• In Europe, a Fed President Urges Quantitative Easing - NYT
• BoJ holds off on fresh monetary easing - FT.com
• The Hidden, Unexpected Public Costs of a Stadium - Sports Economist
• Lessons at the Zero Bound from Japan and the US - William Dudley
• SNAP Rolls: They’re Elevated for a Reason - Jared Bernstein
• Why pre-tax inequality matters - Stumbling and Mumbling
• Urban Class Warfare: Are Cities Built for the Rich? - Spiegel
• Perma-Stimulus, Again - Paul Krugman
• What Our Words Don’t Tell Us - The Berkeley Blog
• Why Is Europe So Messed Up? - John Cassidy
• Variance Estimators That Minimize MSE - Dave Giles
• Despite Keynesians’ Victory, Economic Policy Holds - NYT
• The IRS tale--Times letter writers seem to get it  ataxingmatter
• Exchanging Currency and Electronic Money - Supply-Side Liberal
• Kenya's Central Bank Macroeconometric Model - Brookings
• Reasonable Approaches to Fiscal Consolidation? - Econbrowser
• BRICS shows G20 the way - The Interpreter
• Spending on America's Pets - Tim Taylor
• Keynes-Skeptics Find New Economic Poster Boy - Jonathan Chait
• Government Failure vs. Market Failure - Jared Bernstein
• Sharing Abuse Fairly - Paul Krugman
• The Bush Tax-Cut Failure - Economix

KLCC FM Public Radio
Oregon Legislature Moves to End Content Protections for Private Colleges
KLCC FM Public Radio
“In Central Oregon, we wanted to start a program at Central Oregon Community College and someone out of Eugene says you can't do that. So it seems to me like we have a regional problem, and if this problem was a fly, we're using a cannon to fix it.” ...

Tim Duy:

And Then There is Bernanke, by Tim Duy: Lots of Fed chatter in the last week. For openers, some background from Reuters:

It decided on May 1 to keep buying at an $85 billion monthly pace, and many economists say mixed economic data warrants keeping up the purchases through year-end.

But persistent warnings from more hawkish Fed officials had fanned talk that it might start to wind back soon.

The hawkish Fed officials would be Dallas Federal Reserve President Richard Fisher, Philadelphia Federal Reserve President Charles Plosser, and Richmond Federal Reserve President Jeffrey Lacker. These are often colorful voices, but as a general rule are not voices that will hold much sway with regards to the pace of easing. What is much more important is to what extent remaining policymakers are coming along to the same view. In other words, these three can ruffle their feathers all they want, but that ruffling should not be interpreted as consensus movement within the FOMC.

For consensus movement, turn more toward New York Federal Reserve President William Dudley. Great speech today, but I will narrow my focus with a few points I think are relevant for US policy. While Dudley is clearly concerned about deflation, this is important:

Similarly, current circumstances in the two countries are different, with deflationary expectations still in the process of being dislodged in Japan. The BoJ needs to push up inflation expectations, whereas in the U.S. the current level of inflation expectations is consistent with the long-term objective of the Fed.

This speaks to his concerns - or lack thereof - about the current US inflation numbers. My sense is that he will dismiss those low numbers as long as expectations stay anchored at 2 percent. Later he says:

Let me give a few examples of how my own thinking may evolve. In terms of our asset purchase program, I believe we should be prepared to adjust the total amount of purchases to that needed to deliver a substantial improvement in the labor market outlook in the context of price stability. In doing this, we might adjust the pace of purchases up or down as the labor market and inflation outlook changes in a material way. For me, the base case forecast is not the sole consideration—how confident we are about that outcome is also important.

Here he brings inflation back as an issue in determining the pace of purchases. But then in the next paragraph:

Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

Which sounds as if inflation is not the primary determinant in the decision to taper. The labor market is the primary determinant, which might be expected if he believes that low inflation numbers are not a relevant concern in the context of stable inflation expectations. In such a context, Dudley wants to see to what extent the labor market will feel the fiscal drag. In other words, be cautious about how far the low inflation story will travel in the FOMC.

