Late May Archives Page

J. Bradford DeLong

But if you find any intelligent, liberal, and polite/well-intentioned/kind-spirited weblogs (okay, I'd be happy with two out of three), email me.

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Stuff Worth Reading: Daily

Wall Street Journal (alas! subscription only) | Economic Calendar | briefing.com | Morgan Stanley Global Economic Forum | Joshua Marshall | Economist | Arts and Letters Daily | National Journal (alas! subscription only) | Patrick Nielsen Hayden | blogdex | Andrew Tobias | Tom Tomorrow | Mickey Kaus | NYTimes Opeds | ZDNet Anchordesk | Metafilter | MediaNews | American Prospect | Global News Watch | Bookwatch |

DAYPOP 

Weekly:

Jonathan Rauch | Virginia Postrel | Red Rock Eater News Service | (Unofficial) Paul Krugman | In the Loop... | I, Cringely | Paul Krugman | NBER Working Papers | Tim O'Reilly | Jim Dunnigan | IMF What's New | Arnold Kling | Glenn Fleishman | Jim Henley | Dan Gillmor | Glenn Reynolds | Nightly Business Report | Spinsanity | Kevin Werbach | Chris Bertram | Charles Dodgson | Frankston, Reed, and Friends | Ted Barlow | Avedon Carol | Gary Farber | Avram Grumer | Glenn Kinen | Ginger Stampley | Charles Stross | Angry Clam | Adrian Hon | Max Sawicky |

Monthly:

Atlantic Monthly Online | Center on Budget and Policy Priorities | Institute for International Economics | Hal Varian | Andrew Odlyzko | Janes Information Group | CEA-JEC Economic Indicators | Clay Shirky | BEA Economy-at-a-Glance | NBER Business Cycle Dating | Culture Books |

2002-05-31: The World Population Distribution

I'm tired of maps of world population that lazily represent a country's population as evenly distributed throughout its territory. Who in India lives in the Thar Desert? How many people in Egypt live outside the Nile Valley? The map below--with each dot representing ten million people--is an attempt to show the real human population distribution in 2000.

The first thing that jumps out at you just how much humanity today is still concentrated in the old river-valley Eurasian agriculural heartlands: the Ganges-Indus and the China Coast-Yangtze-Yellow River regions, plus secondary population concentrations in Honshu, Java, along the Nile, and the Rhine-Thames (plus the mouths of the Niger, the Hudson, and the southern coast of Brazil.

Perhaps the most curious thing from the long-term structure of human population history is the Middle East. The quadrilateral from Greece to Ebypt to Iran to the Caucasus held perhaps half the human race 7000 years ago. The other earliest civilizations--India and China--have maintained their relative demographic weight. What happened to the Middle East?


2002-05-30: From David Reed: Did You Try Google?...

Thursday, May 30, 2002

DPR at 4:55 PM [url]:

Did you try Google?

It happened again. I told a friend about a new program. He wants a URL. I say "Did you try Google?" and he says "oh ... yeah." He doesn't need a URL.

Maybe it's just that we're used to having difficulty finding information about things. So few people have absorbed that Google creates a shared context that is bigger than all of our brains, so we humans don't need specific pointers most of the time anymore. We're slow learners.

But now when I sit in a meeting where I have an Internet connection, or conferencing on the phone in my office, I'm Googling all the time. The context it creates is immense and useful. Somebody might make an allusion to some literary idea - and I'm no longer in the dark. Somebody might mention a product or service - and I can order it immediately, or bookmark it.

When someone can't remember a fact or a name, I can usually get it quickly enough to be useful.

Google is my other memory. If it isn't yours, it probably will be eventually.


2002-05-29: The Russia Hand

Strobe Talbott (2002), The Russia Hand: A Memoir of Presidential Diplomacy (New York: Random House: 0375507140).


Strobe Talbott, Deputy Secretary of State in the Clinton administration and longtime Friend of Bill, has written his memoirs. They are extremely well-written, fascinating, informative, and a marvelous addition to the historical record. They give us a ringside seat at U.S.-Russian relations in the 1990s.

There were two great problems in Russian economic reform. The first was that nobody knew what to do: nobody had ever undertaken a transition from socialism to capitalism before. The second was that the Russian political nation did not know what it wanted to do. Outside of the former Soviet Union it was very clear what economies of transition wanted to do: they wanted to become as much like western Europe as possible as fast as possible. Inside the former Soviet Union it was not so clear.

A democratic, non-Communist Russia--one that is not ruled by those who regard themselves as Marx's viceroys on earth--has no interests opposed to and many interests aligned with the United States. On the political side, they share a common interest in making sure that Germany is no longer the "exceptional" nation that it was in the first half of the twentieth century. They share a common interest in general peace in Europe. They share a common interest that the emerging twenty-first century Asian superpowers--China and India--do not turn nationalist, expansionist, and totalitarian: a China with national socialist characteristics or a fascist India with anti-Islamism replacing anti-Semitism could be very bad for both. Most important, they both share a common interest in the political success of Russia's reforms: that the 1990s and 2000s not be looked at in retrospect as the period of "Weimar Russia."

Russia and the United States also have a common economic interest in a wealthy and prosperous Russia. From the U.S. standpoint, a wealthy and prosperous Russia is a way of not finding out whether there truly is an elective affinity in late industrializers between large-scale economic distress and expansionist fascist nationalism. From the U.S. standpoint, a wealthy and prosperous Russia is a much better trading partner than a poor and depressed one. And from the Russian standpoint, achieving rapid economic growth must rank second in its list of national priorities, behind only national defense (Russia has, after all, been conquered or come within an inch of being conquered five times--by Mongols, Swedes, French, and Germans (twice) in the last millennium).

The coincidence of strategic interests has thus left me puzzled that American-Russian relations on security issues were not even better in the 1990s than they were. Missile defense, Chechnya, Bosnia, NATO, and other disputes were about tools to be used to achieve what ought to have been seen as common goals, not about the goals themselves. Strobe Talbott's memoir does not make this much clearer to me. Talbott writes (p. 142) about often-learned and often-forgotten lessons: "The bottom line was clear: once again, we had taken too much for granted and left too much to chance. We should have spent much more time making sure that the Russians knew exactly what the communique would say, what it would mean, and how we should handle our differences in public..." But the root causes of the strategic disputes remain elusive. I got a sense that a large component of it was political shadowboxing--both the American and the Russian governments more interested in playing parts in front of their own domestic political audiences, and willing to do so because the points of friction were not truly serious.

On the other side, the coincidence of economic interests has not left me puzzled that more was not achieved in the Russian economy in the 1990s. There were two great problems in Russian economic reform. The first was that nobody knew what to do: nobody had ever undertaken a transition from socialism to capitalism before. The second was that the Russian political nation did not know what it wanted to do. Outside of the former Soviet Union it was very clear what economies of transition wanted to do: they wanted to become as much like western Europe as possible as fast as possible. Inside the former Soviet Union it was not so clear. Supporters of aggressive market reform like Yegor Gaidar coexisted with those like Victor Chernomyrdin who wanted to preserve as much of the bureaucratic-industrial structure of the past as possible, and with other factions that sought a return to the Communist past or a step forward to some other form of disciplined and non-capitalist society. Thus believers in reform always had at most a tenuous and temporary hold on power, and were usually outweighed in the Duma and in the Kremlin by the other factions--apparatchiks, believers in patronage, believers in stability, believers in authority, and so forth.

In such a situation, the American government can do only two things. First, it can come up with enough money in the form of aid to make the dislocations and privations of transition smaller. Second, it can speak with one voice to assert that the currents pushing for reform are indeed headed in the right direction, and that short-run political difficulties arising from faster economic reforms are likely in short order to be outweighed by longer-run political advantages as successful economic policies begin to have their effect. From my perspective, the most interesting thing about Strobe Talbott's book is how weakly the U.S. government's attempts to undertake these two things were.

One thread running throughout the book is the disconnect between President Clinton's commands that those aiding Russia "think big" and the tiny drips of aid money that in fact appeared. Talbot writes (p. 61) of how Clinton and Gore commanded Congress to "'think big and act big' on Russia, and how Clinton smiled when Newt Gringrich 'gave a stem-winding speech on the overriding importance of helping Russia as "one of the great defining moments of our time,"' whispering "'Ol' Newt's trying to... out-Russia me. That's fine, as long as I can keep him with me.'" Talbot writes (p. 58) of how "only when we came back to the President on March 23 [1993] with a[n aid] package worth $1.6 billion was he satisfied." After the end of the Clinton administration, Talbott and Clinton would talk in Clinton's house about how Clinton "...wished we'd done things differently.... [H]e thought we should have done more--much more--in our effort to underwrite the transition to a market economy. He regretted that we hadn't been able to mobilize international support early in the administration for the kind of program that Larry Summers and David Lipton tried to develop... to alleviate the pain and dislocation that came with privatization." But the money from the U.S. wasn't there. And without large-scale U.S. money, the pockets of the Europeans and the IMF are shallow indeed. $1.6 billion is, after all, only $10 per Russian.

Why was the U.S. government thinking of $1.6 billion totals for aid to Russia, rather than $50 billion? If the U.S. was willing to spend $8 trillion over a generation to defend itself against Communist Russia, shouldn't it be willing to spend more than $1.6 billion to try to keep Russia non-Communist? One would think so. But the Reagan administration's deficits in the 1980s had eliminated the ability of the U.S. government to undertake large-scale initiatives. By 1993 the fear was that the exploding budget deficit was on the brink of causing large-scale Latin American-style economic chaos. (Recall that Argentina's total debt at the moment of its late-2001 economic collapse was no larger a share of GDP than and growing no faster than the U.S.'s total debt in 1993.)

Talbott does, I think, owe his readers an obligation to connect the dots. If there truly was a disastrous waste of opportunity (and I think it probable that there was) in the failure of the U.S. to aid Yeltsin in his first term with more than an eyedropper, it is important to understand that the eyedropper was used not because Clinton and his staff did not understand what was at stake but because Reagan had taken away the hose.

A second thread running through the book is the failure of the White House to consistently back what weak reform factions were present within Yeltsin's government. On one side of the internal debate within the Clinton administration were Larry Summers and his right-hand David Lipton, believing that "...Russia's ability to make proper use of the G-7 money depended" on the continuing power of "pro-Western economic reformers like Yegor Gaidar... and Boris Fyodorov" and the eclipse of "those who believed in maintaining employment through subsidies to inefficient enterprises and churning out rubles, propelling Russia back toward the brink of hyperinflation." Summers's reaction to Yeltsin's firing of Gaidar and Fyodorov was, as Talbott recounts it (p. 117), "high dudgeon. Yeltsin, [Summers] said, was inflicting a major blow on Russia's chances... Larry asked me to get word to Clinton that he should intercede with Yeltsin immediately to keep Gaidar and Fyodorov." But Clinton's reaction was not what Summers had hoped. As Talbott tells the story: "'I'll do it', said Clinton, 'but it's a tough one. Their political requirements are at cross-purposes with good economics.' He went off to talk to Yeltsin, while I went looking for Mamedov.... His advice was... 'Don't get excited; don't overdramatize.... You want us to be a democracy... so don't be surprised when a president and a prime minister have to sacrifice a minister of two who are tarred with the brush of what are seen as failed policies. This is real politics. At least we don't shoot people...'"

Or consider the U.S. government's reaction to the infamous 1996 loans-for-shares scheme. Summers and Lipton were horrified. Talbott writes (p. 208) of their "...deep qualms... sure to make instant billionaires... cast discredit on the very idea of market democracy... bad economics, bad civics, and bad politics." The Yeltsin administration responded that the favor that loans-for shares did "the oligarchs was nowhere near as bad as the communist victory it helpd them avert." In retrospect Talbott appears to regret the White House's failure to back Summers and Lipton: "The Russians... calculation... was debatable, and we, as the reformers' constant backers and occasional advisors, should have debated it more with them. We would have done so if we'd had more time, more foresight, and more influence..." Or consider Al Gore's belief that "...Larry's arguments were right on the merits... but... needed to be balanced against the imperatives of Russian democracy, since they, too, exerted 'a force as powerful as gravity or thermodynamics.' Our policy, said Gore, ought to be a 'synthesis between the iron laws of economics and the hard realities of Russian politics'."

