Peter Diamond, making us regret Republicans. Again.

Peter Diamond, for those of you who are not economists, is an brilliant economist by any measure. His nomination to the Fed was an excellent choice. But to my surprise, he was controversial.

Why? I don’t understand. At some point, somebody said to some Republican senators that Diamond has studied poverty and income constraints. Or somebody remarked that Diamond isn’t a jackbooted free market Chicago School guy, and so he must be unqualified. Yeah, because MIT gives out full professor positions to just any crank.

Whatever it was, Diamond says his goodbye in the New York Times and explains very well how the idiots running this country (elected by other people who see no value in education and, thus, have no idea what the Fed does or what qualifications would be helpful at the Fed) feel free to mouth the words “monetary policy” without actually understanding what “monetary policy” is.

Did Peter get a minor or a certificate in monetary policy? No? Well that must mean he KNOWS NOTHING.

I wonder if the Dems would strike at a Gary Becker nomination. I doubt it.

It brings to mind Jonathon Chait’s essay this week over at the New Republic, about how a loud, bullying, unreasonable subsection of the American right has taken over largely because their attitude is “screw negotiation, screw facts, screw reasonableness; what I want is the way God intended it and I will stop at nothing get my way”:

Remember when Democrats swept the 2006 elections, then stormed into Washington demanding national health care reform and the repeal of President Bush’s upper-bracket tax cuts as a condition for keeping the government open? Right, me neither. Yet somehow the Republicans, controlling just one house of Congress—unlike the two held by Democrats in 2007—have completely seized control of the political agenda.

As somebody who falls much farther to the free market side than most in my profession, the dogmatic right certainly doesn’t reflect my values in any real way. These are people who are willing to shoot down the nomination of an imminently qualified, brilliant man because he fails to fit their ideology, and I’m tired of it.

I honestly was thinking yesterday during my walk that it might actually better to get rid of the Fed entirely rather than let it become even more politicized. I don’t actually recommend that, but it was a worthy thought experiment for several blocks.

Consider, as well, the embarrassing state of our Supreme Court. Oh, we wouldn’t want those activist judges, now, would we? Giving out civil rights and what all.

I saw a tweet that made me laugh yesterday, from Rick Flora: “The Kardashians’ have now been on the air twice as long as ‘Arrested Development.’ THIS IS WHY YOU CAN’T HAVE NICE THINGS, AMERICA.”


Visualizing the Bubble

Decision Science News has a wonderful graphic on visualizing the housing bubble, using the Standard and Poor numbers. This is a really data-rich graphic, one of those that is both simple yet complex, and you can spend a lot of time thinking about what the different trajectories mean in terms of the extent and timing of the bubble. This is their first graphic–go to the website and read the rest of the presentation. A second, cleaner graphic calls out the ‘exceptional’ stories–a good way to build a narrative with graphics: first show the whole picture, then select what people should take away.

I’d like to know more about the bounce at the end of those numbers; every city gets higher, then crashes, then (for most, not all), there’s a bounce, then another fall.

Voila Capture11

The graphic was made with ggplot2, one of my favorite new toys for R.

On the ‘jobless recovery’: Chris Hayes in The Nation

Professor Tom Jankowski pointed me to this piece by Chris Hayes in the Nation. He breaks down the policy indifference to unemployment in Washington DC in two numbers: the unemployment rate among those with college educations (low) and the unemployment in booming Washington DC (also low–it’s a place with a lot of unemployment).

This manifests itself in our politics in two ways. For one, it just so happens that policy-makers, pundits and politicians are drawn from the classes that are in recovery, and they live in an area where new sushi restaurants are opening all the time. For even the best-intentioned and most conscientious staffers and aides this has, I think, a subconscious effect. Think of it this way: two office buildings are operating side by side in Chicago’s Loop in the middle of a brutally cold January day, when the heat in both buildings gives out. The manager of one building has an on-site office, so he finds himself plunged into cold; the other building is managed remotely, from a warm office whose heat is functioning. If you had to bet, you’d guess that the manager experiencing the cold himself would have a bit more urgency in restoring the heat. The same holds for the economy. The people running the country are not viscerally experiencing the depredations of this ghastly economic winter, and they lack what might be called the “fierce urgency of now” in getting the heat turned back on.

Deepening interdependence in global financial networks

Pdfout gif 504×504 pixels

International Political Economy blog writing out of the University of North Carolina has a post up displaying an animated version of this very cool network graphic. These are quarterly observations.

I don’t quite understand the model yet, but I am trying to.

Make sure to take a look at the animated gif. It really brings their point home. A great visualization to help us understand what happened in the industry in just a few short years.

The Best Book of the Year: The Big Short by Michael Lewis

One of the things that I think we have to figure out, and soon, is proper regulation of financial markets, if we are going to climb out of the hole we are in. In many circumstances, I tend to argue that regulations are too inflexible to deliver good policy. But in financial markets, a certain amount of standardization at this point–perhaps with sunsetting–would make a lot of sense.

Nobody makes that case better than Michael Lewis in The Big Short: Inside the Doomsday Machine. There is much to kvetch about in this book: I get weary of the ‘hero’s journey’ take that writers like Lewis adopt in order to tell their stories journalistically rather than using evidence. And it’s a pretty one-sided book. Yet, I sat through seminar after seminar after seminar with economist after economist after economist who couldn’t explain WTH happened as clearly as Lewis does in this book. That’s a real gift, and a real contribution to the discussion about how to go forward.

Localism and trade: does specialization help globals or locals more?

I have always been a bit confused by the “buy local” argument. How local is local? Does my local include San Diego? California? I am never sure.

