The case for fiscal stimulus

In this article for National Journal, I look at the arguments for a second fiscal stimulus. In light of the most recent data another fiscal boost is needed, and it had better be big.

This week, we learned that consumer confidence crashed in October to its lowest level since records began more than 40 years ago. This is far more worrying than a run of bad days on Wall Street. So severe a collapse in confidence -- forecasters had expected a big drop, but not this big -- is invariably the leading edge of a major recession, and unless governments act promptly and wisely, maybe a very prolonged one as well.

Several interacting forces are pressing the economy down. First, the credit system is broken. Good corporate borrowers cannot get financing to make new investments, or in some cases even to cover their payrolls and stay in business. Households are finding it harder to get loans as well, which is holding back recovery in the housing market. The government's $700 billion bailout was intended to preserve the flow of loans. Without it, things would be even worse, but the situation is still anything but normal. The Treasury Department is telling banks that they must lend, lend, lend; but they are weak, and a process of sudden "deleveraging" -- a collectively self-defeating effort to avoid risk by curbing credit -- cannot be easily switched off.

Second, households are adding up their net worth. Their homes are valued at much less than they were a year ago, and prices are still dropping. Their 401(k)s have fallen by a third or more. Jobs that might have looked safe even a month or two ago no longer do. People suddenly feel much more vulnerable. To repair some of the savings shortfall, they are spending less, causing sharply lower sales of inessential goods. This, of course, is putting many companies under extra pressure. As firms cut their profit forecasts -- which they are now doing en masse -- and start to lay off workers, consumers become even more worried, and try even harder to cut back. And so it goes.

On top of all this is the fog of uncertainty about where the economy is heading. Until recently, many consumers had been telling themselves that the economy and the stock market would bounce back. They seem to have changed their minds. The parallels with the 1930s that the Bush administration drew to win support for the bailout were hardly reassuring. And lately, economists have been striving to outdo each other in the gravity of their assessments. In the end, all of this alarm seeps through.

A depression like that of the 1930s seems, even now, so unlikely as to be almost impossible -- but in itself this is not very reassuring. Unemployment reached 25 percent in 1933. With government spending now much higher as a share of national income than it was back then, and with Congress, the administration, and the Federal Reserve Board all set on acting promptly and at sufficient scale, it is hard to see how a similarly massive and sustained contraction could happen again.

But unemployment in double digits -- say half of what it was in the 1930s -- is by no means unimaginable. Even if we are not headed for another Great Depression, we could easily be heading for the worst recession that most Americans have ever experienced. In fact, we most likely are.

You can read the whole article here. (The link expires in two weeks.)

McCain on taxes

I've had a lot of emails about a recent piece on McCain's failure to sell his main tax proposal--the refundable credit for health insurance. The article explained how the credit would leave most middle-income Americans paying less tax than under Obama's plans.

Both candidates have offered complex tax proposals. Proliferating alternative baselines (with or without the extension of the Bush tax cuts, with or without a "patch" for the alternative minimum tax, and so forth) deepen the confusion. Unable to fathom the details, voters are left to weigh the competing slogans. Mr Obama promises to cut taxes for 95 per cent of working families. Mr McCain says the rich need a tax cut, too. Guess who wins that argument.

Here is a fact you might not have noticed. It certainly seems to have slipped by most Americans. The typical US household would get a bigger tax cut under Mr McCain's proposals than under Mr Obama's. I know a few politicians who could do something with that.

Broadly speaking, Mr McCain proposes to leave the Bush tax cuts in place. Mr Obama proposes a big increase in taxes on people earning more than $250,000 a year, in order to cut taxes and increase subsidies at the bottom; for the middle, he too would mostly keep the Bush tax code. Middle-income households do come out slightly ahead under the Obama plan - but only if you leave out the effect of Mr McCain's healthcare proposal. The question is, why would you do that?

Mr McCain wants to abolish the tax-break for employer-provided healthcare and replace it with a refundable $5,000 credit. Mr Obama says that a family health plan might cost $12,000 a year - leaving families who buy their own policy $7,000 worse off. This is incorrect. So far as I know, Mr McCain has never taken the trouble to explain why.

