This gives a much better perspective on the events of noon on 20 January 2009 than the feed CNN sent up here to the Great White North.

rdan


40 year wish list op-ed piece in the WSJ says (hat tip Tinman) :

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

Talking point presentations are to be expected, but such statements need to be rational at a minimum.

Another piece in the WSJ brought to my attention by Tinman is a narrative reminder of how interrelated we are, and one person's 'saving' is another person's loss that link to the second person needing to 'save' money that leads...well, you know.

Update: 17 major financials events 2008. Lots of links too.

By Stormy

The once thriving U.S. furniture industry is....where?

Beijing (ANTARA News/Asia Pulse) - China sold abroad US$24.12 billion worth of furniture in the first 11 months of 2008, a growth of 21.7 per cent on the same period of 2007, the General Administration of Customs said on Wednesday.

In November alone, the foreign sales stood at US$2.52 billion, up 13.8 per cent year-on-year. Foreign-funded companies made up 51.9 per cent of China's total furniture exports.

They sold US$12.53 billion worth, up 11.5 per cent. The United States and the European Union were the major target markets of Chinese-made furniture.

Ok... so it is still thriving...it just followed the crowd. Gotcha.

I am reliably informed (though I cannot find it on the web) that Forbes yesterday and MSNBC today are both referring to the next kleptocratic maneuverbank bailout bill as the Bank Asset Recovery Fund.

Anyone got the links?

UPDATE: Forbes link added.

UPDATE II: The consensus in comments appears to be that a Meredith Whitney report on the 29th may be the original source of the BARF acronym. Via Paul Kedrosky, FT Alphaville has an excerpt from her spot-on report of the issue with the BARF plan. The acronym is sadly missing from it, though commenter leftback chez Ritholtz claims to have been "ripped off." (Think of it as having been mainstreamed, mate.)

Dr. Black graciously asks:

Am I the only to whom it's occurred that monetary policy through the banking channel (as opposed to, say, actually dropping money from helicopters) is only likely to be effective if banks are pretty good at allocating capital efficiently, and recent history tells us that the existing set of clowns in charge completely suck ass at this?

No. In fact, this is one of the better reasons for advocating spending (fiscal) solutions over monetary ones. The monetary ones haven't worked, because the skillset to make them so does not currently exist sufficiently in the financial community.

Or, as someone once observed, we have thirty major banks. What we don't have are thirty bankers to run them.

These tables from CBO show the actual breakout by category of both spending and tax cuts in HR.1 the House version of the Stimulus Bill as introduced (some things were stripped out for passage). I'd like to invite everyone to compile their own list of what they consider to be pork or mistimed (i.e. too late) investment and put that list in comments. On the other hand I will compile a list of investments unlikely or impossible to see being delivered via tax cuts on capital. That list will appear under the fold probably Sat. AM. Each page is a separate image, click on it to enlarge. If that is still too small bigger images are available at my website CBO Tables
(UPDATE: Reader Kolohe suggested I simply point these images over there. Well I like to keep these because the show whole pages, whereas the big ones are half pages. So instead I just put the big images below the fold)
(UPDATE 2: Some of the categories are not very transparent. For example what is the relatively small amount in Title 4 Defense ($4.8 bn) for? People who want a higher level of detail can consult the text of the bill
HR.1 Full text)

People in comments on a previous post were complaining about tone and lack of substance. Well there is plenty of substance here. Dive in!

By Stormy

In 2003, IBM laid out its strategy for globalization. Before the 1970’s IBM rarely fired anyone. People who worked for IBM had a lifetime job. By the 1990’s, all that had changed. Trade barriers were falling; NAFTA opened a wide door for off shoring.

I have written repeatedly on this subject, but economists simply ignore what American business is doing. In one of my pieces, "A Question for the Council on Foreign Relations: Globalization at any Cost," I quoted Tom Lynch, then IBM Director for Global Relations, as he laid out the case for off shoring. All the hoop-la that we are losing just sewing jobs is nonsense. I will let Tom speak again.


How can we operationally define the phrase “trade barrier”? Normally, we think of trade barriers as tariffs between countries or a government subsidy of goods produced, a subsidy that unfairly disadvantages a foreign firm. But a trade barrier can also be defined as: An obstacle to a company in finding cheaper labor to create products or services elsewhere. Those products—or services—will be sent back to the country the company left. The resulting trade imbalance, the resulting shift of wealth to the top of the food chain, and the resulting debt if credit is made cheap all certainly should be self-evident, even if those goods are now less expensive. In short, a trade barrier can be a barrier to off shoring.

A few posts ago, I put up some U.S. trade data regarding Advanced Technology, computers, computer parts, etc. It seems the U.S. has a growing and healthy deficit in these areas. The companies have not changed; just their locations. Advanced Technology is not sewing shirts. (Nike likes to make its expensive sneakers in purported sweatshops—and then sell them back here.)

In 2007, I wrote a post on Sam Palmisano’s remarks in Foreign Relations, “What about U.S. Investment Abroad?” Sam knew what was happening, even if most economists do not. (Sam is CEO of IBM.) Did any economist pick up Sam’s remarks? Nope. Sam obviously did not know anything about trade or globalization. Here are Sam's remarks:

By one estimate, between 2000 and 2003 alone, foreign firms built 60,000 manufacturing plants in China. Some of these factories target the local Chinese market, but others target the global market. European chemical companies, Japanese carmakers, and U.S. industrial conglomerates are all building (or have declared their intention to build) factories in China to supply export markets around the world. Similarly, banks, insurance companies, professional-service firms, and it companies are building R & D and service centers in India to support employees, customers, and production worldwide.
[Italics mine.]

Regardless, I thought that I would post Tom Lynch’s remarks once again, even though those 2003 remarks are a bit dated.

If you turn to the chart that begins “off-shoring” then I have next: global sourcing with a question mark. What we’re talking about here is universally known as off shoring throughout business communities. There are people in IBM who are saying that off shoring is in fact a US-centric term. If you’re sitting in Bangalore India, work going to India is hardly going offshore. In any event, the external world uses the term but you may hear it called some different things as the subject evolves. I know that a lot of you as HR partners that have been supporting your customers have been involved in the 1990s with a lot of manufacturing that we moved offshore.
As we saw commoditization of a lot of our products, as we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high cost labor areas to lower cost labor areas. In 1990 that focus was primarily in manufacturing.

Off shoring in manufacturing moved rapidly in the 1990’s. NAFTA was one golden goose of a trade agreement. Shortly thereafter Mexico had a growing trade surplus with the U.S. Mexico was not getting richer; illegal immigration became a flood. We are not living during the time of Ricardo. Trade agreements now are often not used to allow a country to market its wares elsewhere; often, they are simply avenues for foreign corporations to set up shop.

As we saw commoditization of a lot of our products, as we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high cost labor areas to lower cost labor areas. In 1990 that focus was primarily in manufacturing. In looking at the current decade, the decade that has no easy name for it, like the 90s did but from now until the year 2010 and beyond; looking at an emerging trend now to move services offshore, in addition to manufacturing operations, some functions that would be included in those services would be engineering, software development, certainly chip development as well.

Well, 2010 is a bit closer than it was in 2003. And, yes, we are watching multinationals tap cheap foreign labor in software development, engineering, and chip development. This aint sewing, baby.

Services like accounting and financial services. There are companies that realize that there are lots of skills in places like India to do accounting for a fraction of the costs in theUS. Call centers; once we realize that we could have calls handled at a central location in the US and a central location in Europe. The next question is why should only be content by continent by continent, why not go further there? IT-supported services similarly. Why do you have to talk to someone in your own country? Call centers have such an interesting market - focus groups research going on and the like as to why US customers prefer in terms of accent and what they don’t like and what countries are good places to put call centers and which ones are not.

