November 29, 2003

"Starve the Beast"?

Having looked forward only three years ago to a future of budget surpluses (at least until the baby boom generation retired in earnest), we now look forward to huge deficits as far as the eye can see. Let's take the reasonable budget projections for George W. Bush's policies that generate deficits of more than $500 billion a year as far as the eye can see (until the baby boom generation retires, and the deficits grow bigger). These projections assume that there will be a Medicare drug benefit (which there is), that the expiring provisions of the tax code will be extended (which the Bush administration wants to do), that the Alternative Minimum Tax will be reformed along the lines assumed by the Congressional Budget Office (which the Bush administration says it wants to do), and that discretionary spending will grow at the rate of nominal GDP.

Where did this sudden swing back to deficits come from? Republican ideologues who say that this is all part of a clever plan (rather than being yet another mammoth demonstration of the incompetence at governing of the current crew in the White House) say that the purpose of this is to "starve the beast": to cut taxes as a share of GDP to create a budgetary crisis that some future (Democratic?) administration will have to solve. This future administration will, putting the national interest first, recognize that persistent enormous budget deficits do first-order harm to the American economy. It will--as the Clinton administration did--make getting the deficit under control its first and highest priority. And it will have no choice but to do so by severely cutting back Social Security, Medicare, Medicaid, and the other programs of the social insurance state.

Not surprisingly, Republican ideologues are wrong--and innumerate, to boot.

A simple look at the numbers in the CBO's reasonable projections will tell you that this is not what is going on at all. Bush administration policies have cut taxes as a share of GDP, yes. But Bush administration policies have also raised spending as a share of GDP.

Consider what the Congressional Budget Office tells us about the difference between fiscal 2001--the last budget year started under the Clinton administration--and fiscal 2004, the year we are currently in. Of the 5.3% of GDP swing since 2001 in the cyclically-adjusted budget balance from surplus into deficit, 2.3% comes from higher spending and 3.0% from lower revenues. For the last fiscal year to start in Bush's prospective second term--fiscal 2009--the CBO's projections are for revenues to fall from their 19.6% of GDP 2001 value to 17.8%, and for expenditures to rise from their 18.4% of GDP 2001 value to 21.6%. Relative to fiscal 2001, the tax share of GDP falls by 1.8% of GDP. The spending share of GDP rises by 3.2% of GDP. Of the 5.0% of GDP swing in the budget balance the CBO believes that the Bush administration's current policies* will produce between fiscal 2001 and fiscal 2009, 64% will be due to a higher spending share of GDP,** and only 36% will be due to a lower tax share of GDP.

When I teach macroeconomics to the graduate students, one of the things I teach is Alberto Alesina and Guido Tabellini (1990), which builds models in which political parties produce budget deficits as part of a high-stakes and extremely dangerous game of "chicken" they play with each other. In his models, a right-of-center government that seeks a smaller government cuts taxes in order to leave a successor liberal government with a choice between drastically pruning back the size of the government or an Argentina-style budgetary and economic disaster. A left-of-center government, by contrast, that seeks a larger government share raises spending in order to leave a successor conservative government with a choice between drastically pruning back the size of the government or an Argentina-style budgetary and economic disaster. (Alberto's models do not work too well when applied to the Clinton administration.)

But what do you make of a government that calls itself right-of-center, and that both cuts taxes and raises spending as shares of GDP--and that raises spending by significantly more?*** In one's mind's eye, one sees Alberto Alesina dressed in a soccer referee's uniform running out onto the field and telling the Bush administration team, "No! No! You don't understand! You're trying to keep the ball out of that goal!!"

"Starve the beast?" In a pig's eye.


*Defining "current policies" to include extension of expiring tax provisions, the Medicare drug benefit, AMT reform, and discretionary spending growth at the rate of growth of nominal GDP.

**Democrats should not cheer. 8 of those 64 percentage points are higher debt service--not higher programmatic spending. Only 56 of those percentage points are higher programmatic spending. And a lot of that programmatic spending--pork for Republican interest groups with weak claims--has a very low social value.

***And it's not that the budget is being driven by defense spending. Defense spending rises by only 0.4% of GDP from 2001 to 2009 on Bush administration policies.


Reference: Alberto Alesina and Guido Tabellini (1990), "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies 57 (July), pp. 403-14.

Posted by DeLong at November 29, 2003 04:33 PM | TrackBack

Comments

Does anyone accuse Dubya of being a "small government Republican"?

As far as modeling goes, I don't think either party is "small government" when it actually has the power to reward its constituents with spending. It seems much more like each party sells itself to the public as being the more fiscally responsible one when it is out of power, and thus doesn't have the opportunity to profit by spending -- while the other one has the opportunity and uses it.

The fact that the relatively few people who really want to "starve the beast" are more likely to be found in Republican ranks than Democratic ones, because Republicans are less overtly hostile to them, hardly means the Republican party as a whole is a party of small government. E.g., here in NY State I can't remember a "small government" Republican governor ever: Rockefeller, Pataki, you name 'em, big government expanders all.

Those small government types out there might more realistically accept a model that posits both parties are big spenders when given the chance, and the way to slow the growth of the beast is not to starve it but to frustrate it by having divided government, so neither party can get its spending desires past the other. As Bruce Bartlett recenly described:
http://www.townhall.com/columnists/brucebartlett/bb20031125.shtml

BTW, in spite of all heated "starve the beast" rhetoric it is unimaginable that the beast will do anything but grow substantially in coming decades, even if Grover Norquist and his modern day Jacobins try to bring out the guillotine. The most that small government types can really hope for is that some sort of political constraints on spending will keep the beast from becoming morbidly obese, and that it may be introduced to some market mechanisms that will keep it in decent enough shape to avoid the fate of the sendentary couch potato whose blood stopped moving after eating the fatal last bon-bon. Some revolutionary agenda there!

