December 28, 2003
The 1990s Boom

The keen-witted Paul Kedrosky points us to a very nice piece about the 1990s by Yale's brilliant and hard-working Bill Nordhaus: The New York Review of Books: The Story of a Bubble: ...While the supply-side years are often touted as the "unshackling of American capitalism," the 1980s in fact had a miserable productivity growth of only 1.8 percent per year. This rate rose sharply in the "fabulous" Nineties, and, much to the surprise of many, has continued to increase during the last three years. While these structural indicators form the backdrop of long-run economic performance, the business cycle makes the headlines and drives election results. Table 1 shows four major factors that are central to the business cycle: the inflation rate, the rate of growth of real GDP, the unemployment rate, and the rate of growth of employment. The striking feature of the Nineties was that each of the major cyclical indicators improved, often sharply, as compared to the supply-side period. For example, real GDP growth rose from 2.8 percent per year to 3.7 percent per year, and employment growth rose from 1.6 percent per year to 2.4 percent per year. These changes in percentage points may seem trivially small....

Posted by DeLong at 06:56 PM

December 22, 2003
The Key Problem of Modern Liberalism

The highly thoughtful Decembrist puts his finger on the core problem of modern liberalism. How can one support the idea of an activist government when half the time that government will be run by malevolent or incompetent Republicans? The Decembrist: ...Bush's domestic initiatives, on the other hand, are as disgraceful to liberals as to conservatives. The Medicare bill may be the biggest new entitlement in generations, but it is more of an entitlement to insurance companies, pharmaceutical manufacturers and employers than to the beneficiaries. As Caldwell puts it, "even the basic plan is indecipherable...The president is right to call this a new kind of entitlement: It is the first entitlement that you have to hire an accountant to take advantage of." It is impossible to see how this scam will form the basis for a better-structured entitlement in the future. The same is true of No Child Left Behind. Caldwell argues that "Mr. Bush has built his re-election around policies that will help him personally in the next election but harm his party thereafter. Republicans will not long wish to defend the education bill. Nor will they be able to fund the Medicare benefit fully, as voters will surely demand....

Posted by DeLong at 04:03 PM

December 01, 2003
Why Was Bob Rubin Such a Good Public Servant?

Robert Rubin and Jacob Weisberg (2003) In an Uncertain World (New York: Random House: 0375505857). Economists and historians will long debate the contrast between the economic policies of the Clinton and George W. Bush administrations. The Clinton administration took office with remarkably few and remarkably bad cards--a long-term legacy of extremely slow economic growth, the huge federal budget deficits created by the Reagan-George H.W. Bush administrations of 1980-1992, a relatively high "natural" rate of unemployment below which inflationary pressures began to build, and so on. The George W. Bush administration took office with remarkably good cards: a budget in substantial surplus, rapid trend productivity growth produced by the fact that the information-technology revolution had reached critical mass, and a remarkably low "natural" rate of unemployment. Yet nearly everything the Clinton economic policy team touched turned to gold: deficit reduction and the largely-successful attempt to enhance the high-investment high-productivity growth recovery, initiatives to reduce trade barriers, and the largely-successful handling of the 1994 Mexican and 1997-1998 Asian financial crises. And presiding over a remarkably good record of economic policy successes was first Assistant to the President and later Secretary of the Treasury Robert Rubin.* By contrast, nearly everything the George W....

Posted by DeLong at 12:11 PM

November 24, 2003
Newt Gingrich and the Washington Post

Some more polite score-settling from Robert Rubin and Jacob Weisberg's In an Uncertain World. What Rubin thinks of the Washington Post: p. 211: "The [IRS reform] bill President Clinton signed in July 1998 still had serious flaws--especially the provisions that deterred or impeded enforcement. Since I left office, a cascade of news reports have appeared about the problems created by the reform legislation. People who had supported the bill at the time were now 'shocked' to discover that enforcement was suffering.... Such a consequence... was entirely forseeable. The very news organizations that had failed to bring balance to the debate in the first place were now complaining about their own central role. One example was an editorial in the Washington Post that accused members of Congress of having 'assaulted and weakened' the IRS--which was true--but neglected to mention how the Post itself and other news organizations had contributed to the process." What Rubin thinks of Newt Gingrich: pp. 169-70: "Newt Gingrich began publicly to bring up the possibility of refusing to raise the debt limit in April 1995.... Gingrich was suggesting a deliberate financial default by the government of the United States... the cessation... of payment on debt instruments... sending...

Posted by DeLong at 08:16 PM

Andrew Sullivan Despairs

Andrew Sullivan despairs when he contemplates the future of America: - Daily Dish: I know I'm a broken record on this but we truly need some kind of third force again in American politics - fiscally conservative, socially inclusive, and vigilant against terror... It was called the Clinton Administration, Mr. Sullivan.* And you and your friends spent a decade trying (unsuccessfully)( as hard as you could to wreck it. *As Madeleine Albright has said, the lack of seriousness with which the incoming Bush administration took their briefings on terrorism in the winter of 2000-2001 was very disappointing....

Posted by DeLong at 10:50 AM

October 03, 2003
Greg Mankiw Needs to Be Very, Very Careful

Greg Mankiw says: Remarks at the Annual Meeting of the National Association of Business Economists: It is also important to be aware of how these deficits arose. About half of the change in the fiscal outlook since the President took office is attributable to the weak economy, including the stock market. About a quarter is due to higher expenditures, mainly on homeland security and defense. The last quarter is due to reduced revenue from the tax cuts. And these estimates are based on static scoring, so they surely overstate the role of the tax cuts. What is important is to have a plan under which the deficits shrink over time relative to the size of the economy. This is the case under the President’s policies. The deficit as a share of GDP is projected to diminish by more than half over the next five years.... There are problems with the entire passage, but just focus on the last sentence. Greg Mankiw should not, really should not have said, had no business at all saying that "the deficit as a share of GDP is projected to diminish by more than half over the next five years." That is the projection the...

Posted by DeLong at 09:04 AM

Nightmare Scenario

"So that's your nightmare scenario?" "No. That's not my nightmare scenario. My nightmare scenario is that the Democrats regain the White House in 2005 or 2009, and that their conventional wisdom is that Clinton's big mistake was in ruling as a moderate Republican. My nightmare scenario is that the next Democratic Assistant to the President for Economic Policy is much more like Larry Lindsey than Bob Rubin, and that the next Democratic Assistant to the President for Political Affairs is much more like Karl Rove than Paul Begala. That White House would then say, 'The Republicans bet that they could run large deficits produced by tax cuts and that we would clean up their mess? Let's raise them: let's put all the social programs we might ever like to see in motion, double the deficit, and make it their responsibility to clean up the mess. That way lies Argentina, remarkably rapidly." "Ah. Yes. Nobody seems to remember how near-run a lot of what we regard as the good policy calls were within the Clinton Administration."...

Posted by DeLong at 08:28 AM

September 27, 2003
Janet Yellen

Macroeconomic Advisers adds more power to its lineup: Macroeconomic Advisers, LLC: Welcome Janet!: We are thrilled to announce that former Federal Reserve Governor and former Chair of the President's Council of Economic Advisers Janet Yellen has become a Senior Adviser to Macroeconomic Advisers and Meyer's Monetary Policy Insights (MPI). Janet is a superb economist and a gifted communicator. She brings insights about the policy process that reflect her experience as a former monetary policymaker and economic adviser to the president... I've said this before: Janet Yellen's book (coauthored with Alan Blinder), The Fabulous Decade, is the best single short thing to read about the U.S. macroeconomy in the 1990s....

Posted by DeLong at 09:28 AM

September 26, 2003
The Do-Not-Call List

Michael Froomkin writes Lots More About the Do-Not-Call-List. He was polite about the first judge. He's less polite about the second....

Posted by DeLong at 07:36 AM

September 17, 2003
If Something Is Unsustainable, It Will Stop

If Something Is Unsustainable, Then It Will Stop Up through 1997 the measured United States current account deficit was a relatively-small one percent of GDP. Since then the measured deficit has grown remarkably--to 2.7% of GDP in 1999, to 3.5% of GDP in 2001, to an estimated 4.7% of GDP this year, and with the U.S. economy currently forecast to grow significantly faster than most of its trading partners to 5.1% of GDP in 2004. How long will non-U.S. residents continue to embrace the large flows of capital to the United States needed to finance this deficit? And what will happen when they stop doing so? Clearly the United States's current account deficit is unsustainable. And, as the late Herb Stein used to say, if something is unsustainable then someday it will stop. I used to think that the United States current account deficit would stop when the rest of the world "balanced up"--when Japan recovered from its more than a decade-long stagnation, and when western Europe restructured its economy, boosted aggregate demand, and reduced its unemployment rate to some reasonable level. But as the years have passed "balancing up"--rapid growth in the rest of the world boosting demand...

Posted by DeLong at 10:59 AM

September 08, 2003
A Trifecta from Patrick Nielsen Hayden

When I need an informed opinion on a subject about which I know nothing, I often find that I cannot do better at coming up with one than by going to Patrick Nielsen Hayden's weblog and borrowing his informed opinion: Here he is, hitting a trifecta: Electrolite: Two years on.: It's a hell of a thing when I, a two-decade citizen of the state of New York, have to go to a British newspaper for full coverage of what my own Senator is up to. Briefly, our junior Senator has announced that she will block the nomination of Utah governor Michael O. Leavitt as EPA administrator until the Bush administration provides some straight talk about air quality around the World Trade Center site--and the White House's role in pressuring the EPA to falsify itself on the subject. A number of New York City webloggers have made an ongoing gig out of their anger and outrage over September 11, 2001. Words like "idiotarian" figure prominently in their arias. I was there, too. I saw the towers burn from my office in the Flatiron Building. And I came home to Brooklyn, hours later, to see the vast plume dropping its particulates on...

Posted by DeLong at 08:14 AM

August 26, 2003
1100 Words on Service-Sector Outsourcing

We economists don't spend enough time pushing the political arguments for freeing-up trade and accelerating the development of poorer countries. We feel that the economic case alone is so strong that that should be sufficient. / Comment & analysis: ...On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century? Democratic politics will produce strong pressures to compensate and assist those who work in industries that will be battered by foreign competition. But, please, let the compensation and assistance take the form of social insurance rather than trade protection....

Posted by DeLong at 09:18 PM

August 24, 2003
Racial Discrimination in America

Kieran Healy reports from the American Sociological Association: Crooked Timber: Incarceration and the Labor Market : Devah Pager has won this year's Dissertation Award from the American Sociological Association.... Devah studies the effect of incarceration on labor market outcomes. Her approach was to conduct an audit study of employers, sending in applications for real jobs using vitas for matched pairs of black and white men.... Pager found that blacks "are less than half as likely to receive consideration by employers relative to their white counterparts, and black non-offenders fall behind even whites with prior felony convictions." In other words, even though being black and having served time both negatively affect one's employment opportunities, controlling for education and skills you are better off being a white male with a felony conviction than a black male with no criminal record......

Posted by DeLong at 08:49 PM

August 19, 2003
Nathan Newman Says: I Told You So

For quite a while Nathan Newman has been worrying about utility privatization. Who, exactly, takes responsibility for (and pays the costs of) maintaining the reliability and stability of the utility system as a whole? He has been telling us so for more than five years now. So today Nathan Newman says, "I told you so": Blackouts: I Told You So As my power was finally restored late last night, I could take small spiteful comfort in feeling like a prophet confirmed. Like the price ripoffs out in California, I basically predicted back in 1998 that this kind of blackout was almost inevitable due to national energy deregulation. With none of the utilities taking real responsibility for maintenance of the grid, neglect was bound to lead to a catastrophic meltdown. From my 1998 Dissertation version (the 2002 book version had some updated analysis): "Under market competition, power producers treat their own plant capacity as fixed moment-to-moment (since all prices will be based on marginal costs, not on longer-term rates of return as with the utilities) while prices will fluctuate across the country as demand adjusts to prices changes. Regulation is required because marginal cost decisions will not include calculations relating to...