There has been a bit of a backlash with foreign call centers, but R&D and real hi-tech off shoring continues apace.

Then there is Microsoft and Hewlitt Packard. One-third of HP’s employees are off shore. HP is one of the largest IT employers in the world.

Microsoft actually had a road show that one of their senior vice presidents told their managers go ahead and pick a project and move it offshore today. I’ll tell you in a minute where you can actually access on the web that Microsoft presentation. HP, another big competitor, obviously, told the press and analysts that one of the ways it hoped to gain competitive advantage over rivals like IBM was to move stuff offshore

And, as I pointed in an earlier post, HP thinks it is among the crown jewels of American business, and, as such, should receive government support. I had to chuckle. Haven't the trade agreements and China's entry into the WTO been enough of a handout to HP? It's worse than the banks.

I have to ask: Do economists ever listen to CEO shoptalk? Will they ever do a close study of some of these multinationals?

The government, I believe you’re going to find is fairly limited to what they can do and unionizing becomes an attractive option for a lot of reasons, there are indications that union organizing will become more aggressive over the coming months.

Unions have become helpless. And of course the government cannot do much. Any government that pours billions into banks while the banks declare dividends and bonuses is just laughable. Besides, there are crowds of economists all ready to join in any chorus that mindlessly promotes another free trade agreement. Cheek to cheek they chant; jowl to jowl. They know their Ricardo. They think they know how trade works. What they know is a fairy tale spun in a tower, buttressed with equations that are never predictive, not even descriptive.

Are they surprised at the latest fiasco? I think they are.

In the past, when the local witch doctor failed, the tribe sent him into the desert for a refresher course. Today, he should be forced to sit in an IBM or Microsoft or HP global strategy session.

Naw….won’t work. He will sit there, humming Ricardian tunes, not paying attention, wondering if IBM will give him tenure…or whether he can get on a talk show.... Some dummies are just dumb.

Tom Bozzo

tips the hat to Ken and SvN for a pointer to a nice paper from the Journal of Money, Credit and Banking called "The Deficit Gamble," by Laurence Ball, Douglas Elmendorf (now CBO director), and N. Gregory Mankiw. Ball, Elmendorf, and Mankiw showed that the government can "with a high probability" run a deficit in the present and roll the resulting debt over indefinitely. In the states of the world where this so-called "Ponzi gamble" (*) works, the result is Pareto-improving; if the gamble fails, then at least some generations are better-off. The authors note that this does not imply that deficits are necessarily "good policy." (**)

The details of how this works also bear a bit on the "freshwater" versus "saltwater" debate over the stimulus package and "crowding out" of private sector investment. One possibility is that there can be crowding out even in the sense that Fama describes and that may nevertheless be welfare-enhancing. Under risk aversion, a reduction in the variance of consumption can compensate for a reduction in the mean, as in substituting (safe) government debt for risky but higher-return private capital investments. But, more realistically, the portfolio choice is among private investments with a variety of risk/reward features. Ball, Elmendorf, and Mankiw show that under such circumstances, increasing holdings of safe government debt should lead to a portfolio shift towards higher-risk, higher-(mean)-return capital. This formalizes a sort-of "safety nets are good for entrepreneurs" argument. The central issue, though, is that it's not just the quantity of capital that matters, but also its composition.

In fact, in some respects the Ball, Elmendorf, and Mankiw model may be too pessimistic as to the likelihood of the deficit-spending gamble paying off. As is fairly common in macro modeling (***), the government spending financed by the deficit is assumed to be unproductive. Of course deficit-financed stimuli can be arranged as airdrops of nondurable consumption goods. The actual stimulus package we're fighting over, however, would direct a good chunk of money on public-sector investments (not necessarily "public goods"). So some of the "crowding out" is a substitution of public for private investment. We can fight over the relative marginal products of various public and private capital investments, but in general those will be positive. I leave knock-on portfolio effects to others, but I'll assert without proof that the net effect shouldn't be to increase the probability that the debt rollover would fail.

---------------------------------------

(*) The term "Ponzi" may be too loaded; the "gamble" involves a series of intergenerational transfers that are not inherently unsustainable in contrast to a "scheme" a la Madoff.

(**) Basic prudence is not revoked. Borrowing "too much" money, for instance, would affect the probability of successfully rolling over the debt.

(***) I recently flipped through the main graduate macro text of my formative years, Blanchard and Fisher's Lectures on Macroeconomics, and you have to get pretty far along (p. 591 of my edition) to read that "in the equilibrium context some components of government spending may operate as a current input into production." Wow, what a concept!

Robert Waldmann

Following a link e-mailed by Ken Houghton I read this at "the Ambrosini critique" (thanks Ken)

I read

The need for more math is also related to the increase in the empirical relevance of theory. I’m convinced the only standing legacy of the Real Business Cycle literature, besides method, is its insistence on bringing the models to the data. In modern macro, its simply not enough to identify the existence of some effect or other. For example, real business cycles were relevant because they proved to be quantitatively important… a large chuck of business cycle fluctuations are driven by supply shocks. And RBCs have been supplanted because they didn’t explain enough of the data. The empirical relevance of real shocks couldn't have been tested without out explicit mathematical models of the phenomenon.

This is what frustrates me about Kling, Krugman, et al’s ad-hoc theorizing. They seem contented to identify that certain macroeconomic features exist, but they don’t bother to quantify the importance of those features.

and also a comment

pushmedia1 Says:

January 29th, 2009 at 3:03 pm
To be honest, yours is an interesting request. How does one show a discipline is empirically relevant?

What sort of evidence would convince you?

(I am not the referent of the pronoun "you" in the comment).



I comment after the jump



Now Krugman does appeal to quantitative models. For example he notes the CBO predictions. Now you might not consider the CBO model to be an economic model, because I suppose it lacks micro foundations. The fact is that Krugman makes quantitavie calculations. To you they don't count, because the theoretical argument is just that a causal effect isn't zero, then it is estimated reduced form. Does this approach yield worse predictions than those generated by DSGE models ? I am familiar with the Lucas critique. So was Marshak who stated it long before Lucas (who made "no claim of originality" in "Econometric Policy Evaluation: A Critique and cited Marshak). However, Marshak also attempted to forecast with models which he knew were vulnerable to the Lucas critique.

He thought that was the best approach available. Since Marshak we have accumulated a good bit of data on forecasts and outcomes. Was he wrong ?

Or to put it another way, does anyone whose employment depends on getting macroeconomic predictions right use DSGE models ? If not what is the market failure ?

Pushmedia it is easy to show that a discipline is empirically relevant. The acid test is out of sample forecasting. Models can be tweaked to fit the past. A more empirically relevant model gives better out of sample forecasts.

In particular, DSGE are an empirical advance if and only if out of sample forecasts based on DSGE models are better than those based on, say, VARs, old Keynesian macro models or something else without micro foundations.

Now you will notice that the methodology described by Ambrosini is based on the ability to match summary statistics.

OK so I took a model which I am absolutely sure has nothing to do with reality and tried to see how blatantly I had to cheat to get it to match summary statistics. My sense was that it was about average plausible for DSGE (had spillovers, the labor market cleared, no exogenous technology shocks). I conclude that the approach is not fruitful.

If you are interested, I can send you the paper presenting the model and the gauss file which does the simulations. If you can convince me I fudged more than the average macro theorist, I will thank you. If you can convince me that the model and program have any scientific value at all, I will be very very grateful.


Consider astronomy. It is like macro in that it is non experimental. It is unlike macro in that astronemers can predict, for example, where planets will be in the sky. Astronomers are clearly empirically successful, they can predict things that you see in the sky better than you and I.

Can we predict what will happen to the economy better than astronomers ?

