"What it doesn't have is experience bringing the economy out of a deep recession or a depression. "

From Casey Mulligan, the following post that I agree with:

"Inflation article in yesterday's Tribune

Click here.

IMO, it somewhat overstates the benefits, but I agree in spirit. The article is exactly right that inflation is the only housing price stimulus plan that would not add further to the housing glut.

Posted by Casey B. Mulligan at 4:18 AM

Now, from Steve Chapman on the Chicago Tribune:

"The growing case for inflation

Steve Chapman

December 21, 2008

Steve Chapman

December 21, 2008

One of the great achievements of our time has been the conquest of inflation. In the 1970s, it ravaged our savings, raised our taxes and kept the economy on a roller coaster. So it is a measure of our current economic crisis that the return of inflation might be the best thing that could happen( I AGREE ).

Over and over during the postwar era, the Federal Reserve has decided that overcoming inflation was worth suffering a recession. This time, it ought to recognize overcoming a deep recession is worth enduring some inflation( I AGREE ).

The existing downturn already looks certain to be the most severe since 1981-82, when unemployment soared to nearly 11 percent. There is even a real risk of a painful deflation( TRUE ). The World Bank fears we are entering the worst period since the Great Depression.

Faced with that looming catastrophe, the federal government has been considering or doing things that were once unthinkable: partly nationalizing banks( THEY SHOULD HAVE NATIONALIZED SOME, THEN SOLD THEM ), buying up debt, bailing out automakers( FOR SOCIAL AND IMMEDIATE ECONOMIC REASONS ), spending hundreds of billions of dollars on infrastructure( SOME. I DON'T HAVE A FIGURE ) and doubling or tripling the budget deficit( TRUE ).

It's possible these measures can restore the economy to health. But only possible. What is certain is that they will produce a government that is bigger, more expensive, more overextended and more involved in the operations of private businesses. That result, rest assured, will live on after the crisis is over( HERE I DISAGREE. NOTHING IS WRITTEN ).

So some economists have concluded that expanding the money supply is the worst option except for the others( THAT'S ABOUT IT. IT'S CALLED AN EXISTENTIAL DECISION ). Kenneth Rogoff of Harvard University writes that "a sudden burst of moderate inflation would be extremely helpful ( I AGREE )." Casey Mulligan of the University of Chicago says, "Inflation will alleviate some economic problems; prolonged deflation will aggravate them( I AGREE )."

Gregory Mankiw, who was chairman of the Council of Economic Advisers under President George W. Bush, urges the Federal Reserve to abandon price stability and commit itself to modest inflation ( I AGREE ). David Henderson of the Hoover Institution says that if the choice is more federal spending or rising prices, he prefers the latter( I AGREE ).

It's not hard to see why. Most of our problems stem from the bursting of the housing bubble. That sent home prices plunging, which reduced the value of mortgages and mortgage-backed securities, which caused losses at banks( OR THE NEED TO ADD CAPITAL ), which forced a cutback in lending( I SAY THAT LEHMAN CAUSED THIS. IN OTHER WORDS, UNCERTAINTY ABOUT THE GOVERNMENT GUARANTEES AND RESPONSE ), which squelched consumer spending( THE FEAR AND AVERSION TO RISK AND ACCOMPANYING FLIGHT TO SAFETY SPREAD TO THE ECONOMY ), which brought the economy to a halt. Which started the whole miserable cycle over again( LIKE THE ETERNAL RETURN OR FINNEGANS WAKE? ).

But if the crisis stems from declining real estate values, why not stop them from declining( IT DEPENDS ON HOW )? A spell of inflation would arrest the slide by pushing up the price of everything. As home prices stabilize, mortgage-backed securities would regain value, banks would get financially stronger, and loan officers would stop hiding in the vault( WE HOPE ).

Consumer spending would also revive. In the first place, those who want to buy new cars or remodel their kitchens would be able to borrow money to do so( WE HOPE ). In the second, people whose money is eroding in value would be motivated to spend today rather than tomorrow, the opposite of the incentive when prices are falling, as they are today( I AGREE ).

Unlike measures to bail out homeowners, inflation wouldn't spawn a new bubble by stimulating overinvestment in real estate. Home prices might rise, but other prices would rise still more, pulling investment away from the housing sector until the current glut subsides ( WE HOPE ).

The best part of inflation is that it avoids the need for the government to embrace vast spending initiatives and micromanage capitalist enterprises it is not equipped to run( WE HOPE ). And unlike government programs, inflation doesn't last forever( WE HOPE ).

One of the historic evils of inflation is that by reducing the value of debt, it rewards borrowers while punishing lenders. But this time, both sides may gain from a rising consumer price index—borrowers because their properties will be worth more than they owe, and lenders because their customers will find it easier to meet their obligations( THAT'S POSSIBLE ).

