Fiscal Stimulus II

See this from the Center on Budget and Policy Priorities: http://www.cbpp.org/cms/index.cfm?fa=view&id=2815

And on intrade, I see that "the market" says that unemployment will be above 10.75% by December, with an 18% chance of topping 12%!

If in government, I would propose a swift, immediate transfer of about $400 billion to state and local governments to be used for deficit reduction, preventing the cutting of necessary services, preventing more tax hikes, and stimulus, letting the states decide whether to give temporary tax cuts or fund more public infrastructure projects.

It was clear back in February that the stimulus was imprudently small -- that if things got better, it could be scaled back and we really wouldn't have lost much, but that if things got worse, it might be tough politically to send another stimulus back through the Congress, with the Republicans no doubt jabbering about how, why, if the first stimulus failed, why you'd want to throw more good money after bad. And now the public is stupidly more concerned with deficit reduction than fighting the recession.

What I suspect will happen is this: the economy will continue to muddle along, perhaps with slowing unemployment losses, but more or less along a trajectory of 11% unemployment by years end and 12+ sometime next year, by which time GDP may stop contracting, and then we'll go through a whole 'nuther year or so of just very slow growth and a very weak economy. Without any genuine cliff-diving, we won't get another stimulus, but just a Japanese-style muddle.

For this we can thank that brilliant wunderkind Larry Summers.

Hoisted from the Comments

Anonymous writes:

Is there any chance you can mess with the html for the site to widen the margins (it's a pain to read something this narrow!), but I like the work.

I'll work on it.

And then writes:

I still don't understand how you're an aspiring academic economist - my personal favorites are mostly people who work in finance (either some of the bigger analysts like Rosenberg and Xie, hedge funders like Dalio, and Fleckenstein, or the enigmas of Roubini/Duy/Setser). You spend a lot of time ripping apart the field, and seem to have a strong interdisciplinary background. Who are the economists you really look to? Are you more of a post-Keynesian? Where do you really place yourself in the field?

OK, so the reason I'm an aspiring academic economist is because I think education is actually quite important, and I'd like to change the field. It doesn't have to be the case that academic economists are like medieval priests. They could potentially function as a useful segment of society. Or so I hope.

I'll admit I had not heard of most of the people you just mentioned. I just took a look at a Bill Fleckenstein article "Printing Money Isn't the Cure", and it looks Acemoglu look like a genius. In or close to a liquidity trap, which is where we are, then printing money is precisely what needs to be done. If inflation is ignited (which is our goal), then the fed can scale back later. And if we have 4-5% inflation, so what?

I have actually had a difficult time finding good economists, but my favorite is probably Joseph Stiglitz, then Krugman. Peter Temin and Gavin Wright have done some good work. David Card is of course excellent. Dani Rodrik can be ok on occasion. For econ history, i like Crosby, Diamond, Landes and Clark (plus krugman's geog & trade). I believe all of these books can tell you something about why some countries are rich and others are poor.

I lean left politically and that explains my economics. I believe Keynesian spending makes sense when you are close to being in a liquidity trap. I think that when state governments cut their budgets in the middle of recessions it's the dumbest policy imaginable. In normal recessions, however, I think the Fed alone is well-equipped to handle things, but I also like having automatic stabilizers. I think all of this is fairly standard for most economists on the center-right, center, center left, or far left. (Usually have faith in monetary policy except for steep recessions/liquidity traps.)

It's time Thorstein Veblen went to bed...

Summers is good!

at manipulating newsman.

This is a piece of garbage:

http://www.nytimes.com/2009/06/08/us/politics/08team.html?_r=2&ref=todayspaper&pagewanted=all

Note that, in all of the disputes except one, Summers was allegedly arguing for the more liberal position... I just can't believe that. The other thing is that Geithner, Romer, and Goolsbee are all basically centrists, so one wouldn't really expect any big ideological debates between them. The issue is w/ the Bernstein's, the Volcker's, the Stiglitz's and the Krugman's being cut off.

And they are cut off.

Naomi Klein on Summers:

http://www.naomiklein.org/articles/2009/04/why-we-should-banish-larry-summers-public-life

Sleepy Summers

Poor guy. Sleepin' during a White House meeting. Maybe it's time to call it quits so he can spend more time with Peter Orszag's children.

