Kevin Drum

Unemployment Armageddon

| Wed Apr. 8, 2009 8:47 PM EDT

According to the minutes of the latest Fed meeting, their staff economists believe that weaker than expected economic growth will result in "the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year."  An artist's conception of unemployment growing steeply all the way through the first quarter of 2010 is shown below.  I sure hope the Fed economists are just kidding about this.

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Caving on Auctions

| Wed Apr. 8, 2009 2:17 PM EDT

That Washington Post reports that the Obama administration has all but caved on the principle of auctioning 100% of emission credits in a cap-and-trade system:

The Obama administration might agree to postpone auctioning off 100 percent of emissions allowances under a cap-and-trade system to limit greenhouse gas pollution, White House science adviser John P. Holdren said today, a move that would please electricity providers and manufacturers but could anger environmentalists.

...."The idea, obviously, is to end up with a bill that reflects both the thinking of Congress and the administration, a bill that the president can sign," Holdren said, adding that when it comes to a 100 percent auction, "Whether you get to start with that or get there over a period of time is something that's being discussed."

Getting there over time is what the Europeans tried, of course, and it was a disaster.  Basically, it meant nearly a decade of wasted effort until they finally got close to a 100% auction.  Blecch.  Still, at this point I suppose I'll be grateful if we put any kind of plan in place at all, since I assume the one thing we will get 100% of is Republican opposition.

Franken-Coleman

| Wed Apr. 8, 2009 12:00 PM EDT

Generally speaking, I don't blame Norm Coleman for doing everything he can to win his razor-close Senate race against Al Franken.  If there are legal avenues open during a recount, candidates have the right to use them.

But that's getting harder and harder to defend.  Minnesota's election procedures may not be perfect (whose are?), but there's never been any serious evidence of widespread fraud or favoritism, and Franken's lead has increased at every step.  Even Scott Johnson, a conservative Minnesota attorney, writing in National Review today, agrees.  Coleman's recount strategy may have been poor, he says, but Franken "didn’t steal the election."

Coleman has nothing left now except an equal protection claim so poorly conceived that it plainly has no chance at either the state or federal level.  In a system where votes are counted and tallied locally, there will inevitably be small differences in procedure, but Coleman has no plausible evidence that a class of voters was mistreated or that election officials were systematically biased against him.  Even conservatives are finally starting to admit that, as much as they dislike Franken, Coleman's effort has turned into little more than a shabby campaign of retribution and spite.  It's past time to let it go, guys.

Charts Charts Charts

| Wed Apr. 8, 2009 1:22 AM EDT

CFR's Paul Swartz has a whole passel of horrifically grim charts for you today.  Bottom line: our current recession is the worst since World War II by practically every measure.  And on some measures, it's even worse than that.  U.S. trade, for example, is now collapsing at nearly Great Depression velocity.  Eichengreen and O'Rourke concur.  The only good news is that we're responding to events better than our ancestors did.  We hope.

Navy: No Cuts Until 2040

| Tue Apr. 7, 2009 9:41 PM EDT

The New Republic asked a few defense experts who won and who lost in the Pentagon procurement reshuffling announced yesterday.  Here's one answer:

NAME: Andrew Krepinevich

POSITION: President of the Center for Strategic and Budgetary Assessments

WHO WON: The Navy, which "essentially emerges unscathed. I talked to Gates this morning. According to him, they'll get to keep their eleven carriers through 2040, and [the budget] left the proposed increase in submarine production intact."

WHO LOST: The Air Force, because of the slashed F-22 program. "You look across the board, and you say, ‘The Air Force had a pretty tough day.'" Also, the Army, which was "already in a state of disrepair after the cancellations of the Crusader Artillery System and Comanche helicopter" over the past decade. Under the new budget plan, the Army will see huge cutbacks to FCS (Future Combat Systems), which is "the crown jewel of the Army's modernization program."

The Navy's reduction from 11 carriers to 10 won't happen until 2040?  Since their only other "loss" was the DDG-1000 destroyer, which they wanted to cancel anyway, I guess they really did come through this whole thing pretty unscathed.  The other services must be pretty hosed off about this.

Dover and the Press

| Tue Apr. 7, 2009 5:22 PM EDT

For the past 18 years the press has been banned from attending the arrival ceremonies of deceased soldiers at Dover Air Force Base.  Supposedly this was to protect the privacy of the families, despite the fact that families weren't complaining at the time the policy was changed during the Gulf War1.  But now that the ceremonies are open once again, Pentagon spokesman Lt. Col. Les Melnyk has a different concern:

Last night’s ceremony was a landmark occasion. But now that the ceremonies are likely to be open so often, there’s little guarantee that the press will regularly come out in such force.

“Now that the families are giving their consent, will the media care?” asks Melnyk, who worries that families who consent to coverage, but see no journalists at their loved one’s arrival, may get the impression that the nation does not appreciate their loss. “It ain’t going to be news in a month.”

Yeesh.  It's disrespectful when the press shows up and it's disrespectful when they don't.  Sometimes you just can't win.

1More likely reason: Following the invasion of Panama in 1989, George Bush Sr. got pissed off when pictures of coffins arriving at Dover were inadvertently broadcast live on a split screen while he was laughing with reporters at a press conference. Two years later, he made sure that wouldn't happen again.

