Tag Archives: Brad DeLong

That Zany Zandi

Lori Montgomery at WaPo:

A Republican plan to sharply cut federal spending this year would destroy 700,000 jobs through 2012, according to an independent economic analysis set for release Monday.

The report, by Moody’s Analytics chief economist Mark Zandi, offers fresh ammunition to Democrats seeking block the Republican plan, which would terminate dozens of programs and slash federal appropriations by $61 billion over the next seven months.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year.

Brad DeLong:

One question: in what sense was Mark Zandi an “architect of the 2009 stimulus plan”? I don’t get that at all.


UPDATE: Queried, Lori Montgomery emails:

he was on the team of economists who were advising pelosi during that period, and his research helped shape the package. don’t you remember all those photo ops?

Hmmm… By that standard, the Recovery Act had at least 200 “architects,” including me…

Atrios:

It doesn’t matter how many “reports” from “economists” get released making the obvious point that cutting spending=cutting jobs, the Real Americans in the Tea Party and those who understand them and speak for them, the Villagers, know that cutting spending is the right thing to do. Because arglebargle!

Jonathan Cohn at TNR:

I can’t vouch for these numbers and Zandi, who used to advise John McCain, is now the Democrats’ favorite economist to cite. But that’s largely because Democrats are making an argument that mainstream economists like Zandi happen to support: In the midst of such a weak economic recovery, less government spending is almost certainly going to mean fewer jobs.

Patricia Murphy at Politics Daily:

On Monday, House Majority Leader Eric Cantor dismissed the Moody’s report entirely: “I would note that Mr. Zandi was a chief proponent of the Obama/Reid/Pelosi stimulus bill that we know has failed to deliver on the promise of making sure unemployment did not rise above 8 percent.”

But speaking with senators on Capitol Hill Tuesday, Bernanke took issue with the reports and their predictions of dire consequences if the Republican proposal were to pass the Senate.

“A $60 billion cut obviously would be contractionary to some extent, but our analysis does not get a number quite that high,” Bernanke said of the job losses predicted by Moody’s and the economic damage predicted by Goldman Sachs. “I have to say we get smaller impact than that.” Instead, Bernanke said that the cuts would likely slow economic growth by “several tenths” of a percent and that the lost jobs would be “much less than 700,000.”

Although Republicans may feel vindicated by Bernanke’s remarks, he did add that the proposed GOP cuts would not grow the economy in the short term.

“It would of course have the effect of reducing growth on the margins certainly,” he said. “It would have a negative impact, but 2 percent? I’d like to see their analysis. It seems like a somewhat big number relative to the size of the cut.”

John B. Taylor at Economics One:

As I have written before, the old-style Keynesian approach used by Zandi has many of the same flaws that are found in the Goldman Sachs approach: excessively large multipliers, inaccurate predictions of the effect of the 2009 stimulus, failure to recognize that reducing uncertainty about the debt can have positive effects, especially if it is done in a credible way by reducing spending growth now, not postponing it to a date uncertain in the future. After stating that “too much cutting too soon would be counterproductive,” Zandi claims that this is what the “House Republicans want” and what their budget does. But it’s simply not credible to say that a budget that has government spending increasing at 6.7 percent per year cuts spending too much too soon.

In sum, there is no convincing evidence that H.R. 1 will reduce economic growth or total employment. To the contrary, there is more reason to expect that it will increase economic growth and employment as the federal government begins to put its fiscal house in order and encourage job-producing private sector investment.

David Weigel at Slate:

Zandi, Phillips, and other economists who think the government has been creating or saving jobs with supply-side spending are not taken seriously on the right. They have economic models that rate how much “bang for the buck” (they prefer this cliché) is delivered from various types of spending—unemployment checks, food stamps, tax cuts. They have the CBO’s numbers, which posit that 1.4 million to 3.5 million people have jobs that wouldn’t have existed without the stimulus package that became law two years ago this month. Republicans just don’t buy them.

“These analyses by the Keynesians are missing a key part of the story,” Rep. John Campbell, R-Calif., explained Monday. “One hundred percent of the money they’re talking about is borrowed. Republicans, right now, are talking about cutting spending on the margins, and 100 percent of what we don’t cut will be borrowed. The capital that they’re putting to work is capital that’s not improving something in the private sector, and all of these studies fail to take into account the interest we’re paying on the deficit.”

Campbell, an Ayn Rand disciple, has been saying this for a while. Republicans have started aping him only recently. Two years ago, as they opposed the stimulus bill, House Republicans reverse-engineered the White House’s economic models—models bearing a kissing-cousin resemblance to Zandi’s—and promised 6.2 million jobs for half the price of the Democrats’ proposal. The number was based on calculating how many jobs would be killed by tax hikes and inverting it.

This didn’t make much sense, and Republicans didn’t really believe it, but they were out of power. Their bill didn’t pass, so no one noticed. The Democrats’ stimulus did pass, and because unemployment went up, voters don’t think it worked. This gives Republicans a free hand to say anything they like about doomsaying predictions of cuts in government spending leading to cuts in employment. (Rep. Paul Ryan, R-Wis., who helped develop the GOP’s Potemkin stimulus, noted that the Democrats planned on spending $275,000 per job if their models worked; the current cost estimate per job is $228,055, as reported derisively by the conservative CNSNews.com.)

They may be dismissive, but Republicans aren’t Pollyannas about this stuff. Boehner’s comment to a Pacifica Radio reporter—if the spending cuts killed government jobs, he said, “so be it” —was not the party’s message. It’s not actually how they’ve been approaching their cuts.

A GOP aide with knowledge of the process that led to $61 billion in proposed cuts described it like this. The ideas for cuts came from plenty of places—a lot of them came from freshmen—but they were vetted by veteran staff on the Appropriations Committee. Those people tried to direct the cuts away from the salary side of the agencies they were attacking. They tried to target discretionary spending that was not part of salaries. For example, Republicans cut $1.3 billion of discretionary funding to community health centers; the Affordable Care Act, which is still there, stubbornly unrepealed, included mandatory funding for those health centers that the GOP didn’t touch.

The goal, even if GOP leaders won’t sing about it, was to shrink spending but leave employment as unmolested as possible. The agencies have discretion over how they use their shrunken budgets; they don’t have to cut back jobs.

The Republicans who’ll open up about possible job losses might have the more convincing case. Campbell talks about the losses as Joseph Schumpeter talked about creative destruction—temporary losses offset by sustainable gains.

“If we do not get the deficit down, if we don’t change trajectory, will lose more jobs than we lose from cuts,” Campbell said. “When a debt crisis hits, if we’ve still got 47 percent of our debt held by foreigners, we’ll have much greater job loss than that. Our first objective to is try and prevent a fiscal collapse, a la Greece. And it will take a longer time for the private sector to replace public-sector jobs that are cut, but when they do, they’ll last longer.”

Republicans have been talking like this for months, and they haven’t been hurt by it. The choice between stimulus spending and creative destruction is a choice between something voters don’t think worked and something voters don’t think we’ve tried. As long as voters don’t pay attention to how the U.K.’s austerity program is working, the GOP will be just fine.

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The Asteroid Can Hit If It Means We No Longer Have To Listen To Bad Aerosmith Songs

Mark Kleiman:

When I saw that Rand Paul (R-Comedy Central) had voted against a bill outlawing the use of lasers to blind airline pilots on the grounds that “the states ought to take care of it,” I was reminded of this week’s best Onion story imagining an effort by Republicans to repeal a law providing for the destruction of an asteroid coming at the Earth.

The Onion story didn’t mention lawsuits seeking to have asteroid-destruction declared unconstitutional as a violation of the limited, delegated powers of the Federal government. But I’d be grateful if one of our libertarian-leaning readers could point me to the specific provision of the Constitution under which the Federal government could spend money on asteroid destruction. It’s not, properly speaking, defense, unless the asteroid was deliberately launched at us by the Klingons. The asteroid isn’t “in commerce” at all, so it can’t be covered by the Commerce Clause.

No doubt some socialists would assert that the reference to “the General Welfare” in the first sentence of Art. 1, Sec. 8, plus the Necessary and Proper clause at the end of that section, would cover asteroid destruction. And I might agree with them. But of course from the libertarian perspective that proves way, way too much.

So I offer this as a challenge: If you think that the doctrine of limited powers forbids much of what the federal government currently does, please explain why that same argument wouldn’t forbid spending money to shoot down an asteroid.

Footnote If your objections to “big government” are based on economics rather than constitutional law, please explain why the public-goods argument that justifies shooting down the asteroid doesn’t apply to the programs you don’t like.