Posted by: Jim Glass on November 29, 2003 07:21 PM

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Sounds like the Alesina-Tabellini model could be turned into a good Sim City-like game, as long as it is deep enough to allow variations like big-spending Republicans.

Posted by: paulo on November 29, 2003 07:29 PM

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"A left-of-center government, by contrast, that seeks a larger government share raises spending in order to leave a successor conservative government with a choice of ... (Alberto's models do not work too well when applied to the Clinton administration.)"

Yes, except for trying to push through national health care, which would have been the biggest expansion of "government share" since the New Deal and WWII, the Clinton Administration was particularly modest during its first two years in its attempts to leave a successor more conservative administration with the problems of dealing with greatly expanded government. ;-)

During its next six years its modesty about same might have had something to do with trying to recover from the fiasco of the '94 election and having to deal with the opposition Congress it brought in. "The era of big government is over", etc. (If only.)

In the Alesina/Tabellini model does an executive administration count as a left- or right-of-center "government" if the legislature is on the opposing side of the center? After all, the legislature is part of the government too.

Posted by: Jim Glass on November 29, 2003 08:52 PM

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Actually, Republicans have given a successor Administration an extremely easy solution:

1) Cut the defense budget from imperial levels to something resembling genuine national defense ($200B). End the drug war (a few more tens of billions).

2) Eliminate corporate pork (probably $200B and up)

3) Convert to single payer, reducing health care expenses from 14% of GDP to 11% ($300B, but perhaps resulting in some dissavings to government, made up in greater economic growth).

4) Partially replace the income tax with a constitutionally-mandated wealth tax of 1-2%, aiming to increase revenues by $300B.

Any surplus will go to ensure the solvency of Social Security and Medicare.

If the right wants to create a crisis, things can cut both ways at the outcome.

Of course, we could also declare that the first American Republic ended on December 12th, 2000, and that all subsequent acts were illegal, then collect all income tax that was not paid in. That could be fun, too.

Posted by: Charles on November 29, 2003 10:47 PM

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I understand a strategy of 'starve the beast' for a minority party. But, if you control the presidency, the house and the senate, and you truly believe in small government, why not enact legistation and just cut it?

Posted by: Anurag on November 29, 2003 10:52 PM

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"Having looked forward only three years ago to a future of budget surpluses (at least until the baby boom generation retired in earnest), we now look forward to huge deficits as far as the eye can see."

The era of big government is back, and big government that the Administration has no thought to paying for. For a time we can borrow and borrow, but only for a time. The reckoning will be most painful! We should be most worried.

Posted by: anne on November 30, 2003 05:34 AM

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Can't anybody around this joint spell "capital levy"?

Posted by: David Lloyd-Jones on November 30, 2003 06:07 AM

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Charles,

I have mentioned something very similar to your four point plan to a number of my fellow Republicans. Most really don't like hearing it.

Among the remainder(a rather larger fraction that Frank Wilhoit might believe), there is actually a pretty strong agreement that 1 and 2 will be the way to go, a rather strong opposition to 3, and some support for 4.

Posted by: Steven Rogers on November 30, 2003 07:55 AM

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I'm sorry but I think the Republicans seem to know what they are doing and they have nearly no qualms about sayin exactly what they are after.

The only thin wail the Republicans put up is that they say it is the taxes that they refer to when they say "the beast"; in fact I think it is budget surplus itself, and therefore the principal means and ways to expand social programs, and therefore move towards a path in the direction of socialism, communism.

Ultimately, then, when the Republicans say "the beast", they really mean potential for communism, communism itself.

You can't fully and accurately describe what has happened during the past three or four years, under the Bush administration, unless you look at how they changed income flows(*) in a drastic manner -- they have completely turned the tide around, in fact -- for at least eight years if Bush doesn't win the next term and at least 16 years if Bush does win, and thereby delaying any serious transition, even discussion, towards communism for at least 20 years.

The Bush admnistration, by (a) moving from half a trillion surplus to half a trillion deficit and (b) taking on the war path have completely changed income flows in the country for the next 10 to 20 years, thereby put off even any possibility of any serious discussion of communism --- hey, I don't mean any "workers' dictatorship", I mean collective ownership of capital and direct democracy but still markets and free enterprise and very high productivity and very strong social safety net and universal higher education -- this could be established in US in about ten years if there were political will, but Bush took steps precisely to prevent it, to put it off by at least a decade or two.

So what happens when they move from surplus to deficit? They borrow money from arms manufacturers to buy weapons from the same arms manufacturers and they send people to war instead of college and who is going to pay back the debt? Children of people who go to war instead of college, and because of their debt, they'll have less of chance to go to college.

Instead of going into Iraq, one might as well do the fireworks day and night all over the country continuosly borrowing from fireworks manufacturers to buy fireworks from them -- if only that were politically easier to sell. The whole point in all this was to reverse the direction of transfer payments, in a way, and eliminate any chances of budget surplus for a long time to come.

What could be done if surplus continued? Social safety net could be expanded and extended, even beyond US, for example, in the form of global loan facility for higher education. But that would lead to communism and the Republicans could not tolerate that.


The Republicans are much smarter than they look, and they don't mind war to protect privileges of the capitalist class.

They know they can't ultimately prevent communism, because productivity increase will at some point make it inevitable. But they can delay it and they are doing precisely that.

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(*) I'm not an economist and I'm not sure if "income flows" is the right term here, but I hope I am managing to get my point across.

Posted by: Bulent Sayin on November 30, 2003 08:07 AM

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I'm sorry but I think the Republicans seem to know what they are doing and they have nearly no qualms about sayin exactly what they are after.

The only thin wail the Republicans put up is that they say it is the taxes that they refer to when they say "the beast"; in fact I think it is budget surplus itself, and therefore the principal means and ways to expand social programs, and therefore move towards a path in the direction of socialism, communism.

