You don’t know what you’re talking about!’ cried Humpty Dumpty. ‘How many days are there in a year?’

‘Three hundred and sixty-five,’ said Alice.

‘And how many birthdays have you?’

‘One.’

‘And if you take one from three hundred and sixty-five, what remains?’

‘Three hundred and sixty-four, of course.’

Humpty Dumpty looked doubtful. ‘I’d rather see that done on paper,’ he said.

Alice couldn’t help smiling as she took out her memorandum-book, and worked the sum for him:
365
1
____

364
___

Humpty Dumpty took the book, and looked at it carefully. ‘That seems to be done right—’ he began.

‘You’re holding it upside down!’ Alice interrupted.

‘To be sure I was!’ Humpty Dumpty said gaily, as she turned it round for him. ‘I thought it looked a little queer. As I was saying, that SEEMS to be done right—though I haven’t time to look it over thoroughly just now—and that shows that there are three hundred and sixty-four days when you might get un-birthday presents—’

Lewis Carroll, Through the Looking Glass

Somewhat against my better instincts I listened to the president’s speech last night, the prepared text of which can be found here. I thought the tone of it was just fine. I didn’t find it begging or angry as some did. I thought it was hortatory, which was appropriate. I would further point out that anybody who interprets exhortation as anger (or begging for that matter) has a problem. James Fallows notes a relationship to the “call and refrain” mode of some sermons. I think that’s fair comment.

Before I begin any reaction to the substance of the speech can anyone tell me over what period the spending is to take place? I haven’t seen that defined anywhere. I would guess three years. Now let me put my reaction in the form of a word problem.

Question: The economy has a $1.4 trillion output gap. The president has proposed $150 billion per year in additional stimulus spending. Based on that it is reasonable to infer that the president believes

A. The Keynesian multiplier is around 10.

B. Half a loaf is better than none.

C. There’s no chance that the House Republicans will pass this bill in its current form so he may as well rack up some points with his base for proposing the spending he has and give himself a platform to run on in the 2012 elections.

D. Never let a good crisis go to waste.

E. I understood there was to be no math.

F. Other

Note that the proposal makes no sense whatever unless you believe in the effectiveness of Keynesian stimulus or you believe that the proposal is merely a cynical political ploy.

If the president’s economic advisors are telling him that the Keynesian multiplier is around 10, they are blowing smoke up his skirt.

Reactions from the president’s allies are tending towards B, cf. Paul Krugman’s column. I don’t see how Dr. Krugman reconciles “it would probably make a significant dent in unemployment” with his previous complaints about the inadequacy of the 2009 stimulus. Once the afterglow has worn off will it be followed by a walk of shame?

The speech had barely been made before the AP had already fact-checked it and found it wanting. The analogy that I made some time ago is starting to gain traction: he will gladly pay you Tuesday for a hamburger today.

Mike Shedlock is even more critical, cataloguing the speech’s “lies”, e.g.:

Obama: The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for the long-term unemployed. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services.

Mish: That is lie number 4. The primary purpose of the American Jobs Act is simple: To keep one person (namely President Obama), in his job.

I am more charitable. I don’t think they’re mostly lies but rather wishful thinking and exaggerations, i.e. campaign promises.

I continue to find the White House’s position incoherent. Does the president really think that his proposal is large enough? That it’s the most he can get with the Congress he has? If he can’t even get what he has proposed, which I think is more than likely, shouldn’t he have proposed even more? He’ll gain more traction with his base by failing to get a $1 trillion stimulus package than he will by failing to get a $450 billion dollar one.

In the end the president’s proposal does not meet the standards I outlined earlier for an acceptable package. It is insufficiently focused. The president is punting on fiscal problems presented by a solution that even if you accept the Keynesian analysis is too small to accomplish objectives other than political ones.

Just for fun I re-took the Political Compass test. As usual my views wander around the very center of the compass. At this point my views among political parties most closely resemble those of the British Liberal Democratic Party or among governments the Finnish government which sounds about right to me.

Still centrist after all these years. It’s no wonder that I’m disaffected.

repent at leisure. FBI agents served search warrants at Solyndra, the company that received a half billion in loan guarantees from the federal government only to declare bankruptcy.

PDT FREMONT — FBI agents served search warrants this morning at Solyndra, the Fremont solar company that abruptly closed last week, two years after receiving more than $500 million in federal stimulus money, an agency official said.

The search is part of a joint investigation involving the FBI and the Department of Energy’s Office of Inspector General, said FBI spokeswoman Julianne Sohn, who declined to elaborate.

There are any number of fishy things in this story from the 39% ownership by the Kaiser Family Foundation (George Kaiser is a major Obama contributor and fund-raiser) to the low interest rate the company received to the inter-creditor agreement by which investors receive precedence in getting paid back in the bankruptcy.

I’d sure like to know what they’re looking for.

