January 10, 2004
Employment and the Labor Force

Between unemployment's April 1979 low point and its July 1980 peak, the American employment-to-population ratio fell by one percentage point--from 59.8% to 58.8%--while the unemployment rate climbed by 2.1 percentage points. Between unemployment's July 1981 low point and its December 1982 peak, the employment-to-population ratio fell by 1.9 percentage points--from 59.1% to 57.2%--while the unemployment rate climbed by 3.6%. Between unemployment's June 1990 low point and its June 1992 peak, the employment-to-population ratio fell by 1.4%--from 62.9% to 61.5%--while the unemployment rate climbed by 2.6%. In general, during a serious labor-market downturn the unemployment rate jumps up sharply, and jumps up sharply by almost twice as much as the fall in the employment-to-population ratio. But this past recession has been very different. Since December of 2000 the employment-to-population ratio has shrunk by 2.3%--from 64.5% to 62.2%. From previous experience we would expect such a fall in the employment-to-population ratio to be accompanied by a big jump in the unemployment: 3.5%, 4.1%, or 4.6%. But it hasn't--the unemployment rate today is only 1.8% above its peak. We have had less than half the jump in the unemployment rate I would have expected given the fall in the employment-to-population ratio. We have...

Posted by DeLong at 04:39 PM

January 07, 2004
Eating Your Own Dogfood!

In a passage that seems ripped from a cyberpunk novel, a daring reporter hacks into the key communications system of a group of high corporate executives, monitors their daily activities, and then ambushes them by posting probing questions about their forthcoming unannounced merger directly to their computer screens. Of course, the "key communications system" was nothing but AOL. The "high corporate executives" were the executives of AOL itself. The "daring reporter" is Wall Street Journal reporter Kara Swisher. She "monitored their daily activities" by adding them to her own AOL Buddy List. And the direct access to their screens was provided by AOL Instant Messenger. AOL executives back then really did eat their own dogfood. And reporters covering them ate it too. From Kara Swisher and Lisa Dickey (2003), There Must Be a Pony in Here Somewhere: The AOL Time Warner Merger Debacle and the Quest for the Digital Future (New York: Crown Business: 1400049636). pp. 1-7: ...the door slammed in my face from 3000 miles away.... Luckily for me, it wasn't a heavy wooden door, but a virtual one. Many virtual ones being banged shut by different high-level executives at America Online Inc. almost immediately after I pinged...

Posted by DeLong at 04:16 PM

January 06, 2004
The Slime Machine at Work Again

Daniel Drezner screams and leaps, fangs bared, for Paul Krugman's jugular. However, he trips over a tree root and falls off a cliff: Daniel Drezner: CORRECTING KRUGMAN.... Krugman's assertion here is that the number of discouraged workers ("those who have given up looking for work") plus the number of part-time workers who wish they were full-time ("only marginally employed") are unusually high by historical standards.... [But] the percentage of discouraged workers... was much higher a decade ago.... [T]he percentage of Americans who are part-time workers but would prefer full-time... was higher a decade ago.... Krugman is either wrong or has a different definition of "unusual" than the rest of the English-speaking world. Distortions like this one... There are, of course, two big problems with Drezner's "argument." When Krugman writes "an unusually large number of people have given up looking for work" he is tracking the flow of people who used to be employed into out-of-the-labor force status, and is referring to a much larger category of people who have dropped out of the labor force over the past three years than just the Bureau of Labor Statistics's "Discouraged Workers" category. When Krugman writes "many of those who say they have...

Posted by DeLong at 07:01 AM

January 03, 2004
Note: Statistical Discrepancies

In the second quarter of 1994 some $39.7 billion more worth of goods and services were sold to customers than were earned as income--an amount equal to 2.4% of the then-ongoing flow of national income. This cannot be, of course: the National Income and Product Accounts are set up to enforce the identity that the money paid for everything sold becomes somebody's income, that income is equal to expenditure. But the NIPA numbers are estimates, and fuzzy estimates at that--this 2.4% of GDP in 1994:II was thus a statistical discrepancy (and a very unusually large number for this discrepancy. By the first quarter of 2000 this statistical discrepancy had swung around to be -$42.9 billion: incomes were some $42.9 billion--some 2.0% of national income--higher that quarter than the value of goods and services sold. This large swing in the statistical discrepancy matters for our picture of growth in the late 1990s: according to income measures, the U.S. economic growth rate from 1994:II to 2000:I was some 0.8% per year higher than according to output or expenditure measures. Since 2000, the statistical discrepancy has swung back. This latest quarter--the third quarter of 2003--the statistical discrepancy was $13.5 billion, or 0.6% of...

Posted by DeLong at 05:13 PM

December 28, 2003
Civilization and Its Discontents

Thoughts on Paul Berman (2003), Terror and Liberalism (New York: Norton: 0393057755). This is a very good book, a very dense book, and a very strange book. From one angle, it is Freud's Civilization and Its Discontents and Fromm's Escape from Freedom brought up to date. Freud sought to explain how it was that modern liberal society did not appropriately channel human destructive impulses, and Fromm extended the argument with the claim that liberal freedom was the last thing that many people want. Berman reads all powerful anti-liberal movements--whether Lenin's, Mussolini's, Hitler's, Franco's, Castro's, Khomeini's, or bin Laden's--as expression of this same basic set of drives and impulses that must be fought and constrained or else catastrophe follows. From a second angle, Berman's Terror and Liberalism is an extended meditation on Camus's The Rebel and on Camus's critique of the literary intellectual who, from the sidelines, cheers on the doers of bloody deeds. And from a third angle Berman's book is a critique of all who won't settle for liberal peace and order but seek to build a New Jerusalem here and now. Berman opens with a potted description of the nineteenth century as an era of wonderful human...

Posted by DeLong at 10:45 AM

December 26, 2003
Outsourcing Once Again

Matthew Yglesias reads Bob Herbert on "outsourcing": Matthew Yglesias: High Tech Offshoring: Bob Herbert writes on the subject of high tech offshoring. It's easy to see why this bothers many Americans -- it means that some Americans who otherwise would have had high paying jobs either have no jobs, or else lower paying jobs. All else being equal, it would be better for more Americans to have higher paying jobs. What I don't quite see, however, is why the alternatives are supposed to be so much better. Say we changed things around and more Americans made more money, more Indians made less money, and all people everywhere had to pay somewhat more for their software. How is that really better? Because it's better for Americans? What if we sent the Marines into Bombay to rob a few banks and help close the budget deficit -- would that be better? I would say not. Now it's not the same as restricting the offshoring of jobs, but it's not totally different either, the Indian software engineers are people too, and their interests count. Come to think of it, American software consumers have interests that count as well. So do the shareholders in...

Posted by DeLong at 01:21 PM

December 20, 2003
Thoughts on Rubinomics

J. Bradford DeLong Director's Cut Version [a much-shortened version will be appearing in the American Prospect] 1702 words The "Reagan Revolution" did not shrink the size of the federal government: in 1980 when Ronald Reagan ran for president federal spending (gross of offsetting receipts) was 22.7% of GDP; in 1992 when Bill Clinton ran for president federal spending was 23.2% of GDP. The "Reagan Revolution" did change the shape of federal spending: one-third of domestic federal spending outside of the entitlement programs went missing between 1980 and 1992, replaced primarily by debt interest and secondarily by higher military spending. (A truly amazing fact, and testimony to the strength of the military-industrial complex: defense took a higher share of GDP in 1992 after the collapse of the Soviet Union than it had taken in 1980). Higher debt interest came from the huge debts run up to finance Reagan's unfunded tax cuts. Debt held by the public amounted to 48% of GDP in 1992, compared to 26% of GDP in 1980. The 4.7% of GDP deficit of 1992 was a structural one: forecast--given then-current policies--to persist and grow as far out as the eye could see (my own winter of 1993...

Posted by DeLong at 11:51 AM

December 08, 2003
Note: The Strange Case of the Unemployment Rate That Did Little in the Early 2000s

Look at what has happened to the U.S. employment-to-population ratio--estimated from the BLS household survey--over the past half century: The employment-to-population ratio falls in each recessionary period.* Back in the old days, the rule of thumb was that the rise in the unemployment rate (in percentage points) was about five-thirds as large as the fall in the employment-to-population ratio (in percentage points). Thus the 1973-1945 recession saw the unemployment rate rise by 4.4% while the employment-to-population ratio fell by 2.4%. The 1979-1983 recessionary period saw the unemployment rate rise by 5.2% while the employment-to-population ratio fell by 3.1%. But in the most recent 2000-2003 recessionary period, the employment-to-population ratio has fallen by 2.7% while the unemployment rate has only risen by 2.1%. The old pattern would have led us to expect such a fall in the employment-to-population ratio to have been accompanied by a rise in the unemployment rate of not 2.1% but 4.5%. More than half of the additional people who would have reported themselves as unemployed in a previous big recessionary period... aren't. They're reporting themselves as out of the labor force instead. Why? What's happened to change the relationship between changes in employment and changes in the...