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Chart of the Day - 4.7.2009

| Tue Apr. 7, 2009 3:55 PM EDT

Via Paul Krugman, this comes from a recent paper by Thomas Philippon and Ariell Reshef.  Basically, they created a metric of financial regulation and graphed it against the relative pay of people in the finance industry.  Guess what?  When the market is lightly regulated, pay skyrockets!

Now, sure, a lot of other stuff was going on during this period too, so take this with a grain of salt.  But still: the amount of money being shoveled into the FIRE sector over the past 30 years has been pretty phenomenal, and it's hardly a stretch to think that that's pretty tightly correlated with loose regulation, massive leverage, and opaque rocket science derivatives.

What's more, as Krugman points out, the amount of money going into finance has been so stratospheric lately that it actually has a significant impact on overall income inequality.  It's only a part of the story, but it's still a part.  One of the reasons there's been less money for the middle class, thus spurring ever greater indebtedness in order to keep living standards on the rise, is because our financial titans kept so much of it for themselves.  It's time for that to stop.  Finance should be the servant of industry, not its master.

Is Toxic Waste Undervalued?

| Tue Apr. 7, 2009 2:20 PM EDT

Several academic economists published a paper a few days ago suggesting that toxic assets are priced at pennies on the dollar because that's exactly what they're worth.  Anyone who thinks they're undervalued because of illiquid markets and forced fire sales is just kidding themselves.

Maybe!  But Economics of Contempt isn't convinced.  It turns out the authors analyzed investment grade corporate debt, not housing securities:

Are they serious? The Treasury is arguing that the prices for mortgage-related securities are artificially depressed because of illiquidity and fire sales. No one is arguing that investment grade corporates are underpriced due to illiquidity and fire sales. That's why ABS and CDOs backed by investment grade corporates aren't eligible for the TALF or the PPIP. The fact that prices for tranches of CDOs backed by investment grade corporates are accurate is completely irrelevant to whether prices for mortgage-related securities are accurate.

This is above my pay grade as usual, so just consider it useful data for now.  Seems like a pretty reasonable criticism, though.

Via Megan McArdle.

Animal Spirits

| Tue Apr. 7, 2009 1:31 PM EDT

In a review of George Akerlof and Robert Shiller's Animal Spirits, Richard Posner writes:

The idea that monetary policy — raising interest rates [...] to check inflation, and lowering interest rates to check economic downturns — holds the key to moderating the business cycle, and therefore to preventing depressions as well as inflations, has been falsified. The Federal Reserve has pushed interest rates way down, but the amount of lending has been tepid and economic activity has continued to fall.

There are two problems with this.  The smaller of them is Posner's apparent contention that until now economists have believed that monetary policy alone is sufficient to prevent depressions.  This is a crude exaggeration.  The whole point of Keynesian stimulus, after all, is that it's supposed to kick in when monetary policy has reached a lower bound and has no further traction.  That would hardly even be a topic of conversation if everyone believed that monetary policy alone could solve every economic ill.

But the bigger problem is that we've really only tried half of Posner's prescription: lowering interest rates and pumping liquidity into the market during a downturn.  And he's right that it hasn't been enough.  But there's also the flip side: moderating credit expansion during upturns, something that Alan Greenspan signally declined to do during the housing boom.  If he had, though, the housing bubble wouldn't have gotten anywhere near as big as it did.  It still would have burst eventually, but the downturn would have been more modest: probably a fairly ordinary recession to be fought with fairly ordinary monetary means.

I'm generally a fan of more robust countercyclical economic policy, but our recent experience (not to mention the unbroken experience of the past several centuries) prompts a big question for people like me: How do you ensure that it happens not just during downturns, when everyone is eager for it, but also during upturns?  Part of the problem is technical — when should you intervene to slow things down? what's the best way to do it? — but the much bigger problem is purely human.  After all, no one wants to spoil a party when everyone is having a good time, and there are always a dozen plausible reasons why this time it's different and the economy is truly on a new and sustainable flight path.  And so things inevitably get out of control, sometimes disastrously so.

I'm not sure what the answer is here, though certainly a denser web of both regulatory and cultural attitudes oriented toward moderation can help a lot.  But in any case, that's the question to be answered: how do we credibly bind future regulators to pursue robust countercyclical policies during economic expansions in the face of both legitimate technical problems and the animal spirits of human nature?  Suggestions welcome.

Fighting the Power

| Tue Apr. 7, 2009 12:31 PM EDT

Via Alan Jacobs, here's Henry Porter in the Guardian warning about the vast evil perpetrated on the unwary by Google:

Google presents a far greater threat to the livelihood of individuals and the future of commercial institutions important to the community. One case emerged last week when a letter from Billy Bragg, Robin Gibb and other songwriters was published in the Times explaining that Google was playing very rough with those who appeared on its subsidiary, YouTube. When the Performing Rights Society demanded more money for music videos streamed from the website, Google reacted by refusing to pay the requested 0.22p per play and took down the videos of the artists concerned.

It does this with impunity because it is dominant worldwide and knows the songwriters have nowhere else to go. Google is the portal to a massive audience: you comply with its terms or feel the weight of its boot on your windpipe.

Its boot on your windpipe!  Because of a commercial disagreement with another enormous industry over the acceptable size of royalty payments!

Whatever.  But what I'm really curious about is whether the PRS really thinks it can get 30 cents per play for YouTube music videos.  At a guess, that sounds too high by a factor of ten or a hundred.  What are they thinking?