The most interesting thing in retrospect is how insistent Marty is here that “BAD BIG GOVERNMENT” arrived suddenly and discontinuously in 1967—that the U.S. economy was fine up until then, but that afterwards things fell off a cliff with “government policies… deserv[ing] substantial blame for the adverse experience[s] of the past decade”. Plus an awful lot of cherry-picking—like assessing corporate America based on the ten large firms whose stock prices plunged the most. And, of course, it was Marty’s guy Ronnie whose policies wound up imposing much larger drags on societal wellbeing, from income maldistribution through draining the pool of productive savings to slow-walking equal opportunity: Martin Feldstein (1979): Introduction to The American Economy in Transition: “The post-[World] War [II] period began in an atmosphere of doubt and fear…

Many economists believed that the nation would slip back into the deep recession from which it had escaped only as the war began…. [But the first two decades of the postwar period were a time of unsurpassed economic prosperity, stability, and optimism. The contrast between the strength and achievement of the economy during those years and its poor record since then signals a major change in the performance of the economy over the postwar period…. Real GNP growth slowed from an annual rate of 3.9 percent between 1947 and 1967 to only 2.9 percent between 1967 and 1979…. The average unemployment rate rose from 4.7 percent of the labor force to 5.8 percent. The average rate of consumer price index (CPI) inflation jumped from 2 percent to 6.7 percent (since 1967) with an acceleration to an average of nearly 9 percent since 1973 and over 13 percent in 1979….

Some of the poor record of the 1970s has undoubtedly been due to inappropriate macroeconomic policies adopted during the Vietnam War, to the change in the production policy of the OPEC cartel, and to other disturbances whose impacts will eventually fade away. But the deteriorating performance of the economy may also have more fundamental causes… so deeply rooted in our social and political system that they cannot be eliminated even when the causes of the problem become better understood…. Many of the papers and comments in this volume point to the expanded role of government as a major reason, perhaps the major reason, for the deterioration of our economic performance. The government’s mismanagement of monetary and fiscal policy has contributed to the instability of aggregate output and to the rapid rise in inflation. Government regulations are a principal cause of lower productivity growth and of the decline in research and development. The growth of government income-transfer programs has exacerbated the instability of family life and perhaps the decline in the birthrate. The low rate of saving and the slow growth of the capital stock reflect tax rules, macroeconomic policies, and the growth of social insurance programs.

The expanded role of government has undoubtedly been the most important change in the structure of the American economy in the post-war period…. There can be no doubt that government policies do deserve substantial blame for the adverse experience of the past decade…. The adverse consequences of government policies have been largely the unintended and unexpected by-products of well-meaning policies that were adopted without looking beyond their immediate purpose or understanding the magnitudes of their adverse long-run consequences. Expansionary monetary and fiscal policies were adopted throughout the past fifteen years in the hope of lowering the unemployment rate but without anticipating the higher inflation rate that would eventually follow. High tax rates on investment income were enacted and the social security retirement benefits were increased without considering the subsequent impact on investment and saving. Regulations were imposed to protect health and safety without evaluating the reduction in productivity that would result or the effect of an uncertain regulatory future on long-term R&D activities…. The government never considered that raising the amount and duration of unemployment benefits to the current high levels to avoid hardship among the unemployed would encourage layoffs and discourage reemployment; that Medicare and Medicaid, introduced to help the elderly and the poor, might lead to an explosion in health care costs; that welfare programs, introduced and expanded to help poor families, might weaken family structures; or that federal aid through the tax laws and through special credit programs to encourage homeownership would have such adverse effects on the cities, precipitating the relocation of business and consequent poverty and other problems for those who remained behind. The list of well-meaning policies with unintended adverse consequences could be extended almost without limit….

Unfortunately, even when the inappropriateness of old policies is recognized, change is difficult to achieve. Existing programs are maintained even though the same programs would not be adopted today. These programs survive and grow with the help of sympathetic bureaucrats and well-organized beneficiary groups. Loyalties develop to the form of public programs rather than to their basic purpose…. The government in its decision-making is inherently myopic, more myopic than either households or firms. Political accountability means that a policy will be judged on its apparent effects within as little as two years….

