2012 - %3, February

Who's Afraid of a Little Inflation?

| Sun Feb. 19, 2012 1:37 PM EST

Dylan Matthews has a nice piece in the Washington Post today about Modern Monetary Theory, an economic model that, roughly speaking, says government deficits are always good unless there's a risk of runaway inflation. Jared Bernstein comments:

For me, I’m down with MMTs up to a point. I very much agree that deficit reduction has been deeply miscast as pure virtue, with little regard for its economic impact. As I’ve written many times here, the first question re fiscal policy, at least until we’re reliably headed toward full employment is not “how quickly does your deficit come down?” It’s: “is your deficit large enough to replace lost private sector demand?”

This emphasis on using the tools of government, including the ability to print money and run large budget deficits in times of market failure, is MMT’s most important contribution to the current debate.

Now this I don't get. Sure, MMT says we should run large budget deficits during severe recessions. But so does Old Keynesianism. And post-Keynesianism. And New Keynesianism. If that's really MMT's most important contribution, who needs it?

The more important side of MMT is its insistence that we should run substantial deficits even when the economy is in good shape. Only when inflation appears ready to run out of control should we use budget surpluses to rein things in. But MMT proponent Jamie Galbraith says that pretty much never happens:

Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.

“The last time we had what could be plausibly called a demand-driven, serious inflation problem was probably World War I,” Galbraith says. “It’s been a long time since this hypothetical possibility has actually been observed, and it was observed only under conditions that will never be repeated.”

In some sense, this all comes down to a question of how scared we should be of inflation. Mainstream economic opinion says that a strong focus on full employment will inevitably risk high inflation, just as our current obsession with low inflation produces generally high unemployment. If we were focused on, say, a target unemployment rate of 4%, we'd see some periods where unemployment fell below that rate and some where it rose above it. But as the chart on the right shows, that's not what we've had over the past few decades. Instead, because our economic policy has been focused strongly on low inflation, we see only a couple of brief periods in which unemployment barely got close to 4%, followed immediately by a recession that kicked it back above 6%.

So should we focus instead on a genuine target of 4% unemployment, reining in budget deficits only when we fall well below that? That depends a lot on what you think the productive capacity of the country really is, and the mainstream estimate of NAIRU, the highest unemployment rate consistent with stable inflation, is around 5.5% right now. If that's the right estimate, then you could argue that we've been doing OK for the past few decades. But if full employment is really more consistent with an unemployment rate of 4%, then we've been wasting an awful lot of productive capacity for nothing.

POSTSCRIPT: Of course, you might also want to consider MPT, or Modern Petro-Monetary Theory. Rather than asking what level of economic growth kicks off unacceptable inflation, it asks what level of economic growth kicks off an oil price spike that produces a recession and higher unemployment. I have to admit that I increasingly think of the economy in those terms these days.

JAMIE GALBRAITH RESPONDS: In comments, he says:

Your instinct on the oil price is on target, in my view. The inflation threat that we face doesn't come from deficits or high employment — it comes from the cost and price of energy. But managing this is not within the competence of the Federal Reserve.

I have been trying to call attention to this issue for years (it's in my 2008 book, The Predator State, and in articles written recently with Jing Chen, most recently in the Cambridge Journal of Economics, which contains the following paragraph:

Our central argument is that stimulus fell short — and would have fallen short even if the amounts had been greater — because increased demand under existing high-fixed cost structures drove, or would have driven, the price of resources too high, too quickly. The constraint on growth was not inflation generated by easy money, but the combination of the rising real marginal cost especially of energy, combined with monopoly control of and speculative instability in energy prices, which together act as a choke-chain on the return to full employment.

But the endless debate over deficits, debt and quantitative easing tends to obscure this issue — and in public discourse one cannot easily answer questions that are not being asked. So thanks for making the point, and keep digging at it.

Apparently I am a Galbraithian but just didn't know it.

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LA Times Op-Ed Page Finds Common Ground: Liberals Are Pricks

| Sun Feb. 19, 2012 12:13 PM EST

Today the LA Times has a paired set of op-eds: Diana Wagman's "Why liberals can't talk to conservatives" (in blue!) is splashed across the page from Charlotte Allen's "Why conservatives can't talk to liberals" (in red!). And guess what? Ironically, it turns out that liberals and conservatives actually agree about this. It's because liberals are assholes.