What Clinton, Gore, and Yeltsin seem not to have gotten was that doing the "politically smart" thing this year puts you behind the 8-ball when the year after next rolls around. You see, economic policies have consequences. In any but the shortest of runs, there is no trade-off between good politics and good economics. It is only if your economic policies work that you have a chance of being politically smart. The task of a leader is to figure out what good economics is, and how to reframe the situation so that good economics becomes good politics--not to figure out how much economic rationality to sacrifice to short-term political advantage.


Late May:

World Population Distribution | Google Is My Other Brain | Russia in the 1990s | Why Has the IT Revolution Come Slowly to Europe? | Institutions and Business Cycle Vulnerability | Nightly Business Report II | Trust, but Verify? | McKenna | Thinking About Unemployment | Potential Signature Lines | Berkeley Graduation: Great Expectations | Why Has U.S. Growth Been Relatively Rapid? | Knowledge Worker Productivity | Philosophy and Israel's Right to Exist | May's Strange Victory |


Greatest Hits:

| Early May | Freedom to Innovate? | Economic Forecasts | Let Us Now Praise Right Wing Hacks | The Silence of the Priests | Free Pants! | McCarthyite Nutboys in the OEOB | Republicans: The Stupid Party | Dan Kennedy on Bush Foreign Policy | Boneheaded Paul Kennedy | The Private Sector and Repairing One's Laptop

| April | International Productivity Comparisons | Krugman too Partisan? | Jose Bove | We Are Californians | Does It Matter That George W. Bush Is Dumb and Lazy? | Why There Will Be No Peace in Palestine | Tax Day | Nightly Business Report | Cognitive Anticipation | Dealing with Robert Skidelsky | Questions About India | Indian Retail Politics

|March| Twirlip of the Mists | Laptops Outside | Steel Tariffs | Trade Deficit | David Brock

|February| ipaqs | Eating Meat

Recent Entries:

2002-05-24: Why Has the IT Revolution Come Slowly to Europe?

The Economist reports on an OECD working paper--“The Role of Policy and Institutions for Productivity and Firm Dynamics: Evidence from Micro and Industry Data”, by Stefano Scarpetta, Philip Hemmings, Thierry Tressel and Jaejoon Woo. OECD working paper 329, 2002 <http://appli1.oecd.org/olis/2002doc.nsf/linkto/eco-wkp(2002)15/$FILE/JT00125006.PDF>--that tries to account for why both unemployment and productivity growth have been unsatisfactory in most of continental Europe over the past decade. Scarpetta et al. may finally have found the smoking gun linking labor and product market overregulation to poor economic performance.


How might the entry of new firms be influenced by labour- and product-market regulations? The study looks across several countries at the rates at which new firms are born and others die. In any given year, on average, about one-fifth of all firms are either new entrants or will close down. As many as 30-40% of new firms do not survive beyond their first two years.

It is often argued that one reason for low productivity growth in Europe is that high barriers to entry deter the creation of new firms. Not only are the administrative costs of start-ups high; it can also take ages to get a permit. Setting up a new firm takes, on average, seven business days in America, but 66 days in France and 90 days in Germany—reason to expect the rate at which new firms are created to be much lower in Europe than in America. Yet as the top chart shows, the entry and exit rate for firms is broadly the same in Europe as it is in America. The main exception is Germany, where the rate of corporate churning is quite a bit lower.

They argue that it is in technologically-dynamic rapidly-growing industries that European job-protection laws (that discourage initial hiring) and red-tape barriers to firm start-up and expansion have the most powerful effects.


Stefano Scarpetta, Philip Hemmings, Thierry Tressel and Jaejoon Woo, "The Role of Policy and Institutions for Productivity and Firm Dynamics: Evidence from Micro and Industry Data," OECD working paper 329, 2002. Summary: From an accounting point of view, two main factors seem to have played an important role in explaining the growing disparities in growth paths across the OECD countries over the past decade: differences in productivity patterns of certain high-tech industries; and differences in the pace of adoption of the new information and communication technology (ICT) (see Scarpetta et al., 2000). These two facts, in turn, raise the question as to why OECD countries -- that have access to common technologies and strong trade and investment links -- differ in their ability to innovate and adopt new technologies. This paper looks at the possible role of regulations and institutional settings, in both product and labour markets, in explaining this phenomenon. Product market regulations may contribute to both innovation and adoption by creating different conditions for the birth and expansion of innovative firms as well as for the exit of obsolete ones. Likewise, policy and institutions in the labour market may affect the costs of adjustment associated with the shift to a new technology, as well as the returns to innovation activity.

The paper comprises two main sections. Section 1 presents a number of stylised facts from firm-level data. It starts by reporting evidence on productivity effects generated by the expansion and contraction of existing units, as well as by the entry and exit of firms. A decomposition of productivity growth is performed for different manufacturing industries, as well as for some service sectors. The Section then investigates further the process of firm dynamics -- entry, exit and post-entry growth -- in different industries and countries. Section 2 sheds some light on how policy and institutions influence firm and industry performance. First, it assesses whether policy settings in product and labour markets help to explain the observed differences in firm entry rates. Second, it presents industry-level productivity regressions that include policy variables for a wide set of OECD countries.

Summary of empirical results

The main results of the firm-level analysis, which is based on data from the late-1980s to the mid-1990s, can be summarised as follows:

The econometric evidence suggests a number of ways in which policy and institutions may influence the patterns of productivity and firm dynamics. In particular:

Policy considerations

The empirical evidence presented in this paper suggests that aggregate productivity patterns depend on a combination of within-firm performance and firm dynamics: the specific contributions of these two factors vary across industries and countries, depending inter alia on the “maturity” of each industry and on market and regulatory framework conditions. As far as within-firm performance is concerned, the present results lend support to the idea that strict product market regulations -- as exist in many continental European countries -- may hinder multifactor productivity, especially if there is a significant technology gap with the technology leader.

There appears to be relatively straightforward evidence that strict regulations on entrepreneurial activity, and high costs of adjusting the workforce, negatively affect the entry of new (small) firms. However, the link with aggregate performance is less clear-cut in this case, insofar as greater firm dynamics is not univocally associated with stronger productivity performance. Nevertheless, these results offer a consistent interpretation for the observed cross-country differences in firm dynamics, which has some policy implications. In particular, they offer a rationale for the fact that new firms tend to be smaller and with lower-than-average productivity in the United States when compared with most European countries, but, if successful, they also tend to grow much more rapidly. The more market-based financial system may lead to a lower risk aversion to project financing in the United States, with greater financing possibilities for entrepreneurs with small or innovative projects, often characterised by limited cash flows and lack of collateral. Moreover, low administrative costs of start-ups and not unduly strict regulations on labour adjustments in the United States, are likely to stimulate potential entrepreneurs to start on a small scale, test the market and, if successful with their business plan, expand rapidly to reach the minimum efficient scale. In contrast, higher entry and adjustment costs in Europe may stimulate a pre-market selection of business plans with less market experimentation. There is no evidence in the available data that one model dominates the other in terms of aggregate performance. However, in a period (like the present) of rapid diffusion of a new technology (ICT), greater experimentation may allow new ideas and forms of production to emerge more rapidly, thereby leading to a faster process of innovation and technology adoption. This seems to be confirmed by the strong positive contribution made to overall productivity by new firms in ICT-related industries in the sample of OECD countries analysed in this paper.


2002-05-24 What Institutional Factors Make Economies Respond More or Less Well to Business Cycles/Shocks?

What Institutional Factors Make Economies Respond More or Less Well to Business Cycles/Shocks?

Dimensions of economic performance

Dear Adam:

The first question is, "What do we mean by vulnerability to macroeconomic shocks?" Two decades ago I would have said that our outcome measure would be a variance-based measures--the volatility of inflation, or the variance of output around (or, possibly, the average gap of output below) some potential-output measure that was largely invariant to short-run macroeconomic disturbances.

After the last two decades, such a separation between "trend" and "cycle" is much harder to maintain. In western Europe the combination of the productivity slowdown, tight monetary policy to fight inflation, labor market institutions, and a lack of political courage has given western Europe two full decades of super-normal unemployment. In its cumulative impact relative to the size of the economy at the time, the western European unemployment crisis now rivals the Great Depression in western Europe in the total unemployment point-years and cumulative output gaps associated with it. In Japan--I don't understand Japan. I do understand that a full decade with effectively zero growth in a place where trend real GDP growth should be 4% per year is unnatural.

Even in the United States, macroeconomic shocks over the past few decades seem to have cast very long shadows. It is not plausible to imagine that it was predestined before the world began that the IT revolution would substantially boost U.S. economic growth starting in 1996. The coming of the IT revolution was a long and drawn-out process, in which rising demands for information technology products induced invention, innovation, and learning by doing that produced extraordinary cost reductions that in turn fueled further expansions in demand. For fourteen years before the macroeconomic imprint became obvious, the U.S. had very high federal budget deficits and very high interest rates. By how much did these high interest rates reduce demand for information technology-using capital? By how much did this reduced demand delay the advent of the IT revolution? If Reagan's economic advisors had possessed the competence of, say, Eisenhower's, by how many years would the coming of the IT revolution have been advanced?

So I think I will have to take a much broader view of "vulnerability to macroeconomic shocks" than just "variance"...

So let me propose the following structure for the paper:


Does the "New Economy" Bring a New Business Cycle as Well?

J. Bradford DeLong


I. Introduction: look forward by looking back at the past two decades
II. Macroeconomic Shocks and Long-Run Growth: American fiscal policy and the coming of the information-technology revolution
III. "New Economy" Institutions and Business-Cycle Performance
A. Information Technology and the Future of the Inventory Cycle
B. Information Technology and the Average Level of Unemployment
IV. Modern Finance and New Vulnerabilities
A. Units of Account: the unexpected debt crises of the 1990s
B. Is More Information Better Information?: the .com bubble and the quality of regulation
C. Central Bank Power in the Information Age
V. Conclusion: Four Eras of Business Cycles: (i) before WWII; (ii) 1948-1982; (iii) 1982-2000 (the age of central bankers); (iv) today and tomorrow...


Of course, it is not yet clear to me what I am going to say...



Brad DeLong


Dear Brad

Where I have you slotted is on the topic of: "What institutional factors make economies more or less responsive to stabilization policy?" The reason I had you in mind for this was due to your various work on what you call (on your website) the "Macroeconomic Implications of the 'New Economy.'"

What I had in mind was something drawing on your Jackson Hole paper with Summers (though admittedly that focused more on deep micro changes) and your comments on how the new economy may limit stabilization policy, but asking you to place at least equal emphasis on fiscal as monetary policy. Maybe you don't think the implications of the new economy for the fiscal side, even on revenue collection or international tax competition, are as important as on the monetary side, but it would be worth spelling that out.

Conference draft is due June 15. Should you have something before then, i'd be happy to give you feedback, but I think you get that IF is trying to add to the supply of papers in macro/finance that you publish in JEP, so you know what we're looking for. Not that you need it, but there should be good press coverage at the conference (Business Week, Economist, and Wall Street Journal have already confirmed attendance).


2002-05-23: Nightly Business Report (May 30): Strong American Relative Growth

The Permanent Link to This Will Be: <http://www.j-bradford-delong.net/ToTW/Daily_Journal_2002_05.html#2002-05-23-nbr>

During the 1990s, U.S. economic growth by far outstripped that of the other major industrial economies. American industrial production grew by 46.6% over the decade; European industrial production grew by only as much; Japanese industrial production grew by only one-eighth as much as did American. A small part of this difference was due to differences in population growth--birthrates and immigration. However, most of the U.S. edge in economic growth in the 1990s came from just three factors: better business cycle management (and thus falling unemployment with stable prices); high investment (the result of curing the deficit, among other factors); and the faster diffusion of the new technologies and new forms of business organization associated with the coming of the information age.

