Romer Post-mortem

Lauren Lyster gets this right!

Romer deserves props for arguing for a larger stimulus, but she backed up her arguments with economic projections which suggested the downturn would be short and one of the lightest recessions in the post-war period, despite this being the worst financial crisis. The moment that projection was made, we here at the Economists for Firing Larry Summers pointed out that her forecasts were nonsense.

Secondly, I suspect she supported the reconfirmation of Ben Bernanke, which was a horrendous mistake. If she disagreed with it, she should have resigned then.

Thirdly, the administration waited over a year to make a Fed Board appointment. I suspect that had she really been pushing this as a priority, it would have gotten done sooner. This was a clear administration mistake, and its importance is not to be understated. The more I think about it, the more foolish I think it was.

Fourthly, she didn't "work the refs" at all. I don't get the sense that she's been out there persuading reporters and economists to attack Bernanke's patently wrong policies like we have here at "Economists for Firing Larry Summers". I suspect the reason is she doesn't grasp what the Fed's been doing (or hasn't been doing), and that she actually believes Ben Bernanke is doing just fine.

But, alas, I suspect the voters this fall will send a message to the Democrats how well they think Ben Bernanke is doing.

Romer vs. Summers

She also was reported to have butted heads with other members of Obama’s economic team, in particular Larry Summers, director of the National Economic Council. In December, the she sand Summers even seemed to contradict each other — in interviews conducted on the same day — on whether the recession had ended.

“Everybody agrees that the recession is over,” Summers said.
“Of course not,” Romer said in a separate interview.

The clash appeared at the time to speak not just to the differing views on the economy within Obama’s inner circle but also to the sharply conflicting signals out of the economy itself, which continues to struggle to rebound.

I think that shows she's got more human, and better, instincts than Summers. When unemployment has been above 9.5% for over a year and the economy is shedding jobs, you cannot try to pretend like everything is OK when you are in office. It makes you look out of touch. In Summers case, of course, he is out of touch. So it's not just framing...

So, Diamond Rejected, what now?

Recess-Appoint Jaime Galbraith and Joseph Gagnon!

(hat-tip again to sfraffa!)

UPDATE: I meant thanks to Matthew Saroff for suggesting the Galbraith recess-appointment!

Wow... Diamond Rejected...

Wow. There goes any hope for monetary policy... The article doesn't say how Republicans alone could block the appointment w/ just 41 senators in the entire senate. How'd they get a majority on the Senate Banking Committee???

I wonder if now some wheels are starting to turn at the White House. If, now, they might start to reconsider how smart it was to leave Monetary Policy to a bunch of partisan-Republicans when they could have made these appointments 15 months ago, and whether it was smart to re-nominate a Republican inflation hawk in the midst of a liquidity trap. Now, of course, apparently the Republicans can easily block any dovish appointment with just 41 senators... I wonder if they can even grasp the importance of this.

If I were in the White House, of course, I would go on the offensive and accuse Republicans of sabotaging the economy... But that's just me.

UPDATE: Now it's come out that just one senator can send a nomination back to the White House. If I were there, I'd resubmit Diamond's application. (thanks to commenter sraffa.)

Christy Romer to Resign?

This certainly wasn't the Fed official I wanted to resign. The word was that she wanted a larger stimulus, Larry didn't, and she felt she wasn't having enough influence...

Don't think it's official yet tho'...

UPDATE: Wow! It's official. Of course, I suspect part of this is that, given that Congress is unlikely to do more stimulus (except for tiny things...), there's just not that much the CEA can do for the economy at this point. And with Republicans perhaps taking control of the House, the situation is only fit to get worse.

The Key Problem with Ben Friedman's Thesis...

Yglesias holds up the rightwing push to repeal the 14th amendment as support for Benjamin Friedman's book "The Moral Consequences of Economic Growth". However, the key problem I had with the book has been very much revealed. You might recall that in the wake of the financial crisis, Americans elected Barack Hussein Obama, the first black man ever. They didn't go all right-wingy. Since Obama's election, however, the Tea Party has really gained momentum, so much so that my father-in-law sent me an email forward the other day alleging that Barack Hussein Obama and his sinister cronies in government are in the midst of a devious plot, involving the global-warming "hoax", in order to make them all multi-billionaires.