Summers Defending the Small Size of Stimulus...

http://www.youtube.com/watch?v=eGXYvcZF9ek

Don't know how I missed this. Summers is asked repeatedly why the stimulus was too small. He doesn't have an answer. He alludes to "the multiplier", but the stimulus is only around 1% of GDP. The GDP gap is closer to 6-8%. Even with a multiplier of 2 -- implausibly large -- the gap isn't filled. Now, much of the economic news in the past few months suggests that the economy is getting worse at a much slower rate, and may even start to get better soon. There's almost no chance we'll see unemployment below 6 or 7% by the end of next year, however, so the stimulus won't have been wasted. On the other hand, what if the economy doesn't start to get better. What if it keeps getting worse? Then the stimulus will have been way too small, and we'll need another round, which could take awhile to be injected into the economy. That's why we (liberal economists) thought and think that the stimulus was imprudently large. There was no downside to doing too much, only a downside to doing too little, and that's what Obama did.

Bob Allen's New Book Discussion Thread

OK, so Bob Allen made my summer reading list. 17 pages in, however, and I'm already discouraged...

For, on page 4, Allen writes "[Greg] Clark... claims that medieval institutions were almost perfect for economic development." Now, this isn't a wholly inaccurate representation of Clark, but it would be more accurate to say that if the key institutions and keys for development are as the IMF/Washington Consensus sees them, then medieval european institutions were pretty good. Low inflation. Free, well-integrated markets. Low government spending. Very low tax rates (generally 0% on wage income, compared to 50-60% as a top tax rate in many modern european countries). But if these things aren't really the causes of economic growth (as at least I do not believe), then it's inappropriate to say that they are "perfect for economic development", and certainly wrong to say that Clark thinks that. This is just a small issue, however, compared to what comes next...

Allen then writes that "One can reach an optimistic conclusion about medieval institutions only by glossing over their most characteristic forms -- e.g. serfdom. For most of the middle ages, a majority of English were serfs..." But there are two major problems with using this as your key example about how it was poor institutions which held back the world economy before 1760 -- serfdom ended in most of europe by 1450-1500, due to the Black Death-induced high wage economy (thereafter it revived in eastern europe which didn't have the European marriage pattern nor as high of wages). So, there's a 300 year gap between the end of the key institutions Allen sees as holding back economic growth and the start of the modern world, which is problem number one. Problem number two is that if as powerful an institution as serfdom could be eradicated due to the shock of the black death, then does that not imply that institutions also are malleable, and reply to economic shocks?

The next example Allen brings up is about property rights -- he paints a picture whereby commoners had no incentive to invest in things such as land b/c it could just be taken by their lords. While this might be true, since there was a very active land market in England in the late middle ages we can actually test this theory by looking at Clark's series on property prices, and by looking at the variability. What we see, of course, is that property prices were extremely stable for most of the entire period from 1200-1800. (in the netherlands, which experienced more warfare over the same period, prices rose and fell much more...) Stability of prices implies lack of risk of expropriation.

And those are basically the only examples allen has of "institutions" holding back medieval england.

Another thing which caught my eye is on page 16, when he seems to have said that around 1500, "productivity and incomes were low" in britain. That couldn't be further from the truth. We know from clark's time series, eye-witness accounts, and various other series on wages that they were extraordinarily high around 1500 owing to the black death and decimated populations. I suspect this was just an innocent slip-up, however.

I am also sad to see that he modeled his thesis on Paul David's work -- he writes that "David's approach has strongly influenced my own views." This is unfortunate, b/c as Alan Olmstead has shown, a long, careful look at the relative prices of agricultural inputs & output prices in the US failed to support David's hypothesis...

Hopefully the next 250 pages will be better. The book is on an interesting topic and does contain interesting data, however, so I do recommend it!

I'm curious to see what other people think...

Acemoglu Text Review

Haven't posted in awhile. Been busy. Arm is better.

Anyway, today I had the considerable misfortune of sifting through Acemoglu's new textbook for a paper I'm writing. It's f*cking terrible. So, I reviewed it for Amazon, and the posted it on DeLong's blog as well. Here it is, for posterity:

This book is bad, bad, bad. Plain and simple. I give it one star b/c I don't know how to advance to the next screen and submit for no stars.

Having suffered the extreme misfortune of having been assigned to read and present some of Acemoglu's papers (some 2-3 times now), I have a lot of pent-up aggression that needs to be released. Now will be that time.

