David Leonhardt writes today that if we expect the economy to eventually rebound the way it did after the Great Depression of the 1930s, we're sorely mistaken. There's obviously something to this: after World War II, which finally ended the Depression for good, the United States had (a) a huge pool of savings that people were eager to put to use, and (b) a strong potential export economy since the rest of the world had been blown to smithereens. We didn't need to import goods from Japan or China, and we didn't need to import oil from OPEC. We had all we needed right here at home.

Today, even after we crawl out of our current malaise, things will be just the opposite. Our debt overhang will probably be a drag on growth for a long time to come, our trade balance is persistently negative, and the price of oil acts as a significant constraint on economic growth. So some pessimism is warranted. But I'm not so sure about this:

Three giant industries — finance, health care and housing — now include large amounts of unproductive capacity. Housing may have shrunk, but it is still a bigger, more subsidized sector in this country than in many others. Health care is far larger, with the United States spending at least 50 percent more per person on medical care than any other country, without getting vastly better results....The contrast suggests that a significant portion of medical spending is wasted, be it on approaches that do not make people healthier or on insurance-company bureaucracy.

In finance, trading volumes have boomed in recent decades, yet it is unclear how much all the activity has lifted living standards....Wall Street has captured a growing share of the world’s economic pie — thereby increasing inequality — without doing much to expand the pie. It may even have shrunk the pie, given that a new International Monetary Fund analysis found that higher inequality leads to slower economic growth.

The common question with these industries is whether they are using resources that could do more economic good elsewhere. “The health care problem is very similar to the finance problem,” says Lawrence F. Katz, a Harvard economist, “in that incredibly talented people are wasting their talent on something that is essentially a zero-sum game.”

I'd treat these three things separately. Housing is a purely short-term issue. There's really no reason to think that it will act as a permanent drag on the economy. Sometime in the next few years it will return to its trend rate of growth and that will be that.

Healthcare is different. There's unquestionably some waste, both in human and economic terms, and this really is a misallocation of resources. At the same time, the big reason we pay more for healthcare than other countries is simply because we pay doctors more, we pay hospitals more, we pay insurance companies more, and we pay pharmaceutical companies more. I happen to think this is a bad thing, but it's not as if the money falls through a sieve and disappears. It all stays in the economy and gets spent one way or another.

And then there's high finance, which as near as I can tell, really has turned into a huge leech on the economy. If I had to guess, I'd say that upwards of a quarter of all financial activity today is actively damaging to the economy, and reforms like Dodd-Frank will have only the slightest impact on that.

So what's my beef with Leonhardt? Just that I think he's overstating things a little bit? No. My beef is with the bolded sentence above. The problem is that there's very little evidence that housing and healthcare and finance are actively sucking away investment dollars that could be better used elsewhere. Rather, the problem seems to be a drought of good investment opportunities, which leaves lots of money idle and looking for something else to do. The result is the same — lots of money going into unproductive sectors — but the arrow of causality is different. If there were lots of great, high-yield investment opportunities in the real world of consumer goods and services, money would flow there instead of blowing up housing bubbles and enriching a bunch of testosterone-fueled Wall Street traders.

A couple of days ago I argued that our capacity for innovation might be healthier than it's often given credit for. But if there's a strong counterargument, I think this is at the core of it. If we really are innovating at the same pace as in the past, why are the world's investment dollars flowing so heavily into useless crap instead? It might be, as I sort of argued on Friday, that present-day innovations are as great as they've ever been, but simply don't cost very much and don't employ very many people. Maybe. But in any case, the great investment drought of the past decade is, I think, at the core of everything. One way or another, we need to figure out why it happened and why it seems to be persisting.

Ezra Klein has a really, really good piece in the Post today that looks back at the Obama administration's response to the Great Recession and explains why it wasn't enough. It's so good that I almost hate to excerpt anything, but you guys are spoiled and might not click the link just because I tell you it's well worth 15 minutes of your time to do it. So here's an excerpt that explains why Team Obama did so little about mortgage debt even though it was clear from the beginning that debt was a key difference between this recession and every other postwar recession:

On first blush, there are few groups more sympathetic than underwater homeowners or foreclosed families. They remain so until about two seconds after their neighbors are asked to pay their mortgages. Recall that Rick Santelli’s famous CNBC rant wasn’t about big government or high taxes or creeping socialism. It was about a modest program the White House was proposing to help certain homeowners restructure their mortgages. It had Santelli screaming bloody murder.

