greenspan Sees Danger In Deficits (washingtonpost.com): Federal Reserve Chairman Alan Greenspan warned yesterday that continuing large federal budget deficits eventually would cause long-term interest rates to rise and damage U.S. economic growth. "There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy," Greenspan told the Senate Banking Committee. On Tuesday, the Bush administration forecast that the deficit will reach $455 billion in fiscal 2003... [a]s economic growth improves and the nation nears full employment, the deficit...

Posted by DeLong at 09:30 AM

July 15, 2003
Greenspan Before the House Financial Services Committee

Greenspan made two points that I did not really expect. The first is the Federal Reserve's new position that it still has "substantial" room to cut short-term interest rates, even though the target Federal Funds rate is now a low 1% per year. The second is that the Federal Reserve thinks that the accounting scandals have played a significant role in discouraging investment--in which case the failure of the Bush administration to take action and the great Harvey Pitt follies have been very expensive for the American economy. Greenspan: Further interest rate cuts possible - Jul. 15, 2003: NEW YORK (CNN/Money) - The Federal Reserve could make further substantial cuts in interest rates, Alan Greenspan told Congress Tuesday, but the central bank chairman also said the Fed was not ready to take unusual steps such as buying Treasury bonds to give a lift to the economy. "With the target funds rate at 1 percent, substantial further conventional easings could be implemented if (Fed policy makers) judged such policy actions warranted," Greenspan said in remarks to the House Financial Services Committee. Greenspan also said the Fed, the nation's central bank, was ready to keep rates low for a "considerable" period of...

Posted by DeLong at 10:08 AM

July 14, 2003
U.S. Monetary Policy

Greg Ip of the Wall Street Journal is hearing interesting things about the ideas that the Federal Reserve is thinking about these days: WSJ.com - Greenspan Has Opportunity To Clarify the Fed's Message: ...Greenspan... remains more optimistic than many of his colleagues and likely will cite scattered evidence of the postwar pickup he long has expected, while acknowledging hard evidence is scarce. He may emphasize that there is so much unemployment and unused capacity in the economy that inflation remains likely to edge lower. Markets also will look to Mr. Greenspan for hints about the Fed's views on unconventional monetary policy, given that short-term interest rates are at a 45-year low. They may not get much. While Fed policy makers discussed these options at length at their June meeting, there is no sign they have emerged with any consensus. Mr. Greenspan himself appears uneasy about the unpredictable consequences of unconventional policies, whether buying bonds or committing to hold down the funds rate for a particular period of time or until some economic target is met. Mr. Greenspan, however, could reassure the public that the Fed has plenty of room for conventional stimulus. He has noted that cutting the funds rate...

Posted by DeLong at 08:52 PM

July 12, 2003
When Will the NBER Call the End of the Recession?

The Washington Post's John Berry gives a very interesting look: his take on the back-and-forth within the NBER's Business Cycle Dating Committee. As Berry interprets it, the NBER is moving away from its old methodology ("We use the common pattern shown by cyclical indicators to gauge the state of the business cycle. What are cyclical indicators? Cyclical indicators are those that are useful in gauging the state of the business cycle.") to one that will ultimately conclude that a recession is a six-month decline in estimates of seasonally-adjusted monthly real GDP. I would prefer a shift to a three-part classification: recession, expansion, and employment stagnation. But I'm not on the NBER BCDC. washingtonpost.com: Number Crunchers vs. Recession: The arbiter of when U.S. economic recessions begin and end, the Business Cycle Dating Committee of the National Bureau of Economic Research, has laid the groundwork for calling an official end to the slump that began in March 2001.It could be weeks or months before that happens, but the committee has found a way around the fact that its key monthly indicator, payroll employment, has continued to decline long after the economy resumed growing.The committee designated March 2001 as the beginning of the...

Posted by DeLong at 09:56 AM

July 10, 2003
David Wessel Wonders When the Recovery Will Begin

David Wessel wonders when the real recovery will begin--when real GDP will begin to grow at the 3.5% per year pace that we think is needed to keep the unemployment rate from rising, or the 4.0% per year pace that we think is necessary if unemployment is to start to decline (and even then only slowly: by perhaps 0.2 percentage points per year). Forecasters tell him that the real recovery should begin very soon--but they said the same thing six months ago, and six months before that as well. More disturbing is the fact that it is not at all clear where any extra boost to the economy could come, should one turn out to be needed. The Federal Reserve is out of gunpowder. More aggressive fiscal policy--bigger short-run deficits--would be possible, but neither the president nor the congressional majority has shown any inclination at all to think seriously about how to try to use spending and tax policy to boost employment and growth in the next year or so. If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and...

Posted by DeLong at 12:21 AM

July 07, 2003
Reply Hazy, Ask Again

Morgan Stanley forecasts that the economy will either "muddle through or gain steam." I don't, however, understand their expectation of a radically different tone to the labor market in a few months--remember, at the average post-1995 labor productivity growth rate, we need about 3.6% per year real GDP growth just to keep the unemployment rate from rising. Morgan Stanley: ...Thus, it's far from catastrophic that convincing evidence is so far lacking for a meaningful economic acceleration.  But it does speak to the fact that consumers and businesses remain cautious.  Courtesy of declining energy prices, consumers clearly stepped up their spending pace in the last few months; real outlays rose at a smart 4.4% annualized clip in the three months ending in May, compared with a 2% rate in the first quarter.  But their appraisal of current economic conditions has essentially been unchanged for the past nine months, hinting that the faster pace isn't sustainable without improvement in fundamentals, namely income and jobs. And that's our key worry: Business hiring caution has kept the recovery jobless, with the current experience marking the worst employment performance of any postwar recovery.  We expect a dramatically different tone to labor markets soon, as the...

Posted by DeLong at 10:42 AM

Neoliberalism Rides Again?

The Wall Street Journal says to watch what the new government's economic policy is, not what it says that it's policy is: WSJ.com - Argentina's Rebound Shows IMF's Principles Still Thrive: ...New Argentine President Nestor Kirchner agrees with the latter assessment, arguing that the "neoliberal model" had failed his country. Yet his economic team promises an agenda that Washington Consensus advocates would applaud: inflation-targeting, fiscal restraint, tax overhaul, financial restructuring and market-driven infrastructure solutions. Utilities, trapped in a postcrisis rate freeze and facing contract renegotiations, can be forgiven for doubts. But, at the same time, there is no great movement to renationalize their businesses, especially after the most left-leaning candidates did poorly in recent elections. What is emerging is a distinction between the image of the Washington Consensus as a whipping boy and the continued, if less dogmatically applied, implementation of its principles. Argentine policy makers seem conscious of the good things privatization brought -- healthier water, lower electricity rates, functioning telephones -- they don't really want to turn back the clock. What they are doing is selling the idea differently: They are bashing the 1990s "model" but still embracing the language of the market. Economy Minister Roberto Lavagna argued...

Posted by DeLong at 10:25 AM

The Economist Sees Bad News on the Supply Side

As if the world economy needed another factor adding drag... Economist.com: MANY of those who advocated war in Iraq argued that it would be a relatively cheap exercise. After all, Iraq sits on the world’s second-biggest oil reserves after Saudi Arabia; even before the war, the country was thought to have a production capacity of 3m barrels per day (bpd). All the conquering coalition troops would have to do is fix up the creaking or damaged oil wells and refineries, and Iraq would soon start paying for itself. Unfortunately, things haven’t turned out that way. Thanks to some astute forward planning (and the advance deployment of special forces), there was very little wartime damage to Iraq's oil fields. Since the war, though, disgruntled supporters of Saddam Hussein have sabotaged oil fields and pipelines. So Iraq has yet to export any oil produced since the war, a state of affairs that has buoyed the oil price. Now a general strike in Nigeria, triggered by a jump in the cost of petrol, threatens that country’s 2m bpd output. Some oil experts now think the oil price, currently bobbing around the $30 mark, could climb as high as $35 if the strike, already...

Posted by DeLong at 10:19 AM

July 03, 2003
Economic Growth Forecasts

The Wall Street Journal's stable of forecasters is looking for a strong rebound in economic growth after the most recent three bad quarters. WSJ.com - Economists Forecast A Second-Half Rebound: ...Last year at this time, for example, after the magnitude of the accounting scandals had already become clear, the consensus was still predicting a return to growth rates of about 3.5%. Instead, the economy grew at a 1.4% annual rate in the fourth quarter of 2002, and repeated that performance in the first quarter of this year. The second-quarter growth rate is believed to have been close to the same tepid level. The Commerce Department will report preliminary second-quarter growth later this month. These are the perils of predicting the future. Even the Federal Reserve has had its share of missed forecasts in recent years. In 2001, for example, Fed economists predicted the economy would grow by a little more than 2% and the unemployment rate would drift up to 4.5%. Instead it grew by 0.3% and the unemployment rate shot up to 5.8%. And last year at this time, the Fed was also predicting growth rates in excess of 3.5% by now. What is so alluring about the 3.5%...

Posted by DeLong at 08:19 PM

The Help-Wanted Index

Slate's Daniel Gross has a nice piece on the Conference Board's help-wanted index: No Help Wanted for Help-Wanted - A tribute to the Help-Wanted Index, the economic gauge that shouldn't work but does. By Daniel Gross: Feeling more optimistic about the job market? Check out the Conference Board's Help-Wanted Index. The 52-year-old index, which measures the volume of help-wanted classified advertisements in newspapers, stood at 36 in May (with 1987 as a 100 baseline), its lowest level since 1961, and off 50 percent from February 2001.Should we care about this seemingly Jurassic metric? Surprisingly, yes. The Help-Wanted Index is oddly comforting, an economic gauge that seems archaic but remains incredibly useful. The index is derived from a medium that is slowly losing its audience. It ignores technological advances that have utterly changed what it is measuring. And it lost its bearings for a period in the late 1990s. (Truth be told, who didn't?) Even so, this dead-tree index is still vigorously alive.Since the Truman administration (1951), the Conference Board has been diligently collecting information on how many help-wanted ads were sold by one newspaper in each of 52 representative labor markets. (One can envision rows of clerks with green eyeshades sitting...

Posted by DeLong at 10:37 AM

Klong...

Unemployment news significantly worse than I thought it would be. Yet another disappointing surprise. Jobless Rate Rises to 6.4 Percent; Highest in More Than 9 Years: WASHINGTON (AP) -- The nation's unemployment rate shot up to 6.4 percent in June, the highest level in more than nine years, in an economic slump that has added nearly a million people to jobless rolls in the past three months. Businesses slashed 30,000 jobs just last month, with cuts heavily concentrated on factory assembly lines, the Labor Department reported Thursday. The 0.3 percentage point increase from May's 6.1 percent rate was the largest month-to-month rise since the Sept. 11, 2001 terror attacks. That surprised analysts who predicted a smaller rise, to 6.2 percent. The last time the overall rate was higher was in March 1994. While recent economic indicators point to an economy struggling toward recovery, the latest report demonstrated that America's job market was still very much in a state of recession last month. Since March, unemployment has increased by 913,000. Two million people were unemployed for 27 weeks or more last month, an increase of 410,000 since the start of the year. Another factor behind the increase in the overall civilian...

Posted by DeLong at 07:03 AM

July 01, 2003
Historical Revisionism

John F. Irons is really annoyed that George W. Bush is trying to backdate the start of the recession to 2000. Of course, the real thing to get annoyed about is that the Bush Administration has done so very, very little to fight the recession: This isn't to say that Bush somehow caused the initial recession (although it certainly didn't help that VP Cheney was running around in the country in late 2000 and early 2001 telling everyone how the economy was in bad shape.)... The important question is not whose fault is the recession, but rather what has been the response of the administration to the economic situation. We have seen 3 major tax cuts... each of which were sold as economic and job stimulus, but which in reality had very little to do with good counter-cyclical fiscal policy, or with the current economic problems. The result? Unemployment continued to increase and is up to 6.1%, and there have been 2.5 million jobs lost since March 2001... As I've said before, the failure of the Bush Administration to take any significant steps to boost aggregate demand over the past two years is remarkable and strange. The most they've done...

Posted by DeLong at 12:51 PM

June 30, 2003
The BIS Is an Unhappy Camper

The Bank for International Settlements is very unhappy at the latest Bush tax cut: FT.com Home US: Bush tax cuts 'may sap confidence' By Christopher Swann in London | Published: June 30 2003 19:49: The Bush tax cuts risk undermining confidence in the health of US public finances, according to the Bank for International Settlements, the forum for the world's central banks. The BIS said in its annual report that the Bush administration and the US Federal Reserve had been right to take action to boost the economy. But it said the $350bn tax cuts package agreed by Congress had "not been helpful" and there was a danger that debt would reach unsustainable levels. The BIS warned that the US risked exacerbating imbalances in the US economy which could result in a painful correction in the future. The Fed may have contributed to new imbalances, the report suggests, by fuelling a rise in house prices with its steep interest rate cuts which have led to a further build-up of debt. The sharp reversal in US government finances has become a growing source of concern. The latest official forecast for 2003 is for a deficit of more than $400bn, compared with...

Posted by DeLong at 08:32 PM

June 26, 2003
Different From You and Me

John S. Irons writes about how The Rich are Getting Richer......

Posted by DeLong at 11:42 AM

June 25, 2003
The Expected Interest Rate Cut Materializes

The Federal Reserve's expected interest rate cut materializes: Fed cuts rates by quarter point: The Federal Reserve cut its overnight interest rate by a quarter percentage point Wednesday.... The 25 basis-point reduction in the federal funds target rate to a 45-year low of 1 percent is the 13th rate cut by the U.S. central bank since January 2001, when the fed funds rate stood at 6.50 percent. The Fed said "a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time." Financial markets were leaning toward the expectation that there would be a more aggressive half-point cut to 0.75 percent.... policymakers repeated their determination to prevent an unwelcome decline in inflation. In the foreseeable future, the FOMC said risks were tilted toward too little growth as opposed to higher inflation. The statement strongly implied that the Fed will keep its target rate very low for a long time......

Posted by DeLong at 11:27 AM

A Disappointment

A surprising disappointment: Durable goods orders down 0.3% in May - Jun. 25, 2003: U.S. durable goods orders sank 0.3 percent last month -- in contrast to the expectations of private economists that they would rise 0.8 percent. The data from the Commerce Department showed April orders plunged 2.4 percent, revised down from an earlier reported 2.3 percent drop. The report showed broad-based weakness in demand for big-ticket items, with categories such as cars, computers and machinery showing declines. Excluding the volatile transportation sector, orders edged up 0.2 percent, a much weaker showing than the 1 percent gain projected by economists in a Reuters survey......

Posted by DeLong at 07:20 AM

June 21, 2003
Forthcoming Federal Reserve Rate Cut

The Washington Post's John Berry puts his ear to the ground and guesses that the Federal Reserve will cut interest rates next week by 0.50 percentage points (a 60% chance) or by 0.25 percentage points (a 40% chance). That seems about right to me--but his sources are much, much better than mine. One bone to pick, however. John Berry says that economists were "surprise[d]" by the fact that "recovery has been halting and 'jobless' despite huge doses of monetary and fiscal stimulus." This economist hasn't been surprised. Simply look at the late-1990s boom and the structural sources of the acceleration in productivity growth, and a "jobless recovery" looked like a definite possibility. Rate Cut Looking Like a Sure Thing (washingtonpost.com): ...Federal Reserve officials, concerned there is still no sign of the solid pickup in U.S. economic growth needed to foreclose the possibility of deflation, appear certain to cut their target for overnight interest rates next week. There is broad agreement among investors and analysts that a rate cut is coming, but there is disagreement about whether policymakers will lower their 1.25 percent target by a quarter-percentage point or by a half-point. The latter seems to be more likely as a...

Posted by DeLong at 06:48 AM

June 12, 2003
Make That, "The Glass Is at Most 1/4 Full"

The post-Iraq War bounce-back continues to be missing in the dataflow: FT.com Home US: US retail sales were flat in May and the number of new requests for jobless benefits remained high last week - signs that the economy continues to show little growth. The Commerce Department said retail sales rose only 0.1 per cent in May after a 0.3 per cent decline in April. The results were somewhat depressed by a drops in cas and gas sales. Excluding those declines, sales were up 0.6 per cent after a 0.4 per cent decline in April. All figures are seasonally adjusted. Seperately, the Labor Department said first-time unemployment insurance claims fell by 17,000 to 430,000 last week - but that result remains well above the 400,000 level most economists associate with a shrinking job market. The four-week moving average, a smoother gauge, rose to 433,750 from 431,500......