Ultimately, then, when the Republicans say "the beast", they really mean potential for communism, communism itself.

You can't fully and accurately describe what has happened during the past three or four years, under the Bush administration, unless you look at how they changed income flows(*) in a drastic manner -- they have completely turned the tide around, in fact -- for at least eight years if Bush doesn't win the next term and at least 16 years if Bush does win, and thereby delaying any serious transition, even discussion, towards communism for at least 20 years.

The Bush admnistration, by (a) moving from half a trillion surplus to half a trillion deficit and (b) taking on the war path have completely changed income flows in the country for the next 10 to 20 years, thereby put off even any possibility of any serious discussion of communism --- hey, I don't mean any "workers' dictatorship", I mean collective ownership of capital and direct democracy but still markets and free enterprise and very high productivity and very strong social safety net and universal higher education -- this could be established in US in about ten years if there were political will, but Bush took steps precisely to prevent it, to put it off by at least a decade or two.

So what happens when they move from surplus to deficit? They borrow money from arms manufacturers to buy weapons from the same arms manufacturers and they send people to war instead of college and who is going to pay back the debt? Children of people who go to war instead of college, and because of their debt, they'll have less of chance to go to college.

Instead of going into Iraq, one might as well do the fireworks day and night all over the country continuosly borrowing from fireworks manufacturers to buy fireworks from them -- if only that were politically easier to sell. The whole point in all this was to reverse the direction of transfer payments, in a way, and eliminate any chances of budget surplus for a long time to come.

What could be done if surplus continued? Social safety net could be expanded and extended, even beyond US, for example, in the form of global loan facility for higher education. But that would lead to communism and the Republicans could not tolerate that.


The Republicans are much smarter than they look, and they don't mind war to protect privileges of the capitalist class.

They know they can't ultimately prevent communism, because productivity increase will at some point make it inevitable. But they can delay it and they are doing precisely that.

-----

(*) I'm not an economist and I'm not sure if "income flows" is the right term here, but I hope I am managing to get my point across.

Posted by: Bulent Sayin on November 30, 2003 08:12 AM

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Sorry! I thought my comment didn't go through and I posted it again! Please delete this one and the above -- assuming you want to keep the first.

I apologize.

Posted by: Bulent Sayin on November 30, 2003 08:24 AM

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Has there been any study of exactly how long we can keep borrowing? Or is this a complex systems macro thing, inherently unpredictable?

Posted by: Lee A. on November 30, 2003 08:42 AM

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I have a question for all the economist types here.

We all agree that spending insane amounts money borrowed from the future is unsustainable.

But what's likely to happen and when? Do we have models for this? Will it be an interest rate shock? Will it be a terrible standard-of-living adjustment downward? Huge cuts in government programs resulting in what? Are there analyses of these things out there to read anywhere?

Or put another way, how should one prepare?

Posted by: Henry on November 30, 2003 08:52 AM

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Also, I wonder if someone here would be kind enough to explain something to me, because I am trying to understand international economics: What's to prevent investors from France, Germany, Russia, Saudi, China, etc, running from the dollar to the euro, if we enact another foreign policy gambit they don't like? Aren't we strapping ourselves over a barrel? Are we just presuming upon their rational greed? Would someone please explain to me why this does not happen?

Posted by: Lee A. on November 30, 2003 08:58 AM

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"What's to prevent investors from France, Germany, Russia, Saudi, China, etc, running from the dollar to the euro, if we enact another foreign policy gambit they don't like?"

Because we buy stuff and they like to sell us stuff and there are all sorts of investment opportunities in America. The debt is a significant long term problem, but just now all seems fine. Worried about the dollar, buy foreign assets. There are few foreign country indexes not up over 25% this year. Many are up over 40%. Hedging against the dollar is not difficult.

After all, California's Governor will try try try to shift debt to the future and that works when there is no worry about debt in 2 or 5 or 10 years.

Remember, we are in the midst of a fine bull market in America.

Posted by: anne on November 30, 2003 09:13 AM

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Or, to frame it as a national security question: in a world with another reserve currency that can be politically quickly appreciated (for example, after world opinion questions our foreign policy), are we "weaponizing" our own currency against us by running such big budget deficits? Or is the U.S. economy just too large for this to be a serious issue? Or am I missing something immutable about investor psychology?

Posted by: Lee A. on November 30, 2003 09:19 AM

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Another version of Henry and Lee's questions is, what are the consequences if foreign investors start to ask that private debt be denominated in yen or euros, or alternatively sell lots and lots of dollar futures?

Is this starting to happen?

Posted by: Bernard Yomtov on November 30, 2003 09:41 AM

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Charles, great plan, but not easy. Unless the Dems get huge majorities in both houses and stronger party leadership that they've had in decades, I don't see item #2 on your plan happening to easily. Dems protect local pork too, some of them are very good at it.

Posted by: DJW on November 30, 2003 09:50 AM

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It was asked above:

I understand a strategy of 'starve the beast' for a minority party. But, if you control the presidency, the house and the senate, and you truly believe in small government, why not enact legistation and just cut it?

Because the cuts it would take to get really small (non-defense) government, namely Social Security, Medicare, and Medicaid, are unpopular. The Republicans fear, probably with excellent reason, that if they proposed them directly they would be voted out of office at the next opportunity. So, they try to do it by stealth.
Some of us find that dishonest. It's one thing to carry out a mandate from the electorate; it's another to put through changes that would loose at the polls.

On another topic, I've never understood opposition to a higher share of medical expenditure being channelled through government if the total cost will be reduced and outcomes improved. An examination of the situation in other countries suggests that this is well within reach. OTOH, I can well understand opposition to Hillarycare. Not much good can be said about that.