These three factors were in their turn driven by an expert Federal Reserve; by a President and a Congress that cared deeply about responsible budgeting; and an open, flexible, and entrepreneurial society. The third of these factors is a deep, enduring American strength. The other two are not. Budgeting was not responsible in Ronald Reagan's 1980s. The Federal Reserve was not as skilled at managing the business cycle in the 1970s.

Thus, like it or not, continued good relative economic performance hinges on a good government. It thus hinges on our ability to elect good macroeconomic managers.

I'm Brad DeLong from Berkeley.


2002-05-22: Trust, but Verify?

The Permanent Link to This Will Be: <http://www.j-bradford-delong.net/ToTW/Daily_Journal_2002_05.html#2002-05-22-trust>

A correspondent from Washington writes that I have been grossly unfair to the Cato Institute--that Stephen Moore is not a representative Catonian: "Bill Niskanen's work, Jim Dorn's Cato Journal, Peter VanDoren's Regulation, Ian Vasquez's work on IMF and World Bank issues, Brink Lindsey's work, and the work generally at the Center for Trade Policy Studies are all serious stuff."

I've certainly learned a lot from Bill Niskanen and from the Cato Journal; I've learned something from Regulation, although IIRC things it reports as "facts" need to handled with tongs; people I trust tell me I will learn a lot when Brink Lindsey's Against the Dead Hand rises to the top of my to-be-read pile (and, IIRC, he had a nice piece in the Wall Street Journal about Argentina's institutional failures); and what things of Ian Vasquez's I've read I've found a waste of my time--shallow rhetoric that pretends all the hard questions about international macroeconomic and financial management don't exist.

Any more opinions on what I should put in the "Verify, but Don't Trust Even Then" circle, what I should put into the "Trust, but Verify" circle, and what I should put in the "Trust" circle?


2002-05-22: Trust, but Verify?

A correspondent from Washington writes that I have been grossly unfair to the Cato Institute--that Stephen Moore is not a representative Catonian: "Bill Niskanen's work, Jim Dorn's Cato Journal, Peter VanDoren's Regulation, Ian Vasquez's work on IMF and World Bank issues, Brink Lindsey's work, and the work generally at the Center for Trade Policy Studies are all serious stuff."

I've certainly learned a lot from Bill Niskanen and from the Cato Journal; I've learned something from Regulation, although IIRC things it reports as "facts" need to handled with tongs; people I trust tell me I will learn a lot when Brink Lindsey's Against the Dead Hand rises to the top of my to-be-read pile (and, IIRC, he had a nice piece in the Wall Street Journal about Argentina's institutional failures); and what things of Ian Vasquez's I've read I've found a waste of my time--shallow rhetoric that pretends all the hard questions about international macroeconomic and financial management don't exist.

Any more opinions on what I should put in the "Verify, but Don't Trust Even Then" circle, what I should put into the "Trust, but Verify" circle, and what I should put in the "Trust" circle?


2002-05-21: McKenna Lecture Draft

What--if anything--does a professional economist have to say about September 11, 2001? The terror-attack on the World Trade Center, its destruction, and the loss of life in the atrocity are the domain of political scientists, military strategists, students of religious fundamentalisms, and of researchers into psychological pathology. What does an economist--this economist--have to add?

I think that an economist does have something to add. I do not necessarily think that a professional economist's point of view is the most important point of view, or even an especially important point of view. But it does look at September 11 and what came before and after from a different perspective. And there is value in looking even at something very well known from a different perspective, and seeing what comes out.

First, however, I want to say a word about what the danger that threatened us on September 11, 2001, and continues to threaten us today, is. The big danger is not terrorism defined as the acts of a few crazed madmen armed with dangerous explosives or other weapons. The big danger is made up of nation-state governments that have or will come to power, state governments backed by wide (if shallow) popular support, state governments that believe that Americans--and/or Canadians, Britons, Frenchmen, Germans, Bosnians, Jews, capitalists, Indian Hindus, Indian Muslims, et cetera--are their enemies, and that many of their enemies--young and old, rich and poor, men, women and children--must die. Terrorists come from many backgrounds and are motivated by many causes. They become a danger only when they are the tip of a much larger spear.

In the course of the twentieth century, we have seen many governments and the people of many nations decide that others are their enemies, and must die. Think of the French preparing for war against Germany to recover the provinces of Alsace and Lorraine back before World War I. Think of the tremendous enthusiasm with which Germans volunteered for war when World War I broke out. Think of Nazi Germany. Think of Stalin's Russia, Mao's China, and Pol Pot's Cambodia--and remember that those four genocidal governments do not exhaust the twentieth-century list, and that they were even more dangerous to their own subjects than to outsiders.

Now let me move on to the way that those of us who served in the Clinton administration thought of these threats to world peace in the 1990s, and to how the grand strategy of the Clinton administration was tuned to deal with them. After that, I will discuss how our image of the world turned out to be grossly inadequate come September 11, 2001. And then I will discuss what our grand strategy should be in the aftermath of 911--for God alone knows what our current grand strategy in fact is.

Begin with the fact that the grand march toward political democracy and economic prosperity is not at all assured. We have a limited competence in managing economic growth. Times of economic distress are times of political danger for all countries. And the process of industrialization--the move from farmwork to factory and office work, from the country to the city, from a time when your life is very much like your grandparents' was to a time when each generation's experiences really are new--is bound to create considerable economic distress no matter how good its management, and can create immense distress when things go wrong, as they did back in the Great Depression.

Such times of economic distress in an economy and society caught halfway between agriculture and industry, between tradition and modernity, are times when people are prone to find solutions--to economic problems, to status anxiety, to uncertainty about who they in fact are--in allegiance to political movements that we might as well call fascist. It is a good word. "Fascism" has a number of earmarks, present in different proportions in different episodes, including: (i) a strong, authoritarian leader, (ii) a profound distaste for the disgusting compromises of interest-group parliamentary coalitions, (iii) a belief that society's goals are not chosen by the will of the people but imposed by the will of the leader, (iv) a belief that the most important aims are the collective ones of national or "racial" strength, (v) a belief that life is a hard struggle against mortal enemies, among which are (vii) some despised and relatively powerless group--usually Jews, but in Latin America usually "leftists," and (ironically) in India today Muslims.

Germany and Japan went through their high-fascist episodes in the first half of the twentieth century and in the process turned the world into an abattoir. History does not repeat itself, but it does rhyme. Will the emerging powers of the developing world--Russia, Brazil, China, and India--go through similar fascist episodes over the next half century? And if they do will they be as dangerous to their neighbors and the world as National Socialist Germany was?

The view of the Clinton administration was, "Let's not find out." Let's do whatever we can at all costs to avoid the emergence of a Weimar Russia, or a National Socialist China. Let's do whatever we can to maximize the rate of economic growth in the developing world, for it was the Great Depression that gave Hitler his chance in Germany and the militarist-fascists their chance in Japan. Let's hope that in fifty years the process of industrialization in the emerging great powers of the developing world--Russia, Brazil, China, and India--will be completed, and it will be as unthinkable that one of them will embark on a fascist-nationalist campaign of conquest against its neighbors as a death struggle between France and Italy, or America and Canada, is unthinkable today. Let's push for as much democratization as possible as fast as possible, not because democracies are never aggressive--consider France on the eve of World War I--but because your odds that societal goals will be peaceful are greater if they well up from the people than if they are imposed by a dictator.

And that was the grand strategy of the Clinton administration: world peace through world trade, world technology transfer, and world law. Naive? Yes. But better than the alternatives of, say, trying to keep the Chinese as poor as possible as long as possible that would virtually guarantee the emergence of an aggressive, expansionist China with National Socialist characteristics.

But those who thought up the grand strategy of the Clinton administration forgot about religion. Specifically, they forgot about the dangerously explosive interaction between (i) rapidly-rising literacy rates found in an urban middle class, and (ii) a religion based on a Holy Book that few in previous generations could read.

What happens? Bad things. On August 24, 1572, St. Bartholomew's Day, the Huguenots, the Protestants of Paris, were massacred by the soldiers of the French crown, by the nobles of the Guise faction, and by their own neighbors. The death toll reportedly ran into the tens of thousands. The then-Pope had a medal struck to celebrate and commemorate the downfall of the Huguenots. In public, at least, the Vatican then showed the same glee over the megadeaths as Osama bin Laden and his lieutenants showed over the mass-murder of more than 5000 people who happened to be in the World Trade Center at the wrong time.

Of course, there were the systematic atrocities on the other side: consider the systematic slaughter by Protestant English garrisons in Ireland of castaways from the wreck of the Spanish Armada of 1588; consider the rapes and murders committed by the largely Protestant landsknechts in 1527 during the sack of Rome; consider the Protestant Roundhead soldiers who used the stained-glass windows of Canterbury Cathedral for target practice--spiritual brothers of the members of the Taliban who destroyed the more than a millennium-old Buddhist rock sculptures of Bamiyan for sport.

If we have thought about it, we have given thanks that we have been spared the burden of living in the Age of the Protestant Reformation. But now we fear that we have been doomed, instead, to live in the Age of the Islamic Reformation. The parallels are striking: a dominant clergy and aristocracy that seem to have lost their way and succumbed to materialism; a rising literate middle class; the mass distribution of personal copies of the Holy Book so that people can read it and think for themselves; and then terror delivered not by isolated mad individuals but by those who have the approval and support of wide groups of "believers", as those who have convinced themselves that they bear the will of God take action, and people fight and die.

In Europe it--the Wars of the Reformation--lasted for more than 120 years--with one third of the population of Germany dying in the 30 Years War--before nearly everyone learned that reading ones private copy of the Holy Book did not make one the vessel of the will of God, and that waging Holy War was not a way to save the souls of others, but a way to lose ones own.

So what can be done to accelerate the process of social learning? If the parallel with Europe's Reformation holds true, it will take four full generations before the Islamic Reformation now being born will burn itself out. What can be done so that it will take onlyone generation before those who would otherwise become our latter-day Puritans and terrorists recognize that the ideology of "Believe in a loving God, infidel, or die!" is no way to approach the world? The U.S. and other governments seek to establish the principle that governments that sponsor wholesale terrorism that creates megadeaths do not long survive. This is a principle worth establishing, but to properly establish it requires military power and intervention forces that can carry out their missions with minimal cost in civilian lives.

All governments are stepping up their systems of surveillance and security, trying to guard and shield those places in our societies that are particularly vulnerable to mass terror. All governments should seek to diminish potential flashpoints: if there were only 1/10 as many Israeli settlers on the wrong side of the 1967 border, there would be fewer potential suicide bombers--1/100? 1/10? 1/3?--and the pit out of which we must climb would be less deep. But to those who know that the will of God requires the abolition of Israel as well as of the successor states of the Ottoman Empire, the root offense would remain. Thus military and political solutions--which must be pursued--are unlikely to be complete or comprehensive. Osama bin Laden is probably correct to think that his struggle will outlast him, and that there are dozens if not hundreds prepared to step into his shoes.

In the final analysis, the same forces will bring an end to the current atrocities that brought an end to the atrocities of the Age of the Reformation in Europe: despair at the awful consequences of the past generation of religious war, contact with others who think differently to bring about a recognition that ones own interpretation of the Holy Book is quite probably wrong, and is surely not cause to kill anyone, growing economic prosperity, and wise and tolerant leadership.

On the political side, it is not clear what we have. I don't know what the grand strategy of the Bush administration is. I don't even know what the strategy of the Bush administration is.

Colin Powell tries to isolate Iraq through diplomacy. Karl Rove, drafting the State-of-the-Union address, wins Iraq two new allies--North Korea and Iran, one of which, Iran, hated Iraq more than anything else up until the State-of-the-Union address gave them powerful interests in common. Colin Powell persuades Bush to call for Israeli withdrawal from the West Bank. Donald Rumsfeld blocks Bush's words from being backed by any deeds to put more than verbal pressure on Ariel Sharon. Karl Rove pushes the nice rhetorical line that the sponsors of terror are as guility of it and are as much enemies of the United States as the terrorists themselves. Donald Rumsfeld points out that the Saudis who financed Al-Qaeda and who finance Hamas today are necessary allies in any campaign against Iraq.