Note to Times op-ed editor: The next time you hire someone to present the liberal side of things, please choose someone other than Wagman. I assure you she doesn't speak for all of us. Thanks.

Teen Pregnancy Is Higher in Red States Than in Blue States

| Sun Feb. 19, 2012 1:31 AM EST

Ross Douthat on teen pregnancy rates in blue states and red states:

If liberal social policies really led inexorably to fewer unplanned pregnancies and thus fewer abortions, you would expect "blue" regions of the country to have lower teen pregnancy rates and fewer abortions per capita than demographically similar "red" regions.

But that isn't what the data show. Instead, abortion rates are frequently higher in more liberal states, where access is often largely unrestricted, than in more conservative states, which are more likely to have parental consent laws, waiting periods, and so on. "Safe, legal and rare" is a nice slogan, but liberal policies don't always seem to deliver the "rare" part.

What’s more, another Guttmacher Institute study suggests that liberal states don’t necessarily do better than conservative ones at preventing teenagers from getting pregnant in the first place. Instead, the lower teenage birth rates in many blue states are mostly just a consequence of (again) their higher abortion rates. Liberal California, for instance, has a higher teen pregnancy rate than socially conservative Alabama; the Californian teenage birth rate is only lower because the Californian abortion rate is more than twice as high.

Are abortion rates lower in states that make it really hard to get an abortion? Of course. I'm not really clear on what, if anything, this is supposed to prove.

As for California and Alabama, that's mostly just a clever bit of cherry picking. The table below is reconstructed from Guttmacher Institute data, and it gives a better sense of the big picture. Douthat is right that there's not a sharp red-blue divide between states with the highest and lowest teen pregnancy rates. Still, the top 10 is pretty heavily dominated by red states and the bottom 10 is pretty heavily dominated by blue states. I think it's probably unwise to pretend that there are simple lessons to be derived from this, but at the same time it's deceptive to pretend that the divide isn't there. There really is a difference, and it's likely that social values play a role in it.

Public Libraries and the Digital Divide

| Sat Feb. 18, 2012 12:15 PM EST

Via David Ryan, a Metafilter comment on libraries and the digital divide. Here's a piece:

If you can take yourself out of your first world techie social media smart-shoes for a second then imagine this: you're 53 years old, you've been in prison from 20 to 26, you didn't finish high school, and you have a grandson who you're now supporting because your daughter is in jail. You're lucky, you have a job at the local Wendy's. You have to fill out a renewal form for government assistance which has just been moved online as a cost saving measure (this isn't hypothetical, more and more municipalities are doing this now). You have a very limited idea of how to use a computer, you don't have Internet access, and your survival (and the survival of your grandson) is contingent upon this form being filled out correctly.

Do you go to the local social services office? No, you don't. The overworked staff there says that due to budget cuts they can no longer do walk-in advising, and that there's a 2 week waiting list to get assistance with filling out forms. You call them up on the by-the-minute phone you're borrowing from your cousin (wasting 15 of her minutes on hold) and they say that they can't help, but you can go to your public library. OK, so you go to your public library after work.....

It's worth a few minutes of your time to read the whole thing from the beginning.

Which Major Corporations Are Backing a Climate-Denier Think Tank?

| Sat Feb. 18, 2012 6:00 AM EST

Over at ThinkProgress Green, Josh Israel and Brad Johnson expose 19 major corporations backing the Heartland Institute, the think tank whose internal documents were leaked this week, laying bare its plans to teach students that climate change is a hoax and other anti-climate efforts. As my colleague Kate Sheppard reported on Thursday, the documents—posted here and here—prompted a backlash from Heartland, which deemed at least one of the documents fake and some tampered with. Interestingly, Heartland president Joseph Bast then used the incident to write to donors, first to apologize—the leaked emails identified some private donors, to whom Heartland promises anonymity "because nobody wants the risk of nutty environmentalists or Occupy Wall Street goons harassing them"—and then to ask for more money ("Now more than ever, I need you to stand by us in our time of need").

Heartland's fundraising tactics (PDF) seem to have worked well in the past, given the group's impressive suite of corporate donations in 2010 and 2011. Here's a selection of the full list* of Heartland's corporate backers, via ThinkProgress:

Altria Client Services Inc.: $90,000

Amgen, USA: $25,000

Anheuser-Busch Companies Inc.: $5,000

AT&T: $100,000

BB&T: $16,105

Comcast Corporation: $35,000

General Motors Foundation: $30,000

GlaxoSmithKline: $50,000

Microsoft Corporation: $59,908

Nucor Corporation: $502,000

PepsiCo, Inc.: $5,000

Pfizer: $130,000

Reynolds American Inc.: $110,000

Time Warner Cable: $20,000

Correction: An earlier version of this article stated that the list above was the full list. The sentence has since been fixed.

