I’m going to try an experiment here. As regular readers know, a lot of comment inches on every post are taken up by the same few ranters, who say the same thing every time; it kind of degrades the experience for everyone else. But I’m not going to edit out hostile comments (and by the way, neither I nor the various other people who moderate here ever have.) What I’m going to try instead is a three-inch rule: if it takes up more than about 3 inches on my screen, I’m going to tag it as spam. I don’t know if the other moderators will follow suit, but I’m suggesting they do.

So feel free to rant, if you’re so inclined. But if you want your insights published, keep your language clean, and be terse. You’ll probably find that it improves your writing style.

I’ve seen a peculiar meme surfacing here and there lately — the assertion that people like me are exaggerating how bad our current difficulties are, that things were actually worse in the 70s and 80s. I wonder where that’s coming from — and I really do; it has the feel of one of those things being disseminated on talk radio or something, and I think I hear a faint chant of Jimmy Carter! Jimmy Carter! in the background.

Whatever. The truth is that this really is the big one. Catherine Rampell recently updated the recession comparison chart, showing declines in employment. Here’s the percentage decline in employment in recessions since 1970:

We’re really number one, by that standard.

But wasn’t the unemployment rate higher in the past? Well, in 1982, although not in the 1970s, it was briefly a bit higher than the peak this cycle:

But back then the “full employment” level of unemployment was higher, so the increase wasn’t as large; more important, most of the unemployment was short-term, nothing like the deeply corrosive long-term unemployment we’re facing now:

So these really are the worst of times.

Just a quick note: I thought it might be worth doing an Irons-Bivens plot for Japan (and, to be honest, I wanted to see if I had finally managed to trick a spreadsheet into labeling the data points!). So here it is (data from IMF WEO database):

So, Japan has had high debt and low growth since the mid-90s — in other words, since the economy entered deflation.

Do you really want to argue that the debt caused the low growth, rather than the other way around? Really, really?

Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance. But the longer answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009:

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

In practice, it was even worse, because one of the key elements of the plan — aid to state and local governments — was cut back sharply in the Senate. We ended up with only about $600 billion of real stimulus over that two-year period.

So this wasn’t a test of fiscal stimulus, even though it has played out that way in the political arena: the whole thing was obviously underpowered from the start.

For my sins, I followed a link from Matthew Yglesias to Erick Erickson’s explanation of how great the Bush tax cuts really were. And there I learned some things I didn’t know:

More crucially, after the 2001 initial tax cuts, the annual growth rate went from 0.3% in 2001 to 2.5% in 2002. By 2004, GDP growth was the highest in 20 years.

Um:

And:

Likewise, after the 2003 tax cuts, the unemployment rate fell to the lowest level since World War II. Let me repeat that: the Bush economic program created the lowest unemployment level ever.

More um:

The bit about unemployment really surprised me — after all, the incredibly good job market of the late 90s isn’t that far behind us.

But I think we have part of the key to how Republicans can believe that returning to the Bush agenda is exactly what we need: they’ve invented themselves an alternate history in which wonderful things happened under Bush, and earlier booms have been sent down the memory hole.

John Irons and Josh Bivens have the best takedown yet of the Reinhart-Rogoff paper (pdf) claiming that debt over 90 percent of GDP leads to drastically slower growth. R-R specifically highlight the case of the United States:

Irons and Bivens show, in a nice clean chart, what’s really going on:

It’s all, repeat all, the postwar demobilization.

I think we can say that this paper has been completely discredited. I’m actually sort of shocked that R-R apparently failed even to notice that all of their high-debt observations for the US — and remember, it was their own choice to highlight US data — come from the years immediately after World War II, and to think about what that means.

I have to say, I don’t get the administration waffling on Elizabeth Warren at all.

Leave aside the merits of appointing Warren, which are considerable, and think about the politics. At this point, not appointing Warren would be seen by the base as a slap in the face, and would seriously dampen enthusiasm going into the midterms. And Democrats need every bit of enthusiasm they can muster to avoid a Republican takeover of the House.