Maximizing world economic growth through free trade is not on the Bush administration's radar screen. Neither is getting people out of the Madrassas and into industry and commerce by dropping our import quotas that hobble Pakistan's textile industry.

On the political side it is clear what we need. We need an Italian Prime Minister who will remember the role played by Medieval Islam in the development and transmission of the knowledge of Classical Antiquity. We need a U.S. president who will remember the root meaning of "crusade" before he uses the word, and will have a wiser approach to dealing with the aftermath and consequences of U.S. military operations than that contained in the offhand remark that "we don't do nation-building." Political and military action needs to prevent future atrocities, punish criminals, and deter states, but not to declare war on entire peoples or to wage crusades.

On the economic side it is equally clear what we need. In Europe, the descendants of the fanatics of the Reformation and Counter-Reformation were offered a stake in a developing, more prosperous, expanding world. The more tolerant states were magnets drawing migrant craftsmen and merchants in. The less tolerant lost productive workers and entrepreneurs by the hundreds of thousands with the expulsion of the Jews and Moriscos from Spain, and of the Huguenots from France. As Albert Hirschman has pointed out, the eighteenth century was full of observations from Voltaire, Johnson, and others that increasing commerce made people "sweet"--that it led to a broadness of mind and a focus on how each could benefit from successful trade, a broadness of mind that did not fit with the denial of others' humanity necessary to wage holy war. And as generations passed, the places where narrow-mindedness and intolerance ruled became backward, poor, and unattractive even to their own subjects.

Today, however, it is not clear to many just how they benefit from the world's economic and political order. The gaps between rich and poor across the world are far greater than in any previous generation, and there are only a few muddied indications that the world will draw together over the next few generations. It is conventional in the industrial core today to blame development failures on the corruption and the incompetence of developing-country governments, and possibly on cultures badly aligned with the requirements of modern machine production. But this is at best a half-truth. Developing-country governments have on balance done a very bad job of climbing the cliff, but the industrial core has not let down many ropes for them to grasp.

For example, consider that in the 1970s Bangladesh was viewed by many as a country whose economic development was bound to be unsuccessful. By the start of the 1980s, however, Bangladesh had a thriving and rapidly-growing export-oriented textile industry. How long did it take before the Reagan administration slapped quotas on the importation of textile from Bangladesh? Five years. Today--fifteen years later--the economic development of Bangladesh, Pakistan, and many others continues to be hobbled by first-world quotas on textile exports that create unemployment and depress incomes.

As WTO head Michael Moore said more than a year ago, it is now the turn of the industrial core to deliver on its promises of market access to the developing world. The industrial core has obtained the safeguards for overseas investment, the rights of its firms to national treatment, and the protection of its intellectual property that it sought. Now it must fulfill its part of the deal: to provide demand for the products of the farms factories of the rest of the world world as it develops.

That, however, has been slow in coming. Where is the willingness of the industrial core to accept--to encourage--the large-scale imports of agricultural and textile products necessary for economic development to succeed in the next generation, and not four generations from now? Where is the recognition that the successful economic development of the world is essential for the long-run national security of even the strongest nation in the industrial core?

When governments cannot provide the very basics--law and order, education, hospitals, famine relief, the promise of a job, the promise of a standard of living better than ones parents saw--false prophets who promise a Puritan paradise and the imminent arrival of the reign of God have an easy time finding followers for their message. Nation-building cannot be something we "don't do." Nation-building and economy-building must be something that we "do do"--at the very heart of the long-run enterprise.

As Harvard's Jessica Stern put it in her testimony last September in front of the U.S. House of Representatives Committee on Governmental Reform: "When we talk about Pearl Harbor, we should also be thinking of a Marshall Plan."


2002-05-20: Thinking About Unemployment

The Permanent Link to This Will Be: <http://www.j-bradford-delong.net/ToTW/Daily_Journal_2002_05.html#2002-05-20-blanchard>

If you leave to one side the efficiency losses associated with western Europe's Common Agricultural Policy--its farm policy--and the poverty caused by European barriers to developing-country imports, there are two dimensions along which pan-European economic policy over the last generation can be severely criticized: the slowness with which the information-technology revolution has spread to Europe, and the extraordinary persistence of high european unemployment. Let me put the slow coming of the IT revolution to Europe to one side, and think only about unemployment.

Surely the most thoughtful and brilliant macroeconomist trained in the late 1970s is M.I.T.'s Olivier Blanchard. I his Robbins Lectures he turns his mind to summarizing what he knows about the nature, causes, persistence, and prospects of and for European unemployment. [Olivier Blanchard (forthcoming 2002?), The Economics of Unemployment: Shocks, Institutions, and Interactions (Cambridge: MIT Press:).] He gives us THE WORD.

What does he say?

The story he tells is a complicated one: it involves a slowdown in technological progress; a lag in recognition that keeps this slowdown from being accompanied by an immediate slowdown in aspirations for real wage growth; barriers to entry in product markets, and their erosion as a result of product-market deregulation; barriers to labor market flexibility, and their erosion as a result of labor-market deregulation; costs to firms of firing workers, the resulting creation of labor-market 'sclerosis' and high long-term unemployment, and the persistent difficulty in building a satisfactory theory to linke high long-term unemployment to a badly-performing labor market.

The overall lesson is neoconservative: Blanchard believes that policies have been set in motion--reductions in workers' bargaining power--that will yield large decreases in unemployment and large increases in real wages over the next decade or so. But even though the reduction in union power has been ongoing for fifteen years, so far its only large-scale visible effect has been... a reduction in the wage share. The reason is straightforward: in Blanchard's model, reductions in the real wage affect employment principally by inducing new firms to enter the market, and not by changing the number of workers that existing firms want to employ; thus the increases in unemployment that are to follow from reductions in workers' bargaining power are not "short run" but "long run" phenomena, requiring a lengthy process of firm start-up and expansion.

Why these beliefs--that high labor union power is a powerful source of unemployment, and that reducing labor union power increases employment only with very long lags? It turns out to rest on a basic modelling decision: Blanchard models the bargaining process between firms and workers as one in which (a) both sides agree to set the level of employment at whatever maximizes the firm's producer-side surplus, and (b) both sides then split the rents earned according to union power. Thus in Blanchard's model you cannot have a short-run situation in which firms respond to reduced wages and union power by increasing hiring--because union power and the wage level never have any effect on hiring in the first place. The channel through which changes in union power affect unemployment is a long-run one, that requires the entry and establishment of new firms before employment can rise.

I find this ingenious, but unsatisfactory as an account of why European unemployment has remained stubbornly high fifteen years after the wage share of national product began to fall sharply. It seems to me that perhaps too complicated an analytical apparatus has been deployed here. What's wrong with the belief that fifteen years ago a large chunk of European unemployment was "classical"--produced by a real wage that was stuck at too high a level, the result both of insider-outsider union dynamics and unrealistic aspirations for real wage growth--and that today a large chunk of European unemployment is "Keynesian"--the result of the fact that aggregate demand is too low?

I am profoundly ignorant about the European situation--I have to borrow an informed opinion from Andy Rose up at the Business School whenever I need one--but that European unemployment has shifted over the 1990s from primarily classical to primarily Keynesian would be the first hypothesis I would entertain, yet it is not clear to me from his Robbins Lectures why Olivier Blanchard--who is, on this topic and others, Il Maestro di Color che Sanno--dismisses it.


"The increase in the overall [European] unemployment rate, from 1.7% in the early 1960s to 11.0% in the mid 1990s, together with the large dispersion in unemployment rates across countries, from 4.0% in Switzerland to more than 20% in Spain in the mid 1990s."

"In the recent past, a broad consensus appears to have emerged, based on both shocks and institutions. It goes roughly like this: Some time in the 1970s, the period of fast technological progress which had characterized the post-war period... came to an end.... Aspirations and wage demands continued at the old pace for some time, leading to a decrease in employment, profitability, and capital accumulation. Low, even negative, real interest rates initially softened the impact in the 1970s, only to increase and make things worse in the 1980s. Since the mid 1980s, success stories, among them the Netherlands and Ireland, have typically been associated with the reverse process, with wage moderation leading to an increase in employment, profitability, and capital accumulation. Most other European countries now appear to be following suit."

"Stories which blame the increase in unemployment on the rise of the welfare state simply rewrite history. But some programs indeed became more generous in the 1960s, when times were still good and countries thought they could afford a more generous social insurance system. Others were extended in the 1970s and the 1980s when times turned bad, and governments tried to temper the effects of adverse shocks on unemployment. In the last 15 years, as it has become clear that some of these earlier changes had been counterproductive, changes have gone mostly the other way. These evolutions also play a role in explaining both the rise, and the more recent fall in European unemployment."

"the slowdown in productivity was smaller in the United States than in Europe, and this may explain in part why the increase in unemployment was more limited in the United States. But, leaving this aside, the United States appears to have institutions which lead to a much more stable natural rate than Europe."

"Lecture 1 focuses on the role of shocks. To do so, I construct what may be one of the simplest models to think about unemployment, a model in which profit maximizing firms use labor and capital, where the interest rate is given, and the wage required by workers is decreasing in the unemployment rate. I use the model to explain the evolution of European unemployment, from the effects of the productivity slowdown
on the 1970s, to the gyrations of real interest rates in the 1970s and 1980s, to the role of wage moderation in the sharp declines in unemployment in the Netherlands and Ireland since the mid 1980s--the so-called Dutch and Irish miracles."

"Lecture 2 focuses on the role of... product and labor market regulation and deregulation.... I introduce... monopolistic competition in the goods market, and bargaining between firms and workers in the labor market. I then use the model to provide an explanation to may be one of the most puzzling aspects of European unemployment, the persistence of unemployment for most of the 1990s, despite a very large increase in the profit share in most continental European countries from the mid-1980s on."

"Lecture 3 focuses on... the effects of employment protection. I show that employment protection makes the labor market more sclerotic.... Sclerotic markets exhibit much higher long-term unemployment, and this leads me to explore an old theme in the literature, namely that long-term unemployment does not exert much effect on wages."

"As workers revise down their estimated underlying rate of technological progress, g(a*) will steadily converge to g(a). But as workers use too high a growth rate to compute a*, a* will diverge from a for a while, until eventually returning to a over time. To get a sense of magnitudes, suppose that at time t = 0, g(a) decreases from 5 to 2%. Figure 3 then shows the evolution of log(a) and log(a*) over time if lambda = 0:9. In this case, log(a*)/log(a) reaches a maximum of 10% roughly 10 years after the start of the slowdown, and then returns to zero over time. The point of this exercise is simple: The effect of the decrease in the rate of technological progress can be fairly large (equivalent to a 10% wage push," an increase of z of 10%), and the maximum effect may happen after some time, here after 10 years."

"The higher wage leads firms to decrease the ratio of labor to capital over time. The ratio reaches a minimum after 9 years. And the lower profit rate leads to lower capital accumulation, with the trough taking place 16 years after the initial shock. Lower capital and a lower labor-capital ratio both lead to a decrease in employment, and a corresponding increase in unemployment. The increase in the unemployment rate is largest after 10 years, equal to about 8%. The associated loss in output (relative to its balanced growth path value) 10 years out is equal to nearly 10%."

"Going back to European unemployment: The argument developed in this
section suggests that, some of the increase in unemployment which would
have taken place in the 1970s was instead shifted to later, to the 1980s and
maybe even to the early 1990s. Put another way, the evolution of interest
rates helps explain why high equilibrium unemployment persisted into the
1980s, although it still leaves us short of a convincing explanation for why
it persisted well into the 1990s in most countries."

"To summarize: The focus of this first lecture has been on shocks, and how
they lead to changes in equilibrium unemployment. I have argued that the
decrease in the rate of technological progress was at the root of the initial
increase in European unemployment, that monetary policy shifted some of
the increase from the 1970s to the 1980s, and that wage moderation is at
the root of the recent unemployment miracles."