Indeed, taking the in the abstract the percentage of GDP spent by government as a criterion for anything is mysterious to me. The question is, what do we get for it vs. alternatives.

Posted by: Jonathan Goldberg on November 30, 2003 10:22 AM

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I disagree that this is a "fine bull market". I believe we're seeing the inevitable but temporary stimulative effect of mortgage refinancing, business cycle effect pent-up demand, whatever paltry effects the tax cuts for the elite have had.

All of these are temporary of course, so the next question must be will it be enough to tip us into real, sustained growth? I don't think this is possible given the state of the current account and budget deficits, as well as the diversion resources away from investing in America's future, like education and infrastructure, and instead directing resources to the wealthy and to "money pits" like Iraq.

It seems to me that the most likely outcome of the current imbalances is a slow dollar collapse, causing inflation to consumers and falling US asset values, then eventual very high interest rates due to the record overleverage in the consumer, business and government sectors, as well as our international financiers' reevaluation of the state of American fiscal and economic policy, all of which would of course create a drastic drag on economic activity. Finally, with a US govt. out of resources, quite possibly a banana-republic type attempt to approach paying our obligations by printing more dollars, potentially driving inflation sky-high and interest rates to levels perhaps never seen.

To prepare? Diminish exposure to US interest rates and asset values and increase exposure where things make more sense.

Posted by: Stewart Rice on November 30, 2003 10:22 AM

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Anne wrote: "Remember, we are in the midst of a fine bull market in America."

True. But the question is - is it also a secondary bubble.

I'd be damned surprised if it wasn't.

Posted by: Ian Welsh on November 30, 2003 11:04 AM

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Stock valuations seem generally high, especially in historical context. Bond prices are definitely high, unless there is another slow down in the offing and perhaps even so. Housing prices in major cities seem high. So take some profits in assets that seem especially pricey, and become more defensive. There are better and worse valued stock market sectors. There are some well valued nice dividend paying stocks to own to take us through some difficulty. Bond funds can be lowered from long term corporate or tax free to intermediate, 10 year duration to 5 year duration.

Though I really am worried about long term economic problems, I am content to hold a nice balanced portfolio of assets now. The dollar may fall against the Euro, but so what. Index in European stocks. Currencies rise and fall, but there is no need for alarm unless I am simply too dull to notice.

Posted by: anne on November 30, 2003 11:28 AM

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We are in a cyclcical bull market, but that is probably within the context of a secular bear market. The problem with the above comments from my perspective is that bull and bear markets are largely a function of monetary policy. Moreover, some of my leading-concurrent indicators of the stock market PE are now turning negative.
For example, nominal personal income growth has a stronger negative correlation with the PE than bond yields and it just gave a sell signal as is
real money supply growth. Earlier this year free reserves growth implied that the Fed was easing aggresively. But since evidence of stronger growth materialized free reserve growth has slowed to zero -- a significant negative leading indicator of S&P 500 p/e -- suggesting the Fed is already starting to change policy.

What we seem to be getting in int'l finance flows
is that current international interest rate spreads are insufficient to attract enough foreign capital to finance the growing current accounts deficit. For the last couple of months German and US 10 yr t Bond yields have been about the same & UK rates are already above 5%.
The consequence is a weak dollar. It looks ike int'l interest rate spreads need to be 50 to 100 basis points higher to keep dollar from weakening. We are clearly at the point where it requires a combo of higher rates and a weaker dollar to finance the deficit with significant negative consequences for the the stock market and inflation.

Gold prices are also a good leading, concurrent stock market indicator and they just rose over $400. S&P 500 PE has a stronger negative correlation with gold prices than with bond yields.

Posted by: spencer on November 30, 2003 11:41 AM

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Dear anne, Thank you for responding to my question. I stepped out to breakfast here in sunny Santa Monica. Forgive my cranial density but I still donít understand something, and as usually when I donít, itís probably blindingly obvious to everyone else. My own question isnít about hedging oneís investments, but instead what foreign investors can do to the U.S. economy by refusing rather quickly to fund the twin deficits, should a world crisis make them angry enough. I assume (though this may be wrong too) that, since trade in real goods and services composes less than 10% of total trade, the fact that we buy stuff and they like to sell us stuff could become temporarily secondary. Suppose, for example, the toxic Texan decides to invade another country, and this creates a series of unforeseen, violent geopolitical consequences blamed on the U.S. Investors dump the dollar and head for the euro, enticed by the prospect of its rapid appreciation. Things stay that way a year or two. U.S. interest rates soar, the federal government starts to worry about meeting some obligations, and the economy tanks. Most of the rest of the world is already eating dirt, so they donít mind that much... --What am I missing? Are there too many investors for them all to run in a herd? Or will self-interest always trump group outrage? Or is the U.S. Treasury to index in European stocks? (I forgive you if youíve already stepped out to lunch.)

Posted by: Lee A. on November 30, 2003 12:03 PM

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Stewart Rice writes:

"Diminish exposure to US interest rates and asset values and increase exposure where things make more sense."

Say, Europe, for example, "where things make more sense"?

But a "banana-republic" might outlaw such shift of exposure, or prohibitively tax it (that's not too many steps far from slapping tariffs on steel imports and then printing money).

Then, once that door is closed, i.e., can't shift exposure from US assets, then do what?

Posted by: Bulent Sayin on November 30, 2003 12:31 PM

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This is some totally off-topic and irrelevant information related to "Pig's Eye", who was a bootlegger in St. Paul when it was known as "Pig's Eye" and not St. Paul. When I went on field trips to the Twin Cities, Pig's Eye beer was a staple, otherwise known as having a "Big Pig".

When the trains screeched by at 4 in the morning, having a few Big Pigs the night before guaranteed that we would sleep through that potential interruption and wake up well relaxed to take up the next day's work.