Pejman Yousefzadeh:

As a libertarian-conservative, I am glad to help resolve this question. Of course, it should be noted from the outset that the framing of these kinds of questions is a common Kleimanian tactic; he tosses out an appealing public policy approach, and then dares readers to conclude that the approach may not be constitutional. I certainly agree with Kleiman that asteroid defense cannot be covered by the Commerce Clause (thank goodness that there are some limits recognized by the Left on the reach and scope of the Clause), but I don’t see why he is so quick to dismiss asteroid destruction as a defense measure merely because the asteroid was not “deliberately launched at us by the Klingons.”Original public meaning jurisprudence assists us in showing how asteroid destruction can be justified by Art. I, Sec. 8 of the Constitution as being “for the common Defence.” I am indebted to Professor Larry Solum for his excellent and comprehensive definition of original public meaning jurisprudence, which is excerpted below:

The original-meaning version of originalism emphasizes the meaning that the Constitution (or its amendments) would have had to the relevant audience at the time of its adoptions. How would the Constitution of 1789 have been understood by an ordinary adult citizen at the time it was adopted? Of course, the same sources that are relevant to original intent are relevant to original meaning. So, for example, the debates at the Constitutional Convention in Philadelphia may shed light on the question how the Constitution produced by the Convention would have been understood by those who did not participate in the secret deliberations of the drafters. But for original-meaning originalists, other sources become of paramount importance. The ratification debates and Federalist Papers can be supplemented by evidence of ordinary usage and by the constructions placed on the Constitution by the political branches and the states in the early years after its adoption. The turn to original meaning made originalism a stronger theory and vitiated many of the powerful objections that had been made against original-intentions originalism.

This sets the stage for what is sometimes called “the New Originalism”  and also is called “Original Meaning Originalism.”   Whatever the actual origins of this theory, the conventional story identifies Antonin Scalia as having a key role.  As early as 1986, Scalia gave a speech exhorting originalists to “change the label from the Doctrine of Original Intent to the Doctrine of Original Meaning.”   The phrase “original public meaning” seems to have entered into the contemporary theoretical debates in the work of Gary Lawson  with Steven Calabresi as another “early adopter.”   The core idea of the revised theory is that the original meaning of the constitution is the original public meaning of the constitutional text.

Randy Barnett  and Keith Whittington  have played prominent roles in the development of the “New Originalism.”  Both Barnett and Whittington build their theories on a foundation of “original public meaning,” but they extend the moves made by Scalia and Lawson in a variety of interesting ways.  For the purposes of this very brief survey, perhaps their most important move is to embrace the distinction between “constitutional interpretation” understood as the enterprise of discerning the semantic content of the constitution and “constitutional construction,” which we might tentatively define as the activity of further specifying constitutional rules when the original public meaning of the text is vague (or underdeterminate for some other reason).  This distinction explicitly acknowledges what we might call “the fact of constitutional underdeterminacy.”   With this turn, original-meaning originalist explicitly embrace the idea that the original public meaning of the text “runs out” and hence that constitutional interpretation must be supplemented by constitutional construction, the results of which must be guided by something other than the semantic content of the constitutional text.

Once originalists had acknowledged that vague constitutional provisions required construction, the door was opened for a reconciliation between originalism and living constitutionalism.  The key figure in that reconciliation has been Jack Balkin, whose influential 2006 and 2007 essays Abortion and Original Meaning and Original Meaning and Constitutional Redemption have argued for a reconciliation of original meaning originalism with living constitutionalism in the form of a theory that might be called “the method of text and principle.”  Balkin has called his position on the relationship between originalism and living constitutionalism “comptibilism,” but it is important to understand that this means that an originalist approach to interpretation is consistent with a living constitutionalist approach to construction.

Per Professor Solum’s definition, we have to ask how “the common Defence” would “have been understood by an ordinary adult citizen at the time it was adopted.” Specifically, we have to demonstrate that the notion of “Defence” against a threat does not depend upon that threat being initiated by a sentient being, or group of beings. This entails showing Kleiman that the non-presence of Klingons or any other sentient beings in a scenario which features an asteroid threatening life on Earth does not prevent the necessary countermeasures from being considered constitutional as acts of “Defence.”

In order to proceed along this line of inquiry, a definition of “defence” or “defense” (however one wishes to spell it) is needed. I can think of no better lexicographical authority than Samuel Johnson’s A Dictionary of the English Language. Consider especially the following bit of information: In his book Dr Johnson’s Dictionary: The Extraordinary Story of the Book that Defined the World, the writer Henry Hitchings quoted Joseph Emerson Worcester as saying that “[Johnson’s] Dictionary has also played its part in the law, especially in the United States. Legislators are much occuped with ascertaining ‘first meanings,’ with trying to secure the literal sense of their predecessors’ legislation . . . Often it is a matter of historicizing language: to understand a law, you need to understand what its terminology meant to its original architects . . . as long as the American Constitution remains intact, Johnson’s Dictionary will have a role to play in American law.”

So, Johnson’s Dictionary was/is quite useful when it comes to analyzing bodies of American law. Now, we have to ask what Johnson wrote about the definition of the word “defence.” Well, it just so happens that we can look. Feel free to examine the definitions of “defence,” “defenceless,” “to defend,” and “defendable.” One will find that none of the definitions in question make it necessary for a threat to have been launched by some form of sentient being, or group of beings, before one can be said to organize and implement some kind of “defense/defence” against that threat via preventive measures. Absent any competing definitions of similar or greater influence, one may reasonably conclude that “an ordinary adult citizen” would not have understood “defence” to mean a countermeasure against a threat set into motion by a sentient being, or group of beings–like Klingons, for example. A “defence” can therefore be mounted against a threat that appeared or emerged sua sponte, without any sentient beings or higher intelligence having brought that threat into being, and/or having directed that threat against us.

Indeed, if Kleiman wanted to get a libertarian legal analysis regarding this issue, he might have done well to ask Glenn Reynolds, whose blog is full of posts regarding the need for asteroid defense. I recognize that Kleiman loathes Reynolds, and has nothing but contempt for him, but it perhaps would not have been a bad idea for Kleiman to put his loathing aside and consider that Reynolds’s example might indicate that there are plenty of libertarians who (a) are concerned about defending the Earth against extinction-causing asteroids, and (b) might be able to justify it (as I have) constitutionally. As a general matter, it might be best for Kleiman to consult actual lawyers regarding constitutional or statutory interpretation, before trying to navigate legal thickets on his own. I mean, it’s his blog, and he can do what he wants, but it is worth noting that past Kleimanian efforts to play lawyer have ended quite poorly.

Jonathan Adler:

This post by Mark Kleiman is a good example, in that it puts forward a laughable caricature of libertarian and originalist constitutional thought that would have been discredited with but a moment’s investigation into the question (as I noted here, and Pejman Yousefzadeh discussed here).  To Prof. Kleiman’s credit, he backed off (a little) when other took the time to respond, but that a prominent, thoughtful academic would post something like this as an ostensibly thoughtful critique of right-leaning ideas says quite a bit about the state of much academic discourse.

Sasha Volokh:

I agree with Jonathan below that the Constitution (through the spending power) allows Congress to spend tax money to protect the Earth from an asteroid.

On the other hand — and at the risk of confirming Mark Kleiman in his belief that libertarians are loopy — I don’t speak for all libertarians, but I think there’s a good case to be made that taxing people to protect the Earth from an asteroid, while within Congress’s powers, is an illegitimate function of government from a moral perspective. I think it’s O.K. to violate people’s rights (e.g. through taxation) if the result is that you protect people’s rights to some greater extent (e.g. through police, courts, the military). But it’s not obvious to me that the Earth being hit by an asteroid (or, say, someone being hit by lightning or a falling tree) violates anyone’s rights; if that’s so, then I’m not sure I can justify preventing it through taxation.

Bryan Caplan once suggested the asteroid hypo to me as a reductio ad absurdum against my view. But a reductio ad absurdum doesn’t work against someone who’s willing to be absurd, and I may be willing to bite the bullet on this one.

On the other hand, if you could show that, once the impending asteroid impact became known, all hell would break loose and lots of rights be violated by looters et al. during the ensuing anarchy, I could justify the taxation as a way of preventing those rights violations; but this wouldn’t apply if, say, the asteroid impact were unknown to the public.

This does make me uncomfortable, much like my view that patents are highly useful but morally unjustifiable, so I’m open to persuasion

Matthew Yglesias:

I think this is a mistake about how a reductio works. The mere fact that Volokh is willing to bite this bullet has no real bearing on the fact that the conclusion is clearly false, and so the argument is either logically invalid or else proceeds from false premises. I’d say “false premises.” The best liberal thinking—classical, modern, whatever—proceeds from broadly consequentialist ideas about making human beings better off.

Brad DeLong:

So not only does Sasha Volokh claim that it is immoral to tax people to blow up an asteroid (or install lightning rods, or mandate lightning rods, or pay for a tree-trimming crew on the public roads), but it is immoral to tell people of an approaching asteroid so they can scramble to safety because it will cause violations of rights through looting.

Wow.

