Opinion

I’m referring, of course, to Brooklyn. Robin and I will be talking with Jeff Madrick at the Brooklyn Book Festival, 11 AM Sunday.

Menzie Chinn points out that government employment has not, in fact, soared under Obama; he gets the usual mass of hysterical comments accusing him of being naive, dishonest, whatever. Heh.

Here’s another one: compare real government purchases in stimulus-happy America and frugal, austere Germany (I’ve mentioned this before, but here’s a chart):

Eurostat

It’s worth noting that just to keep up with the trend in potential GDP, US government purchases would have to have risen about 6 percent over the period shown. As far as actual government spending on goods and services goes, as opposed to aid to individuals, we’ve had no stimulus at all — basically because of cutbacks at the state and local level.

But hey, stimulus has failed.

Regular readers may remember that I’ve spent more than a year trying to knock down the idea that the United States dare not get tough with China, because we need them to keep buying our bonds; as I wrote way back in May 2009, given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports.

I’ve failed, despite repeated attempts, to get through with this point here — but the Japanese get it. They’re complaining to China about its purchases of yen-denominated bonds, which they argue — correctly — hurts Japan by strengthening the yen.

Quick update: I should also link to this post, and quote Dean Baker again: China has an unloaded water pistol pointed at our head.

Brad DeLong has some fun with Megan McArdle acting as if using present values to compare costs at different dates were some weird leftist idea. But it actually gets funnier: she asserts that

the only reason the two numbers look even remotely similar is that they’re using a present value calculation and a very long time frame

which is right, but not in the way she thinks: if you use a shorter time frame, say 25 years, there isn’t any Social Security shortfall at all!

There’s also the bit about how

the government doesn’t really have any mechanism to save

except for, you know, running smaller deficits so that it doesn’t run up as much debt.

But there’s an issue here a lot broader than Ms. McArdle, involving time horizons and the convenient way they shift among those on the right.

The basic position here is that people on the right favor high-end tax cuts that will worsen the deficit, while at the same time demanding both immediate fiscal austerity and cuts to Social Security, in the name of deficit reduction.

They justify their tax cuts/austerity position by arguing that what’s important is holding down current deficit numbers, never mind the 10-year outlook.

Meanwhile, they declare that it’s urgent that we act now to lock in cuts in Social Security benefits that won’t take place for decades.

Why, it’s almost as if they’re grabbing any argument at hand to justify spending cuts for the middle class and tax cuts for the rich, regardless of the inconsistency.

Reading David Brooks today, I couldn’t help thinking of Bob Solow’s old line that efforts to explain Britain’s relative decline always end up in a “blaze of amateur sociology.” That’s not an attack on David; everyone does it — although I might point out that the reason so many smart kids go into finance, not manufacturing, is that the pay is much better.

And with this, a bleg: all the references I can find online to that Solow remark are, ahem, to me quoting it. I know I got it, more than 20 years ago, from Solow’s discussion of a paper on British relative decline. But does anyone actually have the reference?

Update: Success! From various sources, it’s here (pdf), p. 103:

Every discussion among economists of the relatively slow growth of the British economy compared with the Continental economies ends up in a blaze of amateur sociology.

William Easterly has a post comparing fractals and inequality, which is fine. But hey, I made that comparison many years ago!

Sigh. I’ve turned into one of those people I ridiculed back when I was a young economist — the people who would say, in response to any idea, “It’s trivial, it’s wrong, and I said it in 1963.”

Regular readers may recall that back in May I fulminated about the OECD Economic Outlook. The Paris-based OECD is Conventional Wisdom Central; and in May, it dutifully relayed the conventional wisdom that advanced nations should start cutting spending and, even more remarkably, raising interest rates right away. As I pointed out, this made no sense even in terms of the OECD’s own forecasts, which said that unemployment would remain very high and inflation very low for years to come.

Now the OECD has climbed down, sort of (pdf). Maybe hold off on those interest hikes, it says, and if things get really bad, maybe delay the fiscal austerity.

Two points:

1. This new document is presented as a response to a change in forecasts. But as I pointed out in May, even given the forecasts the OECD was making back then, its call for near-term austerity made no sense. When you’re expecting 8.4 percent unemployment and 1 percent inflation at the end of 2011, raising interest rates this year would be a violation of everything we know about sensible monetary policy. And the OECD never explained why fiscal contraction should take place while the economy was still deeply depressed, except by vague appeals to confidence, i.e., the invisible bond vigilantes.

2. The slowdown we’re seeing now isn’t a surprise: everyone who took a Keynesian approach seriously was very worried about the second half of 2010, long in advance.

So here’s how I see it: what we’re really seeing here is a sort of intellectual Wile E. Coyote moment. Back in May, the OECD was responding to social pressure, not economic logic. All the right people wanted austerity now now now, because, well, because, and the OECD went along. Now a bit of bad economic news has led the organization to look down, and realize that there’s nothing supporting its position. But there never was.

Ah — I see that my last post was too elliptical, mainly thanks to jet lag; people aren’t quite getting my point.

So: Japan does suffer from inadequate demand; this is why it faces persistent deflation, why ever-fewer workers can get long-term employment, why unemployment has risen and working hours fallen.