Posted by DeLong at 02:18 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 29, 2003
"Starve the Beast"?

Having looked forward only three years ago to a future of budget surpluses (at least until the baby boom generation retired in earnest), we now look forward to huge deficits as far as the eye can see. Let's take the reasonable budget projections for George W. Bush's policies that generate deficits of more than $500 billion a year as far as the eye can see (until the baby boom generation retires, and the deficits grow bigger). These projections assume that there will be a Medicare drug benefit (which there is), that the expiring provisions of the tax code will be extended (which the Bush administration wants to do), that the Alternative Minimum Tax will be reformed along the lines assumed by the Congressional Budget Office (which the Bush administration says it wants to do), and that discretionary spending will grow at the rate of nominal GDP. Where did this sudden swing back to deficits come from? Republican ideologues who say that this is all part of a clever plan (rather than being yet another mammoth demonstration of the incompetence at governing of the current crew in the White House) say that the purpose of this is to "starve the beast":...

Posted by DeLong at 04:33 PM

November 26, 2003
Economic Growth Lunch: December 3, 2003

Trade and Growth Can we believe the large effects of trade on economic growth found by Sachs-Warner (1995), Frankel-Romer (1999), Dollar (1992), Edwards (1992), and others--those that say that a one percentage point increase in import and export shares is associated with a two percentage point increase in real GDP? Readings: Jeffrey Sachs and Andrew Warner (1995), "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity 1995:1, pp. 1-118. Jeffrey Frankel and David Romer (1999), "Does Trade Cause Growth?" American Economic Review 89:3 (June), pp. 379-399. David Dollar (1992), "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-85," Economic Development and Cultural Change, pp. 523-544. Sebastian Edwards (1992), "Trade Orientation, Distortions, and Growth in Developing Countries," Journal of Development Economics 39:1 (July), pp. 31-57. Dani Rodrik (1999), "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence" (Cambridge: NBER Working Paper 7081, April). Paul Krugman (1995), "Dutch Tulips and Emerging Markets," Foreign Affairs 74:4 (July/August), pp. 28-44. From Krugman (1995): ...Mexico's crisis is neither a temporary setback nor a purely Mexican affair. Something like that crisis was an accident waiting to happen because the stunning initial success of the Washington...

Posted by DeLong at 12:00 PM

Notes: Robert Rubin's View of Health Care Reform

Robert Rubin and Jacob Weisberg's In an Uncertain World on health care: pp. 149-150: ...giving the Health Care Task Force a hundred-day deadline to submit legislation was probably unrealistic. More significantly, health care cuts across much of the domestic side of the government, and significant participants in the administration--including the members of the economic team, even though most agreed with the general approach--didn't think, at least until nearer the end, that this process aired their views in a way that seriously affected decision making. Consequently, people whose internal backing was crucial too often felt somewhat disaffected, and cooperation was less than it could have been. At one point, for instance, Lloyd Bentsen said he couldn't produce cost estimates because he didn't feel adequately informed. Also, important arguments and criticism weren't exposed in the way that would have occurred in an NEC-type decision-making process. And, of course, the health reform process had the additional complication of having the First Lady in charge. I [had] told [Clinton] I liked the idea--she was smart and effective and clearly knew the subject well.... What I didn't understand at that stage was how being the President's wife would complicate her role.... People tend to pull...

Posted by DeLong at 11:29 AM

November 17, 2003
You're Not Karl Rove's Gofer Anymore, Glenn...

Glenn Hubbard reviews Bob Rubin's book, and momentarily forgets that he is no longer Karl Rove's indentured servant and no longer has to fudge the numbers: FT.com Home US: Moreover, as even Rubin acknowledges, surplus-enhancing measures signed by George Bush Sr, a decline in defence spending, and congressional spending restraint played a leading role in deficit reduction. According to 1996 numbers from the Congressional Budget Office, only $26bn of deficit reduction between 1992 and 1995 was the result of Clinton policies (and even this was after the "stimulus package" and healthcare plan had died in Congress). To claim that year-two figures are a good measure of the quantitative magnitude of a plan that is phased-in over five years--that's the type of thing that a gofer for Karl Rove does. What's a fairer assessment of responsibility for the successful elimination of the Reagan deficits? You can look at it either two ways: The first way is to say that in retrospect about 40% of the swing from the record $200 billion annual deficit of 1992 to the amazing surplus of 2000 was the result of technological revolution: the extraordinary leaps and advances that led to the remarkable fall in the price...

Posted by DeLong at 05:49 PM

Actual and Potential Output

When industrial capacity utilization--as estimated by the Federal Reserve Board--falls one percentage point below its average of 82%, real GDP falls about 0.6 percentage points relative to the economy's productive potential. The industrial sector is a cyclically-sensitive one, and its relative cyclical movements are more than half again as great as those of the economy as a whole. We can use this statistical relationship to get an idea of the relative movements of real GDP and the American economy's productive potential over the past generation and a half: The naked eye, gazing at this figure, can easily discern two things: The acceleration in the rate of GDP growth in the mid-1990s as the technological revolutions in information and communications technology reach critical mass and significantly affect the growth rate of the economy's productive potential. The two great shortfalls of output relative to potential in the past generation and a half--the Volcker disinflation recession of 1980-1983 and the current shortfall of output relative to potential--are of roughly similar magnitude. I remember the 1980-1083 Volcker disinflation. This current episode--although the shortfall in capacity utilization and in output relative to potential is as great and has gone on for as long--does not feel...

Posted by DeLong at 12:50 PM

Econ 101b: Fall 2003: Syllabus

Economics 101b: Fall 2003 Schedule Updated October 9, 2003 This Page: http://www.j-bradford-delong.net/movable_type/2003_archives/002054.html Course Index Page: http://www.j-bradford-delong.net/movable_type/2003_archives/002061.html J. Bradford DeLong delong@econ.berkeley.edu http://www.j-bradford-delong.net/ Office Hours: Th 1-3, Evans 601, or by appointment Rui Pedro Esteves resteves@econ.Berkeley.EDU Office Hours: Th 2-4, Evans 508-3 Lecture Meets: TTh 11:00-12:30, 70 Evans Sections Meet: TTh 8 AM, 45 Evans; TTh 1 PM, 39 Evans This is the go-faster and do-more version of macroeconomics--the study of the determination of output, production, income, employment, and prices in the economy as a whole. Two books are required: The intermediate macroeconomics textbook I am most comfortable with: my own (which should be in the bookstore the week of August 25). Why I wrote this textbook. Order it online. The Economic Report of the President (available online at http://w3.access.gpo.gov/eop/). You might also browse, for recent economic data, the CEA-JEC Recent Economic Indicators. And if you want alternative takes at the subject matter, let me recommend two alternative textbooks: Greg Mankiw's Macroeconomics (4th edition): http://www.amazon.com/exec/obidos/ASIN/1572596449/, and Olivier Blanchard's Macroeconomics (2nd edition): http://www.amazon.com/exec/obidos/ASIN/013013306X/ Since this is a go-faster do-more course, we will go faster and do more. As a group, the class will be made up of people comfortable using calculus, so I'll...

Posted by DeLong at 12:28 PM

October 31, 2003
Last Summer's Boom

The Angry Bear has some very nice and interesting thoughts about last summer's economic boom: : Explaining the GDP BoomFurther insight into yesterday’s big GDP numbers was provided by the release this morning of the September personal income and spending data by the BEA. Both income and spending were sharply lower in September compared to August. The reason? Overwhelmingly, it was because of the end of the one-time tax rebates sent out over the summer. In the graph below, you can see the big bump in both disposable income and consumer spending in July and August, which was almost entirely due to the tax rebates.What does this mean? Three things.First: this provides strong evidence that the huge increase in GDP last quarter, which was powered largely by consumer spending, was largely due to the tax cut. Good old fashioned Keynesianism, as AB pointed out. The mortgage refinancing boom helped some, too, but the lion’s share of the credit goes to the tax cuts.Second: this suggests that last quarter’s GDP figures were an aberration. The fourth quarter will most likely not be nearly as good, since the tax rebates have now been spent and their impact on the economy is pretty...

Posted by DeLong at 03:08 PM

October 21, 2003
Department of "Huh?"

But that's not the way it happened! On the very first page of the preface of his new book, The Roaring Nineties, Joseph Stiglitz writes: ...the idea for this book was hatched as I considered stories [about the Clinton administration] that were not so widely available, or so well understood. The recovery from the 1991 recession, for instance, seemed to defy what was universally taught in economics courses around the world. The popular version, trumpeted by some within the Clinton administration, claimed that deficit reduction... had brought about the recovery, yet standard theory said that deficit reductions worsened economic downturns... Stiglitz is here setting the stage for his argument--which will reach its conclusion on page 44--that the Clinton administration's deficit-reduction program was a mistake. But the story that he tells is not the story that happened. First of all, Stiglitz's last clause in the quote above is simply wrong. There was never any theoretical prediction that the Clinton deficit-reduction program would send the economy back into recession in 1993 and 1994. The deficit reduction program did not cut the current-year deficit but the deficit three and more years in the future. Standard theory says that cutting the current deficit worsens...

