Lunchtime Must-Read: Mark Schmitt: Righting the GOP: Rick Perlstein’s “The Invisible Bridge”

Mark Schmitt: Righting the GOP: Rick Perlstein’s The Invisible Bridge: “Perlstein’s subject is always political movements and political culture…. [Perlstein] rests too much agency in Reagan, the individual, when the whole point of the Perlstein project is to trace the lines of the conservative counterrevolution, undistracted by the charms and psychodrama of its front men. The book works best when it does exactly that, just as the 1976 Reagan campaign… the movement–in the form of its issues and its direct-mail operations–was more successful than the man…. There is a great book within *The Invisible Bridge*, but it would be about 500 pages… about the structure and strength of the conservative movement, the continuities between Nixon’s politics and Reagan’s, the failure of liberals and Democrats (and organized labor, whose disintegration during the decade goes mostly unmentioned) to speak to the economic and cultural panic of the decade…”

Lunchtime Must-Read: David Weigel: Rick Perlstein’s Critics: The Plagiarism Dead-Enders

David Weigel: Rick Perlstein’s Critics: The Plagiarism Dead-Enders Alexandra Alter… [said] Sam Tanenhaus…

‘Lamenting the lack of primary sources’… ‘wrote that Mr. Perlstein had “adopted the methodology of the web aggregator”‘. It was a serious accusation, but now that Tanenhaus’s review is up, there’s very little to it. Tanenhaus[‘s calling]… the mid-1970s… the moment when right-wingers became ‘inverse Marxists’ and ‘revanchists’. How is this different than Perlstein’s argument? Perlstein just lacks Tanenhaus’s pompous fatalism…. The ‘web aggregator’ line looks even worse…. Reading [Tanenhaus], you might assume that Perlstein abandoned the archives to write this book. But Perlstein’s online notes refer to findings from Michael Deaver’s papers… Reagan’s papers… Nixon’s papers… half a dozen other primary source archives. Perlstein does use more online sources than his 2001 book. Has anything happened since 2001? Have more sources been placed online? Why, yes, they have…. Paul Bedard, the Washington Examiner’s replacement level gossip columnist, reports… ‘the Atlantic magazine said Perlstein has shown in his latest political history that he is less a researcher-historian than a simple “web aggregator” who collects publicly available information and stitches it into a book’…

The Atlantic Monthly and the New York Times have, I think, some explaining to do…

Technology may not reduce employment but still affect jobs

The Pew Research Center yesterday released a report on the future of technology and robotics. The center interviewed about 1,900 experts on the topic and asked them about the effect of future technology on employment. Would new technology create jobs on net or would it destroy jobs?

The results were just about split down the middle, with half of the experts saying technology would be a net job creator and the other half disagreeing. Attempts at projecting the future of our economy don’t have a sterling track record. But the evidence from the effects of past technological change on the labor market points toward a future where technology doesn’t destroy jobs after factoring in the new ones created by technological innovation.

David Autor, an economist at the Massachusetts Institute of Technology, has done some of the leading work on how technological change affects the labor market. He is a leading proponent of the argument that skill-biased technological change, or technological change that complements the skills of highly educated workers, increases demand for those workers. At the same time, this change reduces the demand for workers with skills that are made redundant by technology. These workers don’t end up unemployed, but rather move to a different occupation. Such job polarization contributes to increased economic inequality.

The model has its short comings, but it’s useful for thinking about how technology affects the labor market. This might be easier to understand when compared to another factor, increased international trade. Autor along with his co-authors David Dorn of the Centro de Estudios Monetarios y Financieros in Madrid and Gordon Hanson of the University of California-San Diego have done research trying to untangle the effects of trade and technology on the labor market. In one study, the three economists look at the changes in the labor market from 1990 to 2007—a period where policymakers liberalized trade and technological change was quite rapid.

Autor, Dorn, and Hanson found that trade and technology had very different effects. The authors disentangle these effects by looking at differences across labor markets within the United States. Some markets were more exposed to imports from China while other markets employed more workers in routine occupations. What they found was that areas more exposed to increased imports saw significant declines in manufacturing employment as well as well as total employment. In local labor markets more exposed to technological change, total employment didn’t decline. Rather, declines in routine employment were offset by gains in other areas.

In short, increased foreign trade led to job losses while technology led to job polarization.