Ilya Somin:

That said, I don’t think that Sasha’s view is necessarily ridiculous or “insane.” Any theory based on absolute respect for certain rights necessarily carries the risk that it will lead to catastrophe in some instances. Let’s say you believe that torture is always wrong. Then you would not resort to it even in a case where relatively mild torture of a terrorist is the only way to prevent a nuclear attack that kills millions. What if you think that it’s always wrong to knowingly kill innocent civilians? Then you would oppose strategic bombing even if it were the only way to defeat Nazi Germany in World War II. How about absolute rights to freedom of political speech? If you are committed to them, that means you oppose censorship even if it’s the only way to prevent Nazi or communist totalitarians from coming to power and slaughtering millions.

Many such scenarios are improbable. But over the long sweep of human history, improbable events can and do happen. Had Kerensky suppressed the Bolsheviks in 1917 (as he easily could have that summer) or had the Weimar Republic done the same with the Nazis, the world would be a vastly better place, even though most political censorship (even of evil ideologies) causes far more harm than good. A civilization-destroying asteroid attack during the next few hundred years is also a low-probability event.

Thus, the potential flaw in Sasha’s view is one that it shares with all absolutist rights theories. Scenarios like the above are one of the main reasons why I’m not a rights-absolutist myself. But I don’t believe that all the great moral theorists who endorse such views from Kant to the present are either ridiculous or “insane.”

It’s also worth noting that Sasha’s approach would in fact justify asteroid defense in virtually any plausible real world scenario. As he puts it, “if you could show that, once the impending asteroid impact became known, all hell would break loose and lots of rights be violated by looters et al. during the ensuing anarchy, I could justify the taxation as a way of preventing those rights violations; but this wouldn’t apply if, say, the asteroid impact were unknown to the public.” It’s highly unlikely that news of an impending asteroid impact whose onset was known to the government could be prevented from leaking to the general public. Even if it could, “all hell” would surely break loose after the asteroid impact, resulting in numerous violations of libertarian rights by looters, bandits, people stealing food out of desperation, and so on. Either way, Sasha’s analysis ends up justifying asteroid defense.

If I understand Sasha correctly, he’s only partially a rights absolutist. He doesn’t believe that you can ever sacrifice rights for utilitarian benefits, even truly enormous ones. But he does think that you can justify small rights violations as a way of forestalling bigger ones. Sasha is an absolutist when it comes to trading off libertarian rights for other considerations, but a maximizer when it comes to trading off rights for greater protection of those same rights in the future. Effective defense against a massive asteroid impact easily passes Sasha’s rights-maximizing test.

Obviously, I welcome correction from Sasha if I have misinterpreted his views.

Mark Kleiman:

I’m glad that Adler agrees with me – and disagrees with many Tea Party lunatics, including some recently elected to the Senate and the House – that there’s no actual Constitutional question about funding the Department of Education or National Public Radio. That, of course, was my point.

I’m also glad that Sasha is standing by his guns, thus demonstrating that my argument was not directed at a mere straw man, though his objection to spending is philosophical rather than Constitutional.

Sasha worries that his honest and forthright response might confirm me in my belief that “libertarians are loopy.” That’s certainly a reasonable concern. But I would have thought that a bigger concern would be that the conclusion is, in fact, obviously loopy, and – like any good reductio ad absurdum argument, ought to lead to a re-examination of the premises that would lead to such a loopy conclusion.

Ilya Somin is right to point out that any theory that puts an absolute constraint on action runs into problems when inaction has catastrophic consequences. But if he really can’t see the difference between torture and income taxation – can’t understand why absolute opposition to torture is not analogous to absolute opposition to public spending on public goods – then “loopy” is entirely too weak a word.

Eugene Volokh:

I leave it to others to debate the constitutional and moral merits of government spending on asteroid defense (my view is that such spending is both constitutionally permissible and morally proper, but I have nothing original to add on the subject). I just wanted to add that one side of the debate is an unusually near-literal application of the saying, “Let justice be done, though the heavens fall.”

Noah Millman at The American Scene:

An impending catastrophe – asteroid strike – threatens to kill everyone in the society. That doesn’t violate anyone’s “rights” because you don’t have a “right to life” but rather a right not to have your life taken away by somebody else against your will. Therefore, the government has no right to tax you to protect you – and everybody else – from the asteroid.

So how is the asteroid to be stopped?

Presumably, everyone in society would agree voluntarily to cooperate to stop the asteroid. That is to say: we could still have collective action, but it would have to be voluntary, not coerced.

But would everyone participate?

The government goes around, passing the hat for contributions to stop the asteroid. A certain percentage of people, though, don’t believe in asteroids. Another percentage believe that the asteroid will bring the Rapture and so must not be stopped. These people are crazy, though, and crazy people are not interesting to talk about. Let’s hope there aren’t too many and ignore them.

Some people, though, notice that there are wealthier people than them in the society, and figure those other people should shoulder the burden of saving society. These are the “free-riders.”

Now, so long as this group is relatively small, no problem. Enough people will still put up enough money to stop the collective catastrophe. But so long as that is the case, free-riding is the economically rational thing to do. Indeed, in any large enough society, free-riding is always the rational thing to do: in a society with enough people putting up enough money voluntarily to stop the asteroid, free-riding is costless; in a society without enough such people, contributing is pointless.

The salvation of this ultra-libertarian society, then, depends upon the existence of a sufficient number of irrationally self-sacrificing people, people who ignore their rational self-interest in order to procure a social good for the group, without regard for the amount of “free riding” going on around them.

On the assumption – which I don’t think is pushing it at all – that there are a whole lot of communal problems that require collective action to address, libertarianism is only practical in highly communitarian societies.

I don’t know that that’s a knock-down argument against libertarianism. Wikipedia is a highly communitarian activity that grew up in a highly libertarian environment (the Internet), and most of the world is free-riding.

But it’s worth stressing nonetheless, because libertarians tend to talk as if rationality will lead to the necessary level of cooperation. But it won’t. In any case of communal threat where attempted free-riders cannot independently exposed to the threat, while contributors are protected, the rational thing to do is free-ride.

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Filed under Conservative Movement, Go Meta, The Constitution

There’s Something Strange In The Numbers Here, Waiter

Chart via Calculated Risk

Calculated Risk:

From the BLS:

The unemployment rate fell by 0.4 percentage point to 9.0 percent in
January, while nonfarm payroll employment changed little (+36,000),
the U.S. Bureau of Labor Statistics reported today.

And on the benchmark revision:

The total nonfarm employment level for March 2010 was revised downward by 378,000 … The previously published level for December 2010 was revised downward by 452,000.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Ryan Avent at Free Exchange at The Economist:

LOOK almost anywhere in the recent economic data and the signs point to an accelerating recovery. A solid fourth quarter GDP report contained a truly blockbuster increase in real final sales. Manufacturing activity is soaring. Consumer spending is up and the trade deficit is down. Markets are trading at their highest level in over two years. And so economists anxiously awaited the first employment figures for 2011, hoping that in January firms would finally react to better conditions by taking on lots of new help.

Instead, the Bureau of Labour Statistics has dropped a puzzler of an employment report in our laps—one which points in many directions but not, decidedly, toward strong job growth. In the month of January, total nonfarm employment grew by a very disappointing 39,000 jobs. This was not at all what forecasters were expecting. Earlier this week, an ADP report indicated that private sector employment rose by 187,000 in January; the BLS pegged the figure at just 50,000. There were some compensating shifts. December’s employment gain was revised upward from 103,000 to 121,000. November’s employment rise, which was originally reported at 39,000, has been revised to a total gain of 93,000.

But there is bad news, as well. The BLS included its annual revision of the previous year’s data in this report, and while job growth over the year looks stronger than before, the level of employment looks worse. In March of last year, 411,000 fewer Americans were working than originally reported. And thanks to a weaker employment performance in April through October, 483,000 fewer Americans were on the job in December than was originally believed to be the case. For now, the economy remains 7.7m jobs short of its previous employment peak.

Felix Salmon:

The BLS press release makes this very clear in a box right at the top, which says that

“Changes to The Employment Situation news release tables are being introduced with this release. In addition, establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2011 reflect updated population estimates.”

The effects here are large and unpredictable: the total number of people holding jobs in December 2010, for instance, was revised down by a whopping 452,000 — but despite that, the official December 2010 payrolls number now shows an even bigger month-on-month rise than it did before. More generally the size of the total civilian labor force was revised downwards by 504,000, almost half of which came from the Latino population. That has all manner of knock-on effects: the BLS warns that “data users are cautioned that these annual population adjustments affect the comparability of household data series over time.”

This is a messy report, then — even messier than you’d expect from a monthly data series which is mainly valued for its speed as opposed to its accuracy. At the margin, it’s bad for markets, which concentrate on the headline payrolls number, and it’s good for politicians, who tend to concentrate on the headline unemployment number. But for anybody who’s neither a trader nor a politician, it’s a noisy series which is best treated with a whopping great amount of salt — especially in January, and especially also when any big-picture message is so murky.

Instapundit:

Does this mean that most of the “fall” came from discouraged workers dropping out of the workforce? That would explain the difference between this and the Gallup survey, which showed unemployment rising to 9.8% instead of falling. Or am I missing something?