Suppose a family currently has a $12,000 policy provided by an employer. Under the McCain proposal, instead of attracting relief as at present, this benefit would be taxed as ordinary employment income - but the extra tax paid would be more than offset by the new $5,000 credit. In the first analysis, nothing changes so far as employers are concerned: all the action is on the employee's pay cheque. The policy delivers a net tax cut to middle-income households and is enough to make the McCain tax plan on average a better overall deal for them than the Obama plan.

Odd, don't you think, that the McCain campaign should think this unworthy of emphasis?

As it happens, taken together, I prefer Obama's tax and health-care proposals to McCain's: I think McCain's health credit is good as far as it goes, but it does not go nearly far enough. Obama's plan would expand coverage much more, and it seems to me that this should be a key goal. However, the fact remains that McCain's plan would put more disposable income (net of taxes and health-care outlays) in the pockets of most middle-income voters.

Well, you would not guess this from the way the McCain campaign has dealt with the issue. Joe the Plumber and the preoccupation with Obama's thinking on redistribution has clouded what surely ought to have been the main thing, from a tactical point of view. Anyway, as many have pointed out, we are all redistributionists in principle. Republicans too believe in spreading the wealth around. Is McCain planning to abolish the earned-income tax credit? Is he proposing a flat-rate income tax with no exemptions? It is a question of how far, not whether.

Many of the emails I received began, "You are just wrong," and came from accounting firms, lawyers, and academics of one sort or another. I was initially disconcerted. What had I missed, I wondered? But no, it turns out, my correspondents had simply misunderstood McCain's proposal in one way or another--and I don't blame them for having done so. He is offering a refundable tax credit, not an ordinary credit (which can only be set against taxes owed) and not a deduction in taxable income (which would provide a much smaller tax saving); this credit would also be paid to people with employer-provided health insurance, not just to people who buy their own; and the existing payroll-tax exemption for health insurance would continue under the McCain plan (if this were abolished too, his plan would cut disposable income rather than increase it for many households).

These were the most popular reasons for believing I was mistaken, and for maintaining that the Obama proposals would give middle-income households a bigger overall tax cut. Even sophisticated voters have failed to get the message: McCain is offering middle-income American a bigger tax cut than Obama.

Am I naive to suppose that this would have been a stronger selling-point than Joe the Plumber? Wouldn't it have been a good idea to make sure this was understood?

How McCain lost the centrist vote

Mr Obama, for all his remarkable strengths, was beatable. The fact that he is not even further ahead in the polls underlines the point. Put his race to one side: in my view, the fact that he is black is as much an advantage as a disadvantage. But he is inexperienced and his voting record is firmly to the left. Independent voters have therefore had their doubts throughout and it is independent voters who decide elections. Mr McCain was the very man to appeal to these wavering centrists. Among Republicans he was uniquely qualified because of his reputation as a pragmatist and serial deviator from the party line. Yet he failed to exploit this advantage.

The choice of Sarah Palin as running mate was pivotal. Mr McCain's mistake was not his decision to choose a social conservative with no experience of national politics. He needed a running mate to energise his party's activists, who would otherwise have found the prospect of a McCain presidency uninspiring. And inexperience, in itself, is not a disqualification for high political office - if it were, Mr Obama would be ruled out, too. The first response to Ms Palin was everything Mr McCain could have wished. She appealed not only to the conservative base but to many independents as well. The instant contempt many Democrats expressed at her selection hurt them, not her, and the Republican ticket moved ahead in the polls for the first and only time in the race.

Against the odds, this was a position from which Mr McCain could have won. But two things had to happen for him to capitalise on this advantage. First, Ms Palin needed to withstand scrutiny. Second, Mr McCain, with the conservative base now in his pocket, needed to exploit the opportunity this gave him to move his campaign to the centre.

Letter from London

I've been visiting London and the north of England for the past few days. Since I moved to the US in 2005, I've neglected British politics somewhat. I look at the news now and then, but it all seems increasingly strange. The saga of Gordon Brown is completely bewildering to me--his popularity now restored by the worst financial crisis in the country's history? Whatever happened to "no more boom and bust"? Whatever happened to "prudence with a purpose"? (Allow me to mention a headline I once wrote for The Economist: "Gordon and Prudence--It's So Over." Little did I know.) It all seems such a long time ago.

