Every once in a while I get comments and correspondence indicating that the right has found an unlikely economic hero: Warren Harding. The recovery from the 1920-21 recession supposedly demonstrates that deflation and hands-off monetary policy is the way to go.

But have the people making these arguments really looked at what happened back then? Or are they relying on vague impressions about a distant episode, with bad data, that has been spun as a confirmation of their beliefs?

OK, I’m not going to invest a lot in this. But even a cursory examination of the available data suggests that 1921 has few useful lessons for the kind of slump we’re facing now.

Read more…

Atrios links to this piece on transit at Asian airports, then lists some US airports with fairly good rail links to the city.

So, a bit of New Jersey patriotism: Newark! AirTrain to the Northeast Corridor station, then NJ Transit to New York. Not too bad in the opposite direction, either: I quite often take the train between EWR and Princeton Junction.

Part of the appeal for me is that I can read or work on the train — and it’s a lot cheaper than a limo.

Also, if you must use JFK, and you’re willing to spend a few more dollars, don’t take AirTrain to the subway — take it to the Long Island Railroad, which gets to Penn Station much more quickly.

In general, New Jersey along the Northeast corridor is one of the best rail areas in the country – decent service both north and south, and to the airport too. Not Asian-level, but good enough. You got a problem with that!

This used to be a big topic of empirical research, but seems to have largely faded out since the mid-1990s — probably because macro had shifted away from structural estimates in general, and also possibly because of the rise of real business cycle stuff.

But what the old literature found was a very clear effect of demand growth on investment — the so-called “accelerator” — and not much else very clear. Here’s a useful example from the Boston Fed (pdf), in 1993, during an earlier slump in business investment.

And what that paper concluded applies perfectly to our current circumstances, too:

The disappointing volume of capital spending by businesses during the early 1990s appears to be a symptom of the slow rate of growth of economic activity in recent years rather than the consequence of exceptional impediments to investment spending

It’s not the socialist atheist Islamic Kenyans; it’s the economy, stupid.

There has been some celebrating over the jobs report, and for sure 200,000 jobs is better than 100,000, or none at all.

But still: here’s the employment-population ratio:

BLS Employment-population ratio

We need much more than this.

That’s Doris Lessing on the left, and Albert Einstein by the food bowls.

Happy April Fool’s Day.

Oh, my. I think John Taylor is being deliberately dense here: he professes himself baffled by my two posts criticizing his assertion that the investment-unemployment correlation says that anti-business rhetoric and policies are the problem.

Maybe this will help: let’s look at two slumps in nonresidential fixed investment as a share of GDP, one beginning in 2000 (peak in the third quarter) and one beginning in 2007 (peak in the fourth quarter). Here’s how they compare, quarter by quarter:

BEA

The slump in business investment was actually deeper and longer in the Bush-era recession and aftermath than this time around. Yet the economic slump this time has, of course, been much deeper. Why? Mainly because housing slumped this time; indeed, you can think of the 2001 recession as a recession basically led by business investment, while the 2007 recession was basically led by housing, with business investment a lagging indicator.

So where, in all this, is there any reason to think that anti-business rhetoric or policies are at fault? I mean, if weak business investment says that you have an anti-business administration, then of the last two presidents Bush looks like the more anti-business guy.

The point is that this looks very much like a housing and household-balance-sheet slump, with business investment if anything stronger than you might have expected given the amount of excess capacity. I cannot understand what makes Taylor think otherwise.

To follow up on John Taylor: suppose we look only at nonresidential investment, and suppose that we think (as we should) that the causation runs mainly from unemployment — a proxy for excess capacity — to business investment, rather than the other way around. Then the data since 1990 look like this:

BEA, BLS

Investment is low as a share of GDP; well, that’s no surprise given how depressed the economy is. And if anything investment is a bit stronger than you might have expected from past behavior.

So, on one side, you have David Leonhardt pointing out, completely correctly, that the Fed is being far too timid. And on the other hand (via Yglesias), we have Tim Pawlenty — who’s supposed to be the non-crazy non-Romney — saying things like this:

Former Minnesota Gov. Tim Pawlenty (R) predicted Tuesday that the U.S. will face a double-dip recession that could last all the way until the 2012 elections.