Tom (STR) has another post at Health Care Think Tank

Senator Daschle wants to build on the current private system, but also expand the scope and reach of federal government programs.

The Federal Health Board, modeled after the Federal Reserve Board, would initially be directed at the federal government programs, but Daschle makes it clear that with enough influence the FHB would assert significant control over the entire U.S. health care system.

"I believe a Federal Health Board should be charged with establishing the system's framework and filling in most of the details. This independent board would be insulated from political pressure [emphasis mine] and, at the same time, accountable to elected officials and the American people. This would make it capable of making the complex decisions inherent in promoting health system performance. It also would give it the flexibility to make tough changes that have eluded Congress in the past." (page 169)

"The Federal Health Board would have regional boards that would have a say in national decisions, but would focus primarily on promoting best practices and quality of care locally...... Over time, the regional boards might assume other roles, such as ensuring an adequate supply of certain services or linking payments to performance....." (page 170)

Next post, the five functions of the proposed FHB.

lifted from Calculated Risk

From the International Air Transport Association: Cargo Plummets 22.6% in December (hat tip Bob_in_MA)

In the month of December global international cargo traffic plummeted by 22.6% compared to December 2007. The same comparison for international passenger traffic showed a 4.6% drop. The international load factor stood at 73.8%.

For the full-year 2008, international cargo traffic was down 4.0%, passenger traffic showed a modest increase of 1.6%, and the international load factor stood at 75.9%.

“The 22.6% free fall in global cargo is unprecedented and shocking. There is no clearer description of the slowdown in world trade. Even in September 2001, when much of the global fleet was grounded, the decline was only 13.9%,” said Giovanni Bisignani, IATA’s Director General and CEO.” Air cargo carries 35% of the value of goods traded internationally.
...
“2009 is shaping up to be one of the toughest years ever for international aviation. The 22.6% drop in international cargo traffic in December puts us in un-charted territory and the bottom is nowhere in sight. Keep your seatbelts fastened and prepare for a bumpy ride and a hard landing,” said Bisignani.
emphasis added

Update: MG clarifies the post in comments:

Well, look at the FTK and ATK declines reflected in the second pdf document. Asia is bleeding far worse than Europe or the USA.

Now compare that to the significant decline in passenger travel across the Pacific in the other pdf document. Some of that lost travel is industrial business travel, and that slump kicked in last September as stated on that document. As explained, M&A deals, other financial meetings, and manufacturers business travel fell sharply. Perhaps it's a stretch, but I tied the decline in business travel to the large drop in cargo movements across the Pacific. In other words, I believe that they go hand in hand. Of course, I'm also drawing upon information noted elsewhere.

If the USA snapshot was one during the early or mid '90s, we would see more of a slump in air cargo movements in the USA as opposed to large transocean movement declines to/from Asia where a high concentration of goods are being manufactured for the U.S. and other markets.

I expect that was one of the points that Rdan noted or thought about as he made the post.

My short answer is simple: There should be no question that air cargo movements to/from Asia are down considerably. And it will probably get much worse.

rdan

Naked Capitalism also points to the underlying inattention to US trade policy and our financial wizards.

Last night, we reported that the International Institute of Finance was calling for a global GDP contraction for 2009. The IMF today, while not going as far as the IIF, got about as downbeat as one could expect them to be, predicting a marked contraction in advanced economies. From the Financial Times:

[T]he International Monetary Fund increased its estimate of credit losses on US-based assets from $1,400bn to $2,200bn. It also said world output, measured at market exchange rates, would fall in 2009 for the first time since the second world war. Weighted by purchasing power, growth would be very slightly positive.

The new growth forecasts mark a huge revision – down by more than 1.5 percentage points – from the IMF’s previous forecast for the year in spite of the inclusion of the fiscal stimulus efforts by governments into its predictions for the first time. Advanced economies, the IMF predicted, would contract 2 per cent in 2009 with the UK hit hardest.

In Geneva, the International Labour Organization said the global recession would lead to a “dramatic increase” in unemployment this year, which would certainly lead to 18m-30m additional unemployed and more than 50m “if the situation continues to deteriorate”.

reader Jimi

sends a link to a NYT article in 1988 on the economist schism mentioned in 2009 NYT article.

Robert Waldmann

Mark Thoma has a long post on the end of the Fresh Water Salt Water truce. He quotes at length from Olivier Blanchard's declaration of peace in our time. In particular from Blanchard

the old fresh water/salt water distinction has become largely irrelevant: While research on the topic started with new-Keynesians, recent research has been largely triggered by an article by Golosov and Lucas (2007), itself building on earlier work on aggregation of state-dependent rules by Caplin and by Caballero, among others.

I'd call Caplin and Caballero definitely salt water, so the proof that the war is over is the paper by Golosov and Lucas.

Obviously Blanchard knows a lot more than I do about the current state of macro research. However, I can't help but notice that he names only one paper by Fresh water economists which accepts nominal rigities (OK one of the economists is Lucas so it counts more than double but still one article is one article).

Blanchard is likely to see convergence basically to New Keynesian general equilibrium models (like say Blanchard and Kiyotaki which isn't exactly new is it). He, like Mankiw, is a new Keynesian who loves math and favors the rational expectations hypothesis. That is, he will be reconciled with Prescott long before, say, Larry Summers or Brad DeLong.

I'm not surprised by the recent contributions of fresh water economists to the policy debate. For one thing, many fresh water economists have extreme policy views. The school is partly based on preferring mathematical elegance to assumptions which most people find plausible, but it is also partly based on the idea that the market is wonderful and public intervetion in the market is always bad. Thus a nice model of nominal rigidities is OK, but a conclusion that, therefore countercyclical macro policy is good is not.

Note Lucas decided that the business cycle is of trivial importance so reducing its amplitude would provide trivial benefits *before* he accepted a model with nominal rigidities. Back when he considered the business cycle the key issue in Macro, he argued that active policy could only increase its amplitude.

Now that we seem to be in a recession which sure doesn't seem trivial, he suddenly argues that macro stabilization policy can't work, although it can given nominal rigidities as in his paper with Golosov.

Is there any work from Lucas at all that doesn't fall under the heading of lets do math, the harder the better, so long as we don't conclude that it is possible for public intervention to improve on laissez faire ?

rdan

A background for the non economists concerning freshwater and saltwater economists harks back to 1976 when Robert Hall christened the central schism in macroeconomic thought as being between the freshwater and saltwater schools. The division was picked by their location (on the Great Lakes and Rivers versus the coastal schools). The division exists today – and indeed is being played out in Krugman’s (saltwater) blog and by the Chicago economists who think he is a bozo idiot.

Yeah Robert and PGL.

by reader Noni Mausa

The 'illions, by volume, area and time

If a million
Was a walnut

A billion
Would be three ice cream pails

A trillion
Would be my spare bedroom
====
If a million
Could be covered by a man's handkerchief

A billion
Could be covered by a 1500 square foot bungalow

A trillion
Would be 25 acres - 33 football fields
====
If a million
Was a single day

A billion
Would be 2 years 10 months

A trillion
Would be 2800 years
------------------------------
by reader Noni Mausa

By Stormy

How is China handling the global slow-down? And what precisely are China's prospects? The answers to the first are more neatly framable than the answers to the second. The answer to the second depends not only on China but also on the West, specifically, the U.S. How the U.S. confronts the issue of China will be central as both move through the present crisis.


