Derek Thompson

Americans are getting increasingly nervous about the strain of Obama's projected trillion-dollar deficits. Yesterday's poll numbers from the New York Times and Wall Street Journal are crystal clear: With unemployment still climbing, 58 percent of the public wants Obama to focus on deficit-reduction even if it means a longer recession. We are all Herbert Hoover now?

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Tired of overdraft fees? Sick of ATM charges? Of course you are. So here's Probity, a Texas-based bank that promises to treat you better. But there's a catch. You're going to have to pay for that checking account. And you're going to have to pay every month.

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Secretary Timothy F. Geithner urged skeptical lawmakers on Thursday to act quickly on President Obama's plan to overhaul the regulatory structure for the financial system.

"Every financial crisis of the last generation has sparked some effort at reform," Mr. Geithner said as he went before the Senate Banking Committee on Thursday. "But past efforts have begun too late, after the will to act has subsided."

HAVING spent much of the past year putting out fires, America's leaders are now turning their attention to preventing future blazes. Barack Obama unveiled proposals on Wednesday June 17th that would refashion the federal rules governing almost every corner of finance, pushing government much more deeply into private markets and partially rolling back a quarter-century of liberalisation. Eye-catching though the 85-page "white paper" is, it might have been bolder. It merely sounds the opening salvo in a battle that could stretch into next year, because much of the plan requires approval in Congress, where jurisdictional and ideological clashes beckon.

In a speech at the White House yesterday, President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth . . . a transformation on a scale not seen since the reforms that followed the Great Depression." Indeed it is.

His plan, if adopted, will fundamentally change the nature of our financial system and economy. The underlying concerns and assumptions are clear, and they are made clearer by considering other ways that his administration has dealt with the consequences of competition -- particularly the faux bankruptcies of General Motors and Chrysler and the impending change in antitrust policy. Although the president said in his speech that he supports free markets, these initiatives confirm that the administration fears the "creative destruction" that free markets produce, preferring stability over innovation, competition and change.

Three quarters of a century ago, President Franklin Roosevelt earned the undying enmity of Wall Street when he used his enormous popularity to push through a series of radical regulatory reforms that completely changed the norms of the financial industry.

Well that was fast. Two big polls came out last night and this morning -- here's the CBS/NYT poll and here's the NBC/WSJ poll -- to find that the administration's agenda is starting its trip down the tubes. "Obama Poll Sees Doubt on Budget and Health Care," headlines the Times. "Public Wary of Deficit, Economic Intervention," headlines the Journal.

Right, so there is a lot of interesting stuff in the polls. (The Journal poll, in particular, finds that the auto crisis has made American more likely to purchase American cars. Or so they say.) But I find the results on the deficit genuinely confusing.

The Journal poll has a solid majority (58%) agreeing that "The President and the Congress should worry more about keeping the budget deficit down, even though it may mean it will take longer for the economy to recover." The Times poll has a majority (52%) siding with the view that the "federal government should NOT spend money to stimulate the national economy and should instead focus on reducing the budget deficit."

I find this odd because Americans overwhelming supported the recent effort to ... spent a humongous pile of money stimulating the economy. You can find a rundown of 11 polls on this here. In every poll -- every single poll -- a big plurality of Americans supports the stimulus, and in nine of the polls a majority of the public supports it. Sometimes as much as 70% of the public supports it.

I know public opinion is complicated and preferences can work on many levels and so forth, but I would have thought it would take at least six months to do a complete somersault on this.

Attention America: If you find yourself without underwear, covered in mosquitoes, running from a charging pack of alligators while trying to read a romance novel through your goopy eye lashes ... you still might be living in a recession.

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Christopher Beam at Slate makes the excellent observation that President Obama excels at selling his policy reforms as the solution to a complex web of issues extending far beyond the core policy. Health care reform, for example, is always about more than health care. It's about corporate competitiveness, a nimble job market that isn't tethered to precious employer benefits, more disposable income for families, freed up state funds for education and infrastructure, diminished deficits, diminished reliance on foreign owners of the deficit, and so on. Beam quips, "the only thing left for Obama to cite is some statistic showing most terrorist attacks are the result of high premiums."