President Lyndon Johnson rejected the warnings of his economic advisors that taxes had to be raised in order to avoid an accelerating rate of inflation. Johnson chose to accept an increased long-run inflation rate in order to avoid the short-run political cost of a tax increase. His choice, while perhaps politically rational, was economically myopic. During the 1970s, the government and the monetary authorities focused on the short-run goal of reducing unemployment through expansionary policies that served only to exacerbate the inflationary situation. If escaping from the current high rate of inflation requires a sustained period of increased unemployment and economic slack, the shortsightedness of the political process may make this very difficult to achieve….

Of course, politicians do not have a monopoly on myopia. But although some of the political shortsightedness is undoubtedly a response to constituent pressures, the myopia of the political process actually encourages voters to be impatient…. To the extent that the poor economic performance of the past decade can be traced to the growing role of government and the inherent myopia of the political process, improvement of our performance will be difficult to achieve. Difficult but not impossible…. If the public begins to see more clearly the links between current policies and future consequences, there will be less reason to fear the unexpected consequences of myopic decisions.

The 1970s have been a decade of frustrated expectations. The size and influence of the government have grown rapidly, but the public’s distrust of government has grown even more rapidly. The economics profession has discovered a new humility as the economy’s performance has worsened. As the 1980s begin, there is widespread anxiety about the future. Will this decade be a period of severe economic problems with a major recession, accelerating inflation, or both? Or can the poor economic performance of the 1970s be reversed? The current data on the developing state of the economy are not clear. And, while some events may be outside our control, the success of the economy in the current decade and in the remainder of this century will depend also on whether we choose wisely as we reevaluate and restructure our major economic policies.

Alessandro Nicita, Marcelo Olarreaga, and Peri da Silva: [A trade war will increase average tariffs by 32 percentage points(https://voxeu.org/article/trade-war-will-increase-average-tariffs-32-percentage-points): “A trade war will increase average tariffs by 32 percentage points…

…There are growing signs that a trade war is possible, and that the multilateral trading system may not be able to prevent it. This column asks what would happen with tariffs around the world if countries were to move from cooperative tariff setting within the WTO to non-cooperative tariff setting outside the WTO. It argues that that the resulting trade war with countries exploiting their market power would lead to a 32-percentage point increase in the tariff protection faced by the average world exporter…

“If getting China to pay what it owes for technology were the goal, you’d expect the U.S…. to make specific demands… and… build a coalition”, a Tran-Pacific Partnership, so to speak: Paul Krugman: The Art of the Flail: “Whenever investors suspect that Donald Trump will really go through with his threats of big tariff increases… stocks plunge…

…Incoherence rules: The administration lashes out, then tries to calm markets by saying that it might not carry through…. If getting better protection of patent rights and so on were the goal, America should be trying to build a coalition with other advanced countries to pressure the Chinese; instead, we’ve been alienating everyone in sight. Anyway, what seems to really bother Trump aren’t China’s genuine policy sins, but its trade surplus with the United States, which he has repeatedly said is $500 billion a year. (It’s actually less than $340 billion, but who’s counting?)… This is junk economics. Except at times of mass unemployment, trade deficits aren’t a subtraction from the economies that run them, nor are trade surpluses an addition to the economies on the other side of the imbalance…..

