10/21/10 10:46 AMCan I Please Go Back to My Home Timeline Now? - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchOctober 04, 2010

Can I Please Go Back to My Home Timeline Now?

If you had told me four years agothat come October 2010 I would beforecasting that highly-efficientAmerican steel companies would beoperating at only 70% of normalcapacity in 2011, that the U.S.Treasury would be able to borrowfor 30 years at 1.61%/year real andat 3.71% per year nominal placingall inflation risk on the creditor, andthat the last six months' CPIinflation would be 0.1% at anannual rate...

...I would simply not have believed you. I would have said that that could happen insome strange alternate universe in which Spock was evil and had a beard, but not inany real world that could plausibly exist.

...I would have said that, in the real world, with that much excess capacity and thoselow borrowing rates, 90% of both the Senate and the House would get behind bigprograms to push taxes off into the future and pull infrastructure into the present.

How the &^#%^*@! did we get here? And why can't we get out?

Brad DeLong on October 04, 2010 at 12:13 AM in Economics, Economics: FederalReserve, Economics: Finance, Economics: Fiscal Policy, Economics: Macro, ObamaAdministration, Politics, Utter Stupidity | Permalink

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christofay said...We haven't had all Demo gov. We have a strong GOP minority and Mod Republicans inthe White House, administration, Fedup Reserve, Senate, think tanks, and on and on,play along to pay long

Change is continuity

Hope is what you feel when you're heading to dentist

As in, I hope I don't need to get another root canal

Reply October 04, 2010 at 02:40 AMMichael Turner said...Spock's not evil?

He doesn't have a beard?

Wait a minute: you DO remember that, on Sep 11th, 2001, the Starship Enterprise wasflown into the Twin Towers, and that we're now bogged down fighting an insurgencyon Vulcan, right?

You liberals. It's like you're living in some alternate reality.

Reply October 04, 2010 at 02:55 AMDavis X. Machina said...It is more important to have heroes and villains than jobs. You're an economist, youlive in an economy, you see an economy. The rest of us, we live in an economy but seea morality play.

Reply October 04, 2010 at 03:42 AMsave_the_rustbelt said...The workers who received their last pay checks for packing up the factory for shipmentto China were predicting a crash for years.

But since they were mere high school graduates with calloused hands no one caredwhat they thought, least not economists.

Reply October 04, 2010 at 04:20 AMCVS said...Sora: No, there is no fundamental contradiction. The problem is, there are lots of

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different types of spending and taxing.

Under GWB, we got a permanent tax plan (at least, it was envisioned as such - if notextended, i.e. everybody's tax cuts go up next year, it's not so bad) that will bankruptus long term. We got Medicaid part D, which was a huge unfunded mandate that willhelp bankrupt us long term

Brad is pushing for enough temporary tax breaks and spending now to break therecession cycle. Note his phrase "push taxes off into the future and pull infrastructureinto the present." If done correctly, it will actually decrease the debt relative to theGDP, as it will stimulate growth, and debt is cheap now. This is somethingfundamentally different.

In the long run, the only thing that will economically bankrupt us is substantiallylowed economic growth, and rising health care costs -- hence the need for stimulus,and for health care reform, which is at least projected in most scenarios to reducemedical costs.

Reply October 04, 2010 at 05:02 AMrickstersherpa said...I found Nancy Folbre's opinion piece in the N.Y. Times's Economix fairly enlighteningabout the sociological and political economic transformation since the period of 1929-1970 to today enlightening. Bottom line, America's elite, the upper 1%, both in themedia and in wealth holding, have fewer common interests with most Americans thenthey did during that earlier period. The one common ground may be fear of Islamicand Eco-terrorists (the latter group being very much imaginary).

http://economix.blogs.nytimes.com/2010/10/04/what-would-keynes-say-today/?hp

...In other words, the cross-class coalition that supported strong state participation inthe United States economy in the post-World War II has come undone.

If Keynes were around today, I think he would emphasize a supreme irony ofNeoliberalism: No country has taken better advantage of free trade than China, with itscontrolled currency and strong industrial policies, including huge public investments inrenewable energy technologies.

China’s state capitalist regime has borrowed Keynesian theory from the West andgarnered huge profits from it.

But I don’t think Keynes would take much pride in this. He would be deeplydisappointed that democratic capitalist countries like the United States seem unwillingto commit themselves to policies that could reduce unemployment and promotesustainable economic growth.