Beam hits on most of the advantages of Obama's karmic approach to selling policy, but I wanted to highlight two distinct drawbacks. First, it forces him to promise too much from his reforms. Second, as anybody who's played Jenga knows, interconnectedness has its risks.

To be sure, promising too much from your policies is a prerogative of governing. But in Obama's case, where no stone should be left unturned by reform, I think it threatens to raise public expectations to a level where reality will prove to be a consistent disappointment. Take his cap-and-trade policies. Obama sees it creating five million jobs, reducing emissions by 80 percent by 2050, and saving Americans $130 billion on energy bills.

Now wait. The point of cap-and-trade (or carbon taxing) is to price the negative externality of carbon pollution to discourage profligate production by firms and over-use by consumers. That means creating a little bit of hitherto unfelt pain to teach both sides the true cost of carbon. How do you raise the market price of carbon nearer to its environmental "cost" and save Americans money on their energy bills in the short term? It's not possible, really. Whether you auction the carbon allowances and kick back to consumers or don't auction the allowances and foot consumers with a larger bill, the price of energy has to rise. In the long term, perhaps, "everybody wins." In the short term, everybody pays.

There are other risks that follow inevitably from the everything-is-connected school of speaking. If every reform is balancing on another policy, what happens when that Jenga piece comes loose? Beam quotes Obama tying the GM bailout to health care reform. On the one hand, he's right to do so. GM pays $65 per hour to its employees when you factor in its bloated health care costs to current and retired workers, which contributed to its money woes. But it's ominous that today the New York Times released a poll finding that the public is falling behind the Obama administration on two key issues: GM and health care reform. While the president's overall approval rating is still a healthy 63 percent, views of the president's job with the auto industry and health care hover in the mid-to-low 40s, and this before what will be a sweltering summer of negotiations in DC.

Obama's ability to explain himself through narratives rather than sound bites is, on the whole, a distinct advantage, and Beam is right to focus his piece on the positive aspects of Obama's karmic worldview, in which we are all connected in the great circle of policy reform. But, as we head into a health care process where Obama clearly has more convincing to do, I wonder whether he'll continue to sample from a buffet of interconnected benefits of reform, or pick one theme and run with it.

Jenga! Flickr image from 416style.

The United States has lost $63 billion of personal income in the last quarter, and about the fifth of the loss comes from California. But when you line up the states back to back in order of percent change in income, America's late acquisitions are the bookends: Hawaii is getting richer, faster, while Alaska's income plummet is more than six-times worse than the national average.

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I guess I'm a little surprised by Karl Rove's op-ed today in the Wall Street Journal. The MO of House and Senate Republicans has been to block, block, block. Now the strategy seems to be: Engage in the details of health care reform to expose the flaws in "ObamaCare." That sounds like hard work! Maybe a united front against president hasn't paid off in public opinion, but it did have a kind of simple logic to it.

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Christopher Beam at Slate makes the excellent observation that President Obama excels at selling his policy reforms as the solution to a complex web of issues extending far beyond the core policy. Health care reform, for example, is always about more than health care. It's about corporate competitiveness, a nimble job market that isn't tethered to precious employer benefits, more disposable income for families, freed up state funds for education and infrastructure, diminished deficits, diminished reliance on foreign owners of the deficit, and so on. Beam quips, "the only thing left for Obama to cite is some statistic showing most terrorist attacks are the result of high premiums."

Beam hits on most of the advantages of Obama's karmic approach to selling policy, but I wanted to highlight two distinct drawbacks. First, it forces him to promise too much from his reforms. Second, as anybody who's played Jenga knows, interconnectedness has its risks.

More »

Two Japanese travelers trying to enter Switzerland were caught carrying $134 billion -- yes, billion -- in fake US Treasury bonds in a briefcase. The forgeries contained 249 securities with a face value of $500 million, several "worth" more than $1 billion, and several "Kennedy" bonds, which, um, are just totally made up to begin with. What exactly is the endgame here, one wonders? As my colleague Charles Davi, who discovered the article, quipped: "Uh excuse me. I'd like to cash my 130 billion dollar check!"

