Jim Arkedis has a provocative suggestion that the recent trend of administration officials talking down the prospects of talks with Iran is a kind of smokescreen designed to facilitate . . . talks with Iran:

Ross has been a staunch advocate of direct, secret back-channel diplomacy with Iran, and his addition to the equation may have something to do with this leak about Secretary Clinton’s “doubts”. Her remarks could have a one-two punch of lowering expectations for success with Iran while providing a bit of political cover to begin those hush-hush conversations that Ross is so fond of.

This could be right. But then again, the problem with this kind of speculation is that there’d be no way for an external observer to distinguish this approach from the approach of an administration that had just decided for some reason to abandon serious efforts at diplomacy with Iran.

The UK Labour Party’s 12-year grip on power seems set to end at the next elections. Conventional wisdom would attribute the Tories’ success to a mix of the bad economy, public fatigue with Labour scandals after more than a decade in office, and David Cameron’s success in moving the party to the center. Some see here a lesson for the Republicans—to win, you need to take advantage of Democratic mistakes, but also modernize the party. John O’Sullivan writing in National Review is having none of it and says there are no positive lessons to be learned from Cameronism. Alex Massie takes Sullivan’s article apart and then moves on to a more provocative point:

Equally, if a return to “true” conservatism is all that is needed for victory, why is it that, by the conservative movement’s own strict standards, there has been only one truly conservative president since the Second World War? Reagan is the only Republican president who hasn’t been written out the movement. This suggests that, far from being a guarantee of electoral success, Reaganism might better be viewed as an outlier, not a reliable template for future victories. The United States may well be, by international standards, a centre-right nation, but common sense dictates that the “centre” bit matters just as much as the “right”.

I’d venture that there’s something to that. Relatedly, try as some might to deny it, I just don’t see any way to deny that Bush-era governance was substantially more dominated by the conservative movement than was Reagan-era governance. Reagan was constrained by congress for a longer period of time (1983-88 years versus 2007-8) and dominated congress less definitively (even in 1981-82 he needed conservative Democrat votes in the House and he dealt with a much more robust bloc of moderate Republicans) at the height of his powers. His administration, meanwhile, included a number of members of the moderate wing of the party in positions of influence. Conservatives like Reagan better because he was more successful. But he was more successful in large part because his administration was less thoroughly dominated by the hard-right. That put them in a position to forge statesmanlike compromises on Social Security and the 1986 tax reform as well as engage in some course-corrections of policies that didn’t seem to be working. The conservative element was obviously there, but more moderate elements were crucial ballast and integral to Reagan’s successes.

Cato Institute senior fellow William Poole offers us the latest version of the new right-wing fad for 1920s-vintage economic thinking:

Federal policy is damaging the economy’s prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

One could imagine a world populated by beings who respond to government deficit spending by decreasing their own spending on a one-to-one basis in order to offset anticipated higher future taxes. Even then, it’s not entirely clear that you would get zero stimulative effect, but certainly it would be hard to conduct fiscal expansion in a planet populated by such beings. At the same time, it’s somewhat difficult to understand how these supremely calculating beings with no rate of time preference would ever manage to get involved in speculative bubbles or large debts in the first place. And it’s truly mysterious why this effect would exist during deficits caused by increased spending, but not by deficits caused by decreased revenues. And last of all, I find it baffling that a lot of people on the right persist in talking as if the stimulus plan was 100 percent spending and zero percent taxes when it was, in fact, almost 40 percent tax cuts—one of the biggest tax cuts ever. Perhaps if Obama had contrived to concentrate all the benefits at the very top of the income distribution he could get some credit as a tax cutter.

Paul Krugman offers some of the academic background on how we came to this point.

Brad DeLong wrote an excellent article several months ago titled “The Republic of the Central Banker” about the vast and often underappreciated power wielded by central bankers. His focus, naturally, is on the U.S. Federal Reserve system and its chairman. But the central banker who holds sway over the largest economic unit is no longer the Fed Chair. Rather, it’s the head of the European Central Bank, Jean Claude Trichet. His decisions have vast influence over the fate of the entire global economy. And he seems to not be doing a very difficult job, arguing confidently that there’s no risk of deflation and maintaining the ECB’s lifelong obsession with inflation.

This is a problem for Europe. But it’s a problem for us, too. American households are increasing their savings rates which is macroeconomically counterproductive in a downturn. Counterproductive but probably unavoidable considering the past years of dissavings. But the world needs someone to be reducing savings and generating demand. And many of the people in a position to do that live in Germany. But absent a central bank that appreciates the gravity of the situation and is interested in stimulating demand, it won’t happen. And all of us around the world will suffer for it. I think confidence had developed over the past few decades that whatever might come to pass, policymakers wouldn’t just repeat the blunders of the Great Depression era. But that confidence seems to some extent misplaced.

I’m not really sure I understand what policy goals are advanced by having the Secretary of State say in advance that she doesn’t think overtures to Iran will be successful. But this is clearly some sort of deliberate strategy since Secretary of Defense Robert Gates said more-or-less the same thing on Meet The Press yesterday. I appreciate that this is the view of some who served in the Clinton administration, but to be honest I really don’t understand it. The United States was cooperating with Iran in 2001 and 2002, and most indications are that throughout 2002 and 2003 the Iranians were actively seeking improved relations and, indeed, that their cooperation with us on Afghanistan was specifically motivated by a desire to improve the relationship. Unfortunately, that opportunity was lost. But it would be very nice to see a new opportunity created and seized.

Of course a peace effort might fail. But to me this reeks of an effort being set up for failure rather than embarked upon in earnest.

I recently heard Business Week economist Michael Mandal make a provocative point. Fortunately, it turns out that he’s put a related PowerPoint online so I can pull out some of his slides. But his basic thesis is that the current recession does not, in fact, represent a financial crisis that’s spilled over into the “real” economy; rather, he says the cause of the financial crisis is that growth in the recent past has actually been much less robust than people realized. That “looking back, the Internet Decade (1997-2007) was much weaker than we realized.” This starts with the observation that real wage growth during this period was terrible, even for college graduates:

This basic information is familiar to liberals, who spent much of this period being suspicious that capital was somehow sucking up all the gains. But then came the stock market crash:

But if the gains from Internet Decade productivity growth didn’t go to labor and didn’t go to capital, then where did they go? His thesis is that it largely didn’t exist at all. The extra money went into increased costs of health care (while wages have been flat, “total compensation” has gone up because employer-side health insurance premiums are higher) but health care isn’t actually dramatically better than it was ten years ago. Mandel doesn’t put it this way, but you can understand the situation as real, but modest, productivity gains being essentially offset by the decreasing productivity of the health care sector. Instead of really growing, we’ve just been borrowing from foreigners who were willing to invest on the theory that America was going to produce awesome innovations in the IT and biotech sectors that never really panned out:

Instead of the national balance sheet, you can look at the household balance sheet:

The good news, such as it is, about this interpretation of the crisis is that it implies that some fairly large proportion of the ongoing contraction is actually the vanishing of prosperity that to some extent was an illusion all along.

To be honest, I don’t know how plausible this really is. I’ve been alive for the past two years. It certainly looked at the time as if we were, first, facing a relatively minor recession. New housing starts were way down, due to housing having been overbuilt. This was leading to unemployment. At the same time, the dollar was falling and making US exports more competitive which was leading to a (gross) decrease in unemployment. The recession basically reflected the friction involved in this need for a shift in the real economy. But then it turned out that the same oversupply of housing that was leading to the collapse of the building trades as a source of employment was also going to cause a financial crisis. And then only after management of the financial crisis went wrong did the real economy start to get really bad.