I finally managed to see the movie. Do see it if you can; it will make your blood boil, and in a good way.

One side reaction: the movie showed the Hamptons, with the caption “two hours from Manhattan.” Only for the little people, guys. Almost 20 years ago — when Wall Street paychecks were small by modern standards — I asked some investment bankers whether getting out to their Hamptons places was a hard drive; there was a silence, then someone said, “It’s only half an hour by helicopter.” In a way, the point is that even Ferguson doesn’t quite grasp just how big the gaps in life experience have grown.

OK, about the economist-bashing: I thought it was basically fair. There aren’t, I think, all that many cases when economists are literally paid to offer a specific opinion — although Greenspan’s defense of Keating qualifies. But the movie didn’t say there are. What it suggested, instead, was a kind of soft corruption: you get paid a lot of money by the financial industry, you get put on boards, but only if you don’t rock the boat too much. Besides, you hang out with these people, and get assimilated by the financial Borg. I think all of that is very true.

I think this film will stay with us; when you ask how the even worse crisis of, say, 2015 happened, the fact that these people got away with it will loom large.

Every once in a while I think I need to remind readers why we look at inflation ex food and fuel to measure inflation trends. See the original post.

And a reminder, too, that headline inflation has been very erratic, with prices soaring in early 2008, then plunging in 2009; policy would have been equally erratic if the Fed didn’t use core inflation to judge underlying inflationary pressure:

Wolfgang Munchau suggests that we need a German word — ueberfordert — to describe the condition of Europe right now. I think he’s wrong about the lack of an English equivalent; “overmatched” seems fairly close. European leaders, and the European system, just seem not up to dealing with the crisis.

But then, who in the West is? It has been 22 months since I gave vent to a growing sense of despair about the US response; events have not, I’m sorry to say, proved me wrong.

One thing that is peculiarly distressing to people like me, by the way, is the determination of key players to rewrite history. Wolfgang Schaeuble tells us that “deficits were one of the main reasons for the crisis”; in what universe? Ireland and Spain were running surpluses on the eve of the crisis; the US crisis was clearly driven by private-sector, not public-sector debt; unless you define the crisis entirely in terms of Greece, this makes no sense at all.

So we’re ueberfordert, both in terms of will and in terms of intellectual clarity.

Update: And no, deficits were not behind the sovereign debt crisis in Europe. Again, Ireland and Spain began running deficits only after the bust; it was the runaway banks and the private-sector bubbles that did it.

One thing I’m hearing, now that all hope of useful fiscal policy is gone, is the idea that trade can be a driver of recovery — that stuff like the South Korea trade agreement can serve as a form of macro policy.

Um, no.

Our macro problem is insufficient spending on U.S.-produced goods and services; this spending is defined by

Y = C + I + G + X – M

where C is consumer spending, I investment spending, G government purchases of goods and services, X is exports, and M is imports. Trade agreements raise X — but they also lead to higher M. On average, they’re a wash.

This, by the way, is why claims that the Smoot-Hawley tariff caused the Great Depression are nonsense. Yes, protectionism reduced world exports; it also reduced world imports, by the same amount.

There is a case for freer trade — it may make the world economy more efficient. But it does nothing to increase demand.

And there’s even an argument to the effect that increased trade reduces US employment in the current context; if the jobs we gain are higher value-added per worker, while those we lose are lower value-added, and spending stays the same, that means the same GDP but fewer jobs.

If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.

Karl Smith sort of takes issue with my point about how Social Security is a favorite target of the Beltway crowd, because it’s not important to anyone they know. “I doubt anyone thinks about it in such crass terms,” he writes.

Actually, there’s more crassness in this world than is dreamed of in most professors’ philosophy. But still, Smith is right that this is mostly not an explicitly cynical calculation, more a matter of tout le monde, as Tom Wolfe would say — meaning a narrow circle of People Like Us — doesn’t care about Social Security, so it’s hard to grasp how much it matters to others. Yglesias points us to a chart:

Social Security is crucial to most Americans — but not at all to the elite.

