Eric Rauchway sent me another chart that helps illustrate the issue of the puzzling Cole/Ohanian theory that there was no demand-driven recovery from the Great Depression:

According to Cole and Ohanian, demand-driven changes in output can be distinguished from productivity-driven ones, because they’re manifested by changes in hours worked. On this chart, it becomes very difficult to miss the Depression-era collapse in the demand for workers, and recovery of demand during the mid-30s and during World War II. You also see that there was a long-term structural transition to more leisure, but that the line tends to squiggle around with the business cycle. But the Depression is no squiggle. It’s there plain as day, as is the recovery.

Happy New Year:

I’ll be in California for the next couple of days, but there should still be posts.

Why does Greece need a bailout?

This is pretty simple. The Greek budget is way out of whack and Greece can’t repay what it owes.

Why don’t the other Euro countries just let Greece default?

The concern is that if one Euro country defaults, this will increase the perceived riskiness of all European countries. The higher interest rates will be bad for everyone, but in particular could push countries like Ireland, Portugal, Spain, and Italy into default.

Well so what?

That many defaults would call other countries (Belgium, even France) into question. What’s more, the losses to banks would be enormous. Countries would then either need to choose between witnessing massive bank failures, or else engaging in bank bailouts much larger than the cost of just bailing Greece out.

Is this all caused by high taxes and socialism?

No. Sweden’s not on the Euro and they’re fine, notwithstanding high taxes. Even within the Eurozone, relatively high tax countries such as Finland and Austria are doing okay on their own terms.

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The conventional story about the Great Depression says that FDR undertook demand-stimulative policies that boosted growth, then backed away from those policies in 1937 producing a recession-within-a-depression, and then we returned to growth. Cole and Ohanian say they have a chart that calls this story into question:

The figure shows total hours worked per adult for the 1930s. There is little recovery in labor, as hours are about 27 percent down in 1933 relative to 1929, and remain about 21 percent down in 1939. But increasing aggregate demand is supposed to increase output by increasing labor, not by increasing productivity, which is typically considered to be outside the scope of short-run spending/monetary policies.

I’m really uncertain as to what they think they’re seeing in this chart. I see the traditional demand-driven downturn, I see the demand-driven recovery, I see the demand-driven 1937 recession, and I see the demand-driven 1938 recovery. What do Cole and Ohanian see? How is it that the unemployment rate fell from 24.75 in 1933 to 14.18 in 1937 as a result of productivity increases?

Via Tyler Cowen, an account of bookstores moving in to fill the void in former Borders locations. Some of this is happening, but it seems clear that we’re going to see a net loss of physical bookstores.

The interesting thing about this is that the decline of bookstores is almost certainly part of a systematic decline of physical retail of all kinds. Like most people I know, I buy some stuff at stores and some stuff online. But like most people I know, I have broadband internet at home. Something like two-thirds of American households don’t. My assumption is that the broadband share will increase over time, and that getting broadband will make people shift on the margin away from physical retailing. So what’s going to take up that space? In urban locations, I expect we’ll see a lot of bars and restaurants insofar as local regulators are willing to hand out the liquor licenses. But IN the suburban malls where the majority of the retail is located, there isn’t as much demand for bar and restaurant uses, and many of the big box locations seem implausibly large. Malls that are big enough to be spectacles unto themselves like the Mall of America should stay as attractive locations for the physical retail that remains, and in a place like Houston, the population is growing enough that you can just slow the pace of mall construction. But it seems overall like you’re going to have a fair amount of excess space unless it can be usefully repurposed for some kind of health care function.

Rick Perry’s campaign took note of this December 2008 Mitt Romney article in National Review today:

So this is surely the time for economic stimulus. But — and this is the crucial point — the government can’t just make itself bigger and more oppressive in the guise of stimulating the economy. That would make matters worse. Nor should we forget that fiscal stimulus is but one part of the solution. As Christina Romer, Barack Obama’s designee as chairperson of the Council of Economic Advisors concluded from her study of the Great Depression, bad monetary policy was its greatest cause and good monetary policy was its most effective cure. The Fed should continue to expand the money supply. And, it should confirm that it will not tolerate deflation — the pain of inflation pales in comparison.

That being said, a stimulus plan is needed without further delay, and there are some things that Republicans should insist on.

It’s a very sensible piece. He argues that in addition to monetary stimulus, we need tax cuts, infrastructure spending, and money for energy R&D. My disagreement with him is that he disparages state/local fiscal aid, which he sees as passing up an opportunity to reduce the equilibrium size of state and local government. That’s where basic ideology — he’s a conservative, I’m not — will divide reasonable people. The Perry campaign presumably sees this as evidence that Romney isn’t a “real” conservative. I would say the state/local government bit disproves that, and what it shows is that as recently as December 2008, conservative movement figures like Romney and conservative movement organs like National Review were not in the grips of nutty ideas about macroeconomic stabilization. What started as opportunistic opposition to President Obama has, however, seemed to have hardened for many into conviction.