Reviews of how China is handling the present slow-down coming are complex. On the one hand, we have iStockAnalyst watching China, now flush with cash, snap up bargains in commodities like copper, iron, and oil:

Update: Live from Davos

• Iron ore imports were up 6.2% in December, on a year-over-year basis
• Copper imports were up 19.3%
• And imports of crude oil climbed 11.6%

China is helping out its own producers of zinc, aluminum, and copper as they face a slow-down in global demand. China will stockpile those commodities for brighter days. On the other hand, China is aggressively trying to acquire foreign companies:

China’s third-largest zinc producer, Zhongjin, bought a 50.1% stake in Australian zinc miner Perilya Ltd. for $32 million.

China’s Jinchuan Group...will take 100% of the nickel the Zambian mine produces over the rest of its life. (Jinchuan now has an 18% stake in Albidon Ltd, an Australian company that owns the Zambian mine.)

Additionally, China has struck deals with other Australian companies:

• Centrex Metals sold a 50% interest in two magnetite deposits to Wuhan Iron & Steel Co., China’s third-largest steel maker for $180 million
• Mount Gibson Iron brokered a rights issue and share placement to Chinese interests, with two major companies taking a stake of as much as 40% in the miner, while also securing discounted off-take agreements.
• China’s second-largest steel maker, paid $162.1 million to boost its stake in Gindalbie Metals from 12.6% to 36.28%.
• Grange Resources is currently set to merge with Australian Bulk Minerals, which is majority-owned by a Chinese steel maker

On the other hand, China is worried about its huge export-oriented economy. Lay-offs and slow-downs multiply. Additionally, currency exchange watchers will see that China has put once again firmly pegged the yuan to the dollar.

While U.S. the U.S. pours billions into failing banks, China hands checks to its companies for a global buying spree. Chinese companies can tap China's immense current account surplus. Furthermore, China's acquisition timing could not have been better. Commodity prices have plummeted; deals can be made.

And, as has been noted in the economic press, China has now surpassed Germany as the Number 3 economy. Japan is next. And then there is the U.S.

But...and there always is a but...China now faces a serious problem: Its export platform is collapsing. Nonetheless, China is looking ahead. The question is: Can China continue is present path of development?

While there are many ways of looking at this problem, in this short space, I would like to look ahead, beyond the present crisis. Specifically, I want look at the problem from the U.S. point of view.

Much has been said that China is simply shoes and textiles...cheap consumer goods... Actually, nothing could be further from the truth. Consider, for example, U.S. net trade deficit in Advanced Technology:

While imports and exports are both climbing, the absolute difference between the two reveals that imports are climbing faster than exports.

In 2007, Pacific Rim countries accounted for most of U.S. imports of Advanced Technology. Of those countries, China was number one, surpassing even Japan. Surprised? There are many ways of explaining how China, a presumably third world economy, could surpass Japan in exporting Advanced Technology to the U.S.

Of passing interest as well is the fact that the U.S. in 2007 ran a net trade deficit in Non-Automotive Capital Goods. Note the following 2007 statistics:

All of which brings me back to the problem of China, which now has the world's number two economy, Japan, clearly in its sights. Ahead lies the U.S., now in deep trouble.

While China plans for the future, the U.S. and the West are intent on saving their financial institutions while blunting the worst of this Depression.

Many look at the problem as simply one of stimulating aggregate demand. That is a rather myopic view, in my opinion. Trade and the current account balance are important, as is national indebtedness.

I do, however, see signs in the Obama administration that it does see the U.S. trade deficit as the serpent in any future garden. (Remember Geithner's remarks about currency manipulation, for example.)

China and other countries now running a substantial account surplus might weather the financial storm in somewhat better condition, if, if, they can handle the loss in exports. (A big "if.") I suspect that China is counting on our stimulus package to rescue its export machine.

Another part of that "if" is how seriously the U.S. reconsiders its position vis-à-vis trade...and how it looks upon its own corporations that have fled its shores for juicier deals elsewhere.

In this last regard, I found the complaint of Hewlitt Packard's Shane Robison, HP's chief strategy and technology officer, that America's great IT companies might go the way of the automotive industry. He would

like to see the following: a permanent research-and-development tax credit, which would encourage tech companies to do more basic science research, which in turn would benefit everyone, not just the company that conducts the research; more government funding for basic science research; more spending on education; and changes in immigration laws to help foreign-born students who study in the United States to stay in the country afterward.

Now it is true that we do need to invest more heavily in advanced technology. But take another look at the above graphs. Now consider that of the 321,000 HP employees, only 100,000 work in the U.S. According to Stan Williams, a senior fellow at HP labs:

"Technology has been paying the bills in this country," he says. "It's delivering all of the innovation and the profits in the United States. The IT industry has created the wealth that we're enjoying now. But because the industry is doing well, it gets neglected. We're killing the goose that lays the golden eggs."

Consider again the above graphs.

IT may be garnering the wealth, but it is not necessarily providing the jobs. And jobs are now the name of the game.

While we seem to be doing well in semi-conductors, Intel and others are building huge plants in the Philippines and elsewhere (cheaper labor).

If you have any question about major IT companies honing their off shoring strategies, then you should consider IBM's global strategy. (See my comments here. Ironically, the link in this piece to IBM's stated strategy is no longer operative. Nonetheless, the quotations are accurate.) It is simply not a question of more and better education. It is a question of salaries...of jobs.

How would I address this issue? Here are just some possibilities.

• Place an import tax on any American company whose products originated in a country that manipulates its currency or in a country that does not allow labor to bargain freely.
• Insist that any future companies springing from government-funded research be required to stay solely within the U.S. for ten years.

To return to my original question: What are China's prospects? In some respects, they depend on how the U.S. handles its own problems, not the least of which is trade and the corporations it has nourished and will nourish.

Beyond all of these issues loom even larger ones.

According to some recent studies, global warming is now irreversible. Similarly...and just as important...global pollution grows apace, along with unabated population growth. How every country faces this triple threat will govern its real success in the next couple of decades.

China, I think, is just as aware as we are of these coming problems. (It, too, is trying to develop, for example, an affordable and usable electric car. It, too, is trying--albeit abortedly--to create cities that are "green." While IT will continue to be central to any economy, the future will be in melding that technology with a "green" technology, a technology that will radically change how we all must live, if live we will.

Arnold Kling doesn't support the stimulus, but he doesn't agree with fresh water critics either.

He refers to Mankiw's classification of macroeconomists as "scientists" and "engineers" then writes

Because the data are not powerful enough to reject any hypothesis against an interesting alternative, the macroeconomic "scientists" divorced themselves from the "engineers," who continued to use macroeconometric models. In my view, neither the scientists nor the engineers accomplished anything. The scientists did mathematical masturbation, with some occasional, isolated empirical work that satisfied journal referees based on whatever fads were taking place at the moment but had no lasting persuasive impact. The engineers provided forecasts and policy simulations that were precise in form and totally unreliable in substance. In any case, the engineers were kept out of economics departments.

I agree except that I think that Mankiw's use of the word "scientist" is nonsensical and has nothing to do with its ordinary English meaning except as used by economists who flatter themselves.

My outburst along with my thoughts on his discussion of the stimulus after the jump. These were comments so I address Kling in the second person.





I agree with Kling's thoughts on the Macro dark ages.

I have only one objection and it isn't to your thought at all. I do not accept Mankiw's terminology. You write "The scientists did mathematical masturbation." I agree, but, if we are right, then they aren't scientists. Rather they are mathematicians (although mostly not of a level which would meet the grade in a second rate math department).

The defining characteristic of natural science is that theories bow to facts. Theoretical physicists have high standing in the profession (higher than empirical physicists) but, if their theories are contradicted by the data, they are abandoned. The physics profession as a whole, is governed by data so theoretical physicists bow to empirical physicists (who sure are engineers) even though they feel superior.