Posted by DeLong at 11:11 AM

A Glass That Is One-Third Full

The Federal Reserve's "beige book" finds that the postwar business cycle-recovery glass is not half full. But there is water in it... Yahoo! News - Fed Says Economy May Be Near a Rebound : ... The central bank said that four of its 12 districts -- Dallas, Kansas City, New York and Minneapolis -- detected signs of increased economic activity and no district reported further deterioration since the last report in late April. "The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggest that the effect has not been dramatic," the central bank said in its latest survey of business conditions. The central bank cautioned against reading too much into the scattered signs of a rebound, describing overall activity in many districts as still "sluggish, subpar or subdued." The survey of business conditions, known as the beige book for the color of its cover, will be used by Fed policy-makers when they meet June 24-25 to set interest rates. Many analysts are convinced that the Fed will cut rates for a 13th time at that meeting in an effort to make sure that the current weak patch the country is...

Posted by DeLong at 05:04 AM

June 09, 2003
New Online Column From the Economist

The Economist is starting a new online column about the daily ticking and tocking of financial markets. Economist.com: AN ODD thing is happening in the market for risk and the market of the riskless, also known as the equity and government-bond markets: prices are rising in both. The S&P 500 share index, up by over 20% from its low earlier this year, continues to soar. Meanwhile, rising prices in the bond market have driven yields on the ten-year note down to 3.35%--a level last seen when Elvis Presley was a youngster. The same, broadly, is true in Europe: both stocks and government-bond prices are up. It has happened before, of course; indeed, there have been long periods where the two have moved in tandem, in part because lower interest rates reduce the financial burden on companies and make investment cheaper. But the coupling is a perplexing one right now, nonetheless, because the reasons that investors are buying the two markets appear to be diametrically opposed: in effect, bond-market investors seem fearful that the American economy will remain sluggish, while the equity market thinks it is over the worst... Such a column is a hazardous exercise to undertake. It violates Bob...

Posted by DeLong at 03:26 PM

The Consequences of Britain's Saying "No" to the Euro

David Begg, Olivier Blanchard, Diane Coyle, Barry Eichengreen, Jeffrey Frankel, Francesco Giavazzi, Richard Portes, Paul Seabright, Alan Winters, Anthony Venables, and Charles Wyplosz say that The Consequences of Saying No--or, rather, not yet--to the euro are much bigger than the British Treasury thinks. A Britain that is not in the euro has no influence on how the euro zone develops. And they believe that over time--a couple of decades?--British trade will reorient itself toward Europe. Thus the choice is between joining the euro now (and helping the euro zone evolve in a direction that is good for Britain) and joining the euro later (and in the meantime having no influence into how the euro zone evolves)....

Posted by DeLong at 07:33 AM

Joining the Euro

The British Treasury says it says "not yet" to the euro. But of the reasons it adduces for not joining the euro yet, two--the greater correlation of British with American than European business cycles, and the greater vulnerability of Britain to interest rate shocks--aren't going to go away any time soon. Thus I cannot see what changes in the economy or in the economics (as opposed to the political) analysis in the next five to ten years could lead to a different conclusion. So I suspect that--even though the British Treasury is saying that it is saying "not yet"--that the British Treasury is really saying "never." Quicken Brokerage - News Center: LONDON -- Britain's Treasury announced Monday that the economic conditions are not yet right for Britain to join the 12-nation euro zone and swap its pounds and pence for euro notes and coins. From misaligned exchange rates to oversensitivity to interest-rate changes, the economic studies commissioned by the Treasury indicate that the "clear and unambiguous" case for the United Kingdom dropping the pound in favor of the euro cannot yet be made, the Treasury said. The general tone of the documents was not strongly in favor of or against...

Posted by DeLong at 06:45 AM

June 06, 2003
Unemployment Report

The expected bad employment report for May: Unemployment rises to 6.1% - Jun. 6, 2003: NEW YORK (CNN/Money) - The unemployment rate rose to 6.1 percent in May as businesses cut thousands more jobs, the government said Friday, extending the labor market's prolonged slump. Unemployment rose from 6.0 percent in April, the Labor Department said, to the highest level since July 1994.... Non-farm payrolls lost 17,000 jobs, the report said, after being unchanged in April.... Nine million people were unemployed in May, compared with 8.8 million in April.... Several labor-market indicators in recent weeks gave warning that a weak jobs report was on the way, especially a stream of new claims for unemployment benefits numbering more than 400,000 every week, a benchmark sign of weakness... Remember, given population and trend labor force growth, a monthly payroll increase number of about 80,000 is needed to keep labor market conditions from getting worse....

Posted by DeLong at 06:29 AM

June 05, 2003
The Economist Sounds... Shrill

The Economist sounds "shrill"... like Paul Krugman, in fact... as it contemplates the state of European monetary policy, the start of a new recession in the industrial core of western Europe, and the still-low but non-zero dangers of deflation. I wish it had come to the party earlier, but the refreshments the Economist is bringing are still very welcome: Economist.com: ...The euro-area economies are caught in a bind. The ECB has been consistently reluctant to use monetary policy to provide the sort of short-term stimulus which countries like Germany urgently need. Europe?s largest economy is now technically in recession, and the growth outlook for the euro area as a whole is grim this year and next. Careful examination of what the ECB has said about the role of monetary policy and what it has actually done shows that it has in the past been prepared to pay attention to broader economic objectives and not confine itself only to questions of inflation. Rate cuts have sometimes been implemented when inflation was above the target range. But what appears to be, at best, the ECB?s own confusion about its role has ensured that, on balance, monetary policy has been less effective in...

Posted by DeLong at 10:07 AM

June 04, 2003
Demand News and Employment News

Reuters expects bad employment news this Friday, but thinks that the rest of the economic news is good--and that the discrepancy is because employment is a lagging indicator. I think that the discrepancy comes from the fact that underlying trend productivity growth is much more rapid than in any recession for the past generation--and this drives a big wedge between the demand news and the employment news. Forbes.com: Economists braced for gloomy U.S. jobs report: WASHINGTON (Reuters) - A postwar jump in consumer confidence and higher stock prices have raised hopes for a U.S. economic rebound, but the job market is still expected to remain listless for months to come. On Friday, the Labor Department will offer its latest snapshot on employment, for May, and analysts project it will show that businesses are still determined to keep payrolls lean. "This data may be a problem in that it could show extreme labor market weakness, but it will be a lagging indicator of what's going on in the rest of the economy," said Chris Rupkey, economist with Bank of Tokyo-Mitsubishi Ltd. in New York. "All of the anecdotal data suggests things are going to be improving," Rupkey added. U.S. economists in...

Posted by DeLong at 03:01 PM

June 03, 2003
Time to Bang My Head Against the Wall Once Again

Back when George W. Bush "won" the presidential election of 2000, I said that there was at least one bright spot: under the Clinton administration making progress on freeing up world trade had been a very hard slog. Republican administrations, I said, have a much easier job advancinge the free trade ball because of their different constellation of key domestic interest groups they must appease. I was, once again, an idiot. I had no grasp of how incompetent and how substance-free George W. Bush and the key members of his team were. I really don't understand why Bob Zoellick hasn't quit his job as Special Trade Representative yet: he could make more money, enhance rather than diminish his reputation, and do more to put pressure on George W. Bush and company to liberalize trade from outside the administration than it appears he can from inside. Today's Wall Street Journal has some details on the latest missed opportunity: WSJ.com - World Leaders End Summit; Farm Funds Stymie Progress: EVIAN, France -- While world leaders gathered here insisted consumers and firms should be more optimistic about the global economy, they failed to make headway on an issue that would make them feel...

Posted by DeLong at 11:52 AM

June 02, 2003
Notes: Employment Forecasts

Briefing.com expects this Friday's numbers to show a further 50,000 loss in payroll employment, and a stable unemployment rate. Reports from Briefing.com: The labor market remains in transition and showed very clear signs of severe weakening in Feb/Mar.  A heavy hit to Q4 was followed by volatiliity and a sharp downward turn in early 2003.  The news from manufacturing hit another rough spot as the string of declines has stretched to 33 months and sums to 2.3 mln fewer workers.  Private service sector payrolls have shown declines in 5 of the last 7 months.  Military reservists have added to the confusion given the BLS inability to measure the payroll effect.  Announced layoffs, business cost cutting and the economic recession have pummeling the payroll data as the removal of military reservists add another downward force in 2003.  The monthly movement is volatile due partly to corporate spending restraints and strong labor productivity.  The lagging unemployment rate will continue to follow a path higher even as payrolls return to growth.  Hourly earnings are running at a 3% pace as compensation costs are of lesser concern given weak unit labor costs (compensation offset by productivity gains).  The workweek is a key indicator of labor demand and a leading indicator of payroll growth but has only been holding in a range rather than lengthening......

Posted by DeLong at 10:53 AM

A Stronger Forthcoming Rebound in Investment Spending?

Morgan Stanley's Richard Berner turns pessimistically optimistic about the recovery: Morgan Stanley: Incoming data suggest that manufacturing is staging a rebound, following a slide netting more than 2% since last August.  Is the recovery coming faster than we expected a couple of weeks ago?  Certainly several positive fundamentals are in place.  Among them: Declining energy quotes, easier financial conditions, increased fiscal stimulus and reduced uncertainty, all of which should boost demand.  Moreover, a long spending drought has built some pent-up demand in Industrial America.  But it's still a two-tier manufacturing economy, with technology reviving and the rest of manufacturing struggling.  Importantly, manufacturers still face two key cyclical obstacles in a tepid global economy and still-high natural gas prices, while high legacy health and pension costs and competition from China represent key secular challenges. There are certainly glimmers of hope in very recent manufacturing data.  Purchasing managers from Chicago and Milwaukee reported a sharp improvement in both orders and overall business conditions in May over April, and their New York brethren announced that manufacturing business conditions stayed at a high level.  It still looks like a two-tier manufacturing economy, however (see "The Two-Tier Economy Revisited," Global Economic Forum, May 16, 2003). ...

Posted by DeLong at 10:23 AM

May 30, 2003
Another British Economist Scared of the Euro

Sam Brittan crosses the aisle and now opposes replacing the pound with the euro: A case for currency freedom - Samuel Brittan: New Economy 06/03: ...I have never regarded the direct economic effects of euro membership as terribly important one way or the other. The main reason why I formerly supported it was that it seemed for many years the most likely way of establishing an operationally independent central bank. The independence of the European Central Bank was established by treaty on the lines of the Bundesbank in Germany and seemed pretty safely ensconced. But since the incoming Labour government took many people by surprise in 1997 by unilaterally establishing operational independence for the Bank of England - and still more because of the favourable track record of the new regime - that particular argument for the euro goes out of the window. The case I now wish to make is a positive one, not against the euro - still less against the European Union - but in favour of a floating exchange rate which the UK now enjoys and could not continue to have inside the euro. A floating exchange rate automatically balances a country's overseas payments - current...

Posted by DeLong at 11:20 AM

Is the Radio Spectrum "Scarce"?

The Economist muses about whether the radio spectrum is "scarce" any more: Economist.com: Economics focus Freeing the airwaves May 29th 2003 From The Economist print editionShould radio spectrum be treated as property, or as a common resource? WHAT is the best analogy for radio spectrum? Is it, as most people intuitively believe, a palpable resource like land, best allocated through property rights that can be bought and sold? Or is it, thanks to technological progress, more like the sea, so vast that it doesn't need to be parcelled out (at least for shipping traffic), in which case general rules on how boats should behave are enough to ensure that it is used efficiently. Wireless folk have been discussing these questions for some time. Now, regulators are starting to take an interest, because increasing demands for wireless services require more efficient use of the spectrum. Earlier this month, America's Federal Communications Commission (FCC) decided to allow leasing and trading of frequency licences—the property model—as a first step towards establishing a market in radio spectrum. However, when regulators meet for the World Radiocommunication Conference in Geneva, starting on June 9th, they will try to harmonise their plans to expand the part of...

Posted by DeLong at 10:37 AM

May 29, 2003
Our Current Semi-Recession

The Wall Street Journal's John Hilsenrath thinks about the fact that the rapid productivity growth of the "new economy" means that output has to grow faster than 3.5% per year for unemployment to fall. That the productive capacity of the American economy is rising so rapidly is a powerful reason for more stimulative short-run policies--and is the thing that makes the Bush administration's failure to propose a significant, real stimulus package a considerable shame. WSJ.com - This Recovery Feels Like Recession: Economy Expands, Payrolls Shrink: ...Payrolls in the electronics sector, and for producers of industrial equipment, have declined for 28 straight months. In communications, payrolls have fallen for 24 months. In the securities and airline industries, they have fallen in 16 of the past 24 months. In some ways, this is the downside of a productivity boom that created much optimism about the economy during the 1990s. Productivity growth means that companies are squeezing more output from existing workers. Over the long run, most economists agree productivity growth is good for workers, because it tends to lead to higher wages. But in the short run, it is creating a problem. Worker productivity has been growing faster than the overall economy....

Posted by DeLong at 07:51 AM

May 28, 2003
Finding Where the Numbers Are Crunched

Paul Krugman praises the Center on Budget and Policy Priorities and the Urban-Brookings Tax Policy Center: Well, here's how to become an instant fiscal expert. Seriously, these sources are must reading for anyone interested in government policy. First is the  Center on Budget and Policy Priorities . It's staffed largely by former Congressional aides. Yes, it's Democratic in orientation - but while that affects its choice of subjects, the statistical work is absolutely impeccable; there is nothing at all like it on the right, or anywhere else. Their recent  analysis  of the declining share of federal revenue in GDP was central to my last column. If you care about these things, check CBPP's site regularly for updates. Second is the  Urban-Brookings Tax Policy Center , which is particularly useful for distributional analyses - whose taxes get cut. Again, the orientation is Democratic - Republicans think that it's evil even to ask such questions - but the work is impeccable. Now you, too, can do the math....

Posted by DeLong at 08:18 PM

May 27, 2003
Note: Greenspan's Views as of May 2003

Greenspan's views, May 2003... Testimony of Chairman Alan Greenspan The economic outlook Before the Joint Economic Committee, U.S. Congress May 21, 2003 Mr. Chairman, I appreciate the opportunity to testify before the Joint Economic Committee. As you will recall, when I appeared here last November, I emphasized the extraordinary resilience manifested by the United States economy in recent years--the cumulative result of increased flexibility over the past quarter century. Since the middle of 2000, our economy has withstood serious blows: a significant decline in equity prices, a substantial fall in capital spending, the terrorist attacks of September 11, confidence-debilitating revelations of corporate malfeasance, and wars in Afghanistan and Iraq. Any combination of these shocks would arguably have induced a severe economic contraction two or three decades ago. Yet remarkably, over the past three years, activity has expanded, on balance--an outcome offering clear evidence of a flexible, more resilient, economic system. Once again this year, our economy has struggled to surmount new obstacles. As the tensions with Iraq increased early in 2003, uncertainties surrounding a possible war contributed to a softening in economic activity. Oil prices moved up close to $40 a barrel in February, stock prices tested their lows of...

Posted by DeLong at 10:44 AM

May 24, 2003
A Question About the Zero Bound on Nominal Interest Rates

Kevin Drum asks what he describes as a "really dumb question": CalPundit: Interest Rates: Now, I know this is a really dumb question (and yes, contrary to popular wisdom, there is such a thing as a dumb question), but why is this so? Why can't the Fed have negative interest rates? Walk up to the discount window, borrow a million dollars, and next month when it comes due you only have to pay back $900,000. Banks would then have an incentive to loan out this money at a negative rate too. As long as their rate was less negative than the Feds, they'd make money on the deal... The problem comes at the second stage of your thought experiment. Yes, the Fed can loan money at negative nominal interest rates to banks. But the banks then have an incentive to simply put the cash in their vaults and keep it there. They could loan it out at negative interest rates and make money (as long as there was a spread), but they would make more money if they did not lend it out and just squirreled it away. To break this greater incentive for banks not to squirrel the cash...

Posted by DeLong at 10:46 AM

May 21, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCXXI

The New York Times beats up on the Bush administration Treasury: ... stature gap... Paul O'Neill the gaffe-prone... John Snow... credibilit... impaired... policies which are now discredited... credibility in question, Mr. Snow... antagonizing America's trading partners... dangerous confusion in currency markets... I cannot disagree: for someone used to Bentsen-Rubin-Summers O'Neill and Snow seem a long, long, long way down. But then the Times tells why it is beating up on the Treasury Secretary, and in the process reveals how pitifully little those who write--and review, and edit--it know about finance and economics: The dollar's decline... certainly amounts a vote of no confidence in America... it isn't as if Europe is attracting investment on its own merits... This makes me want to say, "But... But... But..." Over the past year investors have become convinced (rightly, I believe) that the Federal Reserve is seriously concerned about the dangers of deflation and is willing to keep interest rates low to prevent even a shadow of a chance of a full-scale deflation, while the European Central Bank is not. This means that European interest rates are likely to be significantly higher than American interest rates for years to come. This makes euro-denominated bonds more...

