Readings:

Feb. 8: Introduction

Social Security Administration, Historical Background, http://www.ssa.gov/history/briefhistory3.html

OECD, “How expensive is the welfare state?”, http://www.oecd-ilibrary.org/social-issues-migration-health/how-expensive-is-the-welfare-state_220615515052

Brandolini and Smeeding, Income inequality in richer and OECD countries, http://www.fondazionebasso.it/site/_files/Scuola_per_la_buona_politica/2008/Materiali_laboratori/OECD%20Countries.PDF

CBPP, Taking stock of the safety net: http://www.offthechartsblog.org/tag/taking-stock-of-the-safety-net-series/

Class notes (pdf)

I don’t tweet, but I have a robot that does — all it does it tell followers that there’s a new entry on this blog. For some marketing purposes I was told to check the number of followers, of which more in a moment; and this had me wasting some time on the math of Twitter followership.

What I knew is that many more or less hierarchical systems — the size of cities, the distribution of income in the upper tail — follow a power law, meaning that number 100 is to number 10 as number 10 is to number 1. Does Twitter?

Not exactly; the rank-followership gradient is relatively flat at the top (Lady Gaga and Justin Bieber have roughly the same number of followers), then steepens once you get past the mega-celebrities:

Source.

Oh, and me? Well, let’s just say I’m no Lady Gaga. But the question, of course, is who can you look down on? And it turns out that with around 700,000 followers, I’m slightly ahead of Arianna Huffington, Miley Cyrus, and … Sarah Palin.

That plus a couple of dollars will get me a Starbucks cup of coffee.

Update: Oh well, apparently that’s a fake Miley Cyrus account; the real one is much higher. At least I too can claim to be the victim of fake accounts …

Some more about the whole values and the working class thing. You can say this for Charles Murray’s Coming Apart; he did do a fair bit of data crunching, producing results like this:

And he’s not the only one to note that marriage rates have fallen sharply among less-educated Americans, whites as well as minorities:

But as David Frum says, it’s odd how Murray dismisses the notion that declining opportunities rather than moral turpitude coming from mysterious sources might be responsible. Real wages for less-educated workers have fallen substantially, even as average incomes have continued to rise; maybe you think this shouldn’t have had a demoralizing, family-values-undermining effect, but the reality is that it does.

And Larry Mishel points me to an even more striking example of how the payoff to working hard and playing by the rules has fallen off a cliff, the collapse of employment benefits:

So we’ve created a society in which many young people see no chance of ever achieving middle-class status; then we look at their failure to adhere to middle-class values, and declare that there must be some mysterious force corroding our morality.

Let me talk some more about the sudden fashionability of bemoaning the deteriorating values of working-class Americans, by documenting the points David Frum made.

So, as Pew says, there really has been a drastic decline in marriage rates among less educated Americans:

What could be causing that? Well, it could be some kind of cultural contagion from liberalism, or something; as Mike Konczal says, there’s kind of an odd absence of causal stories in the latest “values” thing.

But it could also be this, from EPI:

Should we really be surprised that young men, confronting the reality that they won’t earn anything near as much in real terms as their fathers did — and that they will be even further from having what society sees as an adequate income, because even Adam Smith acknowledged the importance of social norms in defining prosperity — don’t marry and raise families the way the previous generation did?

Nobody does hissy fits like Karl Rove; the master of hardball, dirty-trick politics is constantly outraged, outraged, at his opponents’ underhanded tactics. And the latest hissy-target is the Chrysler ad during the Super Bowl, starring Clint Eastwood.

Jon Cohn gets it: it’s actually a double-edged problem for the Republicans. They hate any reminder that they were dead wrong on the auto bailout; and they hate any thought that the Democrats are becoming the party of optimism. Hey, only Republicans are allowed to celebrate American success!

And behind the yelling lies, almost surely, a growing sense of panic:

All the talk on the intellectual (or pseudo-intellectual) right seems to be about Charles Murray’s book Coming Apart: The State of White America, which asserts that the problem with blue-collar whites is … declining family values.

