Economic View: If You Have the Answers, Tell Me

Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.

But that certitude reflects bravado more often than true knowledge. So let me come clean and highlight three questions that perplex me. The answers to them may well shape the economy in the years to come.

How long will it take for the economy’s wounds to heal?

When President Obama took office in 2009, his economic team projected a quick recovery from the recession the nation was experiencing. The administration’s first official forecast said economic growth, computed from fourth quarter to?fourth quarter,?would average 3.5 percent in 2010 and 4.4 percent in 2011. Unemployment was supposed to fall to 7.7 percent by the end of 2010 and to 6.8 percent by the end of 2011.

The reality has turned out not nearly as rosy. Growth was only 2.8 percent last year, and the first quarter of this year came in at a meager rate of 1.8 percent. Unemployment, meanwhile, lingers well above 8 percent, and according to Ben S. Bernanke, the Federal Reserve chairman, is expected to keep doing so throughout this year.

Economists will long debate whether President Obama’s policies are to blame or the patient was just sicker than his economists realized. But there is no doubt that the pace of this recovery will come nowhere close to matching the one achieved after the last deep recession, when President Ronald Reagan presided over a fall in the unemployment rate from 10.8 percent in December 1982 to 7.3 percent two years later.

Looking ahead, an open issue is whether the recession will leave scars that prevent a return to jobless rates that were considered normal just a few years ago. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills and find their future prospects permanently impaired. But because we are in uncharted waters, it is hard for anyone to be sure.

How long will inflation expectations remain anchored?

In 1967, Milton Friedman gave an address to the American Economic Association with this simple but profound message: The inflation rate that the economy gets is, in large measure, based on the inflation rate that people expect. When everyone expects high inflation, workers bargain hard for wage increases, and companies push prices higher to keep up with the projected cost increases. When everyone expects inflation to be benign, workers and companies are less aggressive. In short, the perception of inflation — or of the lack of it — creates the reality.

Although novel when Professor Friedman proposed it, his theory is now textbook economics, and is at the heart of Federal Reserve policy. Fed policy makers are keeping interest rates low, despite soaring commodity prices. Why? Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip.

They are probably right, but there is still reason to wonder. Even if expectations are as important as the conventional canon presumes, it isn’t obvious what determines those expectations. Are people merely backward-looking, extrapolating recent experience into the future? Or are the expectations based on the credibility of policy makers? And if credibility matters, how is it established? Are people making rational judgments, or are they easily overcome by fear and influenced by extraneous events?

Mr. Bernanke and his team may learn that, in turbulent times, expectations can become unmoored more easily than they think.

How long will the bond market trust the United States?

A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.

Less obvious, however, is how far we are from the day of reckoning.

Winston Churchill famously remarked that “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” That seems to capture the attitude of the bond market today. It trusts our leaders to get the government’s fiscal house in order, eventually, and is waiting patiently while they exhaust the alternatives.

But such confidence in American rectitude will not last forever. The more we delay, the bigger the risk that we follow the path of Greece, Ireland and Portugal. I don’t know how long we have before the bond market turns on the United States, but I would prefer not to run the experiment to find out.

?

So those are the three questions that puzzle me most as I read the daily news. If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.

N. Gregory Mankiw is a professor of economics at Harvard.

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Tensions Rise as U.S. Officials Press Pakistan for Answers

John O. Brennan, the top White House counterterrorism adviser, said there were many questions about how the sprawling compound “was able to be there for so many years with Bin Laden resident there and it didn’t come to the attention of the local authorities.”

“We need to understand what sort of support network that Bin Laden might have had in place,” Mr. Brennan said during an interview with ABC on Tuesday.

The suspicions have intensified efforts by some members of Congress to scale back American aid to Pakistan, or cut it entirely, as lawmakers described Pakistan as a duplicitous ally undeserving of the billions of dollars it receives each year from Washington.

Still, Obama administration officials and some members of Congress seemed determined to avoid the kind of break in relations that would jeopardize the counterterrorism network the C.I.A. has carefully constructed over the last few years in Pakistan, and as the administration tries to end the war in Afghanistan, a conflict where Pakistan is a necessary, if difficult, partner.

On Monday, the Obama administration’s special envoy to Afghanistan and Pakistan landed in the Pakistani capital, Islamabad, and delivered what American officials described as a stern message to senior Pakistani military and intelligence leaders. The envoy, Marc Grossman, told them that patience in Congress was wearing thin, officials familiar with the discussions said.

Officials in Washington said they hoped to learn far more about the network that Bin Laden tapped for support by examining the trove of computer files and documents that members of the Navy Seals grabbed during Monday’s raid.

Top Pakistani officials have vehemently denied that Islamabad tried to harbor Bin Laden, and American officials said that at this point there was no hard evidence that any Pakistani officials visited the compound in Abbottabad, or had any direct contacts with Bin Laden.

