Ben Bernanke Should Be Drawn and Quartered. And then hanged...

I awoke this morning with a pounding headache... And resolved it's time to start blogging again.

Here we are, in the 20-something odd month of labor market bleeding, and still the Fed's mighty printing presses are largely sitting idle. And despite the fact that textbook theory says you can print your way out of a liquidity trap, and that, in the situation we are in, the Fed should be rapidly expanding its balance sheet, the Fed has moved slowly and cautiously, consistently erring on the side of doing too little. Yes, the Fed's Balance sheet is now the biggest since last December -- but, wait, why did the Fed's Balance sheet ever shrink exactly? Why didn't the Fed continuously ramp up the balance sheet until we had sustained employment increases? (Or at least until we stopped the bleeding?) That's b/c Ben Bernanke patted himself on the back last February, and started shrinking the Fed's assets. This set off another sell-off on Wall Street, causing Bernanke to reverse course. Things got a touch better, so Bernanke, having not learned any lessons from Feb-March, took his foot off the pedal again, triggering more bad news on Wall Street and in the labor market in June. Since then, he's slowly increased the Fed's Balance Sheet, but here we are, 21 months into the recession, and the economy coughed up 200,000 jobs last month and the Fed has, on net, tightened in the past year. This is really incredible.

A thought: The Dow has continued to track what's going on with the Fed's balance sheet. When the WSJ first wrote an article back in May/June pointing this out, I thought it was a fluke/anomaly, and, after all, correlation isn't causality. But the fluke has continued... It still sounds nuts to me, and I'd like to think it *must* be wrong that when the Fed buys assets, the stock market rises generally, but the correlation seems too good to just dismiss this... On the other hand, the Fed now has $847 billion in MBS (up $80 billion in one week!), so I guess it's not so crazy to think this much buying would effect asset prices generally...

Another random thought: What do our nation's economists do? It's been clear for at least six months now that the Fed has been foolishly bullish on the economy, and foolishly cautious in pumping money into the economy. How many voices within the profession are pointing this out? Very few. (Tim Duy and Scott Sumner deserve credit...) Part of this is that some economists do not think it is helpful to get the Congress riled up over monetary policy (perhaps this is Krugman & DeLong's view), but I think the Fed needs to feel some heat from the profession. I very much doubt it is hearing nearly enough, if any -- even behind the scenes -- and certainly not the type of pointed criticism it needs. Bernanke needs, in short, a good smack across the face to be jolted out of his inaction. It could take a generation for unemployment to get back down to 4% (where it was in 2007), all because Ben Bernanke has been too cautious, worried about some nonexistent hyperinflation around the corner. A generation of higher joblessness is a stiff price for society to pay for one man's shortcomings.

In any case, all indications are that this is a serially incompetent Fed. Despite the good the Fed did last week, we can expect Bernanke to take his foot off of the pedal again next week (or next month), needlessly prolonging a recession which should have ended half a year ago.

Cheers for Chris Dodd : "It's not necessarily a foregone conclusion that Ben Bernanke will be confirmed."

In the immortal words of JMK, I say cut this "blind and deaf Don Quijote" loose. Let him join the millions unemployed whose fate he sealed...

Economists for Firing Larry Summers Learns Wash U.'s David K. Levine a lesson...

First, my apologies for not posting recently -- I got hit hard by the summer conference season, and journal submissions. I'm happy to report everything is going great research-wise!

In response to Paul Krugman, David K. Levin writes that "Here we are, the recession is over and we've spent 10% of the [stimulus] money..."

I then posted, in the comments:

Dear David Levine,

I'm just curious where you got the 10% figure from. The initial CBO estimate is that $185 billion will have been spent by the end of September, 2009, that's 24% of the total outlays. Even if it had only spent $100 billion (which is counterfactual), that is still more than 10%. In addition, the states' used knowledge that more stimulus was on the way next year when they set their budgets earlier this year -- so without the stimulus, states would have cut back more than they did.

Also, when people judge whether "the stimulus" worked, they need to look at the net stimulus. Since states and local governments have made roughly $100 billion in cuts for fiscal year 2009, the "net" government stimulus was probably less than $100 billion.