Given that, it’s crazy to vacillate. Maybe Tim Geithner doesn’t like Warren. Maybe Rahm Emanuel finds her hard to deal with. (I’m speculating here, not speaking from any inside knowledge.) How can such things count compared with the catastrophic effect of a GOP victory on the White House?

Maybe they don’t understand what will happen if John Boehner becomes speaker. Maybe they don’t realize that they’ll face total obstructionism and quite possibly a government shutdown; maybe they don’t realize that there will be investigations and fake scandals over everything in sight, that Andrew Breitbart will become the de facto GOP whip.

But if they don’t realize that, they’re idiots. And I say that with all due respect.

That’s basically the thrust of Mort Zuckerman’s op-ed accusing Obama of “demonizing” business.

The op-ed contains the usual — false claims that Fannie and Freddie caused the financial crisis, false claims that fear of government policy — as opposed to weak demand — is holding back investment and hiring. But I was struck by this passage:

The predilection to blame business was manifest in one of President Barack Obama’s recent speeches. He was supposed to be seeking the support of the business community for a doubling of exports over the next five years. Instead he lashed out at “unscrupulous and underhanded businesses, who are unencumbered by any restriction on activities that might harm the environment, take advantage of middle-class families, or, as we’ve seen, threaten to bring down the entire financial system.”

This kind of gratuitous and overstated demonisation – widely seen in the business community as a resort to economic populism on the part of Mr Obama to shore up the growing weakness in his political standing – is exactly the wrong approach.

That sounded odd, since Obama is not, in fact, given to random business-bashing. So what’s the context? Here’s what Obama actually said:

Too much regulation or too much spending can stifle innovation, can hamper confidence and growth, and hurt business and families. A government that does too little can be just as irresponsible as a government that does too much — because, for example, in the absence of sound oversight, responsible businesses are forced to compete against unscrupulous and underhanded businesses, who are unencumbered by any restrictions on activities that might harm the environment, or take advantage of middle-class families, or threaten to bring down the entire financial system. That’s bad for everybody.

Kind of different, isn’t it? That’s only business-bashing if you believe that there’s no such thing as businesses who cut costs by ignoring the environmental impact of their activities, or take risks that end up endangering the financial system. If so, I wish I lived on your planet.

I think this is telling. This is the only actual example of Obama’s alleged demonization of business that Zuckerman offers — and it’s essentially a mini-Breitbart, a quote taken out of context to make it seem as if Obama was saying something he wasn’t. That’s typical of the whole argument.

Oh, and one more thing: are there no copy editors at the FT? When I quote someone in my column, I supply the source material, and my copy editor checks, not just to be sure that the quote is accurate, but that it’s not taken out of context. But I guess such rules don’t apply if you’re a conservative.

Sigh.

Ezra Klein today.

Me, March 2009.

Chronicle of a disaster foretold.

Brad DeLong, commenting on Greg Mankiw, writes:

Mankiw’s broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse–and hence have the government stand back and wash its hands of the situation.

However, even a minor and hasty acquaintance with the Great Depression teaches that the belief that the government should stand back and wash its hands because the self-regulating market quickly returns to full-employment equilibrium is the most arrogant belief possible.

And even a minor and hasty acquaintance with the Great Depression teaches that having the government stand back and wash its hands is the most risky strategy conceivable.

Quite. I really don’t think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded:

Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.

And there are already indications that this is happening. Bill Dickens, one of the people has who worked on downward nominal rigidity, tells me that the Beveridge curve — the relationship between job vacancies and the unemployment rate — already seems to have shifted out dramatically. This has, in the past, been a sign of a major worsening in the NAIRU, the non-accelerating-inflation rate of unemployment.

The point is that while policy makers may think they’re being prudent and appropriately cautious in their responses to unemployment, there’s a good chance that they’re prudenting and cautiousing us into a long-term jobs catastrophe.