And that's physics. One of the problems with those Mankiw defined as "scientists" is that physics is the only science they ever think of. In biology, it is perfectly possible for a Nobel Laureate to admit without embarrassment that he needs to ask for help with calculus except for the simplest things (Salvatore Luria personal communication 1983). His role in the MIT biology department (then clearly the best in the world) was similar to that of Samuelson over at the economics department).

Many economists sincerely identify a scientific approach with a mathematical approach. I hope the fact that this is nonsense is obvious to everyone reading this.

I'd ask Mankiw if he can find 10 natural scientists who would consider those he calls "scientists" to be scientists.

Now as to your criticisms of the engineers -- well what would you do ? I'm new to this blog, so I note my ignorance without apology. What is your current policy proposal (say you became 218 representatives, 60 senators and the President what would be done ? Would you wait to act until you had made a new approach to macro based on Hayek and Minsky ? I don't think that would be optimal.

On the stimulus, as far as I can tell, Kling says that Hayek showed that a stimulus was bad if reallocation of labor is needed (no hint as to evidence nor any response to critics of Hayek) objects that Obama isn't libertarian, and says that Americans have to suffer to punish financiers who used excessive leverage. I can't tell very far though. He doesn't seem to offer any explanation of how the stimulus can have bad effects and rather seems to think that an economy without a crisis and a stimulus would be better than one with both. Unfortunately an economy without a crisis is not on offer. I edit down his thoughts but you should click the link.

1. We have a heterogeneous labor force, and that will require Hayekian market adjustment, not central planning. [snip]

2. The stimulus plan is highly partisan and ideological in nature. [snip]

3. I have a Minsky-esque view of the nature of the crisis. That is, we have gone from being risk-loving (ponzi finance, in Minsky's terminology) to ultraconservative (hedge finance, as he calls it). I don't think we can (or should) put back together the Humpty-Dumpty of securitization and leverage that we had before. Businesses need to expand out of good, old-fashioned profits. Fiscal stimulus ought to be aimed at improving profitability.

I don't see how any can describe the stimulus plan as "central planning." Evidently Kling uses "central planning" to mean "not laissez faire." It would be easier to see if he has an argument if he would use words with their standard meanings.

My comment on his arguments

I don't agree at all with your first argument.
As far as I can understand it, you are arguing that the Beveridge curve has shifted out. I believe it has shifted in in the past 16 years. In other words you seem to be arguing that natural rate of unemployment has increased which explains why Alan Greenspan was wrong to guess that low unemployment in the mid 90s did not imply that monetary tightening was needed.

Neither you nor Hayek has explained why higher unemployment is needed to shift out of over-expanded sectors than was needed to shift into them. You can't explain why a stimulus would interfere with reallocation of talent, nor am I aware of any empirical evidence supporting Hayek's view (quite the opposite I'd say high unemployment causes people to stick to jobs which don't optimally use their skills and interferes with reallocation basically what we need to get people out of where they are and to where they are productive are job vacancies and their is this thing called the Beveridge curve).

Your point 2 explains why you would prefer a different stimulus. Obviously you fundamentally disagree with Obama about most areas of policy other than, maybe, the case for fiscal stimulus right now. I think you could just say "I'm at CATO so obviously I don't like any bill proposed by Obama" and leave it at that. In any case I'd say it means you would prefer a different stimulus, but does it mean you think that no stimulus would be better than Obama's proposal ?

The only link between your point 3 seems to be that you seem almost to be arguing that a stimulus would be bad, because it would reduce economic suffering and people should suffer to punish them for their folly and teach them better. A rather broad brush approach. I don't see why someone who hasn't even bought a house losing his job is an efficient deterrent for say AIG writing CDSs. I mean is your argument, as it seems to be, the worst it is the better it is ?
That is the only link I can see between your respect for Minsky and your opposition to the stimulus.

by Bruce Webb
reader Buffpilot in comments insists the answer is clearly yes on the grounds

The Dems, have NEVER, shown fiscal responsibility when in charge of the purse strings (or at least since before LBJ). So you have zero track record to back you up on thinking that the Dems will suddenly cut back government expenditures and raise taxes to at least get close to balancing the budget. Can you imagine the Dems actually cutting the size of the Federal governemnt? Or reducing its power? Neither do I. BTW the Rs have not been any better.

Well the historical record tells us something different. If we examine Total Debt as a percentage of GDP it went down or stayed even under every post-war President not named Reagan or Bush. We were able to fund the post-war GI bill, the Marshall Plan, Korea, the Great Society, Vietnam, navigate the first Oil Shock all of it except for two years with a Democratically controlled house. And came through the whole thing with debt as a percentage of GDP bottoming out in 1980. I am afraid the old narrative of Democrats as the party of tax and spend policy leading to ever increasing deficts while Republicans being the party of fiscal responsibility has really not been the case since Eisenhower left office. Instead the whole concept of Small Government has since 1964 and the birth of the Modern Republican Party meant "don't spend tax money on undeserving poor people".

by Bruce Webb

Movie Guy further requested some discussion on CBO Director Elmendorf's testimony to Congress from yesterday. The whole text is here Elmendorf testifies before House Budget Comm I didn't have time to thouroughly review the whole thing but these tables were interesting enough to put up for comment.

by Bruce Webb
Reader Movie Guy suggests that the following letter and table merit some discussion. It seems to speak for itself but the whole thing is short enough simply to post (I deleted some returns and added some commas to save space, the original PDF is here CBO Letter to Rep. Ryan). Please add any contributions in comments.

Honorable Paul Ryan, Ranking Member, Committee on the Budget, U.S. House of Representatives

Dear Congressman:

As you requested, the Congressional Budget Office has estimated the costs of additional debt service that would result from enacting H.R. 1, the American Recovery and Reinvestment Act of 2009. Such costs are not included in CBO’s cost estimates for individual pieces of legislation and are not counted for Congressional scorekeeping purposes for such legislation.

Under CBO’s current economic assumptions and assuming that none of the direct budgetary effects of H.R. 1 are offset by future legislation, CBO estimates that the government’s interest costs would increase by $0.7 billion in fiscal year 2009 and by a total of $347 billion over the 2009-2019 period (see enclosed table).

If you would like any additional information, we would be happy to
provide it. The CBO staff contact is (redacted).

Sincerely, Douglas W. Elmendorf, Director

rdan

Newsroom of the Project on Student Debt.

reader Movie Guy

WHITE HOUSE Communications:

White House Press Pool Report
No pool reports filed yet.

EXECUTIVE ORDERS and PRESIDENTIAL MEMORANDA
The White House

President Obama delivers Your Weekly Address
The White House
Saturday, January 24th, 2009 at 5:55 am


MEMORANDUM FOR
THE SECRETARY OF STATE
THE ADMINISTRATOR OF THE UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT
SUBJECT: Mexico City Policy and Assistance for Voluntary Population Planning
BARACK OBAMA
THE WHITE HOUSE, January 23, 2009


Statement released after the President rescinds "Mexico City Policy"
The White House
Saturday, January 24th, 2009 at 10:12 am


----

In The News:

Face The Nation: VP Biden (including full transcript)
Jan. 25, 2009

Obama’s Order Is Likely to Tighten Auto Standards
January 25, 2009
NYT and WAPO

Package questioned - stimulus or wasteful?
January 25, 2009

by Robert

Menzie Chinn provides an excellent summary of arguments that a fiscal stimulus will have no effect on GNP. He charitably doesn't mention the deduction from an accounting identity. I can't resist arguing against the arguments which he lists.
Click the link to find the arguments.


Excellent summary. I think that there is one important practical observation which might be added. Cases 2 and 3 assume non-accommodating monetary policy. At the moment this is very unrealistic. The FED is clearly pedal to the metal. An increase of safe short term nominal interest rates would be countered by the FED. I don't see how a fiscal stimulus can reduce expected inflation so I don't see how it could cause increased real interest rates either.