If I thought a little bit harder, I could somehow relate this to the budget, but I've been having a few (NOT Big Pigs) so I don't think I can do that at the present time.

Hope you at least enjoy the following history lesson, courtesy of City Pages, 3/5/98.

"From the label of a beer bottle plastered onto the Minnesota Brewing Company's West Seventh Street billboard just off Jefferson Avenue, Pierre "Pig's Eye" Parrant watches over the city he helped to build. Parrant founded one of the first settlements in St. Paul in 1838, though his tenancy was brief. After he and a group of Canadian colonists were kicked out of Fort Snelling on charges of using too much of the army's wood and grazing land, Parrant established an encampment in the woods around Fountain Cave--a spot now commemorated by a stone monument at the crossing of Randolph Avenue and Shepard Road in West St. Paul. A French-Canadian voyageur, Parrant caused no end of trouble for early Fort Snelling commanders: His claim to fame, and the reason he still graces the Landmark Brewery billboard, has everything to do with whiskey. Virginia Brainard Kunz, in her 1991 book Saint Paul: The First 150 Years, describes Parrant as a "coarse, ill-looking, low-browed fellow" whose single good eye was "marble-hued and crooked, with a sinister white ring glaring around the pupil, giving a kind of piggish expression to his sodden, low features." Parrant set up his whiskey business in the gorge that sheltered the mouth of a stream flowing out of Fountain Cave and into the Mississippi. If location is everything in business, Parrant had it. Customers paddled to his door, and steamboats stopped on his landing to unload stilling supplies. In 1839, with illicit liquor sales still plaguing the post, the army extended Fort Snelling's boundaries to include Parrant's colony; a year later, troops evicted the settlers and set fire to their cabins.

After the expulsion a few colonists followed Parrant into what is now downtown St. Paul. The renegade staked his new claim to extend from Minnesota to Jackson streets, and hung out his liquor shingle. In 1844, historian Kunz continues, Parrant sold his claim on the lower landing and moved to the alluvial bottomland along the Mississippi below St. Paul. He stayed only a few months before losing that claim, and set off again, this time for Sault Sainte Marie. Parrant never arrived. He died before reaching Lake Superior, Kunz writes, "of a disease resulting from his own vices."

Posted by: northernLights on November 30, 2003 12:53 PM

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One thing that the "starve the beast" scenario doesn't take into account is that this current Republican regime has no intention of letting go of their monopoly on power. DeLay is certainly setting up for a long reign and Bush and crew expect to have the White House for the forseeable future. (Aren't they grooming Jeb as Bush III?) So what are they waiting for before cutting spending?

I think they are waiting for Americans to be so cowed that they will voluntarily become serfs to the "ruling class" and give up not only their rights but also their expectation that government works for them. War and empire are their means and goals to having a plutocracy that favors only the select few.

Posted by: Mary on November 30, 2003 01:33 PM

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The problem with the current radical plan to explode the US national debt, with the intent of defunding major social programs, is that the debt doesn't know what it's aimed at. (And who wrote the plan? And why are the bombs all set to go off in 2010?) If we need the money for anything else--like, say, a war, or remediation of climactic disasters--the USA will have no credit.

"Has there been any study of exactly how long we can keep borrowing?" We can keep borrowing as long as we have a credit line. With the current lot in power, that is until they have achieved their policy goals, including cutting off Social Security and Medicare, or until there is international political action which forces the USA to stop. Stopping Soc. Sec. and Medicare without a consensus to do it will lead to political upheavals within the USA.

I drew up some timelines, once, as a matter of investment planning. You can see them at
http://www.livejournal.com/users/randwolf/3621.html

Posted by: Randolph Fritz on November 30, 2003 02:50 PM

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Anurag asks, "But, if you control the presidency, the house and the senate, and you truly believe in small government, why not enact legistation and just cut it?"

It all comes down to the meaning of the word "truly".

Steven Rogers says, "I have mentioned something very similar to your four point plan to a number of my fellow Republicans. Most really don't like hearing it. Among the remainder(a rather larger fraction that Frank Wilhoit might believe), there is actually a pretty strong agreement that 1 and 2 [cut defense and corporate pork] will be the way to go, a rather strong opposition to 3 [healthcare], and some support for 4 [taxes]."

That's encouraging, Steven. Then they'll only be about one-quarter disappointed by the medicine that's coming. When that time comes, I doubt anyone will actually object. They'll be too concerned with mortgage rates at 14% and unemployment around 10%. Even Republicans will be pro-single payer.

DJW says, "Charles, great plan, but not easy. Unless the Dems get huge majorities in both houses and stronger party leadership that they've had in decades, I don't see item #2 on your plan happening to easily. Dems protect local pork too, some of them are very good at it."

While I think the Democratic Party is in need of being cleaned out, too, corporate porks dwarfs what is typically thought of as pork: the earmarked funds for a playgorund set in the park of a swing ward, for example. Those run in the hundreds of millions or low billions (the Senate Democrats have a nice chart of earmarks through the ages). Corporate pork is BIIIIIIG money.

Posted by: Charles on November 30, 2003 03:18 PM

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Lee A. asks, "Has there been any study of exactly how long we can keep borrowing? Or is this a complex systems macro thing, inherently unpredictable?"

It's inherently unpredictable. During WW II, we ran massive budget deficits and the economy chugged along just fine. Of course, everything was rationed and you couldn't spend your money on very much except Liberty Bonds, but economically it was quite stable and worked out because we won.

This time, we're on the losing side of the economics.

As for investors running elsewhere, most investors are not trying to influence political events. They're trying to make money. However, one of the dangerous things the US is doing is tearing apart the alliance. Central banks don't necessarily have to make money. It's not impossible that a future Japanese government would say, "To blazes with the dollar and its effect on exports. We're afraid of these lunatics triggering nuclear war in Asia. Let's give them something else to think about."

