Geithner, Grace Under Pressure

While I was somewhat disappointed that Summers won't be tapped to run Treasury, I'm very relieved that it will be Geithner.

Jeff Frankel, who was in Geithner's presence yesterday --presumably when he got the call from Obama-- describes him as a cool customer and as a strong choice.

I enjoyed reading this piece by Noam Schreiber that paints a pretty nice picture of Geithner (h/t Steve Benen, more here). I can't begin to imagine his smarts if Rubin and Summers relied on this guy despite his relatively minimal training or background in finance and economics.

Fourteen Black Paintings

Since Jonah posted about Will.i.am's new song, I thought I'd share as well.

I put on Peter Gabriel's "Us" (link is to rhapsody) the other day and thought about Obama while listening to "Fourteen black paintings":

From the pain come the dream
From the dream come the vision
From the vision come the people
From the people come the power
From this power come the change

Right now, we need Summers

Jeff Frankel bets Obama will pick Summers for Treasury. I know there are many in the progressive blogosphere with strong negative feelings about Summers but I have to say that I think it would be a wise choice by Obama --assuming Obama feels he can personally get along with him.

The bottom line for me is that right now, the Treasury Secretary will likely be the second most powerful position in the administration. During this period of financial crisis we need someone who has a deep intellect and a sophisticated understanding of the interplay between macroeconomics and financial markets. Right now, we simply cannot afford to have anything less than the best person for the job. If we just focused on this criteria and put aside Summers' history of making offensive comments I think there's a compelling case for Summers.

Summers is by all accounts one of a small group of leading intellectual thinkers about macroeconomic policy. For those who are Krugman fans, Summers is one of a few who are at Krugman's level of intellect. (Krugman, in my view is simply not at all temperamentally well suited to be a Treasury Secretary). In addition to his intellect, Summers brings tremendous real world experience having already served at Treasury during the peso crisis and during the Asian financial crisis. Although he bears some responsibility for being involved in some of the missteps of the 1990s e.g. the financial deregulation that helped lay the foundation for the current financial crisis, I think that he probably has a deeper understanding of these mistakes than most of his critics and is not ideologically driven to defend them or repeat them.

I was somewhat reluctant to write this post not only because of Summer's controversial comments but also because I doubt it will make all that much difference to the currently severe economic conditions we are facing. Summers will certainly not be a savior. I see Summers as more of an insurance policy, as a way of minimizing the downside risks rather than dramatically changing the current situation. Two years from now we do not want to be engaged in second-guessing whether or not Obama picked the most capable person for the job.

Until recently, my feeling has been that if there was a fresh young talented person who say resembles a Larry Summers of 20 years ago who could serve as a strong Deputy under a Volcker or Tyson, that this might be a satisfactory alternative. Maybe such a person exists but I certainly don't know who it is. As for Geithner --he wouldn't be bad but I think we're well served with him remaining at the Fed.

Obama Campaign Photos

There are many great sites out there celebrating President-elect Obama's victory. Here's one of my favorites: professional photographer Scout Tufankjian's photos from two years of following the campaign.

The Fair Model and the Crisis

I've been trying to figure out a way to argue the case for more short-term stimulus in a way that might appeal to those worried about deficits over the longer term. It is likely that a stimulus that reduces the duration and intensity of the recession will result in a lower national debt over the medium-term horizon (say, 5-10 years). This is because the longer and deeper the recession is, the more government revenue will suffer.

I thought to run Ray Fair's macro model to quantify what government debt might look several years in the future, with and without a stimulus package now. Empirical forecasting models like this one suffer from the Lucas critique, but they're the best we have.

My intents were stymied, however, by the fact that the most baseline run of the model doesn't forecast a severe recession. Here's what the model's forecast memo of October 30 says:

Real GDP Growth and the Unemployment Rate: The model is predicting no growth in the next two quarters, 1.7 percent in 2009:2, and 2.3 percent in 2009:3. The unemployment rate rises to 6.9 percent in 2009:3.
....
The negative wealth effect from the fall in stock prices ... is one of the reasons the model is predicting no growth for the next two quarters. There is, however, nothing in the initial conditions and likely paths of the exogenous variables that suggests there is going to be a deep and prolonged recession. It may be, of course, because of the current financial crisis that consumers and investors are concerned enough or restricted enough in their ability to borrow that they decrease their spending by huge amounts. These potential "animal spirits" and "credit crunch" effects are not the type that the model can capture. If, for example, people have been spooked by the dire warnings of policy makers and significantly cut back their spending, the economy could be much worse in the next few quarters than the model is predicting.