And yet, in other respects, the more things change, the more they stay the same. Mohamed Fayed is on the front page of the Evening Standard still, this time questioned over an alleged sexual assault--which he vehemently denies. Peter Mandelson is back in government, and "Tory sleaze" is a resurgent theme: these stories seem to have the same Russian oligarch in common, which is a new twist, but still. When Mandelson left office for the second time, and the papers were saying his political career was over, I bet my friend and FT colleague Gideon Rachman a fiver that he would be back for a third spell in due course. And so it proved. However, Gideon now denies all knowledge of this wager. Did I dream it? I think not. I am searching for documentary support. Had blogs existed back then, I feel I would be in the money.

Private Eye is the fixed point around which the country revolves. Could anything be more English? The current issue has a disappointingly indulgent review of three new television programs about America:  travelogues looking at the United States as though it were another (much more vulgar) planet, narrated with effortless superiority by Stephen Fry, Simon Schama and Griff Rhys-Jones. I sampled all three, as it happens, and could not stand to watch more than five minutes of any of them. Simon Schama, striving for intellectual depth as well as flattering visuals, was worried about the water shortage out west. Driving through the Nevada desert, he talked about "paradise lost". Was it a green and pleasant land before the gluttonous appetites of Las Vegas stripped it bare? Who'd have thunk? Never mind, I am very fond of the Nevada desert.

Also from the current Private Eye, a feature called "Dumb Britain" compiles idiotic answers from TV quiz shows. It has this:

The Weakest Link

Anne Robinson: In education, what is a formal cap worn by academics and also a piece of equipment used by bricklayers?

Contestant: Trowel

As a friend said when I read that out to her, "Aw." But really, "The Weakest Link" is still in business? And Anne Robinson, I imagine, is still very stern and rude to her guests--who, if they prevail against her scorn and all odds, stand to win as much as Gideon owes me, or even a little more. How come she hasn't died of boredom?

Back to the Standard, and another very British story. A 16-year old is stabbed to death for no reason. The killer is sentenced to 12 years. He should be out for his 30th birthday. The judge is quoted: "This was an unprovoked attack, but I accept that your intention was not to kill when you used [the knife] to inflict that fatal wound and that you have behavioral and learning difficulties."

Yes, I dare say stabbing people falls under the heading of "behavioral difficulties". Calling Theodore Dalrymple. Get me back to the land of the sane.

More on "the end of capitalism"

What form will the backlash against lightly regulated capitalism take in the US? I ponder the question is this piece for the FT's Analysis page:

Even before the worst financial crisis since the 1930s bore down on the US this summer, the country seemed poised for an ideological shift. The administration of President George W. Bush was immensely unpopular. Anti-trade and anti-business sentiment was on the rise and both main political parties, in different ways, were responding.

The technocratic market-friendly liberalism espoused by Bill Clinton and the New Democrats was already much less prominent in Barack Obama's presidential campaign. As the country's economic difficulties have worsened, the pro-market theme has not so much subsided as disappeared. Mr Obama now is far more likely to talk about the bankruptcy of "trickle-down economics" than the need for competition and incentives.

John McCain, the Republican candidate, has yielded nothing to his opponent in the stridency of his recent denunciations of "Wall Street greed". The administration, meanwhile, has been forced to swallow what remained of its rhetorical commitment to market forces and deregulation with a $250bn bank recapitalisation - a plan that Hank Paulson, Treasury secretary, described as "objectionable" but necessary.

Where might this lead? Does the present upheaval, as some have speculated, point to the end of a distinctively American capitalism? On the whole, this seems unlikely - though the pressures on "American exceptionalism" have rarely looked so strong.

Read on here.

The final presidential debate

It was the best of the three, and way better than the useless second debate, for sure. The format worked well--sitting at a table seemed to encourage them to engage with each other--and the moderator Bob Schieffer did a fine job, asking shrewd, pointed questions and then following up. Both men raised their game, especially McCain, who of the two had far more ground to recover. We got a fuller discussion than before of most of the issues that came up--tax policy, for instance, and health care. But I doubt it has changed anybody's mind. Neither landed a heavy blow, and neither made a bad mistake--unless McCain's increasingly tiresome references to Joe the Plumber fall into that category.

