Archive for July 2011


Very Good News

At least that’s what the markets are telling us.   But that’s mostly relief that there won’t be a fiscal/debt train wreck on Tuesday.  I’m more interested in the details.  This is the PR put out by the White House tonight:

  • Removes the cloud of uncertainty over our economy at this critical time, by ensuring that no one will be able to use the threat of the nation’s first default now, or in only a few months, for political gain;
  • Locks in a down payment on significant deficit reduction, with savings from both domestic and Pentagon spending, and is designed to protect crucial investments like aid for college students;
  • Establishes a bipartisan process to seek a balanced approach to larger deficit reduction through entitlement and tax reform;
  • Deploys an enforcement mechanism that gives all sides an incentive to reach bipartisan compromise on historic deficit reduction, while protecting Social Security, Medicare beneficiaries and low-income programs;
  • Stays true to the President’s commitment to shared sacrifice by preventing the middle class, seniors and those who are most vulnerable from shouldering the burden of deficit reduction. The President did not agree to any entitlement reforms outside of the context of a bipartisan committee process where tax reform will be on the table and the President will insist on shared sacrifice from the most well-off and those with the most indefensible tax breaks.

I don’t care much about the debate over “revenues” and “cuts.”  When read a document like that I see:

Blah, blah, blah, blah, entitlement and tax reform, blah, blah, blah, blah, tax reform will be on the table, blah, blah, blah, blah.

It’s all about entitlement and tax reform, the rest is just window dressing.  Of course I’m glad the defense budget will fall, but given how bloated it is and how deeply in debt we are, that was a given.  The good news is that there will be a commission that will produce some real reforms.  How do I know that?  Because economics isn’t a zero sum game.  There are $100 bills lying all over the place if the commission cares to pick them up.  The only way to get an agreement is to make it a positive sum game–otherwise the two sides are too far apart.  We’ve already seen both Simpson-Bowles and the Gang of Six promote major tax reform, so it doesn’t take a rocket scientist to predict the commission’s proposal will be bold—I’m taking 1986 bold.

The Asian markets are soaring because there is an end to the uncertainty, but I think the likely reform package will also be good in the longer term for the US equity markets.  At a minimum they have to do something about the US corporate income tax, which I believe is now the highest of any industrial country.  I’d look for a ten percentage point cut there, which would clearly boost equities.

Of course all this assumes the compromise will pass.  If not, then . . . well . . . nevermind.

While I was on vacation

I’ll slack off from blogging soon for a bit of travel.  Comment response will be slower.  In case anyone is interested, here’s a brief list of some of the books, music, and films I consumed while taking a break from blogging this spring:

The most interesting book was probably A Time for Everything, a fairly long Norwegian novel that takes some of the Biblical stories quite seriously, although they are transported to a location that seems a lot like Norway.  I also read Microscripts, by Robert Walser and An Episode in the Life of a Landscape Painter by Cesar Aira (both of which I found slightly disappointing.)  I found Atlas of Remote Islands by Judith Schalansky to be delightful.  And I greatly enjoyed Tiepolo Pink by Roberto Calasso.  I’m told that Danube by Claudio Magris is a classic.  It is certainly impressive, but is probably better suited for those with a greater knowledge of Central Europe.  It left me with the impression that the Danube River contains the most dense and complex cultural mosiac on the planet.   If the internet had never been invented I’d be well read enough by now to have handled it, but the internet was invented.  I got 220 pages into Underworld by Don DeLillo, and gave up.   I just finished Peter Hessler’s River Town, and liked it alot.   He’s my favorite observer of Chinese culture (this is the first of three books that he has written.  I should probably do a book review.)

Here’s some quick music comments:

The Wild Hunt by Kristian Mattson was my only discovery, as I’m afraid I don’t keep up with pop music.  I also got his two newest EPs.

Oh but rumor has it that I wasn’t born
I just walked in one frosty morn

Car Wheels on a Gravel Road.   I can’t understand why Lucinda Williams isn’t a superstar.

My Beautiful Dark Twisted Fantasy.  I can understand why Kanye West is a superstar.

Jonsi Live.  The lead singer from Sigur Ros

Bob Dylan Live 1964.  For some reason I love his voice, but find Joan Baez (who also sings on the album) to be very annoying.  Go figure.