Posted by DeLong at 12:42 AM

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

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

Posted by DeLong at 05:07 PM

The "Embedded" Economy Thesis

Something I wrote back in 1997: worth dredging up... I have been following the discussion of Karl Polanyi, and I have been worried because it seems to me that of readers are missing the point. I think that Polanyi does have an interesting argument. But it is being hidden from many because of his terminology. The underlying point is that it used to be the case--painting with a very broad brush--that what happened in economic transactions was in large part determined and guided by sociological and political relationships, but that now--again painting with a very broad brush--the principal direction of influence it is reversed: politics and sociology are more shaped by economic factors than they in turn manage to shape what happens in economic transactions. In Polanyi's vocabulary, this is a transformation from an "embedded" to a "market" economy. And many readers do not hear Polanyi's point because their first reaction is: "We have had markets since time out of mind: what was the agora of Periclean Athens?" I'm not sure how true Polanyi's point really is. But I do think it is worth thinking about. What does Polanyi mean by a claim that a market is "embedded" in a...

Posted by DeLong at 02:50 PM

Fall 2003 Teaching and Office Hours (Revised)

STARTING OCTOBER 20TH... Fall 2003 Teaching and Office Hours Office Hours: Thursdays 12:30-2:30 for the second half of the semester; or call 510-643-4027 or 925-283-2709 or drop me a note at delong@econ.berkeley.edu Present Courses: Economics 101b (Fall 2003). Economic Growth Lunch. Econ 210a, Economic History (Fall 2003)....

Posted by DeLong at 11:35 AM

October 09, 2003
A Non-Socratic Dialogue on Social Welfare Functions

Glaukon: "Professor!" Agathon: "Professor! Good to see you. Getting coffee?" Glaukon: "Yes. I'm teaching. I find that teaching is always and everywhere a caffeine phenomenon." Agathon: "I tend to find that teaching is usually a bagel phenomenon myself. What are you going to teach them?" Glaukon: "Social welfare. Utilitarianism. Condorcet. Arrow. Aggregation of preferences. Preference-revealing mechanisms." Agathon: "Sounds like a full class." Glaukon: "You have no idea." Agathon: "Be sure to teach them about the market's social welfare function." Glaukon: "The market has a social welfare function?" Agathon: "Under appropriate conditions of perfect competition, non-increasing returns, and the absence of externalities the market's decisions about the production and allocation of goods and services attain a point on the Pareto frontier. Every point on the Pareto frontier maximizes some social welfare function." Glaukon: "Yes, of course." Agathon: "Therefore the market, considered as a collective mechanism for making social decisions, chooses to maximize a particular social welfare function. It is instructive to consider what that social welfare function is." Glaukon: "I resent the tone in which you are talking down to me." Agathon: "You do not. This part of this conversation never took place in even approximate form in the real world....

Posted by DeLong at 03:00 PM

Econ 101b: Fall 2003

Economics 101b: Fall 2003: Index Page Problem Sets | Problem Set Answers Exams | Exam Answers Notes on Lectures Notes on Sections Stray Thoughts...

Posted by DeLong at 02:40 PM

October 03, 2003
Allan Meltzer Long Ago Stopped Being Careful

Allan Meltzer long ago stopped being careful. He accuses Alan Greenspan of "misread[ing] the employment data... referr[ing] to the 'weakening' labor market. It isn't so.... Don't believe these reports.... All these alleged facts are either wrong or greatly exaggerated, based on the same faulty source." Meltzer goes on to write: WSJ.com - A Jobless Recovery?: There are two sources of labor market statistics, the Establishment Survey and the Household Survey.... The first asks manufacturing and service sector companies how many employees they have. The second asks a sample of people whether they have jobs... old firms die and new ones are born. The Labor Department learns about the deaths quickly, but it takes longer to learn about the births. When the cafeteria workers are asked about their employment, they report that they are working. If they work for a new firm, the Establishment Survey misses them for a time. But their former employer reports that the number employed at the firm declined this month. Both reports are true, but the second is misleading when taken to the aggregate level.... Downsizing large firms in the interest of greater efficiency is a big source of the new, small firms. It's good to...

Posted by DeLong at 07:26 PM

October 01, 2003
Andrew Sullivan Needs Help

Andrew Sullivan is confused about what is happening in Washington. So a precis of the Plame affair seems called for to tell him what it is "about": www.AndrewSullivan.com - Daily Dish: Well, I sat down yesterday afternoon and tried - no, really tried - to understand what this whole Wilson-Plame "scandal" is about... Let me help: The CIA has declared bureaucratic war on the White House staff. On the journalistic leak front, CIA Director George Tenet or those "familiar with his thinking" have told reporters that the two senior White House aides who called at least six Washington jouralists in an attempt to destroy Valerie Plame Wilson's cover as a CIA operative did so "purely and simply for revenge," that the leaks were "wrong" and "mistaken." On the legal front, the CIA has requested that the Justice Department begin an investigation into the leaking of Valerie Plame Wilson's status. In late July, the CIA filed a report stating that a crime had been committed. Three weeks ago, the CIA reported to the Justice Department that the crime had in fact damaged national security. The FBI has begun a criminal investigation into the unauthorized disclosure of Valerie Plame Wilson's status as...

Posted by DeLong at 08:31 AM

September 23, 2003
The Weak Dollar Policy

One of the many things Robert Rubin has been is a bond salesman. That, I believe, accounts for his "strong dollar policy"--Rubin's promise to people thinking of buying U.S. Treasury and other dollar-denominated bonds that the U.S. government was in the business of trying to keep the value of its securities high, and was not thinking of pursuing a policy of dollar depreciation that would boost exports while eroding the wealth of foreign bondholders. But this Treasury Secretary is different. Over the weekend, Treasury Secretary John Snow persuaded the G-7 nations to issue a communique largely--and correctly--perceived as calling for a "market-based" rather than a "strong" dollar. In response, the value of the dollar fell. U.S. interest rates jumped. The stock market declined: Markets Fall on Declining Dollar | Jerry Knight: The stock market skidded, the value of the dollar fell and interest rates today rose as financial markets responded to a weekend meeting of world economic leaders. At the meeting in Dubai, representatives of leading industrialized countries in the Group of Seven proclaimed that markets rather than governments ought to determine currency values. Such a strategy is usually endorsed by most economists and governments, but the statement aroused concern...

Posted by DeLong at 09:23 AM

September 16, 2003
The Endgame for the U.S. Current-Account Deficit

Kevin Drum interviews Paul Krugman, and in the course of the interview Krugman thinks about the end of the U.S. trade deficit: CalPundit: An Interview With Paul Krugman: What happens if these foreign countries do stop buying U.S. bonds? Is this a real concern, or a tinfoil hat kind of thing? Oh, I don't think China is going to [stop buying U.S. bonds in order] to pressure us. You can just barely conceive of a situation where they're mad at us because we're keeping them from invading Taiwan or something, but more likely they just start to wonder if this is really a good place to be putting their money. So what happens is a plunge in the dollar when they decide to stop buying and start cashing in, and a spike in U.S. interest rates. But you might also get in a situation where the interest rates the government has to pay to roll over its debt become so high that you get an accelerating problem, which is what happened in Argentina. What happened was that suddenly no one would buy Argentine debt unless they paid a twenty something percent interest rate, and everybody says, but if they have...

Posted by DeLong at 01:23 PM

September 13, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCCXXVIII

Today it's the New York Times that makes me want to bang my head against the wall: As Factory Jobs Disappear, Workers Have Few Options: But in June, Mr. Greathouse, 55, lost his job at the Hoover vacuum cleaner factory here, and with so many other factories laying off people, he is at a loss about what to do. "What does it do when you take away all these jobs from people who support families, who raise families?" he asked. "Manufacturing has been the strength of this country. If we can't make anything here anymore, what does that do? The fabric of this society is falling apart." Mr. Greathouse has a lot of company. In three years, Ohio has lost more than 160,000 factory jobs, representing one-sixth of its total. That is but a small fraction of the 2.7 million manufacturing jobs lost nationwide in those three years, many of them because of imports. Some economists say that even with a boom all those jobs are not likely to return. Factory unemployment has snowballed into a huge social and political issue across the Midwest, after manufacturing in the region boomed in the 1990's. President Bush gave a speech about manufacturing...

Posted by DeLong at 11:01 PM

September 12, 2003
Naughty, Naughty...