David Frum, who may really be the last honest conservative, has a terrific takedown:

To understand what Murray does in Coming Apart, imagine this analogy:

A social scientist visits a Gulf Coast town. He notices that the houses near the water have all been smashed and shattered. The former occupants now live in tents and FEMA trailers. The social scientist writes a report:

The evidence strongly shows that living in houses is better for children and families than living in tents and trailers. The people on the waterfront are irresponsibly subjecting their children to unacceptable conditions.

When he publishes his report, somebody points out: “You know, there was a hurricane here last week.” The social scientist shrugs off the criticism with the reply, “I’m writing about housing, not weather.”

And Alec MacGillis points out that Murray himself grew up in a company town where Maytag provided good jobs for blue-collar workers — until it shut the plant and moved operations to Mexico.

From an analytical point of view, this would seem to be a very odd time to focus on the alleged moral decline of the lower classes. During the 60s, it was at least somewhat reasonable to ask why social ills were rising despite a booming economy producing widely shared gains (although as William Julius Wilson pointed out, work was disappearing in the inner cities, and this helped explain rising social problems among those trapped in those inner cities). But now we have an economy that has left blue-collar workers behind; why invoke social values to explain their plight?

And to the extent that social decay is a reality among, say, the bottom third of the income distribution among whites, doesn’t this say that Wilson was right, that lack of economic opportunity is what breeds social disruption?

Of course, the sudden fuss about values makes perfect sense from a political point of view, as a distraction from the issue of soaring incomes at the top.

Well, I see that Bill Gross is still demanding that we fight the slump by … raising interest rates. I wish I could say that he had no support; there are, in fact, a lot of Very Serious People demanding a rate rise, and a growing number of stories about the plight of savers.

So let me explain how I think about zero rates and their relationship to the depression we’re in. (Yes, it is a depression, even if we’re having some job growth; there was a lot of job growth between 1933 and 1937, but it was still the Depression).

Think of the supply and demand for loanable funds. The tricky thing about interest rates is that there are seemingly two theories of interest rates — loanable funds, which is about supply and demand for savings, and liquidity preference, which is about the tradeoff between money and bonds. Which is right? Both are — because savings and investment also depend on GDP, which can change. That’s one point of approach into the IS-LM model.

So what is happening when we’re at the zero lower bound? One way to think about it is to draw the supply and demand for savings that would prevail if the economy were at full employment. They look like this:

The policy problem is that for whatever reason — in current conditions, mainly the deleveraging taking place after an era of debt complacency — the interest rate that would match savings and investment at full employment is negative. Unfortunately, that’s not possible, because rather than lend at a loss people can just hold cash. So we have an “incipient” excess supply of savings, which is eliminated not via a fall in interest rates but via a fall in income, i.e., a depression.

Now, the figure above may look familiar from microeconomics; it’s more than a bit like the standard analysis of a price floor that creates a persistent excess supply of a good, such as the way European price floors on agricultural products created butter mountains, wine lakes, etc..

One way to think about macro policy in a liquidity trap is that it’s about trying to reduce that incipient surplus, say through government spending to make use of the excess savings.

But what the people who want to raise rates are demanding is that we take the price floor that is causing this destructive surplus, and raise it higher.

Yes, savers would like higher returns, just as farmers would like higher prices for their butter. But free-market oriented economists, of all people, should understand that you can’t just decree higher returns without paying a price in economic disruption.

Hmm. A number of people who attacked Keynesian analysis vigorously seem to be in the process of backing off, which is good. But they also seem to be in the process of rewriting history, specifically the history of their own positions. So just a few notes about what actually happened.

Read more…

Good article in Bloomberg:

Procter & Gamble Co.’s failure to raise the price of Cascade dishwashing soap shows why investors are buying Treasuries at the lowest yields in history, giving the Federal Reserve more scope to boost the economy.