This means, of course, that what you and your comrades argued and are arguing for is for governments to suddenly cut way back on spending at the first sign of a recession. The way your write suggests you are not privy to what's going on at the state and local level.

Very respectfully submitted, Thorstein Veblen

Of course, I should also have mentioned that we're not 100% out of the woods yet. That unemployment is still increasing each month, and that unemployment 12 months from now, when the net stimulus will be done, is still expected to be above 9%, so that none of the stimulus will have been spent in anything approximating full employment.

In any case, David K. Levin responds:

I think 10% is a month out of date. http://projects.propublica.org/tables/stimulus-spending-progress reports $98 billion spent out of $792 billion which is 12.4%. It is certainly possible that there is some additional spending in anticipation of stimulus money coming in. It's also true that a lot of stimulus money is being spent on things that would have been done anyway, which in turn might create other spending that wouldn't have taken place without the stimulus. The key point is that even $200 billion in a roughly $14 trillion economy isn't such a big deal. It makes sense for government to do things it would have done anyway earlier to take advantage of the fact that many resources are unemployed and cheap right now. But if things have turned around - and all indications are that they have - why do we want to incur another $600 billion of debt unless we are willing to pay for it? That is, why do it outside the usual budgetary process? If we want to pay for a green power grid, and it would be more cost-effective to start sooner rather than later - then say so, don't call it a "stimulus."

Some of the stimulus spending makes sense; much does not. We are saving a small number of jobs at vast public expense - $100,000s of dollars per job - and we will have to pay it back later. There are better ways to help people in need.

Trouble is, you go to the link and it shows $98 billion spent plus $63 billion in tax cuts, which Professor Levine apparently did not see. That's more than 20% of the stimulus, and it's likely not updated to-the-minute. It's also from an anti-stimulus source, so I doubt it's going to go out of its way to make the stimulus look better than it is. I responded, but it hasn't gone thru the Huffpo's filter yet. I'll post it when it (if it?) does. I might have been too condescending, which was unnecessary, and in which case I apologize to professor Levine. At the same time, these are basic, fundamental mistakes he's making. And he's a well-paid, tenured economist in a fairly prestigious department. He should be competent enough to look up basic economic statistics, especially after being alerted to his initial mistake.

In any case, I see that Professor Levin is an MIT grad. Remember what I've said about Harvard and MIT economists . Should be no surprise that they cannot even do simple math.

Update: OK, my post went through, here it is:

Not so fast, shooter.

Your link (written by folks obviously hostile to the stimulus) says they've spent $98 billion (out of about $500 billion), plus they've issued $63 billion in tax cuts. (And, btw, I spent my $400 stimulus check... I kind of doubt I'm the only one.) That's more than 20%, and that's probably not updated to the minute. You didn't see that, not because your stupid (I think you're a bright guy!), but because you've made up your mind (and announced it!) that you are against the stimulus, and so you can only see things which confirm your biases.

By the way, in the 2nd quarter, GDP was down 1%. Federal spending was up 11%. Even w/ no multiplier, why shouldn't we think this would have an effect? With interest rates pinned at zero?

California is paying people with IOUs. Pennsylvania didn't pay its workers in July. Florida raised taxes on retirement homes. New York City raised fares for disabled people. Sacramento laid off teachers. Public employees everywhere are taking a haircut. State shortfalls alone (not counting local, which are also substantial), are $170 billion for FY2010. Yes, this means that the net fiscal stimulus is quite small. But it also means you are pushing for far more drastic spending cuts and tax increases in a recession.

That's nuts.

Summers on Meet the Press

I had been busy, and missed this, but this is Summers more or less at his best.

Check it out.

He was far from perfect, but I have to give him credit -- he did a good thing. We need him on TV more. I thought he should have focused more on the human aspects of why we need health care reform rather than arguing that slowing the growing costs of health care should increase competitiveness and talking about how Obama insists on doing health care reform in a balanced budget way, but it's larry summers we're talking about. And part of the reason I believe he can be so effective in this capacity is that, in fact, he thinks like a Republican. Republicans don't care if some poor person will get health care under Obamacare, but if businesses can cut costs and gov't can balance its budget, then! it's a winner.

