Regions where sub-prime mortgages were rare did not have housing booms or busts.

The boom and bust in housing prices has not been at all nationwide.  There are great differences among States and metropolitan areas, and only a handfull of States were affected statewide, according to a recent report from the New York Fed.

The researchers found that sub-prime mortgages were prevalent in the areas with the most volatile prices and not commonly used in areas that did not participate in the boom. 

Hat tip to Mark Thoma.

Update on Monday, April 12, 2010 at 08:25AM by Skeptic

Paul Krugman notes that Georgia has had more bank failures than any other State whereas Texas banks and real estate markets have not been severely affected.  He says it's because Texas has strong consumer protection laws that discouraged cash-out re-fis and other risky loans that were rampant in the unregulated Georgia environment. 

Why Democrats love markets

Mark Thoma describes the party politics of regulatory schemes. It's not that market-based regimes are always better science than traditional command and control regulation, but in these times market-based regimes are always better politics for Democrats.

There's an inconsistency between free market ideology and the need for reform in areas like health care and financial services. One of the first steps in reforming the system is to acknowledge that the market won't take care of the problems itself. Once that is acknowledged, i.e. that regulation is needed to fix these market failures, the only question is whether that regulation will be of the "market-based" variety or by edict (e.g. this is the difference between system of tradable carbon permits that allow least cost carbon reduction strategies to emerge and a government set emission limit for each industry which generally does not achieve carbon reductions at least cost).

With Democrats mostly opposed to old fashioned edict style regulation --  with their willingness to embrace market-based solutions to regulatory issues --  and with Republicans unwilling to embrace anything that Democrats propose, there is little ground left for those Republicans who are willing to admit that markets sometimes fail to stand upon. Democrats have taken the middle ground -- market based regulation -- from Republicans. This leaves Republicans with a choice of going along and compromising (and thereby embracing proposals they have made in the past, e.g. the health care bill looks an awful lot like the health care program Romney put in place in Massachusetts), or standing in opposition simply because it is a Democratic proposal. The choice they've made, standing in opposition to everything, is a losing strategy that allows policy to be shaped entirely be the other side. It will be interesting to see if a fissure develops within the Republican Party over this.

Federal spending for R&D has become improvident because the jobs created by adoption of new technology are increasingly offshored.

The director of CBO reminds us

A leading argument in favor of federal support for . . . technology R&D holds that because private developers of scientific and technical innovations do not capture all of the benefits from their discoveries and inventions, private investment is lower than would be justified by the magnitude of its benefit to society.

In a globalized economy, the job-creating benefits of technological advances are predominantly enjoyed where labor is cheapest instead of where the technology was developed. This inability to reap where we sow undercuts the traditional argument for US government investment in R&D and goes a long way to explaining why China has leapt ahead of the US in green technology development. Indeed, because of free trade agreements, it appears that private developers are now generally better able than governments to capture the benefits of their R&D investments.

Here is a longer post on forces influencing where innnovation occurs and where the benefits are distributed.

Realistically, economics is an art, not a science.

David Brooks' high-level historical overview of economics concludes it's not a science at all and eventually economists may realize that. 

In Act IV, in other words, economists are taking baby steps into the world of emotion, social relationships, imagination, love and virtue. In Act V, I predict, they will blow up their whole field.

Economics achieved coherence as a science by amputating most of human nature. Now economists are starting with those parts of emotional life that they can count and model (the activities that make them economists). But once they’re in this terrain, they’ll surely find that the processes that make up the inner life are not amenable to the methodologies of social science. The moral and social yearnings of fully realized human beings are not reducible to universal laws and cannot be studied like physics.

Once this is accepted, economics would again become a subsection of history and moral philosophy. It will be a powerful language for analyzing certain sorts of activity. Economists will be able to describe how some people acted in some specific contexts. They will be able to draw out some suggestive lessons to keep in mind while thinking about other people and other contexts — just as historians, psychologists and novelists do.

At the end of Act V, economics will be realistic, but it will be an art, not a science.

In addition to dismissing much of modern economic science as virtual reality games, I have noted that economic theories are as far from the complexity of real economies as cell biology is from physicians diagnosing and treating real human patients.  The cell biologist may know a great deal that is useful, but he doesn't know nearly enough to be entrusted with patients. Cell biologists seem much better than macroeconomists at knowing their own limits. 

Update on Sunday, March 28, 2010 at 07:38AM by Skeptic

To be fair to economists, many of them are aware of the problem, according to Tim Hartford here.  For example, in a 1983 article, Let's Take the Con Out of Econometrics, Edward Leamer pointed out that econometricians often have great difficulty teasing out cause and effect.

This is the “identification problem” – trying to work out whether a statistical pattern is caused by what we think it has been caused by. It muddies any statistical analysis of data that have not been generated by a controlled experiment, and it particularly plagues econometricians, the statistical wing of the economics profession. But, complained Leamer, throughout the 1970s they too rarely cared, and much of their work was dubious at best. Leamer was not alone. David Hendry showed in 1980 that by using the standard methods of the day, he could demonstrate that rainfall caused inflation. Or was it that inflation caused rainfall?

Hartford says progress has been made.

Update on Friday, April 2, 2010 at 10:34AM by Skeptic

Commenting on the same Brooks column, economist Justin Fox says economics is too important to be left to the economists.

[T]he ways in which scholars interpret the world can (with a time lag and a lot lost in translation) have a big influence on the way the rest of us see things. Over the past half century, economists have come to utterly dominate thinking about economic matters, and begun to insinuate themselves into lots of other fields too. Business education, and business advice, has certainly become much more economics-oriented. Which isn't all bad. But even an economist would agree that we could use more competition in the marketplace of ideas. Right?

Update on Friday, May 14, 2010 at 06:30AM by Skeptic

Arnold Kling says there are too many things going on in the real world to be represented by one model applied to one data set.

Fifty years of macroeconomic thought—scientific and political gains but engineering failure

One way to understand the feud among macroeconomists is that some of them are "engineers" focused on solving real world economic problems and some are "scientists" focused on improving mathematical models of their theories, according to Harvard professor Greg Mankiw in this very interesting paper from 2006. [Please see 6/26/2020 update for a working link.]  Mankiw says the "engineers" trace their roots to MIT (Samuelson and Solow), while the "scientific" tradition is rooted in the University of Chicago (Friedman, Barro, and Lucas). (This is often referred to as the "saltwater-freshwater" schism.) He notes that many prominent economic engineers have taken senior positions in government under both Democratic and Republican administrations, as he did in George W. Bush's first term as chair of CEA, but that he cannot think of a single prominent economic scientist who has done that.

After a fascinating summary of the main research threads and theories since the 1930s, he surprised me by concluding that almost none of the developments in economic science since WWII has affected how the economist-engineers in Washington do their jobs.

The real world of macroeconomic policymaking can be disheartening for those of us who have spent most of our careers in academia. The sad truth is that the macroeconomic research of the past three decades has had only minor impact on the practical analysis of monetary or fiscal policy. The explanation is not that economists in the policy arena are ignorant of recent developments. Quite the contrary: The staff of the Federal Reserve includes some of the best young Ph.D.'s, and the Council of Economic Advisers under both Democratic and Republican administrations draws talent from the nation's top research universities. The fact that modern macroeconomic research is not widely used in practical policymaking is prima facie evidence that it is of little use for this purpose. The research may have been successful as a matter of science, but it has not contributed significantly to macroeconomic engineering.

Nor has there been a great effect on college textbooks, which still bear strong resemblance to Samuelson's 1948 Economics, according to Mankiw who is author of today's most widely used introductory college economics textbook. The most prominent alternative textbook, introduced by Chicago's Robert Barro in 1984, failed to catch on.

Although Mankiw doesn't discuss it, many of the ideas that have not been implemented by the engineers and have been largely abandoned by the scientists nevertheless had, and continue to have, great political influence. For that reason, I summarize below Mankiw's history of the evolution of mainstream economic thought since the Great Depression. Among the theories and concepts that flash across the screen are the neoclassical-Keynesian synthesis, an economy stuck in a suboptimal equilibrium, sticky prices, animal spirits, fiscal stimulus, Phillips curve, monetarism, rational expectations, real business cycle theory, short run and long run behavior, imperfect competition, dynamic stochastic general equilibrium theory, and the new neoclassical synthesis. Clearly, this is my wonkiest post ever.

Although the word "macroeconomics" first appears in the scholarly literature in the 1940s, economists had been paying attention for at least 200 years to the main concerns of macroeconomics—inflation, unemployment, economic growth, the business cycle, monetary policy, and fiscal policy. The Great Depression brought the realization that economists did not understand why there was no spontaneous recovery until John Maynard Keynes explained in General Theory (1936) that markets can get stuck in an unfavorable equilibrium because of a general pessimism and lack of confidence or animal spirits and because prices, especially labor prices, tend to be sticky. When an economy was stuck in a depression, Keynes prescribed massive government spending with borrowed money (fiscal stimulus) to generate personal incomes that would boost aggregate demand which would stimulate hiring and investment, turning stagnation into a resumption of growth.

Many who had the life-changing experience of living through the Great Depression and later became prominent economists seized on these ideas and became leaders of the "Keynesian Revolution." They undertook to turn Keynes' grand vision into a simpler, more concrete and precise model.

One of the first and most influential attempts was the IS-LM [Investment/Saving-Liquidity preference/Money supply] model proposed by the 33-year-old John Hicks (1937). The 26-year-old Franco Modigliani (1944) then extended and explained the model more fully. To this day, the IS-LM model remains the interpretation of Keynes offered in the most widely used intermediate-level macroeconomics textbooks. . . .

[Meanwhile] . . ., econometricians such as Klein were working on more applied models that could be brought to the data and used for policy analysis. Over time, in the hope of becoming more realistic, the models became larger and eventually included hundreds of variables and equations. By the 1960s, there were many competing models, each based on the input of prominent Keynesians of the day, such as the Wharton Model associated with Klein, the DRI (Data Resource, Inc.) model associated with Otto Eckstein, and the MPS (MIT-Penn-Social Science Research Council) model associated with Albert Ando and Modigliani. These models were widely used for forecasting and policy analysis. The MPS model was maintained by the Federal Reserve for many years and would become the precursor to the FRB/US model, which is still maintained and used by Fed staff.

Although these models differed in detail, their similarities were more striking than their differences. They all had an essentially Keynesian structure. In the back of each model builder's mind was the same simple model taught to undergraduates today: an IS curve relating financial conditions and fiscal policy to the components of GDP, an LM curve that determined interest rates as the price that equilibrates the supply and demand for money, and some kind of Phillips curve that describes how the price level responds over time to changes in the economy."

. . . .

Yet the Keynesian revolution cannot be understood merely as a scientific advance. To a large extent, Keynes and the Keynesian model builders had the perspective of engineers. They were motivated by problems in the real world, and once they developed their theories, they were eager to put them into practice. Until his death in 1946, Keynes himself was heavily involved in offering policy advice. So, too, were the early American Keynesians. Tobin, Solow, and Eckstein all took time away from their academic pursuits during the 1960s to work at the Council of Economic Advisers. The Kennedy tax cut, eventually passed in 1964, was in many ways the direct result of the emerging Keynesian consensus and the models that embodied it.

The Phillips curve, based on a 1958 paper, was incorporated into the Keynesian model in the 1960s. It purported to describe a fixed relationship between the unemployment rate and the inflation rate—if one was high the other would be low and vice versa, supposedly making it possible for policymakers to choose among various combinations of unemployment and inflation. It underpins the Congressional mandate to the Fed that it must consider both inflation and unemployment in policy making, unlike some other central banks that are mandated only to limit inflation. Although modified versions of a Phillips curve are still used in econometric models today, the 1970s versions could not explain the coincidence of high inflation and high unemployment ("stagflation") of that decade [See 4/16/11 Update], and that opened the door (at ix) to rival theories being developed and taught in Chicago.