Real housing prices are exogenous in the model, and the baseline scenario has prices continuing to drop slowly and stabilizing at about 5% below current values. I tried running the model with a bigger decline in housing prices (which creates a larger wealth effect in the model), but it didn't make much difference for the trajectory of the economy beyond a couple quarters down the line.

The model's forecast does make me wonder just for a moment if the dangers of a deep recession have been overstated. But I am fairly confident that the main reason the model doesn't forecast a more severe recession is that, reflecting the weaknesses of macro modeling, the model doesn't have a way of incorporating the "credit crunch" effect.

(Note that I'm not actually a macroeconomist, and this was first stab at tinkering with the Fair model, so take all my conclusions with a grain of salt.)

Still Celebrating

I keep thinking I should come up with something original to say about what to expect from Obamanomics going forward, but I've too busy savoring our victory. I was at the DC for Obama rooftop karaoke party last night, and everyone was just so joyous. And the inauguration is still to come! Here's one of many great videos from last Tuesday:

Keynes Lives in Beijing: U.S. vs. Chinese Stimulus Numbers

Like Yves Smith says, the Chinese stimulus package puts into context America's puny stimulus efforts thus far. Yves, however, confuses the numbers a bit by converting everything into dollars at PPP exchange rate. Much better to stick to thinking about this in terms of national currencies:

• The Chinese have announced plans to spend 4 trillion yuan for "transportation networks, ecology, technical innovation and post-disaster reconstruction" to stimulate their economy. That amounts to 16.2% of GDP (which was 24.67 trillion yuan in 2007).
• In contrast, the U.S. $150 billion package passed earlier to this year is equivalent to just 1.1% of GDP (which was $13.84 trillion in 2007).

Put in other terms, a U.S. stimulus of the same size as the Chinese package (proportional to GDP) would amount to $2.2 trillion.

That's the kind of rocket-powered stimulus we need! I would say that we could learn from the Chinese Keynesians, but Obama's team is already ready to roll with similar plans. It's great to see that all signs are that Obama is ignoring the New Hoovers and planning a "big bang" investment package. Job 1 right now is preventing what will be a severe recession from turning into a 2nd Great Depression, and it is absolutely not the time to be worried about short-run deficits.

It's a New Day

Just now I was writing up a technical appendix concerning the asymptotic covariance matrix of an estimator. I was listening to will.i.am's new song, "It's a New Day", for probably the fifth time today. When he got to the part where he sings, 

'Cause we weren't fighting for nothing
And the soldiers weren't fighting
For nothing
No, Martin wasn't dreaming for nothing
And Lincoln didn't change it for nothing
And children weren't crying for nothing

I just started crying. 

This is unusual for me. 

As I wrote on election night, I supported Obama because I thought he was the best candidate, not because he's black. But just now, it really hit me, just how big a deal this is for America.

Here's the video:

Thank you Don Pedro

As a late addition to blogging here I just want to say how useful I have found the information on the site. I so much appreciate all the great facts and analysis and the initiative you all took to set it up. (I even ordered some Economists for Obama items from the listed vendor--a tip they still have items that are sold out elsewhere.) I hope the founders will keep the site going for the next couple of months as the transition unfolds. Doubtless there will be some economic policy initiatives that can be usefully commented upon. I too share in the optimism that this new administration will be able to get our country back on the right track. As one whose daily work is super affected by who's in power, it will be very hard to wait for January 20th!

Today's Newspaper Front Pages from Around the World

A marvelous sight. See it here.
(I switched the link from the archive to just the permanent today's page, since the archive link turned out to not be stable.)

Congratulations, America!

What an amazing day for our country. I had some colleagues and friends over to watch the returns come in, and it was a moving experience.

I am very proud, very optimistic, and very hopeful. I know the road ahead will be difficult, but finally, it is a road that plausibly leads somewhere better than where we find ourselves now.

I thought McCain's concession speech was appropriate to the moment, and I hope he will be willing to work with President-elect Obama. 