Last year, right before the election, Nancy Pelosi brought a bill to the floor that would have cracked down on China’s currency practices. It stood no chance of becoming law, but it passed overwhelmingly with 348 yes votes. So back when the House GOP leadership sent Ben Bernanke a letter complaining about debasing the dollar, I was all ready to do a hypocrisy hit on them, but it turns out that John Boehner, Eric Cantor, and Kevin McCarthy were all in the small minority that voted no. Hit abandoned, but it makes me worry that their hard money views are sincere and that conservatives will hold onto them even if their electoral incentives change.

At any rate, that bill didn’t go anywhere in the Senate last year, but Harry Reid is now eager to bring it to the floor for a vote in the Senate. This is being covered by congressional reporters largely as so much gamesmanship, but the legislation is a moderately good idea on the merits. Threatening the Chinese government with trade penalties if they don’t alter the dollar-yuan exchange rate is a mighty clumsy alternative to doing monetary stimulus, but it’s something Congress has authority over and it’s something there’s some GOP support for. Meanwhile, since voters are strongly nationalistic and strongly confused, they think a “strong dollar” is good but that “Chinese currency manipulation” is bad, even though the point of Chinese currency manipulation is to make the dollar strong. I say thumbs up.

The Obama administration, meanwhile, is opposing this bill, which I understand as a matter of general executive authority concerns, but is also not using their executive authority in a way that’s making adequate progress on the issue.

Alec MacGillis dives deep into the Rick Perry legislative record and finds little evidence of the principled opposition to industrial policy that conservative politicians discovered two weeks ago when Solyndra went bankrupt. Indeed, Perry’s specific policy interventions were heavily oriented around what amount to slush funds.

This gets somewhat tied into the contrast between Perry’s reputation in Texas as basically a conventional business conservative and the impression given by his book that he’s a wild-eyed ideologue. For my part, I think this circle can be easily squared by noting that Texas is an unusual state. For one thing, it’s big. It has way more people than Portugal or Switzerland or the Netherlands or Sweden or other perfectly respectable developed countries. And unlike, say, New York or Pennsylvania, it doesn’t include metropolitan areas that cross state borders. It has a lot of natural resources, including oil and empty space and a political culture that’s hostile to redistribution of income to poor people. Under the circumstances, an insane ideological project to radically decentralize the United States of America is a pragmatic business conservative agenda. Chris Christie’s not going to sit in Trenton and say, “I wish these other states would just leave us alone!” Lots of his constituents work in those other states. Kansas is pretty clearly not going to work as a freestanding enterprise. Texas is different.

A couple of articles are out today seeming to deplore the fact that members of the deficit “super committee” are holding some closed-door meetings and then not blabbing to reporters about what’s happening.

I think this shows they’re doing the right thing after all, contrary to what some initial reporting led me to believe. Transparency is great. The committee’s work product should be subject to extensive public scrutiny. But if you subject an ongoing bargaining process to public scrutiny, you’re just ensuring that nothing will get done. People need to be able to speak their minds rather than playing to the cameras. Playing to the cameras is, of course, stimulus for reporters, so they don’t like it when people stay quiet. But on the merits, this is the right call.

John Judis in TNR, taking advantage of some kind of perestroika in the Richard Just Era: “In 1947, the United States faced a very similar situation in the UN and took exactly the opposite position—to the benefit of Palestine’s Jewish population.”

The whole piece is recommended.

Your daily fail: “The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday.”

Lars Svensson and others have a principle that central bankers ought to “target the forecast.” This means you need to align your forecasts of what’s going to happen with your proposed actions. If the pilot of your airplane says “at the current pace we’re going to land about an hour late,” you might ask him why he doesn’t fly faster. You expect him to have a good answer. Maybe the plane can’t fly any faster? Maybe you’ll run out of fuel if you go that fast? Maybe you’re not cleared by the tower to land at that time so there’d be no sense in going faster? There could be reasons. Central banking ought to be the same. If your forecast is for a prolonged period of high unemployment, people ought to be asking you why you don’t do more. If there’s a good answer to that question, it ought to be “I’m afraid of raising already high inflation expectations.” What we’re seeing, instead, is slow and falling inflation expectations.

It’s what failing looks like.

Many supermarkets seem to be finding that the hoped-for labor savings from self-checkout machines aren’t materializing. The impulse among some progressives to cheer this as a pro-labor development is, I think, a big mistake. It’s absolutely true that firms seek to take advantage of productivity improvements to lay workers off and that we should feel very bad for people who lose their jobs. This is why progressives must and do support a social safety net and generous provision of social services.