Technology is one of the key drivers of long-term economic growth. Advancements in information technology, robotics, and other promising technologies emerging out of the materials sciences and biology offer the promise of increased productivity and therefore economic growth in the years to come. But past technological shifts in the economy have not been so unambiguously positive for workers. The technology changes afoot today may not reduce total employment, but by disrupting current occupations these changes could be a major driver toward rising inequality.

Policymakers need to consider how they can help workers adjust to these shocks and create a labor market where the benefits of increased productivity are broadly shared as new technologies create new employment opportunities and challenges.

Big Thinking About ObamaCare: Wednesday Focus for August 6, 2014

Coffee yesterday with Peter Gosselin. Back in the day, when he worked for the Los Angeles Times he was one of the very very very best reporters covering American healthcare and related subjects. Then he was Tim Geithner’s speechwriter. Now he is doing something at and, I think, underutilized –at least I find myself learning a lot less from him these days then I used to learn.

And at coffee he put me on the spot. He asked me what big thoughts I had about the implementation of the Affordable Care Act.

So I stammered something relatively incoherent…

Now, however, I have had a chance to regroup. I have had an opportunity to bring some things that were barely or unconscious into the full light of reason. So I would like to try to do a better job…

Ten points:

  1. This is an ugly sausage. It had to be passed with only Democratic votes. I did see this before. In the run-up to the 1993 Reconciliation bill, Bob Dole pledged that Clinton would get no Senate votes from Republicans. It was not, you understand, because Dole thought the policies were bad policies. It was because he wanted no Republican fingerprints on the bill, so if the economy tanked Republicans could use it as an issue. Not personal, or policy, just political. It seemed to me at the time that this was a rather silly thing for Dole to do. The Clinton economic policies were likely to work–they were, by and large, good policies. Republicans were much more likely to be eager to share credit for the boom than eager to run against Clinton on the economy. Forcing passage via Democratic votes degraded the quality of the bill from our perspective, but degraded it much more from Dole’s perspective.

    So it has proved with the ACA. The ACA was the best bill that could have been passed given that McConnell had persuaded Brown, Collins, Snowe, and Voinovich to oppose it rather than to bargain their votes to improve it. The ACA was much better than nothing. And the ACA is something that moderate Republicans are already profoundly unhappy they let themselves be bullied into lining up in opposition to. Everyone who gains coverage via the Medicaid expansion or via the Exchanges or who sleeps easier because they know they will still be able to afford health insurance if they lose their job knows that the Republicans wanted to keep them from getting that benefit–the Republican Noise Machine has made sure of that.

  2. The Republican-Heritage Foundation piece of the bill–the exchanges–appear, to me at least, to be functioning much better than expected. I thought, given the amount of brainpower health insurance companies devoted to gaming the system, that they would have been able to blast large holes through community raining by crafting policies that only an idiot with chronic conditions would sign up for. That has not happened. Yet. But I am now considerably more optimistic about the possibility of providing effective social insurance via a health insurance marketplace dominated by for-profit insurance companies than I once was.

  3. Where the Medicaid expansion has been allowed to take effect, it has taken effect. People are going to the doctor more, people are finding doctors to go to, and the only minus is one that we already knew: that Medicaid is not a terribly good way to spend our money in treating people with chronic conditions.

  4. I still cannot believe that anybody smart and energetic enough to become president could have focused as little on and had as little idea how to manage the implementation of his career signature initiative as Barack Obama.

  5. Matching Barack Obama on not understanding the situation is John Roberts: if you are going to rewrite the Medicaid expansion part of the law from the bench, you first brief yourself on what the Medicaid expansion is. You thus know that even though the reduction in Disproportionate Share payments is in another title of the bill that it is part of the Medicaid expansion. You thus know that the income floor for citizen subsidy eligibility at 138% of the poverty level is part of the Medicaid expansion. John Roberts did not do his homework when he legislated from the bench. And so he turned what was already an ugly sausage into a true dog’s breakfast.

  6. The end of rapid health-care inflation has been astonishing. It is hard to see how it can possibly be a thing unconnected with the ACA. But it is not clear what the important connections between the passage of the ACA and the slowing-down of health-care cost inflation have been.