And now some brief film reviews.  These are mostly new films, but a few old ones.  I see what’s available at the theater, and almost never watch films on TV

Uncle Boonmee Can Recall His Past Lives (Thai)  3.9  Apichatpong Weerasethakul might just be the best director in the world today.  It’s a tragedy that few will see this on the big screen, where the visuals/sound/atmospherics are so impressive.  Winner of the Palme d’Or at Cannes in 2010.

Poetry (Korean) 3.8  Another great movie by Lee Chang-Dong, director of Secret Sunshine.  Like some other great directors (and unlike Hollywood) his movies are partly defined by what they choose not to show.  Great use of sunlight.  Brilliant ending.  I’m sure I’d get lots more out of it on a second viewing.

HaHaHa (aka Summer/Summer/Summer) (Korean)  3.6  Song’s films are reminiscent of all those French films about young people adrift in and out of relationships.  I’m not sure if it’s the Korean setting that makes them seem fresh, or his skill as a director.

Cameraman: The Life and Times of Jack Cardiff  (British)  3.5  A must see film for fans of “Black Narcissus.”  I wish I could have lived his life instead of mine.

Incendies (Canadian)  3.5 A very powerful look at the Lebanese civil war.  Does a lot of things well, but doesn’t really excel in any single category””except perhaps acting.

City of Life and Death  (China)  3.4  The rape of Nanjing.

Deep End (British)  3.3  An old British film by a Polish director.  Reminds me of Peeping Tom, although not as good.

The Robber (Austrian)  3.2  Interesting film based on a true story of a marathon runner who robbed banks.  Stylistically reminiscent of many films of the 1950s and 1960s, which makes it seems derivative at times.

The Tree of Life (US) 3.2  Worth seeing, but I found it much less impressive than some of the critics suggested.  The visuals were nice, but not visionary as in Tarkovsky and Kubrick films.  Did a great job of capturing the feel of childhood.  The scenes with Sean Penn didn’t work for me.

The Housemaid (Korean)  3.2  Like many Korean films, it’s a movie that loves extremes.  It’s interesting seeing Western culture symbolizing decadence and evil.  Korea’s quite nationalistic.

Cold Weather (US)  3.1  An independent film that is ostensibly a detective story, but is actually a sly comedy about slackers.

The Strange Case of Angelica (Portuguese) 3.0  Charming at times, but in the end he doesn’t quite pull it off.  The director (Oliviera) is 102 years old.  Time to retire?

Midnight in Paris (US) 3.0  Another entertaining and completely forgettable film from Woody Allen.

Battleship Potemkin  (Russian)  3.0   Thrilling visual images, corny dialog, overacting, simplistic message and a really big ship.  No, it wasn’t Titanic, it was a “film classic.”  Didn’t Eisenstein steal that baby carriage sequence from Brian DePalma?

Nostalgia for the Light  (Chile) 2.8 Well-intentioned film that overreaches.

Summer Wars  (Japan) 2.5  Disappointing anime by the director who did The Girl Who Leap Through Time.

My favorite film blogger is Colin Marshall.  Here’s an except from a recent post:

Another essayist, centuries older but still a friend-maker in his way, may point to the escape route. A couple weeks ago, I interviewed Sarah Bakewell, Michel de Montaigne’s latest biographer. I admire many things about Montaigne, not least having invented the modern essay form, but his lack of strong opinions really wins me over. In his work “” point out the staggering oversimplification in this if you must “” I see a man struggling so hard to be honest about himself that, in the process, he strips himself of his opinions. I’ve come to think of honesty as a solution that, poured on one’s own opinions, dissolves them. When we dig down to bedrock, claims like “I love Andrei Tarkovsky’s movies” and “I hate Andrei Tarkovsky’s movies” amount to little more than “” well, grunts, right? We can’t credibly call them honest or dishonest, since their vagueness and rootedness in impulse takes them out of territory where that sort of truth and falsity applies.

Which isn’t to say that we should stop talking about the cultural products that attract or repel us. I just wonder if we should talk about them from richer angles than liking and disliking. In the best critics’ vocabularies, do words like good, bad, and any synonyms thereof have any place at all? In our interview, Geoff Dyer mentioned his current work on a book entirely about Stalker, in which “” and only my own conjecture follows “” he will not say “Stalker is good,” or even “Stalker is great.” I wager he’ll say something more interesting like, oh, “It’s not enough to say that Stalker is a great film “” it is the reason cinema was invented.“ Hence, I suppose, the fact that I showed up to interview him, not the other way around.