Your Daily Newt: Among the Forest People

| Fri Feb. 17, 2012 7:35 PM EST
Former speaker of the house Newt Gingrich.

As a service to our readers, every day we are delivering a classic moment from the political life of Newt Gingrich—until he either clinches the nomination or bows out.

Newt Gingrich's 1995 class at Reinhardt College focused largely on themes of personal responsibility, the unsurpassed awesomeness of the Founding Fathers, and futurism. But his two-hour-long lectures were prone to long digressions on all manner of subjects—which led to this epic musing on the lost tribes of the Amazon:

As late as 40 or 50 years ago, there were still fairly significant stretches of the planet that had hunting-gathering societies. There are a handful left today, but mostly as deliberately maintained museums. I mean, the people who survive in the Brazilian rain forests survive because we deliberately will them to survive, because the sheer reach of modern civilization is now so enormous that if we didn't discipline ourselves, we'd overrun the Bushman of the Kalahari. I mean, these are people who are—who will rapidly be absorbed into this. And you have to raise an ethical question at some point, is it really fair to the human being who happens to have been born randomly into this environment to not let them have a laptop, not give them a vaccination against polio, and not dramatically raise their lives? And yet the second you do, you blow apart this system.

I mean, it's all wonderful and it's all romantic in the 90-minute film, and then you start thinking about the 12-year-old who has a limp and they're not going to make it. And it's a wonderful book by Colin—let's see, "the mountain people" and "the forest people." I can't remember Colin's last name. It will come to me in a minute. Anyway—I haven't read it in almost 30 years, but it is a—it's very romantic, it's very wonderful. Look how natural they are, and then you realize the cost of being natural.

The solution, of course, is to give them all laptops.

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Seriously, What Does Sheldon Adelson Want From Gingrich?

| Fri Feb. 17, 2012 5:25 PM EST
Sheldon Adelson: What's another $10 million among friends?

Ho hum. Another day, another $10 million donation from casino mogul Sheldon Adelson to bail out Newt Gingrich. Aldelson and his wife, you'll recall, have already dropped $10 million on the pro-Gingrich super-PAC Winning Our Future. The latest anticipated infusion of cash could help Gingrich's campaign, which is nearly busted, stay in the game a bit longer. Yet assuming that the conventional wisdom that Newt is more likely to reanimate dinosaurs on the moon than win the nomination is true, why is Adelson still showing so much love for him?

A few theories:

1. It's all about Israel. Adelson is an ardent supporter of Israel, and more specifically, hawkish Israeli politicians such as Prime Minister Benjamin Netanyahu. Adelson owns a pro-Netanyahu Israeli newspaper and has underwritten trips to Israel for members of Congress to drum up support for the country. Gingrich has told The Hill that Israel is Adelson's motivating concern: "Sheldon's primary driving source is the survival of the United States and Israel in the face of an Iranian nuclear weapon."

Gingrich and Adelson appear to see perfectly eye to eye on Israel. As MoJo's Adam Serwer notes, "Adelson's donation to Gingrich likely has something to do with their shared anti-Palestinian views, namely the notion that Palestinian national identity is 'invented.'" And Gingrich has said that his first executive order would be to move the US Embassy in Israel from Tel Aviv to Jerusalem, which would be a de facto recognition of Jerusalem as Israel's capital. Adelson has been pushing for the embassy move for years; he first mentioned it to Gingrich when he was still House speaker.

Image-of-the-Week: Boozy Fruit Flies

| Fri Feb. 17, 2012 3:07 PM EST

 Credit: David Marquina Reyes via Flickr.

Credit: David Marquina Reyes via Flickr.

Fruit flies live on fruit, and a lot of fruit rots and ferments, so that fruit flies also live to some extent on alcohol. A new paper in Current Biology reports on whether this boozy lifestyle contributes anything besides slurred flight, impromptu couplings, and fruit fights (okay, I made that part up). What they found was that having an elevated blood alcohol was the best defense against a parasitic wasp that lays its eggs in their bloodstream. In lab tests, researchers from Emory U in Georgia found the larvae of infected fruit flies self-medicated with booze (the first ever case for an insect) equivalent in alcohol to beer, and that boozers survived infestation better than teetotalers... To the holidays—all 365 of them.

