Salon.com > Brad DeLong

Why Ben and Hank are right, mostly

Thu, 25 Sep 2008 19:30:00 +0000

This is bad.

Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke are not yelling for help -- asking for permission to print up $700 billion of Treasury bonds, sell them, and use the cash to buy up mortgage-backed securities -- for no reason. Things are bad in the financial economy and always threatening to spill out over into the real economy, destroying jobs and boosting unemployment. But things could easily get much worse: That is what Bernanke and Paulson are trying to stop with their valid call for assistance and their needed, albeit badly flawed, three-page plan.

Today's announcement that lawmakers are close to an early agreement in principle on the plan is good news for the country. Let's hope it has some teeth.

But what is going on? Back up for a second into the abstractions of economic theory. If on the morning of Thursday, Sept. 18, 2008, you had set out to park your money in a three-month Treasury bill, you would have found that the interest you could get was ... zero. Well, not quite zero: You would get $1 in interest over three months on a $1,000 Treasury bill investment -- an annual interest rate of 0.4 percent. By contrast, if you had taken that $1,000 and put it into a major bank in a three-month bank certificate of deposit -- a CD -- you would have been promised $14 in interest at the end of three months: an annual interest rate of 5.6 percent.

No, Hillary Clinton shouldn’t be winning

Thu, 10 Apr 2008 11:51:00 +0000

Hillary Rodham Clinton has won fewer votes this spring in contested primaries than Barack Obama. She has persuaded fewer of her supporters to turn out for caucuses. She has won fewer pledged delegates. Yet Sean Wilentz writes that she "should be winning." And in response I say: "Huh?"

It turns out that when Sean Wilentz says that Hillary Clinton "should be winning" the race for the Democratic presidential nomination, what he means is that if all the Democratic caucuses and primaries had been winner-take-all, then "Clinton would now have 1,743 pledged delegates to Obama's 1,257."

Sean Wilentz is a Yankees fan. I am a Red Sox fan. Perhaps Sean Wilentz could write that the American League championship should go to the team with the most hits instead of the most wins, which would have made the Yankees rather than the Red Sox the real champions last year. After all, isn't the real point of baseball to hit the ball and get on base? That's why it's called baseball, and not run-ball or win-ball, right? I would not find that argument convincing. Wilentz's winner-take-all gambit is a talking point, not an argument: "If my grandmother had wheels, she would be a bus" is rarely a persuasive line of reasoning. If the rules for winning delegates and the nomination had been different, the candidates would have run different campaigns and put their resources into different places and different proportions.

Mike Huckabee wants to abolish the IRS

Mon, 07 Jan 2008 12:00:00 +0000

For a generation Republicans have won elections by promising to do something new -- and usually strange -- to America's tax system, and by making wild and improbable claims about how great what they propose will turn out to be. This was how Ronald Reagan rode to victory in 1980 with his tax cut plan -- a plan that his own vice president and successor to be, George H.W. Bush, dismissed as "voodoo economics." This was what George W. Bush did back in 2000 when he claimed that faster economic growth would be guaranteed by yet another tax cut for the rich. And this is what Republican presidential front-runner Mike Huckabee is doing today with the "FairTax": a plan to replace the income tax and the Internal Revenue Service with a nationwide federal sales tax.

A man who hated government

Fri, 17 Nov 2006 16:19:00 +0000

"Lord, enlighten thou our enemies," prayed 19th century British economist and moral philosopher John Stuart Mill in his "Essay on Coleridge." "Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers. We are in danger from their folly, not from their wisdom: their weakness is what fills us with apprehension, not their strength."

For every left-of-center American economist in the second half of the 20th century, Milton Friedman (1912-2006), Nobel Prize winner, founder of the conservative "Chicago School" of economics and advisor to Republicans from Goldwater to Reagan, was the incarnate answer to John Stuart Mill's prayer. His wits were sharp, his perceptions acute, his arguments strong, his reasoning powers clear, coherent and terrifyingly quick. You tangled with him at your peril. And you left not necessarily convinced, but well aware of the weak points in your own argument.

The pause that might not refresh

Tue, 08 Aug 2006 20:03:00 +0000

Shortly before 2:15 p.m. Eastern time Tuesday, after a meeting in Washington that nearly every American would've found mind-numbingly dull, someone made a phone call to the Federal Reserve Bank in New York. The purpose of the phone call was to tell the bank's trading desk that the Federal Reserve's Federal Open Market Committee, known as the FOMC, had decided that the level of bond prices -- specifically, the price of three-month Treasury bills: promises by the U.S. Treasury to pay cash in three months -- was just right.

The price didn't need to be raised or lowered to be consistent with price stability and with maximum employment, purchasing power and growth. The FOMC told the trading desk to buy and sell some of its three-month Treasury bills to keep their price stable, and thus keep the interest rate the Treasury bills would earn stable: 5.25 percent. This is the first time in two years (and 18 meetings -- the meetings are held every month and a half) that the FOMC has not raised interest rates, which have climbed 4.25 percentage points since the spring of 2004.

The odds of economic meltdown

Thu, 03 Aug 2006 12:00:00 +0000

Forecasting recessions is a fool's game. If there is enough solid economic information to make it appear highly likely that a recession is coming -- that production, employment and consumer demand will actually fall -- then it is highly likely that there already is a recession. Businesses are not stupid, and they don't have to wait for economists to tell them what they already know. By the time a gloomy forecast has been issued they've probably already noticed a drop in consumer demand and responded by firing workers and reducing production.

So: Never say that a recession is coming. Say only that a recession is here, or that there might be a recession on the way. Which, in fact, is what I'm saying today. As of the beginning of August 2006, a recession is not here, and I'm not going to violate my own rule by saying one is coming. But there is a good chance -- for the first time since 2003 -- that there might be a recession in progress six months from now.

Why? Three factors: 1) A Federal Reserve that finds itself with less inflation-fighting credibility than it thought it had; 2) upward pressure on inflation from rising energy and, perhaps, import prices; and 3) millions of middle-class homeowners who for too long have treated their houses as gigantic ATMs, using home equity loans and refinancing to generate extra spending money.

Deficit games

Wed, 12 Jul 2006 00:07:00 +0000

Suppose you are George W. Bush and you cut taxes. By how much do you have to cut spending in order to keep the budget deficit from growing? Gregory Mankiw -- chosen by Bush to chair his Council of Economic Advisers and be his chief economic advisor in 2003-2004 -- says that initially you have to cut spending by almost the entire amount of the tax cut. If you do, however, according to ex-CEA head Mankiw and most credentialed economists, you find that the economy does grow faster.

What if you cut taxes but don't cut spending? There the consensus of economists is equally clear. A tax cut without accompanying spending cuts lowers economic growth. In the end taxes must be raised, and raised to a higher level than they were before the cutting began. As Ben Bernanke -- whom Bush chose to succeed Mankiw as chairman of the Council of Economic Advisers, and then chose again to run the Federal Reserve -- puts it: "This adverse effect of budget deficits on economic growth is probably the most important cost of deficits, and a major reason why economists advise governments to minimize their deficits."