Posted by DeLong at 06:29 PM

William Saletan Is Unbalanced and Unfair

Why oh why do we have such a lousy press corps? Here we have William Saletan and Ben Jacobs sneering at Dick Gephardt for being proud of his role in the 1993 deficit-reduction package: The Best of Dick Gephardt - The bravest thing he ever did. By William Saletan and Ben Jacobs ...Whether that [1993 Clinton] budget caused the expansion, boosted home ownership, lowered inflation, and created millions of jobs is far more dubious. According to figures released by the Office of Management and Budget in 1999, the recovery from the 1990 recession started in April 1991, nearly two years before Clinton took office. Furthermore, the Dow Jones Industrial Average didn't begin skyrocketing until Republicans captured Congress in 1994. The Dow gained just 538 points during the two years in which Clinton enjoyed a Democratic Congress. The Dow then soared nearly 7,000 points in the six years during which Clinton faced a Republican Congress. And the nation's Gross Domestic Product didn't starting recording annual increases of 4 percent until 1996. Where to start? Let's work backwards, with the claim that the 1993 budget deal did not contribute to rapid growth in the late 1990s because GDP growth did not cross 4% per year...

Posted by DeLong at 08:44 AM

August 15, 2003
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: 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 14, 2003
A Voice of Middle-of-the-Road Reason

Tom Maguire has some intelligent questions to ask about recent trends in California demography: Just One Minute: What was the pattern of domestic migration by demographic group? Maybe high real estate prices prompted retired folks to cash out and leave California, and discouraged other retirees from settling in the Golden State. Or, perhaps, high real estate prices and declining public schools had a similar net effect on families. Maybe the news that California's economy grew by 27%, relative to the national average of 21%, is interesting but incomplete - IF, for example, Washington and Oregon grew by 30%, that might skew domestic migration. Or, for purists, these (and other) states only have to grow faster than normal relative to California to skew the results. Maybe California normally outperforms the nation by 10%, so these five years were relatively grim. (OK, I would not spend a lot of time on that national scenario, but it is a possibility, and the regional scenario is superficially plausible.) If I were running for Governor of California, I would find the question posed by Dr. Sowell to be very interesting, and the answers presented by both Dr. Sowell and Dr. DeLong to be incomplete. And...

Posted by DeLong at 11:29 AM

July 29, 2003
Blithe Unconcern

DeLong tries to figure out why the Bush Administration makes the economic policy decisions it does: Home US: A phrase that comes to mind when looking at America's pattern of business cycle management is "blithe unconcern", writes Brad Delong, professor of the University of California......

Posted by DeLong at 05:28 PM

July 13, 2003
Report on the Loss of Columbia

What kind of reforms are needed at NASA? The Columbia loss investigation seems to be turning up the same sort of things that the Challenger loss investigation turned up more than fifteen years ago. Losing shuttles is bad. Losing shuttles because managers block engineers is much, much worse. NASA Management Failings Are Linked to Shuttle Demise: ...Some management factors have been obvious for weeks. For example, NASA knew that the shuttle was vulnerable to debris strikes and knew that it was being hit by foam debris on nearly every flight, but left the issue unresolved. That factor, board members have noted, resembles the O-ring failure that destroyed the Challenger in 1986, when NASA knew it had a component prone to problems but did not recognize the potential for catastrophe. Another management issue is that during the Columbia's 16-day flight, after scientists realized that foam had struck the shuttle on liftoff, some NASA engineers thought the agency should get spy satellite photographs of the shuttle to look for damage, but managers decided not to.... [M]ore management problems would be listed in the final report, involving other examples of "flying with things you shouldn't fly with"... "a lack of foresight" by managers.......

Posted by DeLong at 12:17 PM

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 08, 2003
Notes: Blanchard on Transition

Olivier Blanchard's view on the transition from communism to capitalism as of the mid-1990s. If I read his Economics of Post-Communist Transition right, the key problem was the absence of a Marshall Plan to keep demand high and employment high during transition. In the immediate aftermath of World War II in Western Europe, the Marshall Plan allowed countries to maintain high aggregate demand without worrying about balance-of-payments constraints. There was no similar inflow of hard currency in the early 1990s to allow transition governments to create the demand to rapidly reemploy those laid off from state industries. The Bush I Administration had, because of the Reagan deficits, "more will than wallet." As a result, Blanchard argues, high unemployment led to a fear of reallocation and restructuring, and the slowing of the entire process of reform down to a glacial pace. If only demand and employment could have been kept high during the initial stages of transition... And since the mid-1990s? Since Blanchard wrote his book, what has happened? If I read the data right, economic progress in Central Europe has been slow, in Eastern Europe has been very slow, and in the former Soviet Union (where there never was the...

Posted by DeLong at 03:28 PM

July 02, 2003
Democratic Policy Infrastructure

Things to sign up for... American Majority Institute: ...The American Majority Institute moved into new offices at 15th and H Streets N.W. this week and has already filled some key slots. Podesta will serve as president; Laura Nichols, who worked as communications director for former House Minority Leader Dick Gephardt (D-Mo.), will be senior vice president; Sarah Wartell, who served as chief of staff for the National Economic Council in the Clinton administration, will be the chief operating officer; and Neera Tanden, former policy director and deputy campaign manager for Sen. Hillary Clinton (D-N.Y.), will oversee domestic policy. Organizers will spend the summer raising money and hiring more staff before the formal launch in September... Democrats for National Security: July 2 Newsletter: On Sunday, the Council on Foreign Relations released a new report warning that nearly two years after the September 11 attacks, the United States remains dangerously vulnerable to terrorist attack and that funding at all levels of government must be increased... The Hill: House Republican leaders have signaled that they are disinclined to grant permanent status to the panel that will oversee the new Department of Homeland Security (DHS). GOP aides say the political will and motivation are...

Posted by DeLong at 08:01 PM

June 27, 2003
Out of Gas

Stephen Roach meditates on the gap between what the Federal Reserve wants the American economy to do--grow at 4 percent per year for a couple of years or so--and the tools at the Federal Reserve's disposal: Morgan Stanley: ...Since the equity bubble popped in early 2000, the US economy has been on an anemic 1.7% annualized growth path. That includes a mild recession in the first three quarters of 2001 and an unusually subpar recovery in the subsequent seven quarters. Significantly, the post-bubble growth pace has been well below America?s productivity-driven potential growth rate that most put in the 3.25% to 3.75% zone. The result is the emergence of a wide margin of slack between aggregate supply and demand. For a US economy that entered this post-bubble business cycle at a 2.25% inflation rate, this slack has been sufficient to push the US dangerously close to the deflation threshold; in the first five months of 2003, annualized core CPI inflation has averaged just 1.2%. Little wonder the most common complaint heard from US businesses pertains to the lack of pricing leverage. In this context, the Fed?s goal is simple -- to get the economic growth rate back above its long...

Posted by DeLong at 06:17 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 ( ...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 05, 2003
Gains From International Trade and Investment

An Irish-Arizonian-Australian cross-disciplinary alliance of Kieran Healy and John Quiggin is thinking about Pierre-Olivier Gourinchas and Olivier Jeanne's brand-new "The Elusive Benefits of International Financial Integration"--the conclusion of which is that in standard neoclassical models freeing up capital flows across nations has the capability to boost economic welfare by an amount on the order of magnitude of one percent: John Quiggin: (Small) gains from trade: (Small) gains from trade: Kieran Healy links to a paper by Pierre-Olivier Gourinchas and the missing-from-the-web Olivier Jeanne in which a calibrated growth accounting model is used to show that the gains from unrestricted capital mobility are likely to be of the order of 1 per cent of GDP. Gains from risk sharing aren't mentioned but other papers are cited to say that these are of a similar magnitude. Those who listen to the general pronouncements of economists might be surprised by the modest size of the estimated gains. But for those who have looked at similar exercises in the past there is no surprise here. One of the better-kept secrets of economics is the fact that most studies suggest that the replacement of a typical high-tariff regime (say Australia's in the 1960s) will yield...

Posted by DeLong at 07:09 AM

May 27, 2003
The G-7 Process

Yale's Jeffrey Garten, he no like the G-7: / Comment & analysis: ...These summit meetings are a far cry from what was intended when they were conceived in 1975. At the time, I was a young official working for Henry Kissinger, then secretary of state. I recall discussions about the importance of heads of state getting together in intimate, informal circumstances to build genuine rapport. The bureaucracy was to be kept to an absolute minimum. The objective was to manage the interdependence of G7 countries and for them to co-ordinate important policies in both their own collective interest and that of the world at large. Today, these meetings are overrun by large bureaucratic staffs and have become gargantuan media extravaganzas. Except for sleep-inducing communiqués, G7 members barely deal with critical economic reforms within their own countries - the very policies that matter most to the global economy. Instead, they offer plenty of advice on what non-member countries should do. The group also likes to deflect attention from its inability to make the tough economic choices at home by loading the agenda with the political issues of the day. The non- proliferation of weapons and illegal traffic in narcotics are...

Posted by DeLong at 11:36 AM

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 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... | 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

May 14, 2003
Notes: Grigore Pop-Eleches, "Refracting Conditionality: IMF Programs and Domestic Politics During the Latin American Debt Crisis and the Post-Communist Transition"

I have to read a political science dissertation tonight. It's very good... Grigore Pop-Eleches (2003), "Refracting Conditionality: IMF Programs and Domestic Politics During the Latin American Debt Crisis and the Post-Communist Transition" (Berkeley, CA: U.C. Berkeley Ph.D. Diss.). To the extent that neoliberal reforms are consolidated in any but the most developed countries of the two regions, the relative success stories discussed in this dissertation (Bolivia and Bulgaria) revealed a highly contingent pattern of deep initial economic crisis, skillful political coalition building, and generous Western support... the importance of taking advantage of the initial economic crisis... to forge a more durable political coalition in support of economic reforms. While.. the importance of such coalitions is easy to ignore during the post-electoral honeymoon period, governments that succumb to the temptation of insulated economic policy decision-making have a much more difficult time sustaining economic reforms once their popularity is undermined by the sometimes sizeable social costs of such reforms.... another interesting dilemma... the statistical results and the discussion of Bolivia's unlikely neoliberal reform coalition confirm the importance of rent sharing as the glue that binds together social and political actors.... On the other hand, the increasing neoliberal emphasis on privatization, deregulation,...

Posted by DeLong at 05:18 PM

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: ...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
Paul Krugman's "Thinking About the Liquidity Trap"

Paul Krugman's "Thinking About the Liquidity Trap": Thinking about the liquidity trap: We live in the Age of the Central Banker - an era in which Greenspan, Duisenberg, and Hayami are household words, in which monetary policy is generally believed to be so effective that it cannot safely be left in the hands of politicians who might use it to their advantage. Through much of the world, quasi-independent central banks are now entrusted with the job of steering economies between the rocks of inflation and the whirlpool of deflation. Their judgement is often questioned, but their power is not. It is therefore ironic as well as unnerving that precisely at this moment, when we have all become sort-of monetarists, the long-scorned Keynesian challenge to monetary policy - the claim that it is ineffective at recession-fighting, because you can?t push on a string - has reemerged as a real issue. So far only Japan has actually found itself in liquidity-trap conditions, but if it has happened once it can happen again, and if it can happen here it presumably can happen elsewhere. So even if Japan does eventually emerge from its slump, the question of how it became trapped and what...

Posted by DeLong at 07:28 AM

May 07, 2003
Why Oh Why Can't We Have a Competent Executive Branch? Part MCIX

Bruce Bartlett (one of the few sane people in Washington, DC, as evidenced by his decision to live in beautiful Great Falls, Virginia) has switched from believing that Job #1 is to reform and reduce the taxation of income from capital in order to boost long-run economic growth to believing that Job #1 is to boost demand and stimulate the economy over the next two years. Unfortunately, he says, as the economic news making the case for immediate stimulus stronger has dribbled in over the past half year, "the White House [which] recognizes that the political and economic landscape has changed... has simply revised its rhetoric. Now, instead of making the correct argument for its dividend plan -- that it will raise productivity, growth and incomes over time -- the White House talks only about jobs, jobs, jobs. The problem is that the dividend plan probably won't create many new jobs and very few of those will come in the short run." The Thomas option -- The Washington Times: May 7, 2003 The Thomas option Bruce Bartlett      By tomorrow , both the House Ways and Means Committee and the Senate Finance Committee will have completed mark-up of a major tax...