“This is America!” he shouted from the trading floor at the Chicago Board of Trade. “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.” The traders around him began booing loudly. “President Obama, are you listening?”

Thus was the Tea Party born. And it's an important point: one way or another, taxpayers are always going to be on the hook for any kind of debt relief. They can be on the hook directly, by shoveling dollars to homeowners so they can pay down their mortgages, or they can be on the hook indirectly by bailing out all the banks that would fail if courts were allowed to unilaterally slash the principal on underwater mortgages via cramdown. Taxpayers aren't going to be happy about this either way, and like it or not, that constrains the responses available to politicians.

Economist Carmen Reinhardt gives Obama a lot of credit for what he did. "The initial policy of monetary and fiscal stimulus really made a huge difference," she says. "I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn't fully appreciated." The combination of the stimulus bill, the auto bailout, and the bank rescues really did make a big difference.

But it wasn't enough. Partly that was because of political timidity. Partly it was because of genuine disagreements over which policies were likely to work best. And partly it was because we didn't know how truly bad things were in early 2009. As Ezra reminds us:

To understand how the administration got it so wrong, we need to look at the data it was looking at. The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; they didn’t know that it had been run over by a truck.

Anyway, click the link and read the whole thing. Really. This is one of the best roundups I've read of just what the Obama administration did right, what they did wrong, and whether they could have done better.

And if you're looking for a bottom line, mine is this: Despite everything, Team Obama actually did pretty well. Maybe 70-80% as well as anyone could have done. Housing was their single biggest area of failure, but even there, taxpayer and congressional resistance to bailing out "reckless" borrowers constrained them more than critics usually admit. Our failure to adequately address the Great Recession wasn't really rooted in the Obama administration, it was rooted in the fact that virtually no one, faced with an economic crisis, ever has the guts to truly unleash the proper amount of firepower. It's a very human problem, but for now anyway, humans are all we have. So a human response was what we got.

On Tuesday, John Cole foolishly baited me with a video of his cat, Tunch, purring for the camera. "Can Inkblot make noise like that?" he asked from the safety of his home 3,000 miles away in West Virginia.

Skeevy oppo researchers make insinuations like this all the time, since they know America won't elect a cat president who doesn't have a presidential purr. So today is movie day, proof positive that Inkblot has just the right timbre and resonance we demand from our presidents in this media age.

The bad news, of course, is that this means His Mightiness1 has now pushed Domino off the blog for two weeks running. But have no worries. She's plotting her revenge. She'll be back next week.

1Back in 1789, this was one of the original suggestions for how we should address the president. Inkblot is considering reviving this if he's elected.

From Karl Smith, responding to outgoing ECB President Jean-Claude Trichet's continuing insistence on choking off the economy with tight money:

Obviously the European Central Bank (ECB) has nearly unlimited power to inflict suffering on the people of the Eurozone. And, from the looks of it they it intend to use it.

Read the rest for some wonkery to fill in the details. But really, the two sentences above pretty much tell the story.

Paul Krugman writes today about the Occupy Wall Street protesters:

Now, it’s true that some of the protesters are oddly dressed or have silly-sounding slogans, which is inevitable given the open character of the events. But so what? I, at least, am a lot more offended by the sight of exquisitely tailored plutocrats, who owe their continued wealth to government guarantees, whining that President Obama has said mean things about them than I am by the sight of ragtag young people denouncing consumerism.

This is a really important point, and it's especially important for sober, mainstream, analytical liberal folks. Like me. So consider this post a warning to myself.

If you go to any tea party event, you'll hear some crackpot stuff and see some people dressed up in crackpot costumes (tricorner hats etc.). By "crackpot," I mean stuff so outré that even movement conservatives know it's crazy and want nothing to do with it. Of course, it gets reported in the media occasionally, and when it does, snarky liberals have a field day with it.

But does this scare off anyone on the right? It does not. They ignore it, or dismiss it, or try to explain it away, and then continue praising the overall movement. The fact that liberals have found some hook to deliver a blast of well-timed mockery just doesn't faze them. They know whose side they're on.