In their article After Keynesian Macroeconomics, Sargent and Lucas (1979) wrote, "For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, noneconomists." Although Sargent and Lucas thought Keynesian engineering was based on flawed science, they knew that the new classical school (circa 1979) did not yet have a model that was ready to bring to Washington: "We consider the best currently existing equilibrium models as prototypes of better, future models which will, we hope, prove of practical use in the formulation of policy." They also ventured that such models would be available "in ten years if we get lucky.

Although Sargent and Lucas admitted their models were not ready for Washington (and were then indeed as scientifically flawed as the Keynesian models) some of the ideas behind the Chicago models were nevertheless kidnapped from the cradle and taken to Washington where they quickly became and remain hugely influential on policy decisions and public discourse about economics. In large part this was because their escalating attacks on the Phillips curve at a time when it pretty clearly wasn't working discredited the whole Keynesian model, including its valid ideas about the possibilities for stagnation, sticky prices, and fiscal stimulus of aggregate demand. The Chicago ideas were also successful because they supported existing political preferences for reduced government spending and laissez faire markets and because Milton Friedman was a weekly Newsweek columnist from 1966 to 1984, an advisor to Ronald Reagan, the host of a TV series about political economy, and generally a prominent public intellectual. During this period, Chicago launched three big macroeconomic ideas emphasizing the virtues of markets and the failings of government.

The first wave of new classical economics was monetarism, and its most notable proponent was Milton Friedman. Friedman's (1957) early work on the permanent income hypothesis was not directly about money or the business cycle, but it certainly had implications for business cycle theory. It was in part an attack on the Keynesian consumption function, which provided the foundation for the fiscal policy multipliers that were central to Keynesian theory and policy prescriptions. If the marginal propensity to consume out of transitory income is small, as Friedman's theory suggested, then fiscal policy would have a much smaller impact on equilibrium income than many Keynesians believed.

Friedman and Schwartz's (1963) Monetary History of the United States was more directly concerned with the business cycle and it, too, undermined the Keynesian consensus. Most Keynesians viewed the economy as inherently volatile, constantly buffeted by the shifting "animal spirits" of investors. Friedman and Schwartz suggested that economic instability should be traced not to private actors but rather to inept monetary policy.

Although the Keynesian models dealt with the money supply among other factors, the monetarists said "only money matters." In its turn, strict monetarism was quickly displaced in academia by "rational expectations" theory, also developed in Chicago.

In a series of highly influential papers, Robert Lucas extended Friedman's argument. In his Econometric Policy Evaluation: A Critique, Lucas (1976) argued that the mainstream Keynesian models were useless for policy analysis because they failed to take expectations seriously; as a result, the estimated empirical relationships that made up these models would break down if an alternative policy were implemented. Lucas (1973) also proposed a business cycle theory based on the assumptions of imperfect information, rational expectations, and market clearing. In this theory, monetary policy matters only to the extent to which it surprises people and confuses them about relative prices. Barro (1977) offered evidence that this model was consistent with U.S. time-series data. Sargent and Wallace (1975) pointed out a key policy implication: Because it is impossible to surprise rational people systematically, systematic monetary policy aimed at stabilizing the economy is doomed to failure.

The third wave of new classical economics was the real business cycle theories of Kydland and Prescott (1982) and Long and Plosser (1983). Like the theories of Friedman and Lucas, these were built on the assumption that prices adjust instantly to clear markets—a radical difference from Keynesian theorizing. But unlike the new classical predecessors, the real business cycle theories omitted any role of monetary policy, unanticipated or otherwise, in explaining economic fluctuations. The emphasis switched to the role of random shocks to technology and the intertemporal substitution in consumption and leisure that these shocks induced.

As a result of the three waves of new classical economics, the field of macroeconomics became increasingly rigorous and increasingly tied to the tools of microeconomics. . . .

This commitment to rigorous mathematical scientific modeling and to microeconomic foundations had become the hallmark of new classical economics. The methodology was more important than the particular postulates modeled.

Today, many macroeconomists coming from the new classical tradition are happy to concede to the Keynesian assumption of sticky prices as long as this assumption is imbedded in a suitably rigorous model in which economic actors are rational and forward-looking. Because of this change in emphasis, the terminology has evolved, and this class of work now often goes by the label "dynamic stochastic general equilibrium" theory.

Meanwhile, the Keynesians had not gone away or been converted. They too had been troubled by the absence of micro-foundations for their macroeconomics. While the freshwater economists had rejected Keynes outright and set about building their own theories and models, the saltwater economists tried to improve the neoclassical-Keynesian synthesis by incorporating micro-foundations.

All modern economists are, to some degree, classical. We all teach our students about optimization, equilibrium, and market efficiency. How to reconcile these two visions of the economy—one founded on Adam Smith's invisible hand and Alfred Marshall's supply and demand curves, the other founded on Keynes's analysis of an economy suffering from insufficient aggregate demand—has been a profound, nagging question since macroeconomics began as a separate field of study.

Early Keynesians, such as Samuelson, Modigliani, and Tobin, thought they had reconciled these visions in what is sometimes called the "neoclassical-Keynesian synthesis." These economists believed that the classical theory of Smith and Marshall was right in the long run, but the invisible hand could become paralyzed in the short run described by Keynes. The time horizon mattered because some prices—most notably the price of labor—adjusted sluggishly over time. Early Keynesians believed that classical models described the equilibrium toward which the economy gradually evolved, but that Keynesian models offered the better description of the economy at any moment in time when prices were reasonably taken as predetermined.

Mankiw describes (at 10-12) specific problems that were worked out between about 1971 and about 1990 and concludes—

In my judgment, these three waves of new Keynesian research added up to a coherent microeconomic theory for the failure of the invisible hand to work for short-run macroeconomic phenomena. We understand how markets interact when there are price rigidities, the role that expectations can play, and the incentives that price setters face as they choose whether or not to change prices. As a matter of science, there was much success in this research (although, as a participant, I cannot claim to be entirely objective). The work was not revolutionary, but it was not trying to be. Instead, it was counterrevolutionary: Its aim was to defend the essence of the neoclassical-Keynesian synthesis from the new classical assault.

In the late 1990s a new synthesis between the freshwater and saltwater approaches emerged, although it may have been only an uneasy truce (which broke down in the wake of the global financial crisis).

Like the neoclassical-Keynesian synthesis of an earlier generation, the new synthesis attempts to merge the strengths of the competing approaches that preceded it. From the new classical models, it takes the tools of dynamic stochastic general equilibrium theory. Preferences, constraints, and optimization are the starting point, and the analysis builds up from these microeconomic foundations. From the new Keynesian models, it takes nominal rigidities and uses them to explain why monetary policy has real effects in the short run. The most common approach is to assume monopolistically competitive firms that change prices only intermittently, resulting in price dynamics sometimes called the new Keynesian Phillips curve. The heart of the synthesis is the view that the economy is a dynamic general equilibrium system that deviates from a Pareto optimum because of sticky prices (and perhaps a variety of other market imperfections).

. . . .

With the benefit of hindsight, it is clear that the new classical economists promised more than they could deliver. Their stated aim was to discard Keynesian theorizing and replace it with market-clearing models that could be convincingly brought to the data and then used for policy analysis. By that standard, the movement failed. Instead, they helped to develop analytic tools that are now being used to develop another generation of models that assume sticky prices and that, in many ways, resemble the models that the new classicals were campaigning against.

The new Keynesians can claim a degree of vindication here. The new synthesis discards the market-clearing assumption that Solow called "foolishly restrictive" and that the new Keynesian research on sticky prices aimed to undermine. Yet the new Keynesians can be criticized for having taken the new classicals' bait and, as a result, pursuing a research program that turned out to be too abstract and insufficiently practical. Paul Krugman (2000) offers this evaluation of the new Keynesian research program: "One can now explain how price stickiness could happen. But useful predictions about when it happens and when it does not, or models that build from menu costs to a realistic Phillips curve, just don't seem to be forthcoming." Even as a proponent of this line of work, I have to admit that there is some truth to that assessment.

This post would not be complete without mentioning that the "mainstream economics" described by Mankiw above omits many important economics ideas and ongoing work. For example, the work of Hyman Minsky and his followers on asset price bubbles and crashes has gained recent prominence as people try to understand why the mainstream economists were blindsided by the global financial crisis (which hadn't happened yet when Mankiw wrote this paper). Whereas the mainstreamers had accepted the Keynesian lesson that prices could be sticky and had mathematical models to study the resulting effects, they were not considering—and their models did not accommodate—the opposite problem that asset prices can be very volatile. Now, 18 months after the collapse of Lehman Brothers, we still don't seem to have a mainstream answer about how to model and make policy decisions about asset price volatility or what textbooks should say about this.

Another area of economics that is floundering is understanding what policy changes could stimulate growth and prosperity in undeveloped countries. Mankiw explains that the "Great Moderation" of the 1990s caused mainstream economists to think business cycles were a problem of the past and not worth studying, and they turned their attention to growth models, which inspired (in my words, not Mankiw's) other half-baked policies like the Washington Consensus about development, which is already being abandoned by the economist-engineers. There were other reasons for this diversion of attention, including this one:

There is also a fourth, more troublesome reason why budding macroeconomists of the 1990s were drawn to study long-run growth rather than short-run fluctuations: the tension between new classical and new Keynesian worldviews. While Lucas, the leading new classical economist, was proclaiming that "people don't take Keynesian theorizing seriously anymore," leading Keynesians were equally patronizing to their new classical colleagues. In his AEA Presidential Address, Solow (1980) called it "foolishly restrictive" for the new classical economists to rule out by assumption the existence of wage and price rigidities and the possibility that markets do not clear. He said, "I remember reading once that it is still not understood how the giraffe manages to pump an adequate blood supply all the way up to its head; but it is hard to imagine that anyone would therefore conclude that giraffes do not have long necks.

Update on Saturday, March 13, 2010 at 09:08PM by Skeptic

Peter Radford, writing Whither Economics? What do we tell the students? in Real-World Economics Review, has this to say about Mankiw's dichotomy:

I prefer a slightly different division to Mankiw’s. There are economists who study economies, and there are economists who study economics. Both theorize. Both search for regularities. Both offer what they think is practical advice. Both develop technologies based upon their theories. There are engineers and scientists in both camps. The difference is more fundamental than Manikiw suggests.

Those who study economies are naturally drawn to real world economics, whether they think of themselves in that camp or not, because of their attention to the world around them. If the real world and its variety, its institutions, cultures, religions, its diversity and even its geography influence a theorist’s starting point then they are studying economies in a real world sense.

Those who prefer to investigate the properties of equilibrium, rational expectations, and efficient markets are studying economics. They are dealing with abstraction since their starting point is an artefact created from assumptions, axioms and the like. Their hope is that they can elicit useful statements transferable to the real world, but yet not study the real world.

The problem with this split is that it implies that economics over the years has come to represent something other than the study of economies, and this is the source of the conflict that now rages. The realists complain about the irrelevancy of orthodoxy now that it has become little more than a self-referential series of models whose major value resides in their elegance and sparseness. Theirs is a feeling that economics should engage the real world rather than resist it. It is a feeling that a true ‘science’ should not view so much of reality as a failure to conform with theory. Rather it should explain the texture of reality, albeit through the prism of mathematics and models.

Update on Monday, April 26, 2010 at 03:26PM by Skeptic

Paul Krugman explains here the time and the issue that created the freshwater-saltwater schism. Robert Lucas and Robert Barro (Chicago) advanced the "rational expections" model and when it became clear that it didn't work they went on to "real business cycle" theory while the saltwater folks became "New Keynesians."

Update on Tuesday, June 29, 2010 at 08:52AM by Skeptic

Paul Krugman links to some current criticisms of modern freshwater macro and gives his summary of what went wrong  here. 

Update on Saturday, October 9, 2010 at 01:48PM by Skeptic

More in the same vein and a complaint by saltwater economists about how hard it became to get published unless they disguised their models to look like fresh water "modern macroeconomics."

Update on Friday, November 26, 2010 at 12:36PM by Skeptic

Paul Krugman's narration here is less granular but similar, as he considers whether forgetting the economic policy lessons of the Great Depression was perhaps inevitable because of an instability of intellection moderation. 

Update on Monday, November 29, 2010 at 08:36AM by Skeptic

Peter Radford points out that all the major strains of modern economics have failed to resolve the internal contradictions between their respective micro and macro theories.