Posted by DeLong at 10:13 AM

May 20, 2003
Yet Another Downward Forecast Revision

Yet another downward revision in the growth forecast. Yahoo! News - Economists Lower U.S. Growth Forecasts: Economists have cut their U.S. growth forecasts for the current quarter and the whole of 2003, a Federal Reserve (news - web sites) Bank of Philadelphia survey said on Tuesday. Economists expect gross domestic product to grow by 2.2 percent this year, down from their previous prediction of 2.5 percent made three months ago, the Fed bank said in its quarterly Survey of Professional Forecasters......

Posted by DeLong at 03:36 PM

Wow. The Financial Times Is Really Grumpy

Wow. The Financial Times is really grumpy. It's not clear whether the immediate cause is the "dollar policy," the tax cut, or simply a long train of abuses and usurpations that has caused them to lose all patience. What is clear is that the Financial Times is now an advocate of its three-part plan for dealing with the Bush administration: Open toilet. Insert Bush administration. Flush. Financial Times - May 19, 2003 LEADER: Exit economists The news that the two leading contenders for the presidency of the New York Federal Reserve have withdrawn from the running is troubling. It seems neither Stanley Fischer, formerly number two at the International Monetary Fund and now at Citigroup, nor Peter Fisher, Treasury under- secretary for domestic finance and a former New York Fed man, could be persuaded to take over the second most powerful position in the Federal Reserve system. Doubtless both men had understandable personal reasons for their polite refusals. But their reluctance fits something of a disturbing pattern these days. Serious economic policymaking has been so downgraded in George W. Bush's America that it is becoming harder to persuade anyone to do it. All the members of the president's first economic...

Posted by DeLong at 02:40 PM

May 19, 2003
Still Bemused

I'm still bemused by the fact that there were 3.3 percent fewer hours worked in the nonfarm business sector in 2003:I (the first quarter of 2003) than in 2000:I. Such a prolonged shrinkage in hours worked--given America's robust demographics--is an extraordinary labor market experience for the United States....

Posted by DeLong at 04:43 PM

Deflation Warnings

Ed Hugh points out and links to the IMF's Deflation Storm Warning....

Posted by DeLong at 07:29 AM

The Wall Street Journal Is Angry

The Wall Street Journal is angry at the fuzzy math used by the Republican Congress: WSJ.com - Caution: Tax Cuts Are Bigger Than They Appear in Budget: Last week, President Bush again urged American business to "tell the truth to employees and shareholders" and practice "open accounting." At almost the same time, Republicans in the Senate, at the quiet but intense urging of the White House, massaged their own budget accounting rules to fit a $400 billion tax cut through a $124 billion hole. The tax cut approved by the Senate, with Vice President Dick Cheney casting the deciding vote, would repeal the tax that shareholders pay on dividends. It would allow investors to shield half their dividends from income taxes this year and all dividends in the three following years. After that, the bill says the dividend tax would return in full unless Congress acts to repeal it again. That's called "sunsetting" in Beltway patois. But neither friends nor foes of the dividend tax expect Congress to reinstate the tax in 2007. So why add the sunset provision? It's a gimmick whose only purpose is to make the books look better than they truly are. By pretending that the...

Posted by DeLong at 07:08 AM

May 18, 2003
More Gloom

The Financial Times's Lex gets very gloomy on the U.S. economic outlook: FT.com Home US: April's US inflation data were surprisingly weak. As the Federal Reserve has made plain, inflation is at a level where further falls are not welcome. The trend is not encouraging. But the chief reason why deflation is a risk is that the economy has long been operating below trend. The improvement in the Michigan consumer confidence survey is welcome, but that has to be set against weak data on consumer and business spending. It looks like further monetary stimulus (orthodox or otherwise) is needed to aid recovery. Fiscal policy will provide some help. But the focus on the size of the "headline" tax cut is backward and there will be little bang for the buck. Goldman Sachs economists estimate that when a budget is finally passed the impact will be worth up to 0.75 per cent of gross domestic product this year. The impact from the war in Iraq could raise the overall stimulus to just north of 1 per cent - or half as much as last year. There may be some impact on stock prices from a dividend tax cut, but expectations should...

Posted by DeLong at 01:13 PM

May 16, 2003
Still Optimistic About Brazil

The Economist is still optimistic about Brazilian President Lula's chances for pushing through his planned reforms of pensions and taxes... Economist.com | Reforms in Brazil: ...What matters now is how many votes Lula can muster in Congress. Neither proposal is likely to pass unscathed. Both involve constitutional amendments, which must pass twice by three-fifths majorities in both the Chamber of Deputies and the Senate. A lot can happen on the way. To mild surprise, Lula included a contentious clause to reduce the pensions of existing retirees, a measure demanded by the states to shore up their finances. This may be watered down--perhaps by raising the portion exempted from the new charge--or eliminated. Although that would denude the pension reform of much of its immediate fiscal impact, it would not trouble the financial markets much. "If they keep the rest, it's still meaningful," says Carlos Kawall, chief economist at Citibank in Sao Paulo. The tax bill is a hotch-potch, rather than a thorough overhaul. It would unify 27 different state value-added taxes and convert a separate tax on company turnover into a proper VAT. Though less controversial than the pension plan, the tax bill benefits some sectors at the expense of...

Posted by DeLong at 08:53 PM

Ooofff!!

David Pilling of the Financial Times on the latest bad news about deflation in Japan: FT.com Home US: ...Japanese deflation gathered pace in the first quarter with year-on-year prices falling 3.5 per cent - their fastest drop on record. The fall may fuel fears that Japan, which has managed to co-exist with relatively mild deflation since the mid-1990s, could be sliding into a deflationary spiral. Japanese prices - as measured by the gross domestic product deflator, considered a more accurate measure than the consumer price index - have been falling more or less continuously since 1995. Annual price falls have averaged between 1 and 2 per cent for most of that time. Friday's figures showed deflation accelerating in fiscal 2002, a year in which Japan was growing out of recession, to minus 2.2 per cent, a record for a full year. The figures were released along with GDP data showing that growth in the first quarter fell to almost zero, leading some economists to conclude that the economy was on the brink of yet another recession. Nominal growth fell 0.6 per cent in the March quarter, or minus 2.5 per cent on an annualised basis. Paul Sheard, economist at Lehman...

Posted by DeLong at 12:31 PM

The New German Recession

The Economist reports that the German economy has gone into the tank: Economist.com: ...Today it is Germany that economists point to with a mixture of contempt and alarm--emotions reinforced by confirmation on May 15th that the economy is technically in recession, with two successive quarterly declines in output. The latest figures were even worse than anticipated, with GDP falling by 0.2% in the first quarter of this year compared with the last three months of 2002. Every new number seems to bring more bad news. The unemployment data have for months been causing the German chancellor, Gerhard Schroeder, particular embarrassment. The jobless total is now higher than when he first took office in 1998, in spite of his pledge during that year's election that he would cut unemployment. Industrial production is falling, as are manufacturing orders, hit by a combination of weak domestic demand and falling exports, squeezed by the sharp rise in the euro. The decline of Europe's largest economy has worrying implications not just for its immediate neighbours but for the world economy as a whole. The government's weak and flustered response is equally troubling. Instead of using his strong mandate in 1998 to push through much-needed reforms...

Posted by DeLong at 09:54 AM

May 14, 2003
New York Fed Presidency

John Berry reports on three people who apparently do not want to become the next President of the Federal Reserve Bank of New York. But he says nothing about who is likely to become the next President of the Federal Reserve Bank of New York: N.Y. Fed Candidates Withdraw (washingtonpost.com): The two top candidates to become president of the New York Federal Reserve Bank, Treasury Undersecretary Peter R. Fisher and Citigroup Vice Chairman Stanley Fischer, have withdrawn their names from consideration, knowledgeable sources said yesterday.... It couldn't be learned why the two men withdrew, or who is now being considered for the post. Peter G. Peterson, chairman of the New York Fed board and its search committee, couldn't be reached for comment yesterday.... Another potential candidate, Fed Vice Chairman Roger W. Ferguson Jr., has said he is not interested in the position......

Posted by DeLong at 07:13 AM

May 13, 2003
Emerging-Market Bonds with Collective Action Clauses

Emerging-market bonds with collective action clauses to make restructuring easier. Not yet the wave of the future, but perhaps a ripple: Economist.com: ...GEORGE BUSH'S Treasury Department has a mediocre reputation in international economic circles. Mr Bush's first Treasury secretary, Paul O'Neill, was known more for gaffes than for gravitas. His affable successor, John Snow, has been too busy trying to sell Mr Bush's tax cut at home to show much interest in matters abroad. On the international scene, Team Bush pales in comparison with Robert Rubin and Larry Summers, Bill Clinton's Treasury secretaries. Yet the Bush administration may have more influence on one of the most pressing questions in international economic policy than the Clinton crew ever did: how can the debts of developing countries be restructured? John Taylor, the top international man in Mr Bush's Treasury, has long touted a market-based approach to dealing with sovereign-debt crises. He is sceptical of the International Monetary Fund's proposal for a "sovereign-debt restructuring mechanism" (SDRM), which would create, in essence, a watered-down international bankruptcy court. Mr Taylor prefers to encourage solutions to debt problems by persuading emerging economies to introduce "collective-action clauses" in their bonds. In recent months all this has changed....

Posted by DeLong at 11:43 AM

May 12, 2003
"Stimulus" Packages

Morgan Stanley's Richard Berner on the potential effectiveness of what is now being called a "stimulus" package: Morgan Stanley: ...For example, the Senate Democrats' plan has the smallest 10-year cost, but its authors claim $125 billion in first-year stimulus.  That's because most of its stimulative features are temporary and most of the revenue offsets only kick in later.  In contrast, the Senate GOP plan (as it stood at week's end) nets to a 10-year cost more than twice the size of the Democratic proposal.  Based on Congressional Joint Tax Committee data, however, we estimate that its first-year stimulus is only about $70 billion, because some of its stimulus comes on more gradually and is permanent......

Posted by DeLong at 11:32 AM

May 09, 2003
Be Careful: If You Look Into the Abyss

Morgan Stanley's Stephen Roach looks into the abyss that is the western European business cycle conjuncture, and emerges even more frightened and desperate than usual... Morgan Stanley: ...Therein lies the potential for a serious growth shock to Europe. Lacking in support from domestic demand, a sharply appreciating currency will likely deflate Euroland?s external growth cushion, unmasking the full extent of the weakness that has emerged on the domestic demand front. In that context, and with layoffs and unemployment back on the rise, it is all the more critical for policy makers to apply counter-cyclical stimulus in order to jump-start anemic growth in domestic demand. Unfortunately, those options have all but been closed off by the institutional constraints of the European Monetary Union -- the Growth and Stability Pact, which effectively rules out fiscal expansion, and the backward-looking inflation-targeting mandate of the ECB, which inhibits aggressive monetary ease.... And dramatic change is exactly what?s now in the air. The Federal Reserve said it all with its extraordinary policy statement of May 6: After nearly 18 months of steadfast denial, America?s central bank has finally conceded that the risks are now skewed toward deflation. With most of Asia in deflation and US...

Posted by DeLong at 01:58 PM

May 08, 2003
A Primer on FedWatching

Morgan Stanley's Richard Berman provides an excellent updated version of the codebook needed to understand what the Federal Reserve is thinking: Morgan Stanley: Yesterday's FOMC statement makes it clear that deflation risks are the Fed's biggest concern, and that they mean to fight them with every tool -- conventional or not.  In my view, this statement breaks important new ground for our central bank: Officials have taken an important step toward inflation targeting.  The Fed won't likely announce a numerical target for inflation soon.  But fighting deflation risks means that short-term rates will stay low for the foreseeable future, and the Fed will hammer that message home repeatedly to ensure that inflation stabilizes or even rises somewhat. With the stroke of a pen, the Fed has thus clarified its game plan, both for near-term tactics and for medium-term strategy.  Near-term tactics leave officials in a wait-and-see mode, with the option to ease again if inflation falls substantially or downside risks to growth reemerge.  As my colleague David Greenlaw notes, our baseline view is that the Fed won't exercise that option, but it?s a close call (see his accompanying Forum piece, "Some New Code Language from the Fed").  The Fed's medium-term...

Posted by DeLong at 11:22 AM

May 05, 2003
Q&A: Global Investment and Development

Question: how can investment in information technology be adjusted so that it is good for the entire developing world, and not just for the industrial core and for small enclaves like Bangalore? Answer: It's a huge problem. Investment in the developing world depends on (a) financiers placing large bets on developing-country growth, or (b) developing countries successfully exporting to earn the hard currency to buy the capital equipment they need. It's hard to see the first happening as long as large U.S. budget deficits and huge U.S. trade deficits mean that the U.S. is not just the only working cylinder for global growth but also a vacuum cleaner sucking up every loose financial dollar. As far as the second--Pervez Musharraf of Pakistan asked for one important thing in October 2001: an increase in Pakistan's textile export quota. He didn't get it, even though a Pakistani working in a textile factory is one who is not studying in a fundamentalist madrassah....

Posted by DeLong at 04:41 PM

May 04, 2003
The Coming Decline in the Dollar

Morgan Stanley's Stephen Roach hopes and thinks that the dollar will fall far, will fall soon, and that in fact the return to equilibrium valuations is already underway. I'm not sure that it is underway and I'm not at all confident that it will be soon: I recall the late Rudi Dornbusch, who always said that currency value imbalances last much longer than anyone sane would believe possible, and then turn themselves around much more quickly than anyone lulled by the previous period had imagined possible. Fundamentals are on Roach's side. But fundamentals plus $2.80 will get you a BART ticket from Lafayette to Berkeley. Stephen Roach: ...But there?s even a deeper significance to dollar depreciation. Largely for political or other institutional reasons, both Europe and Japan have been unwilling or unable to adopt pro-growth policy measures. Japan is fearful of ending the ?convoy system? of zombie-like companies; the resulting rise in unemployment is an anathema to a system where social contracts still involve some form of lifetime employment. Europe is constricted by a misguided rules-based system of macro policy determination. Monetary policy is still aimed at fighting inflation in an increasingly deflationary world. And fiscal policy is set by...

Posted by DeLong at 11:13 AM

Why Low Profits in Silicon Valley Are Good

Edward Hugh makes an interesting and under-recognized point about how the relative lack of profits in Silicon Valley is (or might be) good news for the information age: Interesting point this: the lack of price leverage in the technology sector is transferring more power to the end users. This is all part of a fairly predictable process of techological evolution. After the initial surge of speculative activity, the real benefits of the arrival of railway and telegraph were felt in the broader industrial economy which grew more rapidly as a consequence. As the internet and the PC come of age, the interest moves downstream, to individuals and companies who will try and realise the enormous productivity and welfare benefits which are there for the taking in the age of connectivity. Of course, the big unanswered question is still whether the rate of expansion in user markets can grow fast enough to absorb the shock of the Moore's Law driven upward pressure on capacity and downward pressure on prices, and hence turn a deflationary conundrum into a growth explosion.......

Posted by DeLong at 09:30 AM

May 02, 2003
Would a Dividend Tax Cut Do Anything?

Angry Bear reviews McKinsey's take on dividend tax cuts: Angry Bear: McKinsey on Dividend Taxes: McKinsey is one of the top, many say the best, management consulting firms--hardly a left-wing industry. Among their various activities, they distribute a newsletter, The McKinsey Quarterly. In the latest issue, they have a short piece entitled Eliminating the double taxation of dividends is more notable for what it won?t do than for what it will (free registration required). This is an exressly non-political piece that speculates about the implications of eliminating the dividend tax from the management perspective. In my series on dividend taxes (see top left of the sidebar), I argued that eliminating dividend taxes would increase the pressure on managers to distribute funds to shareholders and this would be a good thing because the alternative to paying dividends is often money wasting mergers and acquisitions. Making reference to this theory, the McKinsey newsletter says We doubt all this. The proposed tax cut, when viewed with an understanding of the shareholder makeup and share price movements of US companies, seems unlikely to have a significant or lasting effect on US share prices. Moreover, history and practice suggest that if the proposal becomes law,...