Matthew Yglesias:

At first glance I thought that was people dropping out of the labor force, but it seems instead to be the conjunction of two different things. One is upward revisions of the last couple of months’ worth of jobs data. The other is a downward revision to the baseline estimate of how many people there are. Basically, more people had jobs a month ago than we thought had been the case, and also there were fewer unemployed people than we thought had been the case.

The upshot is that the new data looks a lot better than the old data. But the new data doesn’t say the situation improved dramatically over the past month, it merely says that last month’s take on the situation was too pessimistic.

Mark Thoma

Brad DeLong:

I want a trained professional to analyze this. It is not unusual for the series to do something odd around Christmastide. It is not unusual for the series to diverge. Not this much.

 

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Filed under Economics, The Crisis

Shall I Compare Thee To A Snake, A Gorilla, A Jungle, Bananas, Sex…

Uri Friedman at The Atlantic with a round-up.

Paul Kedrosky:

Over the weekend I tried to buy a new dishwasher. Being the fine net-friendly fellow that I am, I  began Google-ing for information. And Google-ing. and Google-ing. As I tweeted frustratedly at the tend of the failed exercise, “To a first approximation, the entire web is spam when it comes to appliance reviews”.

This is, of course, merely a personal example of the drive-by damage done by keyword-driven content — material created to be consumed like info-krill by Google’s algorithms. Find some popular keywords that lead to traffic and transactions, wrap some anodyne and regularly-changing content around the keywords so Google doesn’t kick you out of search results, and watch the dollars roll in as Google steers you life-support systems connected to wallets, i.e, idiot humans.

Google has become a snake that too readily consumes its own keyword tail. Identify some words that show up in profitable searches — from appliances, to mesothelioma suits, to kayak lessons — churn out content cheaply and regularly, and you’re done. On the web, no-one knows you’re a content-grinder.

Charles Arthur at The Guardian:

The reason why this has happened is obvious: Google is the 900-pound gorilla of search, with around 90% of the market (excluding China and Russia), and there’s an entire industry which has grown up specifically around tickling the gorilla to make it happy and enrich the ticklers. I’ve not come across anyone who describes their job as “Bing results optimisation”, nor who puts that at the top of their business CV. Well, I’m sure there are people inside Microsoft whose job title is exactly that. But not outside it.

There are two lines of thought on what happens next.

1) Google comes back from the Christmas break newly determined to fix those damned scraping sites that don’t originate content, because it says in its own webmaster guidelines that “Google will take action against domains that try to rank more highly by just showing scraped or other auto-generated pages that don’t add any value to users.”

The only value those scrapers add, in fact, is to Google, because they display tons of AdSense ads. (Well, you can make a fair bet that they aren’t Bing’s equivalent.)

Wait – the scrapers that dominate the first search page, the place from which 89% of clicks come (for only 11% of clicks come from the last 990 results out of the first thousand, or at least did in 2006, a number that has probably only shifted down since then) all benefit Google financially, even while it sees market share improvements? That’s not quite the disincentive one might have hoped for that would make Google act.

2) People start not using Google, because its search is damn well broken and becoming more broken for stuff you care about by the day. This could happen. The question is whether it would be visible enough – that is, whether enough people would do it – that it would show up on Google’s radar and be made a priority.

Over at Hacker News, the suggestions in the comments echo the idea that Google’s search really isn’t cutting the mustard any more (“vertical search” is the new watchword). Which means that really, Google does need to implement method (1) above. It might not notice if a few geeks abandon it – but once the idea really gets hold (as it will through the links they offer and comments they drop) that Google’s search is broken, then the rout begins.

I haven’t been able to get a comment from Google on this, though I’m sure it would run something along the lines of “Google makes every effort to make its search results the best and takes seriously the issues raised here.”

Update: Google responded to this article: “Google works hard to preserve the quality of our index and we’re continuing to make improvements to this. Sites that abuse our quality guidelines or prove to be spam are removed from our index as fast as possible”. (For clarification, I didn’t initially contact Google as it was a public holiday when I wrote the original article. Matt Cutts did not respond to Twitter contact as he is on holiday, Google says.)

It would be crazy not to. The question is whether it really can make a difference.

Vivek Wadhwa at Tech Crunch:

This semester, my students at the School of Information at UC-Berkeley researched the VC system from the perspective of company founders. We prepared a detailed survey; randomly selected 500 companies from a venture database; and set out to contact the founders. Thanks to Reid Hoffman, we were able to get premium access to LinkedIn—which was very helpful and provided a wealth of information.  But some of the founders didn’t have LinkedIn accounts, and others didn’t respond to our LinkedIn “inmails”. So I instructed my students to use Google searches to research each founder’s work history, by year, and to track him or her down in that way.

But it turns out that you can’t easily do such searches in Google any more. Google has become a jungle: a tropical paradise for spammers and marketers. Almost every search takes you to websites that want you to click on links that make them money, or to sponsored sites that make Google money. There’s no way to do a meaningful chronological search.

We ended up using instead a web-search tool called Blekko. It’s a new technology and is far from perfect; but it is innovative and fills the vacuum of competition with Google (and Bing).

Blekko was founded in 2007 by Rich Skrenta, Tom Annau, Mike Markson, and a bunch of former Google and Yahoo engineers. Previously, Skrenta had built Topix and what has become Netscape’s Open Directory Project. For Blekko, his team has created a new distributed computing platform to crawl the web and create search indices. Blekko is backed by notable angels, including Ron Conway, Marc Andreessen, Jeff Clavier, and Mike Maples. It has received a total of $24 million in venture funding, including $14M from U.S. Venture Partners and CMEA capital.

In addition to providing regular search capabilities like Google’s, Blekko allows you to define what it calls “slashtags” and filter the information you retrieve according to your own criteria. Slashtags are mostly human-curated sets of websites built around a specific topic, such as health, finance, sports, tech, and colleges.  So if you are looking for information about swine flu, you can add “/health” to your query and search only the top 70 or so relevant health sites rather than tens of thousands spam sites.  Blekko crowdsources the editorial judgment for what should and should not be in a slashtag, as Wikipedia does.  One Blekko user created a slashtag for 2100 college websites.  So anyone can do a targeted search for all the schools offering courses in molecular biology, for example. Most searches are like this—they can be restricted to a few thousand relevant sites. The results become much more relevant and trustworthy when you can filter out all the garbage.

The feature that I’ve found most useful is the ability to order search results.  If you are doing searches by date, as my students were, Blekko allows you to add the slashtag “/date” to the end of your query and retrieve information in a chronological fashion. Google does provide an option to search within a date range, but these are the dates when website was indexed rather than created; which means the results are practically useless. Blekko makes an effort to index the page by the date on which it was actually created (by analyzing other information embedded in its HTML).  So if I want to search for articles that mention my name, I can do a regular search; sort the results chronologically; limit them to tech blog sites or to any blog sites for a particular year; and perhaps find any references related to the subject of economics. Try doing any of this in Google or Bing

Anil Dash:

Noticing a pattern here?

Paul Kedrosky, Dishwashers, and How Google Eats Its Own Tail:

Google has become a snake that too readily consumes its own keyword tail. Identify some words that show up in profitable searches — from appliances, to mesothelioma suits, to kayak lessons — churn out content cheaply and regularly, and you’re done. On the web, no-one knows you’re a content-grinder.

The result, however, is awful. Pages and pages of Google results that are just, for practical purposes, advertisements in the loose guise of articles, original or re-purposed. It hearkens back to the dark days of 1999, before Google arrived, when search had become largely useless, with results completely overwhelmed by spam and info-clutter.

Alan Patrick, On the increasing uselessness of Google:

The lead up to the Christmas and New Year holidays required researching a number of consumer goods to buy, which of course meant using Google to search for them and ratings reviews thereof. But this year it really hit home just how badly Google’s systems have been spammed, as typically anything on Page 1 of the search results was some form of SEO spam – most typically a site that doesn’t actually sell you anything, just points to other sites (often doing the same thing) while slipping you some Ads (no doubt sold as “relevant”).

Google is like a monoculture, and thus parasites have a major impact once they have adapted to it – especially if Google has “lost the war”. If search was more heterogenous, spamsites would find it more costly to scam every site. That is a very interesting argument against the level of Google market dominance.

And finally, Jeff Atwood, Trouble in the House of Google:

Throughout my investigation I had nagging doubts that we were seeing serious cracks in the algorithmic search foundations of the house that Google built. But I was afraid to write an article about it for fear I’d be claimed an incompetent kook. I wasn’t comfortable sharing that opinion widely, because we might be doing something obviously wrong. Which we tend to do frequently and often. Gravity can’t be wrong. We’re just clumsy … right?

I can’t help noticing that we’re not the only site to have serious problems with Google search results in the last few months. In fact, the drum beat of deteriorating Google search quality has been practically deafening of late.

From there, Jeff links to several more examples, including the ones I mentioned above. As Alan alludes to in his post, the threat here is that Google has become a monoculture, a threat I’ve written about many times.