One of the things anyone who irritates the hard right quickly gets used to — you see it all the time in comments on this blog — are the constant accusations that you’re lying, even when you did no such thing, simply because you didn’t present the fact or mention some other facts in a way that suits the commenter. If I say “the economy added 236,000 jobs a month under Clinton”, I’ll get “That’s a lie! Krugman doesn’t mention the dot-com bubble!” or “That’s cherry-picking! What about Jimmy Carter?” etc..

But this takes the cake: right-wingers are accusing Shirley Sherrod of lying when she said that Bobby Hall was lynched, when in fact all that happened was that he was beaten to death.

I think I need to say a bit more about the logic of market corners. Along the way, I can say something about reciprocal dumping, which was what was in the back of my mind when I wrote that old Sumitomo article.

So, reciprocal dumping: here’s how I thought about that, back in 1981. Imagine two separate national markets for some good — say, the good can’t be shipped at all — each dominated by a monopolist. In each market, the monopolist will set price above marginal cost. Why? Because the rule is to set marginal cost equal to marginal revenue, and marginal revenue is less than the price, because each additional unit the monopolist produces drives down the price on all his inframarginal units.

Assume for the sake of simplicity that the two markets, and the price charged in each market, are identical.

Now make it possible to ship the good internationally, but at a substantial cost per unit shipped. You might think that there’s no reason for trade to take place, since it’s costly to ship the good, and the prices in the two markets are the same.

But each monopolist, acting unilaterally, might nonetheless find it profitable to ship some of his stuff to the other market. Think about how this works: if he sells a unit of his output abroad, he faces a higher marginal cost than on a domestic sale, because of shipping charges. But whereas an additional unit sold at home depresses the price on his inframarginal sales, an additional unit sold abroad depresses the price on the other guy’s inframarginal sales. So if the firms act unilaterally, each has an incentive to dump into the other’s home market.

What does this have to do with a market corner? Suppose that Chocfinger has managed to buy up a large fraction of this year’s candy bar supply. If he stores a candy bar and sells it next year, he raises prices this year (by reducing the quantity supplied) and lowers them next year. But while Chocfinger benefits from higher prices this year, because he has cornered the current supply, he doesn’t suffer a comparable loss from lower prices next year, because he hasn’t cornered next year’s supply. It’s like the reciprocal dumping story: who cares if you depress the price on some other guy’s inframarginal units.

So that’s how I thought about it.

I eagerly await the long comments about how all this shows that I’m a socialist.

Jon Hilsenrath has a nice piece on the puzzles of gradual deflation, Japan-style. But I’m not sure whether readers will understand quite what the puzzle is — and they certainly wouldn’t gather from the article that there’s actually a literature about this puzzle.

So here’s the underlying puzzle: since Friedman and Phelps laid out the natural rate hypothesis in the 60s, applied macroeconomics has relied on some kind of inflation-adjusted Phillips curve, along the lines of

Actual inflation = A + B * (output gap) + Expected inflation

where the output gap is the difference between actual and potential output, and A and B are estimated parameters. (The output gap is closely correlated with the unemployment rate). Expected inflation, in turn, is assumed to reflect recent past experience. This relationship predicts falling inflation when the economy is depressed and the output gap is negative, rising inflation when the economy is overheating and the output gap is positive; this prediction works fairly well for modern US experience, explaining in particular the disinflation of the Volcker recession of the 1980s and the disinflation we’re experiencing now.

But here’s the thing: the inflation-adjusted Phillips curve predicts not just deflation, but accelerating deflation in the face of a really prolonged economic slump. Suppose that the economy is sufficiently depressed that with expected inflation at 3 percent, actual inflation comes out only 1; expectations will actually eventually catch up, so that if the economy remains depressed we’d expect inflation to go to -1; but if the economy remains depressed even longer, we’d expect inflation to go to -3, then -5, and so on.