Case 4 implies that a fiscal stimulus would make things worse (since they are assumed to be perfect now). However, it is just not true that it would have 0 effect on output. In particular increased Government consumption would crowd out consumption for fixed labor supply. This should cause increased labor supply. Case 4 requires market clearing *and* exogenous labor supply. It is not consistent with real business cycle theory in which labor supply is endogenous. The model with market clearing and fixed labor supply is presented in textbooks just as a step towards a model with unemployment or a model with elastic labor supply -- no one takes it seriously as a model of the business cycle.

Again in case 5, if there is Ricardian equivalence tax cuts have no effect on GNP but increased G can have an effect on GNP by crowding out private consumption and increasing labor supply. This can cause GNP to increase even if there is unemployment if matching of the unemployed and vacant jobs is not perfectly efficient which it isn't.

update: Ooops silly me. Case 5 is plainly nonsense as explained by PGL here.

Suppose we decide to have an additional $100 billion in public investment in 2009. In Ricardo’s example, permanent taxes will increase by $5 billion per year which would have a very modest offsetting reduction in consumption. So if government purchases rise by $100 billion and consumption falls by $5 billion, then isn’t the direct impact on aggregate demand closer to $95 billion for the year rather than zero?

PGL links to Kevin Quinn who noted the error in the Wikipedia


I vaguely recalled that, while Ricardian equivalence implies that tax cuts do not stimulate GNP, even if there is Ricardian equivalence increased Government spending does cause increased GDP. I also recalled that Paul Krugman presented a model of optimal stimulus when in a liquidity trap in which Ricardian equivalence holds. However, my case above against case 5 is totally feeble compared to PGL's simple obvious point that the debt built up by increased government spending would be counted by a rational forward looking representative consumer by subtracting it from her wealth, a stock, while the spending is a flow. Under standard assumptions this rational representative consumer typically spends around 5% of her total wealth per year (equal to the rate of time preference) so the stimulus is 95% as effective as it would be if people ignored their share of the national debt. The timing of taxes doesn't matter to a rational representative consumer, so this is true whether or not the spending is deficit financed or tax financed. Thanks PGL.

Quinn also made a good point in a comment on PGL's post

kevin quinn said...
Further, suppose it's not for war but for public investment with a greater rate of return than 5%. Then our permanent income is higher, so consumption will increase along with G!

Indeed. PGL's calculation assumes that government spending is pure waste. The cost to taxpayer consumers will be lower (and may be negative) if the government spending is productive investment, like, you know infrastructure.

Thanks Kevin Quinn too.




So really the cases are down to case 1 and the question is "is the velocity of money constant ?".
All empirical estimates say no.

by Robert

I'd say that Cochrane's pure quantity theory of money argument against the stimulus is not nonsense like Fama's effort to learn about the world from an accounting identity. This means I disagree with Krugman who focuses on the word "accounting" in Cochrane's post.

I comment on a diatribe by Brad DeLong which has links to Cochrane and Krugman

I'd note that there have been many attempts to define and measure money and all show variable velocity which increases when nominal interest rates are high.

Sitting on money is not pathological. In the real world we can't spend money instantly (in which case the velocity would be infinite).

Also he is wrong about "printing money". Liquid assets of the US gov are not included in any estimate of the stock of money- If M1, M2 etc stay the same and they increase then, according to Cochrane's unique personal definition, the money supply will have been increased.

I wonder what Friedman would think of the fact that a prominent prof at U Chicago doesn't know the definition of M1.

More importantly money holdings by firms (and the gov if you count them) are insignificant compared to money holdings by households. The correct quantity variable for money demand estimates is consumption not GNP, because almost no money is used to lubricate investment or government consumption. This was proven by Mankiw and Summers in 1987. Here is a link to SSRN where you have to pay. Don't pay for it, but if you do get the WP or the published version in the Journal of Money Credit and Banking, please read the acknowledgments.

by Robert

Krugman is back to arguing that this recession will be followed by a long period of slack, that is low employment growth as were the last two and that therefore the standard argument in, for example, his textbook against fiscal stimulus and especially against spending as a stimulus is not convincing in this case.

The key paragraph is

So what is the right criterion? Actually, I think it’s quite straightforward. The reason we’re talking about fiscal policy is the fact that monetary policy is up against the zero lower bound. Stimulus will still be valuable as long as we’re still up against that bound — which is likely to be the case for a long time.

I quibble (addressing Prof Krugman in the second person something which I have never done in real life).

I would like to add one tiny comment on your excellent argument. You seem to be asserting that the key criterion is that the save short term nominal interest rate is zero. In fact you are also assuming that Greenspan knew what he was doing and that Bernanke does too, that is, that interest rates should be at the zero bound because inflation is not a risk (quite the contrary) so more stimulus is needed.

A Fed board along the lines of the Reichsbank 1918-1923 might very well keep nominal interest rates zero during a hyperinflation (they kept the discount rate 3% per year when the inflation rate was 50% per month and uhm rationed loans a bit).

There was a comment above by D. Sean who asks if the Fed kept interest rates high (sic meaning low) in 91 because it didn't know the recession was over. A good question, but I think the answer is that the FED has excellent information and can detect an upturn long before the NBER business cycle timing committee makes a final irreversible decision.

The point is that you are assuming that Bernanke will keep interest rate at zero *and* that he will be wise to do so.

by Robert

Will Wilkinson asks what’s with the economics profession.

A bit more on the public relations quandary the economics profession ought to be in, if it isn’t already…

When I see DeLong more or less indiscriminately trashing everyone at Chicago, or Krugman trashing Barro, etc., what doesn’t arise in my mind is a sense that some of these guys really know what they’re talking about while some of them are idiots. What arises in my mind is the strong suspicion that economic theory, as it is practiced and taught at the world’s leading institutions, is so far from consensus on certain fundamental questions that it is basically useless for adjudicating many profoundly important debates about economic policy. One implication of this is that it is wrong to extend to economists who advise policymakers, or become policymakers themselves, the respect we rightly extend to the practitioners of mature sciences. There is a reason extremely smart economists are out there playing reputation games instead of trying to settle the matter by doing better science. The reason is that, on the questions that are provoking intramural trashtalk, there is no science.

Sadly, there is no one better to listen to.

Now before going on I note that Wilkinson does not address the merits of DeLong's criticisms or Krugman's. He uses a words to suggest that they are writing unprofessionally but he doesn't present a counter argument to their claims. I have quoted his full post. Nothing on the merits.

Instead he asks if disagreements between economists are so fundamental that there is no professional consensus useful to non economists. My brief answer is “yes.” A longer answer after the jump.

Update: Over at Kling's blog commenter Bill Woolsey hits the nail on the head.

Perhaps part of the problem we face in macroeconomics today is that a substantial part of the "macro" wing of free market economists really think that new classical macroeconomics is "true" because simple and formalistically complete models fit their notion of what is scientific.

After the jump you can read my verbose effort to say that.

By the way, Kling's willingness to criticize the arguments others present to support policy positions with which he agrees is really admirable.


It is like Ricardian equivalence. Because the model people (person) rationally saves to pay future taxes, we are supposed to assume this has a connection to reality?





Arnold Kling has already attempted to explain things to Wilkinson. He obtained a “department of huh?” from Brad DeLong and, for what it’s worth, two extremely intemporate comments from me (one was blocked as suspected spam because I provided to many links to support my claims which suggests something about the intellectual seriousness of comment threads at at least one blog).