Felix Salmon:

It turns out that the banana we all know and love — the Cavendish — is actually the second type of banana grown in enormous quantities and exported across Europe and North America. The first was the Gros Michel, which was wiped out by Tropical Race One; you might be saddened to hear that “to those who knew the Gros Michel the flavor of the Cavendish was lamentably bland.” Indeed, Chiquita was so sure that Americans would never switch to the Cavendish that they stuck with the Gros Michel for far too long, and lost dominance of the industry to Dole.

In both cases, the fact that the same species of banana is grown and eaten everywhere constitutes a serious tail risk, even if today’s desperate attempts to genetically modify a disease-resistant Cavendish bear fruit:

A new Cavendish banana still didn’t seem like a panacea. The cultivar may dominate the world’s banana export market, but, it turns out, eighty-seven per cent of bananas are eaten locally. In Africa and Asia, villagers grow such hetergeneous mixes in their back yards that no one disease can imperil them. Tropical Race Four, scientists now theorize, has existed in the soil for thousands of years. Banana companies needed only to enter Asia, as they did twenty years ago, and plant uniform fields of Cavendish in order to unleash the blight. A disease-resistant Cavendish would still mean a commercial monoculture, and who’s to say that one day Tropical Race Five won’t show up?

This is exactly what I was talking about a year ago, in my post about Dan Barber, world hunger, and locavorism, when I talked about how monocultures are naturally prone to disastrous outbreaks of disease, and how a much more heterogeneous system of eating a variety of locally-grown foods is much more robust and equally capable of feeding the planet.

[…]

The problems with monoculture aren’t purely agricultural, either. Anil Dash has a post up today about the decline of Google search quality, and diagnosing the problem as being that “Google has become a monoculture”; Alan Patrick quotes a commenter at Hacker News as saying that if search were more heterogeneous, spamsites would find it more costly to scam every site.

I’m not completely convinced that seeing large numbers of SEO sites atop search results for consumer goods is entirely a function of the fact that Google is a monoculture. My guess is that in fact what we’re seeing is simply the result of enormous numbers of SEO sites, all using slightly different methods of trying to game the Google algorithm. Even if only a small percentage of those SEO sites succeed, and even if they only succeed briefly, the result is still a first page of Google results dominated by SEO spam — a lose-lose proposition for everybody, but one which wouldn’t be solved by having heterogeneous algorithms: they would all simply have different SEO sites atop their various search-result pages.

But maybe if Google wasn’t a monoculture, there wouldn’t be quite as many SEO sites all trying to hit the jackpot of, however briefly, landing atop the Google search results. In general, monoculture is a bad and brittle thing — and that goes for search as much as it goes for bananas.

Brad DeLong

Paul Krugman:

Brad DeLong takes us to two articles on trouble with Google: basically, scammers and spammers are doing their best to game the search engine, and in the process making it less useful to the rest of us. And people are turning to other search engines that are less affected, precisely because they’re less pervasive and the scammers and spammers haven’t adapted to them.

This makes me think of sex.

If you follow evolutionary theory, you know that one big question is why sexual reproduction evolved — and why it persists, given the substantial costs involved. Why doesn’t nature just engage in cloning?

And the most persuasive answer, as I understand it, is defense against parasites. If each generation of an organism looks exactly like the last, parasites can steadily evolve to bypass the organism’s defenses — which is why yes, we’ll have no bananas once the fungus spreads to cloned plantations around the world. But scrambling the genes each generation makes the parasites’ job harder.

So the trouble with Google is that it’s a huge target, to which human parasites — scammers and spammers — are adapting.

I’m not quite sure what search-engine sex would involve. But Google apparently needs some.

Matthew Elshaw:

And that’s not all, there are a large number of other posts which share the same thoughts on Google’s declining search quality.

While the major problems with Google’s search quality appear to be the rise of content farms and review sites, some posts also mention a number of other grey hat SEO tactics like link buying and doorway domains that are still working for some sites.

With the number of posts on this topic, I don’t think it will be long before a Google representative steps in to clear the air. In the mean time, what do you think about Google’s search results? Have you seen a decline in quality in recent months?

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Bloggers Contemplate A Door That Revolves

James Fallows:

Last night, on the “Virtually Speaking” discussion about the media with Jay Rosen of NYU, we talked about the phenomenon of things that everyone in the press corp “knows” but that don’t make their way into news stories or broadcasts. One such category involves things that everyone suspects but can’t quite prove — for instance, how involved Dick Cheney and Karl Rove were in the Valerie Plame case. Or, to make it bipartisan, about Bill Clinton’s sexual behavior over the years. But another category, which I think is even more important, involves things that everyone “knows” but has stopped noticing. This is very similar to what is called “Village” behavior in the big time media.

An item in this second category has just come up: the decision of Peter Orszag, until recently the director of the Office of Management and Budget under Barack Obama, to join Citibank in a senior position. Exactly how much it will pay is not clear, but informed guesses are several million dollars per year. Citibank, of course, was one of the institutions most notably dependent on federal help to survive in these past two years.

Objectively this is both damaging and shocking.

– Damaging, in that it epitomizes and personalizes a criticism both left and right have had of the Obama Administration’s “bailout” policy: that it’s been too protective of the financial system’s high-flying leaders, and too reluctant to hold any person or institution accountable. Of course there’s a strong counter argument to be made, in the spirit of Obama’s recent defense of his tax-cut compromise. (Roughly: that it would have been more satisfying to let Citi and others fail, but the results would have been much more damaging to the economy as a whole.) But it’s a harder argument to make when one of your senior officials has moved straight to the (very generous) Citi payroll. Any competent Republican ad-maker is already collecting clips of Orszag for use in the next campaign.

– Shocking, in the structural rather than personal corruption that it illustrates. I believe Orszag (whom I do not know at all) to be a faultlessly honest man, by the letter of the law. I am sorry for his judgment in taking this job,* but I am implying nothing whatsoever “unethical” in a technical sense. But in the grander scheme, his move illustrates something that is just wrong. The idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution — and then, less than two years after his Administration took office, would take a job that (a) exemplifies the growing disparities the Administration says it’s trying to correct and (b) unavoidably will call on knowledge and contacts Orszag developed while in recent public service — this says something bad about what is taken for granted in American public life.

More Fallows:

I made a mistake several days ago when lamenting Peter Orszag’s decision to take a senior job with Citibank, reportedly for several million dollars per year, so soon after leaving a senior Obama Administration post. Over the past two-plus years, Obama (and GW Bush) policies played a crucial role in saving Citi — and in not holding its executives (or other senior financial-world figures) accountable for polices that brought on the world financial crisis or reining in top-end pay as profitability has returned. Now a senior member of the Obama team — Orszag was budget director — was going straight to one of those top-end jobs, even as his former colleagues in the administration have their hands full fighting the social, economic, and political effects of the crisis on “ordinary” Americans who can’t find jobs or are losing their homes.

My mistake was not in pointing out this problem, nor in identifying it as the kind of thing that is notable precisely because no one even stops to remark on it any more. It was in the sentence that said, “Objectively this is both damaging and shocking.” That’s the difference between one-draft web postings and many-times-edited print articles. What I meant was, “Politically this is damaging and should be shocking.” Because the real point is that official Washington should notice this instance of structural corruption — but won’t.

If you’re wondering just how taken for granted such arrangements are in today’s Washington/ Versailles, here’s a data point. The Washington Post, still aspiring to be official journal of politics, has not published a single story about Orszag’s new job. Here is what its search function shows just now:
WaPo3.png

“Please try another search” indeed. How about “things that are depressing”? To their credit, the Post’s Ezra Klein and Ed O’Keefe each had one-line links on their sites, pointing to (respectively) the NYT “Dealbook” and Reuters stories on Orszag. (And those links come up if you search the Post’s site for “Orszag Citigroup.” Otherwise there appears to have been no “news” coverage by the Post. Klein also had this follow-up link to an item called “Our Peter Orszag Problem” on the Economist’s site.) The gap between the things the Post considers “scandals,” and a development like this, so taken for granted as not to merit mention, says too much about our politics.

More Fallows

Will Wilkinson at DiA at The Economist:

Mr Fallows hits the nail on the head, but what this structural injustice means, politically and ideologically, remains unclear. In my opinion, the seeming inevitability of Orszag-like migrations points to a potentially fatal tension within the progressive strand of liberal thought. Progressives laudably seek to oppose injustice by deploying government power as a countervailing force against the imagined opressive and exploitative tendencies of market institutions. Yet it seems that time and again market institutions find ways to use the government’s regulatory and insurer-of-last-resort functions as countervailing forces against their competitors and, in the end, against the very public these functions were meant to protect.