Update on Saturday, March 19, 2011 at 04:48PM by Skeptic

Krugman says he was a pretty conventional neoclassical economist who thought that monetary policy could stablize the economy without any fiscal help, but he changed his mind and became more Keynesian when the Asian financial crisis of the late 1990s demonstrated clearly that monetary policy was insufficient. 

He also says that when powerful political interests have settled on their preferred policies and want economic analyses and arguments to influence voters, many economists who are politically aligned find ways to reject their own prior professional opinions and back their preferred political positions.

Update on Saturday, April 9, 2011 at 10:38AM by Skeptic

Larry Summers, until recently chief economic policy advisor to President Obama, said in a recent interview by Martin Wolf that in addressing the debt crisis and Great Recession, they considered the basic Keynesian IS-LM model supplemented by liquidity trap considerations and paid no attention to DSGE models and micro foundations papers.  Mark Thoma, who was present, reports it here and quotes a bit from The Economist's writeup and links to it. 

His broader point—reinforced by his mentions of the knowledge contained in the writings of Bagehot, Minsky, Kindleberger, and Eichengreen—was, I think, that while it would be wrong to say economics or economists had nothing useful to say about the crisis, much of what was the most useful was not necessarily the most recent, or even the most mainstream. Economists knew a great deal, he said, but they had also forgotten a great deal and been distracted by a lot.

Update on Saturday, April 16, 2011 at 09:58AM by Skeptic

A series of graphs plotting inflation rates vs. unemployment rates from 1948 to 2007 is presented by Catherine Mulbrandon at VisualizingEconomics. Her interpretation is that the Phillips relationship held only in the 1960s. 

Update on Monday, July 18, 2011 at 03:02PM by Skeptic

Peter Radford identifies the 1930s as a time of great political ferment that created schisms in economic doctrines rather than the other way around.  The doctrines of that time are all incomplete, very much alive, and serve different political interests.  An excerpt:

The divisions that carve economics apart are extraordinarily deep. But very often they are political in their origins. They creep into economics only after having been formed in politics. Economics is hopelessly ideological.

Thus the Austrian school agrees with the neoclassical camp that government intervention in an economy is almost always a negative effect. The Keynesians adamantly disagree.

But the Austrians also embrace uncertainty. That splits them part from the neoclassicists who build their theories on presumptions of varying degrees of certainty. The Keynesians have uncertainty at the core of their ideas, so they agree on this with the Austrians.

Money disappears from neoclassicism which is, essentially, a theory of barter, while Keynes brings money into the center. But he, rather curiously, ignores banks.

The Austrians, via Hayek, have a great deal to say about the centrality of knowledge and its evolution which makes them close to evolutionary economics and more comfortable with behavioral economics, yet they have a naive view of production and entrepreneurial activity which means they fall short of embracing complexity and thus have nothing much to say about the modern firm.

Which is odd, since institutions play a greater role in Austrian theory than in either Keynes or neoclassicism. This leaves new institutional economics straddling the gap between neoclassicism and the Austrian school.

Update on Friday, April 6, 2012 at 02:44PM by Skeptic

Mark Thoma explains New Classical, New Keynesian, and Real Business Cycle Models.

Update on Saturday, April 7, 2012 at 10:29AM by Skeptic

Unlearning Economics lays out the implicit assumptions he thinks all neoclassical economists (freshwater and saltwater) make and then never discuss. 

(1) Methodological individualism – the economy is modeled on the basis of the behaviour of individual agents.

(2) Methodological instrumentalism – individuals act in accordance with certain preferences rankings, to attain some end goal that they deem desirable.

(3) Methodological equilibration – given the above two, macroeconomics asks what will happen if we assume equilibrium. Note that this doesn’t  necessarily posit that the system will end up in equilibrium (although that is often the case), but rather seeks to find out what will happen if we use equilibrium as an epistemological starting point.

This foundation makes it hard for them to credit the work of other schools whose work starts with different assumptions. Unlearning sees this talking-past-each-other problem in the current argument between Keen and Krugman.

Update on Friday, June 26, 2020 at 02:50PM by Skeptic

The link to Mankiw's paper has rotted away.  The official citation is Mankiw, N. G., The Macroeconomist as Scientist and Engineer. Journal of Economic Perspectives. 2006; 20 (4) :29-46.  The link to a PDF is working today.

Put healthcare to a vote, hope it is defeated, and move on.

The US healthcare system has two fundamental problems: It costs too much and at least one-sixth of Americans are effectively excluded by lack of insurance or inadequate insurance from reasonable access to the system. At the beginning of the legislative process in 2008, it seemed possible that there could be a "grand bargain" in which insurers and healthcare providers would receive the enormous benefit of mandatory, government subsidized insurance coverage for almost all Americans, and in exchange would accept provisions to stop the growth of overall costs and perhaps start to reduce them. That didn't happen. The pending bill is all quid and no quo.

Hospitals and physicians like the bill because the mandatory insurance provisions will make it possible for them to get paid for a lot of the services they now do pro bono. The bill is good for insurers (although they are still bargaining for more) because it will give them 30 million or so new taxpayer-subsidized policy holders, and no effective limits on their pricing policies or profit margins. There is even a provision that may perversely drive up insurance costs. The other big political players, drug companies and device and equipment makers, may anticipate some sales growth but are otherwise unaffected. The so-called cost containment provisions are limited to studies, pilot programs, increased anti-fraud measures, and other eyewash measures that don't require any belt-tightening by anybody.

Those in favor of the bill say we should get this big "reform" in place and "fix it later." They don't explain—and I think there is no way to explain—how subsequent legislation to drive down costs will overcome the opposition of a healthcare industry that will stand united against measures that only threaten to reduce their incomes. Proponents say that if we don't pass healthcare now, we can't hope to address it for another generation, but they are implicitly abandoning—for another generation or longer—the opportunity to address the society-destroying affordability problem, which is a much more serious problem than incomplete coverage. I say forcing more Americans into a system on the verge of economic collapse will only hasten and exacerbate the collapse, whereas fixing the cost issues would by itself lead to expanded coverage. Presidential candidate Obama was right when he said this:

A mandate means that in some fashion, everybody will be forced to buy health insurance. ... But I believe the problem is not that folks are trying to avoid getting health care. The problem is they can't afford it. And that's why my plan emphasizes lowering costs.

Our fundamental economic problem is that real incomes have not increased since 1973 for the five-sixths of working Americans who are not bosses, while healthcare costs have continued to increase at an average annual rate of 3.6%—which means they double in real terms every 20 years. Link. If the real incomes of ordinary people had continued to rise at or near the rate that real healthcares costs have risen, we would not have a big healthcare crisis now. But they didn't, and we do. I have argued that the best solution to this and many other problems is doing whatever it takes to get real wages for ordinary people steadily rising again, but there's no political will to do that. The pending healthcare bill is yet another trickle-up program to support rising incomes of healthcare firms and professionals, all of whom are protected by law and practice from any real competition. They and others at the top of the income pyramid need to recognize that their revenues cannot keep rising when their customers' incomes are stagnant.

Some say President Obama and his advisors have mismanaged healthcare reform and that's why we have a "dogs breakfast" of a bill and a reversal of his campaign promise to address costs instead of mandatory coverage. Perhaps it was mismanaged, but it seems more likely to me that there was never any prospect of enacting cost containment over the objections of the politically powerful healthcare industry.  We should not increase that political power more by passing the pending "reform" package. 

Obama’s political style in a nutshell

Toward the end of a long story about Mayor Daley's political career in The New Yorker is this description of the first public meeting between the mayor and candidate for US Senate Barack Obama in 2004:

[F]or all their differences of style and speech, Obama and Daley shared a basic approach to politics as a constant negotiation of interests and ideals—Chicago's brand of Realpolitik. Both had advanced by capitalizing on the prevailing power structure, not by dismantling it, and they were united, above all, not by ideology but by pragmatism.

That fits exactly with the impression I have formed by watching and listening to Obama for two years. At the top of Obama's agenda for change has been improving the tone of discourse and encouraging bi-partisan cooperation. That is not at all a desire to dismantle the prevailing power structure, but would merely make it easier for him to be a pragmatic leader. He has never had a liberal policy agenda or any other substantive agenda, in my view. He has readily accepted that his initial proposals about healthcare, Guantanamo, gay rights, government secrecy, executive powers, global warming, economic stimulus, financial regulation, etc. would have to be scaled back, but he has never wavered from his commitment to bipartisan reasoned discourse and cooperation. That's what he seems to really care about. He's a process guy and would probably be pleased with the notion that his tombstone might say something like, "He played a major role eliminating gridlock in the Congress and making government function effectively." Yes, he's said he admires FDR and Reagan because they led transformations, but I interpret that as his loving the idea that he might have a central role in some historical transformation rather than that he has a vision about a particular transformation he is committed to leading. Not that any of that is bad or disappointing or that it makes him at all unique among successful politicians. I offer it only as a model for interpreting what Obama does, predicting what he will do, understanding what he really cares about, and figuring out how he can and cannot be influenced.

Update on Saturday, March 6, 2010 at 10:04AM by Skeptic

Similar message in this cartoon?

Update on Sunday, March 7, 2010 at 08:54AM by Skeptic

Frank Rich says pragmatism is the opposite of leadership, and Obama needs to lead:

Obama prides himself on not being ideological or partisan — of following, as he put it in his first prime-time presidential press conference, a “pragmatic agenda.” But pragmatism is about process, not principle. Pragmatism is hardly a rallying cry for a nation in this much distress, and it’s not a credible or attainable goal in a Washington as dysfunctional as the one Americans watch in real time on cable. Yes, the Bush administration was incompetent, but we need more than a brilliant mediator, manager or technocrat to move us beyond the wreckage it left behind. To galvanize the nation, Obama needs to articulate a substantive belief system that’s built from his bedrock convictions. His presidency cannot be about the cool equanimity and intellectual command of his management style.

Update on Tuesday, March 9, 2010 at 04:17PM by Skeptic

George Packer reports Washington insiders characterizing the President's style in ways that resonate with the initial post.

Meetings with the President, various Administration officials told me, are businesslike but thorough. Opposing positions are solicited and hashed out, and Obama steers the debate with tough questions . . . . 

This pride in responsible process is the closest thing to an Obama ideology.  It champions pragmatism without pandering to the status quo, and conveys skepticism, even contempt, for Washington's ordinary way of doing business. . . .  When candidate Obama talked about changing the tone of American politics, he meant it earnestly--more, perhaps, than he meant anything else.

"Sometimes the President practices a meta-politics," Paul Begala . . . said.  "He's a process reformer. He cares deeply, I think, about our politics, in the highest sense of the word." . . . .

Obama's quest for bipartisanship, in the face of exceedingly discouraging facts, has been so relentless that it suggests less a strategy than a core conviction . . . .

Meanwhile, Obama's opponents [on healthcare reform legislation] went on the attack, and his restraint came across as weakness.  Close observers of the President said that, as a consequence, he lacks a key element of Presidential power: the ability to inspire fear.

. . . . To be an effective communicator, a President needs a strong world view, a fundamental vision of why things are the way they are and how they ought to be, which can be simplified into a few key ideas and images--in short, an ideology.  For Obama and his advisors, there is no worse pejorative.  Their distaste for ideology sometimes causes them to sand down the sharper edges of their own proposals. . . .

A week after Obama gave his State of the Union speech, Paul Begala mentioned Reagan's address from 1982 and said, "His point of departure was always philosophical.  He explained how the world works. Roosevelt did the same thing."  Begala said that Obama, for all his persuasive gifts, seemed unable to reach the public in this way. . . .  The same qualities that had allowed Obama to make the case for himself in 2008--his aversion to partisan small-mindedness and ideological oversimplification--prevented him from making the case for his political agenda in 2009. . . .

. . . .

Ed Rollins, who held roughly the same position in the Reagan White House that Axelrod holds in Obama's, told me recently, "Everybody knew what Reagan wanted: 'We're going to turn away from the Carter malaise.' Nobody knows what Obama wants. Reagan marched to the policy drums that he believed in.  Obama hasn't thought about these things over a long time.  What Obama thinks about is how he's going to be loved--how he'll become a historic President, like F.D.R.  Reagan became successful because he had policy goals."