A critical moment came when Schieffer asked for their opinion of each other's running-mate. Obama declined the invitation to attack, offering faint praise ("she's a capable politician") and saying that voters would make up their own minds. He will be criticized for that, but I think he was wise. Voters who think Palin a disaster don't need to be reminded of it by Obama, and voters who think she's a good choice wouldn't have been swayed. The main thing was for Obama to stay cool and collected, to avoid seeming angry or rattled. Especially with the economy in such a bad way, those are the traits that commend him to independents, and where he compares so favorably with McCain. His restraint on Palin served to underline them.

McCain's demeanor was much improved, I thought. He also scored a point or two in the tax discussion, criticizing Obama's penchant for "spreading the wealth around". His seeming moderation on Supreme Court appointments--''no litmus test"--will have pleased some independents (at the cost of annoying many conservatives). His best single line of the night was probably when he said he was not George Bush, and that if Obama had wanted to run against Bush he should have run four years ago: "I will take the country in a new direction."

I thought Obama had the better of the crucial exchange on health care. Both men got a bit bogged down in the technicalities. I wonder how many viewers followed what they were saying. But Obama emphasized that if you were happy with your existing insurance nothing would change, and that McCain's scheme would undermine existing employer-provided cover (which indeed it would; it is intended to). For most voters, that wins the argument. McCain's approach has virtues--employer-provided insurance is a bad idea--and Obama's estimates of the cost of his scheme are not at all plausible, but McCain has made a hash of explaining his own proposal, and it is fatally flawed in any case, because it does so little to improve coverage.

We saw a better McCain than the McCain of recent weeks, but it almost certainly comes too late. With the economic ceiling falling in, Obama's grace under pressure inspires more confidence than McCain's agitation, attenuated as it was for tonight's encounter. Obama has the momentum, and I saw nothing to change that.

Two readings on "the end of capitalism"

My column for the FT this week (mentioned here two posts ago) states my own view on the implications of the financial crisis for the future of capitalism--namely, that the effects outside finance will be limited, and this is not the end of capitalism as we know it. Here are two other interesting and forcefully expressed opinions.

Harold Meyerson in the Washington Post thinks the game is up for "unregulated capitalism":

In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled "The God That Failed."

Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. The fall of the financial system has been so fast and far-reaching that there's been no time to fully consider its implications for the reigning economic theology of the past 30 years. But with the most right-wing administration in modern American history scurrying to nationalize the banks, the question cannot be elided indefinitely.

What exactly do economic conservatives believe now that their god is dead? What's become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions?

No wonder we've seen a disoriented John McCain wandering the moors howling about Bill Ayers. What's he supposed to do? Admit that the Reagan-Thatcher faith in unregulated capitalism, to which every GOP presidential candidate was pledging allegiance just last winter, has collapsed?

Interesting to see this dismiss the Clinton and Blair administrations as mere extensions of the Reagan-Thatcher order. Actually I agree with Meyerson about that: they were. But I thought that the Democratic narrative upholds the 1990s as an example of how good things can be when intelligent, well-meaning people are in charge. In other words, good government is more a question of competence and good faith than ideology. To abandon that line, you have to consign Clinton and Blair to the trash.

I was also a bit puzzled by this:

McCain and Barack Obama disagree sharply on the government's role in bolstering the economy. Obama favors public outlays on alternative energy and education, which would not only create jobs but also make us more competitive globally.

What is this, "make us more competitive globally"? Surely that is the old, dead paradigm. Even as the piece reads its last rites, that Reagan-Thatcher way of thinking is stirring back to life. If you are going to dispense with market forces, I don't think you can afford to care very much about staying competitive globally.

The other piece, much more to my own way of thinking, is by Simon Jenkins. For many years (outside the specialist domain of economic commentary) he has been my favourite  British pundit, and one of the two or three best I have come across anywhere. Rigorous, liberal (in the old-fashioned sense), open-minded and surprising. See what you think:

So this is to be Brown's Falklands. Victory on Mount All-fall-down. Bonfire of the bonuses. Service in St Paul's. March-past by the Royal Troop of Derivatives Traders. Anthem to the Bankers' Brigade. Tomb of the Unknown Arbitrageur.