We are constantly exploited by the tools meant to foil our exploitation. For a progressive to acknowledge as much is tantamount to abandoning progressivism. So it’s no surprise that progressives would rather worry over trivialities such as campaign finance reform than dwell on the paradoxes of political power. But it really isn’t the Citizens United decision that’s about to make Peter Orszag a minor Midas. It’s the vast power of a handful of Washington players, with whom Mr Orszag has become relatively intimate, to make or destroy great fortunes more or less at whim. Well-connected wonks can get rich on Wall Street only because Washington power is now so unconstrained. Washington is so unconstrained in no small part because progressives and New Dealers and Keynesians and neo-cons and neo-liberals for various good and bad reasons wanted it that way. So, what is to be done? Summon a self-bottling genie-bottling genie?

The classically liberal answer is to make government less powerful. The monstrous offspring of entangled markets and states can be defeated only by the most thorough possible separation. But public self-protection through market-state divorce can work only if libertarians are right that unfettered markets are not by nature unstable, that they do not lead to opressive concentrations of power, that we would do better without a central bank, and so on. Most of us don’t believe that. Until more of us do, we’re not going far in that direction. And maybe that’s just as well. Maybe it’s true that markets hum along smoothly only with relatively active government intervention and it’s also true that relatively active government intervention is eventually inevitably co-opted, exacerbating rather than mitigating capitalism’s injustices. Perhaps the best we can hope ever to achieve is a fleeting state of grace when fundamentally unstable forces are temporarily held in balance by an evanescent combination of complementary cultural currents. This is increasingly my fear: that there is no principled alternative to muddling through; that every ideologue’s op-ed is wrong, except the ones serendipitously right. But muddle we must.

So what is to be done about the structural injustice spotlighted by Peter Orszag’s passage through the revolving golden door? How exactly do we tweak the unjust structure? If the system is rigged, how exactly do we unrig it? In which direction can we muddle without making matters worse?

Ezra Klein:

But reading the coverage, I’ve been struck by a few things.

1. I’m not nearly so sure it’s about the money as other people seem to be. Orszag is fairly wealthy already (my understanding is he sold off an economic consulting firm when he became director of the Congressional Budget Office), and his lifetime of public service positions does not suggest a man particularly motivated by income. Rather, I think people are underestimating the lure of the job itself.

Orszag has gone as high as he’s likely to go in government, and he’s 41 years old. The guy isn’t done, but there’s not much more for him in Washington. So what is left for him?

Well, he could do academia or a think tank. But that’s a pretty sedate, low-stress existence compared with the tempo he’s kept up over the past few decades. Let’s say he doesn’t want to move into a wiseman or advisory role. New York Times columnist didn’t seem like a bad gig to me, but then, I’ve chosen to devote my life to similar pursuits. I’m not really sure why anyone would want to be a university president. You sometimes hear people say that he should’ve sat around and been fairly rich and respected, but I imagine that gets boring after the first decade or so.

Citigroup is a really big, really powerful institution. Orszag’s position in it is the sort of position that could one day lead to being president of Citigroup. If you’re him, and you’re trying to figure out an interesting and high-impact way to spend the next 40 years, I can see why it’s appealing. But it’s the power and the job and the opportunity, more than the money, that make it appealing.

2. The problem is less why Orszag wanted to go to Citigroup than why Citigroup wanted to hire Orszag. In Citigroup, you’re dealing with a bank that’s simply much more reliant than other banks are on connections with the American government, and other governments. Bank of America has similar needs, and so too do a couple of others, but it’s a short list.

Whether Orszag was a smart hire on these grounds is hard to say. It’s difficult to overstate how much bad will has developed between Orszag and the White House he used to serve. Some of that comes from perceived disloyalty in Orszag’s public statements — like his first New York Times column, which called for a short-term extension of all the tax cuts when the White House was arguing for the permanent extension of most of the cuts and the expiration of the cuts for the rich — but this move, which many in the administration consider politically problematic and personally distasteful, added considerably to the anger.

What Citigroup gets in Orszag is a brilliant policy mind and a deep understanding of government, not to mention a thick rolodex that certainly still has some friendly names on it. The reasons those things are valuable to Citigroup make most of us uncomfortable, and that goes double after the government bailed Citigroup out during the financial crisis. I highly doubt that the meetings between Orszag and Citigroup left him with the impression that he was getting hired to help with governmental affairs. His portfolio, in fact, is explicitly international. But I don’t know anyone who believes that it will stay that way.

Brad DeLong:

Look: Peter Orszag believes–as do I–that the most basic principles of good governance mandate that the American government have a long-term plan in place to match its long-term projected expenditures with its long-term projected revenues. Peter Orszag believes–as do I–that requiring that every policy initiative be paid-for in the long-term so that it does not increase the projected debt, say, ten years out into the future is the minimum low bar that policy should be able to clear.

Barack Obama has not taken Peter Orszag’s advice: he has not proposed only initiatives that are paid-for in the long-term. He has not pledged to veto bills that raise the projected debt ten years hence.

Peter Orszag is no longer in the government.

Does he now have a duty to tell those who read his New York Times columns the same things that he told Obama when he was in government?

Or does he have a duty to tell lies to his readers about what he thinks good policy is in order to advance the interests of an administration that he is no longer part of?

I would say he has the first duty.

Matthew Yglesias:

As I understand it, the concern is that the the job itself is a bribe. In a super-crass version of this, Firm A says to Regulator Z “you won’t be in this job forever, but if you make a lot of decisions favorable to Firm A then we’ll hire you after you quit.” In a more realistic version what happens is that Regulator Z observes that many of his predecessors have gone on to lucrative careers in Industry A and that they probably couldn’t have had if they’d pissed off all the Industry A CEOs. This biases his decision-making in a problematic way.

Sometimes I think this problem is more apparent than real. Any conceivable set of decisions that the FCC makes is going to be favorable to some set of large corporations. So being in the pocket of “big business” as such isn’t a big problem. But sometimes the problem is very real. The entire financial reform debate, for example, has featured a lot of ideas that put the interests of the financial sector as such at stake. Many observers, including Ezra Klein, have posited that shrinking the size of the financial sector overall should be a goal of reform. Obviously, though, people with an ambition to go get jobs in the financial sector are unlikely to espouse such goals.

Will at The League:

Peter Orszag’s new job at Citigroup is one of those under-discussed stories that makes me glad I read blogs. It also makes me depressed because I’m struggling to envision a plausible solution to the problems of regulatory capture and the revolving door between government and the financial services industry. You can imagine better policies arising in a lot of areas – farm subsidies, for example – if we magically removed certain political constraints, but even if you were given free reign to remake the United States’ political system, the problem of regulating an incredibly complicated financial sector would still be pretty tough to figure out.

If you’ll permit me to simplify things for the sake of brevity, the standard progressive view of the financial sector is that we need more and better regulators. This is complicated by the fact that regulation – particularly regulation that involves opaque financial practices – is complex and therefore vulnerable to companies gaming the system. Former high-level Administration officials accepting jobs at financial institutions that were just bailed out basically exemplifies these concerns.

The libertarian/conservative rejoinder is that less regulation equals less opportunities for politically-connected firms to hijack the system. As a safeguard against future financial meltdowns, I find this unsatisfying for a number of reasons: First, attempts to describe the roots of the financial crisis solely through the lens of government intervention sound pretty silly. And second, if the regulatory and administrative superstructure of government is fatally compromised by insiders and corporate lobbyists, are we sure we  can successfully deconstruct that system from within? I think this is part of what liberals are getting at when they suggest the conservative movement is basically a front group for rich people and big business: sure, you might make election year noises about limited government, but genuinely populist conservative impulses take a backseat to corporate interests in a political and regulatory environment dominated by insiders. In other words, the Tea Party will never beat Goldman Sachs at its own game.

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We Have A Letter From Ireland Here

Niamh Hardiman:

Ireland’s fiscal crisis is largely caused by the collapse of the house price bubble and over-reliance on revenues from construction-related activities. This is bad enough, but by itself it would be difficult but manageable. The millstone around the neck of the Irish people is the vast scale of the crisis in the banking sector. Ireland’s banking crisis is not primarily about complicated and risky financial products: it is a common-or-garden result of reckless lending for property development and an inadequate regulatory regime. Between 2004 and 2007, the banks had escalated the scale of their lending to construction and property development enormously. When financial meltdown was imminent in September 2008, the government undertook to guarantee all of the banks’ losses, bondholders as well as depositors. In what is now widely regarded as a terrible mistake, the government in effect socialized the enormous private debt of the banks.

The true picture of what is entailed has been slow to emerge. The government’s attempts to shore up the banks have not involved outright nationalization, but the creation of a National Asset Management Agency (NAMA) to transfer the bulk of the banks’ non-performing property-backed loans into a special purchase vehicle, at a discounted rate. This amounts to indirect recapitalization of the banks. The total cost of Nama-type loan loss is now estimated at €66 billion. This is, in effect, half of GNP (the best measure of the taxable resource base of the Irish economy), which in 2009 amounted to €131.2bn. Mortgage and personal loan losses have not yet come fully into focus, but may amount to an additional €25 billion.