I also hope and trust that President-elect Obama will move to implement the policies on which he campaigned. Some details will need adjusting, but the tapestry he proposed is what he should hang on the wall.

I want to say one other thing. I came to support Barack Obama for President of the United States of America because he convinced me he is a true progressive, one with the right policy and political instincts. I didn't support him because he is black, or because it is time for a black President. Indeed, President-elect Obama is black, and it is long past time for a black person's run for the presidency to be considered serious regardless of his or her race. But President-elect Obama's race was always beside the point for me. A wonderful bonus, and now, a wonderful statement about Progress In America. 

But I gravitated to Barack Obama because he was the best candidate. Period.

Congratulations, America: finally, you picked the right candidate.

Reflections on Election Day

I used to walk in front of the White House on the way to work. I stopped doing so after the revelations that the United States had tortured prisoners in Iraq and Afghanistan and at Guantanamo Bay. I felt so ashamed of my country and so angry at the occupant of the White House that I couldn't bear to walk by the building.

Tonight, I joined a crowd of many, many thousands in front of the White House, crying with joy, chanting "Yes We Did" and "U. S. A.", and singing the Star Spangled Banner and God Bless America. I've never felt so proud of my country. And I'm proud that our little blog played a tiny role in electing President Barack Obama. I want to thank Lerxst, Jonah, David, Pike, Susan, Progedi, and Moxiemomma for their dedication and contributions over the last many months. We helped make history happen.

As Lerxst noted, the original idea for the blog came from the model of the Economists for Dean blog, which he headed up while I was economic adviser for Howard Dean during his presidential campaign. In many ways, Barack Obama's election is the ultimate vindication of Dean's campaign, his political vision, and his policy views. I could not be more please to see Barack Obama carry forward this legacy to the White House.

A new era

A new era has arisen in American politics. Much ink has and will be spilled about the race of our new president-elect and his age and his politics. The new era is much deeper.

In 1994 a Republican Congress arrived in power with no respect for the laws of arithmetic. Following the lead of Ronald Reagan, they prescribed fiscal policies that had only the vaguest pretense of adding up. The goal was clearly to enrich the prosperous, disregarding the burden on future generations. The Bush Administration expanded this model, moving from disregarding reality in fiscal policy to disregarding it in a host of areas ranging from climate change to Saddam's relationship to 9/11.

The incoming adminstraiton faces two wars, an unsustainable fiscal policy, and a financial crisis. The next two years will be bleak for the living standards of much of the world. In short, it is an unimaginably challenging time for a new administration to take power. At the same time, it is an unimaginably great feeling to be proud that our government is once again in the hands of people who believe in reality and who will respect the laws of arithmetic as they try to improve the world.

Celebrating with Thousands at the White House

A Joyous, Joyous Day

YEEEEEAAAAAAAARGHH!!!!!!

Howard Dean was a few years ahead of his time...here's the scream for old time's sake. !!!

(for those who don't know our roots started as Econ4dean)

Where the Celebration Is

The DC chapter of Economists of Obama is at Lucky Bar (you're welcome
to join us--we're in the back corner and I'm wearing my econ4obama t-
shirt. The Chicago contingent is, I believe, at Grant Park. No word
on where the others are.

I just voted for Barack Obama and Joe Biden!

The line was an hour long at my DC polling place. It was twice that
at the middle school a few blocks away, according to a guy on the bus
who voted there.

McCain ends with a fiscal meltdown

John McCain closed his campaign for president with one last speech showing how the possibility of high office has caused a great American to lose his will to speak the plain truth. The most obvious example is McCain’s continued claim: “I'm going to make government live on a budget just like you do.” If that were true, it would strongly bolster his claims he will “bring real change to Washington.”

Unfortunately, the claim continues to be unrelated to reality. Senator McCain also explains:

• “We're going to cut taxes for working families.
• “We will cut business taxes
• “We are going to win in Iraq [while attacking the possibility Obama might reduce military spending]
• “I'm going to protect Social Security; and
• “I'm going to protect Medicare."

Over the next decade these numbers are trillions of dollars away from “living on a budget.” This is not bringing "change to Washington" – it continuing the last 8 years' unsustainable fiscal policy. It is a tragic season to make the analogy, but I can only assume when McCain says he will to “make government live on a budget just like you do” he is speaking to over-extended homeowners about to default.