And here's one of the most delightfully absurd paragraphs I've ever read in a news story:

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In the pantheon of political and economic commentators, there is perhaps no one who writes so lucidly with such utter calm and reasonableness as Fareed Zakaria. His columns aren't Cracker Jack boxes bursting with goshwow revelations. They're mugs of warm milk that go down nice and smooth, filling you with a kind of zen peace and a dozy satisfaction that everything is going to be alright. He can be Obama with a pen and history PhD. He can be Thomas Friedman without the metaphors. And when undozy times call for undozy measures, he can be wrong.

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I've spent the last six months, off and on, trying to interview Paul Samuelson. Samuelson has a long list of accomplishments -- A John Bates Clark Medal, a Nobel Prize -- that I won't try to recap here. But by most accounts he is responsible for popularizing Keynesian economics in Post-Second World War America, and I wanted his thoughts on the current administration's fiscal policies and the modern Keynesian resurgence.

I finally spoke with Dr. Samuelson yesterday morning. (Then my crummy RadioShack recorder -- caveat emptor -- spent yesterday afternoon trying to destroy the file.) Sameulson is an energetic 94 years old and the conversation ran for about an hour, so I've decided to break the transcript into two parts. I'll publish part two tomorrow morning.

The first part of the conversation is mostly economic history -- the rise and fall (and rise) of Keynes, the influence of Milton Friedman, and the era of Alan Greenspan. Part two covers current events -- the need for a more stimulus spending and how is nephew (one Larry Summers) is doing running the economy. My questions are in bold.

So is it time for the Keynesians to declare victory?

Well I don't care very much for the People Magazine approach to applied economics, but let me put it this way. The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up -- and by the way, most of these guys are MIT trained; Princeton to MIT or Harvard to MIT -- Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!

Oh, I used those textbooks. There's got to be something in there on liquidity traps.

Well, not in the index. And I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression.

I am regarded as a Keynesian. My book, which over a period of about 50 years sold millions of copies, for the first time brought home -- not only to advanced Ivy League places but also to community colleges and high schools -- the gist of the Keynesian macroeconomic system. I thought it would be a success because it was one Keynesian book by Lorie Tarshis, which for reasons I've never understood got completely tarred by a kind of a fascist group, and by Bill Buckley, as unsound and so forth. And unfairly that book never got a good chance. He had actually been a student of Keynes.

And my book came along and swept the field, and set a pattern so that every time somebody -- this is just scuttlebutt -- so that every time some economics textbook writer sued another textbook writer for plagiarism, it never got anywhere because the judge would just say, 'it's all Samuelson lite,' so to speak.

Anyway. Things swept so badly that I had distrust -- after 1967, let's say -- of American Keynesianism. For better or worse, US Keynesianism was so far ahead of where it started. I am a cafeteria Keynesian. You know what a cafeteria catholic is?

I think so. Someone who picks and chooses the bits of the doctrine that they find agreeable.

Yeah. I might go to mass every week, so I'm a good catholic, but I don't regulate my family size the way the Pope would like to.

So which bits of the Keynesian doctrine do you not take out of the cafeteria?

Well, let me give you a bit of boring autobiography. I came to the University of Chicago on the morning of January 2, 1932. I wasn't yet a graduate of high school for another few months. And that was about the low point of the Herbert Hoover/Andrew Mellon phase after October of 1929. That's quite a number of years to have inaction. And I couldn't reconcile what I was being taught at the university of Chicago -- the lectures and the books I was being assigned -- with what I knew to be true out in the streets.

My family was well off but not rich. I spent the four years I was an undergraduate working on the beach. And it wasn't because I was lazy; it was because my freshman class would go to a hundred different employers and wouldn't get a nibble. That was a disequilibrium system. I realized that the ordinary old-fashioned Euclidean geometry didn't apply.

And I applauded when the major members of the Chicago faculty -- maybe even a few years before Keynes's general theory -- came out with a petition to have a deficit-financed spending without taxation in order to create a new increment of spending power. And I was for that. And Franklin Roosevelt, who was not a trained economist, and who experimented and made a lot of mistakes, in his first days, by good luck or good advice got the system moving. It was in a sense an easier problem because the pathology was so terrible.