That sort of scenario, at this moment not very likely, becomes more likely with every American strut and swagger on the world stage. And whle central banks are not dominant players in the currency market, concerted dumping of dollars and T-bills would play merry hell.

Henry, economic shocks play out like earthquakes: very unpredictably. Usually the shock spreads itself as widely as possible and inflicts as little damage as possible on any single subsystem. Interest rates will certainly go up and the dollar will weaken. Human beings can, however, modulate the shock. If the government in place is dominated by the rich, unemployment will rise sharply nd social insurance spending will vanish. If the government is not dominated by the rich, these effects will be smaller.

Posted by: Charles on November 30, 2003 03:22 PM

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About one percent of Americans produce all the foodstuff the country needs and then some for exports. Manufacturing is headed in the same direction -- technology for "workerless factory" is already there. A day will come when machines (robots, if you like) will build houses and infrastructure all by themselves, but those sectors don't employ too many people even now.

What does all that mean? It means productivity becomes so high that any body who works in any job for a couple of years would have produced all the food and shelter and infrastructure that he would need during his life time.

It means, basically, you really don't have to work for food and shelter and infrastructure any longer.

It means you replace bureaucrats, both in private and public business, with computers and elected councils -- bureaucracy without bureaucrats! And that means direct democracy replacing representative democracy.

And that means the end of capitalism.

Productivity increase brought the end of the feudal order; further productivity increase will bring the end of the capitalist order.

The only way out of it is to stop productivity from going up and up so quickly.

And I'm afraid there are people who wouldn't mind risking Armageddon in order to keep productivity in check and themselves in privilege -- take us all back to Age Nťolithique!

And then history would indeed repeat itself.

---

Charles is right, folks. Don't expect Republicans to run out of ocean any time soon and give up deficit budget, defense spending, tax cuts, borrowing, and taking the clock back on social programs. And don't pray for their economic policy to hit the wall either, cause then it is going to be rather the ordinary folks who would get hurt.

By all means, however, support sustainable, strong, productivity-based growth, new modes of economic activity like Open Source software, shareholder activism, institutional investment, socially resposible investment, transition to direct democracy -- and watch out trends on intellectual property rights as well.

It is going to be significant developments along these new lines that is going to render redundant and irrelevant the primitive policies that the Republicans are pursuing.

Posted by: Bulent Sayin on November 30, 2003 04:10 PM

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Brad is correct about the incompetence. Krugman is just being shrill about his "starve the beast worries". The Bush administration is defined by its pandering. TX was all about giving favors to loyal supporters. Being president is no different. Bush is playing intrafraternaty council politics and he can win that game. However, he is forgetting that the great unwashed can rise up and upset the Greek hold on the purse strings. Like his father, W lacks the "vision" thing. The vision thing is the very real difference that competent government can make in the lives of very real people who are down on their luck. Bill Clinton understood. He lived it growing up. W, the elitist scion of priveledge is clueless.

Posted by: bakho on November 30, 2003 09:07 PM

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On another topic, I've never understood opposition to a higher share of medical expenditure being channelled through government if the total cost will be reduced and outcomes improved. An examination of the situation in other countries suggests that this is well within reach.

Because you're not thinking in terms of real politics. The people who would benefit from reduced costs of health expenditure overall (i.e. everybody who might get sick) are vast and diffuse and unorganised, and are easily diverted into blaming whoever an advertiser points the finger at.

The people who would lose out from channeling more expenditure through the government (HMOs and perhaps doctor's groups) are narrow, focused like lasers, know where their daily bread comes from, and willing to spend spend spend to keep the bakery in their hands.

Posted by: a Phoenician in a time of Romans. on November 30, 2003 09:12 PM

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On another topic, I've never understood opposition to a higher share of medical expenditure being channelled through government if the total cost will be reduced and outcomes improved. An examination of the situation in other countries suggests that this is well within reach.

Because you're not thinking in terms of real politics. The people who would benefit from reduced costs of health expenditure overall (i.e. everybody who might get sick) are vast and diffuse and unorganised, and are easily diverted into blaming whoever an advertiser points the finger at.

The people who would lose out from channeling more expenditure through the government (HMOs and perhaps doctor's groups) are narrow, focused like lasers, know where their daily bread comes from, and willing to spend spend spend to keep the bakery in their hands.

Posted by: a Phoenician in a time of Romans. on November 30, 2003 09:13 PM

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On another topic, I've never understood opposition to a higher share of medical expenditure being channelled through government if the total cost will be reduced and outcomes improved. An examination of the situation in other countries suggests that this is well within reach.

Because you're not thinking in terms of real politics. The people who would benefit from reduced costs of health expenditure overall (i.e. everybody who might get sick) are vast and diffuse and unorganised, and are easily diverted into blaming whoever an advertiser points the finger at.

The people who would lose out from channeling more expenditure through the government (HMOs and perhaps doctor's groups) are narrow, focused like lasers, know where their daily bread comes from, and willing to spend spend spend to keep the bakery in their hands.

Posted by: a Phoenician in a time of Romans. on November 30, 2003 09:13 PM

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"I've never understood opposition to a higher share of medical expenditure being channelled through government if the total cost will be reduced and outcomes improved."

Hey, I wouldn't mind the government taking over *everything* -- auto design and manufacturing, retail food stores, NFL franchises -- if the result was higher quality at lower cost. But that's not being generally proposed. So for some reason a lot of people seem to think the gov't has an awful lot of management skill in medical services that they don't believe it has in anything else, though *why* they think that has never been explained to me.

As for the evidence I've seen, a relative of mine on Medicare recently needed a bit of therapy on a leg after a minor injury -- just a bit of stretching and strengthening, no equipment, nothing serious. No more than I see done at the local YMCA all the time.