John McCain’s campaign has coincided with America’s financial markets finally recognizing how the short-term interests of some decision-makers (coupled with deception and wishful thinking) have led to the misallocation of hundreds of billions of dollars. The next few hours will tell us if the electorate has come to that same realization about the America’s recent fiscal policy.

Tomorrow's the Day!

Go to this site to find out where to vote. If you're trying to convince your spouse/friend/boss/colleague/neighbor/coach to vote for Obama and have last-minute questions about economic policy, send us an email at econ4obama@gmail.com. You can also search past posts on this blog using the box to the left of the "Search Blog" on the upper left side of this page.

People in the Middle for Obama

That's the name of this website with videos of Republicans and Independents talking about Obama. Here's one which I think captures the reasons lots of Republicans find themselves ready to cast a vote for Obama:



Also see the Republicans for Obama website.

Economic Hacks for McCain

This article in the L.A. Times on the candidates' economic programs includes the following bits:

"Barack Obama is a sure-fire depression," said Douglas Holtz-Eakin, McCain's domestic policy chief.
...
"The policy Obama has proposed is unlikely to result in any economic growth," said Alex Brill, a research fellow at the conservative American Enterprise Institute for Public Policy Research.

Not any economic growth? An economist with any self-respect would be ashamed to see his name in print next to such a ridiculous claim.

Obama would raise tax rates to at or below where they were during the Clinton years, a period of tremendous prosperity and sustained job growth. The idea that these policies would grind the economy to a halt or plunge us into a depression is not a serious claim. (Or maybe Holtz-Eakin is referring to his own psychological state?)

The article quotes Jared Bernstein as saying, correctly, "You can't find evidence that low tax rates foster high economic growth." What we need for long-term growth are the investments in education and infrastructure that Obama is proposing.

Small Business Taxes Under Obama

Media Matters notices that an article in the NY Times yesterday quoted the McCain campaign as asserting that Obama would raise taxes on small businesses, but makes no effort to inform readers as to whether the claim is true.

Obama would raise taxes only on individuals earning over $200,000 per year and families earning over $250,000. These are a subset of taxpayers in the top two tax brackets. According to the Tax Policy Center, only 1.9 percent of tax filers with small business income are in the top two brackets.

Therefore, less than 2 percent of taxpayers with small business income would see their taxes rise under Obama's proposals.

Obama vs. McCain on Special Needs Children

In a Wall Street Journal interview published today, Sarah Palin says that if she were elected VP, her portfolio would include policy for children with special needs.

For such families, the key issue has long been fully funding the Individuals with Disabilities Education Act.

Under the original act passed in 1975, the federal government promised to cover 40% of the costs of educating children with disabilities, but it has never kept that promise. Currently, the feds only cover about 12% of those costs. As a result, special education programs have long been starved for funds, and such programs are a drain on local school districts. Bush's refusal to fully-fund IDEA is what drove Sen. Jim Jeffords to abandon the Republican party in 2001.

Biden and Obama strongly support fully funding special education. In fact, Biden was a co-sponsor of the original IDEA legislation way back when he was a freshman senator.

In a press release issued a week ago, McCain said that he favors fully funding IDEA, but it's hard to see how this is credible given that he's voted against doing so multiple times, most recently last year.

You can find the summary of the Obama-Biden disability policy here
and a PDF with their disability policy plans here. And here's the blog of Obama's disability policy director.

McCain Lies in "Joe the Plumber" Ad

This ad from the McCain campaign says, "Obama raises taxes on seniors, hard working families, to give welfare to those who pay none." At one point, the screen shows “$100 billion to those that pay no taxes.”

It's amazing how many falsehoods the ad can squeeze into a few seconds. We covered some of this in our FAQ on taxes.

Key points of Obama's proposal:

• Eliminates income taxes for seniors making less than $50,000.
• Reduces taxes for 95% of working families.
• Cuts taxes for individuals making less than $200K and couples making less than $250K.

The $100 billion figure is just a pure fabrication. Contrary to what the ad says, everyone who receives a tax cut under Obama's proposals pays taxes.

Here is Wall Street Journal column which describes the Obama plan in detail. Also see the tax calculator and assorted links at left.