I won’t say Stalker is great, but I will say that it has shown at Harvard about a half dozen times in the past 30 years.  And I will say that I saw it twice at Harvard.  And I will say that the 4 times I missed it were four of the biggest mistakes I’ve ever made.

PS.  I really need to read Montaigne—he sounds like he has exactly what I like in a essayist.

President Obama: Get Mankiw on the Fed ASAP!

First let’s get the bad news out of the way.  Greg Mankiw is much too kind to the Fed:

Mr. Bernanke became the Fed chairman in February 2006. Since then, the inflation measure favored by the Fed “” the price index for personal consumption, excluding food and energy “” has averaged 1.9 percent, annualized. A broader price index that includes food and energy has averaged 2.1 percent.

Either way, the outcome is remarkably close to the Fed’s unofficial inflation target of 2 percent. So, despite the economic turmoil of the last five years, the Fed has kept inflation on track.

Two quick reactions:

1.  Remember the man who drowned in the lake that averaged 2 feet in depth?

2.  Remember the Fed’s dual mandate?

Nonetheless, Mankiw (who I’ve recommended before) is the perfect choice.  He’d fly through the Senate.  Academically impeccable Bernanke and Mankiw, both Republicans, would form a one-two punch that the hawks couldn’t resist.  And he’d be pushing for the most expansionary policy that is politically realistic:

What the Fed could do, however, is codify its projected price path of 2 percent. That is, the Fed could announce that, hereafter, it would aim for a price level that rises 2 percent a year. And it would promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.

Even better, Mankiw has anticipated the argument of the hawks, and pre-empted it:

Such an announcement could help mollify critics on both the left and right. If we started to see the Japanese-style deflation that the left fears, the Fed would maintain a loose monetary policy and even allow a bit of extra inflation to make up for past tracking errors. If we faced the high inflation that worries the right, the Fed would be committed to raising interest rates aggressively to bring inflation back on target.

MORE important, an announced target path for inflation would add more certainty to the economy. Americans planning their retirement would have a better sense about the cost of living a decade or two hence. Companies borrowing in the bond market could more accurately pin down the real cost of financing their investment projects.

This puts sand under the tires of the Obama administration.  Yes, they would no longer be able to do anything with fiscal stimulus (zero multiplier), but if you’ve been reading the news you know that’s not happening anyway.  It is an insurance policy against fiscal tightening.  And it lets the Obama people push the SRAS as far right as they can, knowing the Fed has committed to keep up with AD.  Bye-bye to Paul Krugman’s depression economics.  Hello to supply-side econ.  You do an emergency two year cut in minimum wages.  Don’t think a Democrat can cut wages?  Have you been following the Socialists in Greece?  Cut UI benefits to 52 weeks max.  Cut the employer side of the payroll tax for two years, and raise the employee side equally.   Worried about the effect of the employee side on AD?  You haven’t been paying attention—price level targeting means adverse demand shocks don’t matter, because they’re offset.

I think Mankiw knows the oil shock is probably about over.  That means the economy’s slack will push inflation back down toward 1% to 1.5% over the next few years.  This policy would force the Fed to move aggressively.  And the more Obama tries to reduce business costs, the more he forces the Fed to boost the economy.

I’m sure most people read Mankiw and thought “blah.”  He doesn’t have the extremism of this blog.  But he’s a very canny pragmatist, and is much better at the practical side of politics than I am.  My role in life is to try to rearrange people’s brain cells.  It’s people like Mankiw that actually make the world run.

I don’t know if he’d accept the job, but it never hurts to ask.

HT:  Marcus Nunes, JTapp

Update:  I forget to mention that they should target core inflation—a robust recovery might push up oil prices.  Oh, and cut government wages for two years, to free up more NGDP for private hiring.

No more jobs mystery. Period. End of story.

If I hear one more discussion of the mysterious lack of jobs I’ll explode.  The new GDP numbers are the final nail in the coffin.  For years I’ve been saying there is no jobs mystery.  That any deviation from Okun’s Law was minor compared to the scale of the output collapse.  With the new RGDP figures we now know I was right, there isn’t and never was any mystery as to why there are so few jobs.  RGDP is very low.  Period.  End of story.