Once inflation has performed its useful role, it will have to be tamed( TRUE, AND IT WON'T BE EASY ). But the Fed has a lot of experience doing that( THIS IS WHAT I'VE BEEN SAYING ). What it doesn't have is experience bringing the economy out of a deep recession or a depression( THIS IS KEY ).

Inflation is not a good thing, any more than powerful, toxic, nausea-inducing chemotherapy drugs are a good thing. But when you have cancer, the one thing scarier than the cure is the disease.

Steve Chapman is a member of the Tribune's editorial board. E-mail: schapman@tribune.com"

I basically agree, but doubt that government spending can be avoided. However, the trick is to make sure that the money spent is spent on programs that:
1) Are easily assessable
2) Easy to get out of
3) Not easily available to the influence of lobbyists
4) Don't lose the taxpayers money if possible
5) Have some kind of proven track record
From the Fed's point of view, Inflation is easier to deal with than Deflation. In fact, the only proven method of getting out of deflation is to spur inflation, as I understand it.

How's The Middle Class Doing?

Greg Mankiw believes that the Middle Class is doing better than it's perceived to be:

"Tuesday, November 18, 2008

How is the middle class doing?

Better than many people think.

HT: MR.

Now, it turns out to be a link to the same research of this earlier post of mine on Oct. 30th:

Steven Chapman on Reason has a post about what I've called median wage stagnation. He says it isn't so:

"Terry Fitzgerald, a senior economist at the Federal Reserve Bank of Minneapolis, says the answer is simple. Far from declining, he writes, "the economic compensation for work for middle Americans has risen significantly over the past 30 years."

The mistake made by the School of Gloom is looking only at wages, narrowly defined. According to the Bureau of Labor Statistics, average hourly earnings of production and nonsupervisory workers, adjusted for inflation, fell by 4 percent between 1975 and 2005. But those figures deceive because they omit fringe benefits like health insurance, pensions and paid leave, which make up a bigger share of total compensation than before. The numbers also rely on a mismeasure of inflation.

When those flaws are corrected, a very different trend leaps off the page. Median wages, says Fitzgerald, rose 28 percent between 1975 and 2005. Nor were the gains restricted to Bill Gates and Hannah Montana: Significant gains occurred in the middle as well.

The same pattern holds for households. The figures that suggest families are struggling to stay even overlook some types of income, and they don't account for the fact that households have gotten smaller on average. After accounting for such things, Fitzgerald found that "inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006."

So I found the study:

"Conclusion

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

Why does the debate about middle America matter? Because an accurate assessment of the economic progress of middle America is a crucial input in formulating good public policy. Claims of long-term middle America stagnation—such as those quoted at the beginning of this article—are often part of a broader argument about the adverse impact of globalization, outsourcing and free trade. And middle class stagnation is used as motivation for a specific set of policies. But if middle America has not stagnated—as this analysis has shown—then this motivation for those policies is without merit.

Furthermore, if it is understood that middle America has indeed experienced substantial gains, policy priorities may change. For example, more emphasis might be placed on policies that promote continued economic growth or that target deeply rooted poverty rather than middle class stagnation. But regardless of the specific policy, policymakers and the public should base their decisions on an accurate assessment of how the economy has impacted and continues to impact people’s lives."

I agree with the idea that we should focus government on the needy, and really help them, and not on the middle class. However, we have to have a middle class that feels itself to middle class and not hovering above destitution.

I see a few debatable points in the study:

1) Overstated inflation ( I don't know, take your pick, but don't pick because you like the results )

2) There are fewer persons per household, so more for each person ( This cuts both ways. If households are smaller, it could be because people don't feel as wealthy as they used to and are having less children )

3) Expenses paid by employer, etc. ( This could actually cancel out a bit, if these expenses used to be cheaper and were paid by the employee )

It's a good paper, and Fitzgerald has more on the same subject.

Again, I agree with his emphasis, but not necessarily his conclusion, in the following sense: An emphasis that he and I both want needs to be based on how people actually see their situation. I'm not convinced studies like this can do that, however well argued.

I agree with Chapman about this:

"Thanks to American capitalism, ordinary workers and families are better off today than they were a decade or a generation ago. In the midst of scary economic times, that's a heartening fact to keep in mind. Even if certain Democrats would rather you didn't."

But not for the same reasons. It is still possible that median wage stagnation has occurred. Perhaps a libertarian can never be wrong about things always getting better.

Here's an opposing post from Oct.28th.

Another one here from Oct. 9th.