I’d like to draw your attention to two dramatically different visions of the present condition of our economy and what policies we should be using to move forward (not to mention presentation approach). First, Menzie Chinn at Econbrowser presents a pretty conventional Keynesian argument (this is from the “Policy Implications” section):

Even if the economy continues to grow, the pace of GDP expansion is still far below that necessary to shrink the output gap quickly

As of 2011Q2, the cumulative output loss associated with the $2.8 trillion (in Ch.2005$). Using the August 2011 WSJ survey mean forecast, by 2012Q4, an incremental $1.4 trillion cumulative loss is incurred.

Given the deterioration in the economic outlook, I think it absolutely imperative that additional measures be implemented to sustain economic growth. Jim provided some monetary/fiscal options here.

My own suggestions, ignoring the political constraints imposed by those Republicans who have suddenly changed their views regarding optimal policies [1], include an employment tax credit [2], extension of the payroll tax reduction [3], resumption of transfers to the states (recall, if government employment had not declined, NFP employment would have increased in August), and of course substantial infrastructure investment (I argued for this back in the ARRA debates, but there were many Republican critics who argued that such spending would be ill timed, occurring long after the recession [4] … I expect those same critics to argue against infrastructure spending again, with yet different rationalizations [5]). Some other ideas [6].

Note, especially, the graph in that section. Dr. Chinn draws a straight line projection of GDP from its 2007 peak and labels it “Potential GDP”, draws another line of actual GDP, does a straight line projection of that from the most recent data, and labels it “Actual”. The difference between potential and actual is the output gap. The policy proposal is for government spending to fill in that gap.

My biggest problem with the model is that I’m skeptical of the potential GDP projection in the aftermath of a bubble. What is the unit of measure being used for GDP? Dollars. The dollar value of the bubble commodity should not be included in straight line projection from the 2007 peak. What should it be? Beats me.

An alternative view is presented by Arnold Kling in a greenboard presentation:

In his presentation he explains our current situation as the interaction among four forces or groups: “Invaders”, “Helpless peasants”, “Fortified towns”, and “the government”. Rather than using his terminology I’ll call them disruptors, rent-seekers, the powerless, and the government. Disruptors, those who’ve been able to exploit the new Internet and information-based technologies, have prospered. Rent-seekers, those who’ve been able to secure above market level wages via various forms of government intervention, have prospered, too. The powerless are in trouble. The government pretends to worry about the powerless, tries to manipulate the disruptors, and is really in the business of protecting the rent-seekers.

His explanation suffers from the problem typically encountered by libertarians: his proposal for what should be done is nowhere near as appealing as the proposals of the central planners.

There’s one point I’d like to add using a combination of Dr. Chinn’s and Dr. Kling’s terminologies. What I think has happened is that we expected the projected GDP from Dr. Chinn’s graph and have realized the actual GDP from his graph. Wage expectations on the part of the rent-seekers are predicated on that projected GDP. Government can’t deliver on those expectations.

It can’t extract the difference from the powerless. They just don’t have the resources. It can’t extract the difference from the rent-seekers. That’s the “cat and rat farm&148; I’ve written about before. It’s perpetual motion. It violates the laws of physics.

If it extracts the difference from the disruptors is will be, in effect, eating the seed corn and reducing future economic activity. It’s not solution, just kicking the can down the road and we are rapidly running out of road. The only real solution is to deliver what you can to the rent-seekers, not what they expected or what was promised. Failing to do so will bring down the government, the rent-seekers, the powerless, and the disruptors all.

Over at The Economist Greg Ip has an excellent column on uncertainty. Read the whole thing. Just to remind people, I think our economic woes are multifactorial. Low demand, risk aversion, uncertainty, deadweight loss, and any number of other factors all play a part. I also think it’s fatuous to pick one factor, particularly one that nobody knows what to do about, and fixate on it while ignoring all of the others. Dealing with each of them will have some incremental benefit.

There’s one specific thing in Mr. Ip’s column that I want to comment on:

Both sides of the debate erroneously seek support in the macroeconomic data. Gary Burtless of Brookings tells Mark Thoma that the highest profit margins and lowest corporate taxes (as shares of GDP) in 60 years are not consistent with the argument that regulatory uncertainty is an undue burden: firms should clearly be hiring and investing now to make money before those feared rules become reality. I’m not sure I agree with this logic. Today’s profits reflect returns on yesterday’s investments. Regulations and taxes affect the perceived return on tomorrow’s investments. One could equally argue that businesses’ failure to invest despite such high profits show they are demanding new investment meet a much higher expected return rate because of regulatory uncertainty. Conservatives, in fact, make just that argument. But that, too, is faulty. Corporate balance sheets are flush with cash in countries such as Britain that do not share America’s more activist approach to regulation. The simpler explanation for the hesitancy to invest in all countries is the pervasive weakness of overall economic growth.

The problem with this analysis is that the companies that are sitting on wads of cash and the companies that hire belong to two completely different categories of companies that don’t overlap a great deal. Large established companies may well be holding cash at historic levels; they’re not the ones who create jobs. Over the last several decades those companies have shed, literally, millions of jobs. New companies create jobs and they aren’t sitting on a lot of cash.