I still need to see more performances like this (or better) before I'll change the blog title, however.

Thought Control in China

Chris Blattman offers his reflections on China, noting how remarkable it is that even well-educated Chinese do not think democracy would be good for China at present.

One small critique: his post was culturally very american. He takes it as self-evident that democracy is better than the alternative. He faults his hosts for not noticing that democracy works perfectly well in other large, diverse countries such as India, Indonesia, or Brazil. Here's the problem with that argument though: Chinese economic policy is better than Indian, Indonesian, or Brazilian economic policy. For that matter, it's better than America's economic policy in a wide variety of respects -- it's trying to reinstate universal health care, and it didn't have to have a bunch of halfwits in the Congress to sign off on it to get it. And its fiscal stimulus was much larger and quicker than ours, preventing a recession. And China has been able to pull way ahead of India despite having started out way behind after Mao's craziness through the 70s, which held China back for so long.

Here's one concrete policy where China leads India: throughout China, the government forces the students to learn in, and speak in Mandarin in schools. China has (had!) every bit of the linguistic diversity of India, but Democratic India will never vote to banish any of its regional languages. From a cultural point of view, of course, it's quite sad to see so many languages go by the wayside in China. I can't see why this isn't really smart economic policy, however... I'd say China's One-Child policy is another example of an absolutely brilliant development policy that could never have passed in a democracy. And one (fairly large) reason why India and Bangladesh are so poor today has to do with their (failed) population policies, which a smart dictator would simply not have allowed. Another area where China leads India, thanks to its not having democracy, is in where "direct" trains stop. In India, the "direct" trains between large cities stop in all kinds of small towns in between, owing to politics. My sense was that China was much better...

The problem with not having democracy happens if (when?) China gets a bad leader, like Mao. But China's leaders today look, to me, more like the beneficent dictator type.

And so I suspect that Chris Blattman failed to convince his hosts that China needs democracy...

Krugman Defends Summers...

I never thought I'd see the day...

I take this to mean Krugman backs Summers for Fed Chair/is trying to get in good with the White House...

Annoyed with the way Bernanke injected himself into the health care debate, by warning about long-term fiscal deficits (while simultaneously being a bit too slow on the QE, which would also help alleviate long-term debt), I'm also starting to come around to the idea of Summers at Fed. Not in an ideal world, of course, (and he wouldn't be my top pick) but it at least would get him out of the White House. The question is: Where would he do the least amount of damage?

And, although here at 'Economists for Firing Larry Summers', we do love Summers' infamous smackdown of the worthless RBC model, the critique (which Krugman links), was not quite 100% spot on. I'd post more, but, alas, the summer conference season is upon us, and it's time to work on those journal pubs...

Piling on the CBO

The CBO has recently come under fire for its opinion that giving MedPac more authority would do nothing to contain Medicare costs.

I've long been annoyed at the CBO, however, as during the Stimulus Debate, the CBOs most current estimates, from mid-December, for unemployment were often cited, and are still cited, as a way to benchmark what economists thought would happen as the stimulus moves forward. As I posted back in February , however, those estimates, even then, were already a straight-up joke. Probably, from mid-January it was clear that those estimates were a joke. Here's the catch though: December's unemployment numbers weren't really that much of a surprise. Maybe .1% higher than one might have predicted mid-December... The CBO just did an obviously poor job with the forecast, and then made an even worse decision to let that forecast stand during the stimulus debate. With the Obama stimulus, the CBO told us, under the worst case scenario, unemployment would top out at 8.5% this December. As a matter of fact, it hit 8.5% in March!...

I wrote at the time that the CBOs rose-tinted forecasting would not help the Obama administration, since the stimulus would then be judged against an unrealistic baseline. And as a fact, the Republicans are fond of using the CBOs poor forecasting skills as a club to beat the President with...

And my criticism is in no way related to the fact that the CBO denied my internship application.

The Liberal WSJ

A few years back I read about some research published in the QJE, an elite academic economics journal published at Harvard, which claimed that the WSJ's news pages have a liberal bias (although this was pre-Rupert Murdock...)...