To be sure, you can point to today's speech by St. Louis Federal Reserve President James Bullard as a reason that current inflation is relevant. From Reuters:

"Inflation is pretty low in the U.S.," Bullard told reporters after delivering a lecture in Frankfurt. "I can't envision a good case to be made for tapering unless the inflation situation turns around and we are more confident than we are today that inflation is going to move back toward target," he said.

But is this the consensus view? Robin Harding of the FT smartly tweets:

Re Bullard comments, low inflation has always been the main driver of QE for him. Entirely different for Bernanke, Yellen et al.

— Robin Harding (@RobinBHarding) May 21, 2013

I think Harding is right. With inflation expectations stable, from the consensus FOMC viewpoint tapering will be much more dependent on the labor outlook than current inflation.

Other voices include Chicago Federal Reserve President Charles Evans who raises the prospect of a sharp end to quantitative easing. From Reuters:

"Another approach, which doesn't get talked about that much, we could continue to go with $85 billion a month until we decide that absolutely we've seen enough improvement, and then bring it to a quick conclusion at that time," Evans told reporters after the speech.

"That would be a program going into the fall, I would think, because you can't really have that much confidence to bring it to an end" before that, he said. "I think at the moment the key issue is whether or not it is extremely likely that this (improvement) is going to be maintained over the next few months."

That last line is important - I think it means that if the labor market continues on its current pace through the rest of spring and into the summer (again, assessing the impact of fiscal contraction), then the tapering will begin in later summer or early fall.

In contrast, Minneapolis Federal Reserve President Narayana Kocherlakota argues that policy is still too restrictive:

The FOMC has responded to this challenge by providing a historically unprecedented amount of monetary accommodation. But the outlook for prices and employment is that they will remain too low over the next two to three years relative to the FOMC’s objectives. Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.

And, at a minimum, he would not favor reducing the pace of stimulus:

...this kind of analysis suggests that, currently, the gains from tightening related to improving financial stability are both speculative and slight. In contrast, the losses from tightening—in terms of pushing employment and prices even further below the Federal Reserve’s goals—are both tangible and significant. I conclude that financial stability considerations provide little support for reducing accommodation at this time.

I don't think he would favor it in three months regardless of the labor data.

So many voices, so many views. Looking through the noise, I think there is strong interest in tapering QE now that we have a string of job reports pointing to substantial and sustainable improvement in labor markets, but, given the fiscal contraction, little willingness to pull the trigger on tapering until we see another two or three similar reports. On net, I think disinflation concerns will move to the back-burner as long as inflation expectations are stable.

Still, at the same time, the Fed wants to keep its options open, as they are very much cognizant that past efforts to pull back on easing have been premature. Hence the talk that future moves could be up or down, which is really just plain confusing because why would the Fed even begin tapering if they thought there was a reasonable chance of having to reverse course the next month? It is even more confusing given that some officials seem to care about inflation, but others labor markets. The former says more purchases, arguably the latter says less. And I am not sure they have a consensus view of what would be the pace of tapering even if they all could agree on the forecast and relevant indicators. No wonder communications is a problem. Back to Dudley:

An important challenge for us will be to think carefully about what combination of actions and communications will best ensure that when we do eventually judge that it is appropriate to begin normalizing policy, the initial tightening of financial market conditions is commensurate to what we desire. There is a risk is that market participants could overreact to any move in the process of normalization.

It seems that lacking a more clear, consistent framework for the exit from quantitative easing, the risk of miscommunication is high. Hence, we are all looking toward tomorrow's speech by Federal Reserve Chairman Ben Bernanke to provide the clarity that appears very much needed.