He would explain our current shortfall of aggregate demand as the result of a tragicshortfall of national solidarity."

Reply October 04, 2010 at 05:15 AMDrDick said..."How the &^#%^*@! did we get here? "

The Republican Party and Conservadems

"And why can't we get out?"

The Senate.

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Reply October 04, 2010 at 05:39 AMNeal said...Quite simply, if you look further back in the chart where the employment/populationratio is the same as now, you see the 1970's. Oddly enough, that is the same time thatcredit and asset inflation began to substitute for real wage gains.

Is it really all that surprising that we end up in the same place as where we began whenthe most widely held and touted asset (real estate) has collapsed and it is clear that theconsumer has run past all semblance of credit-worthiness?

How dis we get here? We got here by the substitution of a real economic engine withthe engines consisting of asset-inflation and easy credit.

Why can't we get out? Because when there is damn little other than an expectation ofprivilege based on 30 golden post-WW2 years of economic domination, the bluff getscalled eventually.

The major flaw in recovery assumptions is the hubristic assumption that the "forever"arc of the US would follow the ever-upward trajectory set in the 50's, 60's and 70's.When you no longer can pay your own way, it gets difficult.

The change happened a couple of decades ago, not a couple years ago.

Reply October 04, 2010 at 06:19 AMDrDick said in reply to Neal...I would argue that it has been the substitution of easy credit for wage gains whichallowed channeling of ever more wealth and income into the coffers of the wealthy thathas caused this situation. It is the fact that now that the credit has dried up the middleclass, which has really driven the post-WW II economy, has no resources available. Thevery wealth have literally sucked the life out of the economy for their own narrowbenefit and are now staging a "billionaires' coup" as Frank Rich and Krugman areproclaiming.

Reply October 04, 2010 at 06:27 AMNeal said...The "interest-collectors" always win over the "interest-payers" in a credit-basedsociety.

Reply October 04, 2010 at 06:42 AMGraydon said...The 20th Century US economy rested on oil. Said economy _still_ rests on oil (and isstill the 20th Century economy, and not doing what it ought) because the folks who getreal power from oil don't want to give it up.

They know they're going to lose that power; they know it's a really bad idea to bebasing the economy on oil here and now in rationalist terms. But giving up the powermeans they lose relative status. (If some of them were actually to be prosecuted, *lots*of relative status.) Combine that with a wealth-makes-me-good, the poor-are-poor-because-god-hates-them aristocratic movement, and there is a real, strong, and trulyvigorous preference for a catastrophic crash in the unspecified future (preferably afterthe individuals in question are dead) rather than rationally driven change to a betterfuture.

If you can crack this problem in practical terms by means short of bloody revolution,well. That would be one for the history books.

Reply October 04, 2010 at 06:49 AM

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bakho said...How did we get here? Labor has been marginalized. Our government has beencaptured by elites who make money in the FIRE sectors and just don't care. Just as thevoices of those who opposed the Iraq war were shut out of the conversation andmarginalized, now the voices calling for action on jobs are marginalized.

Money controls politics by controlling the ability to message. Ever since mediaconsultants found a way for Big Tobacco to bamboozle the public about lung cancer,the same tactics have been successfully applied to other elite causes.

Reply October 04, 2010 at 07:00 AMFull Employment Hawk said...Obama had the opportunity to turn things around, but he totally bungled it. Makingthe economy grow fast enough so that the unemployment rate would be coming downsignificantly during the 6 months before the election should have been the overridingobjective of the administration. If that were happening, Obama would have a strongapproval rating and would therefore be politically much stronger. And the Democratswould have a very good November.

There a nubmer of things that should have been done and were not. This is anincomple list:

They should have tried for a stimulus that was larger by including a lot moreinvestment in infrastructure. A heavy emphasis on infrastructure had a good chance ofgetting some moderate Republican support.

They should have included a second stimulus in the 2009 budget using reconciliation,which would have only required 50 votes in the Senate. Not all types of stimulus couldhave been passed using reconciliation, but it could have been a numerically largeamount.

The vacancies on the Board of Governors should have been proptly filled with fullemployment hawks.

The beggar-thy-neighbor merchantilist policy of China, which destroys American jobs,should have been agressively confronted.