  7. The willingness of state-level Republican politicians to hurt their own people–those eligible for the Medicaid expansion, those who would benefit from a little insurance counseling to figure out how to take advantage of subsidies, those hospitals who need the Medicaid expansion to balance their finances, those doctors who would ultimately receive the subsidy dollars–is, as John Gruber says, “awesome in its evilness”. The federal government has raised the money, and all the state has to do in order to get it spent is to say “yes”. Especially in contrast with the extraordinary efforts state-level politicians routinely go through in order to attract other spending into their state, whether a BMW plant or a Social Security processing center, this demonstrates an extraordinary contempt for a large tranche of their own citizens. And when I reflect that a good third of that tranche reliably pull the lever for the Republican Party year after year…

  8. The current disaster scenario involves Republican mega-sweeps in the 2016 election. But even in that case the ACA does not die. It gets implemented in Blue States and in half or so of Red States–and the other half of Red States fall even further behind the rest of the country than they are already. Think of TANF in the 1990s: a small plus for the poor of Blue States that had good ideas for what to do with what had been their AFDC money, and a large minus for the poor, especially the deeply poor, of Red States that did not have good ideas.

  9. With the ACA we have placed a lot of bets. The important thing for policy now is to let them ride and see how they come out. The thing to avoid is revisiting the issue until we have a sense of what in the ACA is working and what is not.

  10. Come the 2020s the Cadillac Tax will start to bite, and we will have to decide whether we are happy with the shift from an employer-sponsored to individual-purchase-via-exchange insurance market regime that the Cadillac Tax will impel. We will have a much better idea then of what we should do than we can have now.


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What S&P report means for research on inequality and growth

The research-and-analytics arm of Standard and Poor’s, a rating agency, released a new report yesterday arguing that current high levels of economic inequality are holding back economic growth. As Neil Irwin points out at the Upshot, the report is surprising and interesting not because of its content but rather its source. The report’s publication is a sign that while existing research on this question has sparked quite a bit of interest, more economists and researchers need to think about whether and how economic inequality and growth are linked.

The S&P report doesn’t break new ground or provide any new evidence on the relationship between inequality and growth. Instead, it details some of the research looking to this question. Broadly there are two kinds of research on this topic. First there’s the so called growth regression literature, or papers that use regression analysis to determine which factors are strongly correlated with economic growth. In particular they include a measure of income inequality, most frequently the Gini coefficient. The research by International Monetary Fund economists Jonathan Ostry, Andrew Berg, and Charalambos Tsangarides cited in the report is a very high-quality version of such growth regression research.

Yet the overall findings in this academic arena are mixed. Inequality has been found to reduce growth, boost growth or have no effect at all. The varying methods used in these papers end up producing a variety of results. And even if the results were conclusive, they might not be helpful for further research or for use by policy makers. If we know, for example, that reducing the Gini coefficient by 10 percent boosts growth by, say, one percent, then this knowledge doesn’t really lead to actionable advice. We’d need to know where the changes in the distribution of income are up and down the ladder and the specific way in which inequality was reduced.

Perhaps a more fruitful way to understand the relationship between inequality and growth is the second research avenue: looking at specific economic channels and specific income groups. Examples of research that look at specific channels are the research on the effects of the unequal distribution of debt on consumption by Atif Mian of Princeton University and Amir Sufi of the University of Chicago, which is cited in the S&P report, or the well-documented research by Harvard University economists Claudia Goldin and Larry Katz on the college wage premium.

But research into these two channels or any other one may not result in findings that show ways to reduce inequality and boost growth. Increased college attendance, for example, might not reduce inequality as the demand for cognitive skills appears to be decreasing. Or preliminary research by Equitable Growth grantee and University of Chicago professor Ariel Kalil could find that there is an increasing income-based gap for noncognitive skills in addition to cognitive skills.

Other research can and should investigate how changes in the distribution of income affect the supply and demand sides of our economy in the short term and long term as well as examine the role of economic institutions, entrepreneurship, and innovation in economic growth.

Things to Read on the Morning of August 6, 2014

Must- and Shall-Reads:

  1. Brian Buetler: Watch Rand Paul Run for His Life Before Steve King Insults an Immigrant in Iowa: “It’s a cruel coincidence for GOP presidential aspirants that the Republican Party’s most uncensored, most influential, anti-immigrant member (Representative Steve King) hails from a state (Iowa) where, for arbitrary reasons, presidential primary candidates face their first real electoral test… Republicans like Senator Rand Paul have to break bread in public… with someone they must be prepared to flee mid-meal, while still chewing. That’s what happened Monday at a Paul fundraiser in Okoboji, Iowa…. Sticking up for the DREAMer in the video would plausibly doom Paul’s primary campaign. Standing with King would pose an equal but opposite threat in the general, as would playing dumb. So, he did what he had to do. And it was a wise move…. To many Republicans, feigning surprise at an immigrant’s command of English and calling her a lawbreaker is unremarkable. As is the suggestion that children should refuse to travel with their parents absent proper authorization, or that they should self-deport once they grow up…. But most people don’t find these kinds of things particularly commendable.”