Posted by DeLong at 02:55 PM

Bad Employment News

As expected, the April employment news was bad: in the cyclically adjusted numbers, the unemployment rate was up from 5.8 to 6.0 percent, payroll employment was down by 50,000 jobs, and the average workweek shrank by 1 percent. NEW YORK (CNN/Money) - The U.S. unemployment rate rose to 6 percent in April, the government said Friday, as businesses cut thousands more jobs from their payrolls. Unemployment rose from March's 5.8 percent rate, the Labor Department reported, and non-farm payrolls shrank by 48,000 jobs, after losing a revised 124,000 jobs in March. Economists, on average, expected unemployment to rise to 5.9 percent and 53,000 jobs to be lost, according to a Reuters poll."I find this report a little more reassuring than it looks on the face of it," Bill Cheney, chief economist at John Hancock Financial Services, told CNNfn. "[Some analysts] were looking for a really awful number, and getting a number close to what was expected is actually kind of a relief."The report had little impact on U.S. stock market futures, which pointed to a mixed opening on Wall Street. Treasury bond prices were little changed.Friday's report means the year-to-year net change in private payrolls has been negative for 22...

Posted by DeLong at 06:32 AM

April 30, 2003
Notes: Employment Dimensions of the Current Recession

Notes: The Current Recession: Employment Dimensions The output and production recession--the one that the National Bureau of Economic Research tracks and that the business press reports--began in the spring of 2001. The employment recession began a year earlier, at about the same time as the peak of the NASDAQ. Relative to the size of America's working age population, Americans worked 6.2 percent fewer hours in the winter of 2003 than they had three years before, in the winter of 2000. The working-age population of potential workers has grown by almost exactly 3 percent in the past three years, yet the absolute raw number of hours worked has fallen by 3.2 percent. 1979-1982 may have seen a larger decline in hours--need to check... EPI understates magnitude of employment fall. Hours worked in spring 2001 already a full percentage point below hours worked in winter 2000, yet EPI starts counting from spring 2001......

Posted by DeLong at 03:45 PM

April 28, 2003
Alan Murray Praises Senator Voinovich

Alan Murray praises Senator Voinovich for his "emperor's new clothes" stand: pointing out that deliberately unbalancing the federal budget in the long term is very bad policy--not the kind of thing that anyone can pretend is best for America. One quibble, however: Murray writes that since "the president's hand-picked congressional budget director, Douglas Holtz-Eakin, has cast doubts... with his 'dynamic scoring' report" on the "easy argument that tax cuts will spur growth and offset their cost." What "easy argument"? If you took your economics seriously--had not long since abandoned any claim to be more than a pure political hack--the argument that cutting dividend taxes by this while widening the long-run budget deficit by that would significantly boost economic growth has always been as hard to make as it would be to climb Mt. Everest in your gym shorts. Alan Murray: The Ohio senator isn't in favor of balancing the budget now, in the face of a weak economy, or even anytime soon. He is simply pointing out what every serious budget analyst knows to be true: The retirement of the baby boomers is rapidly approaching, and piling up ever more debt in advance of that near-certain fiscal cataclysm probably isn't...

Posted by DeLong at 09:46 PM

April 27, 2003
Deficits and Interest Rates

Note the "corrections and amplifications" note at the bottom of the story below. It reads: The President's Council of Economic Advisers estimates that a persistent $100 billion annual increase in the budget deficit would increase long-term interest rates by about 0.3 percentage point. The estimate was given incorrectly as 0.015 percentage point in this article. That figure is the effect of a $100 billion increase in government debt. This is the result of Glenn Hubbard's being a little too clever back when he was chairing the Council of Economic Advisers. Reporters would ask him, "What's your estimate of a $100 billion increase in the deficit?" He would answer either "A one-time $100 billion increase in the deficit will raise interest rates by about by 0.015%," or "A $100 billion increase in the government debt would raise interest rates by 0.015%." The reporters would go away, and write that the president's Council of Economic Advisers believed that a $100 billion increase in the deficit would have only a negligible effect on interest rates. The whole point was to confuse reporters--to blur the distinction between the effects of a change in policy that increases the deficit by $100 billion a year, so...

Posted by DeLong at 09:38 PM

A Loud Cry from Martin Wolf

It's unconscionable that so much time passes by without my reading the columns of the sharp-witted pull-no-punches guy who is Martin Wolf. I have my online Financial Times subscription. What is it that is stopping me? Martin Wolf: ...The mixture of global security risks, post-bubble adjustment and unbalanced growth in demand puts into perspective the euphoria at the end of the war. While the world economy could, in principle, enjoy a strong and durable recovery, it is unlikely to do so without vigorous policy action. The outlines of these actions are well known. That does not make them less important. The US must inject a larger fiscal stimulus, without endangering longer run fiscal solvency. The big eurozone members must take reform seriously, while the ECB should recognise its responsibilities as a central bank in charge of an economic superpower. Japan must, at last, both restructure its banks and halt deflation. Beyond this, the Doha round must be accelerated. It is grotesque that in trade, where the European Union is already a superpower, it is unable to offer radical liberalisation of its indefensible farm policies. Yet nobody looks good. The US has spent as much on its war in Iraq in...

Posted by DeLong at 01:42 PM

The Economist Calls for More Aggressive Pro-Market Reforms in Latin America

The Economist calls for "second generation" neoliberal reforms in Latin America: "The way forward, Mr Williamson concludes, is to 'complete, correct, and complement the reforms of a decade ago', not to reverse them. But can this new formulation command a consensus? However cautious, references to selective capital controls, the role of the state, and income distribution all point to the reform agenda moving towards the centre. Some free-marketeers will object. On the other hand, the region's new centre-left governments, such as that of President Luiz Inácio Lula da Silva in Brazil, might agree with much of this new agenda. One interpretation of the past six months in the region is that the left has signed up to the 'Washington consensus', at least in practice. Lula's government has not only tightened monetary and fiscal policy, it is pursuing the structural reforms espoused by its predecessor. This is not simply tactical, insists a member of Mr da Silva's inner circle of advisers. The government's targets include doubling the efficiency of existing social spending in four years, and raising exports by 10% a year... " Certainly Latin America (outside Argentina) looks like it has a very bright potential economic future. But it has...

Posted by DeLong at 01:19 PM

April 26, 2003
More from the Topkapi Palace

The New York Times's Adam Clymer tries to make sense of recent Bush Administration moves in economic policy--or, rather, in economic publicity, for in Clymer's view the point of all the within-White House intrigue is not to shift the administration toward a better economic policy, but to create the media image of a president working on improving the economy. Mr. Clymer misses one big point, however: while the president cannot control the economy, he can influence the economy--albeit with a long lag. If you wanted policies to make the economy better in, say, the summer of 2004, you would have worked to get such policies into place in 2001 and 2002: trade agreements and tariff reductions; aggressive moves to reassure investors that corporate fraud, corporative executive malfeasance, and other problems of corporate control were being dealt with; and perhaps some short-term front-loaded tax cuts targetted at getting more money into the hands of people who would actually spend it. Presidents don't control the economy. But their chances of having a good economy four, five, six years into their terms of office are much, much better if they focus on getting economic policies that are good for the country in place...

Posted by DeLong at 09:12 AM

April 25, 2003
This Is the Good News?

The Economist writes about the "good news for the world economy" that we received today: that U.S. GDP grew at a 1.6% annual rate in the first quarter of 2003. This is good news? It is lower than the forecasts I had seen (up until three weeks ago). At a GDP growth rate of 1.6% per year, the U.S. unemployment rate will rise at about 1 percentage point per year, and employment will fall by roughly a million jobs a year. Plus U.S. growth is markedly faster than growth in Europe and Japan. To be fair, the Economist says that this is "only a bit" of good news. But my first reaction is that they are clearly taking too many Get-Happy Pills in the Economist's office. Economist Slow going Apr 25th 2003 From The Economist Global AgendaAmerican economic growth speeded up only slightly in the first quarter of 2003. And there is still no sign of a strong global economic rebound, according to the latest assessment from the Organisation for Economic Co-operation and Development FINALLY, a tiny bit of good news for the world economy. But it is only a bit. Figures published on April 25th showed that America's economy...

Posted by DeLong at 02:57 PM

April 23, 2003
More Intrigue From the Topkapi Palace

According to the National Journal, President Bush's decision to back Alan Greenspan for another term as Federal Reserve Chairman is "no surprise." But if it is "no surprise," why has there been "speculation" that the White House would rather see someone "in that powerful job that is more likely to support his economic policies"? Somebody or somebodies in the White House want it nosed about that it is "no surprise"--that Bush Administration economic policy is now and always has been run by adults. But if that were the case there would not have been a steel tariff. There would not have been that farm bill. And there would not have been the current incoherent set of budget proposals--it's a cyclical stimulus! no, it's a long-run growth program! it will boost the stock market and raise consumption! no, it will raise national saving and reduce consumption! Greenspan does, after all, think that a deficit-widening tax cut is a bad idea right now. And if the White House thinks that somebody with Greenspan's views is the best person in the country to run the Federal Reserve, what does that mean that the White House thinks about the strength of its own arguments...

Posted by DeLong at 09:10 PM

Fear the Euro

Edward Hugh approvingly quotes from a Marty Feldstein piece in the Financial Times, as Marty tries to warn Gordon Brown and company against taking Britain into the euro zone without thinking very, very, very carefully about it: Financial Times: ...Here are the facts. Germany's gross domestic product rose only 0.5 per cent last year, the lowest of all the leading European countries, and ended the year in decline. Germany also has the lowest inflation rate, just 1.2 per cent. Because the single currency means that all eurozone countries have the same nominal interest rate, Germany's real interest rate is the highest in the eurozone. This is a very dangerous situation in which the high real interest rate weakens the economy and causes inflation to fall further. As the inflation rate falls, the real interest rate rises, creating the potential for a dangerous downward economic spiral. If the German economy were not constrained by the single currency, natural market forces would cause interest rates to decline, thereby boosting all kinds of interest-sensitive spending. Weak demand in Germany would also cause the D-mark to decline relative to its trading partners, boosting exports and helping producers to compete with imports from the rest...

Posted by DeLong at 08:12 PM

April 20, 2003
Latest Deficit News

The scary thing about the deficit is not that it is large this year--as long as we are still near the bottom of the business cycle, the larger the deficit the better. The scary thing is the deterioration in projections of what the deficit will be even after the economy recovers. Associated Press: WASHINGTON -- The government ran up a deficit of $252.6 billion in the first six months of the 2003 budget year, nearly twice the total for the same period a year earlier. The latest figures, released Friday by the Treasury Department, highlighted the government's deteriorating fiscal situation. Record deficits are forecast this year and next. The total deficit so far this fiscal year, from October through March, was higher than the Congressional Budget Office's forecast for a deficit of $248 billion. The shortfall was $131.9 billion in the 2002 first fiscal half. Revenue slipped 6.1% to $825.2 billion from the year-earlier period, reflecting lower tax revenue from the listless economy. Individual income-tax payments dropped 6.8% to $372.1 billion. Corporate tax payments plunged 43% to $44.6 billion, reflecting in part the impact of business tax cuts enacted last year and weaker profits, the CBO said. Federal spending climbed...

Posted by DeLong at 08:39 PM

Future Consequences of High Wealth Inequality

Thomas Piketty thinks that the U.S. is headed down a destructive road that will rob it of many of its social and economic advantages: a road in which family- and inheritance-driven wealth inequality gives the relatively-feckless children of the rich advantages that mere merit cannot outweigh--a society with a true aristocracy. I don't think he is right, largely because I don't see current trends as continuing, but as highly likely to be reversed in the next generation. On the other hand, America is a society where one-fifth believe their incomes are in the top 1%, and where another fifth believe their incomes will be in the top 1%. Perhaps American society will continue to move in a direction in which are institutions are tuned to suit the convenience of those at the very top of the pyramid. Daniel Altman: ...The shares of income controlled by the highest-earning Americans are already higher than at any time since the 1920's, according to Thomas Piketty, a former professor of economics at M.I.T. who is now the director of studies at the École des Hautes Études en Sciences Sociales in Paris. In an e-mail message last week, he predicted severe effects from the further...

Posted by DeLong at 08:26 PM

April 18, 2003
A Big Step Forward on Corporate Reform

Finally, an excellent choice to try to repair the damage done by the corporate fraud and accounting scandals. William McDonough is a class act. Accounting in America Sorting out the wreckage Apr 17th 2003 | NEW YORK From The Economist print editionAmerica's accountants learn the identity of their new overseer BIT by bit, America's financial markets are being patched together again. On April 15th William Donaldson, chairman of the Securities and Exchange Commission (SEC), nominated William McDonough, the retiring head of the Federal Reserve Bank of New York, as the first head of the new Public Company Accounting Oversight Board. Moments later, it was reported that the troubled NASDAQ stockmarket would appoint another banker, Furlong Baldwin, as its chairman and an executive of a financial-technology firm, Robert Greifeld, as chief executive. These appointments should bring stability to areas blighted by chaos. In Mr Baldwin the NASDAQ, a metaphor first for fast-growing technology companies and then for corporate collapse, has chosen a man whose career at Mercantile Bancshares, a Maryland bank, was nothing if not conservative. With Mr McDonough, regulators hope to fill a job that has so far been stillborn. The attempt by Mr Donaldson's predecessor, Harvey Pitt, to appoint...

Posted by DeLong at 08:42 AM

April 17, 2003
Comparative Advantage Creeps Into the White-Collar Service-Sector World

Comparative Advantage Creeps Into the White-Collar Service-Sector World The invention of the iron-hulled steam-powered ocean-going freighter in the mid-nineteenth century transformed transoceanic international trade from an exchange of low-weight high-value manufactures and agricultural products with interesting flavor or neurological properties into an exchange of nearly all goods--even high-weight low-value ones. As the price of ocean transport dropped through the floor, even small differences in nation-specific prices could drive large amounts of trade. Today we are going through something similar, but this time it is the price of sending bits--information--around the world that is dropping through the floor. This means that tomorrow's international trade may well be about performing information-processing tasks in whatever country, far from the ultimate client, the task can be performed most cheaply. Here (sent to me via Dave Farber's IP mail list) Chidanand Rajghatta looks at India's growing potential comparative advantage in the preparation of U.S. IRS Forms 1040. Every industry facing foreign competition finds some reason that the presumption in favor of free trade does not apply to them, and international trade in tax preparation is no exception. Mr. Rajghatta finds Lloyd Caroll, who claims that the "very notion of transmitting confidential tax data... to any...

Posted by DeLong at 11:17 AM

April 14, 2003
The Budget Resolution

Today's Wall Street Journal tries to make sense of this year's Budget Resolution: ...Worried about war costs and rising deficits, Ms. Snowe and Mr. Voinovich vowed to reject tax relief that exceeded $350 billion. Their refusal to bend nearly forced final budget talks to collapse last week; House Republicans were just as firm in insisting on a higher number. The agreement with Mr. Grassley was sealed at 8:10 p.m. Thursday and followed several grueling days of negotiations. Mr. Voinovich came up with the idea of asking for a commitment from Mr. Grassley -- a senator admired for his blunt pragmatism and for keeping his word. Federal budgets set spending and revenue goals and aren't binding documents. But they do make it easier to pass tax cuts in the Senate -- especially in the current Senate, where Republicans hold a one-vote majority. As long as the number stays below what the budget calls for, tax legislation can't be blocked procedurally. House leaders were furious about the Grassley deal, especially because they didn't find out about it until after their chamber approved the budget early Friday morning. House Republicans thought they were approving a plan that allowed a tax-cut package of as...

Posted by DeLong at 10:47 AM

April 11, 2003
Out of Touch

The Economist complains that continental Europe's economic policies are out of touch with reality: Economist.com | Economies after the war: Europe faces many of the same problems as America, but with a much less accommodating economic policy. Conventional wisdom has long held that Europe would avoid most of America's post-bubble fall-out because far fewer Europeans own stocks. That sanguine attitude looks increasingly wrong. Investment in Europe has been contracting since the middle of 2000, and Europe's bank-dominated financial system may be exacerbating the post-bubble hangover. In Germany especially, bank profits are weak, corporate insolvencies are surging, and falling equity prices have eroded banks' reserves. An IMF analysis suggests that these factors are heightening banks' risk aversion and undercutting the credit process, a tale that bears some similarity to Japan's. Add to this the fact that labour and product markets are still too rigid, and it is small wonder that the outlook for Europe is grim. Moreover, policymakers are much less helpful than in America in easing the adjustment. Although Germany's government recently announced plans to cut job protection and improve work incentives, the overall pace of deregulation has been snail-like. With central bankers obsessed by fears of inflation, monetary loosening...