A fortnight is clearly a long time in ideology. What fun historians will have with October 2008. Do you remember the hoary old days when they let Lehmans go bankrupt and refused to guarantee bank deposits? Where were you when a governor of the Bank of England worried about inflation and something called moral hazard? How tables turn. Socialism is now cock of the walk, capitalism mugged by reality.

It is rubbish, total rubbish. Market failure has been compounded by brain failure of the discredited profession of economics, overwhelmed by journalistic wish-fulfilment and glee.

The banks have not been "nationalised", just deluged with money. They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.

Congratulations to Paul Krugman

Warmest congratulations to Paul Krugman on getting the Nobel prize. It was overdue (but then it usually is). I can't think of an economist who could match him at extracting deep insight from simple, ingeniously specified models--again and again, one thought, why did nobody else see this?--or whose forthcoming academic papers would arouse such excitement. He can be an irascible fellow. He often finds it hard to respect people he disagrees with. I think he is much too quick to accuse people of bad faith. But his detractors should not deceive themselves: he is a kind of genius.

As I've mused before, it was a significant loss to economics when he put scholarly work to one side to make himself the scourge of the Bush administration, not to mention an affront to the principle of comparative advantage. Economists of his quality are much harder to find than angry pundits, however effective, and serve a greater social purpose. An enlightened central planner would never have allowed it.

At least we can be sure that the prize won't go to Paul's head. As he pointed out a while back, the Nobel is a second-class award, conferring less distinction than the Clark medal. (Paul won that 16 years ago.)

Column: A system overwhelmed by innovation

The stunning scale of the interventions under way in financial markets - barely imaginable just weeks ago - make it seem that nothing will ever be the same. A crisis so grave, so weighted with ideological implications, must point to a grand political realignment, with much of what we thought we knew about the role of governments and markets overthrown. So it is argued, and so many people hope.

It is possible. It happened after the Great Depression. But I doubt that this crisis will change the world anything like as profoundly. In the end, I doubt it will even overthrow much of the conventional wisdom about states and markets.

Book review: The Closing of the American Border

Continue reading "Book review: The Closing of the American Border" »

Did conservatism overreach?

It's rarely a good idea to pick fights with one's friends--especially the clever ones--but I'll take issue with Gideon Rachman's column, "Conservatism overshoots its limit". Gideon writes:

The market for ideas - like the market for shares - always overshoots. Ideas become fashionable and get pushed to their logical conclusion and beyond, as their backers succumb to "irrational exuberance". Then comes the crash.

What we are experiencing now is the bust that has followed the 30-year bull run in conservative ideas that began with the Thatcher-Reagan revolution of 1979-80.

You can get a sense of how quickly the intellectual atmosphere has changed by picking up a copy of Alan Greenspan's The Age of Turbulence, which was published last year. Mr Greenspan, head of the Federal Reserve from 1987 until 2006, heaped praise on the magic of financial markets and decried the foolishness of those who called for more regulation: "Why do we wish to inhibit the pollinating bees of Wall Street?" he asked rhetorically. Why indeed?

Mr Greenspan was considered such a guru that last year Senator John McCain suggested putting him in charge of a committee on tax reform, adding: "If he's alive or dead it doesn't matter. If he's dead, just prop him up and put some dark glasses on him." But Mr Greenspan's reputation is now on the slide and Mr McCain has reinvented himself as a champion of regulation - and is denouncing the "corruption and unbridled greed that has caused a crisis on Wall Street".

This kind of ideological whiplash is what happens when an intellectual bull market crashes. The current financial crisis can be traced to three of the central ideas of the Reagan-Thatcher era: the promotion of home ownership, financial deregulation and a fervent faith in the market. Each of these ideas did sterling service for 30 years, increasing prosperity and freedom. But pushed too far - and combined - they have created a disaster.

This seems to me to conflate three quite separate points, one true, one false, and one questionable.