Even as they pledged support for the United States’ deeply strained alliance with Pakistan, several top American officials said it was difficult to believe that Bin Laden could have spent years in a town populated by current and former Pakistani military officers — with a Pakistani military academy close by — without the complicity of some in the country’s government.

Senator Dianne Feinstein, the California Democrat who is chairwoman of the Senate Intelligence Committee, acknowledged that she had no evidence that Pakistan’s government knew where Bin Laden was hiding, but said the government had much to answer for.

“If they didn’t know, why didn’t they know? Why didn’t they pay more attention to it? Was it just benign indifference, or was it indifference with a motive,” she said.

A civilian official in the Pakistani government said he did not know if the Pakistani spy agency, the Directorate of Inter-Services Intelligence, helped Bin Laden hide or was simply unaware of his presence in Abbottabad. Either way, he said, the successful American raid was an international humiliation for the agency.

“I’m not denying the possibility,” the official said, referring to the ISI sheltering Bin Laden. “At worst, it’s that. At best, it’s total incompetence.”

He said he hoped the raid would lead Pakistanis — particularly military and ISI leaders — to recognize the deep credibility problem their county now faces internationally.

In his meetings in Islamabad, Mr. Grossman told Pakistani leaders they needed to take steps to stanch the tide of anger in Washington about Pakistan’s behavior, according to Obama administration officials familiar with the meetings.

In public, Mr. Grossman was more diplomatic, telling reporters in Islamabad on Tuesday that the United States was committed to its alliance with Pakistan and that Pakistan was “determined to curb terrorism.”

A senior Pakistani general on Tuesday repeated his government’s formal denials that the military or the ISI knew of Bin Laden’s location. Instead, he acknowledged a major intelligence lapse by the Pakistani police and security forces.

“To me, it’s a big embarrassment that the bastard was in this compound near the academy,” said the Pakistani officer, who spoke on condition of anonymity. “Clearly, the U.S. had better intelligence than we did about what was inside that compound.”

The general said Pakistan and the United States had cooperated in other counterterrorism operations in the Abbottabad area in recent weeks, notably a C.I.A. tip that led to Pakistan’s recent arrest of Umar Patek, one of the main Indonesian suspects in the 2002 Bali bombing.

The Pakistani government statement went further, saying that the ISI had “been sharing information with C.I.A. and other friendly intelligence agencies” about the Bin Laden compound since 2009.

Several American officials said they were puzzled about the statement, pointing out that the C.I.A. did not know about the compound until last August.

The raid has fueled anti-Pakistan sentiment in Congress, yet it is unclear — perhaps even unlikely — that there would be enough support to cut aid to Pakistan.

Speaker John A. Boehner, who just returned from a congressional visit to Pakistan and Afghanistan, said that any discussion about cutting aid or decreasing engagement with Pakistan in the aftermath of the Bin Laden strike was premature and that he would strongly oppose any such move.

? “We both benefit from having a strong bilateral relationship, and I think we need to use this moment to strengthen the ties between our two countries,” Mr. Boehner told reporters. “This is not a time to back away from Pakistan.”

? Senator Harry Reid, the Nevada Democrat and majority leader, also expressed reluctance about limiting aid to Pakistan, saying the country has been an anti-terror partner of the United States. “They’ve lost thousands and thousands of their soldiers fighting terrorists,” he said. “Now, this doesn’t mean we shouldn’t have more oversight, and I’m willing to do that.” ?

In Brussels on Tuesday, the national intelligence officer for South Asia, Neil H. Joeck, spoke about Pakistan at a closed meeting of ambassadors to NATO. According to people present for his presentation, which was based on a December 2010 National Intelligence Estimate on Pakistan, Mr. Joeck said American officials had little expectation that the Pakistani government would mount a serious campaign to wipe out Al Qaeda or Taliban safe havens in the most contested border areas of the country.

“He said there were simply too many ongoing suspicions of the U.S.,” said one foreign official.?

Steven Lee Myers reported from Washington, and Jane Perlez from Islamabad, Pakistan. Reporting was contributed by Mark Mazzetti, Carl Hulse and Eric Schmitt from Washington; David E. Sanger from Brussels; and David Rohde from New York.

 

Tensions Rise as U.S. Officials Press Pakistan for Answers

 

John O. Brennan, the top White House counterterrorism adviser, said there were many questions about how the sprawling compound “was able to be there for so many years with Bin Laden resident there and it didn’t come to the attention of the local authorities.”

“We need to understand what sort of support network that Bin Laden might have had in place,” Mr. Brennan said during an interview with ABC on Tuesday.

The suspicions have intensified efforts by some members of Congress to scale back American aid to Pakistan, or cut it entirely, as lawmakers described Pakistan as a duplicitous ally undeserving of the billions of dollars it receives each year from Washington.

Still, Obama administration officials and some members of Congress seemed determined to avoid the kind of break in relations that would jeopardize the counterterrorism network the C.I.A. has carefully constructed over the last few years in Pakistan, and as the administration tries to end the war in Afghanistan, a conflict where Pakistan is a necessary, if difficult, partner.