Can Obama make his current style work for us?  If not, can he change it?  Is it too late? 

Update on Tuesday, April 27, 2010 at 09:57AM by Skeptic

From Joseph Lelyveld's NYRB review of David Remnick's The Bridge: The Life and Rise of Barack Obama:

What Remnick’s portrayal of Obama’s political evolution makes clear is that the promise was more than a calculated choice, a campaign pose. It was intrinsic to his character and recognized as such early on. As far back as Harvard Law School, he stood out for “his way of absorbing and synthesizing the arguments of others,” for his “earnest, consensus-seeking style,” for an “open-mindedness [that] seemed strange even to his friends.” Later on, when as an obscure state legislator he sat in on a seminar at the Kennedy School, the seminar’s leader, Robert Putnam, was struck by Obama’s ability “to listen for a whole day and see common themes in the midst of an arguing bunch.”

It’s a refrain to which Remnick regularly returns. “Conciliation [is Obama’s] default mode,” he writes, “the dominant strain of his political personality.” The 43 percent of whites who voted for the first African-American president presumably recognized this quality. Its effect on an irreconcilable portion of the 55 percent of whites who voted against him is suggested by the fury of the Tea Party activists. That’s a paradox yet to be resolved. The very qualities of thoughtfulness and patience that made Obama’s election seem such a hopeful harbinger now make him vulnerable to charges of weakness from both flanks of the political divide. It’s who he is. It has something to do with why he is where he is. And in the short term at least, it doesn’t play conspicuously well in the media echo chamber, which is always spoiling for a fight, doesn’t reward prudence, and has no time for ambiguity.

Update on Tuesday, July 20, 2010 at 04:13PM by Skeptic

David Bromwich describes the Obama he sees in this long LRB piece. He says Obama has "tendencies" but not "convictions," that he's a mediator, and that "he's still mystified by the idea that there are people who don't like him."  I have sometimes called him the Mediator in Chief or the Consensus Finder in Chief. 

Consensus, the ultimate dog’s breakfast. In praise of just enough votes.

Offline Charlie says, "The continual decline in support for health care reform and climate change legislation [was because] Congress created incomprehensible quagmires." I agree with that completely, but differ in part with his assessment that this resulted from a certain strategic error by Obama:

He's learning the hard way that he'll have to govern from the center. He turned the key pieces of his legislative agenda—health care and climate—over to liberal congressional leaders and committee chairs, and now we have a dog's breakfast on two critical issues which he'll have a very tough time turning into saleable meals.

It is a dog's breakfast, but I attribute the cause more to supermajority rules than to negotiations within the majority caucus. It seems to me that more often than not a bill that has majority support gets worse when additional votes have to be rounded up and "paid for" with watering-down amendments, earmarks, and other legislative currency. As the managers have to move further and further ideologically to pick up more votes, the price they pay is frequently to make amendments that change a reasonably coherent bill that has a good chance of doing what it proposes to do into a bill beset with crippling and even contradictory provisions that is in fact a dog's breakfast.

A recent example of that is the odyssey of the public option in the pending Senate healthcare legislation: It went from being a robust Medicare-like proposal that would truly have threatened for-profit insurers and driven down premiums to something that is in the bill only because it will be a very unattractive option available to hardly anybody—a public option in name only and probably a waste of money. Now suppose the Senate didn't need just 60 votes but 100—what would that bill have looked like? I submit that any healthcare bill that got 100 votes would be trivial or a travesty or both. Similarly, every year in the California state budget process, which requires a 2/3 majority in both houses, the concessions that have to be made to get the last vote or two are just nauseating. Building supermajorities makes legislation worse, not better. That is particularly true when there is no ideological middle in a legislative body, as I have shown here there clearly is not in the US Senate.

Let's get back to majority rule in all matters. Those who won the last election should grow a spine, take responsibility, write bills they're proud of, pass them with just enough votes, and be accountable in the next election. If they lose, let the other bunch of rascals repeal it. That would give us clearer policy options, less internally contradictory and wasteful legislation, more personal accountability, a more engaged and informed electorate, and overall better government. Also, it would seem more propitious to run for reelection on a record that people can understand, even if they disagree with it, than to run an entire campaign wearing a dog's breakfast.

Update on Friday, March 5, 2010 at 07:01AM by Skeptic

Howard Dean says the pending Senate healthcare bill will "hang out to dry" every Democratic incumbent running for reelection this fall.

"It's easy to campaign on repealing something if no one knows what the something is," Dean said. "And fundamentally people don't understand what the president's healthcare plan is."

In other words, the Dems will be wearing a dog's breakfast. How did the bill become such a mess?  The White House says:

Throughout the debate on health insurance reform, Republican concepts and proposals have been included in legislation.  In fact, hundreds of Republican amendments were adopted during the committee mark-up process.  As a result, both the Senate and the House passed key Republican proposals that are incorporated into the President’s Proposal. 

For all that reaching out to Republicans, the Dems got exactly one Republican vote in the House and none in the Senate. It's hard for me to see wisdom, or even sanity, in that way of legislating.

Hat tip to Christine for the Dean link. 

Update on Sunday, March 7, 2010 at 04:48PM by Skeptic

Judge Richard Posner recounts the history of the filibuster and gives a somewhat balanced account of the pros and cons.  He ends up saying Congress should not pass healthcare reform with a simple majority in the reconciliation process because polls show the public doesn't like the bill. I posted this comment on his blog:

If we should be reluctant to adopt by a simple majority a program that polls say a majority of the electorate does not like, why would it be more legitimate if adopted by a supermajority of equally out-of-touch Senators?

If Posner's idea is that the bill will be amended to be more "moderate" because of the supermajority requirement then we need the proof, or at least the argument, that a more "moderate" bill would be favored by the electorate. In fact, the opposite seems true of health care--Massachusetts voters disliked the pending bill because it lacks a public option and other provisions to make health care more affordable.

Taking the supermajority idea to the extreme, I think we can all agree that if the votes of 100 Senators were required, only a bill that was totally trivial and/or a total travesty of internal contradictions and earmarks could get passed. In California every summer we have the most nauseating deals made to buy the last vote or two to pass a budget. I submit supermajority requirements tend to make legislation less workable, more expensive, and special interest friendly while simultaneously diluting legislator responsibility and accountability. We don't get better legislation, we get worse legislation, and legislators earn voter contempt in the process.

I think there is merit to the idea of a supermajority requirement that gets smaller over time. One proposal is that the first cloture vote would require 60 votes, the next one 55, and after that only 51. That would serve the purpose of cooling the so-called cup of House passions in the Senate saucer for a while, not that you really need a supermajority to do that. The California Assembly and Senate have historically been brutal to ill-considered bills from the other house.

What does it mean that the US electorate is “center-right?” Nothing.

Pundits and politicians, especially conservative ones, frequently tell us that the American electorate is "center-right" and that, therefore, liberal approaches to government policy cannot find favor with the electorate or pass Congress. Every policy must have a conservative flavor, we're told. The latest such pronouncement to come to my attention was by Jonah Goldberg here:

America is, quite simply, a center-right country. Many have cited polling data showing that self-described conservatives outnumber liberals 2 to 1. But that's not nearly so telling as the fact that self-identified conservatives have outnumbered liberals in every year since 1968; when combined with self-proclaimed moderates, the country is enduringly 65% to 75% moderates and conservatives.

I set out to find out if that's true and, if it is, whether one can make any useful inferences about what policies are supported and opposed by majorities of the electorate. I found it is true that self-described conservatives have outnumbered self-described liberals in every election year since at least 1970. But I found that when polled on specific policy questions likely voters were apt to skew liberal instead of conservative. In other words, respondents' self-described ideology is useless in predicting public attitudes toward specific policy issues.

The American National Election Studies, a collaboration of Stanford University and University of Michigan, has a wide array of interesting polling data from 1972 to 2004, including this on how respondents self-identify on the political spectrum. (There was no survey in 2006 and I don't have 2008 data.) [ADD 4/12/2011: The 2008 data have been posted, showing to my eye no significant change from 2004. The direct link to that table is here.]  

See the long term trend? Me neither. Excluding the 23-36% of respondents who said they did not know or had not thought about an answer to the question, self-described Liberals have been 18-28% of the population, self-described Conservatives 36-47%, and self-described Moderates 28-38%. There are fluctuations from year to year, but no long-term trend that I can see. Regrettably, there are no comparable data for the 1960s, when Congress gave us civil rights legislation, Medicare, the War on Poverty, and other landmark liberal programs. However, virtually the entire body of federal environmental legislation, another liberal cause, was enacted in the 1970s. So, clearly an electorate that is 37-38% Conservative and only 24-28% Liberal does not preclude very liberal activity in Congress.  

And this seeming paradox was still true in 2008 and 2009, as described here on Sabato's Crystal Ball.

In the 2008 ANES, for example, 42 percent of Americans placed themselves on the conservative side of the 7-point ideology scale while only 28 percent placed themselves on the liberal side. But in the same survey, 51 percent of Americans placed themselves on the liberal side of a similar 7-point scale measuring support for government-sponsored health insurance while only 37 percent placed themselves on the conservative side. More recently, a CBS/New York Times Poll in September 2009 found that almost two-thirds of Americans supported a government-run insurance option as part of a plan to reform health care in the U.S. It is findings like this that have led some liberal political commentators to argue that the United States is now a center-left nation.

Moreover, the article reports, it wasn't just healthcare on which likely voters skewed liberal.

When asked in an October 2008 Time Magazine poll about their views on specific policy issues, however, these likely voters took the liberal side more often than they took the conservative side. On six of ten issues–abortion, health insurance, the war in Iraq, regulation of financial institutions, government assistance to homeowners threatened by foreclosure and global warming–a majority or plurality of respondents came down on the liberal side. On three issues–gay marriage, offshore drilling, and business tax cuts–a majority or plurality of respondents came down on the conservative side. On one issue, federal bailouts for financial institutions, it was not possible to identify liberal and conservative positions.

Opinions on seven of the ten policy issues were correlated strongly enough that it was possible to combine them into a liberal-conservative issues scale. The issues included in the scale were abortion, gay marriage, health insurance, offshore drilling, global warming, the war in Iraq, and regulation of financial institutions. Scores on this scale ranged from 0 for those who took the most conservative position on all seven issues to 70 for those who took the most liberal position on all seven issues. . . .

So on these issues, likely voters skewed distinctly liberal. Notice also, that the distribution of opinions seems to be roughly normal, i.e., concentrated in the middle and not polarized. To pass legislation on these issues then, it seems, Congress should craft center-left solutions—not center-right ones. Regrettably, attitudes and preferences among Members of Congress are not normally distributed but are highly polarized. Here is the bimodal distribution of Senators' 2009 votes, from this earlier post.

Update on Sunday, May 1, 2011 at 01:47PM by Skeptic

It isn't just the Senate that's polarized.  The House is even more so.  Graphs showing that and historic ebbs and floods of polarization have been added to the May 1, 2011 update to this post.

Update on Sunday, November 4, 2012 at 09:50AM by Skeptic

Psychology professor Drew Westin, writing in today’s NYT, argues that the electorate (as distinguished from party officials and activists) skews strongly left in response to policy questions: 

Most voters intuitively understand that jobs and deficits are linked — too much of an emphasis on deficits leads to too few jobs — because working people with money in their wallets drive demand, whereas wealthier people with money in their wallets drive Jaguars (and send the rest of their income to their hedge fund managers). Even in the heart of red America, people understand that high unemployment and income disparities of the magnitude we are now witnessing are bad for economic growth.

But you have to speak in a way that brings out their inner Keynes, as I discovered when testing the following message in the Deep South: “The only way to cut the deficit is to put Americans back to work.” That message beat the toughest austerity message by over 30 points.

The reality is that our government hasn’t become this dysfunctional because the parties are so “polarized.” It’s because there is only one pole in American politics today, and its magnetic field is so powerful that it has drawn both parties in the same direction — rightward. And it is in that same direction that the magnetic field of contemporary American politics is likely to pull the stories the two parties tell after the election — and the policies the winner pursues.