  2. Paul Krugman: Phosphate Memories “Does anyone remember this, from Erick Erickson of Red State? ‘Washington State has turned its residents into a group of drug runners–crossing state lines to buy dish washer detergent with phosphate. At what point do the people tell the politicians to go to hell? At what point do they get off the couch, march down to their state legislator’s house, pull him outside, and beat him to a bloody pulp for being an idiot? At some point soon, it will happen.’ Yes, because there’s no possible reason meddling politicians should interfere with Americans’ God-given right to use phosphates however they like. Oh, wait. ‘It took a serendipitous slug of toxins and the loss of drinking water for a half-million residents to bring home what scientists and government officials in this part of the country have been saying for years: Lake Erie is in trouble, and getting worse by the year.’… As far as I can tell, there isn’t a well-organized phosphate denial campaign, insisting that runoff has nothing to do with algae blooms. But I’m sure one will arise as policy action grows nearer.”

  3. James Pethokoukis: The ECB continues to ruin Europe: “The GOP might have a soft spot for the European Central Bank. Republicans, including Paul Ryan and Kevin Brady, have in the past advocated changing the Fed’s dual jobs-inflation mandate to a sole focus on inflation. Unlike the Fed, the ECB has just a mandate to maintain price stability. Also unlike the Fed, the ECB hasn’t engaged in massive bond-buys to boost demand. It hasn’t, however, worked out so well for the euro zone where the jobless rate is 11.6%…. The difference between the US and EZ recoveries is startling. While the former is weak, the latter is comatose. A key explanation, I and other market monetarists have argued, is the more active Fed…”

  4. Jonathan Chait: GOP Climate Policy Gets Less Intelligent: “12 states filed suit to block the Obama administration’s Clean Power Plan. Rep. Mike Kelly (R-PA) has an op-ed in yesterday’s Wall Street Journal endorsing the lawsuit and laying out an unofficial political manifesto…. Kelly’s op-ed neither denies nor accepts the validity of climate science. Rather, it offers up a pastiche of political and economic reasons to oppose regulatory action, or any action at all, to mitigate climate change. As such, it represents something close to the cutting edge of Republican Party thinking on the issue…. Three substantive public-policy arguments, or approximations of public policy arguments, emerge: 1. Energy prices will go through the roof…. [But] nope. The study mentioned — authored by the conservative American Action Forum–doesn’t really say that Obama’s new regulations on coal plants will increase electricity prices by 10 percent. It arrives at this figure by adding the projected costs of all of Obama’s energy regulations, past and present…. 2. Businesses will suffer and have to lay off workers…. The following five words are the best tip-off that you’re about to encounter an invalid citation: ‘According to the Heritage Foundation…’ And sure enough, when you click over to the Heritage study, it concedes… [they] measured a different plan than the actual one and are pretending it’s basically the same thing…. 3. Unilateral reductions are pointless…. This is a common but bizarre allocation of blame. The United States has emitted far more carbon into the atmosphere than India or China–indeed, more than India and China combined. The United States continues to emit several times more carbon per person than either China or India…. Reading Kelly’s op-ed, one searches in vain for any minimal attempt to grapple with the costs of allowing the unlimited free dumping of carbon into the atmosphere. The degeneration of the GOP’s climate policy is almost total…”