Posted by DeLong at 09:52 AM

May 06, 2003
Miranda Once Again

Juan Non-Volokh complains (I think justifiably) that I have misinterpreted him. When he says that Miranda v. Arizona is "outrageous," his outrage refers not to the substantive result but to the procedural process. What he finds appalling is not that police must inform suspects of their rights (which would be perfectly fine, and probably good, if a state legislature or a state police chief were to require it), but rather that the Supreme Court is extending its tentacles down into every single officer-suspect confrontation in the entire United States, and does so without adequate warrant for such a reach in legal precedent. But this seems grossly inadequate to me. The existence of a right implies the existence of a remedy--of courts or other instrumentalities that will vindicate that right. When Earl Warren and company issued cert in Miranda v. Arizona, where were the alternative courts or other instrumentalities that would vindicate citizens' rights not to be compelled to bear witness against themselves? In the absence of other instrumentalities it seems clear to me that--if the Constitution is indeed the Supreme Law of the Land rather than a set of Dutch-uncle exhortations to be ignored by legislatures--the federal judiciary must enforce...

Posted by DeLong at 10:04 PM

A Platonic Dialogue Between a Senior Administration Official and a Sane Republican Economist

A Platonic Dialogue Between a Senior Administration Official [SAO] and a Sane Republican Economist [SRE] SAO: The President's Economic Plan is about jobs! Creating jobs! SRE: But... SAO: Creating jobs. The Council of Economic Advisers has estimated that the President's Economic Plan will create 500,000 jobs by the end of 2003. And... SRE: But... SAO: ... one million additional jobs by the first Tuesday of November in 2004. SRE: Yes, I know that you say "Jobs! Jobs! Jobs!" But at least some people at the Treasury Department say different: the linkages from dividend tax cuts and tax rate cuts to investment spending and consumer spending are just too weak to generate such large effects, and the estimates assume that the Federal Reserve keeps interest rates unchanged as fiscal policy shifts, but it does not... SAO: The Council of Economic Advisers has estimated 1.5 million jobs... SRE: And that the true reason for the President's Economic Plan is that it will boost long-run growth by improving the efficiency of investment by reducing the economic drag produced by the double taxation of capital. SAO: We are a disciplined administration. And when there might be conflict in other administrations, we resolve it. We...

Posted by DeLong at 07:44 PM

Kevin Drum Needs to Be Told What to Think

Kevin Drum needs to be told what to think about Mitch Daniels's resignation from the post of Director of the Office of Management and Budget. I will oblige. These are the party-line talking points: The principal task of the Director of the Office of Management and Budget is to tell people "no": he or she needs to tell agencies "no" when they want to expand their programs beyond reason; he or she needs to tell White House political operatives "no" when they want to offer tax cuts beyond reason. A successful OMB Director makes current and projected future federal budget deficits shrink (or current and projected future surpluses expand). Given what has happened to the current and projected future federal budget balances under his tenure, Mitch Daniels may well be the least successful OMB Director in American history. (He may be the second least successful--David Stockman may beat him out for the "worst" title: it's a matter of opinion. You may argue that Mitch Daniels faced a uniquely bad situation when he became OMB Director: a president too lazy to grasp the issues, a senior White House staff that did not understand that, like, bad, like, economic policy could, like,...

Posted by DeLong at 01:19 PM

May 01, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCXIV

Time to Bang My Head Against the Wall Once Again... Why, oh why, can't we get a better class of journalists? Those who write ABC's The Note claim to be unable to understand Alan Greenspan's nuanced--and consistent--position on fiscal policy issues. They write, "The Note has no idea what Alan Greenspan thinks about the prospects for growth and about the Bush economy, and that is after reading everything he said, and everything ABOUT what he said..." And those who write ABC's The Note are close to the cream of the crop. But it's really not hard to understand Greenspan if you are willing to accept that his positions are always nuanced and that he is almost always polite. In Greenspan's view, expressed yesterday and many times in the past. Greenspan believes that: In the long run the most important thing is to have a balanced federal budget. Having a budget not in deficit is especially important over the next decade because of the forthcoming retirement of the baby-boom generation. But it is always important. Having a budget that is not in deficit is job 1. Once that is taken care of, one can turn to other goals. In the long...

Posted by DeLong at 11:35 AM

April 20, 2003
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
Uncle Milton

Just spent an hour and a half being interviewed for a documentary about Milton Friedman to air (hopefully) sometime in 2004... Some after-the-fact notes: Friedman... how great an influence on my thought? Let me think who has had more... Smith, Keynes, Summers, Shleifer... I would put Friedman fifth: only four other economist have had a greater influence on how I think... I'm not atypical at Berkeley in finding myself moving under the influence of the intellectual field generated by Milton Friedman--at least, I don't think I am... Friedman as a pragmatic libertarian, perhaps: believing that market failures are atypical, tending to generate profit opportunities and creating institutions to route around them, and that government failure is pervasive--that any expansion of government beyond the classical liberal state is likely to cause more troubles than it solves... Thus a big difference with Arrow, Samuelson, Akerlof, and company: who see market failure as much more common and hard to route around, and democratic governments as much more competent... One problem for us American liberals is certainly that Republican administrations tend to provide excellent demonstrations of Friedman's claim of governmental incompetence/capture/counterproductive behavior--massive government failure that outweighs probable estimates of market failure and creates a...

Posted by DeLong at 12:59 PM

Jeff Madrick on the CBO's Take on Bushonomics

Jeff Madrick this month covers the Congressional Budget Office's take on the growth effects of the Bush economic program. It's a bad business-cycle stabilization plan. It's bad for American long-run economic growth. Jeff Madrick: Economic Scene: ...The textbook Solow model turned out to reduce the rate of growth and raise the deficit substantially. Higher deficits reduced total national savings and therefore undermined capital investment. The growth effects of the other two models were no more encouraging. In fact, the only cases in which the deficits were reduced by as much as 15 percent were when it was assumed that the government would raise taxes in 2014 to stabilize growing debt. The models then concluded that people anticipated this tax increase and saved more now. The higher level of savings resulted in more capital investment in the model, and therefore more growth and lower federal deficits......

Posted by DeLong at 10:08 AM

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 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: - 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 28, 2003
Josh Marshall Bangs His Head Against the Wall

<sarcasm>Bush Administration incompetent? Who would have thought it, who would have imagined it?</sarcasm> Talking Points Memo: by Joshua Micah Marshall: I've become associated over the last several months with the proposition that the Bush foreign policy team is simply incompetent. I have to tell you though that in recent days I have been repeatedly shocked by just how true this seems to be. If you still need to be convinced how disastrously the situation with Turkey was handled, take a look at this article in Friday's Post. It's almost beyond belief. A bull in a china shop doesn't do it justice. The other analogies I came up with were just unmentionable......

Posted by DeLong at 02:20 PM

March 25, 2003
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 23, 2003
Notes: Basics of Monetary Policy

Date: Sat, 22 Mar 2003 10:19:05 -0800 To: From: Bradford DeLong Subject: Re: Question Status: Professor, >I came across your name on your website. I am a beginner >learning Macro Ecomnics. I would like to know Why the Federal >Reserve try to reign in the economy in a boom. When the >economy grows too fast, why is a bad thing, why Fed wants >to cool it down? >Thanks for your help! It's not the growth the Fed objects to. It's the inflation that comes with it. The Federal Reserve is scared that inflation will damage the efficiency of the price system in the long run, and thinks that it will be easier to control inflation if everyone expects the Fed to take a very tough line to stop even small amounts of inflation. Brad DeLong...

Posted by DeLong at 02:36 PM

March 22, 2003
Brink Lindsey Is Very Good Indeed

I've been rereading Brink Lindsey's book, Against the Dead Hand. God, it's good! When I compare it to other books that have gotten much more attention like... Ummm.... Well! Here's what I said about Brink's book on an earlier occasion: Now Brink Lindsey has written a book: Brink Lindsey (2002), Against the Dead Hand: The Uncertain Struggle for Global Capitalism (New York: John Wiley: 0471442771). The purpose of the book is to celebrate the end of one of what Lindsey sees as one of the great obstacles to human progress. The obstacle is "the dream of centralized, top-down control over the course of economic development" (p. 2). In Lindsey's mind, whether the policies were the bloody collectivization of agriculture by Stalin, Mao's command that peasants smelt steel in their backyards, French bureaucrats providing indicative guidance to enterprises for capacity expansion, the UK Labour Party nationalizing the "commanding heights" of the economy, Franklin D. Roosevelt commanding the separation of investment from commercial banking and decreeing the creation of the TVA, or Park Chung Hee offering large subsidized loans to chaebol that would successfully export--it was all one dream: the dream that government controls could successfully manage the economy. It is this...

Posted by DeLong at 08:40 AM

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. ...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

The Costs of Failing to Put Corporate Reform on the Front Burner

Federal Reserve Bank of New York President William McDonough says that in his judgment the failure to take much more thorough and aggressive action to repair trust in corporate governance and corporate accounts has been and is being very damaging to the American economy. I fear that he is correct. War risk not the only drag on US economy-McDonough: Federal Reserve Bank of New York President William McDonough, citing the damage done to investor and lender confidence by corporate scandals. In a speech to the New York State Bankers Association on Thursday, McDonough said investors continue to doubt the quality of internal governance and external oversight as well as the reliability of the information corporations provide. That contrasts to the Fed's Federal Open Market Committee statement after its policy meeting on Tuesday when it argued that geopolitical uncertainty was the main factor holding back the economy and once that uncertainty lifts, the recovery should pick up. McDonough is currently a voting member of the FOMC but is slated to retire in July. The Fed's next policy meeting is on May 6. McDonough said the rash of serious governance problems was one of the surprises that followed the bursting of...

Posted by DeLong at 10:57 AM

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: | 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
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 16, 2003
Morris Goldstein Is a Very Good Economist

Morris Goldstein is a very good economist. The latest thing from him to land on my desk is his look at "Debt Sustainability, Brazil, and the IMF." After reflecting on Morris's take, I find myself a little bit less optimistic about Lula and Brazil than I used to be......

Posted by DeLong at 07:41 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: ...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
The Wall Street Journal's David Wessel Fears the Deficit

The Wall Street Journal's David Wessel fears the long-run deficits the Bush Administration is planning on running: - Capital: President Bush's economists have one thing right: There are good reasons not to panic about this year's budget deficit or next year's. With the economy still weak, the obvious urgency of improving homeland defenses and the U.S. poised for war with Saddam Hussein, this is no time for austerity. Only Europeans would try shrinking deficits at a time like this. But look beyond the next couple of years, and the fiscal outlook isn't pretty. It'll take more than sprinkling tax cuts over the economy to set things right. Pretending otherwise is like telling your spouse that you can retire early and send the kids to college without saving from weekly paychecks. The problem is that we're headed for a decade of deficits. Start with the new Bush tax cuts (roughly $65 billion a year over the next decade) and the occupation and rebuilding of Iraq (perhaps $20 billion annually for the next few years). Add the cost of the inevitable fix to the unintended middle-class tax increases under the "alternative minimum tax." And make a realistic projection about annually appropriated...

Posted by DeLong at 09:09 PM

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
Fannie Mae and Freddie Mac Lose Six Percent of Their Market Value

I realize that this is one of Bill Poole's stock lines--that we need to figure out exactly what kind of animals Fannie Mae and Freddie Mac are, and make that clear, and that uncertainty is a potential source of vulnerability. And I realize that Bill Poole repeating one of his stock lines should not knock six percent off the equity value of these GSE's. But this market is really weird. Perhaps this line should be rotated out of the stock speech... : Fed's Poole: Fannie Shocks Could Spread: The agencies' stock prices sank after Poole's comments, with Freddie Mac's shares falling to a new 52-week low and Fannie Mae's clinging just above its one-year low. "Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy," Poole said at a conference on the two government-sponsored enterprises, or GSEs. Surprises that destabilize financial markets can and do occur with some frequency, Poole said. Because of the scale of the short-term debt obligations of Fannie Mae and Freddie Mac,...

Posted by DeLong at 07:32 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. 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. 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
Notes: More from Henry Aaron

More from Henry Aaron's February 26 testimony: By its reckless insistence on tax cuts, which aggravate the fiscal shortfall, and its use of trust fund accumulations to pay for current government spending, the Administration?s program will reduce growth of national income by ever larger amounts?just under $500 billion in 2013. These tax cuts will add $130 billion annually to the governments interest payment burden in 2013. The revenue sacrificed by the tax cuts that the Administration has proposed since coming to office is more than sufficient to eliminate the entire projected deficits of the Social Security system and Medicare Hospital Insurance, with enough left over to double federal aid to higher education and bio-medical research and to support a major initiative to improve life chances for America?s children....