The data, however, suggest just the opposite — that both candidates have benefited in the general election every time they have taken a left turn. President Obama was in deep political trouble 15 months ago when he cut the closest thing he could to a “grand bargain” with House Speaker John A. Boehner to slash the federal budget by trillions, and he did nothing for his popularity nine months earlier when he extended the Bush tax cuts to the wealthy. Not until he began talking like a populist did he begin picking up steam in the polls. Indeed, one of the most powerful messages the Democrats chose not to use in the 2010 midterm elections — which would have supported a policy that was extremely popular then and remains as popular now — was a simple message on taxes I tested nationally, which won in every region and with every demographic, including Tea Partyers: “In tough times like these, millionaires ought to be giving to charity, not getting it.” Once that position (and other populist appeals) became central to Mr. Obama’s presidential campaign, the election looked like it would be a rout.

Update on Friday, October 11, 2013 at 02:04PM by Skeptic

Voteview.com has a large series of graphs demonstrating the dramatic increase in Congressional polarization since about 1980.  Here is one of the set: 

The House was totally polarized before 1928 and after 2005.  The Senate was not quite so polarized for so long, but it did follow a similar trajectory. This creates a problem for those who think redistricting is the primary cause of polarization because Senate races are state-wide.  So what does explain polarization, depolarization, and repolarization? 

The US Senate is dysfunctional because there are very few centrists.

The following chart, based on data from That's My Congress, shows how polarized the US Senate was on 22 selected votes in 2009.  Republicans Snowe (0) and Collins (-5) were slightly more progressive than Democrat Bayh (-7). All other Democrats and Independents were more progressive than those three, and all other Republicans were more conservative. 

That's how close we are to having zero ideological overlap between Senate Republicans and Senate Democrats/Independents. Note also how far the parties' centers of gravity are from the average of all Senators (-2.63). The average Republican (-49.55) is about 47 points from the center, and the average Democrat/Independent (28.65) is about 31 points from the center. Because the center is so unpopulated it is necessary for either party to skew legislation substantial ideological distances to pick up votes from the other side--especially to overcome a filibuster.  

If Democrats wanted to pass a measure supported by all of its most progressive members, it could get the 51st vote at a +12 ranking.  On the other hand, if it needed 60 votes to end a filibuster without Republican votes, it would have to skew to minus 7 to pick up the last Democrat. Republicans wanting to add 11 Democratic/Independent votes to their united caucus would have to skew the measure to plus 12 to find a 51st vote and to plus 20 (which is coincidentally majority leader Reid's ranking) to break a filibuster.

I'm quite sure the bimodal distribution of the Senate does not reflect the distribution of voters, which I expect is a normal bell-shaped distribution--high in the middle with two tails to the extremes. If I find the ambition and the data, I'll add a chart illustrating that. Further work could also include charting the House of Representatives, using issues selected by a conservative organization, and tracking back a few decades to see if there has been increasing polarization of Congress, as some pundits say. But what I'd rather do is access this work already done by others. Please leave a comment if you can steer me toward such work.

Update on Monday, March 15, 2010 at 05:06PM by Skeptic

This later post has a graph showing that in an October 2008 Time Magazine poll public opinions on selected polarizing issues were normally distributed, not bimodal like the Senate. 

Update on Sunday, May 1, 2011 at 01:22PM by Skeptic

Royce Carroll, et al. generated the following graph (and others) purporting to show that the polarization of the House and Senate has waxed and waned greatly since 1879.  In particular, the House is now considerably more polarized than the Senate, according to this work.

Unfortunately, I don't understand what data were used and even less about the methodology, but Nate Silver does and he discusses the study here. Silver uses data from the same study to show trends in the House over the last 100 years.

A Constitutional amendment to undo Citizens United

I inveighed here against the recent US Supreme Court decision in Citizens United but until now had no proposed remedy that I thought might be effective. Appearing on Bill Moyers' Journal, Larry Lessig helped me along by casting a different light on the majority opinion. Based on that, I have drafted a Constitutional amendment to undo Citizens United and provide a solid foundation for broader campaign finance reform that isn't blocked by the money-equals-speech wall the Court has created in this and earlier decisions such as Buckley vs. Vallejo (1976).

My recollection of Lessig's point is this, perhaps with some of my embellishments: The Supreme Court has always been very careful to protect the public reputation of the judicial branch for impartiality and legitimacy, and properly so.  Due process requires, they say, that a judge must recuse himself if there is even an appearance that he is biased for or against a litigant.  Just last term, they held a West Virginia supreme court judge should have recused himself from a case in which a litigant (Massey Coal Co.) had spent ~$1 million to get him elected.  In its various efforts over a century to regulate campaign finance and lobbying, Congress has had exactly the same purpose—to revive and protect its own reputation for integrity and legitimacy.  In Citizens United the Court has ruled that, although the Judiciary has inherent power to protect its own integrity, Congress does not. Worse, the Court has now held that it's unconstitutional for Congress and the President not to be essentially for sale to the highest bidder. 

My draft amendment is also influenced by Ronald Dworkin who argues here that one of the most basic purposes of the right of free speech is to help "protect democracy," i.e., to protect from corruption and distortion the process by which the People elect their representatives.

Here's my draft:

Section 1: The Congress shall have the power to enact laws protecting the integrity and reputation for legitimacy of the Congress and the Office of President, of every person holding or seeking an elective office of the United States, and of democratic election processes, by providing for the public financing of elections and campaigns and limiting the use of private funds therein to those provided by citizens who are natural persons, by limiting the amounts that each person may contribute or spend for or against candidates, and by requiring public disclosure of such contributions and expenditures.

Section 2: The several States may exercise the same powers to govern elections for offices of the State and its political subdivisions.

Section 3: This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission to the States by the Congress.

[Please see the revised draft in the March 6, 2010 Update below.]

Update on Saturday, February 13, 2010 at 10:46AM by Skeptic

Via email, here is Don's comment:

One policy problem with Skeptic's proposed Constitutional amendment is that it would allow an incumbent majority in Congress to impose a very low limit on contributions by natural persons but not provide public financing (or only do so in very small amounts). The incumbent party already wins every election, by a huge landslide. Would an incumbent majority vote for even more assurance of re-election? What's wrong with that?  The incumbent party is doing a terrific job, isn't it?

I agree with Don that incumbency protection is a problem, but would my proposed amendment likely make it worse?  Since 1964, 85-98% of House incumbents and 55-96% of Senators have been reelected, according to these graphs posted by the Center for Responsive Politics. My proposal would allow Congress to eliminate the most pernicious of their many tools for incumbency protection--trading access and votes for financial support. From time to time, there has been bipartisan Congressional support for preventing that, but the Supreme Court has blocked them. Of course, there has not often been support for public financing.  If public financing were skimpy, incumbents could, I suppose, go back to winning on name recognition, the franking privilege (remember when people thought that was important?), constituent services, "earned media coverage," etc., but will a majority of incumbents really want to take their chances without paid advertising?  Certainly important to consider the potential unintended consequences of my proposal. 

Update on Sunday, February 14, 2010 at 01:53PM by Skeptic

Roy emailed this comment:

I have two main points in response to Skeptic's insightful comment:

1.  I was struck by Skeptic's phrase "the Court has now held that it's unconstitutional for Congress and the President not to be essentially for sale to the highest bidder."  What Justice Kennedy would say to that is that where there is a quid pro quo for the contribution or expenditure, that is a bribery, which is illegal.  You punish the person who made the bribe and the person who took it, and that is certainly constitutional.  In Buckley the Supreme Court upheld the constitutionality of limits on direct contributions to candidates because of the potential for corruption and the appearance of corruption.  (What was at issue in Citizens United was independent expenditures.)

The problem with bribery is showing the causal connection between a political campaign expenditure and the public official's actions.  Justice Kennedy would say that the contributors are just buying "access" and "ingratiation" and that, relying on the Court's decision in Buckley, "independent expenditures do not lead to, or create the appearance of, quid pro quo corruption. . . . Ingratiation and access . . . are not corruption."  Justice Kennedy then went on to acknowledge the legitimate interests of Congress to avoid the appearance of corruption resulting from independent expenditures  but concluded, without further reasoning, that Congress cannot solve that problem with an unconstitutional remedy, a ban on political speech. 

My own reaction is that what is going on is more subtle than outright bribery.  Access and ingratiation do present an appearance of corruption, or at least an appearance of influence, and political expenditures are (at least some of the time) effective tools in influencing how a public official acts.  The best evidence is that corporations keep making the expenditures.  I don't think you should have to show outright bribery in order to regulate political expenditures.

2.  I am wondering about the wisdom of a constitutional amendment that allows Congress to limit political expenditures to natural persons.  That would mean that groups like the Sierra Club and the National Rifle Association could not make expenditures with respect to candidates they support or oppose. The same would be true for unions and political action committees.   Indeed, no group of people could make political expenditures if they created an entity to act together.   Would that mean, as a practical matter, that there could be no pooling of money of any kind to make independent expenditures?

My tentative thought is that it would be enough to say that Congress can impose reasonable limitations on contributions and expenditures, without outlawing corporations and other entities from making them.. Corporations and other entities would be subject to the limitations that Congress adopts.   The real problem is not entities versus natural persons.  It is the size of the amounts being spent and the actual and apparent effect of the expenditures on governmental decision-making. 

I agree the draft amendment would allow Congress to outlaw bundling of contributions, and I might object to that after I see it. I might prefer to retain as lawful entities like political action committees funded entirely by individual contributions. However, the proposed draft doesn't require Congress to make any changes at all in current law and certainly doesn't require Congress to limit campaign spending to individuals with no bundling or intermediation. My proposal is deliberately minimalist--just sweeping away the jurisprudence that money equals speech in election campaigns and immunizing the concept of public financing from Constitutional attack. Given the aggressive stance of SCOTUS on corporations as persons, I think it would be wise to authorize Congress explicitly to treat them as not having the rights of natural persons in this context. To say that artificial persons have none of the rights of citizens would be to go way too far, in my opinion. So I went only this far. Artificial persons would still have the First Amendment right to "petition the government for redress of grievances," i.e., engage in lobbying with no expenditure limits, and all other rights that existing jurisprudence and legislation declares they have.

Update on Saturday, February 20, 2010 at 09:24AM by Skeptic

Roy has emailed me another comment:

With respect to the proposed constitutional amendment, there would need to be an exception to the power of Congress to limit political expenditures to natural persons in order to keep in place the present First Amendment provision prohibiting infringement on the freedom of the press.  Most newspapers and other comparable media are owned by corporations.   I am assuming no one would want Congress to have the power to silence the press.  Including that exception in the amendment would raise the question of whether, given that we are now in modern times, the definition of "press" should be fleshed out to make it clear that other forms of media are included..

The amendment might also clarify whether Congress could limit contributions and expenditures by candidates themselves.

I agree my draft raises the question of how to interface my proposed new Congressional powers with freedom of the press.  It's important, but I don't have a response. 

Update on Saturday, March 6, 2010 at 02:08PM by Skeptic

Roy proposed to fix the free press problem by just adding one sentence at the end of Section 1.  I agree, and here is how it now reads:

Section 1: The Congress shall have the power to enact laws protecting the integrity and reputation for legitimacy of the Congress and the Office of President, of every person holding or seeking an elective office of the United States, and of democratic election processes, by providing for the public financing of elections and campaigns and limiting the use of private funds therein to those provided by citizens who are natural persons, by limiting the amounts that each person may contribute or spend for or against candidates, and by requiring public disclosure of such contributions and expenditures. Nothing in this amendment, however, shall change the prohibition in the First Amendment against Congress making laws abridging freedom of the press.

Section 2: The several States may exercise the same powers to govern elections for offices of the State and its political subdivisions.

Section 3: This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission to the States by the Congress.

Here are three other draft Constitutional amendments.  Senator Chris Dodd and Congressman Tom Udall have introduced a Joint Resolution to adopt a Constitutional amendment.  It would authorize Congress and the States to regulate and set limits on contributions to candidates and spending for or against candidates.  There is no mention of any distinctions between natural persons and artificial entities or of public financing; is that necessary or sufficient to defang big business opposition?    