The always-engaging and usually-highly-intelligent (except when he's arguing that the self that succumbs to telemarketers is more "authentic" than the self that wants to plan in advance how not to be bothered by telemarketers) slips up: Marginal Revolution: Paul Krugman's latest: But these days I can never forget the other Paul Krugman, the one who keeps free market and right-wing bloggers so busy. The Krugman of self-righteousness, sloppiness with the facts, and ad hominem attacks.... There are many examples of this other Krugman.... September 2, 2003: "I admire the virtues of free markets as much as anyone."... June 20, 1999: "The question of how to keep demand adequate to make use of the capacity has become crucial. Depression economics is back. ...in a world where there is often not enough demand to go around, the case for free markets is a hard case to make." Now I know--and Tyler knows--that he is quoting Krugman out of context. The first uses "free markets" in a micro sense: in this context, a believer in "free markets" shares Krugman's immensely strong belief that markets have extraordinary virtues as ways of allocating economic resources--especially when the alternative is someone like Robert Kuttner sitting behind...

Posted by DeLong at 08:54 AM

Fall 2003 Teaching and Office Hours

Fall 2003 Teaching and Office Hours Office Hours: Wednesdays 1-3 for the first half of the semester, TBA for the second half of the semester; or call 510-643-4027 or 925-283-2709 or drop me a note at delong@econ.berkeley.edu Present Courses: Economics 101b (Fall 2003). Economic Growth Lunch. Econ 210a, Economic History (Fall 2003)....

Posted by DeLong at 07:55 AM

September 09, 2003
Growth Lunch Talk

I'm supposed to give a very informal talk about American productivity growth at the inaugural growth lunch tomorrow. Here is my handout. Eighteen months ago I would have been pretty confident about what to say. (And, indeed, I said it.) I would have said that the information technology revolution had attained critical mass, and was boosting American prosperity through three channels: Faster productivity growth meant that the labor market could deliver sustained wage increases no greater than the productivity-warranted rate of real wage growth at a lower unemployment rate, and thus that the infotech revoution had reduced the economy's natural rate of unemployment--perhaps by as much as two percentage points. Outstanding productivity growth in the making of infotech products was boosting economy-wide productivity growth by the rate of leading-sector productivity growth times the share of economy-wide total expenditure spent on infotech products. Outstanding productivity growth in infotech boosts economy-wide productivity growth by a further important channel: cheap infotech capital goods raise the economy's capital intensity and boost productivity growth by the rate of leading-sector productivity growth times the quotient of the infotech production-function share divided by labor's production-function share. But the past year and a half's data have been really...

Posted by DeLong at 08:30 PM

September 07, 2003
Measuring Economic Growth

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

Posted by DeLong at 08:44 AM

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

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

Posted by DeLong at 04:22 PM

Erica Groshen and Simon Potter: Structural Change and the Jobless Recovery

UPDATE: Let us now curse and keelhaul the webmasters of the Federal Reserve Bank of San Francisco. They have broken their links. Erica and Simon's article is now here. These aren't my thoughts--I have no informed contribution to make here--but they are very, very interesting ones. Erica Groshen and Simon Potter of the New York Fed are doing serious work on why the last two recessions have been followed by "jobless recoveries." Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York: The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries (Chart 1). To be sure, these earlier recoveries had rocky moments, with occasional jobless intervals. At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period. The divergent paths of output and employment in 1991-92 and...

Posted by DeLong at 07:10 AM

August 29, 2003
Comment on Stock and Watson

Comment on James Stock and Mark Watson (2003), "Has the Business Cycle Changed?" (Forthcoming in the 2004 Monetary Policy and Uncertainty: Adapting to a Changing Economy (Kansas City: Federal Reserve Bank of Kansas City). James Stock and Mark Watson's paper challenges things that I thought I knew, and tells me that I am going to have to rethink a bunch of issues--going to have to mark my beliefs to market once again. To the extent that there has been a conventional wisdom among economic historians, the extraordinary moderation of the business cycle--the reduction in the size of swings in the unemployment rate, and in the variance of annual output growth--has been due to very important learning about how to better conduct monetary policy. Christina Romer has been the most powerful advocate of this line of narrative. And this has been what I have taught my students over the past several years. The founding of the Federal Reserve brought the possibility of an elastic currency, and of avoiding the great liquidity catastrophes that afflicted the U.S. in the late nineteenth century. The silver-agitation crises of the 1890s, the great crash of 1873 when British investors grew nervous about the "crony capitalism"...

Posted by DeLong at 05:55 PM

August 27, 2003
Fast Food-Style Journalism

Ah. A piece of fast food-style journalism--i.e., low-quality, hastily-prepared, and bad for your brain (if not your heart)--from John Kay. There is only one possible response: it is time to break the glass, to sound the siren, to pull out the fire-axe, and to start channelling Milton Friedman: FT.com Home US: ...there has been intensive lobbying by smaller merchants. It is almost impossible today to create new shopping centres on greenfield sites. But these self-serving arguments have been successful not because their proponents made donations to political action committees but because many French people are sympathetic to the cause. They fear the marché municipal might disappear. I doubt if there is much justification for these fears. There are three supermarkets within a quarter of a mile of the market, which stock the same categories of goods, mostly of lower quality and at lower prices. On the outskirts of town is a much larger store with extensive parking. A 20-minute drive will take you to a Carrefour with more than 100,000 square feet of retail space and a US-style mall. In the face of this competition, the marché municipal and another daily market a mile away seem to be doing fine....

Posted by DeLong at 09:57 PM

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. FT.com / 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 19, 2003
Outsourcing Our Future?

Dan Gillmor and others are worried that we are outsourcing our future. Let's begin by clearing away some underbrush. First of all, the number of jobs in the United States is not set by what happens on the sea lanes--on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve, which tries to hit the sweet spot: high enough demand to produce effective full employment, without so much demand that vacancies become so abundant as to lead inflation to run away. Sometimes the Federal Reserve does a good job and is lucky, and we have full employment with price stability. Other times the Federal Reserve is unskillful or unlucky, and we have accelerating inflation or high unemployment. It is certainly true that what happens in international trade affects employment in America. But the Federal Reserve can and does offset and neutralize impacts of trade that push employment away from where the Federal Reserve thinks the sweet spot of full employment is. So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates...

Posted by DeLong at 06:25 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 16, 2003
"Exorbitant Privilege," or, How Worrisome Is the U.S. Trade Deficit?

Back in the 1960s Charles de Gaulle would complain about the "exorbitant privilege" that accrued to the United States by virtue of its role as the key currency in the post-World War II Bretton Woods international monetary system. Other countries had to worry about their balances of payments: they had to constrain demand or go through the distress of a devaluation in order to balance their trade. But the United States did not: it could simply print extra dollars to cover whatever excess of desired imports over desired exports happened to exist.The Bretton Woods system is long gone. But the United States continues to reap "exorbitant privileges" from its role as key currency in the international monetary system. Today, however, they are different of exorbitant privileges.Look at the figure below, showing America's net exports: measured net exports have been negative--often substantially negative--for nearly three decades. Some of these large trade deficits are the result of domestic economic mismanagement (the very large trade deficits of the mid to late 1980s were, in large part, consequences of the disastrously-botched fiscal policy that was the Reagan deficit). Some of these large trade deficits are the result of foreign economic mismanagement (the very, very...

Posted by DeLong at 10:49 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: Forbes.com: Analysts see U.S. 2nd quarter GDP upward revision: Merchandise trade data out on Thursday showed exports rose a healthy 2.4 percent in June, while in real terms, which is what matters for gross domestic product, the trade deficit narrowed sharply to $47.23 billion from $50.04 billion in May. The [trade] deficit was much smaller than that assumed by statisticians in the advance measure of GDP released on July 31, suggesting trade subtracted less from growth than the 1.56 percentage points initially estimated. The trade news comes hot on the heels of significant upward revisions to retail sales figures for both May and June. On Wednesday the Commerce Department unexpectedly upped its June estimate of sales to a rise of 0.9 percent from 0.5 percent, while May now shows a gain of 0.5 percent when it was flat before. The sudden discovery that consumers spent a lot more than first...

Posted by DeLong at 09:54 AM

August 14, 2003
David Brooks Gets Burned by Trusting Charles Murray

David Brooks gets burned by trusting the American Enterprise Institute's Charles Murray: The Atlantic | September 2003 | People Like Us | Brooks: My favorite illustration of this latter pattern comes from the first, noncontroversial chapter of The Bell Curve. Think of your twelve closest friends, Richard J. Herrnstein and Charles Murray write. If you had chosen them randomly from the American population, the odds that half of your twelve closest friends would be college graduates would be six in a thousand. The odds that half of the twelve would have advanced degrees would be less than one in a million... Ummm... No. Definitely not. Back when The Bell Curve was published, 22.2% of Americans over 25 had bachelor's degrees (an additional 7% had associate's degrees) and 7.5% of Americans over 25 had advanced degrees. Draw 12 people at random from this set, and if my hasty back-of-the-envelope calculation is correct* the odds that half of them will have college degrees is 2.5% (7.2% if we are counting associate's degrees)--not "six in a thousand." The odds that half of 12 people drawn at random from this set will have advanced degrees is 0.1%--not "less than one in a million." I...