  5. Ezra Klein: Revenge of the conservative nerds Cooke’s essay… is an interesting window into the state of contemporary conservatism. The old conservative critique of nerds… technocrats and intellectuals… was that their approach to knowledge was fundamentally flawed. ‘I would rather be governed by the first 2,000 people in the Boston telephone directory than by the 2,000 people on the faculty of Harvard University’, William F. Buckley… said…. Cooke’s essay… reflects an emergent trend…. Its argument is… that the left is full of faux-nerds who lack scientific training but nevertheless wear glasses–and… should be mistrusted… the problem is… liberal poseurs…. A version of this transition can be seen in the Republican Party’s lurch from George W. Bush to Paul Ryan…. Ryan… became the Republican Party’s vice presidential nominee on the strength of his unusually detailed budgets…. ‘In an era that seemingly rewards shallow oratorical excellence over substance (see Obama, Barack Hussein), his political brilliance is the capacity to educate on a vision, run on a record of accomplishment, and–yes–stand on his feet and talk persuasively about both’, enthused conservative economist Doug Holtz-Eakin…”

  6. Paul Krugman: Inflation, Unemployment, Ignorance “Jared Bernstein notes that we don’t seem to have a very good story about inflation and unemployment these days…. Ever since the 1970s we’ve been teaching a story in which an economy with excessive unemployment is one in which inflation should keep falling…. I’ve argued that the data are more consistent with a paleo-Keynesian Phillips curve in which unemployment determines the level, not the rate of change, of inflation–which could make sense given anchored expectations and downward wage rigidity. But that’s an educated guess at best, and somewhat post hoc. The thing is, however, that this is not a new problem…. The lesson for now, surely, is that we should not begin tightening based on hypothetical measures of slack…. We should wait until there’s really clear evidence of overheating…. The risks of moving too soon versus too late are not symmetric.”

  7. Nick Bunker: How much is money worth at different income levels?: “Nathaniel Hendren… creat[es]… a new metric… the ‘inequality deflator’…. Hendren argues that economic surplus is worth more to those at the bottom of the income distribution…. According to Hendren… giving $1 of surplus to a person at the 20th income percentile would increase average surplus per person for everyone by about $1.10. Compare that to the deflator of an income at the 90th percentile, which would result in everyone accruing only about $0.80…”

And:

Should Be Aware of:

  1. Greg Sargent: GOP moves from ‘self deport’ to ‘throw them all out’ “The border crisis has pushed the true GOP position on immigration out into the open, confirming Republicans have become the party of maximum deportations. Even the Wall Street Journal editorial board has now echoed this idea, castigating ‘Deportation Republicans’. To understand the possible long term implications of this, note that two Republicans who have explicitly used this debate to raise their profiles–Ted Cruz and Rick Perry–also may well run for president next year…. Perry claimed the big story here is that Obama has failed to secure the border, repeating wildly inflated claims about illegal immigrants being responsible for thousands of homicides, and… ‘have substantial terrorist ties’…. Ted Cruz’s role in pressuring House Republicans to vote to deport all the DREAMers has already been documented…. The House GOP’s lurch to the right on immigration [may be] only a prelude for worse to come in the coming GOP presidential primary…. Obama’s coming action on deportations will introduce another element of #Obummer Lawlessness into the mix, ratcheting up the explosiveness factor among GOP primary voters. It’s not hard to envision the GOP primary candidates… pledging to deport millions…. None of this will matter much in 2014, because Latinos are not a big factor in the key Senate and House contests…”

  2. David Weigel: Republicans back away from the call to impeach President Obama: The GOP understands that message only helps Democrats: “Who Said Impeachment? The conservatives who wanted to impeach Obama are acting like it was never their idea. It seems as if someone has gotten to Rep. Ted Yoho…. [John] Fleming was on board with the omerta, which developed over the weekend…. If impeachment is a scam, it was started on the right, early in the Obama presidency. Some of its early adherents believed in it; some thought they were merely responding to the passions of constituents; some, obviously, wanted to raise money. At the start of this summer, the conservative book-publishing industry churned out two new tomes about why Republicans needed to start an impeachment conversation… on July… came Sarah Palin…”

  3. Duncan Black: Eschaton: Beat Sweeteners Or Deep Pathology: “I guess we’re due for our parade of fluff pieces [from organizations like the National Journal] on Republicans grifters ‘hopefuls’ [like Rick Perry] who are going to spend the next couple of years auditioning for a Fox News gig running for president. To the beltway press, there’s just something about Republicans. They’re so attractive, so charming, so thrilling.”