Now, Trump himself might be O.K. with large-scale deglobalization. But as we’ve seen, his beloved stock market hates the idea, and with good reason: Businesses have invested heavily on the assumption that a closely integrated global economy is here to stay, and a trade war would leave many of those investments stranded. Oh, and a trade war would also devastate much of pro-Trump rural America, since a large share of our agricultural production—including almost two-thirds of food grains—is exported. And that’s why things seem so incoherent…

The idea that the collapse of the aristocratic Roman Free State into the Roman Empire was due to wild dissipative partying—luxus, a vice caught from the Greeks and “Asiatics”, giving rise to avaritia, which then leads to ambitio and cupido imperii—was originally a meme put forward by those I regard as the true villains—plutocrats and political norm breakers—to avoid responsibility: A.W. Lintott (1972): Imperial Expansion and Moral Decline in the Roman Republic: “Imperial expansion in general did of course have divisive economic and political effects…

…This discord should not necessarily be interpreted as moral decline. In particular, radical politicians, who wished to be patrons of the plebs tried to use the profits of empire to satisfy plebeian grievances. By ancient standards there was nothing either new or wrong in this distribution of praeda, though the actual measures clashed with senatorial tradition. What was new was the determination with which politicians pursued their aims, which in turn reflected the strength of socio-economic pressures and greater competition in the Roman governing class. Affluence, new social customs and intenser political strife in the second century were all changes brought about at least in part by empire, but are not sufficient explanations of each other. They should not be wrapped up together and labelled ‘moral decline’.

In my view the tradition which ascribed the political failure of the Republic to moral corruption derived from wealth and foreign conquest, developed from the propaganda of the Gracchan period. Faced with the catstrophe of 133, some people claimed that Scipio Nasica Corculum was vindicated, the elimination of Carthage had brought ambitious demagogues and would-be tyrants. The destroyer of Carthage, Aemilianus, had to find another scapegoat. Disliking Greek luxury and effeminacy, he put the blame on Gracchus’ association with Pergamum and Manlius Vulso’s triumph. This view was reproduced by his contemporary Piso in his annales, while Nasica’s view was eventually incorporated in Poseidonius’ work. The views have become intermingled and confused in Sallust and later historians. They should not distract us now when we try to understand what changes, if any, in polit- ical mores were involved in the Republic’s collapse…

If you did not read this over at Equitable Growth Value Added a year and a half ago when it came out, you should go read it now: Emmanuel Saez (2016): Taxing the rich more—evidence from the 2013 federal tax increase: “In 2013, a surtax on high earners was levied to help pay for the Affordable Care Act at the same time as the 2001 tax cuts for high-income earners that were signed into law by President George W. Bush expired…

…The 2013 tax increase on high earners was the largest since the 1950s, and larger than the previous increase of the top tax rate by the Clinton administration in 1993…. How did the 2013 tax increase affect the behavior of the rich and the pre-tax incomes they reported on their tax returns?… There is a clear surge in… 2012 in anticipation … top 1 percent’s income share… from 19.6 percent in 2011 to 22.8 percent in 2012… before falling sharply back to 20 percent in 2013…. The spike in 2012 is due primarily to realized capital gains, which taxpayers can retime easily. But there is also retiming for other income categories….

What happened to top incomes in the medium-term?… The share of national income going to the top 1 percent income resumed its upward trend… by 2015 back up to 22 percent…. I estimate that only about 20 percent of the projected revenue increase from the 2013 tax hike is lost due to the behavioral responses over the medium term…. These findings echo the findings of earlier work analyzing the 1993 Clinton era tax increase, which also generated short-term retiming of top incomes into 1992 but did not prevent top income shares from surging…

It would seem that veryone serious except Peter Navarro, Robert Lighthizer, Larry Kudlow—and Donald Trump—knows that imposing tariffs on intermediate inputs is especially bad, especially destructive: Chad Brown: The Element of Surprise Is a Bad Strategy for a Trade War: “Trump’s decision to impose restrictions on intermediate inputs and capital equipment is a step backward…

…It goes against decades of government work to lower trade barriers so Americans have easy access to low-cost, high-quality components. This is a basic competitiveness strategy for any government that wants to encourage companies to invest locally and employ more American workers to create valuable products. Trump’s plan means American-based manufacturing and service providers will find it increasingly difficult to compete with Germany, the United Kingdom, Japan, South Korea, and throughout Asia—where tariffs on parts and equipment remain low. That would be bad enough.