Posted by DeLong at 02:25 PM

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: - 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

March 01, 2003
Greenspan's Congressional Credit Remains Very Good

John Berry writes that Alan Greenspan's credit remains at gold-standard levels in Congress: 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 26, 2003
Synchronicity on the Consumption Tax

Synchronicity: Today Vaguely Right writes: According to Bruce Bartlett:  a) "Liberals are opposing [the move from income taxation to consumption taxation] because it would benefit the rich too much." Yesterday, I had the following conversation: Him: "All this talk of the consumption tax seems to be just another way to justify not taxing the rich. Aren't there already enough ways to not tax the rich in this world?" Me: "Yes, a consumption tax is another ideological justification for not taxing the rich. But this reason for not taxing the rich does have desirable long-run efficiency properties......

Posted by DeLong at 01:05 PM

February 25, 2003
Thoughts on the Republican Economists' Letter

Thoughts on the Republican Economists' Letter So I downloaded and read the text and signature list of the Republican economists' letter supporting the Bush Administration's budget proposals: We enthusiastically endorse your economic growth and jobs proposal. It is fiscally responsible and it will create more employment, economic growth, and opportunities for all Americans. Moreover, it will improve corporate accountability and strengthen the nation's international competitiveness. I was somewhat disappointed for three reasons: I was moderately disappointed, first, that the letter was so short. If you have an opportunity as a professional economist to gain some media attention, you have a duty to use that opportunity to raise the level of the media debate over economic policy. This letter doesn't. It doesn't tell anyone who reads it why cutting dividend taxes would (if the appropriate adjustments are made to hold the right other things constant) be a good idea. It doesn't tell anyone who reads it why it would improve corporate accountability (a thing that nobody has explained to me to my satisfaction). It doesn't tell anyone who reads it how it would strengthen America's international competitiveness--let along what "international competitiveness" is, or why it is worth strengthening. I was slightly...

Posted by DeLong at 10:50 AM

February 24, 2003
William Watts Gets Snookered

William Watts of CBS Marketwatch gets snookered. He writes: EarthLink - Finance: But as is usually the case when politics and economics meet, there are a number of contradictory answers. Glenn Hubbard, the chairman of the president's Council of Economic Advisers and an architect of the tax-cut plan, has argued that the deficit's impact is relatively minor, and partly offset by future economic growth that can stem from income-tax cuts. "I think that the effects (on interest rates) of the size of the proposals that the president proposed are very, very modest and they are outweighed" by the potential upside benefits Hubbard told reporters last week. The Economic Report of the President, released earlier this month by the Hubbard-led CEA, laid out a formula that results in a sanguine answer when it comes to the impact of debt on interest rates. Read it. According to the CEA's calculations, each dollar of debt crowds out about 60 cents of capital. The other 40 cents is offset by larger capital inflows from abroad. "A conservative rule of thumb based on this relationship is that interest rates rise by about 3 basis points for every additional $200 billion in government debt," the report...

Posted by DeLong at 06:18 PM

February 23, 2003

These days we see strange and bizarre signs in the media of a bitter, desperate, and hidden struggle over the making of Bush Administration economic policy. Fred Barnes, writing in The International Economy, says that Karl Rove and Dick Cheney have been the key players in the Administration's "decision to change direction," to reject the belief that "no further stimulus was needed," and to "change tack and... propose a package of tax cuts to assure a growing economy, notably in 2004." By contrast, U.S. Treasury staff "point out privately" while talking to the G-7 Group that the "package was never about stimulus..." But the G-7 Group's Treasury sources' boss, newly-hatched Treasury Secretary John Snow, tells journalists and other industrial country finance ministers that the tax cut package is intended to boost short-term global growth and is especially needed "in view of the uncertainties over Iraq." Meanwhile, Cato Institute head William Niskanen claims that Alan Greenspan's "statements [about the inadvisability of widening the deficit] indicate he is leaving the job"--that Greenspan has decided that spreading his view of the long-run folly of Bush Administration fiscal policy is more important than being nominated for another term as Federal Reserve Chairman, and that...

Posted by DeLong at 08:28 PM

February 21, 2003
The Bush Budget Once Again

Michael Kinsley bangs his head against the wall on the Bush budget, saying all the normal and appropriate things. As far as I can see, Bush Administration fiscal policy has no external private supporters (except possibly Kevin Hassett?) at all--at least, not one person I have talked to in private who understands the federal budget has told me that they think that the package as a whole (including future extra military expenditures, AMT relief, and all the other things in the policies but not in the OMB numbers) is good for the country. If anybody does think this is good policy, please drop me a note explaining why. The George W. Diet - Lose unsightly pounds by eating like a pig. By Michael Kinsley: Suppose you had a friend who was grossly overweight for years but lately had been looking very trim. Suddenly, though, he puts on 30 or 40 pounds and is waddling around like his old porcine self. He explains that he's found a marvelous new diet: "You eat like a pig and stop exercising until you get so fat that you just have to lose weight." Would you say that your friend is kidding himself?And if your friend...

Posted by DeLong at 01:41 PM

It's Becoming Genuinely Hard to Be a Hawk

Kevin Drum bangs his head against the wall. It's genuinely hard to be a hawk on Iraq given the composition of the U.S. executive branch. Not only do they lie, but they don't seem to understand what being the "good guys" entails: CalPundit: AFTER THE WAR....The news on the war front is not good. I suspect that many reluctant hawks like me have held their noses and supported the war because of the possibility that, aside from ridding the world of a dangerous and unstable dictator, we might also make Iraq ? and eventually the rest of the Middle East ? into a better place.But the downsides seem to be piling up. Transatlantic relations are strained almost to breaking, and Donald Rumsfeld has already declared his eagerness to punish allies who don't support us. We're in the process of paying out a $32 billion (or so) bribe to the Turks. We seem to be abandoning the Kurds. The planned "Shock and Awe" bombing of Baghdad sounds dangerously close to being a war crime. Some factions in the Bush administration talk about appropriating Iraqi oil funds as "spoils of war," and the latest word from Washington and London is that we...

Posted by DeLong at 12:07 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. ...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 13, 2003
Hal Varian Sees Inflation in Our Future

Hal Varian (whom I rarely see on the Berkeley campus, even though his office is only one building over) offers his prescriptions for what should be done in the short run, the medium run, and the long run as far as U.S. fiscal policy is concerned. Most interesting, however, is his forecast that feckless politicians combined with the structural features of American politics are likely to push us toward much higher inflation--once the president has obtained "a pliable Federal Reserve Board" which "can probably be arranged." Deficits and Political Pain: ...let me offer my own prescriptions for the short, medium and long term. Though there is a good chance that the economy will be significantly stronger this year, it wouldn't hurt to have some modest short-run fiscal stimulus. Consumers have kept on spending; the real budget shortfall is coming from business spending and state government cutbacks. A sensible stimulus package would involve a temporary investment subsidy, like accelerated depreciation or even an old-fashioned investment tax credit, along with direct grants to the states. State tax increases and budget cuts could well exert a significant fiscal drag on the economy in the next year, so some attempt to moderate their impact...

Posted by DeLong at 11:02 AM

February 12, 2003
Stan Collender on Fiscal Policy

Stan Collender writes that the 2004 Budget's summary tables--especially Table S-3--"contradicts virtually every major claim the [Bush] administration is making about what it is proposing." Budget Battles (02/11/2003): The Secrets Of S-3 By Stan Collender Tuesday, Feb. 11, 2003 Summary Table 3, or S-3, is one of the most standard -- and basic -- tables in President Bush's budget. And it contradicts virtually every major claim the administration is making about what it is proposing. (Click here for a PDF of S-3.) OMB's own projections show that by 2006, the annual increase for interest payments on the federal debt will be larger than the increase in defense spending. S-3 starts with the baseline -- that is, the White House's estimate of the surplus or deficit if there are no changes in what the federal government is doing. Budget aficionados often say that the baseline shows what will happen if the federal government is on automatic pilot. The Office of Management and Budget-prepared baseline shows that the deficit will decline precipitously without the changes in tax and spending policies the White House is proposing. In fact, the baseline shows that the budget will be in surplus starting in 2006 and...

Posted by DeLong at 07:25 PM

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
When Are Deficits Supposed to Start to Suppress Spending?

Jacob Levy of the V Conspiracy asks an obvious question. If (as Mickey Kaus and others maintain) running a large federal deficit is good because it restrains spending, how come spending growth is not restrained now? We have the deficit, after all--plus the prospect of national bankruptcy a generation hence to concentrate our minds. Missing from this NYT piece about how conservatives stopped worrying and learned to love deficits: any mention of when this effect of deficits restraining spending is scheduled to kick in. The federal budget is in deficit already, boys and girls... [The Volokh Conspiracy]...

Posted by DeLong at 09:52 PM

Not Serious on Freeing-Up Trade

WASHINGTON, FEB 10--The Bush Administration's first act in its Free Trade Agreement of the Americas negotiations is to take all discussion of agricultural subsidies off the table. This is not good. To say you won't even discuss what is the major hoped-for objective of the other partners in the negotiation is a very bad negotiating strategy--or is a very bad negotiating strategy if you want an agreement. Bob Zoellick has got to know better. As the first stage in negotiations to expand free trade throughout the Western Hemisphere, the Bush administration is offering to lift all tariffs on textiles and apparel within five years. The proposal will be presented on Tuesday by Robert B. Zoellick, the United States trade representative, who prepared the offer to cover duties on everything from beef to lamps while making special concessions for the poorest nations, a senior trade official said. The goal, Mr. Zoellick said, is the eventual elimination of duties on goods and services from throughout North and South America. But the administration will refuse to discuss reducing America's multibillion-dollar agricultural subsidies in the negotiations because they are not tariffs, the senior official said....

Posted by DeLong at 04:32 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

Andrew Sullivan Admits Paul Krugman Was Right All Along

If Paul Krugman had written this, I would have said that it is a little harsh and over-the-top. But it's from Andrew Sullivan, who has finally woken up to the fact that Paul Krugman has been right all the time in his harsh judgments of Bush Administration economic policy: - Daily Dish: ...BUSH'S ACHILLES HEEL: It's the economy, smarty-pants... the explosive rate of current government spending... the president's utter insouciance about how to pay for it... his latest budget removes any [excuse for giving him the benefit of the doubt]... worse than Reagan... ratcheting up discretionary spending... no signs whatever of adjusting to meet the hole he and the Republican Congress are putting in the national debt... illiterate flimflam.... But as the tables in the budget also showed, the tax cuts have also contributed significantly to the deficit - and they've barely taken effect yet... staggered that the budget does not contain any mention of the looming war. I guess you could make a semantic point about its not being inevitable - but not even as a possible contingency? Is that how an ordinary citizen plans his own budget?... an awful legacy in the making. In the first three...

Posted by DeLong at 03:14 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
Michel Camdessus Is Not a Happy Camper...

Camdessus on Stiglitz Michel Camdessus Responds to Joseph Stiglitz A Commentary By Michel Camdessus, Honorary Governor of the Bank of France Nouvel Observateur Week of Thursday, September 12, 2002 - No. 1975 - Economics In our July 18 issue, the author of Globalization and Its Discontents, a former World Bank Chief Economist, had personally criticized Michel Camdessus, former Managing Director of the International Monetary Fund, in these terms: "In December 1997 in Kuala Lumpur, during a meeting of Ministers of Finance of the G-7 and leading Asian countries, I told Michel Camdessus, then the head (French) of the IMF, of my poor opinion of his recommendations. He replied that for a people to recover economically, "they must suffer..."" The following is Michel Camdessus' response: To confine myself to the facts, I would make the following points: the only G-7 meetings I-but not Mr. Stiglitz-attended in my official capacity at the International Monetary Fund were Ministers of Finance meetings. No such meetings were held in November or December 1997 in Kuala Lumpur. I did stop over for a few hours in Kuala Lumpur in early December 1997 to deliver a speech (the text of which I have located) to...

