Outside my usual beat, but the statement from the Anti-Defamation League opposing the construction of a mosque near Ground Zero is truly shocking. As Greg Sargent says, the key passage — it’s a pretty short statement — is this one:

Proponents of the Islamic Center may have every right to build at this site, and may even have chosen the site to send a positive message about Islam. The bigotry some have expressed in attacking them is unfair, and wrong. But ultimately this is not a question of rights, but a question of what is right. In our judgment, building an Islamic Center in the shadow of the World Trade Center will cause some victims more pain – unnecessarily – and that is not right.

Translation: some people will feel bad if this thing is built, and we need to take these feelings into account, even though proponents “have every right to build at this site.”

So let’s try some comparable cases, OK? It causes some people pain to see Jews operating small businesses in non-Jewish neighborhoods; it causes some people pain to see Jews writing for national publications (as I learn from my mailbox most weeks); it causes some people pain to see Jews on the Supreme Court. So would ADL agree that we should ban Jews from these activities, so as to spare these people pain? No? What’s the difference?

One thing I thought Jews were supposed to understand is that they need to be advocates of universal rights, not just rights for their particular group — because it’s the right thing to do, but also because, ahem, there aren’t enough of us. We can’t afford to live in a tribal world.

Update: Times staff briefly removed the link to the ADL statement, because it seemed to be dead — but it was apparently just a case of an overloaded server, and I’ve put it back.

But ADL has apparently forgotten all that. Shameful — and stupid.

Hoo boy. I missed this; but Yglesias points out that in Ezra Klein’s interview with Paul Ryan, Ryan says that the way to increase lending is to raise interest rates:

We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets. I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.

I don’t even know where to start with this. What does Ryan think the fed funds rate is? (It’s the rate at which banks lend each other money overnight, usually to help meet reserve requirements.) He obviously doesn’t know the the Fed funds rate basically equals the return on federal paper, so that raising that rate would make banks more, not less, likely to stay with that federal paper. I’m sure someone will try to come up with a reason why Ryan is being smart here, but the truth is that he’s stone-cold ignorant.

Now, he wouldn’t be the only ignorant member of Congress. But wait — my colleague David Brooks tells me, this very morning, that

Paul Ryan, the most intellectually ambitious Republican in Congress, lavishly cites Brooks’s book. Over the past few years, Ryan has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system.

So this is the smartest Republican Congress has to offer?

Of course, Ryan’s idea of fiscal reform is to run huge deficits for decades, but claim that it’s all OK because we’ll cut spending 40 years from now; and he throws a hissy fit when people challenge his numbers, or call privatization by its real name.

But hey, he’s intellectually ambitious.

Update: And sure enough, Ryan tries to cover himself; see the addendum at the end of Ezra’s interview. But he’s faking it: there’s no way to go from what he now claims he was saying to the words he actually said. So he’s both ignorant and dishonest, which we already knew from the way he tried to deny that privatizing Social Security was actually, um, privatizing Social Security.

Hmm. I see that Scott Sumner has a post heatedly attacking the idea that Japan is stuck in a deflationary trap; he insists that Japan has deflation because that’s what the Bank of Japan prefers:

I was under the impression that the Bank of Japan was an ultra-conservative bank, and liked mild deflation. Indeed I thought that was pretty widely understood. I guess not.

He guesses right: that’s not at all the view of those who have been following Japanese monetary policy since the 1990s, and have even talked to BOJ people now and then. I’m sorry to say that the fact is that Japan is in a deflationary trap. You can argue that the BOJ should have done more — and I would. But persistent deflation isn’t a target, it’s what has happened because conventional monetary policy has lost traction and the BOJ isn’t willing to be more adventurous.

Read more…

A followup on the question of deflation risks: it’s worth bearing in mind that the last year and a half has been a fairly clean test of alternative views about how the economy works. When the economy slumped, budget deficits skyrocketed, and the Fed began large-scale asset purchases, there were two kinds of people: people who divide people into two kinds, and people who don’t On one side were people who said that deficits would drive interest rates way up, crowding out private investment, and that all that money printing would lead to high inflation. On the other were those who said that we’d entered a Japan-type liquidity trap, which meant that (a) there was a savings glut, so deficits would not crowd out private investment and interest rates would stay low (b) increases in the monetary base would just sit there, (c) the risk was deflation, not inflation.