So Krugman is right: liberals need to take the same attitude. Are there some crackpots at the Occupy Wall Street protests who will be gleefully quoted by Fox News? Sure. Are some of the organizers anarchists or socialists or whatnot? Sure. Is it sometimes hard to discern a real set of grievances from the protesters? Sure.

But so what. Ignore it. Dismiss it. Explain it away. Do whatever strikes your fancy. But don't let any of this scare you off. We can put up with a bit of mockery if we keep the chart above firmly in front of our faces. Just keep reminding yourself: a mere three years after the financial industry nearly destroyed the planet, Wall Street is bigger and more profitable than ever while a tenth of the rest of us remain mired in unemployment. Even after nearly destroying the planet, virtually nothing has changed. That's the outrage, not a few folks with funny costumes or wacky slogans. Always keep in mind whose side you're on.

As you've probably heard by now, employment was up by 103,000 last month. Since the economy needs to generate 100-150,000 jobs each month just to keep up with population growth, this means that in real terms we're either treading water or actually moving backward. In any case, it's a lousy report.

But rather than run my usual chart showing this, here's a peek at the details from the BLS report instead. As you can see, our problem is that the private sector is producing more jobs — though slowly — but the public sector is shrinking. That's been the story for a long time now, though you might not know it given the ceaseless clamor from the right about big government, overbearing regulations, and out-of-control spending. The evening news isn't likely to point this out, but the truth is that government employment is down across the board, and that's a big reason our economy has remained so sluggish. Not only are conservatives in Congress grimly determined to prevent any substantive action to improve the economy, but conservatives around the country are actively making things worse. And we wonder why people have such a dim view of our elected officials.

Harry Reid, in a fit of spinefulness, killed off a Senate rule last night. There are really only two things you need to know about this:

  1. The rule itself was an obscure and trivial delaying tactic that, until now, neither party had used for decades. It does not directly affect either cloture or the filibuster, so stop drooling.
  2. The rule was eliminated by a majority vote that overturned a ruling of the parliamentarian.

#1 doesn't matter. (Though details are here if you're a masochist.) #2 might be a big deal. For starters, if you can change the Senate rules by simply overruling the parliamentarian on a majority vote, you can change pretty much any Senate rule by a majority vote. For seconders, Harry Reid actually got the entire Democratic caucus to go along with this. That's.....sort of amazing.

No one knows how this is going to play out in the future. One possibility is that it's a nothingburger. Overturning an obscure rule doesn't set much of a precedent, and likewise, uniting the Democratic caucus over something so arcane doesn't mean much either. Mitch McConnell and his friends will squawk, and then life will go back to normal. What's more, the proposition that a parliamentarian's ruling can be overturned on a majority vote isn't really anything new. It hasn't been used much, but it's a precedent that's been in place for decades.

Still, there's at least the possibility that it's very much a somethingburger. It might be something Republicans take advantage of if they win a Senate majority in the next election. In the nearer future, it might mean Democrats are finally figuring out that if they don't hang together, they will assuredly all hang separately. If I had to guess, I'd vote that this is a nothingburger, but it's worth keeping an eye on.

(It will, of course, also inspire Fox/Drudge/Tea Party shrieks about totalitarianism and Democratic thuggery, but that can be safely ignored. The real action will all be behind the scenes.)

This is one of the reasons that I'm a little less preoccupied by China than some people:

Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday.

....The Boston Consulting Group estimates that the trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade. The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies.

This has been inevitable for a long time. As China grows and gets richer, its workers will get paid more and it will make less and less sense to move U.S. production there. It's a natural brake on offshoring. Add to it China's demographic trends and you have a country that still has a bright future but is almost certainly not going to be able to keep up the torrid growth rates of the past few decades. Once it hits per capita GDP of $10-15 thousand or so, continued progress is going to come ever more slowly.

At the same time, this isn't automatically great news for American manufacturing, which, in the short term, is just likely to migrate to India and Malaysia and other countries with even lower labor costs than China. And as for our current account deficit, the key phrase in the article above is "excluding oil." Obviously China is a significant factor in our trade deficit, but oil is both a bigger and more persistent one. If we want to tackle that — and we do! — we need both macroeconomic action (a weaker dollar) and policy action (ways to reduce our use of OPEC oil). Both a weaker dollar and a carbon tax are our friends right now.