Unfortunately Obama chose people who are in tune with Wall Street and out of contactwith Main Street as his chief economic advisors. These people do not understand howcrucially having a good job and not having to be afraid of losing it is to ordinaryworking people (both for themselves and for their relatives and friends) and if that isnot happening that they show their anger and frustration by voting against theincumbents.

Reply October 04, 2010 at 07:01 AMTim Connor said...The billionaires don't want us out. Between Fox News and the Kochs, the Conservativemovement is bought and sold.

Reply October 04, 2010 at 07:51 AMJacob Davies said...And the new east span of the Bay Bridge is being built with Chinese steel becauseAmerican steelmakers (now with 30% slack capacity) couldn't come up with acompetitive bid, or didn't have - and didn't want to invest in building - the facilitiesnecessary to manufacture piece of that size. It's an interesting question why that is thecase.

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Reply October 04, 2010 at 07:58 AMbeezer said...They didn't win because their government didn't make them win. It's the corrosive ideathat government can't make a positive difference in the private economy.

It's total nonsense, of course. But it is believed by enough people to effectively removethat 'tool' of our economic reality from our tool bag.

Reply October 04, 2010 at 08:32 AMhartal said...OK but we need some good explanation of why the govt is not borrowing and spendingmore. Here's one explanation that takes on Krugman

http://mrzine.monthlyreview.org/2010/wolff031010.html

Reply October 04, 2010 at 09:10 AMhartal said...Yes the Folbre analysis is interesting but it implies that Keynes was himself averse tothe the propping up of effective demand through neo-mercantilist policy based on lowwages rather than deficit financed government expenditures. There was a darknationalist side to Keynes' thinking whitewashed by Skidelsky who after all was oncequite interested in Oswald Moseley.

Reply October 04, 2010 at 09:40 AMthe idler said in reply to Michael Turner...The goateed Spock was the evil one? I preferred that mirror universe. The Empire's"sword through the earth" symbol was pretty cool. I am surprised the neocons haven'tadopted it.

Reply October 04, 2010 at 10:20 AMlow-tech cyclist said..."Can I Please Go Back to My Home Timeline Now?"

Hey, I feel like we've been in one of those alternate realities, along the lines of "What ifthe Confederates had won the Civil War?", since the 2000 election was resolved. I wantback to the timeline where Gore won, and I want there...um, 'now,' whatever the heckthat means when making such a demand.

Reply October 04, 2010 at 10:32 AMBob Athay said in reply to DrDick...I could elaborate, but I can't improve on your explanation. Well stated!

The only apparent difference between now and 80 years ago is that Bernanke, (Hank)Paulson & a few others had the good sense not to repeat the mistakes of theLiquidationist camp. But since we didn't actually crash, Obama must be a Bad Nannybecause we're not back where we were before the bubble burst.

Reply October 04, 2010 at 10:38 AMMahopac cleaning service said...We won't get out until there's major constitutional reform. Read George Packer'sprofile of the Senate in the New Yorker - it's hair-raising stuff.

Reply October 04, 2010 at 10:42 AMPeter K. said...Bob Athay' correct.

I feel like the kid in the backseat of the Range Rover in Jurassic Park at night, who seesthe T-Rex's eye in the window shines the flashlight on it and it dilates, but no one else

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has noticed even though they had heard the stomping. We had a near miss. Thatalternate reality would have really been mind-blowing.

The main problem is the successful propaganda drive discrediting of big governmentfrom Reagan through the husband of Hillary Clinton through George W. Bush. Thisenabled the rise of the shadow banking system, the demogoguery over TARP andgovernment bailouts, and the fake concern over "runaway" government debt and bondvigilantes.

But everything is Obama's fault because he's not tough enough....

Reply October 04, 2010 at 10:56 AMkharris said in reply to Sora..."Am I the only one who thinks it's really weird that you simultaneously castigateRepublicans for worsening the long-term fiscal scenario whenever they take office andthen try to spur Democrats to spend more?"

No, but most of the people who find it weird don't catch the point that fiscal expansionis meant for now, fiscal rectitude once the economy is back near capacity. Right now,the economy is far below capacity and seems likely to remain so to the point that trendcapacity will be lower than trend capacity half a decade ago. What we had under Bushfor 5 of his first 6 years in offers was fiscal stimulus when the economy was runningalong in good fashion. When the time came to fend off recession, what we had wasTARP to help financial firms and no stimulus package for the real economy.Backwards, don't you see?

It's all a question of timing.