JOINT RESOLUTION Proposing an amendment to the Constitution of the United States relating to contributions and expenditures in­tended to affect elections.

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two- thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as part of the Constitution when ratified by the legislatures of three-fourths of the several States within seven years after the date of its submission by the Congress:

ARTICLE __

SECTION 1. Congress shall have power to regulate the raising and spending of money with respect to Federal elections, including through setting limits on—

(1) the amount of contributions to candidates for nomination for election to, or for election to, Federal office; and

(2) the amount of expenditures that may be made by, in support of, or in opposition to such candidates.

SECTION 2. A State shall have power to regulate the raising and spending of money with respect to State elections, including through setting limits on—

(1) the amount of contributions to candidates for nomination for election to, or for election to, State office; and

(2) the amount of expenditures that may be made by, in support of, or in opposition to such candidates.

SECTION 3. Congress shall have power to implement and enforce this article by appropriate legislation.

Public Citizen’s Scott Nelson, who is one of the attorneys representing the key congressional sponsors of the McCain-Feingold law and co-authored their amicus brief in Citizens United, has offered two proposed forms of Constitutional amendment in Public Citizen’s FAQs about Citizens United. The first would declare that for-profit business entities other than publishers and broadcasters are not covered by the First Amendment at all.  The second would authorize Congress and the States to impose reasonable restrictions on the speech and association rights of for-profit business entities that are not publishers or broadcasters and on entities funded by such entities. 

The U.S. Supreme Court ruled on January 21, 2010 in Citizens United v. Federal Election Commission that corporations have the same First Amendment rights as people, and that they can spend unlimited amounts of money on elections. We think corporations aren’t people and should not be able to trample democracy. One key way to overturn this decision is through a constitutional amendment, which Public Citizen will pursue. Below are some questions you may have about such an amendment.

Q: What would a “Free Speech for People” amendment to the Constitution say?

A: We’ve suggested a couple of possibilities at this point. One would state:

The freedoms of speech and the press, and the right to assemble peaceably and to petition the Government for the redress of grievances, as protected by this Constitution, shall not encompass the speech, association, or other activities of any corporation or other artificial entity created for business purposes, except for a corporation or entity whose business is the publication or broadcasting of information, when such corporation or entity is engaged in that business. A corporation or other artificial entity created for business purposes includes a corporation or entity that, although not itself engaged in business pursuits, receives the majority of its funding from other corporations or artificial entities created for business purposes.

Another possibility would be:

Congress and the States may make laws imposing reasonable restrictions on the speech and association of corporations and other artificial entities created for business purposes. This article shall not authorize restrictions not otherwise permissible on the freedom of speech or of the press enjoyed by a corporation or entity whose business is the publication or broadcasting of information, when such corporation or entity is engaged in that business. A corporation or other artificial entity created for business purposes includes a corporation or entity that, although not itself engaged in business pursuits, receives the majority of its funding from other corporations or artificial entities created for business purposes.

These two possibilities would have somewhat different implications in practice, but both would permit Congress to regulate political spending by business corporations. There are other possible approaches. These suggestions are just the beginning of what must be a thoughtful discussion to determine the best language to protect real people’s right to speak freely and to protect the press from government censorship, while making clear that these rights do not extend to corporations’ speech (except for speech by the media).

Q: What will be the affect of this amendment on the media? Will they keep their First Amendment rights, even though they are corporations?

A: Neither of the amendments that we are suggesting would affect the media. The amendments would provide that members of the media retain their full First Amendment rights when they are engaged in publishing, broadcasting and similar activities. Just like other corporations, however, they would not, however, have the right to sponsor campaign ads or make campaign contributions.

Update on Friday, March 19, 2010 at 10:28AM by Skeptic

Larry Lessig has his own proposed form of Constitutional amendment in a good discussion here.

Nothing in this Constitution shall be construed to restrict the power to limit, though not to ban, campaign expenditures of non-citizens of the United States during the last 60 days before an election.

He says this works even if corporations are "persons," they are not citizens, and he wants to change the Constitution as little as possible. 

Update on Tuesday, April 26, 2011 at 05:06PM by Skeptic

Greg Colvin compares his proposed Constitutional amendment with five other approaches and posts a convenient chart covering 13 issues. His proposed language from here is this:

Amendment XXVIII “Citizens Election Amendment” Version 1.0

Section 1. Only natural persons who are citizens of the United States may make contributions and expenditures to influence the exercise of a citizen’s right to vote, although Congress and the States may also institute systems of public financing for election campaigns.

Section 2. Congress and the States shall have concurrent power to implement this article by measures that may set limits on the amounts of each citizen’s contributions and expenditures, including a candidate’s own spending, and authorize citizens to establish committees to receive, spend, and publicly disclose the sources of contributions and expenditures, and by other appropriate legislation.

UPDATE 11/11/11:  Greg Colvin has a good discussion of a fundamental issue here.

Update on Friday, September 23, 2011 at 01:29PM by Skeptic

Here is the text of a proposed amendment introduced September 12 by Conyers and Edwards:

HJ 78 IH

112th CONGRESS 1st Session H. J. RES. 78

Proposing an amendment to the Constitution of the United States to clarify the authority of Congress and the States to regulate the expenditure of funds for political activity by corporations.

IN THE HOUSE OF REPRESENTATIVES

September 12, 2011

Ms. EDWARDS (for herself and Mr. CONYERS) introduced the following joint resolution; which was referred to the Committee on the Judiciary

---

JOINT RESOLUTION

Proposing an amendment to the Constitution of the United States to clarify the authority of Congress and the States to regulate the expenditure of funds for political activity by corporations.

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two-thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as part of the Constitution when ratified by the legislatures of three-fourths of the several States:

`Article--

`Section 1. Nothing in this Constitution shall prohibit Congress and the States from imposing content-neutral regulations and restrictions on the expenditure of funds for political activity by any corporation, limited liability company, or other corporate entity, including but not limited to contributions in support of, or in opposition to, a candidate for public office.

`Section 2. Nothing contained in this Article shall be construed to abridge the freedom of the press.'.

END

Update on Thursday, October 6, 2011 at 03:23PM by Skeptic

Dylan Ratigan is promoting this form of Constitutional Amendment:

"No person, corporation or business entity of any type, domestic or foreign, shall be allowed to contribute money, directly or indirectly, to any candidate for Federal office or to contribute money on behalf of or opposed to any type of campaign for Federal office. Notwithstanding any other provision of law, campaign contributions to candidates for Federal office shall not constitute speech of any kind as guaranteed by the U.S. Constitution or any amendment to the U.S. Constitution. Congress shall set forth a federal holiday for the purposes of voting for candidates for Federal office."

Update on Monday, December 19, 2011 at 08:15AM by Skeptic

Greg Colvin lays out an excellent analytical framework for deciding what should be included in a Constitutional amendment. He identifies 12 issues that should be addressed in the drafting.

Update on Friday, May 2, 2014 at 05:20PM by Skeptic

At a Senate committee hearing this week, Senator Shumer announced that the Senate will vote this year on the proposed Constitutional Amendment introduced by Senator Udall of New Mexico.  The Resolution now has 36 Senate co-sponsors and has been revised since its introduction.  The current version is as follows:  

                            JOINT RESOLUTION

    Proposing an amendment to the Constitution of the United States
     relating to contributions and expenditures intended to affect
                               elections.

    Resolved by the Senate and House of Representatives of the United
States of America in Congress assembled (two-thirds of each House
concurring therein), That the following article is proposed as an
amendment to the Constitution of the United States, which shall be
valid to all intents and purposes as part of the Constitution when
ratified by the legislatures of three-fourths of the several States:

                              ``Article--

    ``Section 1. To advance the fundamental principle of political
equality for all, and to protect the integrity of the legislative and
electoral processes, Congress shall have power to regulate the raising
and spending of money and in-kind equivalents with respect to Federal
elections, including through setting limits on--
            ``(1) the amount of contributions to candidates for
        nomination for election to, or for election to, Federal office;
        and
            ``(2) the amount of funds that may be spent by, in support
        of, or in opposition to such candidates.
    ``Section 2. To advance the fundamental principle of political
equality for all, and to protect the integrity of the legislative and
electoral processes, each State shall have power to regulate the
raising and spending of money and in-kind equivalents with respect to
State elections, including through setting limits on--
            ``(1) the amount of contributions to candidates for
        nomination for election to, or for election to, State office;
        and
            ``(2) the amount of funds that may be spent by, in support
        of, or in opposition to such candidates.
    ``Section 3. Nothing in this article shall be construed to grant
Congress the power to abridge the freedom of the press.
    ``Section 4. Congress and the States shall have power to implement
and enforce this article by appropriate legislation.''.

At the same hearing Retired Justice Stevens argued for a Constitutional Amendment and offered this language:

“Neither the First Amendment, nor any provision of this Constitution, shall be construed to prohibit the Congress or any state from imposing reasonable limits on the amount of money that candidates for public office or their supporters may spend in election campaigns.

Crooks and Liars has video clips of five witnesses, including Justice Stevens, and brief summaries of their testimony here.  I like the simplicity of Justice Stevens' language. 

Prolonged unemployment has profound life-changing economic and social consequences.

The current Atlantic (thanks to Christine for the link) pulls together scholarly studies and anecdotes about how prolonged periods of unemployment change lives permanently for the worse. There is much more to the article than the following snippets about impacts on 20-somethings who first entered the workforce in periods of high and persistent unemployment; it reduced their lifetime earnings and affected their personalities.

But in fact a whole generation of young adults is likely to see its life chances permanently diminished by this recession. Lisa Kahn, an economist at Yale, has studied the impact of recessions on the lifetime earnings of young workers. In one recent study, she followed the career paths of white men who graduated from college between 1979 and 1989. She found that, all else equal, for every one-percentage-point increase in the national unemployment rate, the starting income of new graduates fell by as much as 7 percent; the unluckiest graduates of the decade, who emerged into the teeth of the 1981–82 recession, made roughly 25 percent less in their first year than graduates who stepped into boom times.

But what's truly remarkable is the persistence of the earnings gap. Five, 10, 15 years after graduation, after untold promotions and career changes spanning booms and busts, the unlucky graduates never closed the gap. Seventeen years after graduation, those who had entered the workforce during inhospitable times were still earning 10 percent less on average than those who had emerged into a more bountiful climate. When you add up all the earnings losses over the years, Kahn says, it's as if the lucky graduates had been given a gift of about $100,000, adjusted for inflation, immediately upon graduation—or, alternatively, as if the unlucky ones had been saddled with a debt of the same size.

When Kahn looked more closely at the unlucky graduates at mid-career, she found some surprising characteristics. They were significantly less likely to work in professional occupations or other prestigious spheres. And they clung more tightly to their jobs: average job tenure was unusually long. People who entered the workforce during the recession "didn't switch jobs as much, and particularly for young workers, that's how you increase wages," Kahn told me. This behavior may have resulted from a lingering risk aversion, born of a tough start. But a lack of opportunities may have played a larger role, she said: when you're forced to start work in a particularly low-level job or unsexy career, it's easy for other employers to dismiss you as having low potential. Moving up, or moving on to something different and better, becomes more difficult.

"Graduates' first jobs have an inordinate impact on their career path and [lifetime earnings]," wrote Austan Goolsbee, now a member of President Obama's Council of Economic Advisers, in The New York Times in 2006. "People essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don't catch up." Recent research suggests that as much as two-thirds of real lifetime wage growth typically occurs in the first 10 years of a career. After that, as people start families and their career paths lengthen and solidify, jumping the tracks becomes harder.

. . . .

Journalists and academics have thrown various labels at today's young adults, hoping one might stick—Generation Y, Generation Next, the Net Generation, the Millennials, the Echo Boomers. All of these efforts contain an element of folly; the diversity of character within a generation is always and infinitely larger than the gap between generations. Still, the cultural and economic environment in which each generation is incubated clearly matters. It is no coincidence that the members of Generation X—painted as cynical, apathetic slackers—first emerged into the workforce in the weak job market of the early-to-mid-1980s. Nor is it a coincidence that the early members of Generation Y—labeled as optimistic, rule-following achievers—came of age during the Internet boom of the late 1990s.