Posted by DeLong at 03:18 PM

Michel Camdessus Is Not a Happy Camper...

Camdessus on Stiglitz Michel Camdessus Responds to Joseph Stiglitz A Commentary By Michel Camdessus, Honorary Governor of the Bank of France Nouvel Observateur Week of Thursday, September 12, 2002 - No. 1975 - Economics In our July 18 issue, the author of Globalization and Its Discontents, a former World Bank Chief Economist, had personally criticized Michel Camdessus, former Managing Director of the International Monetary Fund, in these terms: "In December 1997 in Kuala Lumpur, during a meeting of Ministers of Finance of the G-7 and leading Asian countries, I told Michel Camdessus, then the head (French) of the IMF, of my poor opinion of his recommendations. He replied that for a people to recover economically, "they must suffer..."" The following is Michel Camdessus' response: To confine myself to the facts, I would make the following points: the only G-7 meetings I-but not Mr. Stiglitz-attended in my official capacity at the International Monetary Fund were Ministers of Finance meetings. No such meetings were held in November or December 1997 in Kuala Lumpur. I did stop over for a few hours in Kuala Lumpur in early December 1997 to deliver a speech (the text of which I have located) to...

Posted by DeLong at 03:18 PM

Greenspan 5, DeLong 2

"You know me," said one senior Federal Reserve policymaker of the 1990s, "and on the inflation-unemployment tradeoff I'm dovey-dovey. I'm not prone to undercount the distributional and productivity benefits from low unemployment. I'm not prone to overweight the costs of moderate inflation. Yet there I was, in the Chairman's [Greenspan's] office, beggin him to raise interest rates. The NAIRU [the unemployment rate at which inflation is steady] couldn't have fallen that far. Potential growth couldn't be that fast. But he would say, 'It doesn't feel like an economy in which inflationary pressures are building'. And he was right. Whenever we monetary economics types get together, sooner or later the topic of conversation turns to Alan Greenspan. "He's not a God," somebody will say. We will agree that he's not a God. "He has a hard time giving a coherent explanation of why he holds his views," someone else will say. We will agree. Often, after a Greenspan explanation, our only reaction will be, "Huh?" "But why is his judgment so good? Why is he so right so often?" someone else will say. And we will have no answer. He knows things about how to analyze the modern business cycle that...

Posted by DeLong at 01:45 PM

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 13, 2002
Paul Krugman on the "Economic Rationale" for War Against Iraq

Perhaps the stupidest things written about what action should be taken in response to Iraq's flouting of U.N. resolutions on its armaments are Larry Kudlow's cry to invade Iraq to raise the Dow and John Podhoretz's cry to invade Iraq to elect more Republicans to Congress in November. Here Paul Krugman takes on the mostly-whispered claim that a war against Iraq would be "a good thing" for the American economy. Needless to say, policy should rest on whether Saddam Hussein is the successful object of containment policies--a cautious tyrannical madman--or is likely to develop and use weapons that will turn New York or Tel Aviv into abattoirs, not on its effect on the year-over-year growth rate of real GDP. Stocks and Bombs: ...World War II is a very poor model for the economic effects of a new war in the Persian Gulf. On balance, such a war is much more likely to depress than to stimulate our struggling economy. There is nothing magical about military spending — it provides no more economic stimulus than the same amount spent on, say, cleaning up toxic waste sites. The reason World War II accomplished what the New Deal could not was simply that...

Posted by DeLong at 11:00 AM

September 12, 2002
Jeffrey Frankel on U.S. Economic Policy

Jeffrey Frankel asks a hard question: why, for the past two decades, have the economic policies pursued by Republican administrations been so lousy? Over the past two decades, he points out, Republican administrations have been more protectionist, less eager to promote competition, and fiscally irresponsible. Democratic administrations have been more favorable toward free trade, more eager to let competitive markets work, and strongly oriented toward budget surpluses. What's going on? Frankel's answer appears to be that Republican presidents are--don't laugh--drawn from what John Stuart Mill used to call the stupid party. They simply do not understand that bad economic policies are produced not because of the moral failings of politicians and bureaucrats, but because each interest group believes that it deserves a special favor from the government. Resisting such claims from your political supporters requires " stamina, knowledge, ability to absorb and synthesise facts, analysis, ability to communicate, and willingness to trade off issues when constraints make it appropriate, while taking unpopular stands when required." And these qualities George W. Bush's administration seems to lack, badly. / World: ...Governing is far from easy. Intelligent economic decision-making requires painstaking work: gathering detailed information, making logical analysis of trade-offs, and confronting...

Posted by DeLong at 10:03 PM


"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). ...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

Ken Rogoff on the IMF

Ken Rogoff on the claim that IMF bailouts take the money of rich-country taxpayers, give it to the unworthy, and so create "moral hazard". (He also covers a host of other issues.) ...It would be hard to overstate the influence of the popular perception that IMF crisis loans are thinly disguised bail-outs, with the tab paid mainly by ordinary taxpayers in the industrialised world. The presumed need to limit such bail-outs, and their adverse long-term incentive effects, is a central element of virtually every important plan out there to improve the way the IMF does business. The challenge posed by the bail-out view is not simply lack of transparency—that IMF loans are really outright transfers and should be called such. No, the deeper and more troubling implication is the “IMF moral hazard” theory. Simply put, if lenders are confident they will ultimately be bailed out by heavily subsidised IMF loans, they will extend too much credit to emerging-market debtors at rates that do not reflect the true underlying risk. The result? Bigger and more frequent crises than if the IMF did not exist. Giving the IMF more resources, it is argued, exacerbates the crises it was designed to alleviate....

Posted by DeLong at 02:21 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. - 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

Stephen Roach on "The Great Failure of Central Banking"

I don't agree with Stephen Roach that the Federal Reserve should have made interest rates higher and tried to make unemployment higher in the late 1990s in order to diminish investment spending and collapse the stock market bubble. In my view, the time to deal with any problems created by the bubble's collapse is when the bubble collapses--not before. Relative to a lower-stock prices, lower-investment, one-percentage-point-of-unemployment-higher bubble-popping path for the U.S. economy in the late 1990s, the actual path that we took gave us an extra $1 trillion of real production. You can complain about how that $1 trillion was distributed. You can regret that a large chunk of it--$200 billion?--was spent on investments that have much lower social value looking forward than their social cost. You can fear the damaging consequences of banruptcy and fraud on the economy. But you have to argue that these drawbacks from the fallout are quantitatively very large for the cost-benefit analysis to go Stephen Roach's way. Nevertheless, he makes his case more strongly than anybody else does: Morgan Stanley: ... Yet out of this glorious disinflation a new inflation was borne -- asset inflation. And central bankers didn’t have a clue how to...

Posted by DeLong at 09:58 AM

September 06, 2002
Think Analytically!

Think Analytically! I remember one day during the first Clinton Administration when Joe Stiglitz came into the room to chair a meeting, looked around, noticed that--so far--only economists had shown up, and announced that nobody who did not have a Ph.D. in economics would be allowed to speak at the meeting. (Do I need to point out that that Joe was making a joke?) He was. All of us got it. All of us cheered and applauded. We did so not because we Clinton-era economists all agreed on all the issues--anybody with half an ear to the ground would know that we did not. We did so because we had found that it was possible to make intellectual and policy progress in discussions with economists because we had all been trained to think analytically: to break the issue down into background assumptions about the world, beliefs about the principal causal mechanisms, and claims about the likely effects of different policies on those chains of cause-and-effect. When we disagreed--as we often did--we could quickly ascertain where and why, and then agree on how to go hunting for pieces of information that would help resolve the disagreement. This was in striking contrast...

Posted by DeLong at 05:58 PM

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: ...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

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

How Stands the Federal Republic of Germany?

How Stands the Federal Republic? The New German Problem By Brad DeLong As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced. Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb. What will the unemployed, especially the long-term unemployed with only dim memories of integration into the world of work, do with themselves and their time? What will happen to confidence in governments that can not solve the unemployment problem? We all try hard to forget that little more than 50 years ago Europe was and had for half a century been the world's most violent continent. Europeans had slaughtered each other on a scale unprecedented in human history. Against this backdrop, Western Europe after 1950 has been remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece. The most remarkable transformation of all was that of the Federal Republic of Germany. Anyone familiar with German history since 1800 is still astonished at the enthusiasm with...

Posted by DeLong at 07:33 AM

September 03, 2002
Really Scary

It's hard to know if this is a fair picture of what went on--and of how ignorant the typical large-corporation board member is. But if it is a fair picture, it's really scary. Back to School, but This One Is for Top Corporate Officials September 3, 2002 By ANDREW ROSS SORKIN HICAGO — The class was not faring well. On its accounting exam the average score was 32 percent. The teacher was particularly exasperated that so many students had missed a multiple-choice question on the meaning of retained earnings. "Don't tell me that you're on the audit committee and can't tell me what retained earnings are," Roman L. Weil, an accounting professor at the University of Chicago Graduate School of Business, said to the class. These were no first-year M.B.A. students. They were top executives and board members of some of the nation's largest corporations, at a novel post- Enron boot camp. About 80 officers and directors from companies including Pfizer, McDonald's, Motorola and Dow Chemical sat through three days of lectures to understand how to do their jobs at a time when far more people are watching them....

Posted by DeLong at 01:54 PM

Europe's Economic Policy Dilemmas

Here Morgan Stanley's Eric Chaney gives his take on western Europe's current fiscal policy dilemma. Given that the European economies are on the edge of recession, it makes neither economic nor political sense for them to cut their short-run budget deficits. But neither the "Stability and Growth Pact" nor the discourse about European fiscal policy allows one to try what the Clinton administration wanted to try in 1993--a larger deficit now coupled with lots of planned reduction in the deficit in the future. Morgan Stanley: Euroland: The Arithmetic and Politics of Fiscal Policies - Part I...

Posted by DeLong at 12:49 PM

In the Shadow of the Grand Tetons

Richard Berner from Morgan Stanley gives his take on the conversation at last weekend's Federal Reserve Jackson Hole symposium (sponsored by the Federal Reserve Bank of Kansas City). From my perspective, the strangest and most worrisome thing about his report of the conversation is the "European" belief that interest rates have to stay high to promote the "liquidation" of potentially bankrupt enterprises. This is not a strong current of thought in America (save, perhaps, for the pages of the New Republic): ...Few U.S. monetary policymakers fret that low interest rates will forestall corporate downsizing, because they believe that U.S. financial markets are appropriately denying capital to those sectors where gluts are biggest, or giving it to new management who will clean house. On the contrary, some officials worry that Corporate America is hesitant to hire. So while they are guardedly optimistic, they seemed more open-minded about the need for additional stimulus than recent press commentary had suggested. All agreed that the U.S. economy's resilience in the face of financial shocks was comforting, but no guarantee that it would persist.... With oil prices meaningfully higher than we forecast, I share their concern that fourth-quarter growth could zigzag back toward 2%. Such...

Posted by DeLong at 12:39 PM

September 01, 2002
So Where Did the Volume Go?

"Gene Healy's another smart person at Cato," an acquaintance said. "He's making powerful arguments that the Bush Administration must acknowledge Congress's power over war and peace in foreign affairs." So I went to read what Gene Healy had written. I was expecting considerable volume: I had read a short piece by him on the "executive arrogance" of the Clinton years, calling Clinton's foreign policy: ...shameful... brazen... abuse of executive authority... contempt for constitutional limits ... Nixonian... the cluster-bomb humanitarianism of the war on Serbia... But the volume turned out to be extremely muted. After all, if Healy really does believe that Clinton's conduct of foreign affairs in Bosnia, Kosovo, Haiti, and Afghanistan was "...shameful... brazen... abuse... contempt," what words must have come to Healy's mind to apply to many aspects of the Bush Administration's conduct of the campaign against terror? Yet somehow none of these words make it into Healy's discourse, which seems rather... milquetoast... by comparison. His arguments may be right--but if it was so important to express them so... forcefully in judging the Clinton Administration, isn't it even more important to express them forcefully today? War with Iraq: Who Decides? February 26, 2002 by Gene Healy Gene Healy...