Martin Wolf:

Humanity has decided to yawn and let the real and present dangers of climate change mount. ... Judged by the world’s inaction, climate skeptics have won..., however rational it may be to seek to lower the risk of catastrophic outcomes, this is not what is happening now or seems likely to happen in the foreseeable future. ...

The attempt to shift our choices away from the ones now driving ever-rising emissions has failed. It will, for now, continue to fail. The reasons for this failure are deep-seated. Only the threat of more imminent disaster is likely to change this and, by then, it may well be too late. This is a depressing truth. It may also prove a damning failure.

As he says, it's not too late, "Unless the most apocalyptic scenario happens, humanity may be able to curb emissions and buy itself time," but the clock is running and it's hard to see how meaningful change will come about without substantial changes in the political environment. Gridlock favors the skeptics.

PERS, revenue chatter continues; rally against illegal immigration: Oregon ...
OregonLive.com
SALEM -- Legislative leaders continue to talk behind the scenes about a possible deal on new taxes and cuts to public pensions, despite last Thursday's deadline imposed by Gov. John Kitzhaber. Partisan chatter echoed through the Oregon Capitol Monday ...

We are, as they say, live:

The Unemployed Need Bold, Creative Moves from the Fed

I'm not as happy with the Fed as I could be.

I did an interview with James Stafford of OilPrice.com:

Energy and Economic Growth

It covers a few other topics as well.

• Where Are The Deficit Celebrations? - Paul Krugman
• Fed Paper Urges Trading Revamp - WSJ
• Senior poverty is much worse than you think - Dylan Mathews
• Jeffrey Frankel on Alesina - Brad DeLong
• Fears of Widespread “Rate Shock” Unfounded - CBPP
• Macroeconomic Machismo - Paul Krugman
• Projected Medicare/Medicaid Spending Has Fallen by $900 Billion - CBPP
• Integrating monetary policy and macroprudential regulation - Vox EU
• Global Urbanization and the Governance Challenge - Tim Taylor
• German Wages and Portuguese Competitiveness - Paul Krugman
• The Oral Tradition of the IH metaphor - Gavin Kennedy
• Peggy Noonan's Broken Soul - Kevin Drum
• Economic Outlook: Moving in the Right Direction - FRBSF
• Climate change: After activism - The Interpreter
• Tumblr and Yahoo’s portal strategy - Digitopoly
• Do Big Cities Help College Graduates Find Better Jobs? - Liberty Street
• What's the best way to pass a climate bill? - Brad Plumer
• Regulating pot - The Register-Guard
• The Theory of Interstellar Finance - Paul Krugman

Note: The video starts around the 43 minute mark

Betsy Johnson makes first appearance in Oregon Senate since car accident
OregonLive.com
betsy johnson mugshot.jpg View full sizeSen. Betsy Johnson, D-Scappoose. SALEM -- Sen. Betsy Johnson returned to the floor of the Oregon Legislature Monday for the first time since she was injured in an April car accident, but she's not yet back for good.

and more »

Jeff Frankel says:

 ... Alberto Alesina has not been receiving his “fair share of abuse.”  His influential papers with Roberto Perotti  (1995, 1997) and Silvia Ardagna (1998, 2010) found that cutting government spending is not contractionary and that it may even be expansionary ...

More here.

James Kwak:

Liberty for Whom?, by James Kwak: ...Corey Robin's fascinating article on nineteenth-century European culture, Nietzsche, and the economic philosophy of Friedrich Hayek..., in very simplified form, goes like this. For Nietzsche, and for other cultural elitists of late-nineteenth-century Europe, both the rise of the bourgeoisie and the specter of the working class were bad things—the former for its mindless materialism, the latter  for its egalitarian ideals, which threatened to drown the exceptional man among the masses. One set of Nietzsche’s descendants..., which Robin focuses on in this article, is the “Austrian” school of economics led by Friedrich Hayek. People often like to think of the Austrians as advocates of liberty, both for its Economics 101 properties (free choice in free markets, under certain assumptions, maximizes societal welfare) and its moral properties. Robin ties Hayek’s conception of liberty, however, back to Nietzche’s. Hayek cared about liberty for ultimately elitist reasons: liberty is not an end in itself, but a condition that enables the select few to make the world a better place... And those select few are likely to be the rich, for only they have the requisite time and freedom from material concerns... This idea is obviously echoed in Ayn Rand’s novels... It has also trickled into the contemporary conservative worship of the ultra-rich. The phrase today is “job creators” (whatever that means), but it has the same moralistic overtones as in Nietzsche and Hayek—a class of people who are better than the rest of us, on whom we depend for our salvation and prosperity, and whom we should not presume to question or constrain through, say, safety regulation or higher taxes (“penalizing success,” in the jargon). I used to say that most Americans voted against their class interests because they thought they would one day be in the upper class... But today, five years after the financial crisis, with median income below where it was fifteen years ago and social mobility at developing-world levels, I can’t imagine many people really believe that vast riches are in their future. An alternative explanation is that many Americans just think the rich are better than they are and that it’s wrong to question your betters. ...

I think we sometimes forget that voting is multidimensional -- it depends upon more than economic interests (e.g. it's partly about choosing an identity and the other non-economic factors can dominate). In any case, not sure I buy that people "just think the rich are better than they are" argument. It didn't, for example, propel Romney to the presidency.

Cormorant control, public meetings, Jason Lee vs. Mark Hatfield: Oregon ...
OregonLive.com
Cormorant control, public meetings, Jason Lee vs. Mark Hatfield: Oregon Legislature today. Print · Janie Har, The Oregonian By Janie Har, The Oregonian The Oregonian Email the author | Follow on Twitter on May 20, 2013 at 6:00 AM, updated May 20, 2013 ...

Don't say you weren't warned. This is Paul Krugman, just a few days under 10 years ago:

Stating the Obvious, by Paul Krugman, Commentary, NY Times, May 27, 2003: "The lunatics are now in charge of the asylum." So wrote the normally staid Financial Times, traditionally the voice of solid British business opinion, when surveying last week's tax bill. Indeed, the legislation is doubly absurd: the gimmicks used to make an $800-billion-plus tax cut carry an official price tag of only $320 billion are a joke, yet the cost without the gimmicks is so large that the nation can't possibly afford it while keeping its other promises. But then maybe that's the point. The Financial Times suggests that "more extreme Republicans" actually want a fiscal train wreck: "Proposing to slash federal spending, particularly on social programs, is a tricky electoral proposition, but a fiscal crisis offers the tantalizing prospect of forcing such cuts through the back door." Good for The Financial Times. It seems that stating the obvious has now, finally, become respectable. It's no secret that right-wing ideologues want to abolish programs Americans take for granted. But not long ago, to suggest that the Bush administration's policies might actually be driven by those ideologues — that the administration was deliberately setting the country up for a fiscal crisis in which popular social programs could be sharply cut — was to be accused of spouting conspiracy theories. Yet by pushing through another huge tax cut in the face of record deficits, the administration clearly demonstrates either that it is completely feckless, or that it actually wants a fiscal crisis. (Or maybe both.) Here's one way to look at the situation: Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid — which didn't exist in the 1950's — and Social Security, which will become far more expensive as the population ages? (Defense spending has fallen compared with the economy, but not that much, and it's on the rise again.) The answer is that it can't. The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balk — they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control. At that point, either taxes will go up again, or programs that have become fundamental to the American way of life will be gutted. We can be sure that the right will do whatever it takes to preserve the Bush tax cuts — right now the administration is even skimping on homeland security to save a few dollars here and there. But balancing the books without tax increases will require deep cuts where the money is: that is, in Medicaid, Medicare and Social Security. The pain of these benefit cuts will fall on the middle class and the poor, while the tax cuts overwhelmingly favor the rich. For example, the tax cut passed last week will raise the after-tax income of most people by less than 1 percent — not nearly enough to compensate them for the loss of benefits. But people with incomes over $1 million per year will, on average, see their after-tax income rise 4.4 percent. The Financial Times suggests this is deliberate (and I agree): "For them," it says of those extreme Republicans, "undermining the multilateral international order is not enough; long-held views on income distribution also require radical revision." How can this be happening? Most people, even most liberals, are complacent. They don't realize how dire the fiscal outlook really is, and they don't read what the ideologues write. They imagine that the Bush administration, like the Reagan administration, will modify our system only at the edges, that it won't destroy the social safety net built up over the past 70 years. But the people now running America aren't conservatives: they're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what's going on, but when will the public wake up?