But if you look back at American history and the economy as a whole, you’ll see that it’s simply not the case that slow productivity growth has been good for workers. Quite the contrary. Workers have been much worse off since the Great Productivity Slowdown of the 1970s (see Krugman’s The Age of Diminished Expectations) and the best period within the bad period was the mini-boom in productivity of the late-1990s.

Technological change clearly does lead to firm-level layoffs and individual job losses. But economy-wide job losses are driven by inadequate aggregate demand and poor macroeconomic policy. When President Obama flirted with the idea that productivity increases explain high unemployment he was making a mistake. Indeed, one thing that should worry us about the persistence of mass unemployment is that with so many excess workers around firms have less incentive than ever to spend time worrying about finding ways to make their workforce more productive. I suspect that’s part of the issue with the self-checkout machines. Being a cashier is not a particularly fun, glamorous, or high-paying job. In a healthy labor market, lots of cashiers would be looking for work elsewhere and there’d be lots of pressure to raise wages. Shifting to an equilibrium with fewer, but higher paid, staffers would make a lot of sense. But with double-digit unemployment for non-college workers, why bother?

Keith Humphreys on the Euroland crisis:

I have read endless coverage of the Euro Crisis, and my head is now spinning as I learn of sovereign debt swaps, inter-market currency trades and European Central Bank-mediated transaction insurance schemes. I then go back to a much simpler analysis: The system was set up financially such that one party could spend far more money than it had secure in the knowledge that someone else would have to pick up the tab.

I think that’s really mistaken, and it ill-serves the world to have a one-sided narrative told by German bankers dominate the entire discussion. Humanity has long had a system whereby someone can buy something he doesn’t have the money to buy. It’s called borrowing. And thanks to bankruptcy, you can borrow money secure in the knowledge that somebody else may have to pick up the tab. This is why lenders charge interest if you want to borrow their money. If you ask a moneylender why his enterprise is so profitable, he’ll give you two reasons. One is that the profits are a consideration in exchange for the risks he’s running. The other is to observe that he personally is making big money because he personally is skilled at the moneylender’s trade. Spanish households borrowing money and paying interest are not purporting to be skilled borrowers. They’re just regular folks participating in a marketplace dominated by well-compensated professional lenders, whose compensation is based on their alleged skill at the trade.

Well, it turns out these guys weren’t actually that good at their trade. When bankers sit down with borrowers to discuss loans, it’s the lender who’s putting himself forward as a highly trained highly compensated expert in the field of lending money. If it goes bad, it’s because the allegedly expert lender has turned out to be bad at his job. It’s the banks that loaned money to Greece who are saying the German government ought to pick up the tab. It doesn’t say this in any of the EU’s founding treaties — it actually says the reverse. The Greeks would probably just as soon default and devalue as go through this nonsense. It’s the governments of northern Europe who, by offering to act as debt collectors for their domestic banks, have created this situation where they’re left partially holding the tab.

This has been a theme in progressive media for a while and his son Michael Reagan agrees:

In many ways, though, that seems to me to be the mark of a successful politician. Someone who advocated a Medicaid program as stingy as LBJ’s would be a big-time conservative today, but that’s a kind of misleading way of looking at the president who signed Medicaid into existence. Reagan was the first person to make anti-tax fervor the centerpiece of the conservative movement, the first movement conservative since Barry Goldwater to capture the GOP nomination, and then he went on to win two big electoral victories. That completely shifted the balance of power within American politics and turned his “sometimes taxes should go up, sometimes taxes should go down” approach into the national median. I think it’s telling that as early as 1988 you had George H.W. Bush, formerly the moderate alternative to Reagan, loudly promising that taxes would never go up. When he tried to betray that promise, it immediately shattered his coalition in Congress.

That’s all just to say that I think it was the Reagan era itself that transformed the Republican Party into the much-more-conservative party we know today.

— Pretty sure Mitt Romney is already the strong candidate Chris Christie fans think they’re looking for.

— Panda cub group nap.

— The great dental divide.

— Economists surveyed by Bloomberg News like the American Jobs Act.

— Obama’s approval rating surges in Israel.

— The next shutdown standoff happens in seven months.

— Just because you’re cleared of crimes doesn’t mean you’re off the FBI’s watch list.

Budget conditions for America’s cities continue to be bleak, as reported in a new survey from the National League of Cities. Sales tax revenues remain well below the pre-recession trend, financial assistance from state governments has been slashed, and property tax revenues that normally exhibit little sensitivity to the business cycle have been hammered by the current housing-driven downturn. Mayors hoping for the federal government to step into the breach can find a lot to like in President Obama’s proposed American Jobs Act, which would offer billions to help sustain public sector employment and activity. But the plan contains one unfortunate oversight—ongoing transportation costs where the labor market impact of cutbacks could be particularly severe.

Read the rest up at The Atlantic Cities.