The key problem with Friedman's thesis is that when the economy is doing poorly, anger toward the government in power rises. If the government in power is George W. Bush, then liberals gain support and Nancy Pelosi and Barack Obama get to make policy. If you've got a liberal government in power, then they will be discredited. And if the opposition is full of conservatives, then of course they will tend to push zenephobic policies...

Same thing happened during the Great Depression. In the US, the Great Depression destroyed the conservative movement for a generation -- until war hero Ike Eisenhower led the ticket. In Germany, the Great Depression destroyed the left. Key factor was who was in power and that they did not respond effectively to the recession.

This administration has not responded effectively to the recession, and so now we're seeing their enemies emboldened.

Shocking Revelations about Alan 'Ben-you're-hitting-the-bulls-eye' Blinder

He's just tryin' to make his.

He may be a nice guy. At one point I thought highly of him. But since the crisis, that has changed. Everything of his I've seen him write since 2008 has been wildly off-base. Maybe he's spent too much time hustlin' regulators, and not enough time thinking about the economy...

Ken Rogoff, you shoulda stuck to chess...

Give this a read. Like making fun of a retarded kid, it's really too bad to criticize.

Ken says we shouldn't use so much monetary and fiscal policy to fight recessions, and that the government impeded long-run growth by interfering in the Great Depression.

Those are fightin' words to an economic historian.

What's often lost is that, in deep recessions, R&D budgets are cut. R&D budgets in Japan today are certainly much smaller than they'd have been had Japanese central bankers figured out 15 years ago that all they need to do is print money. Instead, Ken tells us, what we need is less focus on these short-term issues like recessions, and instead simplify the tax code. This will lead to faster productivity growth, says he.

I feel like I've been fianchettoed...

Fact of the Day...

Charles Plosser is from Birmingham, Alabama. Born in 1948. And he's not the only white southern male on the Fed.

I wonder how much these conservative white guys from the south fancy having a black man as President...

The Utter Uselessness of Modern Macroeconomists: Michael Woodford Edition

So, I'm trying to divine what Michael Woodford thinks about the Fed's decision, for all intents and purposes, to lower its inflation target in the wake of the largest financial crisis in post-war history, and allow long periods of high unemployment for seemingly no reason. Doesn't appear he's commented. (Let me know if you see anything!)

I see in one of his papers he writes:

We distinguish between quantitative easing in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted.

I have a few problems with this. First is that Quantitative easing is usually defined as targeted asset purchases by a central bank, of assets other than short-term Treasuries. Second, that "quantitative easing ... "is likely be ineffective at all times". (I wish I could get away with such grammar lapses in my Abstract for papers I submit...) In any case, he's arguing that even if the Fed creates trillions of dollars out of thin air and monetizes the entire US debt, that it will have no impact on inflation, gdp, or other economic variables. However, "targeted asset purchases of non-liquid assets", such as MBS, are likely to help.

I'd say, if your model is telling you this, then you need a different model.

Nevertheless, patently ridiculous or not, this paper be gettin' published at the AEJ.

Proposal for "Getting Through" To Ben Bernanke

Although the logic for politician non-involvement in Monetary Policy is reversed in a liquidity trap, I still don't like the idea...

That said, I do think the CEA and administration should try to "work the refs" -- create momentum from top economists for more QE. Two people Larry Summers might want to have a word with are Mark Gertler and Michael Woodford, who've written such real-world-relevant papers as "Monetary policy in a world without Money", are prestigious, well-respected theoretical Monetary Economists who don't often privilege us with comments on real-world economic phenomena.

Yet, from their theoretical papes, they should be all over more QE today, and, of course, they are well-respected by Ben Bernanke.

The President's Council of Economic Advisers' Forecasts and the Memory Hole...