Here's one from Oct.2nd on Income Inequality:

"Via David Friedman, an article on income inequality in the U.S. by Arnold Kling and Nick Schulz. Here's the conclusion:

"Given the other forces driving inequality, there may be less that government can do than one might hope. Research from Heckman suggests that education is a relatively feeble remedy for the effects of family background (although Heckman believes that early intervention, in preschool or even before, shows promise).

In order to make a dramatic impact on inequality, government would have to do something about the fundamental causes: technology and marriage patterns. However, putting a brake on technological progress seems hardly feasible or desirable. And forcing people to select mates at random rather than on the basis of similar backgrounds and tastes seems similarly unlikely. As much as inequality may be a problem, no real solution is in sight."

This is terrible news for my vision of how we can have government take a much smaller role in our lives. My plan envisages our confining our social net to the truly needy, and then decreasing the number of truly needy through a growing economy. However, my plan necessitates that we have fewer poor people and that the middle class comes to be and feel truly middle class. My fear is that income inequality such as that described in the article will make it much harder to develop a middle class that truly feels middle class, as opposed to feeling just above being truly needy."

This is still my bottom line. If we don't have a Middle Class that feels middle class, then we will never have a substantially smaller government. This is my conclusion based on Politics and Political Economy.

"you can never go wrong by lamenting the decline of the middle class and the stagnation of wages."

Steven Chapman on Reason has a post about what I've called median wage stagnation. He says it isn't so:

"Terry Fitzgerald, a senior economist at the Federal Reserve Bank of Minneapolis, says the answer is simple. Far from declining, he writes, "the economic compensation for work for middle Americans has risen significantly over the past 30 years."

The mistake made by the School of Gloom is looking only at wages, narrowly defined. According to the Bureau of Labor Statistics, average hourly earnings of production and nonsupervisory workers, adjusted for inflation, fell by 4 percent between 1975 and 2005. But those figures deceive because they omit fringe benefits like health insurance, pensions and paid leave, which make up a bigger share of total compensation than before. The numbers also rely on a mismeasure of inflation.

When those flaws are corrected, a very different trend leaps off the page. Median wages, says Fitzgerald, rose 28 percent between 1975 and 2005. Nor were the gains restricted to Bill Gates and Hannah Montana: Significant gains occurred in the middle as well.

The same pattern holds for households. The figures that suggest families are struggling to stay even overlook some types of income, and they don't account for the fact that households have gotten smaller on average. After accounting for such things, Fitzgerald found that "inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006."

So I found the study:

"Conclusion

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

Why does the debate about middle America matter? Because an accurate assessment of the economic progress of middle America is a crucial input in formulating good public policy. Claims of long-term middle America stagnation—such as those quoted at the beginning of this article—are often part of a broader argument about the adverse impact of globalization, outsourcing and free trade. And middle class stagnation is used as motivation for a specific set of policies. But if middle America has not stagnated—as this analysis has shown—then this motivation for those policies is without merit.

Furthermore, if it is understood that middle America has indeed experienced substantial gains, policy priorities may change. For example, more emphasis might be placed on policies that promote continued economic growth or that target deeply rooted poverty rather than middle class stagnation. But regardless of the specific policy, policymakers and the public should base their decisions on an accurate assessment of how the economy has impacted and continues to impact people’s lives."

I agree with the idea that we should focus government on the needy, and really help them, and not on the middle class. However, we have to have a middle class that feels itself to middle class and not hovering above destitution.

I see a few debatable points in the study:

1) Overstated inflation ( I don't know, take your pick, but don't pick because you like the results )

2) There are fewer persons per household, so more for each person ( This cuts both ways. If households are smaller, it could be because people don't feel as wealthy as they used to and are having less children )

3) Expenses paid by employer, etc. ( This could actually cancel out a bit, if these expenses used to be cheaper and were paid by the employee )

It's a good paper, and Fitzgerald has more on the same subject.

Again, I agree with his emphasis, but not necessarily his conclusion, in the following sense: An emphasis that he and I both want needs to be based on how people actually see their situation. I'm not convinced studies like this can do that, however well argued.

I agree with Chapman about this:

"Thanks to American capitalism, ordinary workers and families are better off today than they were a decade or a generation ago. In the midst of scary economic times, that's a heartening fact to keep in mind. Even if certain Democrats would rather you didn't."

But not for the same reasons. It is still possible that median wage stagnation has occurred. Perhaps a libertarian can never be wrong about things always getting better.

A Libertarian Democrat Status Report Of This Crisis

Here's how I feel as of Thursday morning. Expect me to feel differently later today.

First, I'm not in favor of the bailout. As Steve Chapman writes on Reason:

"Not only that, the more effective it is, the more damage it will do to the free market system. Saving companies from their bad gambles turns business into a game of "profits for me, losses for you," corroding the incentives that make capitalism so innovative and efficient.