Posted by DeLong at 11:04 AM

April 10, 2003
A Word From the Deficit Hawks

The bipartisan deficit hawks call for an end to tax cuts. The interesting thing is that the Bush White House has paid them no attention--although the Congress is paying them some. They are correct, after all. No New Tax Cuts: By BOB KERREY, SAM NUNN, PETER G. PETERSON, ROBERT E. RUBIN, WARREN B. RUDMAN and PAUL A. VOLCKER ith a war in Iraq and looming postwar costs, growing pressures for a prescription drug benefit, increased expenses for domestic security and a ballooning budget deficit, Congress must exercise restraint on both revenues and spending to prevent fiscal policy from spiraling out of control. The consensus in favor of long-term budget balance must be re-established. This issue is now directly before Congress as it debates the federal budget. The fiscal outlook is much worse than official projections indicate. These projections assume that the tax cuts enacted in 2001 will expire at the end of 2010. They also assume that discretionary spending, the part of the budget that pays for national defense, domestic security, education and transportation, will shrink continuously as a share of the economy. Neither of these assumptions is realistic. Moreover, the official projections do not include the costs of war...

Posted by DeLong at 07:50 PM

April 09, 2003
The IMF Gets Gloomier

The IMF gets gloomier: expected year-2003 growth in Japan down to 0.5%, in Europe to 1.1%, in the U.S. to 2.3%. That should see unemployment rise by 0.5% in the U.S., and by somewhat more in Europe. In a way, the IMF's revisions shouldn't change my view: it's only summarizing news that I already knew, after all. Economist.com: ...The IMF is now expecting slower growth in the world's biggest economy than it was six months ago, and, significantly, than last year. The Fund nevertheless expects America to lead the global upturn, and argues that the world is now too reliant on American growth. A greater sense of urgency is needed to reduce dependence on America, says the Fund in its list of policy prescriptions. Easier said than done, of course. If the outlook for America is subdued, it is dismal in most parts of Europe and Japan. The IMF is clearly very worried by the poor economic performance of the euro area--its latest forecast for growth this year is less than half that produced in September. Germany is of particular concern: as the Fund points out, 2003 will be the third consecutive year that Europe?s largest economy has grown at...

Posted by DeLong at 12:00 PM

April 08, 2003
Huh?

One of the big problems with reading British periodicals is that you can never tell whether they are being sarcastic or not. For example, take last week's Economist on the Doha Round of trade negotiations: The Doha Squabble: In one corner stands the Cairns group of agricultural exporters (including Canada, Australia and Brazil), plus the Americans. Although there are differences among them, this group wants an ambitious outcome, including the scrapping of export subsidies and big cuts in trade-distorting domestic subsidies and tariffs. The Americans want to phase out export subsidies over five years, to cut subsidies to 5% of the value of farm production and to slash tariffs to no more than 25%. These radical plans admittedly stand in stark contrast to the American farm bill signed by George Bush last year, which dramatically increased farm subsidies. What this shows, argues Mr Zoellick, is that America is ready to dismantle subsidies--but only if the playing-field is level. Now we all know that George Bush's farm bill does not show any readiness "to dismantle subsidies... if the playing-field is level." It shows, instead, that the (weak) part of the Bush Administration (then led by then-NEC head Larry Lindsey, before he...

Posted by DeLong at 02:44 PM

April 06, 2003
More Bad Unemployment News

John S. Irons reports more bad employment news: The employment situation remains poor. Data released by the Bureau of Labor Statistics shows that the unemployment rate for March remains unchanged at 5.8%, and, in addition, total nonfarm payroll employment declined by 108,000 after seasonal adjustment. Overall, these numbers again point to the idea that the economy is in somewhat of a holding pattern. Overall growth appears to be weak, leading to the decline in employment, yet the unemployment rate has been holding steady at just under 6% for the past year. Given how lousy the employment numbers have been over the past year, it is remarkable that the unemployment rate has not risen by more......

Posted by DeLong at 08:43 PM

April 03, 2003
Europe's Business Cycle and Monetary Policy

As time passes, and as the European periphery becomes richer and richer, its real exchange rates vis-a-vis the European industrial core have to rise. This is the Balassa-Samuelson effect: poor countries have low real exchange rates because international trade is concentrated among the capital- and technology-intensive goods in which rich countries' absolute advantage is greatest, and so as countries catch up to the industrial core, their real exchange rates rise. In the case of poor countries inside the euro zone, convergence and the consequent rise in real exchange rates requires faster inflation than in the industrial core. If development on the European periphery is successful, and if growth on the European periphery is rapid, then inflation on the European periphery will be rapid too. This means that, if eurozone-wide inflation is to be low, there must be deflation--falling prices--in the German-Belgian-French industrial core of the euro zone. Deflation is, in general, a bad idea for lots of reasons, one of the chief of which is the catastrophic consequences of nominal wage cuts for worker morale. Yet as long as the ECB takes its goal to be low inflation eurozone-wide--rather than low inflation in the eurozone's industrial core, with the developing...

Posted by DeLong at 07:41 PM

April 02, 2003
Time to Start Worrying About a Double-Dip

Time to start worrying about a double-dip recession: Factory orders drop 1.5% in February - Apr. 2, 2003: WASHINGTON (Reuters) - Orders for U.S. manufactured goods slumped sharply in February, the Commerce Department said Wednesday in a report hinting at increased caution among firms ahead of the start of the Iraq war. The Commerce Department said orders fell a larger-than-expected 1.5 percent to $321.16 billion in February, following a revised 1.7 percent increase in January. Orders for durable goods -- items such as cars and appliances meant to last three or more years -- fell 1.6 percent, a bigger fall than the previously reported 1.2 percent drop. Wall Street analysts had been anticipating a smaller drop in overall factory orders, with the average forecast in a survey by Reuters calling for only a 0.6 percent decline. Orders in almost all major categories of manufactured goods were down. Non-durable orders were also down, falling 1.4 percent, their largest decline since February 2002, the department said....

Posted by DeLong at 06:12 PM

April 01, 2003
Alan Murray Reports on Dynamic Scoring

Alan Murray reports on the Congressional Budget Office's analysis of the effect of the Bush budget proposals on economic growth and on tax collections: WSJ.com - Political Capital: ...The results: Some provisions of the president's plan would speed up the economy; others would slow it down. Using some models, the plan would reduce the budget deficit from what it otherwise would have been; using others, it would widen the deficit. But in every case, the effects are relatively small. And in no case does Mr. Bush's tax cut come close to paying for itself over the next 10 years. For the handful of people who read the report in its entirety, there is another surprise. Of the nine different economic models used to analyze the president's plan, only two showed a large improvement in the deficit over the next decade as a result of "supply side" effects. Both those models got their results by assuming that after 2013, taxes would be raised to eliminate the remaining deficit. The theory is that people will work harder between 2004 and 2013 because they know that their taxes will be going up, and will want to earn more money before those tax increases...

Posted by DeLong at 09:38 AM

March 31, 2003
Note: State of the Business Cycle

The Economist now projects that the Euro area's economy will grow at 1.1% in 2003, that the Japanese economy will grow at 0.5% per year in 2003, and that the American economy will grow at 2.5% per year in 2003. I don't see why the America number is so high, given that the business-cycle news since January 1 has not been encouraging....

Posted by DeLong at 03:09 PM

March 30, 2003
Stephen Roach Says (Economic) Doom Is at Hand

Morgan Stanley's Stephen Roach says that economic doom is at hand--that the most likely scenario for the world economy over the next four years is stagnation. I wish his arguments weren't so strong, and his scenario wasn't so believable: Morgan Stanley: ...America?s current-account deficit surged to an annualized $548 billion in the fourth quarter of 2002, a record 5.2% of GDP. The financing of such a shortfall requires $2.2 billion of capital inflows each business day -- hardly a trivial consideration for a low-return, post-bubble US economy. Nor is this a stable situation. As America?s federal budget goes deeper into deficit, the country?s net national saving rate -- consumers, businesses, and the government sector, combined -- could easily plunge from a record low of 1.6% hit in late 2002 toward ?zero.? If that occurs, the US current-account deficit could approach 7% of GDP -- requiring about $3 billion of foreign financing each business day. History is pretty clear on what happens next -- a classic current account adjustment. This will entail a very different macro outcome for the United States -- namely, a weaker dollar, higher real interest rates, and a slowdown in domestic demand. That?s precisely the scenario that...

Posted by DeLong at 08:22 AM

March 26, 2003
Sung Won Sohn at Wells Fargo Is Depressed

Sung Won Sohn at Wells Fargo is depressed about the current state of the business cycle. Data continues to come in significantly weaker than I had thought it would, but I have not yet thought seriously about what it means for the forecast... Forbes.com: WRAPUP 1-Data paints weak picture of U.S. economy: WASHINGTON (Reuters) - Business spending fell and home buying slowed sharply in February, the government said Wednesday, while the number of Americans unable to make credit card payments at the end of last year climbed. Durable goods orders in February sank 1.2 percent, the largest fall since November, while sales of new homes fell to their lowest level in more than two years. Credit card delinquencies in the final quarter of last year rose to their highest level since records began in 1990. "The economy is basically stalled, treading water at the moment. The combination of geopolitical uncertainties, the inclement weather, the lousy stock market and lack of confidence are all combined to depress economic activities for the moment," said Sung Won Sohn, chief economist at Wells Fargo....

Posted by DeLong at 12:59 PM

Dynamic Scoring Is Zero...

The CBO decides that the Bush deficit-augmentation plan will not pay for itself--not even partly. What the WSJ article doesn't say is that the plan produces a small boost to the economy in its first year or two, and then the drag starts to grow. In the out-years beyond the forecast cutoff, the drag grows and grows and grows--so the further out you look, the less good the Bush plan looks. Shouldn't somebody tell Bush, Cheney, and Fleischer that their economic proposals will not pay for themselves, and will increase, not shrink the deficit? WSJ.com - Bush's Tax Plan Won't Boost Economy, CBO Analysis Finds: By a WALL STREET JOURNAL Staff Reporter | WASHINGTON -- The Congressional Budget Office said that President Bush's tax and spending proposals will do far less to spur economic growth in coming years than the White House suggests -- and might not provide any kick at all. For the first time, CBO used what's known as "dynamic scoring" to estimate the favorable macroeconomic and revenue effects of budget proposals, a move tax-cut advocates have long urged and deficit-phobes feared. The range of estimates released Tuesday by CBO said adding supply-side effects could add as much...

Posted by DeLong at 08:02 AM

March 25, 2003
Declining Consumer Confidence...

Disappointing, but not unexpected: FT.com Home US: US consumer confidence declines again. By Peronet Despeignes in Washington. Published: March 25 2003 15:33 | Last Updated: March 25 2003 15:33 | US consumer confidence fell to a new  nine-year low in the days leading to the beginning of the US war with Iraq, according to figures released on Tuesday. The Conference Board said its index of consumer confidence fell to a preliminary 62.5 in March, the lowest reading since October 1993. The index, which is based on a monthly survey of 5,000 households, has fallen more than 40 per cent from last  year's high of 110.3 in May......

Posted by DeLong at 08:53 PM

Is the Senate a Vertebrate?

The Senate shows some backbone... well, not exactly backbone, but at least a notochord... in refusing to go along with Bush Administration plans to boost the long-run deficit and slow the long-run growth of the American economy. God! I really hope the morals and the competence of those who direct the Bush Administration's security policy exceed that of those who direct its economic policy. CNN Politics: WASHINGTON (AP) -- The Senate unexpectedly reversed itself Tuesday, voting to slash more than half of President Bush's proposed $726 billion tax cut and dealing a blow to the keystone of his economic recovery plan. A week after refusing to do so, senators voted 51-48 to reduce the tax reduction's price tag to $350 billion through 2013. Bush has said his plan -- which would eliminate taxes on corporate dividends and reduce income taxes -- is needed to create jobs, boost investment and spur the slumbering economy. Just Friday, the Senate voted 62-38 to reject a similar move to pare Bush's tax plan in half. That plan would have taken the additional money Bush wanted for tax cuts and used it for deficit reduction. Both moderate Sen. Lincoln Chafee, R-Rhode Island, and deficit hawk...

Posted by DeLong at 07:57 PM

March 21, 2003
In Argentina, Water Privatization Was Good for the Poor

The Economist cites Gallani, Gertler, and Schargrodsky as finding that, in Argentina at least, water privatization was good for the poor. Why? Because the old, national water company was much more interested in being a political patronage network than a water company. The new, private water company saw the opportunity to profit from hooking more people p to the water system--and was constrained by the government to serve the poor as well as the well-off. Economist.com: ...water... privatisation may actually bring benefits for the health of young children.... water services in Argentina are the responsibility of local governments, and that only 30% or so of municipalities chose to privatise them between 1991 and 1999.... Water privatisation in Argentina certainly brought increases in productivity and profitability. The largest privatisation involved the transfer to Aguas Argentinas, a consortium led by Lyonnaise des Eaux, a French company, of OSN, a federally owned entity in Buenos Aires. At the end of the first year, prices for both water use and connection were lower than they had been at the start. Non-payment of bills had been high; by cutting customers off after three unpaid bills, the company got 90% of people to pay. The number...

Posted by DeLong at 03:39 PM

March 20, 2003
The End of the Surplus

More from Jackie Calmes of the Wall Street Journal: REMEMBER THE SURPLUS?: The Congressional Budget Office says a $5.6 trillion surplus it projected in January 2001, for 2002-2011, is now a $378 billion deficit. That doesn't count any new tax cuts or war spending. Of the 10-year surplus forecast when Bush took office, CBO says 45% was lost to a weak economy, 21% to tax cuts, 21% to added spending and 13% to interest on federal debt. Now the CBO is forbidden by law from calculating real numbers--from allocating changes in debt service to their underlying spending and tax-cut causes, from incorporating policy proposals, from making judgments about what the course of spending is really likely to be. Add in the costs of war, of Bush proposed tax cuts, of fixing the Alternative Minimum Tax, and of other spending, and it's now a 10-year deficit of $2.5 trillion or so--and it's much more like 33%-40%-27% between revisions to forecasts of economic growth, changes in taxes, and changes in spending...

Posted by DeLong at 09:13 PM

War Costs

The Wall Street Journal's Jackie Calmes reports: Cost of War: WAR COSTS: Bush is mum, but lawmakers see first bill of up to $90 billion. Early estimates suggest supplemental fiscal-2003 spending of $62.5 billion for defense -- mobilization, 30 days of operations and added costs of global antiterrorism efforts. Billions more would go to Middle East allies, reconstruction in Iraq and domestic funds for first-responders, Coast Guard and Transportation Security Administration. Airlines seek aid for expenses of federal security mandates, and relief from security fees and ticket taxes. Chicago-based United relies on House Speaker Hastert of Illinois, visits Senate Leader Frist. House Appropriations Chairman Young chafes that White House isn't more open: Budget director Daniels "is not proving very helpful." Larry Lindsey got fired from the White House last winter in large part because he dominated a news cycle last year with an estimate that war with Iraq would cost $100 billion or so. Think what that means about how this administration operates....

Posted by DeLong at 09:06 PM

March 19, 2003
WalMart

Ted Barlow points to a very nice and interesting article on Fortune.com by Jerry Useem. It's about the Mighty WalMart......

Posted by DeLong at 09:34 PM

March 18, 2003
Accounting for Options

The Economist makes fun of the Silicon Valley executives' campaign to try to stop FASB from requiring that they account sensibly for options granted: Economist.com | Expensing share options: ...ONLY desperate, last-minute lobbying saved America's technology firms last summer from having to count as an expense the billions of dollars-worth of share options that they dish out to their staff each year. This time, the tech industry is better prepared. Even before the Financial Accounting Standards Board (FASB) announced on March 12th that it was opening a formal inquiry into mandating the expensing of stock options, a coalition of tech lobbyists was carpet-bombing the press with propaganda. Wisely, the techies have also shifted their defence. The expensing debate has required delicate handling by Silicon Valley. On the one hand, tech firms oppose the notion that options are an expense at all: accounting for their cost by the usual method (the Black-Scholes options-pricing model) would cut tech firms' reported profits by 70%, on some estimates. On the other, tech firms must guard against the notion that their profits?such as they are?are an accounting fiction. This creates a countervailing urge to argue that the market is already counting in the costs of...