Making matters worse is the administration’s “element of surprise.” That only amplifies the disruption to US businesses. President Trump may be using this tactic to avoid political pushback. But his sneak-attack tariffs are likely to turn out an unwelcome and startling disruption for the very same American businesses and workers he claims to be trying to help…

200,000 a month in payroll employment growth with a stable unemployment rate and no sign of wage growth acceleration means that we are not yet at maximum feasible employment: Jared Bernstein: Employment Breakeven Levels: They’re higher than most of us thought : “We know neither the natural rate of unemployment nor the potential level of GDP…

…As Alan Blinder recently put it: “For [the natural rate] to be useful you have to have at least a little confidence you know the number. You don’t need to know it to two decimal places, but within a reasonable range. If your range is 2.5 to 7, that doesn’t tell you anything.” This post is about a related number… the jobs breakeven level (BL), or the monthly, net change in payroll employment that’s consistent with a stable unemployment rate…. Back in mid-2016, when I was writing about this, economists thought the BL was roughly between 50,000-100,000… This prediction now looks off. For the past six months, the jobless rate has held at 4.1% while payrolls are up an average of 211,000 per month, on net. Why hasn’t faster job growth led to lower unemployment, as most economists would have predicted a few years back? The answer must be that there’s more labor market capacity than folks thought there was….

The climbing of the prime-age (25-54) employment rate and LFPR. Neither are back to their pre-recession peaks, but especially the prime-age employment rate is clawing its way back. In fact, prime-agers have recovered 4.4 out of 5.5 percentage points, or 80%, of their decline over the course of the recession. Prime-age men, whose employment rates have suffered a longer-term decline, have made back 76% of their loss; women have done better, clawing back 90%. So, economists need to update their BLs to accommodate some unknown degree of labor supply that we formerly discounted…. The punchline… the fact that we’ve been adding an average of ~200K jobs a month, while unemployment sticks around 4%, along with, importantly, tame wage and price outcomes, means that we must not yet be at full employment.

Without short selling, the current price of a speculative asset is the expected maximum valuation that will ever be given it by the non-forward looking. When the valuations by the non-forward looking become extrapolative, Katie bar the door!: Noah Smith: Lessons on Bubbles From Bitcoin: “Until there is a way to bet against an asset, its price will be set by the most upbeat buyer…

…The recent Bitcoin bubble wasn’t the first, and it might not be the last. Once in 2011 and twice in 2013, the price soared and then crashed… If you think there will be another, even bigger bubble somewhere down the line, then maybe any losses you took in the recent bubble may be made whole in time…. Basic finance theory says that if there’s no way to invest and profit from an asset’s decline, the price is determined by the most optimistic buyer…. This mechanism is a key part of almost every theory of financial bubbles…. Harrison and… Kreps… without short-selling, differing levels of optimism and pessimism would cause even r…Abreu and… Brunnermeier… Scheinkman and… Xiong…. Shleifer and… Vishny proposed to make this sort of constraint, which they grouped under the general heading of “limits to arbitrage,” a unifying theory of financial market failures…. Limits to arbitrage can help explain why Bitcoin has been so bubble-prone. Until recently, it was easy enough to take a long position, but expensive and risky to bet against the cryptocurrency. Things really changed in December, when U.S. regulators allowed the trading of Bitcoin futures…. Bitcoin’s price crashed….

Was this a coincidence? Maybe. The huge surge in demand for Bitcoin both inflated the bubble and caused a demand for a futures market. But the timing of the crash, right after the introduction of futures markets, is eerie…. This suggests that there’s a good and easy way for regulators to reduce the incidence of bubbles…. Allow more futures trading and other exchanges that let pessimists publicly register their pessimistic beliefs…. Keeping pessimists out of the market is a recipe for repeated bubbles and crashes, as overoptimistic speculators rampage unchecked. Given a level playing field, the bears can restrain the bulls.