"two apparently surprising macroeconomic evolutions in most
European countries from the mid{1980s to the late 1990s, a large decrease
in the labor share as a proportion of GDP, together with the persistence
of high unemployment. I believe that this evolution is best explained in
terms of labor market deregulation:"

"How could Portugal sustain such a major shift in factor income distribution without larger macroeconomic consequences ? A full answer will have to wait until I have developed a model in the next two sections. But here is preview: Part of the increase in the labor share reflected an increase in the bargaining power of workers, indeed bad news for unemployment. But part of the increase in the labor share was due to the removal of barriers to entry in the goods market, good news for investment and for unemployment."

"Putting things together, note that product and labor market regulation are each characterized by two parameters:

The persistence of high unemployment through the 1990s, coupled with sharp declines in European labor shares from the mid-1980s...

"The model we developed earlier suggests a natural interpretation for
this joint evolution, namely a decrease in the bargaining power of workers,
starting some time in the mid-1980s. As we saw, such a shift can initially
generate both a decrease in the real wage and in the labor share, and either
no improvement (if the contract curve is vertical) or an increase (if the contract
curve is upward sloping) in unemployment. Both implications seem to
fit the facts. Under this interpretation, the rewards in terms of employment
are still to come. Indeed, the current decline in unemployment, a decline
which appears to be a decline both in actual and in equilibrium unemployment
(as inflation shows no sign of increasing yet), may be a sign of things
to come."


"Recent theoretical and empirical research has shown that employment
protection indeed changes the nature of the labor market. It makes
it more sclerotic: Flows decrease, individual unemployment duration
increases, and so does the proportion of long-term unemployed."


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OECD, 1999, OECD Employment Outlook, OECD.
Petrolongo, B. and Pissarides, C., 2000, Looking into the black box: A
Economics of unemployment. Lecture 3. 41
survey of the matching function, CEP Discussion Paper 470, LSE.
Pisani-Ferry, J., 2000, Le plein emploi, mimeo, Conseil d'Analyse
Economique, Paris.
Pissarides, C., 1985, Short run equilibrium dynamics of unemployment,
vacancies, and real wages, American Economic Review 1985, 676{690.
Pissarides, C., 1990, Equilibrium Unemployment Theory, Basil Blackwell;
Oxford.
Pissarides, C., 2000, Equilibrium Unemployment Theory, Second edition,
MIT Press.
Prieto, A., 2000, L'introduction d'une allocation chomage degressive en
France en 1992. quel impact sur la reprise de l'emploi?, mimeo, Thema
and Crest-Insee.
Shapiro, C. and Stiglitz, J., 1984, Equilibrium unemployment as a discipline
device, American Economic Review 74, 433{444.


2002-05-18: Potential Signature Lines

"In 1266 Pope Clement IV rebukes the Bishop of Maguellonne in southern France for minting coins with the legends, 'There is no god but Allah' and 'Muhammed is his prophet': such imitation money is, it seems, 'displeasing to God and unprofessional in a bishop'".

--James Buchan, _Frozen Desire_, p. 52.


"Important. Antidisclaimer. This e-mail is not and cannot, by its nature, be confidential. En route from me to you, it will pass across the public Internet, easily readable by any number of system administrators along the way. If you have received this message by mistake, it would be ridiculous for me to tell you not to read it or copy to anyone else, because, let's face it, if it's a message revealing confidential information or that could embarrass me intensely, that's precisely what you'll do. Who wouldn't? Likewise, it is superfluous for me to claim copyright in the contents, because I own that anyway, even if you print out a hard copy or disseminate this message all over the known Universe. I don't know why so many corporate mail servers feel impelled to attach a disclaimer to the bottom of every e-mail message saying otherwise. If you don't know either, why not e-mail your corporate lawyers and system administrators and ask them why they insist on contributing so much to the waste of bandwidth."


"I'm sick of all this talk of weapons of mass destruction. What we need is a creature of mass destruction. Introducing the swamp monster 2003..."

--Michael DeLong


THE ULTIMATE CONSPIRACY THEORY:

"It was the Carlyle Group, working hand-in-glove with the British East India Company and House Harkonnen. Nothing would be allowed to disturb the spice monopoly. ['Remember the tooth']"

--mbs


'I am told you have abandoned writing... set your face towards work in the fields.... Remember you not the condition of the cultivator faced with the registering of the harvest-tax, when the snake has carried off half the corn and the hippopotamus has devoured the rest? The mice abound in the fields. The locusts descend. The cattle devour. The sparrows bring disaster upon the cultivator. The remainder that is on the threshing floor is at an end, it falls to the thieves. The value of the hired cattle is lost. And now the scribe lands on the river bank and is about to register the harvest tax. The janitors carry staves and the Nubians rods of palm, and they say "Hand over the corn" though there is none. The cultivator is beaten all over, he is bound and thrown into the well, soused and dipped head downward. His wife has been bound in his presence, his children are in fetters. His neighbours abandon them and are fled. So their corn flies away. But the scribe is ahead of everyone. He who works in writing is not taxed, he has no dues to pay. Mark it well.'

--Alan Gardiner (1941), "Ramesside Texts Relating to the Taxation and Transport of Corn," _Journal of Egyptian Archaeology 2, pp. 19-20.


'"Hub [that is, the central computer] isn't a civilian?" Ziller asked. "Hub might be depressed and *disturbed*? Is this something else they didn't tell me about?"'


The best-known private library of the tenth century was that of Arethas (c. 850), Archbishop of Caesarea, in Cappadocia. His library probably contained several dozen volumes...


"On the political scale from left to right, I rank myself modestly as 'above'..."

--Marc Beyer


What would our history look like if it were to be viewed from a great distance?...

"You're really a tribe? Do you make stealth V/STOL attacks on other tribes and boil prisoners in pots and eat them like God-Empress Victoria's tribe did with the Communists? This is just so exciting!"

--Mariama Xi


"The [market system] has... been the first to show what human activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades. The [market system], during its reign of scarce one hundred years, has created more massive and more colossal productive forces than all preceding generations together. The subjection of NatureÕs forces, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization, whole populations conjured out of the ground--what earlier century had even a presentiment that such productive forces slumbered in the lap of social labor?"

--Karl Marx and Friedrich Engels (1848)


WOMAN: Well, how did you become King, then?

ARTHUR: The Lady of the Lake,... [angels sing] ...her arm clad in the purest shimmering samite, held aloft Excalibur from the bosom of the water signifying by Divine Providence that I, Arthur, was to carry Excalibur. [singing stops] That is why I am your king!

DENNIS: Listen. Strange women lying in ponds distributing swords is no basis for a system of government. Supreme executive power derives from a mandate from the masses, not from some farcical aquatic ceremony.

ARTHUR: Be quiet!

DENNIS: Well, but you can't expect to wield supreme executive power just 'cause some watery [censored] threw a sword at you!

ARTHUR: Shut up!

DENNIS: I mean, if I went 'round saying I was an emperor just because some moistened [censored] had lobbed a scimitar at me, they'd put me away!

ARTHUR: Shut up, will you? Shut up!

DENNIS: Ah, now we see the violence inherent in the system.

ARTHUR: Shut up!

DENNIS: Oh! Come and see the violence inherent in the system! Help! Help! I'm being repressed!


"I'd much rather lose the ability to control a few toes than lose all my emails with no hope of retrieval. There's more of "me" in those emails than there is in my toes."

--Rich Baker


"The solar neutrino shortfall has probably been cleared up." "In a good way? Or in a WE-HAVE-300-YEARS way?"


"For a Westerner to trash Western culture is like criticizing our nitrogen/oxygen atmosphere on the grounds that it sometimes gets windy, and besides, Jupiter's is much prettier. You may not realize its advantages until you're trying to breathe liquid methane."

--Neal Stephenson


"I really do believe that the Moral Law Is Written in Fiery Letters on the Empyrean (except for the bits about letters, the empyrean, fire and writing)."

--Robert Waldmann


2002-05-17: Berkeley Graduation

Friday evening I shook the hands of 160 graduating seniors who had majored in PEIS--Political Economy of Industrial Societies--at Berkeley. We stood at the world's foremost public university, 2300 years after the founding of the first institution that could be called a public university, to celebrate the intellectual achievements of a portion of the graduating class of 2002.

Now we Berkeley faculty are very fortunate, for the conditions under which we work are much much more favorable for education than were those back when the Great Library of Alexandria was founded. We have over 50 percent literacy worldwide, and our books cost us $20 each. They had 4 percent literacy, and their books cost them the equivalent of $5000 each.

This is fortunate, for the citizens of California ask much more from Berkeley than the Lagid kings of Hellenistic Egypt asked of their Great Library. They sought an ornament for their court, a source of amusing diversion, and an instrument of Greek acculturation. The citizens of California ask Berkeley to be a creator of scientific knowledge, a source of cultural excellence, an engine of economic progress, and a fount of political wisdom.

I felt Friday night that I was laying a burden on those students who had majored in PEIS. All graduating California residents knew that the citizens of California had invested $100,000 in each of their Berkeley educations in the belief that the education will help them accomplish great things. And we need great things from all of our graduates. Never has the pace of scientific and technical advance beeen greater, never has the world been more closely linked, never has the world economy been richer, never has the world seen faster economic growth, never has the world been more democratic. But never has the world been more unequal. Never before have we known how to make such destructive weapons. Never have waves of hatred been able to propagate themselves so rapidly around the globe.

The intellectual achievements of each PEIS graduating student here at Berkeley have been great--or they would not be graduating. So our expectations of great things are, I think, reasonable. I think they will be met. Nevertheless, it seems a heavy burden to lay on people who are, for the most part, just out of their teens.


2002-05-16: The Persistence of Relatively Rapid U.S. Growth?

Between the previous world business cycle peak of 1989 and the just-past business-cycle peak, U.S. economic growth vastly outstripped that of the other components of the world economy's industrial core. U.S. industrial production grew by 46.6%; European Union industrial production grew by 23.2%; Japanese industrial production grew by 6.6%. Some--but less than half--of the U.S. growth edge over Europe comes from the U.S.'s faster population growth. But most of the edge over Europe in growth--and the overwhelming proportion of the edge over Japan--comes from three factors: falling U.S. unemployment, the result of better business cycle management; higher investment, the result of curing the deficit and a technology-driven capital inflow from abroad; and faster development and diffusion of new technologies and better forms of organization.

These three factors were themselves the result of good and lucky people at the Federal Reserve; a President and a Congress that cared about responsible budgeting; and an open, flexible, and entrepreneurial society. The third of these factors is a deep and enduring strength of America and the American economy. The other two are not. They are recent creations: budgeting was not only not responsible, it was extraordinarily irresponsible in the Reagan 1980s. The Federal Reserve was not as skilled as it as today and was very unlucky back in the stagflation-ridden 1970s.

Thus a large chunk of the underpinnings of the relatively rapid economic growth that we have seen in the U.S. in the past decade comes out of politics. If our political system performs well--continues to nominate and confirm superbly competent central bankers to the Federal Reserve, and continues to keep the federal deficit from returning to the high-deficit Reagan days during which it was a mammoth drain on America's rate of national saving and investment--the odds are that we will continue to look forward to rapid relative U.S. growth. If not, then history suggests that we will see a U.S. economy that grows more slowly than the rest of the industrial core despite America's deep and enduring economic strengths: U.S. economic growth was slower than in other industrial countries both in the Reagan deficit-ridden 1980s and in the stagflation-ridden 1970s.


The change from dark grey to light grey laptops... When did it happen? Why? Sony or Apple?


2002-05-15: Knowledge Worker Productivity

The Permanent Link to This Will Be: <http://www.j-bradford-delong.net/ToTW/Daily_Journal_2002_05.html#2002-05-14-productivity>

Over the past decade, the U.S. economy has invested an extraordinary amount of its wealth in information technology equipment and software. The macroeconomic statistics strongly say that this burst of investment has produced overwhelming benefits for the U.S. economy. But the link between the micro investments and the macro economic growth remains much more obscure than we would wish. How, exactly, have computers and networks made real people more productive at their jobs?