And for what? Bernanke warns of a recession. But economic downturns are not to be avoided at all costs. And one good thing about recessions is that they end, usually in a matter of months. An intervention of this nature, by contrast, would have malignant consequences for decades to come.

A group of 122 economists, including at least two Nobel laureates, signed a letter this week summarizing the danger: "If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted."

Not to mention the risk of giving the executive branch powers that a Russian czar would envy. If this bailout goes through, the term "limited government" will have to be permanently retired.

Paulson and Bernanke say, and probably believe, that their program is for the good of us all. But remember what Thoreau thought of their 19th-century counterparts. "If I knew for a certainty that a man was coming to my house with the conscious design of doing me good," he wrote, "I should run for my life."

Second, if there has to be a bailout, I prefer a version of the Swedish Plan, because it has worked, and I understand it. It also protects the taxpayers, which I doubt other plans will.

Third, I like Warren Buffet and William Gross, but their touting this bailout worries me. I feel as if they know something we don't, and that they're going to profit handsomely in this crisis. Again, they're two of the few financial people I respect.

Fourth, Sen. Dodd and Rep. Frank and the Democratic party have greatly improved the original Paulson proposal. In fact, the Democratic party has proven itself far more capable than the GOP in this crisis.

Fifth, many liberal blogs like Kos have featured a lot of libertarian themes in discussing this bailout, and the chatter on Reason, Cato, and libertarian democrat blogs, and also from liberals like Bob Kuttner, Bob Reich, Henry Blodget, Ezra Klein, Paul Krugman, etc., has been much better than GOP blatherers like David Brooks in the NY Times.

Sixth, Sen. Obama has proven himself far more capable in this crisis than John McCain.

Seventh, I've realized that I distrust these hybrid plans being put forward, precisely because they are neither fish nor foul, and so far easier to turn into a disaster.

Eighth, I wonder if there would even be a crisis if the Bush administration wasn't in power.

Ninth, even when I understand credit default swaps, I don't understand them. That can't be good.

Tenth, as a libertarian Democrat, I feel very good about how people I respect are reacting to this crisis, and am more determined to pursue this road in the future. A mix of libertarianism and liberalism in the Democratic party is the only way forward for those who want a less intrusive and powerful goverment.

Here's Hoping Terry Michael Changes His Mind

Terry Michael ends his recent post saying the following:

"But can a jilted supporter like me hold his nose and actually vote for Obama? Anger—more like fury—seized me this past weekend and told me no, at least for the time being. In the meantime, my advice to less practical libertarians: ideas do matter. Go with a protest vote for Bob Barr or sit this one out, if that's where your heart and your head lead you."

I hope that he changes his mind, and takes a position more like the one advanced by Steve Chapman. I continue to feel that Sen. Obama needs to win this election, and I'm willing to cut him a lot of slack in doing so. Ideas do matter, and I don't much like the ones on the other side.

Chapman On Obama

Steve Chapman gives a libertarian view of Sen. Obama that I feel is quite nuanced. He's no libertarian, but...

Here's his conclusion:

"Those who favor a less expensive and less expansive federal government will find plenty to complain about should Obama become president. For consolation, they can try chanting this mantra: It could be worse."

I would argue that Chapman himself makes the point that Sen. Obama is open to new ideas, and some of them do have a libertarian bent.

However, I do not agree with this statement:

"There are no disciples of small government in the Democratic Party, and Barack Obama fits right in. His economic program is based on the assumption that the economy is to the president what a marionette is to a puppeteer, requiring his direction and responding to his every wish.

Anyone partial to free markets, restrained government, fiscal discipline and light taxation approaches a Democratic nominee's economic platform with trepidation, expecting one fright after another. Obama does not disappoint.

He offers a long list of things the federal government should be doing to rearrange the nation's productive sector—paying U.S. automakers to build fuel-efficient vehicles, confiscating allegedly excessive oil profits, and spending hundreds of billions to create jobs in environmental and infrastructure industries. Democrats have not given up their basic faith that the market, while useful, is always in need of Washington's whip hand."

I believe that there is currently much more pragmatism, and more libertarian thought than Chapman says in the Democratic party. It is certainly true that many of Sen. Obama's ideas advance government intervention, but the way that government intervenes and the general size of that intervention are still open to debate. As well, by focusing on areas that libertarians and Democrats can agree on, it might be possible to extend this agreement to other areas if libertarian ideas are advanced within the party. There are enough areas of agreement to at least begin to see if libertarian ideas can be applied to other policy positions in the Democratic party.

Chapman makes my point. It could be worse, but we can also make it better over time.