And so far, the inflationistas have been completely wrong, the deflationistas completely right.

This wasn’t a coincidence. For the most part, the inflationistas basically argued that nothing changes when the economy is depressed and short-term interest rates are up against the zero lower bound: the quantity theory of money still rules, and interest rates reflect supply and demand in the loanable funds market. The deflationistas knew — based on study both of Japan and of the 1930s — that everything changes when you’re in the liquidity trap. And recent experience shows just how true that insight is.

Following up on an earlier post: Heather Boushey shows that far from requiring an unusual amount of reallocation of workers across sectors, this recession has been unusually broadly spread across the economy.

Why does man kill? He kills for food. And not only food: frequently there must be a beverage.

– Woody Allen

Apropos this post, Mark Thoma reminds me that he wrote about the shifting Beveridge curve a little while ago, linking to David Altig.

Here’s the worry, and the puzzle: in general, we expect high unemployment to be associated with low numbers of job vacancies, loosely speaking because employers, facing a buyers’ market, should be able to fill positions quickly. An upward shift in this relationship might therefore indicate a worse-functioning job market — say, because employers find a higher proportion of the unemployed unsuitable workers. And in the past, shifts of the Beveridge curve relating unemployment to vacancies seem to have been associated with movements in the NAIRU.

So now we face what looks like an abrupt shift for the worse:

David Altig

What’s driving this shift? One scary possibility is that we’re rapidly developing a case of Eurosclerosis, as the long-term unemployed come to be seen as unemployable. Another possibility is that it has something to do with the housing market: workers are trapped in place by homes they can’t sell, or by negative equity, and can’t move to where jobs are.

Anyway, there’s something happening here; what it is ain’t exactly clear; but it’s probably not good.

Good news: more people at the Fed are taking the risk of a Japanese-type trap seriously.

But not all of them:

“I think the fear of deflation in and of itself is probably overblown, from my perspective,” Charles I. Plosser, president of the Philadelphia Fed, said last week in an interview. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said.

Atrios asks whether this makes sense. No, it doesn’t. I mean, if we’re talking about the risk of turning Japanese, shouldn’t we, um, look at Japanese experience? Here’s Japan’s monetary base — the sum of bank reserves and currency in circulation — from 1995 to 2005:

Bank of Japan

All that money sitting there — and deflation continued apace. I remember Taka Ito telling me that the only consumer durable selling well was … safes. When you’re in a liquidity trap, the size of the base doesn’t matter.

But at least some Fed types are getting it.

I’ve been surprised by a lot of things since the financial crisis broke, few of them good. One of the truly amazing things, however, is the return of full, 1930s-type liquidationism — the idea that a slump serves a useful purpose, and that stimulating the economy, even through monetary policy, is a mistake. And so we have Raghuram Rajan in today’s FT arguing that with 9.5 percent unemployment, long-term unemployment at record levels, and falling inflation, we need to … raise interest rates:

This crisis followed a period, from 2002-2004, when monetary policy had done too much heavy lifting. The US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily. With households now struggling with this remaining debt, should we expect them to spend beyond their means again, or ask them to do so?

Moreover, if consumers are now going to want fewer houses and cars, a significant number of jobs will disappear permanently. Workers who know how to build houses, or to sell or finance them, will have to learn new skills. This means resources have to be reallocated into other sectors to ensure a robust recovery, not simply a resumption of the old binge. But this will not necessarily be facilitated by ultra-low interest rates.

This is all familiar to students of the history of thought; there’s virtually no difference between what Rajan is saying now and what Schumpeter said in the midst of global economic collapse:

I’ve written about this before; but let me add a few numbers. Is it at all reasonable to attribute high unemployment now to the need to shift the economy out of housing and cars?

OK, I actually haven’t taken cars into account; someone with more time can do that. But let’s look at the role of job losses in construction versus other sectors, since December 2007. It looks like this:

BLS

If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble. Yes, as a percentage job losses have been much larger in construction; but nothing in Rajan’s argument explains why we shouldn’t be using policy in an attempt to prevent vast job losses in parts of the economy that aren’t overblown.

I’d add that even if you think structural unemployment has gone up, it clearly hasn’t risen enough to stop a slide toward deflation — and if it has risen, the slump is arguably a cause, not an effect, of that rise.

Anyway, to go back to the beginning: it’s amazing, and depressing in multiple senses, that we’re having to replay all these old debates.

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.