  4. Tim F.: Batting Next: Darrell Issa: “Rep. Mike Rogers (R-MI) and his House Intelligence Committee just wrapped up two years of Benghazi!!!. They turned up no red meat for the base. No ground beef. No flavored broth. Not even a bouillon cube. Among the Intelligence Committee’s findings…. Intelligence agencies were ‘warned about an increased threat environment, but did not have specific tactical warning…’. ‘A mixed group of individuals… participated in the attack.’ ‘There was no “stand-down order” given to American personnel… no illegal activity or illegal arms transfers… no American was left behind.’ The administration’s… talking points reflected the conflicting intelligence assessments…’. For chrissake GOP. Your boy Romney committed an awful faux pas that night…. You just don’t step on dead American diplomats like that and you especially do not do it before anyone knows what exactly happened…. At the heart of BENGHAZI!!!1one! you will find a deep shame about what Romney did… an embarrassing farce…. Everyone saw the pie on Mitt’s face when Barack Obama cordially asked him to keep digging, even people who will never admit it out loud. Shame can be a powerful emotion…. Even Darrell Issa will one day work through…. I expect eventually they will wheel him out of the Rayburn building in a straitjacket ranting at statues about freemansons and lizard people.”

Follow-Up Musings on the Philosophy of Probability: Tuesday Focus for August 5, 2014

Today s Senate seat count histogram(Roughly) the way Cosma Shalizi puts it:

Because “integrating over the posterior distribution is the whole point of Bayesian decision theory”, a Bayesian cannot be uncertain about the probability of an observable. Bayesians are uncertain about the values of parameters. Bayesians are uncertain about the truth of hypotheses. But they cannot be uncertain about the probabilities of observables–and thus they cannot be uncertain about whether to take bets or not.

Can a Bayesian come close to being uncertain about the probability of an observable?

  1. A Bayesian can say: My posterior over the parameters is such that even a small amount of new information would massively change my assessment of the probability of this observable.

  2. A Bayesian can therefore say: Since discovering that there is another mind out there with a different information set than I have that thinks the probability is X is new information that would greatly move my assessment of the probability toward X.

  3. A Bayesian can say: New information is arriving all the time. Our current assessment of the probability is based on little information. If we possibly can, we should neither accept nor reject this bet but should instead wait for the new information to arrive.

Do those statements that Bayesian can (and often should) make together cover the essentials of what we mean when we say that we are uncertain about the probability of an observable? Do they capture what we are gesturing at when we talk about “Knightian Uncertainty”?

The possible set of answers that could have been given to the question as of November 1, 2012 of whether or not you should make a (small-stakes) bet on Barack Obama at odds of 4-1 were:

  1. Yes: the probability that Obama will win is greater than 80%.
  2. It’s a fair bet: the probability that Obama will win is 80%.
  3. No: the probability that Obama will win is less than 80%.
  4. The probability is uncertain–it’s not a bad bet if you are betting against Nature, but if you are betting against another mind you will probably lose.
  5. The probability is uncertain–your best strategy is to wait for today’s information and then see if you want to make the bet tomorrow.

Is there anything else than (4) and (5) that a rational somebody who wants to start their answer with not “yes”, “no”, or “it’s fair” but with “the probability is uncertain” could want to end their answer with?

I would have been profoundly depressed if back when I was 19 somebody had told me that: “You think you are depressed now because you do not understand ‘Knightian Uncertainty’. But I tell you that when you are 54 you will still not understand ‘Knightian Uncertainty’. In fact, when you are 54, you will not only not understand it, you will be so confused that you will be uncertain about whether ‘Knightian Uncertainty’ is or is not a sensible concept.”


References:

Why Is Employment Today So Much Lower than We Expected Seven Years Ago?: (Late) Monday Focus for August 5, 2014

The extremely sharp and hard-working Neil Irwin has a nice piece that gives his answer:

Why Is the Economy Still Weak Blame These Five Sectors NYTimes com

Neil Irwin: Why Is the Economy Still Weak? Blame These Five Sectors: “The economy keeps underperforming…

…producing around $800 billion a year less in goods and services than it would if the economy were at full health, and as a result millions of people aren’t working who would be if conditions were better. But why?… To get at an answer, we needed a more basic question: What would the economy look like right now if it were fully healthy, and how is the actual reality… different?… A handful of sectors, including housing, government spending and spending on durable goods, are at fault for the continuing underperformance of the American economy…. Six of 11 sectors we analyzed are doing fine… consumer spending on services… spending on nondurable goods… Business spending on intellectual property….