The present government, a coalition between the dominant centre-right Fianna Fáil and the Green Party, must go to the polls soon, and they will certainly be trounced. But unpopular though it is, the government was adamant until almost the last moment that it did not need or ask for the rescue package. Borrowing needs were fully met until mid-2011, and government had no need to go back to the bond markets. ECB as well as European Commission representatives had been on an extended visit to the Department of Finance, inspecting plans for the budget due on 7 December, in line with the strengthened fiscal oversight practices in the Eurozone. EU Commissioner for Economic and Monetary Affairs Olli Rehn had declared himself happy with the plans he had seen.  Austerity measures were projected to take some €4bn out of the economy as part of the planned fiscal consolidation strategy. This was intended to ensure conformity with the Stability and Growth Pact requirements of 3% deficit by 2014.

Yet Ireland is now committed to an IMF-EU rescue package worth €85bn over the coming years, to fund both government spending and to support the costs of sorting out the crisis in the banks. It all happened very quickly, and indeed one government minister said they were bounced into it. The terms are set out in the government’s new four-year fiscal plan. The interest rate involved is not low, at an average of 5.87%. The total fiscal contraction will come to €15bn, though the deadline is now extended until 2015. The December budget alone will take out €6bn in a mix of spending cuts and tax increases. This is tougher than anything that had been envisaged so far. In addition, the National Pension Reserve Fund, a rainy-day measure set against future public pension liabilities, is to be used as part of the bail-out package. Most controversially from the point of view of Irish taxpayers, while these public assets are to be committed to the front line of bank recapitalization, the banks’ bondholders are not to be required to bear any losses. The most equitable adjustment measure, from the point of view of the Irish taxpayers, would have required some element of writing down outstanding debt through an orderly restructuring, that is, burning the bondholders. But this could damage government’s capacity to raise future funds through borrowing; government ministers stress that they really had no option in this. Yet there is palpable anger in Ireland at the outcome which ensures that the banks will be bailed out while the cost is to be borne in full by the taxpayers.

Paul Krugman:

Kevin O’Rourke has put out a beautifully written, heartfelt piece on Ireland’s woes. Read it and weep.

Update: Gah — we seem to have overwhelmed the hamsters at Eurointelligence. I’m going to put O’Rourke’s text under the fold for the time being.

Letter from Dublin

It is one thing to know that someone you love is terminally ill; their death still comes as a shock.

I certainly don’t want to compare the arrival of the EU-IMF team in Dublin last week to a bereavement. But I was surprised at how upsetting I found it, given that it came as no surprise. It had been clear for a long time that the blanket guarantee given to the liabilities of Ireland’s rotten banks, in September 2008, had saddled the State with a debt that was too big for it to handle. Ten successive quarters of declining real GNP, and one attempt too many to draw a line under the losses of our banks, made our exclusion from international capital markets inevitable. But to know something is one thing; to see it actually happen is something entirely different.

I am not alone in feeling this way, it seems. The economics editor of the Irish Times, Dan O’Brien, wrote that

nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.

This is not to say that we would be happy to have our country’s affairs managed by the current, disgraced, government. I yield to no-one in my loathing of the men and women who have done this to my country. What has been the intellectual low-point of the last couple of years? Was it the cash-for-clunkers stimulus package (Ireland does not produce any cars)? Or the statement by our Finance Minister that Ireland need not fear a bank run, since Ireland is an island? Or the biggest Irish joke of them all, which underpinned the bank guarantee in the first place: that if we wanted investors to retain confidence in the creditworthiness of the Irish State, we needed to make sure that nobody who invested in our (private sector) banks ever lost a penny?

The latter decision is the one that sank the country. It was the last great act of hubris of the Celtic Bubble, and was immediately denounced by one of the heroes of the crisis, my old UCD colleague Morgan Kelly. On the night the guarantee was announced, Kelly pointed out that while it was the right policy if the Irish banks were facing a liquidity crisis, it was a terrible policy if they were insolvent, which was in fact the case. As they always do when confronted with someone smarter than them, the Dublin establishment circled the wagons, and Kelly was dismissed as an irresponsible young troublemaker of no consequence. He has been proved right, of course, but the establishment is still at it, making the
same fundamental mistake of thinking that a solvency crisis is just a liquidity crisis. Now, however, the establishment is European as well as Irish, and it is the State rather than the banking sector which is insolvent.

Clive Crook:

David Gardner draws my attention to this Letter from Dublin by Kevin O’Rourke, one of Ireland’s most distinguished economists. It might be the best single thing I’ve read on the Irish crisis. Analytically astute, and moving too. Just how profound a blow this has been comes through. It is not just an economic and political crisis, but a full-blown constitutional crisis. And the European Union has made it all so much worse than it needed to be.

Brad DeLong

Barry Eichengreen:

The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse.

It pains me to say this. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position.

The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. After a couple of years, not just interest but also principal is supposed to begin to be repaid. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.

This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

Kevin Drum:

As a resident of California, I have some advice for the EU: something good is really unlikely to turn up. Kicking the can down the road just makes the can mad. Like it or not, you’re better off dealing with this stuff sooner rather than later.

Megan McArdle:

There’s no question that it is morally outrageous for taxpayers who had nothing to do with the overlending to be saddled with the costs, while bondholders who should have watched where they put their money, walk away scot free.  Moreover, I cannot but believe that this is creating considerable moral hazard; investing in bank debt starts to look something like investing in the sovereign debt of the country where the bank is.

And yet it seems to me that the practical question remains: is Ireland actually better off if it does this?  Are the taxpayers?  Couldn’t the contagion get worse?  We’re talking about a country that has been the net recipient of a lot of foreign capital over the years (which is why, in part, the Irish are so outraged.)  The government is running a sizeable primary deficit, and as far as I can tell, expects to for at least a couple of years.  If telling the bondholders to take a haircut triggered capital flight, wouldn’t that mean dramatic austerity right now, as the government was suddenly forced to balance its books?  What about the contraction of household credit?
I’m asking the question, not answering it: I genuinely don’t know.  The EU could have backstopped Ireland’s government spending without a guarantee for the bondholders, of course.  Probably, they should have.  But was that very likely to happen?  These are countries where the banks are “too big to save”–where the bank liabilities are twice GDP, or even higher.  They’re very wary of anything that makes their financial sector even slightly less sound.
Have there been any really successful situations where the bank bondholders were not made whole? Again, I’m asking, not answering; I would feel a lot better about saying Ireland should take this course if I knew of instances where it had been successfully pulled off in the past.  As far as I can tell, even famously “tough” solutions like the Swedish nationalization ultimately made the bondholders whole, as the FDIC does in our own country.  The logic is simple: a run on bank bonds looks like a slow-motion run on the banks.
To be clear, I am not arguing that bailing out the bondholders at taxpayer expense is right or fair; it is not right, and it is monstrously unfair.  I am only arguing that doing the fair and right thing, and making the bondholders eat the losses instead of the taxpayer, might end up costing taxpayers even more.  For example, I’d argue that whatever it might have cost taxpayers to prop up all the banks in 1929, that burden would have been infinitely preferable to the Great Depression.

I guess we can find some small comfort in the fact that another country is doing it even more wrong.

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Bloggers Make Some Lists And Eat Some Humble Pie

Brad DeLong:

There is a danger in this business. If you don’t mark your beliefs to market occasionally, and throw out worthless intellectual trash, you ossify–you become one of those demented old coots detached from reality ranting unintelligibly at the moon.

[…]

So what major analytical mistakes–errors of either theoretical analysis, of empirical description of reality, or of applying theory to reality–have I made in the past decade?

I can think of three offhand to start the ball rolling. I erred:

  1. In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.
  2. In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.
  3. In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.

These were three biggies. But surely there were others. What were they?

Tyler Cowen:

I shared in one and two, though not three.  I’m starting to believe in #3 however.

(That said, I would word #1 differently; for instance, I have long believed in automatic stabilizers and still do and I remain more skeptical of “ramp-up” spending than Brad.  I would phrase #2 to focus on the balance sheet more generally and not derivatives per se.)

I also take the data on slow median income growth more seriously than I used to.  I no longer think those numbers are a mere statistical artifact.

What can you all cite as changed beliefs?  Examples like “Person X or Policy X turned out to be even worse than I had thought” do not count.

Megan McArdle:

It’s a Friday in August, with nothing to report but the dismal GDP figures we were all expecting.  So I’ll start with the Iraq War:

1)  I erroneously believed that I could interpret the actions of Saddam Hussein.  He seemed to be acting like I’d act if I had WMD.  Whoops!  I wasn’t an Iraqi dictator, which left huge gaps in my mental model of Hussein.

2)  I erroneously extrapolated the experience of World War II to Iraq.  This took several forms:

a)  I overlooked the fact that Japan and Germany were both stable bourgeois nations with solid industrial bases long before we got into the act.

b)  I overlooked the fact that we completely destroyed this nations before occupying and reconstructing them.

3)  I was insufficiently empathetic in imagining how Iraqis would feel about our invasion.  We liked the French for giving us military help during the Revolution.  Now imagine that France had invaded in order to liberate us from the British.  Even if they really did eventually leave, this would have had much worse results.  Looking back, my confidence in our liberatory powers seems terribly callous, and it doesn’t really do the dead Iraqis much good that I’m sorry for it.