Posted by DeLong at 06:56 AM

July 31, 2003
Yes! Good GDP News!

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

Posted by DeLong at 11:46 AM

July 29, 2003
Blithe Unconcern

DeLong tries to figure out why the Bush Administration makes the economic policy decisions it does: FT.com 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 26, 2003
Notes: In the Shadow of Malthus

Begin with the shape of the demographic transition since 1820, with population growth rates plotted as a function of levels of guestimates of levels of real GDP per capita (measured in Maddison's 1990 "International Dollars") for the world's various regions for six irregular (but sensible) subperiods.* The figure shows how population growth rises rapidly as societies progress and grow their annual per-capita incomes from a Malthusian near-subsistence level of $400 (1990 International Dollars) per person per year up to $1,100 or so. Then population growth levels off--typically at 1.75% per year or so--as fertility restriction becomes widespread. Once societies pass $4,000 per capita a year or so, the demographic transition proper sets in, and population growth rates start to decline markedly. Underlying data source: Angus Maddison (2001), The World Economy in Millennial Perspective (Paris: OECD). Raw preliminary spreadsheet at: http://www.j-bradford-delong.net/movable_type/data-TCEH/Maddison_Millennial_Numbers.xls. Let's concentrate on the left-hand side of the figure--the one that lets us hypothesize that human population growth rates are essentially zero when annual GDP per capita levels (guessed-at in 1990 international dollars) are around $400, and that each ten percent increase in living standards above that subsistence level boosts population growth rates by about 0.2 percentage points per year:...

Posted by DeLong at 07:26 AM

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

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

Posted by DeLong at 07:43 PM

July 17, 2003
Utility, Stacking the Deck, and Original Appropriation

I'm annoyed by people who claim that Robert Nozick's Anarchy, State, and Utopia presents a strong rights-based case for a minimal-state capitalist regime as moral, just, or in some sense defensible. Like almost all philosophers, Robert Nozick deals from a stacked deck. Let me briefly note one of several places in Nozick's argument where I noted that something was going on very different from Nozick's claim to present a rights-based argument for a minimal-state capitalist utopia: The place is Nozick's justification for the appropriation and privatization of nature: the dividing-up of natural resources into individuals' private estates. In an original position in which the bounties of nature are unowned and open to all, how can private property possibly arise without violating somebody's rights? Nozick argues that it can, and in so arguing he stacks the deck twice. The first deck-stacking comes with the replacement of one's natural right (i) to freely and fairly use the different kinds of objects that are the bounty of nature by the right (ii) not to have one's situation worsened by the appropriations of others. As Nozick writes (p. 175): ...an object's coming under one person's ownership changes the situation of all others. Whereas previously...

Posted by DeLong at 12:42 PM

Dating the Business Cycle

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

Posted by DeLong at 09:39 AM

July 06, 2003
What Should College Professors Be Paid?

The past is a different country. Even the relatively recent past of, say, a century ago is a very different country. In 1905 "G.H.M.", an anonymous college professor, wrote a four-page article for the Atlantic Monthly in which he pleaded for more money for college professor salaries, and claimed to be vastly underpaid. The first thing to note is the relative level of professorial salaries back then: he claimed that the "average college professor’s salary"--the salary that he saw as clearly inadequate and unfairly low--"is about $2,000." Stan Lebergott's estimates in the Historical Statistics of the United States are that the average annual earnings of an employee in America in 1905 were $490 dollars if employed for the entire year--or $451 taking account of the hazards of unemployment. What G.H.M. says is the average college professor's salary is more than four times annual average earnings of the time. Today's professors don't make such large relative salaries (except in business, law, and medical schools). In order to match turn-of-the-century college professors in terms of income relative to the national average, a professor today would have to make an academic salary of roughly $250,000--a height far above any professorial average, and one...

Posted by DeLong at 04:09 PM

June 30, 2003
International Capital Mobility

The Commerce Department reports on how foreigners have invested much more in the U.S. than U.S. citizens have invested abroad: Forbes.com: US net debtor gap grew to record $2.387 trillion in '02: WASHINGTON, June 30 (Reuters) - The shortfall between U.S.-owned investments abroad and foreign investments here widened again in 2002, to a record $2.387 trillion, the government said in a report Monday. In its annual report on the nation's international investment position, the Commerce Department said the gap between U.S. and foreign investments had increased by $407.31 billion from a revised $1.980 trillion seen in 2001... In the series of linked short runs, we understand why the U.S. is now a debtor nation: the Reagan-Bush deficits, the difference between near-full employment in the U.S. and stagnation in Europe and Japan, the extraordinary attractiveness of investing in U.S. high-tech in the 1990s, fear by rich in other countries that in some future decade political instability will make them glad to have a big bank account in New York, plus a good old-fashioned bubble. All of these contributed to the large capital inflows that have made the U.S. a massive debtor nation. But we neoclassical economists believe that the short runs...

Posted by DeLong at 10:42 AM

June 24, 2003
Equality of Opportunity

Andrew Sullivan doesn't see what is so wrong with an elite university with no black people in it: www.AndrewSullivan.com - Daily Dish: ...But why is a racially un-diverse but intellectually multi-faceted campus such a bad thing? Why is a world without... [affirmative action] so "intolerable"? I think that the politest possible response is that this demonstrates, more than anything else, that Andrew Sullivan is simply and totally clueless about what America is. America is a country built on noble ideas, one of the chief of which is equality of opportunity. But the ancestors of today's African-Americans were, for centuries, Slaves in the Land of America. The ancestors of and many of today's African Americans were, for more than a century, then subjected to an only somewhat less viscious campaign of terror and discrimination in support of America's brutal racial caste system. And discrimination against African-Americans continues today in housing, in employment, in large durable purchases, and in other areas--albeit at a much, much less virulent level. This historical experience has marked today's generations of African-Americans: they were and their parents were much much poorer than other Americans, their and their parents' opportunities were much more restricted, they and their parents...

Posted by DeLong at 09:53 AM

June 23, 2003
Is Uncle Milton Really Naive?

Paul Krugman points out that--no matter what Ben Stein may say--Milton Friedman now agrees with Paul that targeting the growth rate of the money stock has not been a smashing success: FROM THE HORSE'S MOUTH (6/10/03) Readers of the  Unofficial Site may recall that Ben Stein launched a frantic  attack  on me after my quite innocuous column   Missing James Tobin . Among the things that drove him wild was my statement that Milton Friedman's monetarism was a rather "naive" doctrine that has not stood the test of time. But guess who now   concedes   the point? By the way: Friedman did two great things: the permanent income theory of consumption, and the natural rate hypothesis. These do not make him a figure on a level with Keynes, who transformed the way we see the world, and may have saved the market economy. But they're pretty important. Monetarism, on the other hand, was a misguided doctrine. Friedman was looking for a magic way to exclude judgement and discretion from economic policy; he didn't find it. And my own work on the liquidity trap has convinced me that his biggest case for monetarism - the attribution of the Great Depression to monetary contraction...

Posted by DeLong at 10:52 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: FT.com / 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

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

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

Posted by DeLong at 10:46 AM

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

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

Posted by DeLong at 10:13 AM

May 19, 2003
Perhaps John Snow Was Trying to Say Something Intelligent...

Perhaps Treasury Secretary John Snow was trying to say something intelligent. Probably he was. He might have been attempting to say one (or more) of several things, like: I don't determine the value of the dollar, the market does. The market determines the value of the dollar based on the relative attractiveness of dollar-, yen-, pound-, and euro-denominated assets. I don't have any effective influence over the attractiveness of dollar-denominated assets, but Alan Greenspan does. Go ask him how he thinks his monetary policies are affecting the value of the dollar. If two of the world's major economies are in deflation, the third will see the value of its currency decline. That's just arithmetic. If you think I'm trying to have the U.S. join the eurozone and Japan in deflation just to maintain the exchange value of the dollar, you're nuts. Currencies fluctuate for good and bad reasons. Don't try to overinterpret or overanalyze their movements. They're not news unless you're way long or way short. But the problem is that he failed to make sure that the financial market headlines were keyed off of some form of the following paragraph: Although the value of the dollar is a...

Posted by DeLong at 04:25 PM

May 14, 2003
Let's Get Even More Depressed About Cuba

Just because people begin their papers with quotes from Ludwig von Mises does not automatically mean that they are wrong: http://lanic.utexas.edu/la/cb/cuba/asce/cuba8/30smith.pdf http://lanic.utexas.edu/project/asce/pdfs/volume12/perezlopez.pdf The hideously depressing thing is that Cuba under Battista--Cuba in 1957--was a developed country. Cuba in 1957 had lower infant mortality than France, Belgium, West Germany, Israel, Japan, Austria, Italy, Spain, and Portugal. Cuba in 1957 had doctors and nurses: as many doctors and nurses per capita as the Netherlands, and more than Britain or Finland. Cuba in 1957 had as many vehicles per capita as Uruguay, Italy, or Portugal. Cuba in 1957 had 45 TVs per 1000 people--fifth highest in the world. Cuba today has fewer telephones per capita than it had TVs in 1957. You take a look at the standard Human Development Indicator variables--GDP per capita, infant mortality, education--and you try to throw together an HDI for Cuba in the late 1950s, and you come out in the range of Japan, Ireland, Italy, Spain, Israel. Today? Today the UN puts Cuba's HDI in the range of Lithuania, Trinidad, and Mexico. (And Carmelo Mesa-Lago thinks the UN's calculations are seriously flawed: that Cuba's right HDI peers today are places like China, Tunisia, Iran, and South Africa.)...