This turns out to be a question that is remarkably hard to answer: we know much too little about how computers and communications increase white-collar worker productivity. From an economist's standpoint, we tend to look at the fact that computer-literate workers earn more money and say, "Gee. Computer-literate workers must be more productive." We tend to look at the fact that businesses are investing ferociously in computers and say, "Gee. Computers must be very productive." But all these make the standard assumption--common and inevitable among economists--that businesses know what they are doing. But do businesses know what they are doing, especially as far as white-collar computer workers and computer intensity is concerned? That is an open question. And until we can find some way to answer it, we will know much less about white-collar knowledge worker productivity than we should.


2002-05-15: Moral Philosophy and the Recognition of Israel's Right to Exist

Justin Schwartz wrote:
> Even the PLO and the PA have recognized Israel's right to exist...

Has the Palestinian Authority recognized Israel's right to exist?

My belief is that it--if belief can validly be ascribed to an organization--*believes* that it has not, and--if intentionality can validly be ascribed to an organization--has no intention of doing so. But I also believe that it *might* have, and that all of us need to work to turn the possibility that it has into a certainty that it did so some time ago.

If you surf on over to the website of the PLO Permanent Observer Mission to the United Nations, and look for the text of the Palestine National Charter, you find a text written in 1968. Among other things, it says that:

Article 1: Palestine is the homeland of the Arab
Palestinian people; it is an indivisible part of the Arab
homeland, and the Palestinian people are an integral part
of the Arab nation.

Article 2: Palestine, with the boundaries it had during the
British Mandate, is an indivisible territorial unit.

Article 3: The Palestinian Arab people possess the legal right
to their homeland and have the right to determine their destiny
after achieving the liberation of their country in accordance with
their wishes and entirely of their own accord and will.

Article 4: The Palestinian identity is a genuine, essential, and inherent
characteristic; it is transmitted from parents to children. The Zionist
occupation and the dispersal of the Palestinian Arab people, through the
disasters which befell them, do not make them lose their Palestinian
identity and their membership in the Palestinian community, nor do
they negate them.

Article 5: The Palestinians are those Arab nationals who, until 1947,
normally resided in Palestine regardless of whether they were
evicted from it or have stayed there. Anyone born, after that date,
of a Palestinian father - whether inside Palestine or outside it - is
also a Palestinian.

Article 6: The Jews who had normally resided in Palestine until the
beginning of the Zionist invasion will be considered Palestinians...

Article 19: The partition of Palestine in 1947, and the establishment
of the state of Israel are entirely illegal, regardless of the passage of
time, because they were contrary to the will of the Palestinian people
and its natural right in their homeland, and were inconsistent with
the principles embodied in the Charter of the United Nations,
particularly the right to self-determination.

Article 20: The Balfour Declaration, the Palestine Mandate, and
everything that has been based on them, are deemed null and void.
Claims of historical or religious ties of Jews with Palestine are
incompatible with the facts of history and the conception of what
constitutes statehood. Judaism, being a religion, is not an
independent nationality. Nor do Jews constitute a single nation
with an identity of their own; they are citizens of the states to
which they belong.

Article 21: The Arab Palestinian people, expressing themselves
by armed Palestinian revolution, reject all solutions which are
substitutes for the total liberation of Palestine and reject all
proposals aimed at the liquidation of the Palestinian cause, or
at its internationalization....

This does not sound like a recognition of Israel. It sounds like a call for the destruction of Israel and the expulsion of all Jews who cannot trace their ancestry back to the old pre-1850 Yishuv.

Why, then, the belief that the PLO and the PA have recognized Israel's right to exist?

Because of certain letters written by and undertakings made by Yassir Arafat and others, and because of a 1996 meeting at which the Palestine National Council agreed: "A. To abrogate the provisions of the Palestine National Charter that contradict the letters exchanged between Chairman Yasser Arafat and Prime Minister Yitzhak Rabin of September 9 & 10 1993. B. To mandate the legal committee of the PLO to present a new text of the Palestine National Charter."

So the question arises: are the resolutions of the 1996 meeting performative utterances? Do they by virtue of their existence repeal the provisions of the 1968 charter that are not consistent with various letters and undertakings made by Yassir Arafat and others? You can say that they do, and are. And under this interpretation the Palestine National Charter is no longer its 1968 text, but is instead some other, different text that nobody has written down but that is nevertheless very real and that recognizes Israel's right to exist. Under this interpretation, the PLO and the PA have recognized Israel's right to exist.

The alternative position is that the resolutions of the 1996 meeting are *not* performative utterances. Since the 1968 text of the Palestine National Charter contains no provisions for its amendment, it cannot be amended by any meetings, authorities, or councils acting under and deriving their authority by virtue of the Charter, but can only be amended by the equivalent of a constitutional convention. Under this alternative interpretation, the most that can be said is that the 1996 meeting was a call for such a constitutional convention and for a committee to prepare a new text for the convention to ratify. This has not happened. Until it happens, the 1968 text remains the text of the Palestine National Charter. And, by the simplest of legal principles, any letters written or undertakings made by officials or authorities of Palestine that contradict the charter--especially the charter's positions that Palestine is one and indivisible with the boundaries of the British Mandate, that only Jews who can trace their ancestry to the pre-1850 Yishuv are citizens of Palestine, and that the Zionist Entity is an illegal pirate organization--are null and void. Under this interpretation, the PLO and the PA have not recognized Israel's right to exist.

As a liberal constitutionalist, I cannot help but believe that the alternative position is by far the stronger. But whatever Kant may have said, liberal constitutional principles are *not* engraved in the deep fabric of the universe. As Andrew Marvell wrote:

"Though Justice against Fate complain,
And plead the ancient rights in vain:
But those do hold or break
As men are strong or weak."

And I can find no *reason* to be a liberal constitutionalist if it is not useful and convenient to be such. "Fiat justitia, ruat caelum" is a principle that does not appeal to me in the least. Thus, in this context, it is convenient--in the interest of peace, human happiness, prosperity, and not having 3 to 30 million people die horrible deaths in the first twenty-first century war waged using weapons of mass destruction--for us to say that the PLO and PA *have* recognized Israel's right to exist. If enough of us do that, then retrospectively the first interpretation will turn out to be true.

So although I think Justin Schwartz is doing a *good thing* when he states that the PLO and PA have recognized Israel's right to exist, I think he has not told the "truth"--or, rather, that all of us who by our actions will retrospectively decide whether the 1996 meeting's utterances were performative or not will in the end decide whether he has spoken the truth or not.

And I have to point out that there are many, many people who want the 1996 meeting's utterances not to be performative, and who want the PLO and the PA to continue to work for the total destruction of Israel. One such person is Yassir Arafat. Remember what he said in South Africa in 1994:

This agreement--I am not considering it more
than the agreement between our prophet Mohammed
and the Quraysh. And you remember, Caliph Omar
had refused this agreement and considering the
agreement of the very low class. But Mohammed
had accepted it and we, are accepting now this
peace accord.

The truce between Mohammed and the Quraysh arranged in 628 was for ten years. Less than 2 years later, however, when Muslim forces were sufficiently strong, the Quraysh were defeated by the Muslims and Mecca captured.



Brad DeLong, who is not certain whether today is his day to be a Utilitarian, a Post-Modernist, a Sewer Diver for Silver Linings, or a Realist


2002-05-15: Emailing Joshua Marshall About Ernest May's Strange Victory:

Joshua Micah Marshall's Review of Ernest May (2000), Strange Victory: Hitler's Conquest of France (New York: Hill and Wang: 0809089068).

I really, really, really want to recommend a book to you. It's called Strange Victory: Hitler's Conquest of France and it's by Ernest R. May, a highly respected diplomatic historian. There are two reasons why this book is so good. The first is that it is just a marvelously engrossing narrative of one of the most pivotal moments of the 20th Century: the lead-up to the Second World War and particularly Hitler's lightning victory over France in May and June of 1940. It's just a very polished, compelling World War Two book and a very good read.

But it's much more than that.

May begins with a question that most of us would probably not imagine really was a question. That is, why did France lose?

From the newsreels, many histories, and the mythology of appeasement you'd get the impression that this was just a given, that Germany was strong and armed-to-the-teeth and France was unprepared and weak. But this just wasn't the case. May makes very clear that France (and especially France and Britain together) were both quantitatively and qualitatively stronger and better prepared for war. Simply put, on balance, they had more stuff and better stuff.

So then the question: why did they lose and lose so quickly?

May provides a complex series of answers to this question. But the key ones are easily stated.

One, the French intelligence services were inefficiently organized and intelligence gathering was not well wedded to policy-making. In other words, though France had better intelligence assets in Germany the French weren't particularly good at analyzing and making use of that information. Nor were they particularly good at crafting policy based on intelligence.

Two, the French military, though professional and well-equipped, was organized around a series of what one might call risk-averse doctrines which made it cumbersome, immobile and less agile and quick to react than it should have been.

May uses diplomatic, military and intelligence sources from the French and the German sides to assemble a very clear view of how the two diplomatic and war-fighting machines operated. May's readily apparent depth of familiarity with these sources is little short of breath-taking.

All of this combined to allow the weaker power, Germany, to defeat the stronger one, France.

What makes this book valuable to read today is that May makes a convincing case that our Western military and intelligence services are much more like that of the French circa 1940 than the Germans. And that's sobering.

This is the rare work of history that has very real application to constructing defense, intelligence and foreign policy today. More on Strange Victory soon.

My comments:

Dear Mr. Marshall:

I agree that Ernest May's _Strange Victory_ is an excellent book, a wonderful book. However, I'm not sure that it gets the story of the Fall of France right. I finished it thinking that since Ernest May is a historian of intelligence, he blames the collapse predominantly on intelligence failures--but that another historian who focused on something else could equally well and with equal evidence blame the collapse on other key factors.

Even after the misjudgment that was the French initial deployment--the extra army on the left to hook up with the Dutch, the drive for the advanced position at the Dyle River, the weak Ninth Army holding the Meuse through the Ardennes--that left the French vulnerable to disaster should the Germans break through at the Meuse, the French *should* have been able to recover. The Ninth Army was weak, but the Meuse was a strong position. And once it was clear that there was a major attack through the Ardennes, the French Army was not that slow to respond.

From _Strange Victory_ and _The Collapse of the Third Republic_, we can track the French reaction to the Nazi attack across the Meuse. The first thing to note is that the Nazi lead elements took up to 70% casualties and kept coming--indicative of extraordinary ideological commitment. In a world in which any "normal" unit breaks at 25% casualties or so, it's hard to beat people who keep coming at you: you can only hope that the enemy doesn't have that many of them. Had the Nazi soldiers been "normal," the initial attack by the seven panzer divisions would probably have failed, and the French would have had time to redeploy.

_Strange Victory_ reports that the French reacted quickly (albeit not quickly enough) to reports that the Germans were making a major offensive through the Ardennes:

p. 410: "At 3 P.M. on May 12 Huntziger signaled La Ferte that he wanted strong reinforcements to repel a prsopective German attack.... Three of the strongest elements in the general reserve proceed[ed] immediately to join Huntziger's Second Army: the Third Armored, Third Motorized, and Fourteenth Infantry divisions.... The infantry division was a crack unit commanded by... General Jean de Lattre de Tassigny..."

p. 410: "Gamelin and Georges on the morning of May 13 were keeping their eyes out not only for the great battle in Belgium but for... German forces debouching from the Ardennes and attempting to cut behind the Maginot Line..."

Thus three divisions from the general reserve were fed into the Meuse line on the 13th of May, and the French high command clearly knew it was a trouble spot. By May 15, the French First Armored division had been switched from the Belgian plain to the Ninth Army sector, infantry formations had been ordered to assemble behind the Ninth Army to form a new Sixth Army, and the Second Armored division had been ordered to assemble in its sector.