Continue reading "Did conservatism overreach?" »

No Depression

Here is a brave and very interesting piece by Larry Kotlikoff and Perry Mehrling. I wonder if it is correct.

Global markets have not been reassured by the coordinated interest rate cuts of several central banks or by recent congressional action, but they should be. Our bet is that financial markets will return to normal in short order and that the U.S. economy will squeak by with a moderate recession. Recapitalizing the banks and working out mortgages will take time, but the financial system will not collapse -- the government won't let it.

The markets, of course, seem to be factoring in some probability of collapse. Why is this wrong?

For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups. Yes, lots of small shoes may still drop, but the Paulson "buy-up" bill, and, ultimately, the Fed's ability to print money, provides the Treasury and Federal Reserve all the tools they need. The media don't seem to have noticed, but Section 113 of the bill authorizes government capital infusions into the banking system as necessary -- something the British government is now doing and the Swedish government successfully did in the recent past. That means any bank with a viable business will not be allowed to fail simply because it is temporarily undercapitalized.

Second, Uncle Sam (a.k.a. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke) is doing precisely what's needed to avoid the mistakes of the 1930s. With credit markets drying up, he's turning on the faucet by recycling our panic dollars back into the financial market.

The government is taking in our money (in exchange for Treasury bills) and using it to make mortgages and buy up the assets we're too scared to hold. It's doing this via the Treasury, the Fed, the Federal Deposit Insurance Corp., the Federal Housing Administration, the Federal Home Loan Bank, Fannie Mae, Freddie Mac and other appendages. It's starting to lend directly to large and small businesses whose usual sources of credit have become unavailable.

In short, Uncle Sam is becoming our new bank.

Read the whole thing.

Diminishing returns in the Nashville debate

It dragged. Obama and McCain both concentrated on talking-points that are, by now, tiringly familiar. And the format encouraged them. Neither man was ever asked to develop or elaborate. Moderator Tom Brokaw's chief concern was time-keeping, as if covering the ground and squeezing in a couple of extra lame questions from the audience was more important than subjecting any of the answers to examination. He might as well have said: "Please state your position on the economic crisis. Thank you. Please state your position on Pakistan. Thank you." At least Jim Lehrer tried to get them talking to each other in their first debate. Brokaw actually seemed keen to prevent it: pressure of time.

Though both candidates spent a while (and it felt like longer) on the economic emergency, I didn't feel that either's comments advanced the discussion, or seemed equal to the gravity of the situation. Almost the first words out of McCain's mouth were "energy independence"; almost the first words out of Obama's were "blame deregulation". We know, we know. Neither gave much indication that the crisis was leading them to think things through afresh; one wonders what it would take to do that. (Correction: both seemed keen to make Warren Buffett Treasury Secretary. He's too smart to take the job.)

Neither helped viewers to understand the rescue package or how it might be improved; neither conveyed much sense of understanding it themselves. Perhaps McCain was on to something with his idea about doing more to prevent mortgage foreclosures. (The idea is not new, but the emphasis was.) He said so little about what this might mean in practical terms, though, that I'm guessing that the idea just drifted past most viewers.

The most lively clash was, again, one we have seen before. McCain attacked Obama for his rashness in saying he would attack inside Pakistan to get bin Laden if the Pakistani government was "unwilling or unable". Obama reaffirmed the position, noting how odd it is for McCain to chastise him for such undiplomatic talk--as though "bomb bomb bomb, bomb bomb Iran" McCain was more given to gentle persuasion than he was. (a) Most Americans support Obama on this, and are right to. (b) Are we seriously asked to believe that McCain would not also go after bin Laden if the target presented himself? McCain wants to make his charge of "inexperience" stick. This is not the way. He loses this exchange every time he initiates it.

Obama as always was calm, collected, reassuringly intelligent, and vague. McCain seemed less confident intellectually, and a bit more given to bluster in compensation; he also looked old. What else is new? Neither seemed to me to score a decisive hit or make a big mistake. Few if any voters will have switched allegiance--which makes it Obama's night, given his recently widened lead in the polls. McCain needed a clear win. He got a draw, at best.