These things led me to underestimate the time and expense of the war (both fiscal and in human lives), and underestimate the benefits.  Maybe history will vindicate the invasion, but I can’t say this seems likely.

Onto the financial crisis, where my erroneous beliefs are probably pretty typical:

1)  I recognized the housing bubble pretty early (the first mention I can find on my old blog is in 2002)–but I had no idea it would have these kinds of broad, devastating effects.  If you had asked me in 2006 what would happen as a result, I would have pictured

a)  a wealth-effect lead recession, as consumers realized they weren’t as rich as they thought
b) a decline in the construction industry
c) some bank failures.

I would not have pictured wholesale runs on the money markets, the collapse of the shadow banking system, and 10+% unemployment.

2)  I believed in the “Great Moderation”.  That is, I believed that the Fed and prudent fiscal policy had, to a large extent, tamed the business cycle.  I did not believe that there was even a small risk of another Great Depression; I believed that the Fed could and would prevent the contagion from spreading.  Arguably they (and the Treasury) did, but I did not imagine anything close to that level of intervention being necessary.

3)  I believed regulators were smarter than they were.  In 2004, when the SEC decided to let the investment banks lever up to 30-to-1 instead of 12-to-1, because after all, the SEC had the tools to quickly identify and stop any contagion, I would have said they were probably right.  (I’m not sure I was aware of it).

4)  I believed bankers were smarter than they were.  Or rather, I believed the system was smarter than it was.  Individual bankers making idiotic mistakes?  Absolutely.  The occasional bank being brought low?  Sure–it happens pretty regularly, in fact.  But the whole banking system taking its entire balance sheet to the roulette table and laying it all down on a single bet? Ridiculous.

5)  I expected any crisis to come from America’s gaping current account balances and its long-term entitlement problems.  Again, arguably this was true, if you believe the “Global Savings Glut” theory (I’m inclined to).  But I expected the problems to come via a currency crisis, not a global meltdown touched off by crappy US mortgage bonds.

6)  I believed that over reasonably long time-frames, modest investments in equities would allow you to retire in comfort.

7)  I believed that securitization mitigated risk by spreading it around, rather than enhancing risk by reducing transparency.

8)  As a corollary, I believed that on the whole, Fannie/Freddie were harmless–not a libertarian ideal, of course, but hardly the worst thing the US government was doing.  I still don’t think they were the worst thing the US government was doing, but I think that their distortions of the market were toxic, and have been especially so in the wake of the crisis*.

9)  I believed we knew a lot more about the Great Depression, and how to fix such a thing, then we turned out to.  I don’t think we know much at all about the various roles of fiscal and monetary policy; I think the only lessons we know for certain are “don’t peg your currency”, and “don’t let the banking system collapse”.

10) I underestimated the danger that new financial instruments pose to a system in which neither the bankers nor the regulators understand their unexpected effects.

Random policy things I was wrong about:

1)  The bankruptcy reform reduced bankruptcies more, and for longer, than I expected.  Still don’t think it was on net good policy, but about this empirical effect Todd Zywicki was right, and I was wrong.

2)  I think it’s possible the Medicare Prescription Drug benefit may actually be saving money in other parts of the system.  (Sorry, George!)

3)  I was too optimistic about Doha; I no longer expect any serious trade liberalization for at least the next decade, maybe more.

On the political side:

1)  I would never have imagined the 21st century United States Government effectively nationalizing an automaker and an insurance company.

2)  I was astonished that Democrats managed to hold their coalition together to pass an incredibly unpopular policy in the odd belief that it would somehow get more popular later. (Oops)

3)  I would never have predicted the emergence of the Tea Parties as an important phenomenon.

Arnold Kling:

1. My way of thinking about the price/rent ratio for housing (see this post from 2003) caused me to think in terms of values that might be reasonable, not historical norms. When the price/rent ratio went above historical norms, I did not consider this in and of itself as an alarming sign. If I had, I would have started worrying much sooner and much more about high house prices.

Until very late in the game, I thought that the biggest threat to the housing market was an increase in the real interest rate, as opposed to a purely internal bubble/collapse.

2. I was sure that the stress tests used by Freddie and Fannie and the capital regulations at bank were sufficient to keep those institutions from taking on excessive credit risk. I thought that the sub-prime crisis would only cause newer, peripheral institutions to go bankrupt.

Incidentally, the Report released yesterday by the regulator overseeing Freddie Mac and Fannie Mae was very disappointing to me in that it says nothing about stress tests. What I would like to know is this: as of December, 2007, how much capital should Freddie and Fannie have been holding in order to conform to the regulatory stress test requirements? Did they have enough? Too little? More than enough? Then, subsequently, how bad was the housing price outcome relative to the stress tests? And what do the stress tests say now?

I strongly suspect that the actual house price outcome was not dramatically worse than what is used in the stress testing methodology. Instead, I suspect that Freddie and Fannie were way under-capitalized all along based on the stress tests, and that the regulator was not aggressive in dealing with the problem. My guess is that the regulator is not terribly eager to bring this to our attention.

3. I thought that the economy had become less susceptible to cyclical downturns. In April of 2003, I wrote The Elastic Economy, which argued that “the private sector has become more chaotic but more robust.” Read the whole thing. I also believed that inventory corrections would be less of a problem, for two reasons. First, the share of GDP represented by automobiles and other durable goods is much lower. Second, computer systems have made inventory management less mistake-prone.

4. I’ll talk about derivatives, not because I was wrong but because Brad and Tyler bring them up. From the late 1990’s until 2008, I was not interested in financial markets, so derivatives were off my radar screen. Back in 1986, the Fed published a book-length staff study on “Financial Futures and Options in the Economy,” and I wrote a chapter called “Futures Markets and Transaction Costs.” My view was that derivatives markets on organized exchanges serve to reduce transaction costs. Then and now, my thinking tended to downplay the role of derivatives as hedging and risk-management tools. So I would probably not have drunk the Kool-Aid that said that these were making financial markets more able to handle risk.

Back in the 1980’s, I got the sense that a lot of financial executives who played around with derivatives had insufficient understanding of option-pricing models. (You should have seen some of the S&Ls that bought “CMO residuals” for yield back in the 1980’s. I had not yet coined the term “suits vs. geeks divide,” but the phenomenon certainly existed.) So the fact that some companies blew up because of derivatives is not a shock to me. And I don’t think that regulated exchanges are the answer. Google for “Arnold Kling credit default swaps exchange” to see why.

I first heard about credit derivatives when my former Freddie Mac colleague Frank Vetrano mentioned them during a break at one of our fantasy baseball auctions one year at Dave Andrukonis’ house. This was some time around 1999 or 2000, after I had left Freddie, and I did not think that credit derivatives made much sense or would amount to anything. Judging by subsequent market volume, I was clearly wrong in thinking they would not amount to anything. As to whether they make sense, I think one could say that is still an open issue.

5. I would say that I have become less of a Keynesian since the crisis took place. Before the crisis, I would have stuck up for Keynesian macro, with the proviso in (3) that I would have thought that Keynesian demand policies would be needed less going forward. I was always a skeptic on monetary policy, and I continue to have a lot of skepticism. But I developed the whole Recalculation Story and related ideas as kind of a delayed, semi-subliminal response to a Tyler Cowen blog post as well as thinking about various empirical phenomena, such as the JOLTS data. However, whether I was most wrong in believing in Keynesian economics before or whether I am most wrong now in believing the Recalculation Story is certainly an open issue.

Daniel Drezner:

Looking back on my eighth (!!) year of blogging, here are the big things I think I got wrong over the past year:

1)  The Green Movement did not cause Iran’s regime to crack upScore one for the Leveretts — Iran’s regime has effectively silenced the Green movement, without any visible internal cost.  Indeed, the regime now seems entrenched enough so that the fundamentalists and conservatives can now ignore reformists and start turning on each other.  I confess, I though the Ashura protests marked an inflection point on Iran.  Nope.  The regime has suffered some serious costs from its internal repression, but Khamenei ain’t going anywhere anytime soon.

2)  Iceland was willing to pay the price of financial isolation.  I knew that Icelanders were outraged at the notion that they had to help bail out Icesave depositors in England and the Netherlands.  I also thought, however, that when the question was put to a referendum, Icelanders would pause for a moment and consider the ramifications of financial isolation.  Um… whoops.

3)  The G-20 was been far less useful than I anticipated.  A year ago at this juncture I was pretty pessimistic about the prospects of G-20 macroeconomic policy coordination.  I was hopeful, however, that the G-20 could function effectively as a mechanism to pressure China into revaluing the yuan.

And… things are worse on both fronts than I anticipated.  At Toronto, the G-20 encouraged contractionary fiscal policies way too early, helping to push the global economy into double3-dip territory.  On the yuan, China has niminally pledged to let the yuan float, but acual movement has been pretty meager.

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