On Monday, the Obama administration’s special envoy to Afghanistan and Pakistan landed in the Pakistani capital, Islamabad, and delivered what American officials described as a stern message to senior Pakistani military and intelligence leaders. The envoy, Marc Grossman, told them that patience in Congress was wearing thin, officials familiar with the discussions said.

Officials in Washington said they hoped to learn far more about the network that Bin Laden tapped for support by examining the trove of computer files and documents that members of the Navy Seals grabbed during Monday’s raid.

Top Pakistani officials have vehemently denied that Islamabad tried to harbor Bin Laden, and American officials said that at this point there was no hard evidence that any Pakistani officials visited the compound in Abbottabad, or had any direct contacts with Bin Laden.

Even as they pledged support for the United States’ deeply strained alliance with Pakistan, several top American officials said it was difficult to believe that Bin Laden could have spent years in a town populated by current and former Pakistani military officers — with a Pakistani military academy close by — without the complicity of some in the country’s government.

Senator Dianne Feinstein, the California Democrat who is chairwoman of the Senate Intelligence Committee, acknowledged that she had no evidence that Pakistan’s government knew where Bin Laden was hiding, but said the government had much to answer for.

“If they didn’t know, why didn’t they know? Why didn’t they pay more attention to it? Was it just benign indifference, or was it indifference with a motive,” she said.

A civilian official in the Pakistani government said he did not know if the Pakistani spy agency, the Directorate of Inter-Services Intelligence, helped Bin Laden hide or was simply unaware of his presence in Abbottabad. Either way, he said, the successful American raid was an international humiliation for the agency.

“I’m not denying the possibility,” the official said, referring to the ISI sheltering Bin Laden. “At worst, it’s that. At best, it’s total incompetence.”

He said he hoped the raid would lead Pakistanis — particularly military and ISI leaders — to recognize the deep credibility problem their county now faces internationally.

In his meetings in Islamabad, Mr. Grossman told Pakistani leaders they needed to take steps to stanch the tide of anger in Washington about Pakistan’s behavior, according to Obama administration officials familiar with the meetings.

In public, Mr. Grossman was more diplomatic, telling reporters in Islamabad on Tuesday that the United States was committed to its alliance with Pakistan and that Pakistan was “determined to curb terrorism.”

A senior Pakistani general on Tuesday repeated his government’s formal denials that the military or the ISI knew of Bin Laden’s location. Instead, he acknowledged a major intelligence lapse by the Pakistani police and security forces.

“To me, it’s a big embarrassment that the bastard was in this compound near the academy,” said the Pakistani officer, who spoke on condition of anonymity. “Clearly, the U.S. had better intelligence than we did about what was inside that compound.”

The general said Pakistan and the United States had cooperated in other counterterrorism operations in the Abbottabad area in recent weeks, notably a C.I.A. tip that led to Pakistan’s recent arrest of Umar Patek, one of the main Indonesian suspects in the 2002 Bali bombing.

The Pakistani government statement went further, saying that the ISI had “been sharing information with C.I.A. and other friendly intelligence agencies” about the Bin Laden compound since 2009.

Several American officials said they were puzzled about the statement, pointing out that the C.I.A. did not know about the compound until last August.

The raid has fueled anti-Pakistan sentiment in Congress, yet it is unclear — perhaps even unlikely — that there would be enough support to cut aid to Pakistan.

Speaker John A. Boehner, who just returned from a congressional visit to Pakistan and Afghanistan, said that any discussion about cutting aid or decreasing engagement with Pakistan in the aftermath of the Bin Laden strike was premature and that he would strongly oppose any such move.

? “We both benefit from having a strong bilateral relationship, and I think we need to use this moment to strengthen the ties between our two countries,” Mr. Boehner told reporters. “This is not a time to back away from Pakistan.”

? Senator Harry Reid, the Nevada Democrat and majority leader, also expressed reluctance about limiting aid to Pakistan, saying the country has been an anti-terror partner of the United States. “They’ve lost thousands and thousands of their soldiers fighting terrorists,” he said. “Now, this doesn’t mean we shouldn’t have more oversight, and I’m willing to do that.” ?

In Brussels on Tuesday, the national intelligence officer for South Asia, Neil H. Joeck, spoke about Pakistan at a closed meeting of ambassadors to NATO. According to people present for his presentation, which was based on a December 2010 National Intelligence Estimate on Pakistan, Mr. Joeck said American officials had little expectation that the Pakistani government would mount a serious campaign to wipe out Al Qaeda or Taliban safe havens in the most contested border areas of the country.

“He said there were simply too many ongoing suspicions of the U.S.,” said one foreign official.?

Steven Lee Myers reported from Washington, and Jane Perlez from Islamabad, Pakistan. Reporting was contributed by Mark Mazzetti, Carl Hulse and Eric Schmitt from Washington; David E. Sanger from Brussels; and David Rohde from New York.