• Department of "WTF?!?!": Education Gap Weblogging - Brad DeLong
• America’s future early education system - Consider the Evidence
• Is there a stock-market bubble? - James Surowiecki
• Redeeming Bangladesh - Economix
• Europeans' Biggest Problem - Carola Binder
• The Reinhart-Rogoff Rally - Uneasy Money
• Search for yield - Antonio Fatas
• Telecom’s Big Players Hold Back the Future - NYT
• Helicopter money as a policy option - Vox EU
• Inequality and Growth, Discussed - Paul Krugman
• Observing character traits - UnderstandingSociety
• Mark 400, mark 3000: What’s the difference? - Economic Principals
• Financialization and the Incredible Shrinking Time Horizon - EconoSpeak
• US business seeks fast track trade deals - FT.com
• Sovereign debt concerns in 2013 - Econbrowser
• Breaking down the higher ed wage premium - Kids Prefer Cheese
• Who’s Rebalancing - Gloomy European Economist
• The Mythical 70s - Paul Krugman

Getting more doctors, nurses into rural Oregon should win Legislature's support
OregonLive.com
Finding an available doctor or a trained nurse practitioner close to home in Grant or Tillamook counties, to name just two of more than a dozen Oregon counties rated by the U.S. government as medically underserved, could be more of a trial than the ...

New Oregon Medical Pot Bill Would Pump Nearly $1 Million Into State Coffers
Boise Weekly
Proponents of a bill currently being floated before the Oregon Legislature say the measure would make Oregon home to an estimated 225 state-licensed medical marijuana retailers in the next two years. And with each retailer paying $4,000 a year to ...

and more »

Gavin Kennedy follows up on a recent post from Brad DeLong on Keynes and laissez faire:

Keynes on Laissez-Faire, by Gavin Kennedy: I read the Keynes quote below in Brad Delong’s Blog: As John Maynard Keynes shrilly stated back in 1926: “Let us clear… the ground…. It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no 'compact' conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened… individuals… promot[ing] their own ends are too ignorant or too weak to attain even these. Experience does not show that… social unit[s] are always less clear-sighted than [individuals] act[ing] separately. We [must] therefore settle… on its merits… "determin[ing] what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion. Comment My “Collected Writings of John Maynard Keynes” are kept in France, so I was able to re-read “The End of Laissez-Faire” from Volume IX: “Essays in Persuasion” (pp 272-94. Macmillan). The paragraph quoted by Brad Delong is fairly typical of the tone and language of the Essay. While Keynes’s main focus is on laissez-faire, it also strikes at the general proposition now widespread across the discipline, usually wrapped in the extreme neoclassical fable that: [Adam] Smith proclaimed the principle of the ‘Invisible Hand’; every individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good for all, so that any interference with free competition by government was almost certain to be injurious (Samuelson, Economics: an introductory analysis, 5th edition, McGraw-Hill, p 39). Keynes, rightly, points out that Adam Smith never used the words laissez-faire. And on the single occasion where he used the IH metaphor in Wealth Of Nations, it is a travesty to impute, let alone blatantly assert, that his words can be stretched to mean what Samuelson’s wild inference takes them to mean. However, on this occasion I shall not develop that theme. I want to return to laissez-faire, accepting how Keynes expresses his demolition of the popular idea that laissez faire has or ought to have traction in it. I completely agree. And before my libertarian friends jump on me, I should point out that the meaning drawn from the incident between the merchant, Legendre and the French Minister, Colbert, is not entirely innocent of a narrow self interest. ‘Laissez-nous faire’ is not advocated as a universal principle for merchants and their customers; it was a very partial principle for merchants only – “laissez-nous faire” cries Legendre (“leave us alone!”). And that is the point of my own libertarian reservations about the slogan itself and its origins. French markets were highly regulated and supervised by government inspectors. Yes, I agree an abomination. This placed consumers at the mercy of the decisions of local magistrates. Freeing merchants from the administrative burdens of the inspectors could, indeed, be a tentative step forward but freeing merchants from interference from competing merchants puts consumers at the mercy of the intentions of the merchants, which, as experience shows, is a high-risk strategy and generally one that has woeful consequences. As it was, experience in England and Scotland had been deeply marked by the monopolizing consequences of merchant tradesmen free, under governments, through the dead-hand of the Guilds in towns where they held sway, and ruthlessly protected by the Apprenticeship Acts that virtually eliminated competition. No laissez-faire there! Moreover, laissez-faire became the rallying cry for merchants and industrialists in the 19th century to rally support for resisting government legislation against the excessive hours in mills and mines and the employment of very young children and women. It was also the common slogan of the anti-corn law agitation aimed at lowering the wages of labourers under the guise of removing barriers to farm imports. Neither of these laissez-faire campaigns were the disinterested motives of the beneficiaries. Mill owners preferred laissez-faire to protect themselves from interference in the arduous, unsafe employment conditions and long hours they imposed on the males, females and children whom they employed; Mine owners likewise employed women and children underground at lower wages than adult men. Both wrapped themselves in laissez-faire flags to wipe up the blood of their employees when they demanded their own freedoms and not those of their labourers or their customers. On these issues I agree with Keynes.

• Old-fashioned Austerity - Paul Krugman
• The 1 Percent Are Only Half the Problem - NYT
• Unconventional Monetary Policies - The Irish Economy
• For Stock-Picking Advice, Don’t Ask an Economist - Greg Mankiw
• The Week Ahead: Ready for Some Fedspeak? - Dash of Insight
• Cookbook Econometrics - Reprise - Dave Giles
• Stein's Paradox (Statistics) - Normal Deviate
• The Liquidationist Urge - Paul Krugman

George Hall and Thomas Sargent advise Republicans who support the idea of debt prioritization to "ponder the actions" of Hamilton, Madison, and Grant:

Fiscal prioritisation: Lessons from three wars, by George Hall, Thomas J. Sargent, Vox EU: With the temporary suspension on the US Treasury’s statutory debt limit set to expire in late May, Republicans in the US House of Representatives have advanced the idea of debt prioritization. This proposal, put forward in the Full Faith and Credit Act (HR 807), would "require that the government prioritize all obligations on the debt held by the public in the event that the debt limit is reached”. Specifically, as an alternative to increasing the debt limit, the Secretary of the Treasury would be instructed to pay the principal and interest on Treasury securities held by public and the Social Security trust fund before paying the government’s other obligations. Hence the government would honor some of its promises (e.g. those to its bond holders) while threatening to break some of its promises to others (e.g. those to veterans and Medicare recipients expecting payments). This is hardly the first time that the US government has faced the question of whether it should discriminate among its different promises (see Hall and Sargent 2013). In 1868, immediately following the Civil War, the US faced what seemed a crushing debt burden with outstanding Treasury obligations exceeding 35% of GDP. While this may seem low by today’s standards, tax receipts as a share of GDP at the height of the war barely exceed 5% and fell to 3% immediately after war. Hence, debt was roughly ten times tax receipts. Today, the quantity of debt held by the public is between four and five times tax receipts. In order to create sufficient fiscal space to allow the government to rebuild the war-torn South and to honor the long-term pension obligations to Union soldiers and their families, many advocated discriminating across different classes of government creditors. None other than the president at the time, Andrew Johnson, stated in his 1868 Annual Message to Congress: “Various plans have been proposed for the payment of the public debt. However they may have varied as to the time and mode in which it should be redeemed, there seems to be a general concurrence as to the propriety and justness of a reduction in the present rate of interest. … The lessons of the past admonish the lender that it is not well to be over-anxious in exacting from the borrower rigid compliance to the letter of the bond”. ‘Lessons of the past’ What were these ’lessons of the past’ that might suggest less than rigid compliance to previous promises? Prior to the Civil War, the US had fought three major wars. Two of these wars, the Revolutionary War and The War of 1812, had also led to fiscal crises. In 1790, during the US’ first fiscal crisis, then Secretary of the Treasury Alexander Hamilton crafted a plan to restructure the Continental and state debts incurred in the course of the Revolutionary War. Under this plan, Hamilton gave first priority to foreign creditors, paying off Dutch creditors in full (see Table 9 of Garber 1991). Hamilton then reduced the promised interest payments to domestic bondholders while preserving their promised principal payments. This reduction in the interest rate was a form of repudiation, though perhaps Hamilton repudiated less than had been expected during the 1780s, earning him substantial gratitude from 1780s speculators. But not all government creditors fared so well. Holders of Continental Dollars received only 1% of their face value. Clearly Hamilton’s plan enhanced the credit of the new nation, but it was not until the resolution of the second US fiscal crisis that government debt would consistently trade at par. And it would not be for another 70 years that the Treasury could credibly issue paper money. Fast forward 25 years and the Federal government faced a second fiscal crisis during the War of 1812. During this conflict, the value of US Treasury bonds fell to 75 cents on the dollar as many creditors were unwilling to support an unpopular war and saw the nation’s capital burned to the ground. Despite this difficultly in borrowing, President James Madison resisted resorting to the mainstay of the American Revolution – an inflation tax – in financing the war and, in years following the war, awarded outsized positive returns to all holders of US debt. Late 1860s advocates of `lowering ex post interest rates' to be paid to Union creditors might legitimately appeal to Alexander Hamilton as an example; but they could not appeal to the precedent set by the Madison administration and its successors. While President Johnson advocated prioritizing government obligations so that bond holders would receive less then was promised, the 1868 Republican presidential candidate and former Union general Ulysses S Grant argued that to protect the nation’s honor, every dollar of government indebtedness should be paid in full. After winning the presidency, Grant stated: “no repudiator of one farthing of our public debt will be trusted in public place”. And as its very first act following the inauguration, the Congress passed ‘An Act to Strengthen the Public Credit’ committing the Treasury not to discriminate among different classes of creditors. The fact that the US government honored in full all of its obligations after the War of 1812 – including those to British creditors – established precedents that led President Grant and the Congress to preside over a period of post-Civil War deflation. This deflation had the effect of rewarding people who held Union obligations throughout the war, and by 1879, people trusted US government nominal promises to be ‘as good as gold’ for the first time in the country’s history. Alexander Hamilton discriminated among different classes of federal obligations – paying some in full while partially repudiating others. After Hamilton’s restructuring, Treasury debt traded at a discount relative to its par value for nearly 30 years. Contemporary advocates of engaging in fiscal discrimination might ponder the actions of Presidents Madison and Grant, who honored all existing federal obligations despite challenging fiscal conditions. References Garber, Peter (1991), “Alexander Hamilton’s Market Based Debt Reduction Plan”, Carnegie-Rochester Conference Series on Public Policy 35, 79–104. Hall, George J and Thomas J Sargent (2013), "Fiscal Discriminations in Three Wars", NBER Working Papers 19008, National Bureau of Economic Research, Inc.