There's been a boomlet this year in books and articles suggesting that innovation in recent decades has slowed to a trickle and economic productivity is flattening out for the foreseeable future. Peter Thiel has been pushing this meme for a while, Tyler Cowen made a splash in January with his e-book, The Great Stagnation, and Neal Stephenson nearly took the World Policy Institute offline last week with his essay, "Innovation Starvation." Talking about our innovation drought is suddenly all the rage. But is it really true? Or is it mostly just a product of discouragement borne of several years of lousy economic performance?

Honestly, I'm not sure. But maybe it's worth thinking out loud about this a little. The complaints mostly take two basic forms. The first I call "Where's my jetpack?!?" and it's pretty easily disposed of. The argument here is that back in the 1950s we thought the future would bring us flying cars, electricity too cheap to meter, and vacations on the moon. But none of that has happened. What gives?

The answer is prosaic: Forecasters in the '50s were wrong. It's not that the future never arrived—it's that the future brought us different stuff than we thought we were going to get. Our lack of flying cars simply doesn't tell us anything about the pace of innovation.

The second form of the innovation argument is more substantive. I call it the Great-Grandma Argument, and it compares innovation in the first half of the 20th century to innovation since then. Our Great-Grandma from 1900, we're told, would be totally flabbergasted if she were whisked to the year 1950. So much new stuff! But our mothers and fathers from 1950? If they were magically transported to 2011, they'd recognize almost everything they saw. Yawn.

There's obviously something to this. The end of the 19th century and the first half of the 20th century was an astonishingly fertile period: lightbulbs, radios, autos, airplanes, refrigerators, penicillin, TVs, air conditioners, the telephone, and much more. The period since then has seen the digital computer and....that's about it. Things like cell phones and flat screen TVs are mere technological improvements, not genuinely new inventions.

Which is true enough. But although I've often thought about innovation this way too, the more I've chewed it over the more I've decided that it misses something. Most of the best known inventions of the early 20th century were actually offshoots of two really big inventions: electrification and the internal combustion engine. By contrast, the late 20th century had one really big invention: digital computers. Obviously two is more than one, but still, looked at that way, the difference between the two periods becomes a bit more modest. The difference between the offshoots of those big inventions is probably more modest than we think too. Just as we once made better and better use of electrification, we're now making better and better use of digital computing. And to call all these computing-inspired inventions mere "improvements" is like calling TV a mere improvement of radio. These are bigger deals than we often think. We have computers themselves, of course, plus smartphones, the internet, CAT scans, vastly improved supply chain management, fast gene sequencing, GPS, Lasik surgery, e-readers, ATMs and debit cards, video games, and much more.

Wait a second. Video games? Am I joking? No indeed. Give some thought to just what innovation and productivity gains are for.

A couple of years ago, in a bellwether for how hard it's going to be to ever seriously rein in healthcare costs, there was an instant and thunderous backlash against a new recommendation that women with no risk factors put off routine mammograms until age 50. A small number of famous breast cancer survivors who had been diagnosed at a young age took immediately to the airwaves, and that was all she wrote. Within 48 hours, HHS Secretary Kathleen Sebelius had disowned her own task force and assured the nation that absolutely nothing would change.

Now the same group that made the mammogram recommendation is back:

The U.S. Preventive Services Task Force, which triggered a firestorm of controversy in 2009 when it raised questions about routine mammography for breast cancer, will propose downgrading its recommendations for prostate-specific antigen (PSA) for prostate cancer onTuesday, wading into what is perhaps the most contentious and important issue in men’s health.

....“The harms studies showed that significant numbers of men — on the order of 20 to 30 percent — have very significant harms,” Moyer, a professor of pediatrics at Baylor College of Medicine, said in a telephone interview Thursday.

There are never any perfect answers to these questions. We could start routinely testing everyone at age 20, and it's almost certain that at least a few treatable cancers would get screened. At every cutoff point, whether it's age related or condition related, you have to decide if the cost of tightening the testing criteria outweighs the benefit. What you can't do is simply decide that cutoffs should never be tightened because, inevitably, there will be a cost. It might be small, but it's always there. And then the USPSTF becomes a death panel because that's a handy thing for demagogues to call it.

So we'll see how this one goes. My previous brush with prostate screening is here.