Reply October 04, 2010 at 11:15 AMBill K said...Your point about inflation risk reminded me of Bill Clinton's "#%^*-ing bond traders"comment. If inflation risk has been pushed onto a powerful interest group, then wemay be locking in this very low inflation rate environment. This means we may reallybe stuck for quite a while.

Reply October 04, 2010 at 12:04 PMSharon, wearing a red shirt said...You'll have to wait until interphase before you can get back to your Universe. Only oneproblem after that, the power is balanced for four, we've got five.

Who do you leave behind?

Reply October 04, 2010 at 01:05 PMNick Rowe said...I would never have believed it either. It was the one thing I was most wrong on(marking my beliefs to market). Easiest problem in the world to fix, I would have said,and the one that is the most fun to fix. You just get to print money, and spend it onwhat you want, or give it so someone else to spend on what they want, or lend it tosomeone to spend on what they want. Like a kid in a candy store with a big wad ofcash: the only problem would be trying to choose what to spend it on, and not eatingtoo much so you inflate yourself.

Reply October 04, 2010 at 05:45 PMj said in reply to kharris...So you're saying I shouldn't reappropriate Jr.'s tuition payments to pay my bookie- ifonly so that Jr. can take care of me in my old age? But gambling got me into this mess-and now you're saying I should bet on expanding Jr.'s future capacity?

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Look, back when I was gambling, that was investing... and investing in Jr? Why, that'sa gamble. Better Jr. and I make peace with our contracting productive horizons, andbecome my bookie's serfs.

Reply October 04, 2010 at 09:11 PMRandom Blowhard said...How did we get here? Let's see, Spending ourselves to death on worthless crap thatdelivers zero value add, Chimpy Mcflightsuit republicans, Hopey McChange democrats,Bailouts for billionaires, crooks, thieves and union hacks, Rule of Law - Meh,Constitution - Meh, Responsibility/Accountability/Ethics - Meh, Rewarding FAILUREwith lavish Golden Parachutes for CEO incompetance - YES, ...Why can't we get out? Goldman Sachs is the only 'real world' solvent financialinstitution in the United States, all the rest are bankrupt. The current employmentsituation is the HIGH POINT of a new normal going forward. Democrats have nosolutions, Republicans have no solutions, We spend 40% more than we earn, We are inthe early stages of full blown economic collapse the end point of which may be TheUnited States Of Argentina or PANEM if we get civil war.

Reply October 05, 2010 at 12:26 AMReturnFreeRisk said...I agree with your analysis.

BUT the Fed's solution is bogus. AND ALL YOU ECONOMISTS KNOW IT.Monetary policy is not going to do anything. It will benefit speculators and commodityproducers and KILL the unemployed already hard up. WHY DO YOU ECONOMISTSWANT QE - it will raise prices of food and fuel that the ordinary people need. WHY?who is it benefitting but the fat cats?

Reply October 05, 2010 at 08:48 AMBanana_Republic said in reply to Full Employment Hawk...Thanks, FEH, for a concise and accurate summary of Democratic strategic idiocy. It's awelcome contrast from so many other comments in this thread that blame those MeanOld Republicans. I mean, sure, I get it, the Republicans are batshit crazy, and oftensadistic to boot. Thing is, I can't think of a time in the last 20-30 years when the Demsdid a damn thing to usefully oppose their excesses.

Both parties work for the same masters. Voting (in national elections, anyway) onlygives our broken political system a veneer of legitimacy.

Reply October 05, 2010 at 10:10 AMGreg A said...Spock with a beard was the same as Spock without a beard - only the surroundinguniverse changed.

Just sayin'

Reply October 05, 2010 at 03:24 PMpuzzle said...Maybe it's time for a paradigm change from laizzes-faire "company managers andownership know best how to run the economy" to more focus on production andcreating necessary factors of production such as skillbase and investments. In literatureit is known as developmental state.

Reply October 06, 2010 at 12:26 PMElias said...

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Me: Economists:Juicebox Moral

If we're stuck in this timeline, at the mercy of Bearded Spock and the Tea Party, Iwonder what our own timeline is like. Surely it's beset by the uber-hippies thatswapped spots with us. I suspect that they've already passed the Mandatory GayMarriage Act and the Infinite Deficit Amendment. Surely they've implemented aMarijuana-for-All system by now. What a strange world ours must be.

Reply October 07, 2010 at 08:01 AMComment below or sign in with TypePad Facebook Twitter and more...

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