Acemoglu is that nerdy, pudgy, 4-eyed kid from school who everyone picks on and hates b/c he doesn't shut-up, is ignorant, and incredibly and persistently annoying. The kid who says stupid, ignorant things which are just plain dumb on multiple levels, who does not understand what he should know -- just doesn't get it -- and who everyone therefore (or perhaps just me) wants to strangle with their bare hands. He evokes the same feelings in me I get when I watch George W. Bush give a speech. (If you like George W. Bush, then you will love this book!)

So that is how Acemoglu makes me feel when I'm forced to read anything by him. Now, what is it that gives me those feelings? Here are some of the things I hate about his research/book:

1) His famed settler mortality data, which Albouy has convincingly shown were fabricated, do not merely affect GDP via institutions -- they also should and would have affected levels of technology, human capital, and culture, each of which are persistent. The kicker is that since he had data on initial institutions, there was no reason to make up the settler mortality proxy in the first place.

2) His unquestioned use of Maddison's data, which Maddison, by all accounts, simply made up, and which implies (counterfactually) that there never was a Malthusian world. Aside from being made-up, Maddison's data are obviously and fatally flawed.

3) His arrogance in thinking that he could write a book about economic growth without knowing anything about history, and his arrogance in thinking that he could write about geography and development without really having read Jared Diamond (and without even citing Alfred Crosby). It is frustrating that he equates the belief that geography is important for development and history with "geographic determinism" -- that geography is the only thing which matters. No thinking person could believe that, and reading Diamond or Sacchs in the round suggests that they are certainly NOT geographical determinists.

4) As such, he "misunderestimates" the "geography hypothesis" as he calls it.

5) He is a full time believer in the idea that by doing algebra (but not by reading the history of development), one can gain insights into the history of development.

6) A troubling array of shoddy facts, inaccurate statements, frustratingly wrong-headed logic, and all hidden behind a veneer of high-handed math and regressions. Some of these include:

a) His insistence that the North Korea/South Korea split tells us that geography and culture does not matter, and that it is institutions such as property rights which do matter for growth. The trouble with this is that North Korea was taken over by an utter madman who was an absolute dictator and who shut off trade and contact with the outside world. Logically, it's like saying that eating well and exercise do not matter for health b/c, look, you and your brother (who got hit by a bus) ate the same things and exercised the same amount, and your brother got hit by a bus and died. Of course, looking both ways before you cross the street is also important, but then again, who is saying that it isn't? (Acemoglu is basically saying it's the only thing...) The question is which institutions matter, and since North Korea got almost all institutions terribly wrong, the North Korea/South Korea split is actually not insightful.

b) In 'moglu logic, the "Reversal of Fortune" was supposedly that countries like Argentina and North America which were poor in 1500 are now rich, and vice versa has just one flaw. The peoples who lived in modern day argentina and north america are now dead, not rich. and we don't actually have any idea that say, north america was more/less developed than mexico. and certainly don't know if it was rich (and those are two different things, which acemoglu doesn't understand, b/c the world was malthusian then.

8) How does a tenured faculty member at MIT in economics not understand the Malthusian model? WTF?

9) In fact, there are many theories that can be taken "off the shelf" so-to-speak, which do tell us quite a bit about economic development, such as in Krugman's Geography & Trade, the Malthusian Model, Crosby-Jared Diamond, Engerman-Sokoloff, etc., which are all either butchered in Acemoglu's retelling or omitted.

OK, so I've clearly used up more actual thought writing this review than Acemoglu has in his entire research career.

In short, this book is sooooo bad it discredits: not Acemoglu, b/c u can't blame him necessarily, he is what he is, but rather, it completely discredits MIT economics, Robert Solow, growth economics (the soft underbelly of Macro, which is the soft underbelly of economics, which is the soft underbelly of Social science), and the entire economics profession. I am know dumber than i was before i read what parts of this book i could stomach. This book is bad enough to cast a black shadow over the department and the entire field of economics. This book is fodder for those who equate economists with medieval priests or doctors, who babble on about things about which they know nothing, and have no value-added to society.

This book is of interest to sociologists or anthropologists wishing to document the funny "sociology of economics" and the anachronistic, heavily ideological lens with which conservative economists view the world.

Lastly, it is rather strange that while many decrie the fall of U of Chicago, the decline and fall of MIT Economics has hardly been commented on. Clearly, Acemoglu's rise at MIT can and should be equated (in its impact on educated society) with the Vandals sacking of Rome.

that is all.

Have a great day!!!

Summers Wikipedia Page...

Not everything I've added still stands, yet, nevertheless, it does look like much of the dirt on Summers I added (all with citations) is still there...