Remember back in the beginning of 2009, when the administration was telling us a small stimulus was sufficient? Well, part of the reason may have been the rose-tinted glasses with which the administrations' economists saw the recession. Check this CEA report from February, 2009, in which they projected that this recession would be one of the lightest and briefest in the postwar era. They projected GDP would decrease only 1.2% in 2009 (following a contraction of 6.4% in Q4 2008 and an expected 6.0% contraction in Q1 2009), making the 2009 recession the 3rd lightest of 11 post-war recessions.

I'm not sure how the deepest financial crises since the Great Depression, in which the Fed hits liquidity trap territory early on, leads any economist to think it's going to be a light, quick recession.

In any case, the latest revision was that GDP shrank 2.6%. So, what seemed at the time to be a hopelessly optimistic forecast turned out to have been a hopelessly optimistic forecast by the "best and brightest" economists around.

Hoisted from the Comments

Just heard an explanation on NPR about why deflation is a problem. The reporter said "And that's why the Fed does all they can to avoid it"

Thought you might be amused.

No, it makes me want to cry.

What's Been Keeping us out of Deflation?

With the inflation/unemployment circles posted recently on Krugman's blog and others, one thing has been clear -- the disinflation this time around was actually not that severe given the dramatic rise in unemployment.

One reason this might be the case, and this is pure speculation, is that health care is a larger fraction of the economy today, especially compared to oil, than it was in the 1970s. From the BLS, the past three months "benefits" inflation has been three times the wage inflation. And then see this -- health care costs are expected to rise 9% again next year (after being forecast to rise 9.5% this year), are basically on autopilot, and just not that responsive to anything. This is unlikely to be the whole story, but it certainly seems plausible... Any thoughts?

Woe the 14 month wait...

Compare: Charles Plosser, president of the Philadelphia Fed, said in an interview this week that “I don’t think deflation, or sustained deflation, is a real problem at this point. It is hard to imagine how you can get that when you have got a trillion dollars in excess reserves sitting in the banking system or as long as expectations of inflation are well anchored.”

To: Peter Diamond, nominated to be a Fed governor, said this month in a written response to questions from Senator Richard Shelby, that deflation is a “greater risk” than inflation.

Would have been nice to have had Diamond on the Fed 14 months ago...

UPDATE: So, from what I've read of Diamond, and his interviews, I like him, but still I think it is very much wait-and-see. The downside is that he is 70, so he's not in any position to be ensconced at the Fed for the next 35 years helping to elect Democratic Presidents and prevent stupid monetary policy like we're seeing currently (Supreme Court rules apply here...). Secondly, it's an open question whether his older mind is nimble enough to grasp that we need non-standard monetary policy now!.

In his testimony the other day, I saw this:

Diamond favors “maintenance of the current level of ease” in monetary policy, “with vigilance to circumstances that might call for a change in either direction,” according to his responses to written follow-up questions from Shelby.

Hard to interpret that, though, since I would also state support for the current policy in front of congress and then pull a 180 the second the next round of economic data come out...

Another Stimulus Idea...

A comprehensive immigration bill, we know, is not going to happen.

And more stimulus is also, we know, not going to happen.

But, one thing the Congress could do if they weren't idiots is set aside another $5 billion to beef up the fence between the US and Mexico. I know, probably a waste of money, but it would likely reduce at least some of the illegal traffic, including drugs, which come across the border but more importantly it would put Americans back to work and make Americans think that Congress is doing something about immigration... CNN ran this segment the other night making it seem like a total outrage that we don't have a massive fence across the entire border with Mexico...

Why Isn't the Fed Doing More?... someone asks...

Because they are complete fools. Dallas Fed chief Fisher's comments are only the latest data point proving there's just no there there with Fed policy...

The admin already shot itself in the face on Bernanke, but does anyone know if the Obama Administration can have embarrassments like Plosser and Fisher removed?

To Extend Bush Tax Cuts or Not...

Given that we all still expect to be at 9.0%-plus unemployment one year from now, the middle-class tax cuts are clearly still a no-brainer. What about for the rich?

Cristina Romer says no. I think this is terribly short-sighted, however. Republicans, of course, wildly support extending them. So much so that this is one form of stimulus which they won't filibuster. Hence, the Democrats could plausibly agree to a one to two year extension in return for another $200 billion in aid to states and extended unemployment benefits. Of course tax cuts for the rich are the worst form of stimulus possible, but it still is stimulus. (Except the estate tax, no reason whatsoever to extend that...)