Posted by DeLong at 07:55 PM

The New German Problem

Project Syndicate: The New German Problem: J. Bradford DeLong : September 2002 As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced. Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb. What will the unemployed - especially the long-term unemployed with only dim memories of integration into the world of work - do with themselves and their time? What will happen to confidence in governments that can not solve the problem? It is easy to forget that little more than 50 years ago, Europe was the world's most violent continent. Europeans spent the previous forty years slaughtering each other on a scale unprecedented in human history. Against this backdrop, Western Europe after 1950 was remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece. The most remarkable transformation of all was that of the Federal Republic of Germany. Anyone familiar with German history since 1800 is still astonished at the enthusiasm with which the nation that...

Posted by DeLong at 04:44 PM

August 30, 2002
Paul Krugman on the Fiscal Outlook

Back in the early 1990s there were a bunch of us who believed that reducing the deficit--returning American fiscal policy to sanity--would lead to a jump in confidence in America's long-run future, to an increase in investment in America, to a high productivity-growth recovery, and to rapid increases in Americans' incomes. We turned out to be right: economic historians will long argue to what degree the 1990s boom was the result of changes in fiscal policy and to what degree it was the result of other factors, for the magnitude of the productivity boom was far greater than we had hoped for, even in our wildest dreams. Thus it is very disappointing to see how quickly what I regard as our flagship accomplishment is being reversed by the Bush administration and the current congress. Here Paul Krugman sums up the story so far: Just Paul Krugman: Trust Us: The story so far: Summer 2000: Candidate George W. Bush assures voters that his tax cut is affordable. He illustrates his point with four $1 bills. One bill, he says, represents the tax cut; one represents new programs, such as prescription drug coverage; the other two are funds set aside to pay...

Posted by DeLong at 12:51 PM

Greenspan Defends His Policy Toward the Late Stock Market Bubble

There is a principal about asset market bubbles: a policymaking authority like the Federal Reserve can never be sure enough that an asset market rise is a bubble in order for it to take steps to pop it. Why? Because if the Federal Reserve can be sure it is a bubble, the "smart money" in the stock market can be sure that it is a bubble too--and if the smart money is sure that it is a bubble, the smart money will already have gone short the market on a large scale, and so popped the bubble by itself. Therefore the only bubbles that can flourish and grow are those that people are not sure are asset market bubbles. Here the Associated Press reports on Alan Greenspan's defense of Federal Reserve policy in the late 1990s. The only point on which I think Greenspan is weak is his claim that he knew that raising margin requirements would do no good, hence did not raise them. It's not clear to me that they wouldn't have had a beneficial effect--although probably a very small one. Greenspan Defends Decisions of Policy Makers in Late 1990s: ...In addition to defending the Fed's decision not...

Posted by DeLong at 12:36 PM

August 29, 2002
A Reader's Guide to the CBO

John S. Irons notes that the Center on Budget and Policy Priorities has put out a set--a very good set--of one-page analyses making sense of the Congressional Budget Office's updated forecasts. ArgMax Blog: CBO Budget Information: The Center on Budget and Policy Priorities has put together a series of 1-page reports answering questions about the most recent CBO budget release. Why the surplus has disappeared What part was under congressional control Revenue loss vs. spending Debt and interest on the debt CBO vs. OMB What's missing? Data Relating to Recent Budget and Economic Projections by the Congressional Budget Office, 8/29/02, 7pp. This series of one-page analyses discusses a range of issues, including the causes of the disappearing surplus. The data in these materials will be more fully discussed in a forthcoming paper....

Posted by DeLong at 08:45 PM

Bush to Economists: Don't Worry, We'll Make Sure Our Proposals Don't Pass

Economists have been worried that the Bush Administration will monkey with the tax code in destructive ways in an attempt to provide "investor protection" to show that it is "doing something" for the victims of the NASDAQ crash. Now the Bush Administration is telling critical economists not to worry. Whether their proposals are good tax policy or not doesn't matter, for the administration has no intention of actually passing any laws to change the tax code. They just want the investor class to think that something will be done if the Republicans acquire substantial electoral majorities in November. Investor Tax Cut Push Becomes Campaign Tactic: In an Aug. 21 White House meeting with more than a half-dozen economists, Lawrence B. Lindsey, Bush's chief economic adviser, said the administration is committed to moving forward with tax cuts to boost the stock market and soothe investors' pain, several participants said. The package almost certainly will include a provision to increase the amount of stock market losses that can be deducted from income taxes each year, said congressional aides familiar with the negotiations. Also under consideration are reducing the tax rates on capital gains and stock dividends; raising the limit for contributions...

Posted by DeLong at 01:51 PM

August 28, 2002
Defending the Economy by Attacking Asset Prices?

I have always been of the school that central banks should watch asset price bubbles with alarm, but should not raise interest rates in order to try to prick them. My guiding principal has thus been: "Sufficient unto the day is the evil thereof." I suppose I have been most affected by the memory of the Great Depression, where the Fed's desire to restrain asset prices generated interest rate increases that played a role (how big a role is still in dispute) in starting the snowball that became the avalanche of the Great Depression. Here Samuel Brittan cautiously, judiciously makes the case for a more aggressive policy toward asset price bubbles. I'm unconvinced, but it is certainly worth thinking about. Samuel Brittan: Taking asset prices seriously: ...a regime of inflation targets alone has now come under criticism for a different reason. The fear now is not that real output has been neglected but that asset prices have been. There is a vigorous if rarefied debate about whether asset prices as well as consumer price inflation should be specifically targeted. The riposte of central bankers is that asset prices are in fact taken into account insofar as they are expected to...

Posted by DeLong at 09:17 PM

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. - 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

Skepticism Toward the Skeptical Environmentalist

I cannot be the only economist who was disappointed by Bjorn Lomborg's column in the New York Times on Monday, August 26. Lomborg makes a number of good points: it is definitely the case that we are pumping enough CO2 and other greenhouse gases into the atmosphere to warm the earth; that many of our environmental problems are the diseases of poverty, early industrialization, and the absence of democracy; that the Kyoto Protocol would be hideously expensive; that it would delay the warming trend for a decade at most; that projected temperature rises up to 2100 are bearable; and that it would almost surely be better to spend the resources that would be sucked up by the Kyoto Protocol on third-world public health and infrastructure instead. But as I read I kept waiting for another shoe to drop, and it did not. It seemed to me that Bjorn Lomborg's argument was radically and dangerously incomplete. It seemed to me that there were three more critical points that Bjorn Lomborg desperately needed to make, but did not. And because he did not it seemed to me that the net effect of his piece was not to reveal wisdom, but to darkeneth...

Posted by DeLong at 01:23 PM

August 26, 2002
Max Sawicky vs. the Hax and Spinmasters of the Eisenhower Building

Max Sawicky tries to unspin the unspinnable--to say quickly, concisely, and convincingly that what has caused the deterioration in the long-run fiscal outlook is not the Republican "trifecta" of "war, recession, and national emregency." Instead, the major causes of the deterioration are (i) the gradually phased-in 2001 tax cut, and (ii) a revised economic model that is more cautious about the likely future relationship between real GDP and tax revenues. He's right, of course. And Mitch Daniels is wrong. Weblog Entry - 08/26/2002: his testimony today, OMB Director Mitchell Daniels repeats the basic line -- that war, recession, and homeland security are important causes for the worsened budget outlook. But just how important? Let's go over some very simple math. In January 2001 the projected surpluses for 2002 through 2011 were $5.637 trillion. Today under the President's proposed budget, they would be $444 billion for the same ten year period (p. 7, Daniels). Where did the $5.193 trillion fly away to? According to Daniels, it breaks down this way: tax cuts, $1.491 trillion; 'other enacted legislation,' $760 billion; President's proposals, $1.273 trillion; and 'economic and technical reestimates,' $1.669 trillion. Now as I've been ranting for a couple of weeks...

Posted by DeLong at 04:25 PM

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 23, 2002
Treasury Department Staff Losses

All eight of these guys are first-class analysts and economists: smart, non-partisan, willing to tell their political bosses when they are off-base, willing to stay as late as they have to to get the work done, and deeply committed to public service. Their departure is a real loss for the country--for the current and for future administrations. There are still a lot of first-class career staff working at the Treasury, but there are definitely fewer than there were two years ago. Treasury Departures Hurt Staff Morale: ...The Treasury's economic policy division lost four veterans in recent weeks: Springer, John Hambor, Ed Murphy and John Kitchen, "the economic policy backbone at Treasury," said Gary Gensler, a Treasury official during the Clinton administration. The agency's international division has lost four senior staff members: Kristin Forbes, deputy assistant secretary for quantitative analysis; Steven Radelet, who covered East Asia, Africa and the Middle East; Sonal Shah, a former director of African policy; and Brad Setser, who was acting director of International Monetary Fund policy......

Posted by DeLong at 07:49 AM

August 22, 2002
Glenn Hubbard Keeps Pitching

From the Financial Times: CEA Chair Glenn Hubbard: "If you ask the narrow question, are steel tariffs in the US economic interest, the answer is no." Good to see that Council of Economic Advisers Chair Glenn Hubbard is still in there pitching, still clear on what the difference between good and bad economic policy are. But where are the Trade Representative, the Assistant to the President for Economic Policy, and the Treasury Secretary? If CEA gets no support from anywhere else in the government, the White House tends to treat the question "are these economic policies good for the country?" as an irrelevant academic distraction. By contrast, if Treasury and the National Economic Council strongly back the proposition that the most important thing is getting policies right for the long run, then the CEA's arguments become very powerful. If you read the full interview of Glenn by the Financial Times, you see a striking disconnect: the FT wants Glenn to talk about whether the Waco Economic Forum and the tax cuts for investors likely to be proposed as a result of it will strengthen the short-run recovery. Glenn doesn't want to talk about that. (In his shoes, I wouldn't want...

Posted by DeLong at 08:34 AM

August 21, 2002
America's Date with Deflation?

America's Date with Deflation? Two years ago, at the peak of the late-1990s boom, the American economy was slightly overheated. As the unemployment rate fell to four percent and below, inflation began to creep upward, rising by between a quarter and half a percentage point each year. By late 2000 it was very clear that America's GDP was one to two percentage points above potential output--above that level at which aggregate demand balanced aggregate supply, at least in the sense that there was neither upward nor downward pressure on inflation. Today things are very different. Today, in the summer of 2002, America's level of real GDP is running some two percentage points higher than it was in the summer of 2000. However, underneath is the extremely strong underlying productivity growth trend driven by the very real technological revolutions in data processing and data communications. These technological revolutions have boosted potential output by perhaps seven percent over the past two years. Thus today America's real GDP is not one to two percent above but three to four percent below potential output. How do we know this? Simply look at the unemployment rate: today America is producing two percent more than it...

Posted by DeLong at 01:22 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 14, 2002
Making Life Difficult

Now will someone please explain to me why Apple's and Linux's desktop market shares are so small? On Lisa Rein's Radar: Warning To Windows Media File Collectors: Your Music Will Die With Your Computer: A guy reformatted his hard drive and then found out none of his Windows Media files would work. Turns out that Windows Media Player turns the "copy protection" (copy prevention) on by default when it rips CDs, so when he reformatted his hard drive the player thought he was trying to play the copy protected files and a computer other than the one they had been licensed for. Let me say this another way: when you rip CDs on a Windows machine using Windows Media Player, it makes a unique identifier for your computer (that has privacy implications, yes, but I'm trying to make another point here). That unique identifier is associated with a license that is stored separately from the file itself that will only let those files be played back on the one single computer that matches the unique identifier. No other devices. Ever. (Without a lot of hassle anyway -- Without having to backup and restore your licenses on the other computer --...

Posted by DeLong at 02:55 PM

Cats and Dogs Almost Living Together

Raining frogs, plagues of locusts, cats and dogs living together! I agree with the Wall Street Journal editorial page: - Major Business News: ...we'd like to offer one post-Waco suggestion. To wit, that President Bush convene a more workable forum and think seriously about economic policy. We'd suggest he lock himself in a room with Larry Lindsey from the White House, Glenn Hubbard from the Council of Economic Advisers and John Taylor from the Treasury. Then he could reach out to Stanford University to add Michael Boskin... That's a good idea. An economic policy made by those people would be much much better than our current made-by-White-House-Communications policy. On second thought, I don't agree with the WSJ. They add to that list: John Cogan and Martin Anderson. Anderson is the Reagan hack who misrepresented what the sources of the 1980s deficit were. John Cogan spent the late 1980s and early 1990s arguing that budget deficits were caused by the institutional structure of Congressional decision making. To the best of my knowledge, he has never found the time to acknowledge that the end of the deficit in the 1990s was in striking contradiction to all his writings. For the rapid...