Friday Cat Blogging - 17 February 2012

| Fri Feb. 17, 2012 2:53 PM EST

Spring is approaching, and after a bit of rain last weekend the weather has been lovely here in Southern California. On the left, after rolling around in the sun for a while, Domino poses with one of our legion of concrete rabbits. On the right, Inkblot is eating....something. Marian told me what it was last night, but now I've forgotten. But to Inkblot it seemed like a nice snack.

As for me, I've finished our vacation planning. Hooray! It's a family affair scheduled for the second half of May, and we're going to spend a week in Copenhagen visiting friends and then a week in Rome visiting the ruins. It's the first long vacation Marian and I have taken since 2002, and my mother has never been to Rome. Should be fun.  

Barack Obama's Hardline Turn on Medical Marijuana Is a Mystery

| Fri Feb. 17, 2012 2:08 PM EST

Over at Rolling Stone, Tim Dickinson has a good piece about the Obama administration's sudden about-face on medical marijuana. Initially they made soothing noises and announced that they wouldn't target pot dispensaries that complied with state law. Then, last year, everything changed:

The reversal began at the Drug Enforcement Agency with Michele Leonhart, a holdover from the Bush administration who was renominated by Obama to head the DEA…Almost immediately, federal prosecutors went on the attack. Their first target: the city of Oakland, where local officials had moved to raise millions in taxes by licensing high-tech indoor facilities for growing medical marijuana…Two months later, federal prosecutors in Washington state went even further…In isolation, such moves might be seen as the work of overzealous U.S. attorneys, who operate with considerable autonomy. But last June, the Justice Department effectively declared that it was returning to the Bush administration's hard-line stance on medical marijuana. James Cole, who had replaced Ogden as deputy attorney general, wrote a memo revoking his predecessor's deference to states on the definition of "caregiver."…Pot dispensaries, in short, were once again prime federal targets, even if they were following state law to the letter.

As I was reading this piece I kept asking why this had happened. But it was all very mysterious. Finally Dickinson provided the best answer he could:

Supporters of medical marijuana are baffled by Obama's abrupt about-face on the issue. Some blame the federal crackdown not on the president, but on career drug warriors determined to go after medical pot…The White House, for its part, insists that its position on medical pot has been "clear and consistent."…But the official makes no attempt to explain why the administration has permitted a host of federal agencies to revive the Bush-era policy of targeting state-approved dispensaries.

…The administration's retreat on medical pot is certainly consistent with its broader election-year strategy of seeking to outflank Republicans on everything from free trade to offshore drilling…But the president could pay a steep price for his anti-pot crackdown this fall, particularly if it winds up alienating young voters in swing states like Colorado, where two-thirds of residents support medical marijuana…"Medical marijuana is twice as popular as Obama," notes [Rob] Kampia. "It doesn't make any political sense."

None of this makes much sense. Leonhart was a holdover. Nothing changed when she was reappointed. And US Attorneys don't report to DEA anyway. Nor do deputy attorney generals change policy on their own. It has to be approved higher up.

So obviously Obama and Eric Holder went along with this. But Kampia is right: medical marijuana is pretty popular. Some cities, like Los Angeles, have recently cracked down on it, but no one was really begging the federal government to get more involved. And it wasn't a wedge issue either. I don't think the tea party or anyone else on the right was making a big deal out of this. There was really no compelling political reason to change direction.

So why did Barack Obama suddenly decide that a benign attitude toward medical marijuana was a loser? It is a riddle wrapped in a mystery inside an enigma.

UPDATE: Tim Fernholz suggests an answer: when the Obama administration saw the results of its own policy, it got nervous and backed away:

As fear of federal prosecution lessened, more states began adopting or considering medical marijuana laws; where the practice was already legal (as it was in California), there was a boom in the marijuana trade. Operating in a grey market between the federal prohibition and untested state rules, dispensaries of all kinds operated without much supervision.

…Though law enforcement officials could not point to any commensurate increase in crime, all that activity made the federal government uneasy: It realized that tacitly allowing states to regulate medical marijuana had far-reaching consequences that it wasn’t entirely comfortable with…With local and state officials writing letters to their U.S. Attorneys, asking for their thoughts on various schemes to license marijuana growers and distributers, the federal government decided to take a tougher line.

More here.