While I claim that Kling’s take on the stimulus debate is absolutely inconsistent with facts in the public record which I found with a few minutes of googling, I share his general view on the divisions in the profession. He notes that there is more than one fundamental gulf which means that there isn’t a consensus among economists which would enable the few non economists who respect us to take our advice. I will mention three more just because I want to consider more economists than those discussed by Wilkensen and Kling and not because I think Kling left out anything relevant to his post

Kling discusses the policy advice of macroeconomists (and Fama). Not all economists are macroeconomists who think that it is there job to offer policy advice. He notes two divisioins left and right and fresh water and salt water.

Left and right correspond fairly closely to libertarian vs egalitarian in the US political spectrum, that is, closely to Democratic vs Republican positions on economics (except that there are leading economists well to the left of the Democratic party and well to right of all but the left fringe of the Republican party). It is a fact that, except for general support for free international trade, the range of views of economists is similar to the range of views of congressmen but somewhat broader. This is a wide enough ideological range that the methods of verification used by economists are absolutely unable to force economists on left and right to admit that economists on right and left have a point.

In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics). The geography has shifted some as Fresh water economics has been exported. I’d consider Professor Robert Barro at Harvard to be brackish (with, he reports, noticed salty contamination in the first 6 months after he moved from U. Rochester) and the economics department at the University of Pompeu Fabra (in Barcelona) seems to be distilled. It is a little difficult to explain the disagreement to non economists. Frankly, I think this is because non-economists have difficulty believing that any sane person would take ffresh water economics seriously.

Roughly Fresh water economists consider general equilibrium models with complete markets and symmetric information to be decent approximations to reality. Unless they are specifically studying bounded rationality they assume rational expectations, that everyone knows and has always known every conceivable conditional probability. I’ve only met one economists who claims to believe that people actually do have rational expectations (and I suspect he was joking). However, the fresh water view is that it usually must be assumed that people have rational expectations.

Over near the Great Lakes there is considerable investigation of models in which the market outcome is Pareto efficient, that is, it is asserted that recessions are optimal and that, if they could be prevented, it would be a mistake to prevent them.

Salt water macroeconomics is basically everything else with huge differences between people who attempt to conduct useful empirical research without using formal economic theory and people who note the fundamental theoretical importance of incomplete markets and of asymmetric information and of imperfect competition (as in everything you think you know about general equilibrium theory is known to be false if markets are incomplete or there is asymmetric information or there is imperfect competition – Market outcomes are generically constrained Pareto inefficient which means that everyone can be made better off by regulations imposed by regulators who don’t know anything not known to market participants who also just restrict economic activity and don’t introduce innovations like, say, unemployment insurance).

Leading fresh water macroeconomists include Robert Lucas, Ed Prescott Thomas Sargent, Lars Hansen, John Cochrane, Larry Jones, Robert Barro (mostly), and Kevin Murphy (usually). Leading salt water economists include Paul Samuelson, Edmund Malinvaud, Jacques Dreze, Joseph Stiglitz, Robert Solow, Paul Krugman, Andrei Shliefer, Olivier Blanchard, George Akerlof, Robert Hall, Ben Bernankle, N. Gregory Mankiw, Christina Romer, David Romer and, and Lawrence Summers. Brad DeLong is also a salt water economist and he is very very smart, but last I knew, he was a little too far out there to be really a member of the economists club. I can’t classify Paul Romer.

Notably all of the above have made important contributions to fields other than macroeconomics.

In the US there is a strong correlation between Fresh and Salt and Right and Left. The correlation is not perfect: I understand that Hansen and Sargent are politically left of center. Hall is far right politically, Mankiw is right of center. and I must admit that I have no clue about Bernanke (who I have never actually, you know, seen in the flesh).

An important discrimminant is opinions of John Maynard Keynes. Fresh water macroeconomists generally seem to think that he was not a competent economist. Salt water macroeconomists claim (often implausibly) to be in some way his intellectual followers. Barro for example clearly doesn’t remember what is written in “The General Theory of Employment Interest and Money.” Mankiw, in contrast, advised the students in his macro class (including me) to read it again and again searching for insights.

Interestingly, the fresh water macroeconomists are certain that salt water macro is discredited along the lines of the Ptolomaic model or the Phlogiston hypothesis. For a while they called their models “Modern Business Cycle Theory” stating that all incompatible models were obsolete. In the current debate many have considered it sufficient to say that arguments for the stimulus are nonsense (e.g. Cochrane). The surprisingly low quality of contributions to the debate from the vicinity of Great Lakes has a lot to do with the fact that Fresh Water macroeconomists haven’t thought about fiscal stimulus in decades and sincerely believe that it is an obviously invalid proposal so obvious arguments against it might be valid.

Even more interesting, Fresh water macroeconomists do not claim that their models have not been refuted by the data. Rather they note that all models are, by definition, false. They do test hypotheses from time to time, but don’t explain what the point is. As far as I can understand, they claim that a model *can* be both false and useful and, therefore, their models *are* useful.

I understand that in the 70s and, maybe, the early 80s there was a heated debate between Fresh Water and Salt water macroecnomists. Now, it seems to me that there is a truce of sorts where each school of thought ignores the other – that macroeconomists have specialized not in the questions that they ask but in the answers.

I think that this is a very bad situation. Anyone can see that, when top macroeconomists are asked for policy advice, some support each of the different proposals which are under consideration.

Frankly, this truce seems to me to be unilateral. Many salt water economists claim (in public) to respect the contribution of fresh water economists. I know of no fresh water economist who has expressed anything but contempt for the contributions of salt water economists to the stimulus debate and I haven’t heard one word of praise of a Salt Water economist from a Fresh water macroeconomist other than Arrow, Samuelson or Solow. I added the phrase “in public” because I clearly remember one of the salt water economists on my list refer to the fresh water economists as “the crazies”.

update: The truce is over. There have been continual cease fire offensives violations, but the shrill blitzkreig is here.

As far as I can tell, fresh water economists have some respect for some thinkers other than fresh water economists. I think they have rather a favorable view of mathematicians and Physicists. I think it would be useful of mathematicians and physicists to look into fresh water macro and express an opinion. On the other hand, in principle they have great respect for general equilibrium theory, but they don’t listen to general equilibrium theorists at all. Top general equilibrium theorists are all at least left of center politically, the closest David Cass could come to naming an exception is Ed Prescott who, he said, uses general equilibrium theory and studies examples (snort).

Finally I have a view of how people can devote so much effort to working out the implications of assumptions which almost no ordinary people would find other than nonsensical if they understood them. Fresh water economics uses difficult mathematical tools. Students in fresh water graduate programs have to learn a huge amount of math very fast. It is not possible to do so if one doesn't set aside all doubt as to the validity of the approach. Once the huge investment has been made it is psychologically difficult to decide that it was wasted. Hence the school gets new disciples by forcing students to follow extremely difficult courses. Last I hear very few graduate students at U Minnesota came from the USA. Undergrads over there know what the program is like. If my information is not out of date, innocents from abroad are the new blood of fresh water economics.

By Spencer

I just read an interesting article on the New Deal by Alan Brinkley in the New Republic titled No Deal, Learning From FDR's Mistakes".

The first two paragraphs are quote:

Does the New Deal provide a useful model for fixing our own troubled economy? In many respects, yes. The frenzy of activity and innovation that marked Franklin Roosevelt's initial months in office--a welcome contrast to the seeming paralysis of the discredited Hoover regime--helped first and foremost to lessen the panic that had gripped the nation. And, during the prewar years of his presidency, Roosevelt's actions produced an unprecedented array of tangible achievements as well. He moved quickly and effectively to address a wave of bank failures that threatened to shut down the financial system. He created the Securities and Exchange Commission, which helped make the beleaguered stock market more transparent and thus more trustworthy. He responded to out-of-control unemployment by launching the Civil Works Administration, the Public Works Administration, and the Works Progress Administration, which created jobs for millions of the unemployed. He passed the Social Security Act, which over time provided support to the jobless, the indigent, and the elderly--and the Wagner Act, which eventually raised wages by giving unions the right to bargain collectively with employers. He signed the Fair Labor Standards Act, which created the minimum wage and the 40-hour workweek.