Posted by DeLong at 10:46 PM

May 10, 2003
The Causes of Slavery or Serfdom: A Hypothesis

Paul Krugman's post, Serfs Up!, reminds me of one of my major sins this spring (for which I must atone): my cutting Evsey Domar (1970), "The Causes of Slavery or Serfdom: A Hypothesis," Economic History Review 30:1 (March), pp. 18-32, from my spring 2003 Economics 210a reading list. As Krugman summarizes Domar's main point: Domar was motivated by his knowledge of Russian history. Serfdom in Russia, he knew, wasn't an institution that dated back to the Dark Ages. Instead, it was mainly a 16th-century creation, contemporaneous with the beginning of the great Russian expansion into the steppes. Why? He came up with a simple yet powerful insight: there's no point in enslaving or enserfing a man unless the wage you would have to pay him if he was free is substantially above the cost of feeding, housing, and clothing him. Imagine a pre-industrial society where population is pressing on limited land supplies, and the marginal product of labor - and hence the real wage rate under competitive conditions - is barely at subsistence. In that case, why bother establishing property rights in human beings? It costs no more to hire a free worker than to feed an indentured laborer. Indeed,...

Posted by DeLong at 10:08 PM

Economics 236: Extra Readings: Liquidity Trap

Paul R. Krugman (1998), "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Vol. 1998, No. 2. (Fall), pp. 137-187. Paul R. Krugman (1999), "Thinking About the Liquidity Trap." Lars Svensson (2003), "Liquidity Traps, Policy Rules for Inflation Targeting, and Eurosystem Monetary-Policy Strategy". Lars Svensson (2000), "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap." Willem H. Buiter and Nikolaos Panigirtzoglou (1999), "Liquidity Traps: How to Avoid Them and How to Escape Them"....

Posted by DeLong at 09:34 PM

May 06, 2003
Elementary Statistics

Eugene Volokh writes: Volokh Conspiracy: People are condemning Bill Bennett, who has taken on the role of a spokesman for virtue and morality, for what seems to be a gambling habit that has lost him $8 million over the last ten years.... Nonetheless, Bennett suggests that he's "come out pretty close to even," though others doubt this... Suppose you play the $500 slots 20,000 times--thus betting ten million dollars in total--on slot machines that are programmed to keep 10% of the take (which is a quite low house percentage for slot machines), and suppose that the standard deviation of payoffs is $1350 (a large number, but then slots do give some very large payoffs). How likely is it that you have come out "pretty close to even"? Anyone a third of the way through their first course in statistics will know that 20,000 times is enough to safely apply the central limit theorem, and thus will be able to quickly and easily figure out that: Your expected loss is $1 million even. There are only five chances in a hundred that you will have lost more than $1.3 million. There are only five chances in a hundred that you will...

Posted by DeLong at 12:27 PM

May 04, 2003
We Owe One to Ross Perot

The Wall Street Journal's Alan Murray admires Ohio Senator George Voinovich, and compares him to Ross Perot a decade ago. In truth, the country does owe an enormous debt to Ross Perot for making deficit reduction first on the list of political tasks. A large chunk (somewhere between 1/3 and 2/3) of the late-1990s boom is due to the fact that the 1990s ended in debt surpluses rather than in the large 1992-style deficits of George H.W. Bush's administration. And I don't like to think about the the... Argentinian... shape that U.S. politics and economics in the 1990s would have taken had the deficit exploded in the 1990s as candidates competed to offer the largest middle-class tax cuts. We owe a big one to Ross Perot (nutty as he may be): he did the country very good service with his intervention in the 1992 presidential campaign. Alan Murray: ...The embattled senator, who had been avoiding the news media for weeks, accepted a berth on Sunday's "Meet the Press," where he gave a bravura performance and surrounded his feet with even more cement. Moderator Tim Russert's final question: "You're sticking to your guns. It's $350 billion in tax cuts and not...

Posted by DeLong at 08:12 PM

May 02, 2003
Economics 236: Supplementary Readings for May 5

Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny (1998), "Law and Finance", Journal of Political Economy. Edward L. Glaeser and Andrei Shleifer (2002), "Legal Origins", Quarterly Journal of Economics. Florencio Lopez de Silanes, Simeon Djankov, Rafael La Porta, and Andrei Shleifer (2002), "The Regulation of Entry", Quarterly Journal of Economics. Simeon Djankov, Edward L. Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer (2003), "The New Comparative Economics."...

Posted by DeLong at 07:47 AM

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 26, 2003
It's an Industrial Sealant! No, It's a Dessert Topping!

Paul Krugman takes aim at the Bush tax cut. The underlying problem is that the Bush administration had no agreement about what its economic plan was. (a) The political shop seems to have demanded a bold policy that would fight the recession and create jobs. (b) The people who actually control things demanded a tax cut for the rich. (c) The economists (chiefly Glenn Hubbard) sought a program to boost economic growth. This "It needs to be an industrial sealant! No, it needs to be a dessert topping!" policy-development process produced (a) an increase in the deficit that is not front-loaded toward today (when a bigger deficit would be good and boost employment) but back-loaded toward the distant future, and as a result the (b) tax cut for the rich that was proposed took the form of (c) proposing to permanently reduce the double taxation of corporate income. (c) by itself might have been a good program to boost long-run growth, but not if it is accompanied (as it is) by a large, permanent increase in the government's budget deficit--an increase that is more effective at retarding long-run growth than the rationalization of corporate income taxation could possibly be at...

Posted by DeLong at 04:42 PM

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

April 12, 2003
How Deep Is the Current Recession?

The Economic Policy Institute has found a measure according to which the current recession is actually the deepest and most severe of post-WWII recessions. The measure? The percentage by which private employment is below its peak level two years after the recession began: "In the two years since the recession began in March 2001, total payrolls have fallen by 2.1 million and private sector payrolls are down by 2.6 million." This is, of course, only part of the story: the current recession is very shallow insofar as production is concerned (in large part because of the rapid underlying productivity growth trend), moderate as far as the unemployment rate is concerned (in part because lots of people have dropped out of the labor force during this recession), and deep as far as private-sector employment is concerned. Which is the "right" measure? Well, it depends on what you are interested in, of course. A balanced picture of the perhaps-still-ongoing recession needs to comprehend all three......

Posted by DeLong at 09:19 AM

April 10, 2003
Notes: Risk Aversion

Teaching Notes for Econ 236: April 9: What do different risk aversion parameters imply about gambles? Kocherlakota (1995) [Narayana R Kocherlakota (1995), "The Equity Premium: It’s Still a Puzzle," Journal of Economic Literature, 1996-1, pp. 42-72.] reports that the raw "equity premium puzzle" implies a coefficient of relative risk aversion of 18... (and then there is the risk-free rate puzzle: at a crra of 18, you need a raw time preference factor of -8% per year to fit average per-capita consumption growth to the average real risk-free rate of interest. What does such a high risk aversion parameter mean? Well... ...At a coefficient of relative risk aversion of 1... you are indifferent between a this year's consumption level of $30,000 for certain and a 58% chance of $40,000 coupled with a 42% chance of $20,000. ...At a coefficient of relative risk aversion of 5... you are indifferent between a this year's consumption level of $30,000 for certain and a 86% chance of $40,000 coupled with a 14% chance of $20,000. ...At a coefficient of relative risk aversion of 10... you are indifferent between a this year's consumption level of $30,000 for certain and a 97.6% chance of $40,000 coupled with...

Posted by DeLong at 03:44 PM

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

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

Posted by DeLong at 07:41 PM

March 26, 2003
Why Can't Reporters Do a Better Job?

The Economist seems to be slipping lately in the quality of its economic reporting. One reads paragraphs like: Taxing Times: ...Economists are divided about the wisdom of slashing taxes in this way, without trying to balance the books. Last month, around 450 economists, including ten Nobel laureates, openly criticised the tax-cut plan: in response, the White House quickly marshalled support from economists who took a different view. Mr Bush has been arguing that his tax cut will itself have a beneficial impact on economic growth, and that as a result the deficits projected under current methods will turn out to be overly pessimistic... And one wants to scream. What "...economists who took a different view..."? Alan Greenspan--number one Republican economist--who says that now is definitely not the time to cut taxes? Douglas Holtz-Eakin--until two months ago Chief Economist at Bush's Council of Economic Advisers--who, now that he heads the Congressional Budget Office and is out from under Karl Rove's message discipline, politely says that it is "not obvious" why anyone would think the tax cut would have a beneficial effect on growth? Bush's own ex-Treasury Secretary Paul O'Neill, who says that shoring up Social Security would be much better than...