Is there going to be an economic recovery, or is this the new normal?

I was born before WWII, and now is the first time it has ever occurred to me that we are in a recession from which we might not recover for a generation or more. I won't go into the reasons for my pessimism here, although I have written about some of them in previous posts. I write now only to report this recent insight and to point out that whether one assumes recovery or stasis should lead to profoundly different economic policy choices.

If we can have a recovery and resume economic growth and generalized prosperity in the near future, then it behooves us to use government fiscal policy aggressively and continue to keep money cheap to stimulate a recovery as rapidly as possible. The deficit accumulated to do that will be a much better thing to leave to the next generations than several unnecessary years—or a decade, or a generation—of stagnation, high unemployment, missed opportunities for education and career-building, declining international influence, etc., etc.

On the other hand, if this is the new normal, and we can't jump start the economy to perform like it did in the late 1990s, say, and we can't avoid a long period of high unemployment, stagnant family incomes, and declining prices—in other words, a lost decade or generation—then it would be better to start making now the painful adjustments that would be required to survive long-term in that environment. In this scenario, any stimulus money would add to the deficit but would have no expansionary effect. There would be not only smaller federal, state, and local government budgets, but smaller household budgets too. Infrastructure could not be expanded, properly maintained or replaced. Investment abroad might be more profitable than here. Funding for education would continue to decline, increasing the opportunity gap between rich and poor. The safety net for society's least vulnerable would be underfunded. Social Security benefits might have to be reduced, but there would be no employer-sponsored or private replacement—people would just have less to live on when they retire, if they can afford to retire at all. Net job creation would slow and could become negative. The average age of the population would increase as immigration of younger workers slowed and perhaps reversed, exacerbating the Social Security funding problem. The professional, managerial, and small business owner class could not avoid being sucked into this downward spiral, because the vast majority of their revenues come exclusively from what the others in their class and the 5/6 of American workers who are not bosses have available to spend. Real estate and other asset values would decline, and imported goods would become more expensive.

On this cusp of history, what we assume about the future may change what actually happens, which makes a wrong choice all the more perilous. If it is possible to pull out of the Great Recession only with aggressive stimulation, then doing too little or adopting policies appropriate for long-term stagnation might well foreclose the sunny path and assure the dark one. The Obama Administration seems to have chosen not to chose—it will not propose aggressive stimulation to help end the Great Recession, and it will not propose the painful policies that would be appropriate for long-term stagnation. We wait.

Update on Saturday, February 6, 2010 at 12:36PM by Skeptic

To the point that the professional class may also be getting sucked into a downward spiral, the president of the State Bar of California says it's unclear whether the current downturn in the legal profession is cyclical or structural.  He points to reports that legal work is being sent to India, that Beijing now has an English-language law school run the former dean of Cornell Law School and president of University of Michigan, and that some legal work is now being done in the UK by non-lawyers.  Meanwhile, clients are in rebellion at the billable hour model in which fifth year lawyers are billed at $500 per hour. 

Update on Thursday, February 11, 2010 at 04:45PM by Skeptic

Here is a post on some of the gruesome longterm effects on young people of trying to enter the workforce in a period of high persistent unemployment.

Update on Monday, March 1, 2010 at 02:09PM by Skeptic

Paul Krugman reminds us that when output of goods and services (GDP) is below its potential, those goods and services are not just delayed.  They are never produced--opportunity gone forever.  That's the argument for government stimulus to get the economy up to its potential as quickly as possible.  Otherwise, we are suffering, and bequeathing to later generations, a decline in wealth creation much larger than the public debt we avoid incurring if we don't make the effort.  PK illustrates with this graph from Mark Thoma (who got it from the Federal Reserve Bank of San Francisco):

Of course, PK's argument assumes we can raise output to its potential, which is the fundamental question I raised in the initial post, and that government stimulus programs work. I've been persuaded that well designed stimulus programs do work, but I'm not so sure our potential real GDP is still a rising curve.  Perhaps there are structural problems with our economy, such as globalization, that would not be fixed by economic stimulus and which are dragging us into a decade or more of unavoidable stagnation or decline. 

Update on Sunday, March 28, 2010 at 08:03AM by Skeptic

Michael Spence says it's the new normal.

So the most important question the US now faces is whether continued fiscal and monetary stimulus can, as some believe, help to right the economy. To be sure, at the height of the crisis, the combined effect of fiscal stimulus and massive monetary easing had a big impact in preventing a credit freeze and limiting the downward spiral in asset prices and real economic activity. But that period is over.

The reason is simple: the pre-crisis period of consuming capital gains that turned out to be at least partly ephemeral inevitably led to a post-crisis period of inhibited spending, diminished demand, and higher unemployment. Counter-cyclical policy can moderate these negative effects, but it cannot undo the damage or accelerate the recovery beyond fairly strict limits.

As a result, the benefits associated with deficit-financed boosts to household income are now being diminished by the propensity to save and rebuild net worth. On the business side, investment and employment follows demand once the inventory cycle has run its course. Until demand returns, business will remain in a cost-cutting mode.

The bottom line is that deficit spending is now fighting a losing battle with an economy that is deleveraging and restructuring its balance sheets, its exports, and its microeconomic composition – in short, its future growth potential. That restructuring will occur, deficit spending or no deficit spending. So policy needs to acknowledge the fact that there are limits to how fast this restructuring can be accomplished.

Attempting to exceed these speed limits not only risks damaging the fiscal balance and the dollar’s stability and resilience, but also may leave the economy and government finances highly vulnerable to future shocks that outweigh the quite modest short-term benefits of accelerated investment and employment. Demand will revive, but only slowly.

It seems optimistic to say demand will revive slowly because it didn't revive after the 2001 recession until the housing bubble got going and people started spending their paper gains by refinancing. Since per capita personal income from the real economy has been stagnating for decades and seems likely to continue to do so, who will create the demand?  If Spence is right that more government stimulus would be ineffective, then stagnation is the new normal, isn't it?

Citizens United is bad law—the right to speak is not the right to be heard

I've read all the opinions in Citizens United but have never read any of the earlier law on campaign finance reform and no authorities in recent years on free speech.  So, although I think I sorta understand where we are, I don't know much about how we got here, which means I can't say if Citizens United added a little or a lot to the power of money in politics.  Ezra Klein says here that big corporations already have so much political power and so many ways to influence elections that Citizens United won't change much. 

Regardless of how we got here, it seems to me that policy-wise we're in a bad place and that a plain reading of the Constitution would allow much more regulation of elections and the political process.  Perhaps we got here by confusing the right to speak freely and the right to be heard. 

It seems to me the core of the free speech guarantee is that the government cannot censor what we wish to say or punish us for what we said, with some very limited exceptions.  When we're engaging in political speech, we are even entitled to speak recklessly without fear of punishment, and perhaps even with malice (not sure about that) about public officials and candidates.  That seems to me a very big deal, and a precious right, but it's not the same as the right to make oneself heard— heard at all, or especially heard endlessly, noisily, ubiquitously, and exclusively. 

The doctrine that there can be no limit on one's right to spend money to make oneself heard is, of course, not about speech but about being heard—a right not explicitly guaranteed in the Constitution (unless you own a media outlet) but one that can of course be implied.  If there is an unfettered right to spend to be heard, isn't it a Constitutional problem that no media outlet is required to take your money and lend you its megaphone.  Even the fairness doctrine that gave all but "fringe" opinions a right to equal time on the "public" airways has been abrogated, apparently with no Constitutional fuss.  There are other obvious Constitutional limitations on the right to make oneself heard, including protecting the right of others to conduct orderly meetings, to be free of breaches of the peace, and not to have electioneering close to voting booths.  Even public agencies, Congress, and the Supreme Court itself limit who will be permitted to address them and for how many minutes they may be heard.  If those limitations on the right to be heard in those parts of the political process are Constitutional, what's so wrong with similar orderly regulation of the right to be heard in other parts of the political process? 

How is it that we got to this place where, in political campaigns one is Constitutionally entitled to be heard everywhere to the maximum possible extent until one runs out of money?  We've been told this has something to do with the "marketplace of ideas," in which, theoretically, after full exposure to all ideas and vigorous debate, the people decide which ideas are good and useful and which are bad and are rejected.  But that Darwinian debate cannot occur if the useful ideas cannot actually get into the marketplace at all, or once there they are overwhelmed and drowned out by unlimited spending on behalf of other, perhaps terrible, ideas.  Making money the surrogate for ideas, debate, and consideration has gotten us too close to the original meaning of "marketplace," in my opinion.

The doctrine that one may be heard as much, and only as much, as he can afford and, if he chooses, can effectively drown out the chances of everybody else to be heard skews who and what will be heard toward the status quo of entrenched interests and away from new ideas, change, and "creative destruction" in the economy.  Whenever there is a proposal to change the law, the entrenched interests pop up to defend the status quo—they know whom to lobby and how, they are often already organized in groups, and most importantly they have the cash flow from existing enterprises to "make themselves heard."  It may well be that the proposed change would create new opportunities that others would seize to make the world a better place, but those "persons" aren't organized, have no cash flow, and may not even exist.  Similarly, 100 million citizens each of whose pockets will be picked to the extent of $100 per year can't effectively oppose legislation that would do that, but a banking, telecom, or other industry that would share the resulting $10 billion of annual revenue will surely be heard—and surely knows which candidates to support with "independent" TV ads.  I don't think it's any accident that the five most "conservative" justices were the majority in Citizens United. 

I assume all these arguments have been made, and made better, but were rejected by the Supremes.  Perhaps after several personnel changes, such arguments could find some favor and political money could be reasonably regulated.  Until then, my best idea is public financing of campaigns in such lavish amounts that nobody, or hardly anybody, will turn down the public money and spend his/her own.  That would be expensive, but not nearly so costly as letting entrenched interests buy and run our governments. 

Update on Tuesday, April 6, 2010 at 09:46PM by Skeptic

Stanley Fish reports that those who recently gathered at the Brennan Center for Justice similarly focused on the differences between speech and money. 

State of the Union, Part 3—Obama’s grossly inadequate economic proposals

In Part 1, I pointed to the disconnect between the President's vivid and dystopian description or our economic problems and his timid proposals to fix them. In Part 2, I quoted from his State of the Union address and then posted some charts and graphs to show that he does not overstate our problems, which are deep and structural as well as cyclical. However, there is nothing extraordinary, either in type or scale, about the proposed action plan in the State of the Union address. Every one of his proposals is one that has been proposed and/or adopted in response to prior "ordinary" recessions or just as preferred polices in the absence of a recession.

Furthermore, some of Obama's proposals are inconsistent with each other. For example, he wants to spend federal money to promote basic research, infrastructure construction, and education, and increase tax credits and deductions for various things while freezing for three years discretionary federal spending. Some of his proposals are mere goals that seem unattainable, for example the goal of doubling exports in five years, which trade experts say would require doing things that we have been unable to accomplish for decades—things like getting China to float its currency exchange rate.

Here's the President's full list. I challenge readers to explain how any part of this program—or the whole program—can be an adequate response to the problems he described and which do actually exist. To me it seems the President is just unwilling to make a break with past economic policies. He wants us to keep doing the same things that led to our problems and hope the outcomes will be different on his watch.