@#$#@!*&%%!! Ana Swanson: Trump Proposes Rejoining Trans-Pacific Partnership to Shield Farmers From Trade War: “President Trump… [said] he was directing his advisers to look into rejoining the multicountry trade deal known as the Trans-Pacific Partnership…

…Trump… long criticized the deal and withdrew from it last January, in his first major trade action. The president has long maintained that he prefers to negotiate trade deals one on one…. Many economists say the best way to combat a rising China and pressure it to open its market is through multilateral trade deals like the Trans-Pacific Partnership, which create favorable trading terms for participants…. Senator Ben Sasse, Republican of Nebraska, said it was “good news” that the president had directed his economic adviser, Larry Kudlow, and his trade negotiator, Robert Lighthizer, to look into rejoining the deal. “The best thing the United States can do to push back against Chinese cheating now is to lead the other 11 Pacific nations that believe in free trade and the rule of law,” Mr. Sasse said in a statement…

This is an extremely strange piece: that if the “New Democrats” of the late-1980s and early 1990s tried to turn the Democrats into Eisenhower Republicans, Kabaservice wants to rescue the Republican Party by turning Republicans into New Deal Democrats: Geoffrey Kabaservice: The Dream of a Republican New Deal: “Kansas… Governor Sam Brownback’s ‘real live experiment’ in reckless tax cuts…

…[Paul] Ryan, who served as Mr. Brownback’s legislative director when Mr. Brownback was a senator, was the Republican Party’s most prominent cheerleader for the Ayn Rand-inspired idea that society’s “makers” should be lavished with tax cuts while “takers” should be deprived of a social safety net. The downfall of Ryanism, and the rise of Trumpism, indicates that the decades-long domination of the Republican Party by ideological conservatism is finally giving way to an outlook that, for good or ill, better reflects the party’s changed base. The white working class clearly wants to protect and build upon the public sector, not destroy it…. Republican voters are still inflamed by cultural issues but are nowhere near as hostile to government as most political analysts imagine…. It’s no secret that the interests of the party’s donor class have been sharply at odds with those of its base. But political parties ultimately have to deliver concrete benefits to their core constituents if they want to retain their support. And politicians have to respond to the needs and hopes of their voters, not just pander to their fears and hatreds.

Desperation focuses the mind. As the elections loom, Republicans must resist the impulse to become full-time campaigners instead of legislators. That would only reinforce the public perception of Congress as a dysfunctional mess and incumbents as swamp-dwellers more concerned with their political survival (and self-enrichment) than the national welfare. Instead, the party should approach the elections under the banner of an ambitious program to bring economic revival to the working class…. Rebuild our decaying national infrastructure… roads, schools, hospitals and other civic assets that have been squeezed by conservative cutbacks…. Vigorous support for universal entitlements like Social Security and Medicare (as opposed to means-tested programs that only benefit the poor), robust wage subsidies, a generous child care tax credit and high-skilled apprenticeship programs… a national version of a California proposal to make housing more affordable. A Republican campaigning on the back of a Trump New Deal could sell himself or herself as someone who shares the values of voters in the economically ravaged American heartland but also has a real program to address their problems. It would be a lot more persuasive than just touting the magic of tax cuts. The president would relish an initiative built around the most popular parts of his agenda; he might even find it in his self-interest to call Congress into a special session to pass it….

The idea of a New Deal advanced by Republicans, even as unorthodox a Republican as Mr. Trump, sounds like alternate-reality science fiction. But historically the Republican Party has not been an organization with a fixed identity. Its transformation into a conservative ideological force began to take root only in the 1960s and took half a century to complete. It’s hardly impossible for the party to move toward the economic center while continuing to embrace Trump-style cultural populism…. Before the New Deal, the Democrats were predominantly a rural, socially conservative agrarian party allied with a number of urban political machines, while Republicans were advocates of powerful government and the party of intellectuals, African-Americans and the native-born working class. A reborn Republican Party with economic policies oriented toward the working class isn’t beyond imagining…. The ongoing transformation of the party under Mr. Trump points toward a future when it’s more attuned to the economic needs of working-class Americans—and more popular than the conservative party that faces ruinous defeat in November.