The following, however, are the five pieces… [are] vastly undershooting… residential investment; consumption of durable goods; state and local government spending; business investment in equipment; and federal government spending. Together their deficit adds up to $845 billion — in other words, if those sectors returned to their typical share of economic potential, the economy wouldn’t just be doing well, it would be in an outright boom….

Housing is the biggest and least surprising…. Federal spending is below the level that would be expected…. State and local governments spent the years after the crisis cutting employees and trimming costs…. Durable goods consumption is $178 billion lower than it would be in our model of a fully healthy economy. This is most likely related to the same factors holding back housing. People aren’t buying cars, furniture and other big-ticket items as past patterns would suggest, perhaps related to the overhang of debt…. It’s no mystery which sectors are to blame for the crummy economy…

I look at it somewhat differently:

First, figuring out what the services spending trend is is extremely hairy–I have no confidence in my own estimates of how fast we “should” be shifting toward a service economy, let alone anybody else’s.

Second, if you add up all the components of consumption–services, nondurables, and durables–what I, at least, get is that they are jointly low because income is low and not because of any deeper cause: boost the other components of spending and they will, as a group, recover.

Third, there is something odd in the mix of consumption spending: too much in services and too little in durables. I blame this on the overhang of debt and on the failure to fully fix the breakdown in the credit channel. But while this distorts the pattern of what we buy–we would by happier buying fewer services and more durables, if those who would like to buy durables could get the credit–and distorts our allocation of labor and structure of production, the odd mix is not a cause of the shortfall.

Fourth, business equipment spending is also low not for any fundamental reason but because output is low: with low production, you have idle factories, and it would be silly to build capacity ahead of demand.

Thus, five, the shortfall in the economy is at base due to two sectors: residential construction–and here the Obama administration’s extraordinary unconcern with and unwillingness to fix housing finance must take the major part of the blame–and austerity both at the state and local and at the federal level. If we were to fix those two–housing and government–the economy would be fine right now, and the Federal Reserve would already have raised interest rates away from the zero nominal lower bound.

Now you could go a big deeper, and say: OK, housing and government are depressed. But the economy should be able to route around that and rebalance itself. Workers who would, if things were healthy, be producing thing for the government to buy or building housing could work in other sectors, after all, and now a great many of them are doing nothing at all. There, I think, we have to blame the zero lower bound on nominal interest rates–and the failure to effectively summon either the Confidence Fairy to boost business desire to invest or the Inflation-Expectations Imp to reduce household and business desire to save. At this slightly deeper level, given government austerity and housing credit-channel dysfunction, it is the Wicksellian excess of the market interest rate at its nominal lower bound of zero above the natural interest rate that keeps the economy from rejiggering asset prices and incentives and producing a labor market where demand balances supply.

Evening Must-Read: James Pethokoukis: The ECB Continues to Ruin Europe

James Pethokoukis: The ECB continues to ruin Europe: “The GOP…

…might have a soft spot for the European Central Bank. Republicans, including Paul Ryan and Kevin Brady, have in the past advocated changing the Fed’s dual jobs-inflation mandate to a sole focus on inflation. Unlike the Fed, the ECB has just a mandate to maintain price stability. Also unlike the Fed, the ECB hasn’t engaged in massive bond-buys to boost demand. It hasn’t, however, worked out so well for the euro zone where the jobless rate is 11.6%…. The difference between the US and EZ recoveries is startling. While the former is weak, the latter is comatose. A key explanation, I and other market monetarists have argued, is the more active Fed…

Afternoon Must-Read: Paul Krugman: Phosphate Memories

Paul Krugman: Phosphate Memories “Does anyone remember this…

…from Erick Erickson of Red State? ‘Washington State has turned its residents into a group of drug runners–crossing state lines to buy dish washer detergent with phosphate. At what point do the people tell the politicians to go to hell? At what point do they get off the couch, march down to their state legislator’s house, pull him outside, and beat him to a bloody pulp for being an idiot? At some point soon, it will happen.’ Yes, because there’s no possible reason meddling politicians should interfere with Americans’ God-given right to use phosphates however they like. Oh, wait. ‘It took a serendipitous slug of toxins and the loss of drinking water for a half-million residents to bring home what scientists and government officials in this part of the country have been saying for years: Lake Erie is in trouble, and getting worse by the year.’… As far as I can tell, there isn’t a well-organized phosphate denial campaign, insisting that runoff has nothing to do with algae blooms. But I’m sure one will arise as policy action grows nearer.