Posted by DeLong at 11:17 AM

July 29, 2002
Treasury Secretary Paul O'Neill

For quite a while--more than a year now--the majority of economic reporters I know have been telling me that Treasury Secretary Paul O'Neill is really not up to the job. They say he has no clue as to the substance of economic policy. They say his managerial skills are lousy. And they say he is no clue how to look like a Treasury Secretary. I don't care (much) about the third. I care about the second primarily because I have deep affection for the Treasury's career staff: they're very good people who deserve a very good boss. But I do care very deeply about the first for the country's sake. And here we have an example of the deep familiarity of Paul O'Neill with the substance of tax policy, in his response to a question about Bob Rubin's recommendation to restore America's budget surplus: : Political News Summary: July 29: Security, Opportunity and Responsibility "...former Treasury Secretary Robert Rubin's long-term restraint in refusing to publicly (or even privately) criticize current Treasury Secretary Paul O'Neill... was met by a boomerang to the gut... O'Neill...out of the blue attacked Rubin for being in Singapore while Citi was having troubles, in an...

Posted by DeLong at 10:47 AM

July 25, 2002
Down and Out in the United States?

For most of the past decade the world has been lectured to by Americans who proclaimed the perfection of the US economy: its focus on competition, loose labor regulation, and a modest social safety net, all of which supposedly delivered dynamism and high growth rates. Continental Europeans were told to follow the US model and liberalize their labor markets, so that businesses that want to hire can do so without losing money and so that unemployed workers who find new jobs won't see their wages offset by cuts in welfare-state benefits. Japanese were told to socialize the losses their banking system incurred when Japan's bubble burst, then re-privatize those parts of it that could still succeed as going concerns and liquidate the rest. East Asia's Tigers were told to abandon the German-Japanese financial system based on universal banking and adopt the Anglo-American model based on liquid financial markets. They were also admonished to do a better job at regulating their financial system. Other developing countries were told that their trade barriers, their love of inflationary finance, their failure to curb tax evasion, and their lack of governments strong enough to enforce property and contract rights against local notables, organized bandits,...

Posted by DeLong at 10:56 AM

July 23, 2002
The National Review Is Also Off in the Gamma Quadrant

So I read David Malpass on National Review. He has a list: six key policy actions that Bush can take to boost the stock market: Stop the decline in the value of the dollar. Encourage Japan to stop deflation by adopting a proper monetary policy. Encourage Brazil to adopt a growth-oriented economic policy to avoid default. Pull some of the civil litigation teeth out of the accounting bill. Adopt a pro-free trade rather than a protectionist trade policy. Persuade OPEC to lower the price of oil. The problem is that this macedoine of policy proposals has next to nothing to do with the stock market. The first suggestion is positively counterproductive: stopping the decline in the dollar requires making dollar-denominated bonds more attractive to foreigners, hence requires raising interest rates, and higher interest rates put downward pressure on stock prices. The second and third are simply irrelevant: Japan's recession is irrelevant for the value of the American stock market; ditto for Brazil. The fourth is hard to evaluate: only somebody truly certain from faith alone that we are about to move too far in the direction of providing tools to recover from those accused of dereliction of fiduciary duty could...

Posted by DeLong at 04:41 PM

July 22, 2002
Paul Krugman Tells Bush What To Do

Paul Krugman gives his view--a reasonable, sensible, and probably correct view--about what the government ought to be doing vis-a-vis the economy: another round of interest rate cuts to try to eliminate any danger of deflationary psychology taking hold, corporate reform, and a fiscal policy twist to stimulate the economy now with higher deficits and restore confidence in the long-run soundness of the government's tax and spending plans with surpluses later. He then points out that this government will adopt such a program only when pigs fly. Put it this way: Bush didn't listen to his economic advisers when they pointed out the long-run fiscal requirements of Social Security and Medicare, he didn't listen to his economic advisers on the steel tariff, and he didn't listen to his economic advisers on the farm bill. What imaginable reason could there be to think that he will listen to his economic advisers--who are now, in all probability, telling him things very close to what Krugman is saying--now? Living With Bears ...Given the definitely iffy economic outlook, shouldn't Mr. Greenspan be thinking seriously about another interest rate cut? True, rates are already very low. But if there's one thing we've learned from Japan's experience,...

Posted by DeLong at 09:28 PM

The Economist Joins the Chorus: Options Make Executives Long Volatility

Quite a while ago my brother Chris pointed out to me that stock options do not align the interests of executives with those of shareholders. Options, he said, make the top executives want as much volatility in the company's stock price as possible. Now this point is becoming the conventional wisdom. I think this is healthy. ...The theory is that the huge amounts of stock options dished out to executives in the 1990s encouraged them to behave badly. Unlike stock itself, a stock option has no downside: the owner might gain a lot of money if his company's share price rises, but he loses only the cost of the option if the share price falls (and nothing at all if the option is given to him). That might have encouraged excessive risk-taking at the top--a willingness, as Ira Kay of Watson Wyatt, a pay consultancy, puts it, to "roll the dice". Combined with the freedom to sell the company's stock once the option is exercised, stock options might also have encouraged short-term business strategies, or even fraud. By fiddling with their accounts, company bosses could hope to drive up the share price, cash in their options, and set sail...

Posted by DeLong at 10:35 AM

July 20, 2002
Joshua Micah Marshall Says Go Read Chris Caldwell

Joshua Micah Marshall says go read Chris Caldwell's New York Press column, and then go read it again... Talking Points Memo: by Joshua Micah Marshall I didn't want to do any posts this weekend. But this article by Chris Caldwell in the New York Press merits an exception. It's simply devastating and the most apt statement of the White House's predicament I've yet read. Every word of it practically is worth reading and reading again. There's always an element of unmerited, guilty pleasure you feel when you hear someone on the other side making your side's case for you. But it's equally true that sometimes a political point can only be made clearly by someone who has to say it with an element of regret, whose words are free of the dross of wishful-thinking and mindless overstatement......

Posted by DeLong at 10:04 PM

July 16, 2002
Health Insecurity

Sitting outside at a cafe table next to a woman who is talking on her cellphone and becoming increasingly agitated. She is scheduled for surgery next Monday. She disclosed her preexisting condition to her (new) insurance company, showed proof of current coverage under COBRA, and they said, "Fine." Now they say, "We need a HIPAA certificate before we can authorize coverage for this." She cancelled her COBRA Blue Shield coverage as of June 1. But as of July 15 Blue Shield shows her as still enrolled--hence cannot issue a HIPAA certificate. However, dollars will get you doughnuts that when Blue Shield catches up with its own bureaucracy sometime next month, it will refuse to cover any medical costs incurred after June 1. So what can she do, besides beg for mercy from various bureaucracies? I half-feel like introducting myself as a former member of Hillary Clinton's Health Care Task Force, and apologize to her that we were unable to fix a system that creates such large incentives for insurance companies and HMOs to act like such a******s. From their perspective, of course, every expensive case that they can shrug off covering is straight profit to the bottom line, and as...

Posted by DeLong at 05:33 PM

July 08, 2002
Brink Lindsey Says: The Human Race Has Been Dealt a Winning (and Invisible) Hand

"I think you're wrong," said one of the barons of the center-left Washington, DC thinktanks. "Cato's biggest problem isn't that its day-to-day stuff is too carefully crafted to be politically useful to those factions of the Republican Party that it approves of. Cato's biggest problem is that it doesn't have a deep enough analytical bench. In fact, it has only one young full-time truly-heavy intellectual hitter."* "Brink?" "Yes, Brink Lindsey. Very smart. Very knowledgable. Very thoughtful. And--which is very unusual--very willing to entertain the possibility that he might be wrong." Now Brink Lindsey has written a book: Brink Lindsey (2002), Against the Dead Hand: The Uncertain Struggle for Global Capitalism (New York: John Wiley: 0471442771). The purpose of the book is to celebrate the end of one of what Lindsey sees as one of the great obstacles to human progress. The obstacle is "the dream of centralized, top-down control over the course of economic development" (p. 2). In Lindsey's mind, whether the policies were the bloody collectivization of agriculture by Stalin, Mao's command that peasants smelt steel in their backyards, French bureaucrats providing indicative guidance to enterprises for capacity expansion, the UK Labour Party nationalizing the "commanding heights" of...

Posted by DeLong at 06:34 PM

Sustaining American Economic Growth: Education as the Highest Priority

The third of the four things that I had hoped to have finished by mid-May is finally put to bed--on July 9. *Sigh*. Nevertheless, I like it a lot: it is a chapter for a book to be edited by Henry Aaron, part of Brookings's Agenda for the Nation series. It's co-written with the brilliant and thoughtful team of Claudia Goldin and Larry Katz. We're supposed to talk about sustaining American economic growth. What do we say? A fast growing economy is a rich economy. A rich economy is one in which people have more options and better choices: the people can—through their individual private and collective public decisions—decide to consume more, lower tax rates, increase the scope of public education, take better care of the environment, strengthen national defense or accomplish any other goals they might choose. For an economist these are sufficient reasons to consider growth a good thing. Moreover, in America at least, slow economic growth appears to heighten political gridlock, and thus reduce the quality of political decisions. Although faster economic growth is a good thing, it is not the only good thing. The future benefits of more rapid economic growth come at a cost. Resources...

Posted by DeLong at 12:32 PM

Emmanuel Saez Has Evidence That Supply-Side Effects Are Not Large

One of the nicest things to happen to us here in Berkeley's Economics Department this year was our successfully persuading Emmanuel Saez that he wants to move from Harvard to Berkeley. Here Emmanuel looks at the number of people found at the "kinks" in the tax code. If supply-side effects are large, then lots of people who would otherwise work more (and be in the higher bracket) will decide to quit when their forecasted income reaches the point at which the marginal tax rate jumps up. So Emmanuel looks for kinks, and finds less evidence of them than I would have thought (save for those reporting lots of self-employment income, but that's another taxp policy story). It's simple. It's ingenious. It's well-executed. It's convincing. All in all, very nice to see. Emmanuel Saez (2002), " "Do Taxpayers Bunch at Kink Points?"" (Cambridge: Harvard University xerox). Abstract: This paper uses individual tax returns micro data from 1960 to 1997 to analyze whether taxpayers bunch at the kink points of the U.S. income tax schedule generated by jumps in marginal tax rates. Clear evidence of bunching is found only at the threshold of the first tax bracket where tax liability starts. Evidence...

Posted by DeLong at 09:18 AM

July 07, 2002
More Thoughts on Stiglitz's Globalization and Its Discontents

So I reread Globalization and Its Discontents, and I am more puzzled than ever. I cannot figure out what is going on inside Stiglitz's head. Part of it I think I have figured out. The repeated changes of position--"No! You should not have imposed any conditions on Suharto but lent freely respecting Indonesia's national sovereignty!" "No! You should not have loaned anything to Suharto at all!" "No! You should have loaned to Suharto, and encouraged capital to flow into Indonesia! And been very careful of his face! The longer Suharto stayed in power, the more order defeats chaos, and the better for Indonesia!" "No! Corrupt kleptocrats harm their countries! Clinton and Camdessus should have warned industrial-core companies against investing in Indonesia!" These repeated changes of position tell me that Stiglitz's main complaint against Summers, Fischer, and all is that they were sitting in the control seat where he wanted to be. He wanted to be the one making the decisions about when to lend in hope and when lending would be hopeless, when the current leader is the best that can be expected and when the best option is to cut off all economic contact and hope the current leader...

Posted by DeLong at 09:45 PM

Why the Decline in Health Insurance Coverage?

The continued decline in the share of Americans with health insurance coverage places additional stress on our health care financing system. Sometimes those without health insurance get no or get substandard treatment. Sometimes those without health insurance get adequate or excellent-quality catastrophic treatment--but the treatment is paid for by somebody else. Such cost-shifting further increases the cost of insurance, and reduces coverage. The fear is that at some point large chunks of the financing system will enter an adverse-selection death-spiral as each wave of price increases generates a large reduction in the pool of those paying for insurance and a further wave of price increases. And the derangement of the health-care financing system leads to a significant deterioriation in the quality of care provided. But, fortunately, we aren't there yet. However, we are getting closer. Here David Cutler tracks the decline in health insurance coverage in the 1990s. Employee Costs and the Decline in Health Insurance Coverage David M. Cutler NBER Working Paper No.w9036 Issued in July 2002 ---- Abstract...