Within a few days later Charles de Gaulle was placed in command of the Fourth Armored division and told to attack the southern flank of the German breakthrough.

So what happened to all these forces--four heavy armored divisions with perhaps 800 tanks between them, plus a large chunk of the sixteen infantry divisions that were in the French strategic reserve on May 10?

Well...

... The First Armored division ran out of gas. While it was waiting for the fuel trucks to come up to refuel it, it was attacked by Rommel's panzer division and destroyed as a fighting unit. (Curiosity: the Czar of fuel for First Army--from which the armored division had come--was medieval historian Marc Bloch; did he make a huge mistake?)

... The Second Armored division... according to Shirer: "Orders for the [second armored] division to move... did not come until noon of May 13.... The trains with the tanks and artillery were not able to start until the afternon of the 14th.... The wheeled vehicles with the supplies ran into the panzers racing west from Sedan and, having no combat elements, withdrew south of the Aisne.... The tanks and tracked artillery were finally uinloaded from their flatcars... between Saint-Quentin and Hirson.... The division was hopelessly dispersed over a large triangle between Hirson, La Fere on the Oise, and Rethel on the Aisne..."

... The Third Armored division retreated to the south as General Huntziger had ordered: he thought its principal task should be to guard the Maginot line against a flanking attack should the Nazis turn south after crossing the Meuse.

... The infantry formations of the Sixth Army were overrun by Reinhardt's Sixth panzer division on May 15 and 16 while they were trying to assemble.

By May 16, as Shirer puts it (p. 689): "The three heavy [armored divisions] the French had, all of which in May 10 had been stationed... within 50 miles of the Meuse at Sedan and Mezieres, which they could have reached by road overnight, had thus been squandered.... Not one had been properly deployed.... By now, May 16, they no longer counted. There remained only the newly formed 4th [armored division], commanded by de Gaulle, which was below strength and without divisional training..."


The message I get from this is that the French threw 800 tanks in four armored divisions plus between six and ten infantry divisions in front of the Nazi breakthrough in plenty of time--yet (de Gaulle's account of what happened to his division in his memoirs aside) they were completely ineffective in a running fight against seven Nazi panzer divisions.

With such an extremely low level of performance in a running battle, it seems likely that the French in 1940 would have been decisively defeated no matter how good their intelligence and operational leadership had been. They failed in grand strategy--yes. They failed in strategy--yes. They failed in intelligence--yes. They failed in operational control--yes. But still the French managed to get plenty of troops to the Meuse line and plenty of troops to reinforce them in very good time--and still lost decisively.


Brad DeLong

>Brad, this is a fascinating run-down of the issues
>involved, which i enjoyed reading and found illuminating.
>but i guess it begs the question, why were the french so
>bad operationally and in actually fighting? It seems to me
>that May's argument about the sclerotic nature of the
>French forces may come into play here too though, no?

Yes, definitely. But a focus on the fact that the Nazis got inside the French decision loop again and again--so that the French were always reacting today according to orders given yesterday derived from situation reports made the day before which told of how things had been the day before that--weakens the case for the more strident of May's declarations, for example the claim on page 5 that if the French had "... anticipated the German offensive through the Ardennes, even as a worrisome contingency, it is almost inconceivable that France would have been defeated when and as it was. It is more than conceivable that the outcome would have been not France's defeat bug Germany's and, possibly, a French victory parade on the Unter den Linden in Berlin."

I think that May has a rhetorical problem. To the extent that he--as a historian of intelligence--wants to magnify the effects of the Allied intelligence failure, he then has a hard time giving proper weight to the evidence for French logistical, operational, organizational, and strategic incompetence. (Is it Shirer or May who says that the French air force had more combat-ready aircraft at the armistice than it had had on May 10?) To the extent that he gives weight to the French inability to keep the First Armored Division fueled, to move the Second Armored Division to contact, to use the Third Armored Division as more than a flank guard for the Maginot Line, the claims that successful intelligence would have led to a French victory parade down Unter den Linden appear weak...

Brad DeLong


2002-05-14: Freedom to Innovate?

The Permanent Link to This Will Be: <http://www.j-bradford-delong.net/ToTW/Daily_Journal_2002_05.html#2002-05-14-unsettling>

Lurking behind the legal case that is now Unsettling States v. Microsoft has always been a whispered sotto voce claim by Microsoft that competition--in the market for PC operating systems, for office productivity suites, for browsers--is a bad thing. Technological innovation needs a single, strong, dominant, monopolistic firm to set the standard, and to tell the industry when it is time for the standard to change. Whenever I make this (possibly true, possibly false) point, I refer to UNIX-on-micros in the 1980s, when an operating system technologically superior to MS-DOS went nowhere because the lack of a dominant standard-setter prevented growth and allowed the emergence of enough small incompatibilities to fragment the market and discourage applications development (which led John Doerr to once say that I knew nothing about UNIX in the 1980s, applications development, or software markets.)

I have never been able to evaluate this argument satisfactorily. But last week something happened to one of its biggest boosters. Keith Teare, CEO of Real Names, who had favored the maintenance of Microsoft's monopoly in web browsers as pro-consumer because "without Microsoft [to set the standard, and make sure that Real Names's products are included in the standard set of browser capabilities] it could take years to deliver [Real Names's] Internet Keywords globally." With Microsoft as monopolist standard-setter that had "embraced our open standards-based architecture in March 2000 because it makes perfect sense for consumers to use Internet Keywords within MSN and Internet Explorer," Teare was looking forward to a rapid real-time test of whether internet users would prefer Real Names's way of finding things on the Internet to the (badly broken) URL-based way.

But while Real Names's information technologies were impressive, and while it did seem that Real Names had a chance to catch on, it turns out that it will never get that market test. Last week Microsoft decided to remove support for Real Names's products from its web browser, Internet Explorer. Since Real Names's way of naming web sites requires the permission and help of the browser manufacturer to work, and since Microsoft appears to have decided that Real Names's success would diminish Microsoft's share of some future market in Internet searching, Real Names is now gone.

Note that if the market for web browsers were not monopolistic but competitive--if Microsoft's share of the market were not 80% plus, but were 40%--Real Names would be in a much better position. No one would dare pull support from a promising and potentially very useful technology out of the fear that it would become "the next big thing," and that one's browser would lose market share because it did not support what turned out to be something browsers really wanted. But with other browser shares below 20%, the normal discipline a competitive market exercises on firms that think about pulling capabilities--making their products less useful--just does not apply.

Dan Bricklin's proposed solution is for Microsoft to be an altruistic technology leader, doing what is right to maximize innovation and user welfare rather than what Microsoft believes will earn its shareholders the most profits: He hopes that "Microsoft will make amends for this by completely opening up an API for address resolution in a way that does not leave themselves as a bottleneck nor as a toll taker. This is fundamental to the Internet advancing. Microsoft has a duty as the leading company in the client-side world (with officially a monopoly whether they like it or not) to do things that are in the world's maximal interest even if it's not in their specific maximal interest."

My--economist's--reaction is, "When pigs fly." That economist's reaction is not entirely fair. After all, no matter what Microsoft's other shareholders are in the game for, Bill Gates is in the game not to earn more money so that he can buy more things, but for some other purpose. I don't know whether Bill Gates is playing to gain bragging rights by piling up the highest billionaire score or to be the person who shapes the future by bringing the world into the information age, but if Bill Gates is playing the second game then appeals to him to have Microsoft act in the public interest may succeed.

But my economist's reaction is that Microsoft is much more likely to focus its energy on doing things that are in the world's maximal interest--things that make its products as useful and valuable as possible--if it fears the market: if it thinks that failure to make its products as useful and valuable as possible will lead to its disappearance, and that success at making its products as useful and valuable as possible will lead to organizational success, organizational expansion, large bonuses, and lots of in-the-money stock options.

But how to preserve competition and create effective market discipline when all the economics--high fixed costs, effectively zero marginal costs, demand-side economies of use, network effects, upstream and downstream interdependence, the advantages held by whatever firm becomes the standard-setter--pushes for natural monopoly? If you do preserve competition, how to keep it focused on innovation rather than on the creation of small incompatibilities that segment the market and rob the economy of network effects and economies of scale? And does preserving competition mean that you rob successful firms of the profits that were their spur to innovate in the first place?

These are hard and deep questions. Two years ago Real Names's CEO Keith Teare thought that they had simple answers: keep Microsoft in shape to keep maintaining its monopoly no matter what the violations of antitrust law that it had as a matter of fact committed: "It seems to us that the American dream of working hard and prospering is being called into question by the treatment Microsoft is receiving. I came to the United States because I believed it supports entrepreneurs and I still believe that America wants entrepreneurs to succeed. And although the government and the court seem to be sending an opposite message, I do not believe that ordinary Americans should allow one of the country's most successful entrepreneurs to be effectively neutralized because he was 'too successful'."

Today Real Names's ex-CEO Keith Teare sees things somewhat differently: his "...naming technology... is being killed at birth - before it succeeds and becomes "out of control". A small private company is being denied an audience--not because of money--but because of [Microsoft's] fear of losing control.... I am bitterly disappointed by the lack of vision... the defence of search and the URL against a truly global and multi-lingual naming platform with built in directory services.... Naturally I'm pretty unhappy about this. Microsoft seems to be playing the role of the referee who decides whether any innovations succeed ... they've just brought innovation in internet naming to a grinding halt - and the internet *really* needs innovation in naming. RealNames will not be the only victim - there's a whole ecosystem that stretches all around the world that Microsoft is turning off. CNNIC in China, Forval in Japan and other companies in Belgium, Holland, France, Finland, Sweden, Denmark and Norway. There are more than 100 registrars of Keywords and they in turn have thousands of resellers. There are more than 100,000 customers..."


2002-05-13: Economic Forecasts

The Permanent Link to This Will Be: <http://www.j-bradford-delong.net/ToTW/Daily_Journal_2002_05.html#2002-05-13-forecasts>

The Economist's poll of forecasters produces an average forecast rate of GDP growth for the United States of 2.8% in 2002 and 3.5% in 2003--which cumulates to a full two percentage points more of growth in the next two years for the United States than the Euro zone. The only industrial economy forecast to grow faster than the United States over the next two years is Australia. Any signs that the 00s will be the decade for some other country than the United States to lead the industrial core in growth are still invisible.

There are two remarkable things about this pattern of forecast growth. The first is that the fastest-growing countries of Australia and the United States are also the countries with enormous trade deficits. (In absolute values, of course, Australia's trade deficit is much smaller than the U.S. because it is a much smaller economy; but as a share of GDP it is comparable.) Normally large trade deficits are a sign that aggregate demand has outrun supply. This time, however, it appears at least as likely that the large trade deficits are driven from the capital account side--that it is because foreign investors want a share of the opportunities that they see in these fast-growing economies. This does not mean that these trade deficits are benign: U.S. Treasury Secretary O'Neill's rediscovery of the Lawson doctrine that trade deficits are good when they are not accompanied by budget deficits is likely to prove short-sighted. But it does mean that good things are probably going on on the supply side of both of these fast-growing economies.

The second remarkable thing is that the implicit forecasts of U.S. unemployment show little or now change over the next two years. If the growth forecast comes true, unemployment is likely to be in the 5.5% to 6.0% range in two years. Whether this is to be mourned or not depends on what one thinks the NAIRU of the U.S. economy is. It seems likely that Alan Greenspan thinks that the NAIRU is considerably less than 5.5%, and so is now looking for tools with which to stimulate aggregate demand further. But what tools does he have? Short-term interest rates are now down to 1.75% per year.


2002-05-12: Let Us Now Praise Right-Wing Hacks

David Broder* thinks that the success of the Heritage Foundation and the Cato Institute is "something to cheer" because they are so "proficient in generating and promoting ideas" and have great "intellectual honesty." I disagree: I think David Broder has lost his ability to distinguish intellectual wheat from partisan chaff. Cato and Heritage's main function is to provide soundbites. As a result,their work can rarely be relied on: too much of the time, even when the good, straight, accurate arguments are on their side, the guys from Cato and Heritage are likely to come up with something twisted, inaccurate, and misleading that sounds punchy. (Brendan Nyhan also disagrees with Broder, and expresses it better than I do.)