I've now subscribed to the WSJ for close to a year, and I'm still trying to find some evidence that the WSJ is not a print version of Fox News. Here is a case in point. The Headline for the story on the Dems "Millionaires Tax" is "The Small Business Surtax". And, if memory serves, although it is listed as an "opinion" piece here, it was NOT actually on the Op-Ed page in the print version.

A better headline would have been something like "Democrats try to strangle puppies and small-business owners."

Ben Bernanke is not the sharpest tool in the Fed

This is pathetic.

Dude needs to learn to speak in Greenspan-esque "Economese" when he doesn't know the answer to a question... Use some jargon, be long-winded, be boring, get a thick pair of glasses, be an economist!!!

For the record, I do not think the currency swaps in question -- half a trillion dollars to foreign central banks -- was what caused the US nominal dollar exchange rate to "appreciate". In the past year, dollar appreciations have been perfectly correlated with declines in the Dow, the seizing up of financial markets, and a diminishing in investor appetite for risk. The Fed's actions were almost certainly in response to this. What happened was, banks all over the world suddenly want to hold either T-bills or dollars, taking as little risk as possible, and not wanting to hold riskier assets such as the Pound or Euro. Everyone wants this at the same time, so to alleviate the demand, the Fed gives other countries half a trill in dollars in return for half a trill in their currencies... This, if anything, should slow the appreciation of the dollar, which is a good thing.

I cannot fathom why Bernanke could not just elucidate this, except to say that perhaps Bernanke is taking his marching orders from someone else and doesn't himself quite understand the rationale...

An Admission

This blog is not entirely, 100% anti-Larry Summers.

As we've said before, we can see a constructive role for him, actually. And now is the time -- we want to see Larry hit all of the Sunday talk shows this weekend, we want him on Fox News, we want him on Scarborough Country dominating Joe with his alpha-male style, we want him on CNN, all singing the praises of Universal Health Care.

When he's behind his desk at the White House, he does the president no good. We need his rich, conservative, white, male face on TV steam-rolling talking heads and shoving health care for the masses down their throats paid for on the backs of millionaires...

The Huffpo talks about some summers comments he made at a speech at the Peterson Institute from last week... But we need Summers on CNN and the networks, not C-Span. Nobody watches that but nerds, and nerds are already on board.

A second point: where is Bill Clinton? If I'd had been Obama, I'd have put the Big Dog in charge of health care reform, and of putting the Blue Dogs on leashes (or have them kennel-up)... Seriously, he should have tapped Clinton back in January to lead an exploratory panel on health care reform. In a tough fight like this, we need all the star power we can get. That means having the likes of Bill Clinton and Larry Summers pushing the case on TV, where battles like this are won or lost.

Another point -- I've thought for awhile that the President and Michelle should have used their star power right after the election to raise a shit-load of money for the health care fight down the road... Michelle alone could have bagged $1million/dinner plus, I suspect, right after the election. They could have amassed a war chest to fight the drug companies and health insurers, who are made out of money, rather than carrying out the fight as penniless as the uninsured they are fighting for.

Public Plan Petition...

Here.

Sign it. The lack of universal health care in America is inhuman and a national embarrassment. Seal it. Deliver it.

Universal Health Care Now

Here's an old post of mine on health care.

This is part of the post: "Here's a personal story about my cousin, who had two little girls: One day he was carrying boxes across an icy parking lot at work (Ohio in the winter...) Slipped. Fell. Had chronic back problems, but his employer wouldn't pay his medical bills. Tried to sue. anyway, he put on weight and was immobile for awhile. Which led to being unemployed for awhile... Which led to depression. Eventually, the depression got to him, and he decided enough was enough. He's no longer with us.

What would have become of my cousin if he'd have been insured? Admittedly, I don't know the answer to that. Whether he could have been completely cured or not (and perhaps not), it certainly would have made his life much easier. Now we've got the Economist blog telling us that insuring my cousin would have had "no net gain". To which I say Eff You! That's just insultingly let-them-eat-cake ignorant. "

Let's not forget we each have a duty to put pressure on our representative to enact fundamental health care change: http://pol.moveon.org/healthcare/bluedogcalls.html

Make your call today!