In reality, this doesn’t happen. Prices fell sharply at the beginning of the Great Depression, when the real economy was collapsing; but they began rising again when the economy began to recover, even though there was still a huge negative output gap. Japan has been depressed since before incoming freshmen were born, but its chronic deflation has never turned into a rapid downward spiral.

So what’s going on? There’s a body of work I’m surprised we haven’t been hearing more about: the downward nominal wage rigidity literature. I learned about the concept from Pierre Fortin; Mr. Janet Yellin, aka George Akerlof, and co-authors wrote quite a lot about it. (Sorry, don’t have time to search for unprotected versions). What this literature argues is that, probably due to bounded rationality, there’s some downward inflexibility in prices and wages even after expectations have had time to fully adjust. And there’s a fair bit of empirical evidence to that effect.

Why is this important?

First of all, it explains how sustained gradual deflation can persist.

Second, it offers a reason — above and beyond concerns about the zero lower bound — to target a significantly positive inflation rate: at low inflation, more prices and wages will “want” to fall, but be blocked by downward rigidity; so even in the long run, the Phillips curve isn’t vertical at low inflation, and you can get permanently lower unemployment by accepting, say, 4 percent inflation rather than insisting on stable prices.

Third — and I fear that this is going to be a major issue in the future — it’s important to take account of downward rigidity so as not to get fooled into accepting a persistently depressed economy as normal. Picture America in, oh, 2014: unemployment is still around 9 percent, prices are falling about 1 percent a year. Many economists might look at that situation and say, well, deflation is stable, not accelerating, so we must be at the natural rate of unemployment — move along, folks, nothing to see here.

So it’s time to start focusing on downward rigidity and what it implies. After all, all indications are that we’re going to be dealing with a depressed economy for a long time to come.

Aha. An update on Chocfinger: I was trying to remember exactly how the underlying model behind my old copper-corner column worked. It was actually an application of the logic of my even older reciprocal dumping (pdf) work with Jim Brander.

Consider a two-period market in some good, with the possibility of storing some of that good in period 1 and selling it in period 2. Assume, however, that with a competitive market it’s not worth actually doing that — either the expected future price is lower than the current price, or it’s not enough higher to offset interest and storage costs.

But now suppose that some trader has managed to surreptitiously take possession of a large fraction of the period 1 supply, before it went to market. Does he have an incentive to hold some of that supply off the market, and in effect dump it into period 2? Yes! Suppose he owns a million candy bars: by taking one of those bars off the market until period 2, he may lose some money on that bar, but he drives up the price on the other 999,999 bars. This may give him an incentive to “dump” some of his candy into the next period, even if it looks on the surface like a money-losing proposition.

Or to put it another way, by acquiring a large share of period 1 supply, Chocfinger may have created a situation in which his marginal revenue from a current (as opposed to future) candy bar sale is quite low, making it profitable to hold bars off the market.

Fun stuff, if you have an economist’s warped view of what constitutes fun.

Oh, and look at how I ended that old Slate piece:

The funny thing about the Sumitomo affair is that if you ignore the exotic trimmings–the Japanese names, the Chinese connection–it’s a story right out of the robber-baron era, the days of Jay Gould and Jim Fisk. There has been a worldwide rush to deregulate financial markets, to bring back the good old days of the 19th century when investors were free to make money however they saw fit. Maybe the Sumitomo affair will remind us that not all the profitable things unfettered investors can do with their money are socially productive; maybe it will even remind us why we regulated financial markets in the first place.

It didn’t, of course — and the costs of deregulation have exceeded my wildest expectations.

He has a long post arguing that the tax-cutting radical right, not liberal advocates of stimulus spending, poses the real threat to US solvency. (And yes, it is possible to have a solvency problem, even here.) Wolf’s argument and main points are similar to those I made in a recent column; that’s not a criticism, because we need more people saying this.

Martin ends on a deeply pessimistic note. I wish I could disagree.