Posted by DeLong at 10:14 AM

March 17, 2003
Moore's Law Comes to Telecom

Why are WorldCom's physical assets worth only 1/4 what they paid for them? Some people blame incredibly stupid management. I have always ascribed the write-down of the market value of telecom assets to vastly greater progress in telecommunications software control than had been expected--if you can push ten times as many bits through a fiber as you had thought you would be able to, that kinda cramps your ability to make money off of the scarcity of fiber. Kevin Werbach and Scott Rafer seem to have a somewhat different take, but I'm not quite sure what it is. New York Times: "WorldCom's hard assets, including its network, are now worth almost 75 percent less than what they had cost." UPDATE: Scott Rafer's take on the same announcement. He thinks we're ascribing different causes to the writedown, but I think we agree. Worldcom's problem is that it didn't build its business (and capex plans) with Moore's Law in mind. [Werblog]...

Posted by DeLong at 07:16 PM

Why No Free-Trade First Downs?

One of the (few) good things about Republican administrations is that they generally find it much easier to move the free-trade ball forward than do Democratic administrations. Or, at least, they did until this one. Is the Bush Administration's failure to make progress on free trade due to ineptness or to malevolence? Do the High Politicians simply not care? Or do they care, but have no idea about how to run international economic policy? I haven't had anyone explain to me what is going on inside the West Wing, at least not in any fashion I find convincing... U.S. Unilateralism Worries Trade Officials: ... European officials have complained the loudest about the United States breaking trade rules. In one of the largest such judgments, Europe was awarded the right to impose $4 billion worth of trade sanctions against the United States for giving tax breaks to American exporters through foreign sales corporations. European officials say they are tired of waiting for Congress to approve new laws prohibiting these subsidies, and that they may impose 100 percent duties on items like precious stones, sporting goods and agricultural products by the end of the month. The most glaring example here of going-it-alone...

Posted by DeLong at 10:43 AM

March 14, 2003
The Senate Centrists Flex Their Muscles

The center of the Senate flexes its muscles. It is a good sign. It would have been a better sign if they had also said that tax cuts must be frontloaded--that it is worth increasing the deficit over the next two years or so to stimulate employment, but that this year's budget should produce projected surpluses between seven and ten years from now: Dear Majority Leader Frist and Minority Leader Daschle: With the international challenges our nation faces, including a possible military engagement with Iraq, continuing tension on the Korean Peninsula, and the ongoing war on terrorism, coupled with sluggish economic growth, we believe it is critical a budget resolution for Fiscal Year 2004 (FY2004) be enacted this year. We are committed to working in a bipartisan manner to this end. We believe that our nation would benefit from an economic growth package that would effectively and immediately create jobs and encourage investment. We appreciate President Bush's leadership in identifying this need and beginning this important debate with his economic growth proposal. Given these international uncertainties and debt and deficit projections, we believe that any growth package that is enacted through reconciliation this year must be limited to $350 billion...

Posted by DeLong at 02:00 PM

March 13, 2003
The Economist Is Also Worried About Government Bankruptcy a Generation Hence

The Economist is also worried about government bankruptcy--which usually takes the form of serious inflation--a decade hence. But it is more scared of deflation now: it doesn't want attachment to long-run fiscal and monetary rectitude to stall stimulative short-run policies. Economist: ...Governments everywhere should certainly fret about their long-term fiscal health, not least because of future pension and health-care costs; but not if it means choking their economies now. Japan has shown graphically how trying to trim a budget deficit when an economy is weak can actually worsen a country's long-term fiscal position. America and Europe must not risk following suit......

Posted by DeLong at 08:34 PM

The Economist Is Scared of Deflation Now

The Economist is scared of deflation now. They want the Federal Reserve to cut interest rates, the European Central Bank to do the same, and governments to run bigger budget deficits over the next couple of years: Economist.com: ...Some economists argue that, since the present weakness in American confidence and spending is largely due to uncertainty about the consequences of a war with Iraq, it might be better to hold fire for now and see what the economy looks like once the conflict is over.... This argument is wrong, for two reasons. First, at a time of heightened uncertainty, it is wiser to take out an insurance policy against a future deep downturn. If a rate cut proves unnecessary, the cost of reversing it would be small. On the other hand, if the American economy remains weak, valuable time will have been gained in giving it an extra boost. When the world economy is groaning with spare capacity, there is little risk that any excessive easing of policy might send prices soaring. A greater risk is of deflation, not inflation. The lesson of Japan's failure to arrest deflation after its bubble burst in the early 1990s is that, as interest...

Posted by DeLong at 08:30 PM

March 12, 2003
Mickey Kaus Is Puzzled

Mickey Kaus is puzzled: Don't Rush Me VI - Time for the grand gesture? By Mickey Kaus: About What Me Worry? I believe whatever Paul Krugman tells me, of course -- he's going to win the Nobel Prize, not me -- but I'm confused. It seems like only two months ago he had me terrified that inflation was going to go down so low it would plunge into negative territory, as in Japan. Now, after reading today's column, I'm worried that the government will decide to "inflate away debt" and "interest rates will soar." ... In other words[u]nless we slide into Japanese-style deflation, there are much higher interest rates in our future.What I don't understand -- and I recognize I may be missing something -- is why we can't end up somewhere in between inflation so low that it's a crisis and inflation so high that it's a crisis. In other words, not in a crisis! If I'm wondering about this, I bet so are many other Krugman readers. Explanation, please! ... Mickey Kaus is puzzled because he doesn't get the fact that that the two different problems that worry Krugman (and me!) operate at different time scales. One--possible deflation--is a...

Posted by DeLong at 07:30 AM

March 11, 2003
Germany Under Stress

Germany Under Stress: A correspondent writes: Do you realize the German DAX is down 70% from its early 2000 highs? Look at the ten year chart of the DAX versus the S&P 500. The Germans had, in many ways, a much worse bubble and harder come down than we did. That society must really be under some stress. The answer is, "No." I had not realized the magnitude of the decline in the DAX. And I no much too little about what a large stock market decline in Germany must be doing to the shareholder class, to German finance, to the German economy, and to German society. Yet another thing I need to learn about pronto......

Posted by DeLong at 09:30 AM

Japan Under Stress

Japan under stress. The Japanese economy and financial system have been under stress for more than a decade now. But the amount of stress has just ratcheted itself up again. From Dow Jones: TOKYO -- Tokyo stocks ended sharply lower yet again Tuesday, as geopolitical fears and concerns about the falling market's impact on Japan's fragile financial system prompted further selling. The Nikkei 225 Stock Average closed under the 8000-mark, falling 179.83 points, or 2.2%, to 7862.43 -- the lowest finish since January 1983. It was the sixth straight session of declines for the key index. The Topix index of all the Tokyo Stock Exchange First Section issues fell 13.90 points, or 1.8%, to 770.62, the lowest close since August 1984. On the TSE's First Section, 966 issues fell, 419 issues rose, and 133 were unchanged from Monday. The slumping stock market rekindled worries about Japan's financial system. At current index levels, major banks' latent stock losses appear to have ballooned to around ¥6 trillion ($51.2 million or ?46.5 million), and most major life insurers are also seen to have heavy losses, analysts said. Among banks, Sumitomo Mitsui sank 12% to a new all-time low of ¥206,000. Mitsubishi Tokyo Financial...

Posted by DeLong at 09:24 AM

March 10, 2003
Increasing Business Cycle Pessimism

Morgan Stanley's Global Economic Forum revises downward its estimates of U.S. growth in the first half of this year: Morgan Stanley: Richard Berner and David Greenlaw (New York): Although we revised our U.S. and global economic forecasts sharply lower only two weeks ago, rapidly changing events call for more frequent revisions (see "Tipping Point?" Global Economic Forum, February 24, 2003).  Energy and sentiment shocks are pushing the U.S. economy to the brink of recession.  The surge in energy quotes has put a heavy tax on both consumers and businesses, in our view amounting to some $60 billion at an annual rate in the first half of 2003, and the tally could be higher.  The energy shock has hit a weak global economy, and that weakness represents an additional burden on U.S. growth.  Laid on top of the uncertainty related to impending war with Iraq, this shock could be the final blow that pushes the U.S. economy over the edge.  It's a close call, but we think that the economy is resilient enough to skirt an outright downturn.  Moreover, lower prospective energy quotes, additional policy stimulus, some pent-up demand and reduced risk aversion should promote a lasting rebound.  In what follows,...

Posted by DeLong at 06:41 AM

March 07, 2003
Employment Report Today Not Good

John S. Irons summarizes today's unemployment report. It is significantly worse than I, at least, was expecting... ArgMax Economics Weblog: Employment Situation: Not good: The Bureau of Labor Statistics released its monthly employment report today. The unemployment rate was up 0.1 to 5.8% in February. The big news in the report, though, was that total (non-farm) payroll employment fell by 308,000 after seasonal adjustment. This seemes to have been interpreted as a big negative for the economy and was much larger that expected. Keep in mind that the employment data is often called a "lagging indicator," meaning that the statistic tends to reflect the past state of the economy more that it indicates where the economy is headed. The weak employment number tends to indicates what we already know - that the economy was indeed weak; but it does not necessarily mean the economy is headed further downward. However, for the unemployed - and those looking for jobs - it is certainly not good news......

Posted by DeLong at 04:57 PM

March 06, 2003
Right-Wing British Financial Newspaper Calls Bush Economic Policy "Lunacy"

Gerard Baker, the Washington correspondent for the Financial Times, calls the Bush Administration's economic policy "lunacy." Note that Gerard Baker is not a partisan Democrat. Gerard Baker is a normal, smart, conservative, keen-eyed financial reporter who is trying to give the largely well-off European readers of the Financial Times some idea of what is going on in economic policy in Washington. The fact that he is reduced to words like "lunacy" and "utterly out of touch" and "engaged in one of those psychological exercises where if you say something patently false enough times you eventually start to believe it" should give anyone who is still inclined to credit Bush Administration economic policy with any competence at all a great deal of pause. FT.com Home Global: ...the more important lesson of all this is how utterly out of touch with economic reality those on the ideological Republican right have become. They now regard the most obvious and widely accepted nostrums of fiscal economics as tantamount to treason. For the past two years, they have been engaged in one of those psychological exercises where if you say something patently false enough times you eventually start to believe it. Deficits do not matter....

Posted by DeLong at 11:59 AM

March 05, 2003
The Committee on Economic Development Is Scared

The Committee on Economic Development is scared of George W. Bush. David Broder summarizes its--frightened, anxious, and nearly panicked--view. And they're right. The baby boomers are going to start retiring. Slashing their benefits will--given their numbers and their propensity to vote--be a political impossibility. It's past time to start dealing with the consequences of Bush Administration fiscal policy for the long-term health of the American economy. washingtonpost.com: The CEOs' Dim View of Deficits: "Staying on our present track, spending for Social Security, Medicare and Medicaid skyrockets, while revenues fail to keep pace. The federal government deficit would balloon," weakening an already poor savings rate, and "by the 2020s, per-capita income growth would have fallen by more than half, and by 2040 the model predicts growth rates very nearly zero. . . . Perhaps for the first time in this country's history, most Americans could no longer expect their children and grandchildren to have higher living standards than their own." The hardheaded executives dismiss as unrealistic any hope that the United States can simply "grow its way out of" the interlinked challenges of dangerous deficits and rising demands from its aging population. Given the scale of the challenge, no single fix...

Posted by DeLong at 02:29 PM

March 04, 2003
Those Who Do Not Remember History...

Those who do not remember history are condemned to repeat it, and the rest of us are condemned to repeat it with them. Gerardo della Paolera and Alan M. Taylor point out that those who have studied the 1929 collapse of the gold standard in Argentina would have found few surprises indeed in the 2001 collapse of the currency board. Yet another brick in the wall suggesting that it is long-lasting institutional deficiencies that are the causes of the "bad policies" that overoptimistic economists like me think stand in the way of successful development and growth. Gaucho Banking Redux: Gerardo della Paolera, Alan M. Taylor | NBER Working Paper No. w9457 | Issued in January 2003 | Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. A common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony finance was dubbed 'gaucho banking' more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 and 2001...

Posted by DeLong at 02:02 PM

No, Marty Feldstein Is Not "Voting" Against Bush...

ABC News's The Note now counts Marty Feldstein as a dissenter from Bush Administration economic policy. This does not seem to me to be true. Marty agrees with the Bush Administration in wanting to see taxes fall as a share of GDP. Marty is thinking more clearly than the Bush Administration in that he is focused--has long been focused--on the necessity for a severe pruning-back of the social-insurance state if reduced tax shares are to be a durable reality. (The Bush Administration wants to leave this as a problem for future Presidents, future Congresses, and future generation.) Where Marty dissents--and this has been the case for at least a year--is in viewing the current situation in which unemployment is above its natural rate and the economy is approaching the edge of deflation as... well, as a sign that stimulus is needed. In short, this was no surprise to me or to anyone else who has been watching Marty's thinking over the past year. Yet it seems newsworthy to The Note, which is one of the very best political newsletters around. Yet another example of how what seems very basic and fundamental to economists somehow turns into an unobservable nuance for...

Posted by DeLong at 01:02 PM

March 03, 2003
SpongeGeorge SquarePants

The Wall Street Journal's Alan Murray compares George W. Bush to SpongeBob Squarepants: WSJ.com - Political Capital: Therein lies the Bush administration's real deficit problem. It isn't the cost of war, which will come and go. It's the mismatch between the president's stiff-spined determination to cut taxes and his spineless efforts to reduce the size and scope of government. Mr. Bush is the Man of Steel when it comes to his tax cuts, but he's SpongeBob on spending. He sends his minions to take the heat on his budget and Medicare proposals, then caves when they come back under fire. Mr. Bush's economic plan makes sense if -- and only if -- he sticks to his guns on limiting spending and revamping Medicare and Social Security. If he fails to rein in the burgeoning cost of government, then his tax cuts will leave a fiscal mess that future presidents will have to clean up. Mr. Bush's new economic advisers -- Treasury Secretary John Snow and National Economic Council Chairman Stephen Friedman -- seem to understand this. Neither of them buys into the silly arguments being batted about that deficits don't matter. It's all a question of timing. Deficits don't matter...

Posted by DeLong at 09:23 PM

"But the Economic Report Did Nothing in the Nighttime" "That Was the Curious Incident"

Henry Aaron complains about what the 2003 Economic Report of the President does not talk about: The Brookings Institution: To be sure, this Economic Report deals with many important matters. It contains sophisticated reviews of tax policy, regulation, and international trade. But the central challenge facing budget policy in the United States is rather different?how to prepare the U.S. public finances for the fiscal challenge posed by the retirement of the baby boom generation. The first baby-boomers will become eligible for Social Security in just five years and for Medicare in eight. These dates usher in three decades of sharply increasing demands on the federal government to pay for pension and health benefits for the elderly, disabled, and survivors. In brief, the federal budget will come under increasing stress?sooner rather than later. Action is required to prepare the nation to handle this stress?now, and not at some indefinite future time. The fiscal challenge of the baby boom generation's retirement is not a distant problem that can be left to our children. It commences well within the ten-year planning horizon that Congress has been using for budget planning......

Posted by DeLong at 08:20 PM

The Real Supply Siders

John Quiggen succumbs to High Relativism, and proclaims that whether Ronald Reagan was "convinced" that cutting tax rates would raise tax revenues is unknowable. John Quiggin: Wanniski's claim to have convinced Reagan is rejected by (broad sense) supply-siders who were around at the time, like William Niskanen (quoted by Alex Robson), and it seems unlikely that the truth can be determined... I think that this nihilistic-relativistic conclusion is much too pessimistic. What Reagan thought in his heart-of-hearts is not very important. Reagan wanted to lower taxes, balance the budget, and cut waste, fraud, and abuse in government. He (naively) relied on his advisers--his Grand Viziers--to share his priorities and to prepare and implement policies that would accomplish them. It went wrong: Reagan did not run for President so that he could become the biggest deficit-spender in American history. We know a lot about how it went wrong. But if we are to accurately set out what we know, we need to recognize that "supply side" and "economist" are contested terms of art. Different people use these terms to mean different things--deliberately use these terms to mean different things. Let's review the bidding. There are four ideological police actions in progress....