The world’s largest consumer-products company rolled back prices after an 8 percent increase lost the firm 7 percentage points of market share. Kimberly-Clark Corp. (KMB) started offering coupons on Huggies after resistance to the diapers’ cost. Darden Restaurants Inc. (DRI) raised prices at less than the inflation rate as patrons order more of Olive Garden’s discounted stuffed rigatoni than it anticipated.

This is basic economics; prices tend to fall, or at least slow their rise, when there is vast excess capacity and weak demand. But where’s my hyperinflation?

How much is the troika demanding from Greece? How tight is the squeeze? Here’s a look based on the most recent IMF report (pdf).

The current plan calls for Greece to move into large primary surplus — that is, surplus not counting interest payments on the debt:

That’s a huge swing — and it’s supposed to happen in the face of a deeply depressed economy. Here’s what it implies for real government spending:

Can I say that this looks basically inconceivable?

And here’s the thing: when this started, Greece was running a large primary deficit — which meant that even if it repudiated all its debt, it would still have been forced to make a major fiscal contraction. This is no longer true. So we’re now looking at a scenario in which Greece is forced into killing levels of austerity to pay its foreign creditors, with no real light at the end of the tunnel.

This is just not going to work.

It’s now conventional wisdom that the fate of the U.S. economy over the next three quarters — and hence, also, Obama’s reelection chances — depend on events in Europe. So maybe this is a good time to express some skepticism.

The map above — taken from here — tells us that overall, exports to Europe are just 2 percent of GDP. Some states, notably South Carolina, are more exposed (presumably because of those European-owned auto plants). But Obama isn’t going to win South Carolina in any case. And more broadly, even a sharp fall in exports to Europe would be only a small direct hit to demand.

OK, caveats: this only measures goods exports, and we should mark the numbers up maybe 25 percent to take account of services. Also, exports aren’t the only channel: if European events cause a Lehman-type event, disrupting financial markets world-wide, all bets are off.

And I should say that there is a long-standing puzzle concerning world business cycles: economies move in synch more than can easily be explained via concrete linkages in the form of exports.

With all that, however, it’s still very questionable whether Europe’s looming recession will actually have that much negative impact here. Decoupling didn’t hold in 2008-2009, but that was an epochal disaster. This time might be different.

Just a brief further thought on the anti-Keynesian flip-out. Consider three propositions:

1. Deficit spending is expansionary, other things equal.

2. Deficit spending is always expansionary.

3. Only deficit spending is expansionary.

Keynesian economics basically asserts proposition 1. Testing that proposition is tricky, but that’s always the case in economics; you have to look for natural experiments, or be very careful about controls. Christy Romer talks about this in her excellent speech (pdf) on the topic. But when you do it right, the evidence strongly supports proposition #1.

Proposition #2 is, well, stupid. It’s what you see in bad comment threads, where people rant about how if Keynesian economics was right, Greece would be a miracle economy.

And proposition #3 is worse. Which is why I am boggled to see professional economists apparently believing that this is the proposition to focus on.

Via Digby, I see that Keith Poole’s Voteview site has produced estimates of presidential positions on a left-right scale since 1945.

I’ve long been a great admirer of the work done by Poole and his collaborators. What they do is use roll-call votes to map politicians’ positions into an abstract issue space. You can think of this as a sort of iterative process: start with a guess about how to rank bills from left to right, use that ranking to place politicians along the same spectrum, revise the ranking of bills based on the politicians, and repeat until convergence. What they actually do is more complicated and flexible, and allows for multiple dimensions; but that sort of gets at the general idea.

And it turns out that US politics really is one-dimensional, that once you know where politicians stand on a scale that clearly has to do with taxation and the size of the welfare state, you can predict their votes very well. There used to be a second dimension, clearly corresponding to race; but once the Dixiecrats became Republicans, that dimension collapsed into the first.

The new result comes from identifying cases where presidents clearly endorsed or opposed legislation, and using those cases to place presidents on the left-right scale. Here’s what they find, with up meaning moves to the right, down moves to the left:

So, Obama is the least liberal Democratic president since World War II, and presumably the least liberal since Woodrow Wilson.