But Smith has another point: Social Security is easier to discuss than Medicare. True. The story about an aging population and how it burdens the system is easy to explain; explaining that this story is mostly wrong, that we already did the big adjustments for the baby boomers in the 1980s, is a lot harder. And the problem with health care costs is especially hard to explain.

But the flip side of this is that one widely offered opinion — that reforming (aka slashing) Social Security will pave the way for Medicare change — is utterly wrong; precisely because Medicare is a very different kind of issue, whatever techniques you use to sell and implement Social Security cuts will be useless when you go where the money really is.

And Yglesias is right about something else: tout le monde includes doctors and hospital administrators, so while the elite can’t easily visualize the pain of Social Security cuts, it has friends who can tell it about how evil it would be to limit what Medicare pays for. Again, most people don’t think about it that crassly; but elites are very good at seeming classy, even to themselves, while being objectively crass.

One of the things you often hear is the claim that statistics showing falling inflation are just about housing. Via Mark Thoma, the San Francisco Fed has done the homework: the same downward trend is there if you purge housing from the core index:

Also, you can look at wages*: the same pattern is visible:

In both cases, you don’t want to make too much of short-term wiggles; the big point is the downward sweep since the slump began. Disinflation is underway, with deflation a real eventual possibility.

*The St. Louis Fed index is the old BLS number; the new one, available here, shows a smoother downward trend.

Banking expert: “What happened was that tri-party repo, which used to be all government securities, came to include all these cats and dogs, and then these cats and dogs ended up facing haircuts. …”

Digby sounds the warning: a fair number of “centrist” Democrats – probably including the Incredible Shrinking President — seem willing, even eager, to join up with Republicans in cutting Social Security benefits and raising the retirement age. As she says, this is idiotic even in narrow political terms: in the very next election, Republicans will run ads in which they pose as the defenders of Social Security, while Democrats are the meanies who want to take away your retirement.

The question you have to ask is, why are Democrats such suckers on this issue?

The proximate cause is that cutting Social Security is one of those things you’re for if you’re a Very Serious Person. Way back, I wrote that inside the Beltway calling for Social Security cuts is viewed as a “badge of seriousness”, which has nothing to do with the program’s real importance or lack thereof to the budget picture; that column elicited a more or less hysterical reaction, which sort of proved the point. (Looking back at the column, I was surprised to see that it was about the ISP himself; tales of a debacle foretold.)

But why Social Security? There was a telling moment in 2004, during one of the presidential campaign debates. Tim Russert, the moderator, asked eight or nine questions about Social Security, trying to put the candidates on the spot, while asking not once about Medicare, which serious people – as opposed to Serious People – know is the real heart of the story. Why the focus on Social Security?

The answer, I suspect, has to do with class.

When medical expenses are big, they’re big; even the very affluent are grateful when Medicare pays the bills for their mother-in-laws bypass or dialysis. The importance of Medicare, in short, is obvious to all but the very rich.

Social Security, by contrast, is something that matters enormously to the bottom half of the income distribution, but no so much to people in the 250K-plus club. A 30 percent cut in benefits would represent disaster for tens of millions of Americans, but a barely noticeable inconvenience for VSPs and everyone they know. A rise in the retirement age would be a vast hardship for people who do manual labor, but if anything a gift to VSPs, who don’t want to step aside in any case. And so on down the line.

So going after Social Security is a way to seem tough and serious — but entirely at the expense of people you don’t know.

Man: “Excuse youme [needed another cup of coffee!], but are you Tom Friedman?”

Me: “No.”

Man: “Gosh, you look an awful lot like him.”

I felt sorry for Jared Bernstein, who surely knows better, having to convey the administration’s attempt to downplay the terrible jobs numbers.

I know what’s going on: the administration decided, more or less a year ago, that rather than admit that its stimulus package was inadequate and call for more, it would put on a happy face and hope for better news. But here’s the thing: by now we know that this strategy has been a political disaster. So you would think that the administration would change its line.