Posted by DeLong at 07:17 PM

March 22, 2003
Grand Strategy of the United States

James Di Benedetto of the Eleven Day Empire writes: And there were certainly plenty of people [around the world] who did consider 9/11 to be the equivalent of war, and far from reprehensible... Yes. And now, after this invasion of Iraq, there are 10 times as many people around the world who will consider 9/11 to have been the equivalent of war, anticipatory pre-emptive retaliation for the civilian casualties caused as--as they see it--the Bush Administration went out of control, defied world opinion, defied world civil society, and launched an aggressive war aimed at the conquest of Iraq. That's likely to be the master narrative that people in future years will tell themselves about the chain of events in which we are enmeshed. 10 times as many people who say that 9/11 was what Americans had coming. 10 times as many potential recruits for Al-Qaeda and its successors. 10 times as many people who'll say, "I disapprove of their methods, but I don't think we should help the United States capture them." 10 times as many people who... AAUUGGHH!!! Suppose that the Bush Administration had launched this invasion after a Security Council vote of 10 yes, 2 vetoes (France and...

Posted by DeLong at 08:44 AM

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 14, 2003
Reruns: Ontological Breakdown...

Brent Sleeper realizes that he's heard of me before: Blogger and Child Reunion (Brent Sleeper's Web Site): For much longer than I've been publishing my weblog, I've been carting around a manila folder stuffed with interesting articles and pictures I've clipped to remind me of particular places and times. I was looking through it this morning and had a funny moment of recognition: one of my favorite clippings turns out to have been written by Brad DeLong... Here's what he's talking about: Ontological Breakdown Date: Mon, 31 Jul 1995 15:16:24 -0700 From: delong@econ.berkeley.edu (Brad DeLong) To: apple-internet-users@abs.apple.com Subject: Ontological Breakdown Message-ID: I am not at all sure that this is the right place to put this. I can already hear Chuq Von Rospach saying "Now, if this were apple-philosophy-internet-virtuality..." Nevertheless, the experience was profoundly disturbing, and made we want to consult a philosophical professional (in the same way that a health problem makes me want to consult a medical professional...) Let me back up. For the past year or so one of my main Internet activities has been to use it to look for pictures of dinosaurs. The five-year-old sits on my right knee and the two-year-old on my left....

Posted by DeLong at 06:01 PM

Spring 2003 Teaching and Office Hours

Spring 2003 Teaching and Office Hours Office Hours: Wednesdays 2-4, or call 510-643-4027 or 925-283-2709 or drop me a note at delong@econ.berkeley.edu Present Courses: Econ 210a, Economic History (Spring 2003). REVISED Econ 210a (Spring 2003). Econ 236, Dynamic Economics: Advanced Macroeconomics (Spring 2003). Reading Course: European Economic History (Spring 2003). Reading Course: Monetary and Fiscal Policy (Spring 2003). Economics 211: Economic History Seminar. Past Courses: Fall 2001, Economics 101b, Intermediate Macroeconomics; others accessible from the "What I Teach" page... Contact Info: Dept. of Economics, U.C. Berkeley, Berkeley, CA 94720-3880. Phones: 510-643-4027, 925-283-2709. Faxes: 510-642-6615 925-283-9933. delong@econ.berkeley.edu; http://econ161.berkeley.edu/...

Posted by DeLong at 02:43 PM

March 12, 2003
Waiting in Line: How Economists Think

What sort of "property" is your position at the head of a line? Is it something that you can sell--or should be able to sell? If it's yours, you should be able to sell it, right? Suppose somebody comes up to the first person in line--you are number five--and offers a fistfull of dollars for his or her place. Do you have a right to object? Does the person "buying" the first place have to also reach an agreement with you? Lawyers and political scientists think there are interesting and important issues at stake. And perhaps there are. But their discussions are a little bit... unstructured: The Volokh Conspiracy:[Jacob Levy, 12:30 PM] CHRIS BERTRAM ON COMMODIFICATION: Chris writes: One such question is the following: "Is it morally ok for someone to march to the head of a long queue (for tickets for the theatre or football or whatever) and offer to buy another person's place in that queue?" Since the purchaser buys the place and the person they displace goes away or to the back of the line, the exchange isn't worsening any one's position. Respondents seem to break down into three categories: people who think it is just obviously...

Posted by DeLong at 05:55 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

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 11, 2003
On Machiavelli's "Letter to Vettori," or, The Value of the History of Economic Thought

A surprisingly-large number of people have recently asked me why I am interested in the history of economic thought. They make various points. First, we don't learn physics from Galileo's Discourse on Two New Sciences. There are other, better, more complete, more accurate ways of presenting the material. In any real body of knowledge, the more up-to-date has to be preferred to the less because we know more than they did. Second, there are the dangers of promoting dead and dry texts to the status of unquestionable authorities. Karl Marx saw misery in industrial England in the 1840s, jumped to the conclusion that market economies could never deliver persistent, sustained, significant improvements in real wages to the working class, jumped to the conclusion that markets had no place in any truly human mode of social organization, and--because his words became Holy Writ, the sacred gospel that was never to be questioned of a Millennarian World Religion--more than a billion people were doomed to even deeper poverty for more than a generation. Third, there is the danger that one will read texts one has placed high on a pedestal and discover in them a secret message, a crucial form of knowledge...

Posted by DeLong at 03:08 PM

A Short Dialogue on International Trade in Agricultural and Fishery Products

"Okay. One of the things that we are going to eat for lunch has travelled 9000 miles--almost halfway around the world--to land on our table. What is it?" "Bananas!" "Very good guess. But no. Bananas come from the Caribbean and Central America, and travel only 3000 miles or so to get here. It's the smoked salmon, from Tasmania, island off of the southeastern tip of Australia." "I've heard that most animals native to Tasmania are endangered. Is that true?" "BA-NA-NAS!" "It's certainly true that large Tasmanian marsupials are under very heavy pressure from introduced Eurasian forms that fill the same niches..." "BA-NA-NAS HAVE NO THUMBS!" "But does anybody have an idea why I would buy smoked salmon from Tasmania--Royal Tasmanian brand?" "So that you can torture your children with another boring lecture about international trade, the international division of labor, and the importance of human pwogwess through the mutual weduction of twade bawwiews?" "Plausible, but not true in this case..." "BANANAS STAND UP STRAIGHT!" "Because they were cheap?" "Yes, exactly, why were they cheap--half the price of Alaskan smoked salmon?" "BANANAS HAVE NO THUMBS!" "Either because you got a bargain, or because you don't know something about the quality of...

Posted by DeLong at 03:05 PM

September 14, 2002
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

September 13, 2002
Handout--the Current Economic Situation in the U.S.

Next Year's Analyses Next February the Commerce Department's Bureau of Economic Analysis is going to release its first estimates of production and productivity for the year 2002. When they do, everyone is going to sit up and take notice--because the numbers will be very surprising. We today already know (although very few think about it) what those numbers will be in rough outline: some 13/16 of the data for the year-to-year growth rates from 2001 to 2002 is already baked in the cake. So let's take a look at what next February's data releases are going to show: The growth rate of output per hour between 2001 and 2002 is going to be absolutely huge. Labor productivity growth will--unless our forecasts of what has happened in the third quarter and will happen in the fourth quarter are really, really off--be faster than in any year since the Korean War. The extraordinarily, ridiculously high productivity growth rates in the fourth quarter of 2001 and the first quarter of 2002 guarantee it. Labor productivity growth in 2002 relative to 2001 is a far cry from the 0.9 percent per year of the period from the mid-1970s productivity slowdown to the mid-1990s. Labor...

Posted by DeLong at 07:11 PM

September 09, 2002
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

September 05, 2002
Tenth Avenue Freeze-Out

Tenth Avenue Freeze-Out You cannot read Eric Alterman's weblog for very long without getting out your Springsteen CDs and putting them on. And I cannot listen to Springsteen CDs for very long without going out and buying another one--in this case, a three-CD collection of Bruce Springsteen and the E-Street Band live from 1975-1985. The music is wonderful. The CDs also include a lot of stories--Bruce Springsteen tells stories before, in the middle of, and after songs. The stories are mostly about growing up, and about fighting with his father as he grew up. Back at the start of the 1980s, when I was 20 or so listening to concerts in the old Boston Garden, my sympathies were all with Bruce Springtsteen--wanting to make his career with his "god-damned guitar" in the face of a father who wanted him to become a lawyer, get a little something for himself, and stop being such a hippy freak. This time, however, I'm not 21: I'm 42. I'm not terribly interested in stories of people establishing boundaries vis-a-vis their parents and shaping their own lives. Frankly, I'm now on the other side. My heart goes out to the elder Mr. Springsteen, clearly keenly...