Eight half-hour sessions were billed to Medicare for $2,800 -- $700 an hour. That was well more than 10 times the going rate for highly skilled therapists paid for privately. And my relative is not a poor fellow, he'd gladly have paid the going rate out of pocket rather than have poorer working people pick up his bill, but rules are rules...

So we have a regressive poor-to-rich transfer financing a cost at 10+ times the market rate, and that's "progressive" cost reduction & quality enhancement, eh?

I mean, in this very thread we have people lambasting Republican government for being all (evil) Pork and Piggery, while not far away our host has related more than once how the earlier Democratic government's attempt to create national health care was all (well intentioned) management ineptitude and confusion.

And then these very same people conclude that if nationalized health care had in fact been placed as proposed in the hands of these very same governments exhibiting all their pork and piggery and ineptitude and confusion, the result of course would be fair and impartial improved management delivering higher quality at lower cost. ;-)

As an example of the triumph of hope over experience that even tops second marriage.

Posted by: Jim Glass on November 30, 2003 11:30 PM

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A Phoenician says, "On another topic, I've never understood opposition to a higher share of medical expenditure being channelled through government if the total cost will be reduced and outcomes improved. An examination of the situation in other countries suggests that this is well within reach. "

The US has effectively disproved utilitarianism by its attitude on health care.

~~~~~~~~~~~~

Mr. Glass, please tell your relative that he has his choice of therapists under Medicare. If he believes that one is ripping off the government, he can vote for fiscal prudence with his feet. And by making a phone call, he could help to identify one of the relatively small fraction of practitioners engaged in fraud.

Posted by: Charles on November 30, 2003 11:47 PM

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1- United States is producing something in the order of a third of world economic output; if one doesn't talk about US economy and politics, then one doesn't talk about world economy and politics.

2- Productivity improvement is the most critical material factor in bringing more descency and dignity to human life and society; and United States is a world class craddle of productivity improvement -- a huge craddle, at that. If one doesn't talk about US economy and politics, then one doesn't talk about transition to a better society either, any where on earth.

Posted by: Bulent Sayin on December 1, 2003 06:57 AM

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The last I checked, the government does not own or deliver health care with the exception of military doctors, dentists and hospitals and some University facilities. Health Care in the US is delivered by PRIVATE physicians in PRIVATE clinics and hospitals staffed by PRIVATE nurses.

Government acts like a public insurance payer. Congress increased the cost of the prescription drug benefit by adding private insurance companies as an additional layer of bureaucracy.

Posted by: bakho on December 1, 2003 07:33 AM

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"he is forgetting that the great unwashed can rise up and upset the Greek hold on the purse strings". I don't think that's the issue...but German banks, now...

Posted by: Randolph Fritz on December 1, 2003 09:09 AM

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"And then these very same people conclude that if nationalized health care had in fact been placed as proposed in the hands of these very same governments exhibiting all their pork and piggery and ineptitude and confusion, the result of course would be fair and impartial improved management delivering higher quality at lower cost. ;-)

As an example of the triumph of hope over experience that even tops second marriage. "

And I for one am quite gladdened to see that Jim opposed the war and (attempted) reconstruction in Iraq for precisely these reasons... Right?

Posted by: Russell L. Carter on December 1, 2003 10:08 AM

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Way back to the top of the discussion... anybody notice that Moody's began mumbling last week about cutting the US sovereign rating? The mumbling is mostly being discounted for now.

Posted by: K Harris on December 1, 2003 10:26 AM

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If I read it correctly, they include the AMT fix as increased spending. Shouldn't it be decreased revenue??? That would changes the lines slightly.

Posted by: bakho on December 1, 2003 11:11 AM

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Dear learned economists,

(1) Does anyone know any studies about the INCREASED TRANSACTIONS COSTS (search & information, bargaining & decision, policing & enforcement) that will be laid upon retirees and other recipients under (partial or total) privatization of Medicare or Social Security? Transaction costs are supposed to account for nearly half of the GDP. Yet except for law and courts (to secure contracts) and securing a stable currency, it seems to me that, in general, INSTITUTIONAL ECONOMICS looks the other way when it comes to the question of whether government INCREASES efficiency by saving transactions costs for certain classes of people. Why are increases in productivity and market efficiency never costed against all the extra time and trouble? Consider the cost of having to sit around and read about all this new Medicare stuff, for starters. Or the cost to the neighborhood and society if some lonely old-timer reads it the wrong way. (Not to mention how you price-in the extreme emotional distress, and further adverse consequences to health, even the smallest uncertainties may cause in the sick and elderly...)

(2) Are the endless presuppositions of governmental inefficiency, or the public choice theory of bureaucratic selfishness and incapacity, based on anything other than simpletonian neoclassical THEORY + the massive real-world example of failed communist states? Does anyone know of any studies which compare productivity and efficiency in real examples of the market vs. a mixed regulatory system?

And on a different track:

(3) Does anyone know of any studies that look at the transfer of wealth from poor to rich via retirement of the federal debt? It seems to me that since the debt is retired out of the general tax fund, ceteris paribus, working poor taxpayers without investments are handing money to rich bondholders. (In an era of cutbacks in services, this would be quite a sad laugh...) And if so, are there any studies which link it to the widening spread in the distribution of wealth since, say, the Reagan years?

Posted by: Lee A. on December 1, 2003 11:23 AM

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"Eight half-hour sessions were billed to Medicare....."

I believe the word for this is "anecdote." Jim, the numbers I've seen shows that Europe manages to provide equal or better health care than we do for a) lower total cost and b) with a lower fraction of outlays spent on administration.

There is the argument about the rest of the world doing a free rider on US medical research, though I'm not convinced yet on that one; you could frame it just as easily as "ability to freeload on US public investment in medical research (teaching hospitals, university drug research, etc.) results in everyone doing their research in the US."