I’ve heard Dylan Ratigan talk a fair amount on his show about his plan to get money out of politics, but it was only today that I saw what his specific proposed constitutional amendment is:

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.

Ezra Klein’s question “what party does your third party solve” also seems relevant here. There are some obvious problems that this would create. Like let’s say you’re Elizabeth Warren and you want to run a campaign against Scott Brown. How do you pay your campaign manager? How do you let people know that you’re running? To me, this doesn’t solve the problem that when Washington regulates the financial system, it’s dependent for expertise on people with ties to the financial industry. It doesn’t solve the problem of the revolving door. It doesn’t solve the problem that politicians need the “legislative subsidy” of lobbyists to do policy analysis. Nor does it solve the problem of monied interests exercising disproportionate influence over think tanks, advocacy groups, or even (through speaking fees and the like) journalists and pundits. Presumably the people who make the F-22 will still be allowed to advertise about how high levels of defense spending are awesome, just as ExxonMobile will still be allowed to advertise about how fossil fuel extraction is the road to prosperity. You’l have created some big new logistical hassles for political campaigns without, I think, addressing any concrete issues.

I’d say that in general, the problems we have with money and politics aren’t really that there’s too much money “in” the politics and we need to get it “out.” It’s too difficult for non-incumbent candidates to get any money. And it’s too difficult for elected officials to get expert technical opinion on issues without relying on interested parties.

That there were many more women graduating from medical school in 2008 than in 1980 is pretty intuitive. On the one hand, that’s the progress of gender equality. On the other hand, there are many more people today than there were 30 years ago and the population is older and in more need of medical care. So you might be surprised to learn that actually the new woman doctors have just crowded out male doctors:

Given the underlying demographic shifts and the skyrocketing spending on health care, this is kind of amazing. Doctors earn a lot of money and I’m sure more people would be willing to go to medical school if the powers that be wanted to train them.

There’s no particular reason why monetary policy has to be conducted through interactions between the central bank and a banking system. Or, rather, the reason it’s done this way is historical. Under an older set of institutional arrangements, a central bank was actually a bank and it’s importance derived from its interaction with other banks. But in the modern day, you could do something completely different. For example, Peter Frase notes that from time to time, proposals pop up for a national basic income. You could, for example, have the government send a check for $600 each month to every American citizen. Alternatively, you could have the central bank send a check for approximately $600 in newly printed money each month to every American citizen and vary the exact amount of the check in order to stabilize demand. Or, of course, you could use different numbers.

I’m not sure the politics of trying to do things that way would really work out well in the end, but it’s a potential idea for your humanitarian utopia of tomorrow. More broadly, in a strong post-Keynesian approach, I think you’d just say that the government doesn’t have to issue any bonds. If you want to increase aggregate demand, you just spend more than you tax and print money to fill in the gap. If you want to reduce inflation, you tax more than you spend and rip the bills up.

That said, I think this focus on the mechanics can get misleading. The key avenue for determining actual outcomes under our current system is expectations, and that would continue to be the case under any of these systems.

An entirely typical, yet nonetheless infuriating unsigned Washington Examiner editorial makes the case that cars are good for freedom and liberals want to promote walking and mass transit out of dislike for freedom. In order to dismiss progressives’ stated concerns about the environmental impact of burning oil, they offer the following argument:

But fair-minded people with a knowledge of history understand that we should be exceedingly thankful for the automobile and its crucial role in the economic, social and political progress achieved since Henry Ford put America on wheels in 1908 with the Model T. Note that average life expectancy in America that year for men was 49.5 years and 52.8 years for women. Today, the overall average life expectancy in America is 78.37 years, a 58 percent improvement for men and a 48 percent gain for women. So much for the killer exhaust fumes.

I would kindly invite the author of this editorial to park his car in a closed garage and just run the engine for a while. Or maybe attach a hose to his car exhaust and breath the fumes in for a bit. I wonder how long his life expectancy would be?

Now of course nobody does that. You would die if you did. The entire automobile industry would be completely impossible if car drivers had to breathe the exhaust fumes emitted by their cars. Instead, the way a car works is that the fumes just go out into the air that everyone shares. Convenient for the guy driving the car, but sort of unfortunate for everyone on the planet who’s responsible for a below-average quantity of emissions. In most contexts that don’t relate to their peculiar love of air pollution, conservatives are quick to see how ill-defined property rights can lead a tragedy of the commons. Car exhaust is just a special case of the general phenomenon. The toxicity of the emissions is no more fake than the greenhouse gas emissions. But nobody owns the atmosphere. Consequently, the tendency is for individuals to produce far too much pollution. The freedom to over-fish or over-graze or over-pollute or over-anything in a tragedy of the commons scenario is a real kind of freedom, but it’s also a mighty peculiar one and nothing to boast about.