McCain and Palin and the uphill struggle

Mr McCain finds himself in a curious position. He entered the race as an experienced and well-known candidate, much-liked, with years in the Senate behind him. He was running against a virtually unknown novice, with barely any legislative achievements to boast of - and a black man with a funny name, to boot. Mr McCain was the known quantity, the safer choice, literally the elder statesman and Mr Obama had everything to prove. Yet with four weeks to go, the election is being run by both sides as though the opposite were true.

The Biden-Palin debate

Curiouser and curiouser. This was the Palin of earlier in the campaign--if not quite the Palin of the convention speech, at least the adequate though unspectacular Palin of the Gibson interview.

Weirdly, she seems to do better under pressure. From the vast heights of St Paul, she sank to the subterranean lows of the Couric interviews of recent days. Facing soft questions in an unintimidating setting, her performance in those clips was not just poor but pitiful. She looked terrified; she was faking it, and in a painfully obvious way. I literally cringed to listen to her talk about her foreign policy experience (Russia is just next door), her views on the Supreme Court (none that she knew of), and much else besides. Not merely unprepared for the vice-presidency, she seemed unprepared for conversation with anyone who picks up a newspaper now and then.

Tuning in this evening, every Republican I know was dismayed, and every Democrat jubilant, thinking the election would be as good as decided by 10.30 EST. But no. Back in the pressure cooker, with tens of millions watching, she again seemed relaxed and confident. She lost, by the way--Biden gave better answers, I thought--but she was not crushed by any means. It almost felt like victory, and McCain-Palin lives to fight on.

I long to read the inside story of preparing Palin for prime-time. What on earth did the campaign do to her between St Paul and Couric, to drain her confidence so and leave her looking like a gibbering idiot? Somebody must have decided that she had to turn herself into Biden within the space of a few days--a tall order, even supposing that the campaign needed a Biden rather than an anti-Biden, which she was ready, out of the box, to be.

She needed to cram, of course, but not in order to spew it out by rote in answer to any random question. The main thing--and perhaps, by tonight, this lesson had been learned--was not to pretend to be something she isn't, and not to claim knowledge or experience she plainly does not have. Living near an international border is not a grounding in geopolitics. Imperfectly memorising the names of a few foreign leaders does not cut it. The crucial thing was to seem steady, a quick learner, modest about her current breadth of knowledge, but of sound judgment and firm on certain basic principles. In striving to do well in the pop-quiz style of interview so beloved of the US media--any winner of Jeopardy, by this standard, would make a fine president--she surrendered her greatest advantage: authenticity. She had to refuse to play by those rules.

Whatever the reason--her sense of occasion, a change of coaching staff, who knows?--she did well enough tonight to lift the campaign's head back above water. She defaulted frequently to rehearsed talking points, and to topics she feels most comfortable with--notably energy. But what mattered most was that she never really floundered, and above all she never looked scared. She was herself. Some, certainly not all, of the damage of the past week is erased.

No light whatever was shed on policy issues. There were the obligatory pointless tussles about what Obama and McCain have or have not said about taxes, funding troops, and so forth. Biden pressed the linkage between Bush and McCain, and quite effectively--challenging Palin to point to differences. But her main riposte--this election must look forward not back, enough with the finger-pointing--will have struck many viewers as fair.

There was one real breakthrough. Did you notice? Asked which of their campaign promises might need to be delayed because of the financial crisis--a question put three times to Obama and McCain in their debate, without effect--Biden came up with an answer: "Well, the one thing we might have to slow down is a commitment we made to double foreign assistance. We'll probably have to slow that down." There's brave! That laughing you could hear was me.

Could Biden have been more effective? Maybe. I'm sure many Democrats will criticise him for failing to go for the kill. But I think he judged it just right. He was friendly and courteous, laughed at himself once or twice, and displayed a superior mastery of the issues without ever seeming overbearing. He was much more critical of McCain than of her. Altogether he seemed as likeable as Palin, and much more qualified. Perhaps he could have destroyed her by being more aggressive, but it would have been a risk. Palin in this confident mood would be no pushover. More aggression might have backfired, and could have aroused sympathy for his opponent. A clear win on points was all he needed, and that is what he got. Settling for this was wise. Obama and McCain go into the last round with the Democrat comfortably ahead.