Check it out: http://en.wikipedia.org/wiki/Lawrence_Summers

Larry dollar-billz-y'all Summers...

He's become the most prominent Summers critic out there... Guy deserves props. I suspect he's not going to be invited to the White House for any "things" anytime soon...

We discovered, for instance, that Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs. Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration. This dynamic duo’s innovative gift to their country was banks “too big to fail.”

Some spoilsports raise the conflict-of-interest question about Summers: Can he be a fair broker of the bailout when he so recently received lavish compensation from some of its present and, no doubt, future players? This question can be answered only when every transaction in the new “public-private investment plan” to buy the banks’ toxic assets is made transparent. We need verification that this deal is not, as the economist Joseph Stiglitz has warned, a Rube Goldberg contraption contrived to facilitate “huge transfers of wealth to the financial markets” from taxpayers.

But perhaps I’ve become numb to the perennial and bipartisan revolving-door incestuousness of Washington and Wall Street. I was less shocked by the White House’s disclosure of Summers’s recent paydays than by a bit of reporting that appeared deep down in the Times follow-up article on that initial news. The reporter Louise Story wrote that Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard.

That the highly paid leader of arguably America’s most esteemed educational institution (disclosure: I went there) would simultaneously freelance as a hedge-fund guy might stand as a symbol for the values of our time. At the start of his stormy and short-lived presidency, Summers picked a fight with Cornel West for allegedly neglecting his professorial duties by taking on such extracurricular tasks as cutting a spoken-word CD. Yet Summers saw no conflict with moonlighting in the money racket while running the entire university. The students didn’t even get a CD for his efforts — and Harvard’s deflated endowment, now in a daunting liquidity crisis, didn’t exactly benefit either.

Summers’s dual portfolio in Cambridge has already led to one potential intermingling of private business and public policy in his new White House post. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts. But again, Summers’s potential conflicts of interest seem less telling than the conflict of values that his Harvard double-résumé exemplifies.

In the bubble decade, making money as an end in itself boomed as a calling among students at elite universities like Harvard, siphoning off gifted undergraduates who might otherwise have been scientists, teachers, doctors, entrepreneurs, artists or inventors. The Harvard Crimson reported that in the class of 2007, 58 percent of the men and 43 percent of the women entering the work force took jobs in the finance and consulting industries. The figures were similar everywhere, from Duke to the University of Pennsylvania. Dan Rather, on his HDNet television program in December, reported that at Penn this was even true of “over half the students who graduated with engineering degrees — not a field commonly associated with Wall Street.”

Clearly the last person to serve as an inspiring role model for alternative values would have been Summers. But in her first baccalaureate address last June, his successor as Harvard president, Drew Gilpin Faust, stepped into that moral vacuum, zeroing in on the huge number of students heading into finance, consulting and investment banking. “Find work you love,” she implored the class of 2008. The “most remunerative” job choice “may not be the most meaningful and the most satisfying.”

and then we get this interesting Summers-tidbit at the end:

When Lawrence Summers was president of Harvard, he famously delighted students by signing his autograph on dollar bills that already bore his signature from his Treasury secretary days. How we leave that bankrupt culture behind and get to “something good” will be as much a factor in our recovery from this Depression as the fate of the unemployment rate and the Dow.

This is pretty much all par for the course... Although the Obama admin has done a few great things that may well have emanated from Summers (funding the IMF -- awesome! -- easing travel restrictions on Cuba, funding for health care), the Obama Admin will never reach its potential with Summers at the helm...

more bad summers news (broken arm blogging)

Paul Krugman writes:

Only a few people warned that this supercharged financial system might come to a bad end. Perhaps the most notable Cassandra was Raghuram Rajan of the University of Chicago, a former chief economist at the International Monetary Fund, who argued at a 2005 conference that the rapid growth of finance had increased the risk of a “catastrophic meltdown.” But other participants in the conference, including Lawrence Summers, now the head of the National Economic Council, ridiculed Mr. Rajan’s concerns.

This is par for the course if you are a Larry Summers critic.

The second item is that my WSJ tells me that Paul Volcker has essentially given up from trying to have any influence... He's completely out of the loop, and so beaten-down that he's not even complaining about it anymore. He's given up. Submissive. Was just completely outmanoeuvred by Larry Summers...

a reason 4 my silence...

thorstein veblen might be all-powerful when it comes to women, but it turns out, his bones are still as brittle as any mortal man -- and hence, he broke an arm 'boarding in a dangerously icy half-pipe awhile back, hence the low posting volume as of late. yet, he shall return!

in any case--there is a bit of shocking larry summers news --

http://tpmmuckraker.talkingpointsmemo.com/2009/04/larry_summers_ignored_frightening_trading_practice.php

Thorstein Veblen lives...

http://www.boingboing.net/2009/03/14/thorstein-veblen-pre.html

Grrr.... Thorstein Veblen is dismayed...