Posted by DeLong at 05:47 PM

September 04, 2002
Messrs. Lorentz and FitzGerald

Uncertain Principles if you start to get close to light speed, you need Special Relativity to describe what really happens... *Sigh.* This is what happens when you read weblogs by real physicists--especially those who have been part of a team making Bose-Einstein condensates in their laboratory. (Kids! Don't try this at home!) My spreadsheet on the effects of product and income-side estimates of total output on our conception of the economic boom of the 1990s is now filled with Lorentz-FitzGerald contraction formulas... Consider a person standing on the surface of the earth, and consider an event--the birth of a child, say--at that exact same time (in his frame of reference) on the other side of the galaxy--100,000 light years, or 9 x 10^20 meters away. Now consider a second person walking past that first person at that exact same moment (when in the first person's reference frame the child is born), in the direction of the point 100,000 light years away. If you asked that second person whether the child on the other side of the galaxy had been born yet, and if so how old was she, you would get a different answer. According to my calculations, the...

Posted by DeLong at 05:04 PM

September 01, 2002
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 27, 2002
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 21, 2002
Go To College!

If you're listening to this, are under 35, and haven't been to college: go to college. If you have children who are thinking of not going to college: convince them to go to college. Harvard economists Claudia Goldin and Larry Katz have called the twentieth century, "America's century of education." During that century the United States widened its lead over other industrial economies by creating the universal high school, and by developing a large and flexible system of colleges and universities. They believe that this educational expansion greatly increased the skills and adaptability of America's labor force throughout the twentieth century, and was a large part of the reason that America was and is richer and Americans more productive than people anywhere else in the world. But in the past few decades we've seen a slowdown in the growth of education in America. This slowdown has been accompanied by a sharp rise in the difference between the earnings of young workers who have and have not been to college. We economists are scratching our heads: since the--economic--benefits of going to college have become so large, why aren't more people going? One possibility is that people do not realize that the...

Posted by DeLong at 05:09 PM

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 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

Koba and Adolf the Dread

Matthew Yglesias clearly stays up far, far too late and takes the very reasonable position that "Stalin was clearly a very, very, very, very bad man and the USSR was a very, very, very, very bad thing," and announces that he has no interest in debating whether or not Stalin was just as bad as Hitler or not. I think that he misses the point that there is an important historical question that turns on whether Stalin was just #2 or is tied for #1 in the competition for most evil moral monster of the twentieth century. You see, the belief that Stalin was just as bad as Hitler entails the belief that Roosevelt's and Churchill's policies toward the end of World War II were criminally in error. Consider World War II in Europe toward the end of 1943. The Italian government has changed sides. The tide has clearly turned against Nazi Germany. At that point Roosevelt and Churchill could have offered Hitler a deal: the Nazis evacuate the West--Norway, Denmark, Belgium, Holland, Luxemburg, France, Italy--and in return Britain and the U.S. make peace. Hitler would in all likelihood have accepted. What would have been gained by such a deal?...

Posted by DeLong at 08:09 AM

August 11, 2002
New Data Confirm Amazingly Strong Productivity Trend

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

Posted by DeLong at 04:26 AM

August 05, 2002
Five Nines Instead of Nine Fives

"Five nines" means that if you express the reliability of a system numerically, the first five digits are nines: there is a greater than 99.999% chance that the system will do what you hope it will in any particular operation, and only one chance in 10,000 that something will go wrong and break. "Five nines" is a joke--as in, "You wanted nine fives of reliability? I thought you said nine fives!" i.e., that the system will perform as hoped for 55.5555555% of the time--barely more than half the time. The rest of the time something will go badly wrong. Back when I used Windows machines and pre-OS X Macintoshes, it felt like my computer systems had nine fives of reliability. You learn strange habits when you know that the blue screen of death--or the bomb icon--will appear at least twice a day. You save after every paragraph. You don't leave one program open, with a task half completed, while you switch context to another: you know there is a good chance that you will never return to the old program. You write a lot of things down on scraps of paper to try to keep track of what is...

Posted by DeLong at 07:08 PM

August 01, 2002
Time to Cut Interest Rates Further?

Yet more reason that it is time to cut interest rates further... Economist.com With world stockmarkets--and political America--still reeling from a long list of corporate scandals which have destroyed some of the country's biggest companies, there seemed at least one comfort: America's economic recovery seemed strong. Now that reassurance, too, has been brushed aside. Figures issued by the government on July 31st showed that the economy grew much more slowly than expected in the second quarter of this year--by only 1.1% at an annual rate. Separately, survey data published by the Federal Reserve on the same day supported the impression of a slowing, and even faltering recovery......

Posted by DeLong at 04:57 AM

July 28, 2002
Twelve-Year-Old Humor

Twelve-Year-Old Humor: Picture the twelve-year-old seated in the back of a summer day camp bus with the rest of his group. Picture the bus being driven by the counselor, Darryl, who is trying to park the 16-person vehicle at a swimming pool. All of a sudden Darryl hears, from the back of the bus, "Hey! Darryl! There's a spider back here!" Others add to the chorus: "Yeah! It's a spider!" "Watch out for the spider!" "We're not kidding! It's a spider!" I can imagine what Darryl was thinking, something about smart-ass pre-adolescents... CRUNCH! You see, they meant that there was a Toyota SpYder with its nose occupying the last foot or so of the parking place......

Posted by DeLong at 07:46 PM

July 27, 2002
The Daughter-in-Law Who Doesn't Talk Back

Dan Kohn finds a... Dan Kohn's Blog ...inspiring WSJ story on automation improving women's lives in rural Mali. Not only is the peanut butter better -- and Mrs. Doumbia's selling easier -- so is the quality of life in the 300 Mali villages that have the machine. Girls who were kept home to help with the domestic work from dawn to dusk are now going to school. Mothers and grandmothers who would have spent a lifetime pounding and grinding now have the free time to take literacy courses and start up small businesses, or to expand family farming plots and nurture a cash crop such as rice. They have dubbed the durable, uncomplaining machine "the daughter-in-law who doesn't speak." This is the simplest, best description I've ever seen on explaining why productivity improvements (which can often be socially wrenching) are the only way to improve the standard of living... WSJ.com - Mali's Makeshift 'Cuisinarts' Create Peanut Butter and New Possibilities...

Posted by DeLong at 07:38 AM

July 26, 2002
Mark-My-Beliefs-to-Market Time

Mark-My-Beliefs-to-Market Time I am reading Michael Mussa's brand-new very short book on the latest Argentinian financial crisis [Michael Mussa (2002), Argentina and the Fund: From Triumph to Tragedy (Washington: Institute for International Economics: 088132339X)]. In The Importance of Being Earnest, Oscar Wilde gets a laugh out of the idea that a chapter on a rupee crisis is too exciting for young ladies--out of the idea that a technical discussion of anything having to do with international finance can be anything but deadly boring. But reading this is different. First, I'm weird: I'm an economist, which means (these days at least) that I don't even have the sparkle and flash, the willingness to take risks and go out on limbs, that accountants have. Second, the Argentine crisis is an important setback for human happiness--a much more important tragedy even than the closing of a Zambian copper mine. Plus the crisis has important lessons for international economic policy in the future. Third, Michael Mussa--former chief economist at the IMF for a decade--is a fearless and witty guy: he (reportedly) spoke of his boss at the IMF, Michel Camdessus, as a man who was 'so optimistic he always sees the glass as half...

Posted by DeLong at 06:09 PM

July 24, 2002
Strange Branding Phenomena: Ghostwriting

James DiBenedetto flags this from the Washington Post's style section: The Eleven Day Empire Interesting article in the Post's Style section today about something that's been going on for a while: ghostwriters hired by popular authors to crank out formulaic novels. The king of this kind of thing is, of course, Tom Clancy, who has, I don't know, 50 or so book lines that are labelled as "Created by Tom Clancy!", none of which he actually writes. Until recently, the actual author's name didn't appear anywhere on the cover or anywhere else in the book; thankfully, that practice, at least, is changing.The whole idea is to turn authors into "brands"; they come up with a general idea or storyline, stick their name on the cover, and turn the actual writing over to others... The Plot Thickeners (washingtonpost.com) Check the covers of certain bestsellers and you'll notice that though Clancy's name may be emblazoned across the tops of the books, someone else did the writing. "Mission of Honor," part of "Tom Clancy's Op-Center" series, was written by Jeff Rovin. "Bio-Strike," a volume in "Tom Clancy's Power Plays" series, is by Jerome Preisler. "Runaways," one of "Tom Clancy's Net Force" young-adult series...

Posted by DeLong at 10:22 AM

July 01, 2002
Older Files

An earlier organization of this website had an alternative, separate "Thoughts of the Week" page. The above link will take you to it....

Posted by DeLong at 10:04 PM