Now, if the Republicans give nothing in return, then eff it, but we should at least try. The economy really does need to be stimulated, and now that the Fed is leaning toward doing slightly more QE means that another stimulus package would likely only make the Fed lean toward doing nothing/raising rates but not actually do it. So, we're in the sweet spot where more stimulus is warranted and can be effective.

Random Post on Blogging and Family Planning...

OK, so I think I've read Josh Marshall since 2002, roughly, and Matt Yglesias since 2002-2003.

Back in the day, I found that Josh Marshall was the gold standard for questions about the Iraq war, and about who to support in the 2004 Democratic Presidential Primary, and I read his blog first thing when I woke up every morning. (BTW, I went for Wes Clark in '04 -- who got effed by not entering Iowa, but I digress.)

In any case, I think Matt Yglesias has grown up and evolved since then. I've been impressed with how much he's learned of economics. Although I still read Josh Marshall -- and, after meeting him, am even more impressed with him as a person -- I do think he's basically missed the whole story of Obama Administration economic mismanagement and analysis of the financial crisis. Of course, he's not alone in this -- I haven't seen it suggested anywhere in the mainstream media that reappointing Ben Bernanke was a mistake, even though I feel very strongly it was catastrophic. Yglesias, on the other hand, while occasionally writing stupid things about economics, has done a really good job with it. On occasion, he's even beaten Krugman to the punch in criticizing the Fed, and often gets things better than Krugman.

Which all leads me to think -- Josh Marshall started his family a few years back. I'll imagine I'll do the same in a few years. And when I do, I just won't have the time to devote to reading and doing so many random things, and teach myself new skills, which I can now. The only way I'd have as much time to devote to these things is if I was a terrible father, which might end up being the case but won't happen for lack of time commitment. And then there's the evidence that younger minds are more malleable, and that this is a good thing. It's always a good thing to try to teach your students -- to have an open mind. I'll have to think of some good "open mind" NLP scripts to feed my students...

Peter Orzsag says small stimulus size was due to political constraints...

Here's his talk.

I disagree. I'm sure when he was in the room and Democratic Congressman who's jobs depend on having had a large stimulus were demanding a stimulus which was clearly too small it might have clearly seemed like there was "no choice". In fact, however, there are a number of things the administration could have done had they really believed the stimulus was too small. One thing the White House should have done is just to say, flat out, that they think the stimulus was too small but that they didn't think Congress would pass more. Another thing they could have done is announce a larger stimulus in the first place -- which needed no negotiations with Congress. Third, they could have done the AMT patch, which would have been done anyway, separate from the stimulus. Fourthly, they could have merely pushed a $600 billion "net stimulus" which excluded the AMT patch and the $400 billion in counteracting measures at the state and local levels.

Also, we've had a bevy of complaints, at the time and since, from Congressman such as Peter DeFazio that "Larry Summers hates infrastructure". I think there must have been people in the administration who themselves didn't want a larger stimulus, or at least, didn't realize it was something worth fighting for...

More WTF from the CBO...

Doug Henwood has a nice article showing what appears to be the CBO inserting itself into a political debate on the side of budget-cutting now. What did they do? Their budget projections assume that productivity growth in the future will be less than it has been historically, making the future budget situation look worse.

Longtime readers of this blog will remember how awful the CBOs projections were from the middle of December, 2008, when their projection was that the "worst case scenario" would result in unemployment maxing out at 8.5% in 2009, and that the "best case scenario" would see it hit 7.6% (if memory serves), a rate it hit just six weeks later. Six weeks which saw no real unemployment surprises... This extremely positive economic assessment bolstered the arguments of those who said the stimulus was too big, and then it bolstered the arguments of those, like Greg Mankiw, who pointed to the original CBO estimates as proof that the stimulus had a negative impact on growth!

To an "economist-critic" like myself, of course, the latest out of the CBO is just one more data point that helps paint a picture of a very troubled profession...