My point was, however, that Japan’s demand failure hasn’t been as severe as the raw numbers on GDP might suggest. Most of the relative decline of Japanese GDP compared with the US would probably have happened even if economic policy had managed to avoid the deflationary trap. Japan is a depressed economy, but not in a depression.

And by the same token, Japan’s fiscal policies haven’t been as utter a failure as they’re often portrayed. They haven’t created self-sustaining growth, because they’ve never been enough to restore full employment and get the economy out of deflation. But they have kept the economy afloat.

Oh, and about that debt; it’s not good — but net debt is about 100 percent of GDP, not 200, because the BOJ holds so much of it.

The point is that it’s a more nuanced story than you usually hear — not a good story by any stretch of the imagination, but not as terrible as you may have heard. And given the way we’re responding to our own burst bubble, I think we need to stop being so hard on the Japanese.

I’m not the first person by a long shot to make this point, but it’s fairly amazing how much of Japan’s relative slide since the early 90s can be explained not by economics per se but by demography.

Using the Total Economy Database — another useful source — I find that from 1992 to 2007 (eve of the crisis), Japanese GDP per capita fell from 88 percent of US GDP per capita to 76 percent. That sounds bad, and it is. But about two-thirds of that decline can be explained by the aging of Japan’s population. According to the OECD factbook, in 1992 working-age adults were 69.7 percent of Japan’s population, compared with 65.5 in the US; by 2007, the Japanese number was down to 64, while the US number was up to 67.

Demography is not the whole story; Japan has stayed depressed, deflation is a problem, labor markets are poor (although the trouble tends to show in rising numbers of freeters rather than high measured unemployment.) Still, when you look at Japan’s declining share of world GDP, and even its relative decline in per capita GDP, the biggest single cause is the declining number of working-age Japanese.

Holtz-Eakin: GOP Too Focused On ‘Cocaine’ Of Sarah Palin To Rule

Slightly unfair — it was the host, not Holtz-Eakin who used the analogy. But still, an excuse to post this:

More economics and graphs later — but time to go to breakfast …

Now, this is not the end; it is not even the beginning of the end. But it is, perhaps, Begin the Beguine.

(Actually, I’ve been reading Connie Willis’s Remake, and had to go Youtubing.)

Stan Collender has been getting sort of, well, shrill over the way in which austerity enthusiasts told us that we had to utterly obey what the bond market was saying when interest rates were rising, but are telling us to ignore the market now that rates are very low.

The same goes for monetary policy.

A few months ago there was a flurry of demands for tighter monetary policy, right away. And not just from cranks: the OECD, that virtual definer of conventional wisdom, called for a rapid rise in US policy interest rates, even thought its own forecast showed unemployment remaining very high and inflation remaining very low for years to come. Why? Because market indicators of expected inflation had trended up modestly over the previous few months.

But those indicators have since gone into reverse, big time. Look, for example, at the 5-year breakeven rate — the difference between the interest rate on 5-year US bonds and the rate on 5-year TIPS, which are protected against inflation. This rate rose from about 1.7 in fall 2009 to a peak of about 2.4 around the time the OECD was putting that report together. Since then it has fallen to 1.2.

So will the OECD call for a drastic shift toward expansionary policies, since the clear and present danger, at least according to the bond market, is disinflation (and possibly deflation)?

No, it won’t. The bond market only rules if it tells people what they want to hear.

Oy, it seems that another out-of-context quote of mine is being used to claim that I thought the Obama stimulus plan was just dandy. So: back in 2008, I wrote this piece in which I called for stimulus of 4 percent of GDP, or $600 billion. Didn’t we get that, and more?

No. If you read the actual argument — which explains in detail how I arrived at the number — you’ll see that I was thinking in terms of a one-year program; $600 billion is 4 percent of one year’s GDP. I wasn’t clear about the issue of stimulus spread out over 2 years; but if you apply the math in that post, you’ll see that it implies a two-year program twice that size, which was just about what Christina Romer concluded was appropriate.

And by January it was already apparent that the slump was going to be deeper than I expected when I wrote that original post.

Some bleary-eyed thoughts from Japan on the reported administration proposal for $50 billion in new spending:

1. It’s a good idea
2. It’s much too small
3. It won’t pass anyway — which makes you wonder why the administration didn’t propose a bigger plan, so as to at least make the point that the other party is standing in the way of much needed repair to our roads, ports, sewers, and more– not to mention creating jobs. Once again, they’re striking right at the capillaries.

Beyond all that, the new initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money.

Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.

So suppose we’re going to put $50 billion of resources that would otherwise be idle to work. Is it better to use them to produce public goods like improved roads, or private goods like more consumer durables? That’s not at all obvious — and anyone who tells you that basic economics settles the question, that is says that devoting more resources to production of private goods is better, doesn’t understand Econ 101.

And there’s a pretty good argument to be made that we are, in fact, starved for public goods in this country, so that it would actually be a good idea to shift some resources to public goods production even if we were at full employment; in that case, we should definitely give priority to public goods when trying to put unemployed resources to work.

Anyway, it’s all academic right now. My response to the administration plan, at least as best as I can respond given a massive case of jet lag, is a big eh.

Some musical entertainment:

And here’s the scene preceding, the best part of Topsy-Turvy

Yes, I’m on my way to Japan.