He would go to Warm Springs Georgia. And that county -- a pretty sizeable one, this is the old south -- there were maybe three to ten people with enough income to file an income tax return. So, when along came the WPA, the PWA, and a little later the Reconstruction Finance Corporation, you could be very sure that those monies spit out by government-- not from airplanes in the air, sending newly printed greenbacks, but essentially the equivalent of that -- would be spent.

I don't know if you know the name, the professor E. Cary Brown wrote kind of the definitive article in the American Economic Review on what had been accomplished by deficit spending that was sustained. And his numerical findings were that there were no miracles -- it was about what you'd expect -- but it worked. And so I developed I guarded admiration for Keynes. And I say guarded because I don't think he understood his system as well as some of the people around him did.

Anyway, this swept the field for a number of decades. And then, when the 1970s came, with very heavy supply side shocks -- the quadrupling of OPEC oil prices overnight, a rash of bad harvests, and the terrible price/wage control system contrived by Arthur Burns and Nixon 17 months before the election in order to ensure that they won. All these things added up. And Keynesianism, if it was thought to promise perpetual prosperity, became disparaged.

When the king dies you need a new king. Guess what?

Milton Friedman?

Milton Friedman. Friedman had a solid MV = PQ doctrine from which he deviated very little all his life. By the way, he's about as smart a guy as you'll meet. He's as persuasive as you hope not to meet. And to be candid, I should tell you that I stayed on good terms with Milton for more than 60 years. But I didn't do it by telling him exactly everything I thought about him. He was a libertarian to the point of nuttiness. People thought he was joking, but hew as against licensing surgeons and so forth. And when I went quarterly to the Federal Reserve meetings, and he was there, we agreed only twice in the course of the business cycle. .

That's asking for a question. What were the two agreements?

When the economy was going up, we both gave the same advice, and when the economy was going down, we gave the same advice. But in between he didn't change his advice at all. He wanted a machine. He wanted a machine that spit out M0 basic currency at a rate exactly equal to the real rate of growth of the system. And he thought that would stabilize things.

Well, it was about the worst form of prediction that various people who ran scores on this -- and I remember a very lengthy Boston Federal Reserve study -- thought possible. Walter Reston, at that time one of the most respected bankers in the country and in the world fired his whole monetarist, Friedmaniac staff overnight, because they were so off the target.

But Milton Friedman had a big influence on the profession -- much greater than, say, the influence of Friedrich Hayek or Von Mises. Friedman really changed the environment. I don't know whether you read the newspapers, but there's almost an apology from Ben Bernanke that we didn't listen more to Milton Friedman.

But anyway. The craze that really succeeded the Keynesian policy craze was not the monetarist, Friedman view, but the [Robert] Lucas and [Thomas] Sargent new-classical view. And this particular group just said, in effect, that the system will self regulate because the market is all a big rational system.

Those guys were useless at Federal Reserve meetings. Each time stuff broke out, I would take an informal poll of them. If they had wisdom, they were silent. My profession was not well prepared to act.

And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good.'

However, unlike someone like Milton, Greenspan was quite streetwise. But he was overconfident that he could handle anything that arose. I can remember when some of us -- and I remember there were a lot of us in the late 90s -- said you should do something about the stock bubble. And he kind of said, 'look, reasonable men are putting their money into these things -- who are we to second guess them?' Well, reasonable men are not reasonable when you're in the bubbles which have characterized capitalism since the beginning of time.

But now Greenspan admits he was wrong.

Because we had, instead of three standard deviations storm, a six standard deviation storm. Well, we did have something unprecedented. I think looking for scapegoats and blame can be left to the economic historian. But, at the bottom, with eight years of no regulation from the second Bush administration, from the day that the new SEC chairman -- Harvey Pitt -- said 'I'm going to run a kinder and gentler SEC,' every financial officer knew they weren't going to be penalized.