This time, by Harvard's Dani Rodrik.

Dani quotes a former student (now at the ILO) on stimulus sizes from around the globe. The US stimulus is listed as "5.5% of GDP"! If only that were so...

So Thorstein wrote:

The US stimulus is nowhere close to 5.5% of GDP... That's off by nearly an order of magnitude... The stimulus is over three years, not one -- that makes it 1.8%. Secondly, half of it is just plugging the state and local budget shortfalls, so the net size of the US stimulus is perhaps 1% of GDP at best...

Dani, you've got to start butting back on this wingnut stuff a little harder...

Hoisted from the comments!

Anonymous writes:

You seem like you have common sense....why are you in an economics program again?

There is better stuff coming out of the post-Keynesian school - the one that doesn't think that all of the world can be boiled down to 'efficiency' in markets (e.g. the world isn't solved like an algebraic equation).

I'd be interested to hear what you'd like to see taught as economics. I happen to like a book like Jonathan Kirshner's Currency and Coercion (an IR book, but an IR book that deals with the real world and the economy, at the same time!), but I'm also interested in Joan Robinson's work, among others. Besides that, economics students should be forced to be traders for a year as a class so that they are forced to better understand how markets work (or don't work) or don't make sense so easily.

First, why am I in an Economics program (to take that question seriously...) -- merely for the certificate. Times like this, the President feels he needs to trust somebody who's CV says "Economist" even if that person's (Larry Summers) formal academic training is utterly unrelated to the (poor!) decisions he is making now...

Re: "There is better stuff coming out of the post-Keynesian..." Oh, of this I have no doubt. There are good papers out there, certainly. Temin's Treaty of Detroit paper is generally quite solid, as is his "Two Views of the IR", Kremer's long run growth paper is good, Krugman's book on Economic Geography is fantastic, as is Greg Clark's recent book on the Industrial Revolution (or, at least most of it)... These all come to mind, and there are probably lots more good papers out there, just waiting to be read. Unfortunately, 9 out of 10 published (if not 19/20), peer-reviewed Econ papers i pick up prove to be an almost complete waste of time. (And, due to the hard math, that's a lot of time...)

Hmmm... I'll have to check out Joan Robinson & Jonathan Kirshner... Not familiar with either...

What would I teach as economics? Well, I would bring back both reading and writing in the first year curriculum. No real learning goes on by doing mere algebra. I would also bring back discussion section/debate into the classroom. Economics is not mathematics, and shouldn't be taught like it. Would bring back Economic History -- every student should learn about the Industrial Revolution and the Great Depression at a bare minimum. I would keep teaching theory (and still do lots of math!), of course, but it would be supplemented. Presentations, Term papers, projects, class participation and essay questions should be used to gauge student ability in addition to timed math exams. For the second year courses, once students have proved their meddle in the first year, more exams are just redundant. At this point, the professors should just get out of the way and let their students do research on topics of interest to them -- whereas in my program, only half of the courses do this. The other half continue to force students to rote memorize horrendous numbers of utterly irrelevant, intricate models and take difficult, timed math exams... Much of the current Econ Ph.D. sequence just smacks of useless waste of energy. There's lots of commotion, but little real learning or understanding... I posted more about this if you check from about six weeks ago...

AIG, Obama's Bay of Pigs?

I think it's pretty clear at this point that the AIG bonus scandal, and it is indeed a scandal, is the first clear instance where Obama's judgment will be called into question. And rightly so, for it didn't need to happen. There's chatter over at Talking Points Memo that the Congress had inserted language into the bailout money giving Treasury the final say over things such as bonuses, and Larry "we-don't-tell-our-banks-what-to-do" Summers stripped out the clause. Even if this particular anecdote is not true, it is clear the White House could have given itself control over AIG and chose not to. It was an ill-begotten decision borne of fealty to a blind, anachronistic ideology which properly died a natural death 200 years ago in the minds of thinking men. And hence our president, our new blind and deaf Don Quijote as Keynes would no doubt quip, had decided to write hundred-billion dollar checks to banks with no strings attached. The critics had said "you can't separate ownership and control. You'll get asset stripping." Yet our helpless President had entered a dark cavern where the glittering blade lie w/ Larry Summers, who *knows* that the government should let Wall Street run itself.