Caroline Baum at Bloomberg looks into her crystal ball to discern what President Obama is likely to say tonight. Here’s what she predicts:

1. Lame, ineffectual proposals.
2. Blame Bush!
3. Trying to dodge the bullet on deficit reduction.
4. An infrastructure bank.
5. It’s the rich’s fault!

I think that by far the best part of her column is her observation that the emperor really doesn’t have any clothes:

Let’s face it: If the president had a plan to create jobs, he wouldn’t have kept it under wraps until now. Why take flak from Republicans and heat from the public if you have what it takes to turn the economy and labor market around?

Barack Obama doesn’t have a plan to create jobs. Nor is that his job. The government’s role is to provide an environment in which the private sector will create them. That should be his goal.

The sad part is that I don’t believe that either the president or his advisors understand that. Or that they don’t believe that.

Whatever the reality the president is bound to be blamed for action. That’s why lame, ineffectual, even counter-productive measures are the Catch of the Day.

I don’t know that I’ve ever seen worse advice than that which Michael Tomasky gives the president for his speech tonight:

If he comes out with the same passive posture, pleadingly saying to Republicans that we should all set aside our differences for the good of the American people and move forward in the spirit of compromise, he’ll have a disaster on his hands. The Republicans will know they can roll him again. He’s been talking that talk for three years. It’s gotten him to 38 percent approval and zero Republican votes in Congress on big measures.

The effect will be far more dramatic on his fellow Democrats. This tends to be overlooked. We think about how a president’s words are heard by the opposition more than we do about how his own party receives them. But if Democrats have to sit through yet another monologue in which Obama sounds like a fourth grader asking the sixth graders to play nice—well, they’ll go on the cable nets and say what they consider it their duty to say, but they are going to leave that chamber an awfully dispirited bunch.

Instead, Obama needs to say something like: “Now, to my Republican friends. I have made repeated calls for bipartisanship. You have refused to respond in kind, repeatedly. Your Senate leader has said that the most important item on his agenda is not getting the American people jobs, but making sure I lose mine. So far this year, I’ve met you more than halfway on the budget and the debt deal. I have shown my good faith. You haven’t shown yours. I’ve tried to do it the nice way. You keep wanting to fight. So now, if it’s a fight you want, it’s a fight you’ll get. Not for me, or for my job, but for the American people, for the unemployed and the underemployed and everybody whose lives are made tougher by this economy. That’s a fight I’m thrilled to have, because I am on their side, and you people are on the side of the top 2 percent.”

That’s right up there with “I understand there’s a great camping spot there at Little Big Horn” and “Surely no one will notice if we break into Democratic headquarters at the Watergate Hotel”.

It would be fine for a partisan political rally but not for a joint session of Congress. The president is a guest at the Capitol, not the proprietor. It’s not as though the Republicans in Congress have no recourse. They could do exactly the same thing that you’d do if a dinner guest took advantage of your hospitality to lambast you. You wouldn’t invite him or her back. The Congress is under no obligation to invite the president to address its membership in joint session at the Capitol.

For a century the State of the Union message was sent by the president to the Congress as a written report. He has neither an obligation nor a right to address the Congress in joint session and I believe he would be prudent to exercise decorum. IMO he went over the line when he scolded the members of the Supreme Court during his 2010 State of the Union address and abusing the Congress’s hospitality a second time would constitute a pattern of behavior.

Remember, too, that “high crimes and misdemeanors” are whatever the House of Representatives says they are and the House works by simple majority. I’m neither advocating nor predicting that the president could face impeachment for rudeness but I think it’s something to bear in mind. Even if the Senate were to dismiss the case as I think it overwhelmingly likely it would still constitute an asterisk in the record book.

I guess the irony of this article at CNBC.com is going to be lost on most people. The headline of the article is “CEOs to Obama: ‘Get Out of the Way’ for Job Growth”. The article quotes CEOs from six companies: Energy XXI, Citigroup, Deloitte, Mylan Labs, International Paper, and PepsiCo.

What’s the irony? They are an oil company, a bank, an accounting firm, a pharmaceutical company, a paper company, a food and beverage company. Of the six four are ferocious rent-seekers. They might still exist without the patronage of the federal government but they sure wouldn’t exist in their present forms.

It may well be all six. There appears to be some controversy over International Paper’s rent-seeking. And I wonder how much of PepsiCo’s sales are government sales?

Why do I find myself, at least once a week and frequently more often, being compelled to explain comparative advantage to people who should know better?

Here’s the quick summary. Imagine Country A and Country B. Even if Country A produces everything at lower cost than Country B (absolute advantage) both countries benefit by trade as long as the relative costs of production are different between the two countries (comparative advantage).

That’s the gist. If you want more detail look it up. This stuff has been well known for 200 years, since David Ricardo explained it back in 1817.

I think there are reasonable arguments about how trade should be managed between the U. S. and, for example, China. I particularly think that we have been foolish in allowing the Chinese to trade with us on their terms, buying Treasuries with the dollars they obtain by trade wiht us rather than buying U. S. goods and services. But claiming that we’ll stop producing everything because the Chinese can produce it more cheaply is just poorly informed.