The likely presidential candidate said the government, under President Obama, has devalued the dollar by injecting “fiat money” into the economy in an attempt to boost it — a plan he said will be damaging in the long-run.

Now, it’s perfectly clear, even from that small bit, that Pawlenty has absolutely no idea what he’s talking about — that he doesn’t know that we’ve had fiat money since 1933, when FDR took us off the gold standard, and that he also doesn’t know that Ben Bernanke, not Obama, controls the monetary base.

My guess is that Pawlenty was just repeating some phrases he’s heard from the Paulistas, and doesn’t even know the difference between monetary and fiscal policy. After all, he’s done this sort of thing before, going national with some false claims about government employment that he picked up from some right-wing document.

And this is what passes for presidential material.

This post by John Taylor is getting a lot of attention, because it does show a striking correlation between investment and unemployment:

John Taylor

But when Taylor leaps from that correlation to saying that what we need for economic recovery is to “lighten up on the anti-business sentiment coming out of Washington,” I wonder what is going on in his head.

I mean, Taylor presents another graph, showing a plunge in fixed investment since 2006:

John Taylor

But that’s overall fixed investment. Let’s decompose it:

BEA

It’s mostly the housing bust! Yes, business investment is low — but no lower than you might expect given the depressed state of the economy. In fact, business investment is roughly the same percentage of GDP now that it was at the same stage of the much milder 2001 recession.

What the data actually say is that we had a catastrophic housing bust and consumer pullback, and that businesses have, predictably, cut back on investment in the face of excess capacity. The rest is just politically motivated mythology.

Alan Greenspan continues his efforts to cement his reputation as the worst ex-Fed chairman in history; in today’s FT, he comes out for a repeal of financial regulations designed to prevent a repeat of the crisis for which he, more than any other individual, bears personal responsibility.

To be honest, I didn’t know quite how to respond; I was, very nearly, left speechless by the lack of self-awareness on display. But Henry Farrell shows us the way, pointing out that Greenspan’s piece contains this remarkable passage:

Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.

Henry then asks readers to chime in with other uses of the “with notably rare exceptions” phrase. Among the entries:

With notably rare exceptions, Newt Gingrich is a loyal and faithful husband.

With notably rare exceptions, Japanese nuclear reactors have been secure from earthquakes.

Though unredeemably(sic) opaque, Mr. Madoff’s operations delivered excellent returns, with notably rare exceptions.

With notably rare exceptions, the levees protecting New Orleans have held fast in the face of major hurricanes.

With notably rare exceptions, locking all exits to the workplace is a harmless way to improve your employees’ productivity.

With notably rare exceptions, petroleum extraction has minimal environmental impact.

Early last year, many people on both sides of the Atlantic seized on the idea that less is more — that cutting spending would actually help, not hinder, recovery. There was a paper by Alesina and Ardagna that seemed to provide evidence to that effect, and nothing succeeds like telling people what they want to hear.

Since then, the whole intellectual edifice has collapsed. The Alesina et al methodology turns out to be deeply flawed, which should have been obvious from the start (and was, to some of us.) The alleged cases of expansionary austerity have, without exception, turned out to be bad examples, either involving cuts when the economy was booming or situations in which sharp interest rate declines and/or currency depreciations were the actual sources of expansion.

But by then expansionary austerity was the official doctrine of the Conservatives in Britain (and also the ECB) and of the GOP here.

So, how are they dealing with the collapse of their doctrine?

Karl Smith notes that the JEC report is actually even sleazier than I realized on first read. It doesn’t actually say that contraction is expansionary; it engages in innuendo, talking about things that could or might happen, conveying the impression that it’s demonstrating a fact while providing deniability, because it never actually says outright that less is more.

Meanwhile, in Britain, via Yves Smith, people have been digging into the details of the government forecast, and finding that it relies on the assumption that household debt will rise to new heights relative to income:

UK Office of Budget Responsibility

Why? Because the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap — and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt. So we have the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper.

All in all, it’s quite a spectacle. It would be funny, except that millions of people will suffer the cost of this folly.