But to do that, someone at the top has to make the decision to change direction. And clearly, nobody has. I don’t think there was a deliberate decision to persist in an obviously losing strategy; I just think top management has gone missing. And so the administration drifts …

Me too. Long ago I read about Multilateral Man, who believes that nations must coordinate to improve cooperation and also cooperate to improve coordination. Well, I’m in the middle of a meeting with the Multilateral Men (and a few women); I somewhat suspect that I’m an MM myself. So, limited posting.

What I will say about the tone of the meetings is that there’s a broad sense of helplessness. They (we?) aren’t stupid; everyone pretty much understands how badly things are going. But nowhere is there the leadership to do anything more than drift, with a few palliative actions, waiting for things finally to get so bad that something must be done.

Update: Yes, I’m wearing a suit too. At the opening — drinks before dinner, Thursday night — it looked like a gathering of crows; all these guys in their dark gray suits. And I fit right in.

Reading articles about New Ideas In Economics, I often have a sense of deja vu: haven’t we been through all this before? Justin Fox does the legwork, and finds a 1988 article about New Ideas that could, with a few tweaks, have been written today.

In this case, though, the problem is not with the new ideas of 1988, still being marketed as new ideas of 2010: in particular, Shiller was right about market irrationality then, and he’s still right now — with two big bubbles that he called correctly under his belt.

The question we should ask, however, is why the economics profession has been so resistant to the obvious.

I remember 1988; 1988 was a friend of mine. By 1988, it was already obvious that equilibrium business cycle theory had failed. Shiller had already circulated his devastating demonstration that asset prices were much too volatile to be explained by fundamentals, and the 1987 market crash had provided an object lesson in panic. Also, by the way, the savings and loan mess was illustrating the problems with inadequate financial regulation.

And nothing happened. Real business cycle theory continued to prosper, developing an increasing stranglehold over the professional journals. Behavioral finance stayed on the margins. The equilibrium guys had learned nothing and forgotten nothing; and by the time 2008 came around, the ravages of time had left people who actually understood demand-side shocks much thinner on the ground than they had been 20 years earlier.

Our problem, in short, isn’t lack of nifty new ideas; it’s the refusal of too many economists to face up to the fact that some of their preferred theories don’t work, a fact that has been obvious for decades.

Kevin O’Rourke has put out a beautifully written, heartfelt piece on Ireland’s woes. Read it and weep.

Update: Gah — we seem to have overwhelmed the hamsters at Eurointelligence. I’m going to put O’Rourke’s text under the fold for the time being.

Read more…

Bowles-Simpson, the revision, is out. It has not improved.

I think it is worth pointing out that like so many proposals from that side of the political spectrum — for this is, very much, bipartisanship as a compromise between the center-right and the hard right — this one involves a fundamental piece of strange logic. Namely, it argues that in order to head off the dire prospect of future cuts in Social Security benefits, we must … cut future Social Security benefits.

Also: in response to the point many of us have made about raising the retirement age — that only the affluent have seen life expectancy rise faster than the retirement-age rises already in the law — the plan promises special exemptions for those with physical hardships.

Let’s think about that. Right now we have a retirement system that has the great virtue of not being intrusive: Social Security doesn’t demand that you prove you need it, doesn’t ask about your personal life, doesn’t make you feel like a beggar. And now we’re going to replace that with a system in which large numbers of Americans have to plead for special dispensation, on the grounds that they’re too feeble to work for a living. Freedom!

Oh, well. Sewell Chan has an article about the rising influence of conservative economists; what he doesn’t point out is so far that these guys have been wrong about everything. They’re prospering because their political faction is prospering, not because their economic doctrines have proved correct or even plausible.

I have to say, when I got into economics, I expected evidence to matter more than it does — obviously telling people what they want to hear prevails more in the political arena than in academics, but even there the willingness to hang on to preferred narratives no matter the evidence is impressive.

Nothing to do but keep on plugging, I guess. In the long run truth will, one hopes, prevail; but in the long run …