I’m not bashing Obama, by the way; I wish he took stronger stands, but I think he’s moving in that direction; also, even if his health reform was devised by Heritage and implemented by Mitt Romney, it’s a lot better than nothing.

The point, instead, is that this very moderate Democrat is portrayed by the right, not to mentioned the aforementioned Romney, as a radical redistributionist — when the real radicals are on the other side. And now we have numbers.

Recent facts have not been kind to the political right. A better-than-expected jobs report; a renewed focus on inequality, driven both by CBO research and by the gift of Mitt Romney’s candidacy. What to do?

The answer is to throw a bunch of bogus numbers at the issues, in the hope that something sticks, or at least that the discussion becomes confused.

First, about that jobs report: all the usual suspects have jumped on the routine BLS population adjustment to claim that the numbers were cooked. The real story here is that the BLS estimates unemployment based on a monthly survey; this tells us what fraction of workers are unemployed. To turn that into a number of unemployed, the BLS estimates total working-age population; but it updates those estimates only once a year. So there’s usually a step up or down in the totals each January, signifying nothing.

Back in the Bush years there were a lot of bogus claims of huge job growth reflecting a step up in the population numbers. Now we have Rush Limbaugh, Fox, etc., claiming that a step down somehow implies fake calculations. Still not true. And the thing that makes this so tiring is that they keep trotting out the same old bogosity, no matter how many times it has been refuted.

Next up, inequality denial. The Census Gini figure hasn’t moved much since the early 1990s — but as Jon Chait says, we know perfectly well why: it’s because Census numbers are top-coded, that is, cut off at high income levels, and the big gains have come way up the scale.

How do we know that? Partly, just look around: walk around New York’s pricier neighborhoods and tell me that inequality hasn’t increased. But also, income tax data. Here’s what the IRS tells us about income shares at the top:

INCOME SHARES

Notice that the rise is almost entirely concentrated in the top 1 percent; even the bottom half of the top 10 percent went nowhere, which tells you once again that this is about the 1 versus the 99, not the top 20 versus the lower class. And yes, the data are overwhelming support for a rise in inequality.

Oh, and Chait tells us that the usual suspects are also rolling out the old “the rich in America pay more taxes than the rich in other countries” thing. Yes — because the American rich are much, much richer.

In a way it’s almost a relief to find these guys coming up with new fallacies. Brad DeLong catches the WSJ looking at estimates that federal workers get 2 percent more salary and 48 percent more benefits than private-sector workers — and concluding that this means that they are overpaid by 50 percent.

The important point to make here is that all these bogus numbers are coming from seemingly authoritative sources — Fox News, which is a big organization, the WSJ editorial page, the American Enterprise Institute. You could not imagine a similar level of statistical dishonesty from, say, The Nation, or Washington Monthly, or EPI.

This is what I mean when I say that the left and right aren’t symmetric. People of all persuasions lie; but the right has a whole institutional structure of lying that has no counterpart on the left.

Keynesian economists made some pretty clear predictions around 3 years ago – predictions that were very much at odds with what anti-Keynesians were saying. We said that as long as the economy remained deeply depressed, even a huge rise in the monetary base would not be inflationary, and that even huge budget deficits would not send interest rates soaring. And we said that fiscal austerity would be contractionary, not expansionary.

All these predictions have been borne out. And some of the anti-Keynesians seem to be in the process of acknowledging, at least in a grudging way, that they got it wrong.

But some anti-Keynesians have tried to save their dignity, or something, by attacking supposed Keynesian propositions that nobody actually, you know, proposed. The usual one is to claim that Keynesians predicted great results from the Obama stimulus (which I very noisily did not). But Tyler Cowen has come up with something truly strange. He seems to believe that any good news anywhere somehow refutes Keynes. Hints of recovery in Ireland (which proved a false dawn)? Keynesianism is wrong! A relatively encouraging month on the jobs front? Keynesianism is wrong!

I’d say that this was attacking a straw man, but that would be an insult to straw men. What is going on in Cowen’s head?