For example, consider Stephen Moore, sometime Director of Fiscal Policy Studies at Cato, sometime a Fellow at the Heritage Foundation. Let me pull down from the shelf Stephen Moore and Julian Simon (2000), _It's Getting Better All the Time: 100 Greatest Trends of the Last Hundred Years_ (Washington, D.C.: Cato Institute). It's a book I by and large agree with: things are a lot better now than they were 100 years ago. It's a book I'm sorry I bought, because I cannot refer to it without carefully checking every word, and wondering on each page, "Is this a place where Moore is trying to make me into a fool?"

Let me open it at random....

Page 59... in "the broadest measure of a nation's overall economic performance" they headline total GDP rather than GDP per capita. GDP per capita has multiplied more than sixfold over the century, but GDP has grown by more--more than twentyfold. But is total GDP a good measure of overall economic performance? No. A country where population quadrupled and living standards halved would see its total GDP double....

Page 61... nothing wrong here...

Page 63... the graph of median family income is no series I have ever seen before: certainly it is not the case that the years 1989-1994 are the only years since 1947 in which median family income has declined...

Page 65... oh this is an absolute beauty: "The Millionaire Next Door... less than 5000 Americans, or less than 0.1 percent of households, were millionaires in 1900.... Today there are almost 8 million millionaire households in the United States [or 7.7% of households." The problem is that a dollar back in 1900 had about 20 times the purchasing power of a dollar today. If you want to answer the question "How many people today are as wealthy as a 1900-millionaire?" you need to look at the people today with wealth more than $20 million--about 0.4% of households. Now it's not that Moore is confused about the statistics--it's just that he would rather give you the (phony) number that an American today is 77 times more likely than an American in 1900 to be a "millionaire" than the (real) number that an American today is 5 times more likely to have the purchasing power of a 1900-era-millionaire than an American in 1900.

Now on all four of these charts the basic point Moore wants to make is true: America is much richer and there are many more millionaires now than in 1900, median family income has risen steeply over time, the U.S. edge over other countries in productivity has grown, and American economic growth in the twentieth century has been amazing and remarkable. He can tell his story and he can tell it strong without resorting to false, erroneous, or misleading calculations at all.

Yet still he makes them. Only one of the four items above headlines what everyone would agree are the right numbers. The other three do not. Moore simply cannot resist gilding the lily. He cannot resist making things much "clearer than truth." The result is that I cannot believe a word he writes. It's frustrating. Moore's book is completely usless.


Now why does Moore follow this strategy of grasping for the weak and false but good-sounding bite when there are strong, powerful, and valid arguments on his side? The reason is that he is embedded in an ecology in which the major players are people who can't evaluate the substantive strength of intellectual and policy arguments, aren't especially interested in learning the substance of public policy in any depth, yet have acquired substantial journalistic influence without every learning that their own biases and kneejerk reactions are not automatically valid. In such an ecology, what use are a commitment to education first and partisanship second? What use are scruples? What use is an unwillingness to make the worse appear the better cause? You lose them if you swim in the seas of Cato and Heritage, just as animals that live underground lose their eyesight...


*Thanks to Two Think Tanks--Heritage and Cato

by David S. Broder
Wednesday, May 8, 2002; Page A21


This is a week of celebration for two of Washington's great dissenters on the right. On successive nights, dinners are honoring Edwin Feulner for his 25 years at the helm of the Heritage Foundation and Edward Crane for his role in founding the Cato Institute a quarter-century ago. The success of their think tanks is something to cheer, even if, as is my case, you often disagree with their policy prescriptions.

To appreciate what they have achieved, you have to recall that in 1977, when Feulner left his congressional staff job to run the four-year-old Heritage (which he had helped found) and when Crane started Cato out in San Francisco, Jimmy Carter had just been inaugurated and Democrats controlled both houses of Congress. "It was not a hospitable time for Republicans, let alone conservatives," Feulner recalled.

Today, with Republicans running the White House and the House of Representatives and one vote away from regaining control of the Senate, it is easy to see the triumph of conservatism as a historical inevitability. It was not. The political victory can be credited largely to Ronald Reagan. But it was also an intellectual battle, in which Heritage and Cato, along with the older American Enterprise Institute, played a critical role.

Heritage and Cato have become so proficient in generating and promoting ideas that the liberal movement has had to create its own think tanks to compete. With generous corporate and foundation support and thousands of grass-roots contributors, Heritage boasts a staff of 185 and a budget of $28 million; Cato, 98 staffers and $16 million.

In their headquarters buildings, Heritage on Capitol Hill and Cato in a handsome modern structure closer to the White House, they sponsor a steady stream of conferences and churn out papers and books, nudging and prodding the policymakers and opinion-shapers. Feulner has Heritage on hair-trigger, rushing out suggestions before congressional hearings and bill markups. "We sweat the details" critical to the legislative process, he told me. Cato, Crane remarked in a separate interview, "is a little more academic and long-term in its thinking."

Heritage, which had a foothold in Washington when Reagan arrived, wrote a blueprint for his first term called Mandate for Leadership, which became a kind of handbook for the new administration. Tax cuts, missile defense, enterprise zones for cities and scores of other ideas migrated from Heritage to the White House and Capitol Hill.

Cato, which moved to Washington in 1982, has sponsored legal studies influential in the Supreme Court decisions reviving the 10th Amendment limits on federal authority. At times, their agendas overlap. A central, but still unfulfilled dream of Cato's since 1979, now shared by Heritage, is the conversion of Social Security into a system of private retirement accounts.

But the two are not twins. Heritage is mainstream conservative, emphasizing free-market economics and robust national security policy, with some forays into social policy on health care and welfare reform. Cato is libertarian in its roots, more radical in its critique of federal programs, more skeptical about the U.S. international role and decidedly liberal (in the classic sense) on issues of personal freedom and civil liberties.

Their usefulness in Washington politics stems from their intellectual honesty and their willingness to question conventional wisdom, even when their friends are in power. A case in point is the bipartisan but outlandishly expensive farm subsidy bill, which President Bush is preparing to sign. Heritage's Stuart Butler denounced it last week as "a shameless example of corporate pork-barrel spending." And when the establishment was recently cheering the latest campaign finance "reform," Cato and Heritage held forums challenging the government's right to regulate political speech.

In this city, noted for the narrowness of its intellectual range, it is sometimes wildly unpopular -- but absolutely vital -- to have institutions that question fundamental assumptions and occasionally declare that the emperor of the moment has no clothes. Cato and Heritage do that -- to Republican presidents as well as Democrats.

They are also models of healthy democratic discourse at a time when too much of the policy debate here takes the form of "Crossfire"-style exchanges of insults. They have staffed themselves with scholars and writers who share their basic political orientations. But their doors are open to other views, and the policy forums they run are not only stimulating but good-tempered.

What Crane told me is true: "The Washington think-tank world is a great example of how people can have a civil discussion and debate. You don't see it in politics, but politics these days is largely devoid of content."

As long as that is true, all of us who work here in politics or journalism have reason to be thankful that Heritage and Cato are around.


Spinsanity: Creaky foundation

A journalism dean credits the Heritage Foundation for being what it's frequently not: Rigorous, evenhanded and scholarly.



- - - - - - - - - - - -
By Brendan Nyhan



May 10, 2002  |  In his latest column, the Washington Post's David Broder extols the virtues of the Heritage Foundation and the Cato Institute, two of the nation's most powerful and influential think tanks, on their 25th anniversaries. He writes that their "usefulness in Washington politics stems from their intellectual honesty and their willingness to question conventional wisdom, even when their friends are in power."

But his paean fails to acknowledge how ideology and public relations concerns can dictate -- and distort -- much of Heritage's work. What about the foundation's methods, which are more than just an intellectually honest questioning of the "conventional wisdom"? As John Judis describes in his book "The Paradox of American Democracy," the foundation is dedicated to producing good conservative P.R., not rigorous scholarship. Founder Edward Fuelner wanted a "quick response capability" and article-length pieces rather than dense scholarship. Some years ago, Burton Pines, a Heritage vice president, said this of the think tank's mission: "We're not here to be some kind of Ph.D. committee giving equal time. Our role is to provide conservative public-policy makers with arguments to bolster our side."

Of course, there is nothing wrong with this in general, and Broder surely understands how Heritage operates. However, it should be pointed out that the many position papers and Op-Eds it pumps out are often less than rigorous (or worse).

Consider the flaws in some recent Heritage work. Last year, the foundation's Center for Data Analysis launched an attack on a report by the Center on Budget and Policy Priorities (CBPP) about income inequality and tax policy. CBPP responded by taking Heritage's charges apart in embarrassing detail. Most notably, Heritage blatantly misstated the source of CBPP's data, which was clearly cited in the original report, in an attempt to cast doubt on it. This was either a massive error or a troubling attempt at misdirection.

The CBPP authors wrote that their study "relies primarily on the latest data available from the Internal Revenue Service on income and income tax trends." Heritage's rejoinder: "Shapiro and Friedman badly misuse data to create a statistical mirage of growing income inequality in America from 1992 to 1998. The Census Bureau warns researchers not to do this because of major survey changes in 1994." However, these changes were made in the Current Population Survey carried out by the Census Bureau, not the IRS data used by CBPP.

Or consider the March 28 Washington Times Op-Ed by Heritage's Daniel Mitchell praising Russia's flat tax, which Jonathan Chait rightfully excoriated in the New Republic Online. (As the McKenna senior fellow in political economy, Mitchell is blessed with the imprimatur of the institution and given assistance in placing Op-Eds, securing radio interviews, etc.) In his piece, he argues that the fact that Russia has seen tax revenues rise "proves the class-warfare artists in Washington completely wrong when they argue that tax revenues would fall and the rich would get a big tax cut if America adopted such a system. The Russian experience confirms -- again -- that tax revenues rise under a flat tax."

Of course, "intellectual honesty" would require Mitchell to at least acknowledge that he's drawing a conclusion with little evidence to support it. Russia's previous tax system was corrupt; President Vladimir Putin instituted a flat tax as part of a reform effort that also included toughened enforcement. As Chait says, "Any system that involved a strong central government rationalizing and enforcing tax laws would be more efficient than the old Russian system." Moreover, the situation in the United States is obviously almost totally different, yet Mitchell pretends as if Russia's experience provides a useful comparison.

Despite this slipshod work, Broder's overwrought praise continues. He calls the think tanks "models of healthy democratic discourse at a time when too much of the policy debate here takes the form of 'Crossfire'-style exchanges of insults."

While Heritage generally doesn't put out highly aggressive jargon, its experts employ public relations tactics that often polarize public debate. Mitchell in particular appears to specialize in highly charged metaphors equating tax policy with civil rights.

In an Op-Ed in the Washington Times this week, Mitchell condemns the Supreme Court's infamous 1857 decision in the Dred Scott case (which ruled that slaves who escaped to free states were still considered the property of their previous owners) and then attempts to connect the case with a proposed change in corporate tax policy, writing that "some U.S. companies soon may be treated in a similar manner" to slaves under Dred Scott due to a bill in Congress that would prevent U.S. corporations from re-chartering in countries with "better tax laws," such as Bermuda. "The politicians who support this are acting as if these companies belong to the government," he writes. Does Broder actually believe that comparing corporations, legal entities chartered by the government, to human beings owned as slaves is somehow superior to "'Crossfire'-style exchanges"?

Last year, in an interview with the New Republic's Anand Giridharadas, Mitchell similarly compared tax evasion with the civil rights movement, saying that he could not condemn a family that "deposits their assets offshore in the face of a confiscatory tax like the death tax, any more than I would condemn Rosa Parks for sitting in the front of that bus."

Obviously, Mitchell feels passionately about these issues, and it is his job to serve a strong advocate for them. But this shouldn't be what passes for intellectual honesty and healthy democratic debate in Washington. Broder should expect more...