Posted by: Jason McCullough on December 1, 2003 12:18 PM

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Le A asks, "(2) Are the endless presuppositions of governmental inefficiency, or the public choice theory of bureaucratic selfishness and incapacity, based on anything other than simpletonian neoclassical THEORY + the massive real-world example of failed communist states?"

No.

(As an aside, notice that those who savage government are usually those who wax rapturous about the military... one of the largest government programs ever.)

It's too large a topic to be reduced to a study. People take aspects of it and study those. Kuttner (Everything for Sale), for example, showed that the costs of air travel and telephones fell farther and faster under regulation than after repeal of regulation.

Others have compared the US healthcare system to those of other countries. I have several such studies in my library. You don't want to read them. Suffice it to say that some of the better parts of the US healthcare system are those administered by the government.

There have also been some spectacular failures as enterprises have attempted to take over governmental functions. Edison, in the privatization of education, is one example. The for-profit jailers are tomorrow's scandal, as people learn how expensive and how ineffectual privatized prisons are.

There are many areas where government control is simply not useful. But when there are issues of fairness, of maintaining a level playing field, or of prosecuting crime, government is absolutely essential. In such issues, efficiency is the virtue admired by totalitarians.

This is why private schools can be good, yet public schools essential-- for which private school will take the physically disabled, the emotionally troubled, the developmentally retarded children? This is why financial regulation is essential-- who else will unravel the deceptions of an Enron? And so on.

Posted by: Charles on December 1, 2003 12:21 PM

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This is why private schools can be good, yet public schools essential-- for which private school will take the physically disabled, the emotionally troubled, the developmentally retarded children?

And you damn well know that the right-wingers will ignore the cherry-picking, point at the different outcomes and trumpet such a result as "proof" that private education is better.

Posted by: a Phoenician in a time of Romans on December 1, 2003 01:12 PM

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Lee A., there are plenty of competent studies on politically induced inefficiency and incentive problems. The studies don't apply only to government run enterprises. The Communists just managed to create case studies en masse. Try checking through the reading lists of Brad's colleagues on the micro side.

Posted by: Stan on December 1, 2003 01:44 PM

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The ones I have seen so far do not include transactions costs...

Posted by: Lee A. on December 1, 2003 03:01 PM

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Lee, I can rephrase your request then to: show me a study that shows that government run industries' lower transaction costs.

The service cues in the electrical power and telephone industries in much of the world show a large transaction cost increase over private industry providing the same service elsewhere. Nowhere does anything say that transaction costs have to be higher or lower with government run industries. The literature simply shows that government run industries tend to have incentive problems.

Posted by: Stan on December 2, 2003 08:41 AM

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Iím sorry Iím unclear, thatís not my question. The queues at Verizon Wireless here in Santa Monica Ca., either for new phones or service, are longer than anything I remember under Ma Bell. Monopolies are incentivizable. But Iím after something else.

As I understand the basic institutional literature, a FIRM will want to draw its boundary at the point where the entrepreneurís transaction costs of exchanges under his proprietary control are lower than his transaction costs of the same exchanges if they were done on the open market. Meanwhile CONSUMERS on the open market have their transaction costs partially alleviated by the presence of government and courts, for example by consumer right-to-know and safety laws, etc., as well as Adam Smithís general provision of a sound currency.

Now, then: I observe that, for certain consumer populations (such as the elderly), a GOVERNMENT PROGRAM (such as Medicare) very nearly ELIMINATES ALL of the main transactions costs, i.e. ďsearch & information, bargaining & decision, policing & enforcementĒ as defined in the literature. My question really is, are there any studies, preferably experiential but weíll go with theoretical, which have compared this transaction-cost SAVINGS on the DEMAND side, to the LOSS of efficiency and incentive on the SUPPLY side? For example, can it be Pareto optimal?

It seems to me that, depending on how you cost your time, universal health coverage may be far preferable to choosing among a multitude of insurers (and will save the loss of efficiency and incentive after they oligopolize and command the political process--but that would be another topic.)

Parenthetically, I would like to know of any studies which identify queueing as an IRREDUCIBLE transaction cost.


Posted by: Lee A. on December 2, 2003 11:13 AM

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"Mr. Glass, please tell your relative that he has his choice of therapists under Medicare...".

So why would he not take the first one referred to him by his doctor just because the guy charges $700 an hour? After all, the government is paying the bill. Why would he even *ask* what the guy was charging??

Of course, if *he* was paying the bill it'd be different. ;-)

Incentives matter in economics. That's what markets are all about. It's the difference between markets and beasts.

"If he believes that one is ripping off the government..."

Who said anything about "ripping off"?

When the government starts paying for car costs and groceries I'll take my stretch Hummer limo to the market every day to get fresh filet mignon and lobster tail. (Well, at least until the gov't creates national car- and food-management bureaucracies to control costs.) And I won't be "ripping off" anyone. I'll have paid my taxes and be entitled to my choice of what best meets my needs, just like everyone else.

And if I'm supplying cars or groceries I'll be perfectly entitled to charge whatever my lobbyists arrange the rules to allow me to collect. Nobody will be "ripped off". And I will supply more or less to the people according to the success of my lobbyists at getting me a price ....

Posted by: Jim Glass on December 2, 2003 02:05 PM

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Jim Glass,

Do you understand why nobody in its right mind want to be ruled by the USA? it is because there are too many like you there.

DSW

Posted by: Antoni Jaume on December 2, 2003 03:00 PM

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Advertising is 85% confusion and 15% commission.

Posted by: Whitfield Lisa on December 10, 2003 10:03 PM

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You know what's interesting about Washington? It's the kind of place where second-guessing has become second nature.

Posted by: Peterson Lee on January 10, 2004 02:29 AM

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