I also argued that there was no mystery as to the low level of RGDP.  The new GDP reports shows the NGDP collapse, already the worst since 1938, was even worse than we thought.  Show 100 economists in mid-2007 the NGDP path over the next 4 years, and all but the kookiest RBC-types will tell you a severe recession is ahead.  At least 97 out of 100 will make that prediction.  Check out the graph in this Stephen Gordon post.

And then we have none other than Ben Bernanke telling is that the Fed can do more stimulus, he just doesn’t feel it’s necessary.  How do our elite economists react to the following facts?

1.  Unemployment is unambiguously caused by RGDP collapse.

2.  RGDP collapse is almost certainly caused or greatly worsened by the NGDP collapse.

3.  Bernanke says the Fed drives NGDP.

They react by pretending the Fed has no role in the crisis.  The conservatives say it’s structural.   And then we have one famous liberal economist after another issuing calls for more stimulus, which either ignore the Fed entirely (Larry Summers, Robert Shiller) or suggest that the Fed claims it’s out of ammunition (Alan Blinder), which is wrong.

I don’t find it hard to connect the dots between jobs, RGDP, NGDP and the Fed.  I can’t understand why so few other economists see things the way I do.

A subscriber to the publication Consensus Forecasts passed along to me this summary of a survey of economic forecasters they conducted earlier this month:

Percentage of respondents in each country who consider current monetary policy
too tight / about right / too stimulative

US: 4 / 88 / 8
Japan: 15 / 85 / 0
Euro area (German respondents): 0 / 18 / 82
Euro area (French respondents): 9 / 55 / 36
Euro area (Italian respondents): 0 / 100 / 0
UK: 0 / 25 / 75

Unfortunately, there is no link.  Yes, the sample looks rather small (based on the percentages), but it’s consistent with other surveys I’ve seen.  If the public of the developing world actually understood the role of economists in this crisis, we’d all be lynched.  They think we failed to predict it.  But since monetary policy generally reflects the establishment view of the economics profession, it would be more accurate to say we caused the Great Recession.

Check out the always excellent Marcus Nunes on the new NGDP numbers.  This post compares RGDP, NGDP, and jobs in the 1982 and 2009 recessions.  The graphs are quite suggestive.  He also provided the Shiller link.  David Glasner is the go-to-guy on interwar monetary history, at least among us quasi-monetarists.  He has a good post comparing 1932 and 2011.

Take charge Mr President.

At times like this, the public craves bold leadership, even if corners need to be cut.   FDR understood that.  President Obama is very lucky that he could stop this madness without cutting any legal corners.  Here’s what he should say Sunday night:

My fellow Americans.  The endless squabbling in Washington over the debt ceiling is injecting uncertainty into the markets and threatening the recovery.  Therefore, after consultation with my legal advisers, I have decided to not enforce the debt limit, until Congress resolves the budget mess.  This non compliance will consist of two steps.  First, we will show that compliance with the debt limit would force either default on our debt obligations, which is illegal and unthinkable, or deep cuts in programs like Social Security.  Because funding for these programs was passed after the debt limit law, they take precedence whenever there is a conflict between two laws.

I anticipate this stance will be contested in the courts, and there may be a long drawn out case that ends up in the Supreme Court.  If we lose, I’m told there are accounting gimmicks that will allow us to avoid the constraints of the debt limit, in a fashion that is perfectly legal, but undignified for a great power.  Unfortunately, I may have no other choice, as default is far more undignified, and would be disgraceful for a nation like ours.

At the same time, the problems in Europe have given me a greater awareness of the threat posed by runaway spending.  Hence I’ve accepted the fact that some cuts need to be made in programs that I strongly support.  I look forward to working with Congress on the budget process, to sharply reduce the deficit in the out years.  I call on the Federal Reserve to assure the markets that these debt reductions do not reduce economic activity, and lead to higher unemployment.  Thank you.

I know I’m hopelessly naive, and this will never happen.  I have no idea what Obama really thinks.  Maybe this is all a Machiavellian plan to entrap the GOP, as Clinton did in 1995.  But if Obama is serious, I think the public (and stock market) would welcome this speech.  As Obama Osama once said, people gravitate toward the strong horse.  People detest chaos in government and look for bold leadership, especially when the economy is a mess. I probably won’t even vote for Obama, but I think this is what he should do.

Then we should abolish the debt ceiling, and while we’re at it abolish the Social Security trust fund.  Burn all the securities in the trust fund.  Have a marshmallow roast.  Then adopt a parliamentary form of government.

That’s all for today.