Yet, despite these extraordinary achievements, Roosevelt's initiatives did not, in the end, lift the country out of the Great Depression. At no time in the first eight years of the New Deal did unemployment drop below 15 percent. At no time did economic activity reach levels comparable to those of a decade earlier; and, while there were periods when the economy seemed to be recovering, none of them lasted very long. And so this bold, active, and creative moment in our history proved to be a failure at its central task. Understanding what went wrong could help us avoid making the same mistakes today.

This second paragraph drove me up the wall. Every statement in it is incorrect.
(Explanation below the fold)


STATEMENT 1:At no time in the first eight years of the New Deal did unemployment drop below 15 percent.

UNEMPLOYMENT RATE
............OFFICIAL.......... ADJUSTED

1933....... 25.2................ 20.9
1934....... 22.0 .............. 16.2
1935...... 20.3 ............... 14.2
1936...... 17.0 ............... 10.0
1937...... 14.3................... 9.2
1938...... 19.1................ 12.5
1939...... 17.2................ 11.3

Source :BLS

The adjusted rate incorporates Works Programs Employment. If you use this data in every year from 1935 on the unemployment rate was below 15%. But even using the official data it was 14.3% in 1937, directly contradicting Brinkley’s statement.


STATEMENT 2: At no time did economic activity reach levels comparable to those of a decade earlier;

REAL GDP
..............(BILLION.................(BILLION
YEAR ......2000 $)..... YEAR...... 2000)......... %
1925...... $748.60....... 1935...... $766.90....... 2.4
1926...... $793.90....... 1936...... $866.60....... 9.2
1927...... $798.40....... 1937....... $911.10...... 14.1
1928...... $812.60....... 1938....... $879.70....... 8.3
1929...... $865.20....... 1939....... $950.70....... 9.9
1930...... $790.70....... 1940...... $1,034......... 30.8

Source: BEA

In 1935 real GDP was 2.4% larger than in 1925. As the table shows in every year after
1935 economic activity exceeded that of a decade earlier. Brinkley is completely wrong.

Note that in 1936 real GDP exceeded the previous peak of 1929. This is the official NBER definition of an economic recovery.

Statement 3: , while there were periods when the economy seemed to be recovering, none of them lasted very long.

According to the National Bureau of Economic Research (NBER)from 1854 to 1929 there were 17 economic cycles. In these 17 cycles the average peace time expansion lasted 24 months and the longest in the early 1880s lasted 36 months. The two longest expansions were of 46 months during the Civil War and 44 Months during WW I. The May 1933 to June 1938 expansion was 50 months and real GDP growth averaged 7.3%--the strongest four year growth since 1881. The 1933-37 expansion is the longest expansion on record until this time. It was more than double the average previous peacetime expansion and even exceeded the two long war time expansions. Again this is the exact opposite of what Brinkley stated.

Source: NBER.org

Alan Brinkley is a world class, respected historian and The New Republic is not some “wingnut” publication. But how are you suppose to react when mainstream historians who are not particularly anti New Deal start off their article and analysis of the New Deal with such incorrect information? As soon as I read the second paragraph I was forced to conclude that Brinkley did not know what he was talking about and his judgment should not be trusted. What else is one to conclude?

Tom Bozzo

was just looking at this picture and thought it was worth sharing, a propos of recent postings on the prospective pace of stimulus expenditures:


(click to embiggen)

This shows subsequent revisions to the CBO's real GDP forecasts. Barring an exceptionally rapid recovery, GDP looks to be materially below potential output in 2011 (i.e. 3 quarters of FY 2011 and 1 of FY 2012) and 2012. Not-so-near-term stimulus is thus defensible; the real question is whether the near-term package is enough.

(UPDATE: For some reason the detailed outlay tables vanished from the PDF linked to here. Leading some to put on their tin foil hats. Fear not, I have uploaded them and they appear under the fold). (UPDATE 2: Larger images at CBO Tables)
Via Prof. K. It turns out the 'suppressed' CBO 'Report' turned out to be a partial version of the appendix to the full estimate released concurrently with the filing of the bill. Meaning some people can take off their tin-foil hats. And BTW Boehner's numbers are wrong precisely because the document he used was incomplete. In any event here is the real deal.
Congressional Budget Office Cost Estimate: H.R. 1 American Recovery and Reinvestment Act of 2009 and key grafs:

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $93 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

In addition, CBO and the Joint Committee on Taxation (JCT) estimate that enacting the provisions in Division B would reduce revenues by $76 billion in fiscal year 2009, by $131 billion in fiscal year 2010, and by a net of $212 billion over the 2009-2019 period.

Combining the spending and revenue effects of H.R. 1, CBO estimates that enacting the bill would increase federal budget deficits by $170 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion in 2011, and by $816 billion over the 2009-2019 period.

52.6% of projected spending by the end of the first nineteen months (end FY 2010). It helps to use complete numbers.
As noted above the outlay tables can be found under the fold.

Tom Bozzo

has observed EconomistMom Diane Lim Rogers run multiple items pertaining to claims that it's inappropriate to use deficit spending for longer-run public investments. I opine that such claims do not make a hell of a lot of sense. As Rogers is following basically Republican sources (the Washington Post op-ed page, Bruce Bartlett, the Wall Street Journal), at least the strong implication is that deficit-financing households' consumption — or at least transferring debts from the private to the public sector — is OK (for that's what individual tax cuts are; do read Bob Herbert for the latest installment of the 'Party of Ideas' Watch*).

I incorporate by reference Bruce's post below on the actual front-loading of the draft House stimulus package, and reassert the important fact that New GFY 2010 is just 7-1/2 calendar months from the likely date of enactment. More to the point, if in 7-1/2 months we're all sitting around agreeing, "Gee, we didn't need so much stimulus after all," the occasion will be one for Champagne-cork popping, raising taxes on the rich, and preparing kleptocrats' show-trials; having spent a little more than "necessary" on the likes of schools, roads, transit, and the electricity grid shouldn't keep anyone up at night.

Investments and consumption of durable goods are the exact sorts of expenditures for which "deficit spending" generally can be justified, and IOKIYPS** in that nobody in their right mind would says that businesses or households should avoid borrowing money (within reason, natch) for those purposes. I suggest as a matter of principle that the public sector should not needlessly be subject to regulations that would be stupid to apply to the public sector — i.e., that expenditures must be pay-as-you-go. This is not, of course, to say that we should throw long-term fiscal discipline out the window (in fact, I think Republicans were foolish when they in fact defenestrated that part of the Rubin-Summers program).

Now a good Republican should object that business investment is subject to market discipline including affirmative planning to generate sufficient expected income to repay the debt and provide returns to shareholders, whereas political processes can be waylaid in various ways. As a good technocrat, my response is that I have no objection to competently-performed cost-benefit analysis among other controls on public investments. As a good liberal, I'd note that the stimulus durable spending is concentrated in areas (roads, transit, schools, R&D) that in theory are under-provided by the private sector — and, moreover, are underprovided in practice, unless you happen to think that our roads, rails, schools, and intertubes are too good. And, it is not a bad time to borrow long if you happen to be the U.S. federal government.

Ostensibly moderate technocrats who like fiscal discipline should be wary of being played by people who seem to be on their side but who more fundamentally just don't like public spending. I think that eating our public capital is so ingrained that it looks like radicalism to do otherwise.

* Regarding which saying we must conclude that Daniel Patrick Moynihan was offering a backhanded compliment or was nuts.

** It's OK If You're Private Sector.