Thanks to the (well-founded) populist rage boiling throughout the country, I with the Obama Administration good luck in trying to get another bailout package through the Congress this fall when the banks (who say they are profitable) pony up to the trough for another $350 billion...

Free Larry Summers?

If by "free", we mean "fire", then yes, free larry summers!

Noam Scheiber has a truly awful, awful, awful portrait of Larry Summers in TNR...

http://www.tnr.com/politics/story.html?id=aaa57c05-d73e-4321-8893-70d5b45577d1

You see, since Scheiber went in and got to hang out with Larry Summers and drink a Diet Coke, and probably get invited to a White House dinner, they are now friends. And friends scratch each others back. The result is this piece of propaganda fit for Pravda, not for a reputable rag in a free society...

Noam Scheiber is fit to be hanged. And then drawn and quartered.

And yet, TNR will not publish Thorstein Veblen. Woe is me.

AIG bonuses...

These are outrageous, and are also the Obama administration's fault.

The Obama people (Summers, Romer) are saying they are doing "everything possible" to stop the bonuses, but asset stripping, which is what it is, is precisely why you do not separate ownership from control. This is precisely the argument why the government should not merely write large checks and hope everything works out well without taking an ownership stake or getting any sort of control. Listening to the Obama economists, it's clear that's what they've done with AIG. They've written bunches of large, blank checks that let corporate American walk all over them.

That's outrageous.

Gotta Luv Dicky V

http://espn.go.com/

Unrelated to Larry Summers, but click on the Dicky V discussion on espn... He makes the case that St. Mary's of California shoulda gotten into the tournament. They went 26-6 during the regular season, and had their star player injured for four of their losses, and lost another game right when he came back (a little too soon and shot 2 for 16). Yet 20-13 Arizona gets in.

Vitale then argues vehemently with the other commentators, arguing on behalf of the underdog vs. the "power conference" teams, which only makes Dicky V. that much more endearing... I wish he would become a Democrat and make his case for working-class families vs. Wall Street elites...

I am Shocked, Shocked...

To read yet another disappointing Great Depression paper written by an economist. The Christina Romer paper I wrote about earlier, entitled "The Great Crash and the Onset of the Great Depression" turned out to be no better than the Bernanke paper. The new Chairperson of the Council of Economic Advisers writes that the fall in household wealth from the Great Crash was not large enough to cause the reduction in consumer spending that it did. This, as in many GD papers I've read, starts out with too many vague pronouncements and not enough hard facts. She (as does Temin) goes out of her way not to say how large the decline in the stock market was, or how large the decline in consumption was (in the beginning of her paper at least), and farms the evidence that the stock market crash couldn't explain the contraction in consumption to MIT's Peter Temin, who also goes out of his way not to say how much equities declined.

Now, I love Temin (or at least, usually I love Temin), but his Econometric results (in his 1976 book) indicating that a 100% reduction in wealth would only reduce consumption by 1.65% (or 1.52% for an alternative series) is somewhat less than completely credible. Most likely it is non-linear – in normal times, a 10% increase or decrease in my stock portfolio doesn’t have any effect on my spending (especially b/c I don’t watch the stock market every day); but once there is a crash and I become aware that my stock portfolio is down 55%, I start to cut back, and by much more than just .8%...

The contraction in consumption, it turns out, was just 5% between 1929 and 1930, whereas, in the initial crash, the stock market dropped about 33%. So, if you were trading on margin (and everyone was), then that could equate to a 50% loss in liquid real wealth. And, by the end of 1930, the market had dropped more than 50%... So is a 5% drop in consumption thus really a mystery that needs explaining? No, it is not.

And this woman is Chairperson of the CEA. Scary.

Romer: More of the same?

So, I just started in on a Christina Romer paper, and I read:

"This paper argues that there may in fact be a very important link between the stock market crash and the acceleration of the decline in real output in late 1929 and throughout much of 1930."

No kidding. You don't say. Are there really people out there arguing otherwise? Of course, economists never cease to disappoint me. Just when I start to feel that my opinion of the profession couldn't get any worse, I read some new whopper coming out of Cambridge or Hyde Park, like the theory that the Great Crash of 1929 and the Great Depression are unrelated events, or that the current increase in unemployment is caused by a contraction in labor supply...