Posted by DeLong at 10:26 AM

March 01, 2003
John Irons Tracks the Economy

John F. Irons tracks the economy... ArgMax Economics Weblog: Tracking the Economy: This has been a busy week for economic news; I thought I would give an update for the week: 2002Q4 GDP revised up to 1.4% (from a previously estimated 0.7%). Better, but not great. Hubbard out, Mankiw in at the CEA. His nomination shouldn't have been controversial - he is an accomplished and respected academic macroeconomist (and a fellow MIT PhD), but some right-wing supply-side economists are unhappy about what he wrote in his Principles book about Reagan's policies. Oil Prices are hitting 12-year highs and getting close to 40$ a barrel. Consumer prices rose 0.3% in January and wholesale prices (the PPI) jumped 1.6%. The increases were due in part because of rising energy prices. The core CPI and PPI (which exclude food and energy) increased by 0.1% and 0.9%, respectively. If the PPI increases continue and make their way to consumer prices, it will cause the Fed to think twice before reducing interest rates in the case of a "double dig" recession. On the bright side, the increases should lessen deflation fears. Consumer confidence fell to 9-year lows. The link between the Conference Boards' index and...

Posted by DeLong at 05:49 PM

Greenspan's Congressional Credit Remains Very Good

John Berry writes that Alan Greenspan's credit remains at gold-standard levels in Congress: washingtonpost.com: Greenspan Remains Popular in Congress: ederal Reserve Chairman Alan Greenspan may be taking sniping fire from anonymous White House officials unhappy that he questioned the immediate need for President Bush's latest tax-cut plan, but he's still a bipartisan favorite on Capitol Hill. Sen. Charles E. Schumer (D-N.Y.) interrupted a Senate Banking Committee hearing yesterday to criticize what he called "an ongoing orchestrated whisper campaign to discredit" Greenspan after his recent testimony. A number of media reports since then have quoted unnamed White House sources as saying Greenspan, whose term as chairman will end in the middle of next year, might be dumped by Bush. A syndicated column by Robert Novak, for example, appeared Monday in the Washington Post with the headline "Goodbye, Greenspan?" and began, "It's difficult to exaggerate the irritation at the White House over Alan Greenspan's gratuitous shot at President Bush's tax cuts." Schumer said threats to dump Greenspan violated the independence of the Fed, noting that Greenspan had supported the concept of a major tax cut that Bush proposed two years ago. Sen. Wayne Allard (R-Colo.) said he thought administration officials "were pleased...

Posted by DeLong at 05:45 PM

February 28, 2003
Would Ezra Pound Have Been a Better Poet If He Had Taken Ec 10 From Marty Feldstein?

Would Ezra Pound have been a better poet if he had taken Ec 10 from Marty Feldstein? Daniel Davies appears to answer this question with a "yes," as he turns his attention to critiquing Pound's Canto XLV for Pound's failure to include an appropriate general-equilibrium model in his stanzas. D-squared Digest -- A fat young man without a good word for anyone: If you aren't able to charge rates of interest which compensate you for the risk you're taking, then as a lender, you're only going to do business with people familiar to you, which means that the typical working man is not going to find anyone who is prepared to lend to him. This means that the working class is denied one of the principle luxuries of the capitalist class; the ability to make decisions about the timing of purchases of goods independently of the fixed timing of the arrival of one's income. And it turns out that this is a very valuable advantage to enjoy. Usury has been very good in this regard. Pound is possibly in this passage and in the "bread made of good flour", thinking of the obvious association between predatory lending practices and poverty,...

Posted by DeLong at 08:21 AM

February 27, 2003
Excuse Me, What's Your Oxytocin Level Today?

I don't know about you, but in the future I'm only making contracts with people with elevated oxytocin levels... Virginia Postrel writes about those who are beginning to found the subdiscipline of Neuroeconomics: Looking Inside the Brains of the Stingy: ...Professor Zak and his colleagues study trust with a variation of the ultimatum game. Each player receives $10. Player 1 gets an additional $10. Players interact anonymously over computers. Player 1 can send any whole-dollar amount to Player 2. Whatever he sends is tripled, so a $5 gift turns into $15. Finally, Player 2 can return some of the money to Player 1. If Player 1 expects Player 2 not to send any money in return, Player 1 will keep the initial stake. That's the game's standard equilibrium. "In fact," Professor Zak said, "most people send about half of their stake to Player 2. They're signaling that they want to trust them." In response, about 75 percent of the Player 2's return some money, making both better off. "Even though we can't see each other and we don't know each other, we understand the other person as a human being," Professor Zak said. Extrapolating from animal results, he hypothesized that...

Posted by DeLong at 08:09 PM

February 18, 2003
Free Trade Simply Not a High Priority

The Economist writes about how free trade is simply not a priority for the governments of the industrial core--not for Japan, not for Europe, and certainly not for the Bush Administration. Given first-world attitudes, I cannot see how the Doha Round can end in anything but a very minor fig-leaf of an agreement. Economist.com: ...NEVER do today what can be put off till tomorrow. The trade ministers from 22 countries, whose three-day meeting in Tokyo ended on February 16th, managed to live down to their reputation for a reluctance to compromise?and enthusiasm for delay. Hardened trade negotiators are used to deadlines repeatedly missed, crisis talks at the eleventh hour, and second-best solutions. But the outcome of the Tokyo meeting was nevertheless disappointing for those hoping that the Doha round of trade negotiations, conducted under the auspices of the World Trade Organisation (WTO), were going to be different. For a time it looked as if they were. When the round was launched in the Qatari capital in November 2001, the atmosphere was one of rapprochement between the rich countries and their poorer neighbours, and between those rich countries that had been at loggerheads on trade issues. The aftermath of the attacks...

Posted by DeLong at 07:00 AM

February 12, 2003
Alan Greenspan Says the Expected, the Reasonable Thing

Alan Greenspan says the expected, the reasonable thing about the prospective return of the deficit and the long-run fiscal policy dilemmas of the American government. The truly surprising, the bizarre thing that I do not understand is why the Bush Administration PR flacks and their tame dogs in the press ever expected him to say anything else... Fed chief Greenspan undercuts GOP arguments for tax cuts - Feb. 12, 2003: The 'kiss of death': Warning of growing budget deficits, Greenspan again undercuts Bush, GOP arguments for tax cuts. February 12, 2003: 2:18 PM EST NEW YORK (CNN/Money) - Alan Greenspan stepped up his warnings about budget deficits Wednesday, forcing the White House to admit the Federal Reserve chief was at odds with President Bush's push for quick moves to stimulate the economy. In his second day on Capitol Hill, Greenspan told the House Financial Services Committee it was crucial that policy-makers ensure that "growing budget deficits [do not] again become entrenched.'' Bush's $695 billion stimulus plans forecasts record budget deficits this year and next -- drawing criticism from opposition Democrats. Administration officials contend the deficits are modest given the size of the $10 trillion U.S. economy and are needed to...

Posted by DeLong at 04:09 PM

February 11, 2003
The Increasingly-Strong Case for National Health Insurance

Daniel Davies points out that the rapid approach of genetic screening makes national health insurance inevitable--at least if we don't want to have a *huge* problem as those whose genes are bad for expensive-to-treat diseases find themselves very, very poor indeed. D-squared Digest -- A fat young man without a good word for anyone: ...Solutions? Sorry, don't really have one, unless one seriously thinks that the genie of genetic screening can be pushed back in the bottle. I'd note, however, that the engine of most of these "problems of asymmetric information" (in this case, the adverse selection problem which makes the pooled equilibrium solution with private information untenable) is usually an embedded option. In this case, it's the option of the insured party to choose whether or not to buy insurance. Since you can't force them to buy the product, they will only do so when it's to their advantage, and this turns out to be enough to knock down the existence of the market. I speak as a member of a health insurance scheme (the National Health Service) which doesn't have the property that you can refuse to buy it if you don't want it, and would humbly suggest...

Posted by DeLong at 06:24 PM

What Greenspan Did Say

He called for reestablishment of something like the Budget Enforcement Act--"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the inbuilt political bias in favor of growing budget deficits to again become entrenched..." He refused to support the reduction of taxes on dividends unless other taxes were raised to make the net effect budget neutral--"the Fed chairman said he continues to support elimination of double taxation on dividends... only if other revenue can be found so as not to raise the budget deficit." NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan warned Tuesday that "geopolitical tensions" have added to the uncertainties dogging the U.S. economy, making a recovery difficult, and called for more discipline to control the growing U.S. federal budget deficit. In response to questions from senators, the Fed chairman said he continues to support elimination of double taxation on dividends, but only if other revenue can be found so as not to raise the budget deficit. Greenspan, in prepared remarks for his testimony before the Senate Banking Committee, said uncertainties about a possible war with Iraq were "creating formidable barriers...

Posted by DeLong at 03:34 PM

What Alan Greenspan Will Say This Week

The G-7 Group predicts: Greenspan will do a two-step... He will say that he opposes the double taxation of dividends on principle, and that ending such policy represents good long-term tax policy. But he will also concede that eliminating dividends does little to stimulate the economy in the near term and does so at the risk of high deficits. This is what he told moderates behind closed doors and he will not be able to go soft on this point. He will likely warn against a return to long-term budget deficits while stressing the need to curb spending. Greenspan will try to avoid endorsing one party's stimulus package over the other's. But anyone paying attention will understand that he believes the Democrats? smaller package aimed at 2003-04 is better for the economy....

Posted by DeLong at 03:10 PM

September 14, 2002
Daniel Gross, Meet Daniel Gross

Last week Slate's Daniel Gross tut-tutted that Berkshire-Hathaway's Warren Buffett is lending money to distressed companies at usurious interest rates: these transactions are not in existing shareholders' interest, but they do satisfy managers' desire to postpone bankruptcy in the hope that something, anything might turn up. Daniel argued that Berkshire-Hathaway's resort to this strategy--the exploitation of the conflict-of-interest between managers and shareholders--is a sign that the stock market is still highly overvalued: The New Warren Buffett Way - From value investor to vulture investor. By Daniel Gross: ...Perhaps the deals say something more profound about the post-9/11 market than about Buffett. With so many stocks having plummeted, so many companies beset by scandal, so much money fleeing the market, and such a crisis of investor confidence, one might expect that the classic value situations that are Buffett's hallmark would be everywhere. Buffett should be grabbing an underpriced company every few days. The fact that Buffett, who has oodles of cash to put to work, hasn't found many--and has instead been nibbling on distressed properties--shows just how overvalued stocks still are... This week Daniel does a backflip and savages PIMCO Bond's Bill Gross for... saying that the stock market is still...

Posted by DeLong at 08:52 AM

September 12, 2002
Decoherence

"Decoherence" is a word from modern physics. It refers to a situation in which a superposition quantum wave function breaks into separate and mutually exclusive components: either A or B, but not both. Alan Greenspan has been trying to maintain a superposition on fiscal policy, but today it broke down, and became decoherent. He tried to argue both that (a) the Bush tax cut was a good idea, and (b) the Congress really, really needs to strengthen its controls because the country really, really needs a substantial budget surplus. It doesn't work. The position simply doesn't cohere: Greenspan Backs Budget Control and the Tax Cuts: ...The message of the Fed chairman's prepared testimony was that a breakdown of budget discipline over both taxes and spending would lead to higher interest rates and slower economic growth in the long run. Yet in the question-and-answer session, Mr. Greenspan seemed to align himself philosophically with Republicans — and anger Democrats — over how to address the nation's fiscal troubles. In response to some questions, Mr. Greenspan said the specifics of dealing with the situation were up to Congress, and he urged the House and Senate to extend budget rules, adopted a decade ago...

Posted by DeLong at 09:21 PM

More People Worry About Deflation

The Economist steps up to the "let's worry about deflation" plate. I agree with them. The Federal Reserve, however, does not seem to: the Federal Reserve appears to believe that the NAIRU--the unemployment rate at which inflation is constant--is somewhere near 5.5 percent (rather than the 4.5 to 5.5 percent I would estimate), and that the rate of growth of potential output--which is the rate at which real GDP has to grow to keep the unemployment rate constant--is only a shade above 2 percent per year (rather than the 3.5 percent per year that I would estimate). Economist.com: ...As a result, there is a risk that, before the end of 2003, the rich world's three biggest economies—America's, Japan's and Germany's—could all have negative inflation rates. A sharp jump in oil prices as a result of America invading Iraq could, of course, push up headline inflation. But the longer-term impact of higher oil prices would be deflationary, not inflationary. Higher oil prices operate like a tax that depresses growth, so their medium-term impact would be to heighten the deflation risk. DeAnne Julius, a former member of the Bank of England's monetary policy committee, argued in a recent speech that there is...

Posted by DeLong at 04:45 PM

September 11, 2002
Economic Consequences of 911

The Economist points out that the economic effects of 911 have been much smaller than many of us feared. Of course, the terrorists have also proved much more inept than I, at least, feared. If you'd asked me in late September what the chances were that Al Qaeda would not successfully strike at American civilians again within a year, I would have put those chances at one percent. Economist.com Of course, in the initial aftermath of the terrorist attacks, the world Of course, in the initial aftermath of the terrorist attacks, the world’s stockmarkets plunged still further. Economists were unanimous: the events in New York and Washington delivered an enormous blow to confidence. Airlines were on the brink of collapse as passengers vanished, afraid to fly. American retail sales virtually dried up in the days after the attacks as people stayed at home, glued to their televisions. But economists could not agree on how prolonged these short-term effects would be. Previous experience with massive economic shocks suggested that their impact tended to be relatively short-lived and relatively modest over the medium term. On September 12th last year, though, it was impossible to know whether that pattern would be repeated. Nobody...

Posted by DeLong at 04:46 PM

September 09, 2002
Alan Murray on IPO Underpricing

Alan Murray wrestles with the problem of IPO--Initial Public Offering--underpricing. On the one hand, why should the rest of us care if entrepreneurs wish to sell 10 percent of their companies at a half-off discount to the friends and clients of their investment bankers when their firms go public? Entrepreneurs are giving a rather large present to those on the IPO list, but if they did not wish to do so they could always use Hambrecht and Quist and run a true auction to sell off the initial tranche of shares. And they get benefits--a bunch of people who will have made money by investing in their stock, and who are likely to hold onto it and talk it up. Murray comes down on the side of the--highly plausible--theory that IPO underpricing is a way that investment banks get their going-public client corporations to bribe those from whom they want to be thrown other prices of investment banking business. WSJ.com - Article ...When the price of a stock jumps to $20 from $10 in the first day of trading, reaping instant profits for the lucky few who have been allocated shares, the investment bankers celebrate a "hot" offering. They ought...

Posted by DeLong at 09:18 PM

A Platonic Dialogue on Eldred v. Ashcroft

A Platonic Dialogue on Eldred v. Ashcroft Ignoramus Inquisitivus: I have a question. Why did the Supreme Court grant cert. [that is, agree to hear and decide] in Eldred v. Ashcroft [the case arguing that the most recent copyright extension act was unconstitutional because Article 1, Section 8, Clause 8 of the Constitution gives Congress the power to grant copyrights only for limited times, and only to promote the useful arts--and since the extension act was not intended to promote the useful arts Congress did not have the power to lawfully enact it]? One natural way to decide would be to say, "The Commerce Clause gives ample power for Congress to do whatever it wants as far as economic regulation is concerned. I§8¶8 covers patents and copyrights and should be read in a way consistent with the overall Commerce Clause to give the Congress effective plenary power..." A second way would be to say, "Congress has granted patents and copyrights for limited times, 100 years is a 'limited' time, 1000 years would be a 'limited' time, so what is the problem?" Realisticus: But this is not a Supreme Court that accepts cases simply to affirm the Appeals Court decision, and...

Posted by DeLong at 07:06 PM

Why So Many Things Went Right with the Internet

From Dan Gillmor's Sunday column in the San Jose Mercury News: 10 choices that were critical to the Net's success By Dan GillmorMercury News Technology Columnist In our modern, corporate culture, the rise of the Internet is a happy accident. In its roots and growth, says Scott Bradner, the Net never had a business model. How did technologists, government officials and a host of other early players turn something with no obvious business model into a system that has become so intrinsic to the new century? A series of decisions proved critical -- choices that helped turn data transport into a commodity business and put the power in users' hands, not in the centralized telecommunications companies' controlling grasp. At a telecom conference in Massachusetts last week, Bradner, senior technical consultant at Harvard University and a longtime leader in the formation of Internet standards, listed 10 crucial decisions along the way. (You may have other candidates; send them to me and I'll list them on my Web page). Here are Bradner's picks: 1) Make it all work on top of existing networks. Designers deliberately didn't try to build a single, new über-data network -- it was about ``networks, not a network,''...