• Help (in some unspecified way) community banks increase lending to small businesses
• Give a tax credit to any of one million small businesses that hire new workers or raise wages
• Eliminated capital gains taxation on small business investment
• Provide an investment tax credit to any business for investments in new plant and equipment
• Undertake modern infrastructure projects like high-speed rail
• Build clean energy facilities
• Give rebates to Americans who make their homes more energy efficient
• Slash tax breaks for companies that ship our jobs overseas, and give tax breaks to companies that create jobs here
• "Lay a new foundation for long-term economic growth"
• "Serious financial reform," including making sure consumers and middle-class families have the information they need to make financial decisions and preventing financial institutions from taking excessive risks
• Increase government funding of basic research in clean energy, cures for disease, and other fields ripe for innovation
• Build a new generation of nuclear power plants
• Open new areas for offshore oil and gas development
• Invest in biofuels and clean coal technologies
• Adopt legislation that makes clean energy more profitable and dirty energy less profitable
• Set a goal of doubling exports over the next five years by launching a National Export Initiative that will help farmers and small businesses increase their exports and loosen national security-based export controls over high-tech products
• Enforce existing trade agreements when trading partners cheat
• Press forward with the Doha Round and other trade liberalization agreements, particularly with South Korea, Panama, and Columbia
• Invest in the skills and education of our people by targeting federal funds to reform primary and secondary schools to raise achievement levels, "revitalize" community colleges, increase Pell Grants and provide tax credits for the families of college students, and forgive part of the student loans of those that go into public service
• Increase the child care tax credit
• Make it easier for middle-class people to start retirement accounts with expanded tax credits
• Push up housing prices by making it easier for to finance and refinance at lower rates
• Adopt the pending healthcare reform legislation
• Freeze "non-essential" discretionary federal government spending for three years, starting in 2011
• Create a bi-partisan commission to make recommendations for balancing the federal budget over the long term
• Congress should re-adopt the pay-as-you-go rules it had in the 1990s
• Congress should do more "earmark reform"

Update on Tuesday, February 9, 2010 at 11:20AM by Skeptic

In this WaPo op ed two McKinsey Global Institute leaders debunk some of the myths underlying the new economic recovery program announced in Obama's State of the Union address. Neither the small business sector, the high tech sector (green jobs for example), nor increases in exports can have a big impact on our gaping unemployment problem. They foresee a fundamental restructuring of economic activity continuing to destroy existing jobs.

History shows that recessions – particularly those following a financial crisis – accelerate the growth or decline already underway in industries. In this recession, for example, the auto, financial services and residential real estate industries have contracted significantly and won't regain their peak employment anytime soon.

An increase in exports may stem – but will not reverse – the multidecade decline in manufacturing employment. In today's developed economies, net growth in new jobs doesn't come from manufacturing; it comes from service industries. Fortunately, boosting exports creates jobs in supporting service industries, such as design, trucking, shipping and logistics.

State of the Union, Part 2—The Great Recession is far worse than any other post-war recession, and there are big underlying long-term problems.

In Part 1, I pointed to the disconnect between the President's vivid and dystopian description or our economic problems and his timid proposals to fix them. Here I quote from his State of the Union address and then post some charts and graphs to show that he does not overstate our problems. In Part 3, I'll post a list of Obama's proposals.

"One year ago, I took office amid two wars, an economy rocked by a severe recession, a financial system on the verge of collapse, and a government deeply in debt. Experts from across the political spectrum warned that if we did not act we might face a second depression. So we acted—immediately and aggressively. And one year later, the worst of the storm has passed.

"But the devastation remains. One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who'd already known poverty, life has become that much harder.

"The recession also compounded the burdens that America's families have been dealing with for decades—the burden of working harder and longer for less; of being unable to save enough to retire or help kids with college.

. . . .

"So we face big and difficult challenges."

. . . .

"We can't afford another so-called economic "expansion" like the one from the last decade—what some call the "lost decade"—where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was build on a housing bubble and financial speculation."

. . . .

You see, Washington has been telling us to wait for decades, even as the problems have grown worse. Meanwhile, China is not waiting to revamp its economy. Germany is not waiting. India is not waiting. These nations—they're not standing still. These nations are playing for second place. They're putting more emphasis on math and science. They're rebuilding infrastructure. They're making serious investments in clean energy because they want those jobs. Well, I do not accept second place for the United States of America.

Obama is certainly correct that the unemployment problem has no post-WWII precedent, according to these charts from A Historical Look at Labor Markets During Recessions, by staff of the Federal Reserve Bank of Dallas. The unemployment rate has risen faster than in any other post-WWII recession and is well above the worst of those recessions, which was 1973.

 

Total civilian employment has declined more deeply and continued longer than in any other post-WWII recession.

Only in the Great Recession and in the recession of 2001 has the civilian labor force, which tends to grow with population growth, actually shrunk—this is caused by people staying in school, going back to school, or simply abandoning efforts to find work (in which case they are not counted as being in the labor force or "unemployed").

And here is Catherine Rampell on NYT's Economix blog showing the inexorable upward trend in the proportion of job losses that are permanently lost, not just temporary layoffs. In the Great Recession, for the first time ever, over half of the jobs shed are gone forever. How will those be replaced? 

Obama is also correct that American families have been working longer and earning less for decades. Inflation-adjusted wages for the 5/6 of American workers who are not bosses are below where they were in 1973.

Inflation-adjusted average weekly earnings show a similar pattern, with August 2009 on the rise but still below the 1960s and 1970s, according to this LAT story.

Showing a similar pattern are Lane Kenworthy's graphs of real median (not average) family income and real GDP per capita here. Median family income continued to rise after 1972 but at a much slower rate than before.  Presumably, family incomes continued to grow as hourly earnings declined and stagnated because increasingly families had two earners and/or worked longer hours. 

 

State of the Union, Part 1—Obama sees extraordinary economic problems but proposes only ordinary solutions.

In his State of the Union address to the Congress this week, President Obama compared our economic challenges today to the perils we faced after the defeat of the Union at Bull Run, WWII hanging in the balance as our landings in Normandy faltered, the stock market crash in 1929, and the beatings of civil rights marchers on Bloody Sunday, all times when—

the future was anything but certain. . . . Again, we are tested. And again, we must answer history's call.

He goes on to say—

We can't afford another so-called economic "expansion" like the one from the last decade—what some call the "lost decade"—where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was build on a housing bubble and financial speculation.

With such language, the President came down on the pessimistic side of the debate whether the Great Recession is just another ordinary business cycle recession that will fix itself if left alone or if there is a "structural problem" that drives a long-term downward trend. Yet every one of his policy proposals is one that has been proposed and/or adopted in response to prior "ordinary" recessions or just as preferred polices in the absence of any economic recession. There is nothing extraordinary, either in type or scale, about his proposed action plan.

In effect, the captain of our ship of state has gotten on the horn and told us we've struck an iceberg and are in danger of sinking, but his call to action is all about deck chairs. And it's really worse than that. Some proposals are inconsistent with each other, e.g., he wants to spend federal money to promote basic research, infrastructure construction, education, and increase tax credits and deductions for various things while freezing for three years discretionary federal spending. And some of his proposals are mere goals that seem unattainable, for example the goal of doubling exports in five years, which trade experts say would require doing things that we have been unable to accomplish for decades—things like getting China to float its exchange rate.

Having proposed such a timid action plan, Obama has to hope—and we have to hope—that our underlying economic problems are not nearly as great as he said. Unfortunately, I think they are that great. Part 2 goes into that.

Update on Monday, February 1, 2010 at 04:03PM by Skeptic

Paul Krugman has posted the BLS/OMB projections of unemployment through 2013 and a pie chart showing how little of Obama's proposed budget could be affected by his proposed discretionary spending freeze.  PK says, "Nobody — not the Fed, not the administration, not Congress, is willing to do anything to create jobs despite dire projections."  If the BLS/OMB projection is correct, Obama will be running for re-election in 2012 with the unemployment rate at about 8 percent.

How long does it take to change conventional wisdom?

It is often said that conventional wisdom doesn't change until those to whom it is truth die off. John Maynard Keynes said that after age 25 or 30 people seldom change their understanding of how economies work. So I guess that gives entrenched economic beliefs a life expectancy of about two generations. I'm interested in that process.

It was about a year before books about the sub-prime mortgage meltdown began to come out. Before that, people trying to understand what went wrong and what to do about it had only fragments of information in the form of personal communications, newspaper and magazine articles, and blog posts. It took a lot of time-consuming work to interview the people who were there, read the documents, organize the information, weigh the evidence, and finally write a satisfactory and understandable explanation that encompassed something like the whole interconnected picture. Only then, with a viable competing narrative available, can the old conventional wisdom about the proper relationship of Wall Street, government, shadow banks, markets, derivatives, etc. even start to be displaced. Will it go quickly from here? I doubt it.

Another interesting evolution is the New York Times editorial board position on globalization, which went from "embracing" globalization as essential to growth in America 30 months ago to today's assessment that globalization is deeply damaging to America. I wish I knew what they said to each other about this issue, and what evidence (I assume it was evidence, but may have been something else) changed their minds. I don't, but here's the documentation of the evolution.

As recently as July 2007, the New York Times editorial page was telling us to "embrace" globalization:

[F]or American incomes to keep growing, the nation needs to embrace globalization, not turn against it.

Only 13 months later, and in the midst of the Great Recession, the "embrace" was gone and the NYT editorial included globalization in a list of factors inhibiting middle-class prosperity:

There are multiple reasons why Americans are working harder and not getting ahead, including a weak labor movement, globalization, technological change and a slowdown in educational attainment.

Today, the NYT editorial page says straight out that the variety of globalization we actually have is deeply damaging to America and many other nations. NYT's only prescription is for China to change policies that have been central to its worldview for two decades or more, so it's not rejecting globalization altogether but only saying the way it's been working is bad. Still that's a pretty big change.

If China continues its beggar-thy-neighbor currency policy, it will make it even harder for countries and the global economy to revive. As overextended governments wind down their fiscal stimulus, many economies will have to rely on exports as a crucial source of demand while their consumers restructure their sorry personal finances.

This task is made much more difficult if China is flooding the world with cheap goods. China's exports rebounded sharply in December after more than a year of decline. Its trade surplus — after falling last year — is expected to rebound sharply in 2010.

There are healthier strategies for China to follow. In particular, it could deploy some of its mountainous reserves at home to pay for long-neglected social spending: on health care, education and pensions. This would provide substantial economic stimulus and improve the lives of its people.

If it sticks to its cheap-renminbi guns, however, it is bound to draw a protectionist response. The Obama administration already has caved to political demands and slapped exceptional tariffs on Chinese tires and antidumping duties on steel pipes. Congress has been uncharacteristically quiet, but patience is wearing thin in Washington and everywhere.

India has filed a stack of trade complaints against China. And the Asia-Pacific Economic Cooperation forum recently urged the adoption of "market-oriented exchange rates" for Asian currencies, a reference to China's manipulation.

A trade war with China would be disastrous and bound to escalate around the world. Restraint is needed. But we fear no one is going to feel restrained if China doesn't change its strategy.

When a guardian and purveyor of conventional wisdom as powerful as NYT changes its institutional view, that's significant, but what are the next steps in the process of changing minds, and how long will it be before responsive policy changes in Washington are possible? And, of course, I'm very curious about what caused the NYT to change its collective mind.

Shouting at the deaf

Yesterday I described Marxist economists as one of several groups that predicted the financial crisis and pointed out that Marxists do not think about policy prescriptions to prevent, ameliorate, or recover from such crises because their belief system assumes our economic system is inherently unsustainable and will collapse and be replaced. They say a crisis proves their fundamental beliefs and brings us another step closer to the inevitable.

Today, in an exchange with some folks who seem to be strict anti-government free-marketeers, I realized they too are uninterested in policy prescriptions to prevent, ameliorate, or recover from crises because their belief system assumes that whatever happens in a totally unregulated market system is the very best possible result by their only criterion—it is the result of a free market system. If the results seem bad by some econometric or human measure, that can't be considered because they know free markets produce the most "efficient" results, and any undesirable effects must be due to government interference.

Both groups are functionally deaf (and illiterate too) to discussions about making governments and markets work better, and it's no use shouting. Now that I've taken the trouble to write that down, it seems too obvious to waste electrons on. But how does one communicate effectively with ideologues?

Tough financial system regulation is wise policy—and it’s good politics.

This assessment by Paul Krugman sounds right to me:

Let me conclude with a political note. The main reason for reform is to serve the nation. If we don't get major financial reform now, we're laying the foundations for the next crisis. But there are also political reasons to act.

For there's a populist rage building in this country, and President Obama's kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don't take a tough line with the banks in the months ahead, they will pay a big price in November.

  Read PK's whole column.