Brad DeLong directs us to a 1932 letter by Friedrich Hayek and others arguing that (a) deficits somehow caused the Great Depression (b) deficit spending would drive up interest rates and make the Depression worse.

Truly, nothing ever changes. The insistence that big deficits somehow caused the crisis even thought they actually didn’t appear until after the crisis was well underway — and were clearly caused by the crisis, not the other way around — prefigures the debate in Europe, in which everyone declares that fiscal irresponsibility is the core issue even though both Ireland and Spain had low debt and budget surpluses on the eve of crisis.

And Hayek’s prediction that deficits would drive up interest rates despite high unemployment was, of course, totally wrong.

Here’s the picture for the United States. (Yay FRED!) Budget balance, in millions of dollars, red line, right scale; long-term interest rates, blue line, left scale:

You can see that the deficit came after the slump began, not before, and that much bigger deficits never did push rates up. You can also see the big mistake of 1937, when FDR gave in to the austerians of his era.

Still, you can make excuses for Hayek and friends: this was all new territory, and macroeconomics barely existed as a field.

What’s terrifying is the fact that, as Brad notes, the arguments of today’s pain caucus are exactly the same as those Hayek was making in 1932, except that they’re less well expressed. And they’re sticking with their doctrine even though the economic story — deficits mainly the result of the slump, not the cause, and interest rates not rising in the face of those slump-caused deficits — is playing out the same way:

Braiiiinnnnzzz!

I have, in the past, used Sweden’s experience in the 1990s to illustrate the difficulties we face in recovering from a global financial crisis: Sweden recovered from crisis, but it did so only by devaluing its currency and moving from trade deficit to trade surplus, a route that’s not available to the world as a whole (unless we can find another planet to trade with).

In response, right-wingers often trash Swedish performance — they know that the place is a socialist hell, and assert that it did terribly, not well, after devaluation.

But whaddya know: the new Republican slavery is freedom austerity is expansionary (pdf) report cites Sweden in the mid-1990s as, yes, a role model:

Strange to say, there’s no mention of the swing in Sweden’s trade, which was equivalent to a 6 percent of GDP stimulus:

IMF

I’ve put Canada in there too, because it’s another alleged example of expansionary austerity.

I have to say, it’s remarkable how quickly expansionary austerity has gone from interesting speculation to zombie idea, repeatedly killed by evidence but still shambling towards us, trying to eat our brains.

Mike Konczal has been blogging about the continuing conservative insistence that slashing government spending is actually expansionary, as embodied in the recent JEC report (pdf). As he says, it’s a remarkable thing: the empirical case for expansionary austerity has collapsed on examination, but the doctrine lives on regardless.

One thing Mike fails to note is that the recent AEI paper on deficit reduction, which is cited by that JEC study in a way that might make you think that it supports the case for expansionary austerity, actually never provides any evidence to that effect; it focuses only on deficit reduction as an end in itself. In fact, it comes close to conceding defeat on the issue:

While the tendency for spending cuts to be more effective at driving down debt levels is widely accepted, there is a great deal more controversy concerning the impact of successful consolidation on GDP growth. Although empirical studies have found many consolidations coupled with expansion, the degree to which consolidation drives rather than merely accompanies expansion is disputed. Various mechanisms have been proposed through which consolidation may spur growth, including credibility effects on interest rates and the effects outlined under the expectational view. However, the literature has identified endogeneity issues in many of these studies that may cause them to overstate expansionary effects.

Not that this will make any difference to the GOP position, of course. It’s notable that the JEC report blithely cites Canada and Sweden in the 1990s as demonstrations of its case, even though both have in fact been extensively debunked.

Meanwhile, this just in from Britain, the poster child for expansionary austerity:

U.K. business confidence declined in March to the lowest in two years, suggesting the economy may struggle to gather strength in the second quarter.

A gauge of sentiment, which aims to predict economic developments four months in advance, fell to 1 from 3 in February, London-based Lloyds Banking Group Plc (LLOY) said in an e- mailed statement today. The share of companies that were less optimistic about economic prospects increased to 44 percent from 36 percent in the previous month.