Of course it’s good to keep your local businesses in business, and supporting local retail is one thing, obvious enough: but keeping the whole of production locally grounded strikes me as rather counterproductive from a macro-economic and regional economic growth perspective.

There are gains to trade, and at least some of those gains are expected to accrue to producers. It’s one of the thornier issues in the world: how are developing economies to gain if they don’t trade with people in economies who have money to trade for their labor/production, unequal though those trades are?

Yes, it’s nicer for taste to have a locally grown mango, but don’t farmers who farm mangos for shipping deserve to make a living, too? This would be a better question in a world where US corporations don’t run around the world buying up land and employing local farmers at low wages and creating monocultures. But then the problems are the corporations and their privileged social and economic protections rather than trades at larger geographic scales.

But the basic question still stands: regions have different advantages, and your locals that you’d like to keep in business are somebody else’s globals, and while you as a buyer may not mind not consuming the goods/services made from afar (a sacrifice for you) or the fact that your sellers have a restricted market because you think the world gets economic gains from not shipping things (a sacrifice for them), there may be potentially large opportunity costs for your sellers who attempt to wedge themselves in local niches rather than opting into regional specializations.

A new manuscript in the American Economic Review goes through to discuss the geographic incidence of trade costs–the burden that the transactions costs exert on regional imports and exports:

Anderson, James E., and Yoto V. Yotov. 2010. “The Changing Incidence of Geography.”American Economic Review, 100(5): 2157–86. DOI:10.1257/aer.100.5.2157

If you don’t belong to AEA, you can probably find this manuscript in working paper form on NBER. They don’t charge that much for downloads.

This is a complicated and difficult manuscript to read, but it’s worth struggling with because it helps us figure out how to understand why local sellers want to play both sides of the globalization/buying local fence while they want buyers to buy local. The model these authors develop enlightens one of the strong factors of globalization–the benefits of regional specialization are tangible, particularly for producers/sellers–as they are able to leverage markets outside of local areas and common pool benefits (such as infrastructure) provided for scale (not covered in the model as far as I understand it.) There is a physical and social infrastructure question when you think about regional specialization and economies of scale in production and logistics.

The locavore/local consumer answer to that is, I suspect, that if it can’t be made economically and sustainably in a local market, then perhaps the good, whatever it is, doesn’t need to be made at all (within reason; we’re not taking the logic to an extreme with things like medicine). I’m not sure what that means, again, from my macro perspective. Growth comes from trade, and while everybody loves to criticize growth, our recent recession should have given us a little perspective on how easy it is to go without growth (i.e., it’s not).

It’s is a bit like people saying to me that USC can only teach kids from southern California; nobody in the localism advocacy world ever says this stuff to white-collar workers because white-collar work is too often assumed to be green. It’s not. My livelihood depends on lots of kids moving to southern California, which may not be green, and lots of flying to and from for holidays, etc.

Providing free food for billionaires

Sometimes, when people say to me that all politicians are crooks, I think of the genuinely good and brave people who have served as representatives and who make speeches like this one that too few voters take the time to listen to.

HT to Tom Jankowski

So Obama made a deal–because he had to. I would bother to write to about it, but Jonathan Cohn at the New Republic breaks down the deal.

Why sustainability people have to worry about the macroeconomy

and why we should all demand more from the macroeconomists than they have produced in the last 30 years.

Roger C. Altman and Richard N. Hass have written a wonderful essay on American debt: American Profligacy and American Power for Foreign Affairs. You have to be a subscriber to read it all, but even the summary is worth squinting at. Here’s the breakdown:

But over the first ten years of this century, a fundamental shift in fiscal policy occurred. When the George W. Bush administration took office, it initiated, and Congress approved, three steps that turned those budget surpluses into large deficits. The 2001 and 2003 tax cuts, which will reduce federal revenue by more than $2 trillion over ten years, had the biggest impact. But adding the prescription-drug benefit to Medicare also carried a huge cost, as did the war in Afghanistan and, even more so, the war in Iraq.


Then, on top of this, the financial and economic crisis struck in 2008, and the United States confronted the possibility of a 1930s-style depression. Washington correctly chose to enact a large stimulus program and rescue tottering financial institutions. So far, such efforts have worked, at least to the degree that a depression was averted. A recovery (albeit one that is halting and weak by historical standards) is under way. But the gap between spending and revenues has widened much further. Revenues, which had averaged 20 percent of GDP during the 1990s, fell to nearly 15 percent, while spending reached 25 percent in 2009. The deficit for fiscal year 2009 hit a staggering $1.6 trillion, or nearly 12 percent of a GDP of just over $14 trillion. In nominal terms, it was by far the largest in U.S. history. The deficit for 2010, at $1.3 trillion and nine percent, was nearly as huge.

To the endpoint:

It is important to understand the impact of all this debt. As it grows, interest rates inevitably rise. As they do, the U.S. government’s annual interest expense — the cost of borrowing money — will rise from one percent of GDP to four percent or more. At that point, interest expense would rival defense expenditures. And it would exceed all domestic discretionary spending, a category that includes spending on infrastructure, education, energy, and agriculture — in effect, anything other than entitlements and national security. The U.S. Treasury would need to borrow a staggering $5 trillion every single year, both to finance deficits and to refinance maturing debt.

An HSR person told me that the US HSR system would “just” cost a mere trillian, and it would only be 1 percent of GDP over 15 years. Only! Nobody is getting any money for anything unless American leaders start acting like grownups–and soon.

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Corporate greed and managerial power

Bob Herbert writes in a A Sin and a Shame in the NYT that corporate managerialism has stepped on its employees time and time and time again:

The recession officially started in December 2007. From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent.

link: Op-Ed Columnist – A Sin and a Shame –