Posted by DeLong at 07:51 PM

Before Paul Krugman Leaves for His Vacation...

Before Paul Krugman leaves for his vacation, he takes one more shot at George W. Bush. Between the two options Krugman gives us--Bush knew about and benefited from Harken's accounting frauds, and Bush was just a very negligent and disconnected director--I think the second is by far the most probable. Succeeding in Business ...the ploy works as follows: corporate insiders create a front organization that seems independent but is really under their control. This front buys some of the firm's assets at unrealistically high prices, creating a phantom profit that inflates the stock price, allowing the executives to cash in their stock. That's exactly what happened at Harken. A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10 million phantom profit, which hid three-quarters of the company's losses in 1989. White House aides have played down the significance of this maneuver, saying $10 million isn't much, compared with recent scandals. Indeed, it's a small fraction of the apparent profits Halliburton created through a sudden change in accounting procedures during Dick Cheney's tenure as chief executive. But for Harken's stock price -- and hence for Mr. Bush's...

Posted by DeLong at 03:36 PM

July 05, 2002
Unemployment Continues to Creep Upward

Why does the unemployment rate keep rising, if indeed we are in a recovery? First of all, we are not in that much of a recovery--demand and output are not growing that fast. Second, recall that only recently did President Bush agree to extend the duration of unemployment benefits. In the aftermath of any extension of unemployment benefit duration, the unemployment rate tends to rise by half a percentage point or so relatively to what it would have been: people take longer to search for new jobs (and on average do manage to get better jobs as a result of taking longer to search. - Economy WASHINGTON -- The U.S. unemployment rate edged up to 5.9% last month as employers remained reluctant to add new workers to their payrolls. The latest numbers suggest the economic recovery is too fragile to permit the Federal Reserve to raise interest rates anytime soon. The Labor Department's latest snapshot of the job market released Friday also showed that 36,000 jobs were created in June after a revised increase of 24,000 in May. But job growth wasn't strong enough to prevent the unemployment rate from rising in June from May's 5.8% rate....

Posted by DeLong at 11:24 PM

The Head of the Financial Accounting Standards Board

The Economist profiles a guy who will actually have quite an important job over the next several years. It's interesting to note that even with all its problems the American regulatory surveillance system over corporate accounts is better than anywhere else. Yet clearly the American system is not good enough. | Face value | Called to account | Bob Herz faces the daunting task of restoring confidence in American accounts. "ARE you nuts?" was the response of close friends of Bob Herz when told that he was accepting the job of chairman of America's Financial Accounting Standards Board (FASB). Mr Herz, after all, was leaving a safe position as a senior partner at PricewaterhouseCoopers, the world's largest accounting firm, to step into the heart of the current crisis of confidence in corporate America. Only last week, WorldCom and Xerox announced the two largest profit restatements in history. This week, on July 1st, Mr Herz took up the job of steering American accounting standards in a safer direction. Nuts? Probably not. Brave? Certainly. Ever since Enron, the bust energy-trading company, admitted last year that its numbers for the previous five years were wrong, FASB has been under attack. It takes...

Posted by DeLong at 08:29 AM

July 03, 2002
How Did WorldCom Get Away With It For Even an Instant?

Amey Stone tries to understand how WorldCom could have gotten away for so long with what was really a simple, simple, transparent fraud stream. Certainly the auditors--Arthur Anderson--should have caught it. And why didn't the analysts following WorldCom catch it? They were supposed to have a good sense of what WorldCom's investments plans were. BusinessWeek Online: How Everyone Missed WorldCom | JULY 3, 2002 COMMENTARY By Amey Stone: The accounting fraud was obvious -- only to the few who had full access to its books. At least now real reform is almost certain A major source of the gnawing sense of insecurity generated by the WorldCom (WCOME ) scandal is that so many people missed what seems to have been the most basic of accounting tricks. The foundering telecom giant admitted on June 25 that it essentially disguised billions of operating expenses as capital expenditures, allowing it to report fictitious profits. With outside auditors, stock and bond analysts, bankers and regulators, even journalists, all scouring the finances of this already ailing company, how could they not notice that billions in operating expenses had gone missing? Chief Executive John Sidgmore did his best to build confidence in the new management team...

Posted by DeLong at 10:15 AM

July 02, 2002
IMF Chief Economist Ken Rogoff Unloads Both Barrels in the Direction of Joe Stiglitz

IMF chief economist Ken Rogoff unloads both barrels in the direction of Joe Stiglitz. The "nut" paragraphs are below. I think that, analytically, Rogoff has the better of the particular point he chooses for his argument. Following what appear to be Stiglitz's prescriptions--lend more with fewer conditions and have the government print more money to keep interest rates low--seems that it would have been overwhelmingly likely, in all the cases I know well, to end in hyperinflation or in a much larger-scale financial crisis as the falling value of the currency eliminated every firm's and bank's ability to repay its hard-currency debt and sent the entire country's financial and industrial system into bankruptcy. Stiglitz would have to argue that universal bankruptcy is not that bad: that legal deals would have been quickly struck to write down debts and get the flow of financial intermediation going again. I'm not that optimistic about what happens once the lawyers enter the picture. An Open Letter to Joseph Stiglitz, by Kenneth Rogoff, Economic Counsellor and Director of the Research Department, IMF. Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments...

Posted by DeLong at 06:32 PM

June 29, 2002
Plans?! We Don't Need No Steenkin' Plans!

Every once in a while you can watch somebody highly intelligent gather the force of his or her argument, set out the background, approach the conclusion, and then--like a horse shying away from a jump--dissolve into a bunch of non-sequiturs and irrelevencies. Such has happened to the Economist's editor, Bill Emmott, as he writes the introduction to this week's survey of America's foreign policy. Emmott points out that the apex of the Bush administration is unimpressive. He points out that they have often said one thing, and then rapidly said the exact opposite. Are they for nation-building or isolationism? War on all supporters of terrorism or cuddling up with Saudi princes who reward the families of suicide bombers? Free trade or protectionism to grub for special-interest votes? Democracy or what they think of as friendly autocrats and oligarchs? The Western Alliance faces grave challenges as we approach an age which may become that of terrorists armed with weapons of mass destruction. And the Western Alliance's leadership--the American White House--does not seem up to the task. But all is not lost, says Mr. Emmott. It is true that the Bush White House has no idea how to cope with today's foreign...

Posted by DeLong at 09:29 AM

June 28, 2002
Let's Propose Policies That Have Little To Do With Our Problems...

Paul Krugman puts his finger on what worries me about the disconnect between the administration's actions and the problems facing America.... Paul Krugman: The Reality Thing You can say this about the Bush administration: where others might see problems, it sees opportunities. A slump in the economy was an opportunity to push a tax cut that provided very little stimulus in the short run, but will place huge demands on the budget in 2010. An electricity shortage in California was an opportunity to push for drilling in Alaska, which would have produced no electricity and hardly any oil until 2013 or so. An attack by lightly armed terrorist infiltrators was an opportunity to push for lots of heavy weapons and a missile defense system, just in case Al Qaeda makes a frontal assault with tank divisions or fires an ICBM next time... [T]hey are rather less interested in the reality thing. For the distinctive feature of all the programs the administration has pushed in response to real problems is that they do little or nothing to address those problems. Problems are there to be used to pursue the vision.... Clearly, George W. Bush's people believe that real-world problems will solve...

Posted by DeLong at 02:18 PM

June 24, 2002
Why Does the Bush Economic Policy Team Seem So Weak?

All in all a nasty piece about Bush's economic team. Why do they seem so weak? There are a lot of good people in there. Yet they seem to be having little impact. And then they are blamed for not having much impact. I cannot figure out whether they are nearly powerless because they are ignored, or whether they are ignored because they are nearly powerless. Perhaps the key moment came early--when they failed to draw a line in the sand and push for an initial tax cut focused on improving incentives and reducing marginal tax rates. The fact that the tax cut looks as though it was designed to ladle large scoops of money to rich people--rather than to improve incentives--suggests that they had little to do with designing it, and if you're not at the table on your core issues, it's hard to scramble up to it thereafter. Bush Facing Test in Fight to Avert a Financial Crisis Some analysts say Mr. Bush's economic team lacks the influence to prevail not just on Capitol Hill or in the public arena but also in debates with White House political advisers like Karl Rove. Treasury Secretary Paul H. O'Neill, a...

Posted by DeLong at 07:10 PM

June 20, 2002
The Federal Reserve Says Its Keeping Its Foot on the Gas

At the moment short-term real interest rates are negative: the 1.75% per year interest rate that the Federal Reserve has set on overnight federal funds is less than the rate at which consumer prices are rising. This is a very stimulative posture--it tells businesses that they should undertake investments that (in the short term at least) promise any profits at all, no matter how low. Now the Federal Reserve is telling us that there are no interest rate hikes on offer for the next few months. The Federal Reserve does not have confidence that the recovery is strong and steady enough to risk disrupting it by raising interest rates and making the incentive to invest less. The Federal Reserve does not fear rising inflation enough to want to raise interest rates to put downward pressure on price increases. | Fed May Not Raise Rates At Least Until September | John Berry | June 20, 2002 | The Federal Reserve now appears unlikely to raise interest rates until the fall, at the earliest, because inflation remains extremely low and the U.S. economy is not growing fast enough to create many new jobs. At the beginning of the year, some investors...

Posted by DeLong at 09:10 PM

The Economist's Fears for the Strength of the U.S. Recovery

It is a strange business cycle conjuncture that the U.S. is in now. Stock prices appear overvalued, and likely to fall--an extremely unusual thing to happen at the start of the recovery. Business investment seems likely to weaken further. Yet productivity growth appears extraordinarily strong. The most likely forecast thus seems to involve (a) relatively slow growth--less than the growth rate of potential output (which is about 3.5% per year, or perhaps a touch more), coupled with (b) rising unemployment for the rest of this year at least. The Economist's gloomy take: ...there are good reasons for the markets' current angst. Doubts about the pace of economic recovery lie behind much of it. Wall Street is still, by any historical measure, extremely highly valued.... In so far as they ever made sense, such valuations assumed a speedy return to the extraordinarily high profit claims of the late 1990s. That assumption seems increasingly far-fetched. Mr O'Neill may not have noticed any " substantive information" recently, but others have. In particular, they fret about signals that the American consumer may be running out of steam. May's retail sales fell by an unexpectedly large 0.9%. With no evidence of a rebound in...

Posted by DeLong at 11:32 AM

February 15, 2002
Clive Crook on the Benefits of Globalization | Globalisation is a great force for good. But neither governments nor businesses, Clive Crook argues, can be trusted to make the case Far from being the greatest cause of poverty, globalisation is the only feasible cureThese may be extreme positions, but the minority that holds them is not tiny, by any means. Far more important, the anti-globalists have lately drawn tacit support--if nothing else, a reluctance to condemn--from a broad range of public opinion. As a result, they have been, and are likely to remain, politically influential. At a time such as this, sorting through issues of political economy may seem very far removed from what matters. In one sense, it is. But when many in the West are contemplating their future with new foreboding, it is important to understand why the sceptics are wrong; why economic integration is a force for good; and why globalisation, far from being the greatest cause of poverty, is its only feasible cure......

Posted by DeLong at 05:01 PM

June 01, 1990
Robert B. Barsky and J. Bradford DeLong (1990), "Bull and Bear Markets in the Twentieth Century," Journal of Economic History 50: 2 (June), pp. 1-17.

Robert B. Barsky and J. Bradford DeLong (1990), "Bull and Bear Markets in the Twentieth Century," Journal of Economic History 50: 2 (June), pp. 1-17....

Posted by DeLong at 03:10 PM

July 01, 1989
J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989), "The Size and Incidence of Losses from Noise Trading," Journal of Finance 44: 3 (July), pp. 681-696.

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989), "The Size and Incidence of Losses from Noise Trading," Journal of Finance 44: 3 (July), pp. 681-696....

Posted by DeLong at 12:21 PM