Posted by DeLong at 11:43 AM

September 08, 2002
Cory Doctorow on DRM-in-Practice

The principal serious objection to tight control over content by IP rights holders is made by those who argue that by so doing they destroy most of the utility--and most of the consumer surplus--of the technology. Here Cory Doctorow makes this argument, with details, as applied to Toshiba's new clone of Apple's iPod: Boing Boing: A Directory of Wonderful Things: ...Toshiba's new digital music player shows us more evidence that (consumer electronics) (digital rights management) = a**. The DRM vendor's mantra is, "DRM needs to be invisible, it needs to get out of the way of legitimate activity and only crop up when the user tries to infringe on copyright." A good sentiment, but it's more wishful thinking than design specification, as the new Tosh Mobilphone demonstrates. The Mobilphone is an iPod clone with a 5GB drive and a USB 2.0 interface. The iPod, of course, rules for a number of reasons, but one of the biggies is that by using FireWire to synch MP3s with your computer, the iPod is capable of filling itself up with music in a matter of minutes. USB 2.0 leapfrogs FireWire and delivers even greater speed. So far, so good. But for "security" reasons,...

Posted by DeLong at 02:20 PM

Japan's Recession

The Japanese data revisions are in, and they are even worse than anyone--or at least than I--had feared, even fearing that they were worse than we hard feared. The second quarter of 2001 saw real GDP shrink at an 8 percent annual rate. The first quarter of 2002--which had supposedly seen GDP grow at 6 percent per year--was completely flat. All this leaves Japanese real GDP today some 2.5 percent below its level in the fourth quarter of 20002. Economist.com: Earlier this year, optimists could at least take solace from signs that the economy was rebounding in the first quarter, from a dismally deflationary 2001. It now turns out, however, that all of that growth was illusory. After revising the way it tots up the figures, the government announced at the end of August that GDP growth had been zero in the first quarter, not the 5.7% annual rate that was announced earlier. The second quarter was better, but not especially reassuring, with GDP rising at an annual rate of 1.9%. Industrial production rose sharply in April and May, but it tailed off again in June and July. Domestic demand refuses to show a convincing bounce, leaving the economy desperately...

Posted by DeLong at 06:06 AM

September 06, 2002
The Economist Joins the Pile on Alan Greenspan

This week's "Economics Focus" in the Economist joins the pack piling on to Alan Greenspan for not deflating America's stock market bubble earlier: Economist.com: ...There may be no painless way to deflate bubbles. Yet the correct test is not whether a bubble can be deflated without some loss of output. Rather, it is whether the early pricking of a bubble causes less pain than letting it grow only to burst later. The longer a bubble is allowed to inflate, the more it encourages the build-up of other imbalances, such as too much borrowing and investment, which have the power to turn a mild downturn into something nastier. If the Fed had let some air out of the bubble earlier, America's economy might now be better placed for future growth... Admittedly, for the Fed to justify an increase in interest rates when inflation was low would have been hard—but not impossible. It could, for instance, have argued that raising rates and so containing financial imbalances would avoid future economic instability and hence a large undershoot in future inflation. Central bankers do not have a political mandate to respond to asset prices. Even so, Mr Greenspan could still have done more to...

Posted by DeLong at 03:10 PM

BLS August Report

The Bureau of Labor Statistics reports that businesses employed 39,000 more people in August than they did in July (on a seasonally adjusted basis). The BLS also reports that its survey of households produces an estimate of 429,000 more Americans at work in August than in July. Which is more reliable? I have always trusted the business employment survey rather than the household survey as a more reliable business cycle indicator. This month, it is the one that is more pessimistic about the state of the economy. Employment Report...

Posted by DeLong at 01:33 PM

September 04, 2002
The Cyclically-Adjusted Deficit

John Irons find and links to the Congressional Budget Office's estimates of the deficit adjusted for the state of the business cycle: ArgMax Blog: The Cyclically Adjusted Deficit: ..."By those measures, roughly one-third of the projected decline in the total surplus between 2000 and 2003 results from "automatic stabilizers" the automatic response of the budget to the business cycle. Most of the remaining two-thirds is attributable to legislative action: primarily EGTRRA [2001 tax cuts], JCWAA, and increases in discretionary spending (including emergency appropriations enacted in response to the terrorist attacks of September 11)."......

Posted by DeLong at 05:11 PM

August 28, 2002
The Wall Street Journal on the Budget Outlook

There is little news here in this Wall Street Journal summary of the CBO's projections of a return to deficits: if you had been following the numbers, you would have known this five months ago. Perhaps the most interesting thing is the speed with which the late-1990s political consensus--that the U.S. needed to run a budget surplus larger than the Social Security surplus alone--has unraveled. What the effect of the resulting budget deficits will be on investment in America is, in my view, the big question of the hour. But I haven't yet figured out what I think the answer is. WSJ.com - Economy: ...With federal tax collections plunging, the Congressional Budget Office predicted far deeper deficits for the next few years, and the near disappearance of the once-huge projected 10-year surplus.... In the U.S., the ratcheting-down of expectations -- the third such major revision by congressional budget analysts since January 2001 -- signaled the emergence of chronic annual budget deficits as a long-term worry for President Bush... the new CBO report foresees deficits through at least 2006.... And that depends on no further tax cuts and spending growth no greater than inflation. Both assumptions are likely too optimistic. The...

Posted by DeLong at 09:56 AM

August 27, 2002
Updated CBO Outlook

The Congressional Budget Office updates its Economic and Budget Outlook. I haven't yet had a chance to go through it, however: it's the first week of the semester, and there are too many other heavy claims on my time. The Budget and Economic Outlook: An Update: The budget deficit expected for this year has grown and the surpluses anticipated for the coming decade have diminished under the Congressional Budget Office's (CBO's) new baseline projections. A sharp decline in tax revenues coupled with double-digit growth in spending will produce a deficit of about $157 billion in fiscal year 2002, CBO estimates. If current tax and spending policies are maintained, deficits are likely to persist for a few years before giving way to small surpluses. Between 2003 and 2009, those annual deficits and surpluses would generally equal less than 1 percent of the nation's gross domestic product (GDP) and roughly balance out. For the 10-year period from 2003 through 2012, CBO's baseline projects a total surplus of $1.0 trillion....

Posted by DeLong at 01:54 PM

August 26, 2002
The Japanese Economy Is in Worse Shape Than I Had Thought

The Financial Times reports that recent Japanese economic statistics are about to be revised sharply downward--and that taken together the first and second quarters of 2002 will show a real GDP growth rate of only 1.5 percent per year. Thus the hopes--based on preliminary first-quarter statistics--that Japan was pulling out of its long depression appear to have been false. New data may cast doubt on Japan recovery By David Pilling in Tokyo Published: August 26 2002 17:22 | Last Updated: August 26 2002 17:22 Japan may this week drastically scale back preliminary estimates for first-quarter growth, removing much of the gloss from what many had hopefully interpreted as a sharp rebound from the country's worst post-war recession.An improvement in the methodology by which gross domestic product is calculated could see revised GDP numbers for the first three months, due to be published on Friday, fall to about half the initial estimate of 1.4 per cent. The original figure implied an annualised growth rate of an improbable 5.7 per cent."I think it is pretty much established that the new figures will show that GDP did not perform as well as originally stated because those initial figures were based on wildly exaggerated...

Posted by DeLong at 10:01 AM

Weight Training for Fiscal Policy Analysts

Max Sawicky provides a list of exercises for those hoping to get into shape to interpret tomorrow's Congressional Budget Office "Budget and Economic Outlook" release. It's a very good list of sources that he has put together: Weblog Entry - 08/26/2002: "BASIC BUDGET LINKS" Learn your acronyms, intimidate your debating adversaries. Congressional Budget Office (CBO), Office of Management and Budget (OMB), OMB Mid-Session Review (released today), OMB Director Mitch Daniels testimony (1.6 trillion laughs), Council of Economic Advisers (CEA), CEA publications, basic Federal budget documents (can be downloaded free of charge), the Brookings Institution (Peter Orszag, Gene Sperling, Isabel Sawhill, Allan Schick), the Urban Institute (all budget publications, Eugene Steuerle, Rudolph Penner), the Center on Budget and Policy Priorities, Senate Budget Bulletin (Republican staff; high-level bullshit), Senate Budget Committee (Democrats; the deficit's gonna get yo Mama!), House Budget Committee (Democrats), House Budget Committee (Republican staff; low-level bullshit), Joint Economic Committee (Democrats; good stuff on tax policy, economic stimulus, etc.), Concord Coalition (the sky has been falling for years)....

Posted by DeLong at 09:28 AM

August 24, 2002
Louis Uchitelle of the New York Times Also Worries About Deflation

Louis Uchitelle writes about the danger of deflation--and wonders why more people aren't worrying about it. I think the answer is that people are worrying about it. However, it's not yet a crisis, or even a clear and present danger. But it does seem to me that it could become a clear and present danger in a year, if things do not break favorably. Cost-Cutting Can Start a Ruinous Circle: ...Why isn't that danger uppermost in everyone's mind? Why are forecasters like James Glassman, a senior economist at J. P. Morgan Chase, so optimistic? In a nutshell, they expect an infusion of demand from somewhere that will reverse the cost-cutting and persuade companies to expand investment, production and hiring. Their main hopes are more tax cuts, more growth in federal spending and more interest rate cuts by the Federal Reserve. They also count on people to finance consumption by continuing to extract equity from their homes, which are still rising in value. Mainly, though, it is stimulus from Washington that for Mr. Glassman will save the day. "If Washington cannot get us moving toward full employment within a year," he said, "then there will be more federal stimulus. We have...

Posted by DeLong at 09:28 PM

Steel Tariff Struggles Continue

Europeans and Japanese say that the Bush administration's latest partial climb-down on steel tariffs is insufficient. IHT Article Print Page: The European Union refused Friday to withdraw its threat of retaliation over U.S. steel tariffs, saying that Washington's most recent list of exemptions was encouraging but insufficient. Officials in Brussels said the EU would not drop its case against Washington at the World Trade Organization and would proceed with plans to hold a meeting next month to consider its options for retaliation... What happens when the Bush Administration loses its steel case in front of the WTO? I can see only two options: a complete climb-down by the Bushies (with political consequences in states like West Virginia that people like Karl Rove will think disastrous) or a lot of damage to the WTO as an honest broker....

Posted by DeLong at 06:09 PM

Stockmarkets: The Economist Remains Pessimistic

The London Economist gives a pessimistic review of the past summer's movements in the stock market. If you can get your undergraduates to read it, they'll be exposed to a bunch of important points--that stock market values depend on expected future profits; that future profits depend on productivity growth, how close the economy is to full employment, and on the strength of competition; and that high stock market values are a good cause/signal of high levels of business investment. I always like to grab an article like this from the Economist and hide it away until we begin talking about "animal spirits" and the determinants of investment in the Keynesian model. Economist.com: The Stock Market: Jumping Yet Jumpy: ...From the beginning of May, when the Dow Jones Industrial Average stood above 10,000, it slid to a low in July of 7,702. The broader S&P 500 index and London;s FTSE 100 followed similar routes south. Having been stamped on heavily after earlier slips, the Nasdaq Composite index (with a heavy weighting of technology companies) had little strength to resist and so sank too. With at least one eye on Wall Street, many other markets followed suit. Then, almost as abruptly in...

Posted by DeLong at 05:18 PM

August 22, 2002
European Monetary Policy

The Economist worries that European interest rates are too high--especially that they are too high for the unemployment-ridden German economy. It would be nice if the writer of today's piece would talk to the writer of the piece a week or two ago about structural reform of the German labor market. "Structural reform"--meaning cutbacks in the social insurance state, especially for the unemployed--when interest rates are too high is not necessarily a good idea. Economist.com: The ECB's Monetary Policy Is Much Too Tight for Germany: ...So why does the ECB not cut its interest rate, currently at 3.25%, compared with America's rate of 1.75%? The ECB still frets about inflation. The headline rate for the whole euro area, at 1.9%, is a whisker below the 2% ceiling of the ECB's target, but core inflation, excluding food and energy, is 2.5%. Most economists do not expect rates to be cut this year. This raises two questions. First, are rates currently appropriate for the euro area as a whole? Second, how much lower would they be if the Bundesbank was still setting interest rates to suit Germany alone? Given the ECB's inflation target of "below 2%", which can be interpreted as a...

Posted by DeLong at 01:35 PM

August 20, 2002
Falling Forecasts of Short-Run Growth

David Wessel and Thomas Sims of the Wall Street Journal report on how the consensus forecasts of near-term economic growth worldwide are being cut back. Former Fed Governor Larry Meyer provides context: WSJ.com - Major Business News: ...In the U.S., the very slow growth in payrolls and the decelerating pace of wage gains threatens to pinch household income. Household wealth has been whacked by the weak stock market. And business investment spending is restrained by "a sense of pessimism and a reluctance to take risks," says Mr. Meyer, the former Fed governor. Consumer spending and housing have been impressively resilient, and another round of no-interest financing by auto makers will help the economy in the current quarter. "But," he says, "the only way to keep the economy going in the fourth quarter is to get a significant rebound in business fixed investment, and that doesn't seem to be in train."......

Posted by DeLong at 06:57 AM

August 17, 2002
Against the New Enclosure Movement

Larry Lessig calls for resistance to the "new enclosure movement." How long and under what terms intellectual property protection should be provided is a very hard question. But it seems clear to me at least that our current trajectory grossly underestimates the benefits of free distribution. Copyright should not be forever. (Indeed, it's hard to think of a reason why it should be more than fourteen years.) Larry Lessig: ...even at the birth of the 20th century. Here's my favorite example, here: 1928, my hero, Walt Disney, created this extraordinary work, the birth of Mickey Mouse in the form of Steamboat Willie. But what you probably don't recognize about Steamboat Willie and his emergence into Mickey Mouse is that in 1928, Walt Disney, to use the language of the Disney Corporation today, "stole" Willie from Buster Keaton's "Steamboat Bill." It was a parody, a take-off; it was built upon Steamboat Bill. Steamboat Bill was produced in 1928, no [waiting] 14 years--just take it, rip, mix, and burn, as he did [laughter] to produce the Disney empire. This was his character. Walt always parroted feature-length mainstream films to produce the Disney empire, and we see the product of this. This is...

Posted by DeLong at 08:57 AM

Curing German Unemployment

The Economist pushes the Hartz Commission proposals for German unemployment insurance reform. There is, however, one big difference between the condition of Germany now and the condition of Britain--which the Economist compares Germany to--in the 1990s. In Britain the Bank of England was prepared to make sure that institutional reforms did not just shift the economy from classical unemployment to Keynesian unemployment, but instead led to full employment. It was willing to make sure that aggregate demand was high enough to do the job. Is the European Central Bank prepared to fulfill a similar mission? I see no sign that it is. German Unemployment: Too Little, Too Late? ...So the commission's proposals, already broadly backed by employers and trade unions alike, will be put before a special Social Democratic conference this weekend. The cabinet will announce its first measures, ones not requiring legislation, next week, and send further ones to the Bundestag as a bill during the debate on the 2003 budget early next month. Cutting the jobless total in half within three years is feasible, according to the commission, if its recommendations are implemented promptly. The key proposal is for the creation of state-run agencies, alongside the present unemployment...

Posted by DeLong at 08:14 AM

August 15, 2002
The Course of the Recession

Last month's revisions to the NIPA produced a three-quarter decline in real GDP in 2001, instead of the preliminary one-quarter decline. Nevertheless, real GDP declined by only 0.6 percent before beginning its bounce-back in the fourth quarter of 2001. But the most interesting series remains the unemployment rate, still trending upward as real GDP grows less rapidly than productivity plus the trend increase in the labor force, and thus the proportion of America's potential workers left idle continues to grow. Charts from the Wall Street Journal....

Posted by DeLong at 04:22 PM

August 11, 2002
New Data Confirm Amazingly Strong Productivity Trend

Usually reliable sources report that as the preliminary estimates of productivity growth were reported over the past year, Alan Greenspan was dumbfounded. "I don't believe it," he is supposed to have said. "You just can't get such high productivity growth in a recession. It will be revised down." And I don't know anybody who didn't agree, to some degree at least. Well, the revisions are in, and the productivity growth trend is a little bit weaker, but only a little bit. This leaves one big question: if this is productivity growth during a recession, what is the underlying trend rate of productivity growth now? I find it hard to think of a scenario in which trend productivity growth is not continuing the acceleration that began in the mid-1990s--and thus there is reason to think that the next eight years will see more rapid productivity growth than the past seven. One caveat: with productivity surging, it's hard to be pessimistic about GDP growth, but it's easy to be pessimistic about unemployment. washingtonpost.com: Productivity Strong Despite Revisions ...Productivity gains slowed with economic growth in the second quarter, but in the past year, the amount of goods and services produced for each hour...

Posted by DeLong at 04:26 AM

July 01, 2002
Older Clippings

Here are some older clippings (from before the Great Reorganization of this website)....

Posted by DeLong at 07:42 PM