Self regulation never worked as far as macroeconomic events -- whether we're talking about post-Napoleonic War business cycles or the big south sea bubble back in Isaac Newton's time, up to today's time. The pendulum just swings back in the other direction.

About that pendulum. Has macroeconomics learned anything in the past 30 or even in the past 70 years?

Well, I will say this. And this is the main thing to remember. Macroeconomics -- even with all of our computers and with all of our information -- is not an exact science and is incapable of being an exact science. It can be better or it can be worse, but there isn't guaranteed predictability in these matters.

What has pleasantly surprised me is that because of the Obama political sweep we've got some very rapid interventions beyond anything that the Eccles Federal Reserve even dreamed of in Franklin Roosevelt times, and that's why I think we're a little bit ahead o the European Union in the state of our recovery.

On the other hand, I think the popular view -- if I count noses -- is that by the end of this year even, or by 2010, recovery will have set in. That's a very ambiguous thing. Things could get better -- things could even get better such that the National Bureau committee that officially dates these recessions will say that the recession officially ended in something like December 2010. That could be misleading, because it could be completely consistent with continuing decreases in employability, an adverse balance of payments, and a move of both the consumer section and the investing section towards non-spending -- towards saving and hoarding. I don't think we would enjoy a lost decade, like the two lost decades the Japanese had.

However, if you need a framework for these things, then you can't do better than the 1965 Hicks/Hansen version of the Keynesian system, which is pretty clear cut on how a central bank can, by diddling its discount rate up and down judiciously, lead toward a period of great moderation rather than the terrible ups and downs of the 20th century.

Samuelson image via MIT economics page. Thanks to Brad DeLong for letting me know who Lorie Tarshis is, along with the proper spelling of his name.

Yesterday I posted four graphs showing that although the collapse in US home prices and our federal deficit is without precedent, the country is still tracking better than the Great Depression in just about everything else. We're not experiencing (yet) either Depression-era deflation or even average-recession inflation. US trade is beginning to rebound slightly. Our industrial production falloff isn't even close to the early '30s, and our unemployment, while historically terrible, isn't Depression-vintage.

But today I got my hands on alarming graphs from the folks at VoxEU (via a column by Martin Wolf) which convincingly demonstrates that, for the much of the world, 2009 looks, without question, just as bad, if not worse, than the first years of the Great Depression.

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I'm listening to the New Yorker's political podcast, with Ryan Lizza and James Surowiecki discussing health care reform and one of them (Lizza?) makes the perfectly obvious point that if we're going to dramatically change the way we pay for health care, we'll likely have to dramatically change the way we pay the people providing us the care: that is, doctors. Obama has said as much, calling on law makers to "change the warped incentives" that reward doctors for the number of operations they do. But how exactly do we create incentives for doctors to earn less?

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How bad is the Great Recession? Housing prices have slid more sharply than the Great Depression, and the federal deficit free fall is without precedent. That's bad. But in just about every other category, the Great Depression was must worse. That's good! What else? Paul Swartz, an International Economics analyst at the Council on Foreign Relations, presents the recession, in context, in graphs (in a PDF).

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On such a summer's day in 2009, when too big to fail has practically become a national slogan, you would think that the Obama administration would find it in their hearts and their pockets to lend some bailout money to the state of California, which now faces a $24 billion deficit. But no. The early word from DC is that the administration has refused to bail out California and that Arnold Schwarzenegger will be forced to take whatever lessons he learned when playing Mr. Freeze and apply them to government spending.

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Martin Feldstein got kicked around the blogosphere a couple of weeks ago for an op-ed in the Washington Post arguing against cap-and-trade legislation. (See, eg, David Roberts, Matt Yglesias, Mark Thoma, Paul Krugman, Daniel Drezner and Henry Farrell.) Upping the ante, I see Feldstein's now gone and published an even longer version of the exact same argument in the current issue of the Weekly Standard.

The portion of Feldstein's argument that had to do with international relations -- basically, that the US shouldn't act on climate change without extracting similar agreements from China and India -- got picked over pretty well last time around. But the rest of Felstein's argument -- basically, that cap and trade would impose a huge cost on the average American family -- is worth noting: