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February 28, 2005

Can We Get CJR Campaign Desk to Use Google?

Peter Gosselin Gets Some Much-Deserved Press

You don't often hear of reporters wanting to get press, but they do, they do...

CJR Campaign Desk writes, apropos of Peter Gosselin's LA Times series on income inequality and risk:

CJR Campaign Desk: Archives: By Gosselin's own account, despite the Los Angeles Times' daily circulation of over one million, the stories generated almost no response for months. That is, until he recently sent out a link to them to a handful of liberal bloggers, including Kevin Drum, who writes the widely read 'Political Animal' blog on WashingtonMonthly.com. Drum's post, in turn, generated several other blog mentions, including one from J. Bradford DeLong.

Coincidentally, today's Wall Street Journal carries a story (subscription required) by Jackie Calmes exploring the same topic:

Critics say Mr. Bush's vision is blind to economic risks facing Americans, especially lower-income workers. William Gale, a Brookings Institution economist, dismisses the president's agenda as 'the Dismantling-the-Safety-Net Society.' Some applaud his rhetoric, but say the president's policies -- heavy on tax breaks -- don't broaden ownership, but favor the well-off. The poorest workers, exempt from income taxes, can't take advantage of any tax breaks for savings. Eugene Steuerle, a Reagan-era Treasury official now at the Urban Institute, titled a recent analysis, 'An Ownership Society, Or A Society For Those Who Already Own?'

Drum wants Gosselin's stories nominated for a Pulitzer Prize, but it's a little late for that. (Pulitzer nominations for 2004 have long since been submitted, and in fact Pulitzer jurors are busy this week poring over entries.) For his part, Gosselin is caught off-guard by the fact that his series has caught fire so long after it appeared in print to little effect.

'[T]he idea seems to be racing from cutting edge to conventional wisdom with no intervening steps,' says the bewildered author. Also from largely ignored to hot item of the day.

Hey! I've been trying to beat the drum for Peter Gosselin's series on income risk for quite a while now! Google reports that I have done so on November 16, 2004... December 12, 2004... December 31, 2004... January 5, 2005... as well as this morning!

But the fact is that I am only a flappy bird compared to the superhuman web presence that is Kevin Drum:

Google Search: gosselin site:www.j-bradford-delong.net:

Brad DeLong's Semi-Daily Journal: A Weblog: Peter Gosselin on ... ... December 12, 2004. Peter Gosselin on Economic Insecurity. Peter Gosselin continues his excellent series about rising economic risks in America today: ... [http://www.j-bradford-delong.net/ movabletype/2005archives/000068.html] - 14k - Cached - Similar pages

Brad DeLong's Semi-Daily Journal: A Weblog: I Have Messed Up ... ... January 05, 2005. I Have Messed Up: Peter Gosselin of the LA Times and Income Risk. I failed to notice when the galleys came through ... [http://www.j-bradford-delong.net/ movabletype/2005-3archives/000113.html] - 18k - Cached - Similar pages

Brad DeLong's Semi-Daily Journal: A Weblog: Income Instability ... ... December 31, 2004. Income Instability (Peter Gosselin Does Very Good Department). ... Peter Gosselin: By last Christmas, the Saab and Volvo were long gone. ... [http://www.j-bradford-delong.net/ movabletype/2005-3archives/000077.html] - 56k - Cached - Similar pages

Brad DeLong's Semi-Daily Journal: A Weblog: Thinking About ... ... We are treading in the footsteps of Peter Gosselin of the LA Times and Jacob Hacker: Middle-Class-Hood and Its Discontents. Stephen ... [http://www.j-bradford-delong.net/ movabletype/2004-2archives/000545.html] - 22k - Cached - Similar pages"

Posted by DeLong at 04:40 PM | Comments (12) | TrackBack

Dogs vs. Cats, Treasury vs. State, Economists vs. Diplomats

Cats vs. Dogs, State vs. Treasury, Diplomats vs. Economists

Once again today I had my nose rubbed in a fact of life...

When economists talk about international trade and finance, they talk--first and most importantly--about building institutions to allow for mutually-beneficial acts of economic exchange. They talk about diminishing barriers and increasing confidence. They talk about playing positive-sum games with people in other countries that increase wealth, trust, and confidence and that ultimately align interests: the larger is the surplus from international trade and finance, the bigger is that stake that everyone has in continuing the free-trade-and-finance game.

When diplomats talk about international trade and finance, they talk about them as carrots and sticks: we give people we want to reward access to our markets; we punish people who we want to punish by slapping on trade embargos. "Economic diplomacy" is like bombing, only less so.

And arguments that it is much more important to build large and profitable positive-sum games that align interests than to win zero- (or negative!) sum games that lead to the domination of one government's conception of its momentary interest over another's? They blow right past the diplomats, the State Department people as if they were just gentle breezes.

Now this matters a lot, for in the long run we all have an enormous mutual common interest in peace, tolerance, and prosperity. And we have virtually no interest in most of what governments choose to fight about. Who cares today whether the signs in Strasbourg say "Strasbourg" or "Strassburg"? Who today is willing to fight and die to make Vancouver part of the United States of America? Who cares today whether the eighteenth century saw members of the Bourbon or the Habsburg dynasty seated on the throne of Spain?

This has very powerful implications. For one thing, it means that next to nobody in the foreign relations community is thinking about a set of issues that is one of the key sets of geostrategic issues for America today. What set? Let me back up a century and a half.

Between 1850 and 1910--by accident--Great Britain built ties with the United States: economic ties, cultural ties, political ties of mutual deference where strategic issues were at stake. As a result, by 1910 Americans perceived Britain as their friend, and the British Empire as by and large a force for good in the world. This is in striking contrast to how Britain was perceived in 1850: the cruel corrupt ex-colonial power that had just starved a quarter of all Irishmen to death.

Now this mattered a lot.

This meant that when Britain got into trouble in the twentieth century--whether with Wilhelm II or Hitler or Stalin and his successors--it had wired aces as its hole cards in the poker game of seven-card stud that is international relations. The willingness of the United States to send Pershing and his army Over There, to risk war with and then to fight Hitler, and to move U.S. tanks from Ft. Hood, TX, to the Fulda Gap were all powerfully motivated by America's affinity with Britain, its geostrategic causes, and its security.1

How does this apply to the present? It is obvious. Alexis de Tocqueville could project before the Civil War that the U.S. and Russia were likely to become twentieth-century superpowers. We can project today that at least one of India and China--perhaps both--will become late-twenty first century superpowers. We have an interest in building ties of affinity now. It is very important for the late-twenty first century national security of the United States that, fifty years from now, schoolchildren in India and China be taught that America is their friend that did all it could to help them become rich. It is very important that they not be taught that America wishes that they were still barefoot and powerless, and has done all it can to keep them so.

The fact that these issues are not even on the radar screen of the international relations community is indeed terrifying...

1The argument--that I have heard twice--that the U.S. fought World Wars I and II and the Cold War overwhelmingly out of keen-eyed realism, and not in part because of the affinity between the U.S. and Britain that had grown up since 1850, strikes me as prima facie ludicrous for the cases of World Wars I and II. Wilhelmine Germany posed no threat to the national security or the prosperity of the United States. The same goes for Hitler's Germany. D-Day was only possible because (1) 75% of the Wehrmacht was tied down by the Red Army on the Eastern Front and (2) England served as a huge aircraft carrier and logistics base. A D-Day in reverse with 1940s technology is inconceivable. The Atlantic Ocean is big. Only with the coming of the H-bomb and the ICBM does U.S. national security become dependent on what happens on other continents.

Roosevelt tried to sell Hitler's Nazism as a threat to America, but not in a convincing fashion. Wilson didn't even try to sell Wilhelmine Germany as a threat.

Posted by DeLong at 03:57 PM | Comments (59)

Which Inflation Rate?

Which Inflation Rate?

The Economist believes that when asset prices go up, wages should go down:

Economist.com | Economics focus: "LAST week, for the first time, America's Federal Reserve published its forecast of inflation over the next two years. Many observers took this as a sign that the Fed had moved closer to setting an inflation target, as many other central banks have done. The minutes of the Fed's February meeting, published this week, confirmed that its policymakers have discussed the idea. Advocates of targeting argue that it would increase the transparency of America's monetary policy and maintain its credibility after Alan Greenspan retires as Fed chairman in 11 months' time. But at which measure of inflation should the Fed take aim?...

When inflation targets were first introduced (in New Zealand in 1989), the exact measure of inflation did not matter much. The main objective then was to reduce high rates of inflation by anchoring expectations. Today, however, consumer-price indices are arguably too narrow. Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, has long argued that central banks should instead track a broader price index which includes the prices of assets, such as houses and equities. America's core rate of consumer-price inflation (excluding the volatile prices of energy and food) rose by 2.3% in the year to January. But house prices rose by much more, 13%, in the year to the third quarter of 2004 (the latest official figures available). These are excluded from America's consumer-price index (CPI); instead the cost of home ownership is represented by rents. But this can be misleading: over the past year, rents have risen by just over 2%, a lot less than house prices....

If inflation in America is really higher than the official index suggests, then interest rates should also be higher. Similar measures would show inflation well above the standard figures in many other countries too. The main exceptions are Japan and Germany, where house prices have been falling....

The idea that central banks should track asset prices is hardly new. In 1911 Irving Fisher... argued... that policymakers should stabilise a broad price index which included shares, bonds and property as well as goods and services.... [A]sset-price inflation can be harmful in its own right. The most obvious way is through a giddying rise and subsequent crash of markets for shares or property. Big swings in asset prices can also lead to a misallocation of resources and so slower economic growth, just as high rates of general price inflation distort economies by blurring relative price signals....

If the prices of goods and services and those of assets move in step, then excluding the latter does not matter. But if the two types of inflation diverge, as now, a narrow price index could send central bankers astray....

Given the elusiveness of a perfect price index, central banks should keep using conventional, narrow inflation targets, but be prepared to undershoot them temporarily if house or share prices soar....

I'm skeptical. Yes, I see danger in asset price bubbles. But I see more danger in monetary policies that force nominal wages to fall. Telling workers that you are cutting their nominal wages is as easy way to destroy worker morale. If firms refuse to do so--keep nominal wages fixed while the nominal money stock falls--you are asking for big macroeconomic trouble.

Posted by DeLong at 03:56 PM | Comments (26)

Climate Change and Ocean Temperature

From the Economist:

Economist.com | Climate change: More evidence that global warming is man-made:Most published research on climate change looks at the atmosphere. That is partly because the records are good and partly because it is in the atmosphere that the human-induced changes that might be causing it are happening. One of these changes, which would promote global warming, is a rise in the level of so-called greenhouse gases (particularly carbon dioxide) which trap heat from the sun and thus warm the air. Another, which would oppose warming, is a rise in the quantity of sulphate-based aerosols, which encourage cloud formation and thus cool the air by reflecting sunlight back into space. Dr Barnett, however, thinks that the air is the wrong place to look. He would rather look in the sea. Water has a far higher capacity to retain heat than air, so most of any heat that was causing global warming would be expected to end up in the oceans.

And that was what he found. In a follow-up to a preliminary study published four years ago, he looked at ocean-temperature surveys made over the past 65 years. He confirmed that the sea has got warmer since the 1940s, and particularly since the 1960s. Furthermore, it has done so from the top down. At a depth of 700 metres, things are almost unchanged. But surface temperatures in all six of the ocean basins he examined (the north and south Atlantic, Indian and Pacific oceans) have increased by about half a degree Celsius.

So the Earth has, indeed, warmed up over the past few decades, as most climatologists already believed. But the actual pattern of temperature change in each of the six ocean basins is different (see chart), and that diversity allowed Dr Barnett to test the idea that people, rather than natural phenomena, are the reason for the warming. He took two widely respected models of the world's climate (which couple events in the atmosphere with events in the sea, and take account of both greenhouse gases and aerosols) and played with their variables in different ways. He tried mimicking the effects of the natural variability caused by feedback loops within the climate, and also the effects of small changes in the sun's output and the consequences of volcanic eruptions, both of which affect the climate. But the only changes that produced patterns of heating which matched reality were the man-made ones. And the match was good in all six basins. Which is confirmation, in Dr Barnett's eyes at least, that the guilty party in global warming is industrial man....

Posted by DeLong at 11:24 AM | Comments (28) | TrackBack

Notes: Oil and Geopolitics

Brad Setser writes:

Brad Setser: The Saudis indicated that they really don't mind $50 a barrel oil. Shocking, I know. The Saudis do want the world to eventually buy all their oil, and thus don't want too rapid a move to alternative fuel sources. Consequently, they sometimes do start to worry if rising oil prices lead to a fall in demand for oil. This time around, though, high oil prices have not triggered much of a reduction in demand. Asian economies (huge oil importers: most Asian economies have higher oil imports as a share of GDP than the US) have generally resisted letting gasoline prices rise in line with rising oil prices. Remember, China is still a communist country. The state oil companies seem to have been told to keep retail prices low. That is one way to contain inflation...

Posted by DeLong at 11:21 AM | Comments (7) | TrackBack

JDS Uniphase!

Infectious Greed writes:

Infectious Greed: Worst Stock in the World: Okay, it's not really the worst stock in the world -- it didn't fall to zero, and the list is only of stocks that trade on the major U.S. exchanges -- but JDS Uniphase gets dishonorable mention in today's WSJ. It is named 'worst 5-year performer', which can't be thrilling for JDSU shareholders or management:

The Internet-stock craze of the 1990s spawned many bubbles. But few compare to the mania surrounding fiber-optic communications. And no company rode that mania more than JDS Uniphase Corp.

....In March 2000, JDS carried a market value of more than $100 billion, more than the combined total of Ford Motor Co. and McDonald's Corp. At the time, JDS had annual revenue of roughly $3 billion, and hadn't recorded an annual profit since 1996.

Then it all ended. Internet traffic grew, but not at the mind-boggling pace some had predicted. Network operators stopped buying new equipment. Equipment makers, JDS's customers, stopped buying components. Several of those customers, it later turned out, had fudged their financials to overstate their growth.

One statistic tells the story. In 2000, sales of telecom fiber-optic components totaled $15.5 billion, according to research and consulting firm RHK Inc. in South San Francisco, Calif. Last year, the total was $1.5 billion, down 90%.

That, more than anything else, explains why JDS was the worst-performing stock over the past five years among 1,000 companies in this year's Shareholder Scoreboard. The value of $1,000 invested in JDS at the end of 1999 had shrunk to just $39 on Dec. 31, 2004, compared with $890 for $1,000 invested in the Standard & Poor's 500-stock index. That's an average annual return of minus 47.7% for JDS, meaning that the shares lost roughly half their value each year for five years.

Remarkably, or maybe not, JDSU management has managed to find a silver lining, despite the stock having fallen another 41% in 2005:

'We are better positioned than some of our competitors to weather the ups and downs,' [CEO Kevin] Kennedy says.

Now there's optimism for you. That's sort of like someone being run over repeatedly by a truck, but then putting a brave face on it by arguing that at least they know what they're in for if it happens again.

Truly a remarkable ride. The fact that we are still selling only $1.5 billion of fiber-optic components each year is amazing.

Posted by DeLong at 11:19 AM | Comments (12) | TrackBack

A Warning About Charlie Stross

He writes:

Charlie's Diary : My agent took [The Family Trade] and sold it to Tor.... Then the dread words came down from on high: 'can you split this into two volumes?' This is my sole apology to those readers who are annoyed at the abrupt ending of 'The Family Trade' -- it's the first half of the original book, splitting them so that the series would run in 300-page chunks (rather than 600-750 page doorsteps) wasn't my idea (in fact, I protested it), but in the final analysis I can only tell my publisher where to get off if I'm willing to get off (and go find another publisher -- after acquiring a reputation for being 'difficult to work with'). I appreciate the reasoning behind the decision... these are the breaks. At least the second half of the story will be in the shops in roughly twelve weeks' time.

If you start The Family Trade, you are then going to have to buy The Hidden Family (which does have a satisfactory ending).

Posted by DeLong at 11:02 AM | Comments (5) | TrackBack

Right Wing Genocidal Lunatics in Congress

Praktike and Yglesias are afraid. They're right to be. This is frightening:

The Insane Right | Liberals Against Terrorism: Yglesias:

So to recap: Representative Sam Johnson (R-TX) believes that the United States should launch a nuclear strike against Syria. Anyone out there on the right have any comments? Really. A nuclear war. A member of congress. Kind of a big deal.

I would say so.

I would also add that this kind of enthusiasm for genocide is little different than what you get on a daily basis in the comment sections of [various weblogs] or on such vile but popular right-wing radio shows.... There is definitely a large lunatic fringe out there, and it's got representation.

Posted by DeLong at 11:02 AM | Comments (27)

We Had All the Troops We Needed in Iraq...

The Belgravia Dispatch shows up with more evidence that the Bush administration lied--of course--when it claimed that nobody asked for more troops in Iraq:

THE BELGRAVIA DISPATCH: That Troop Number Thang: 'My own preference would have been for more forces after the conflict.' Colin Powell, as recently interviewed in the British press.

Posted by DeLong at 11:01 AM | Comments (4) | TrackBack

Joshua Micah Marshall Likes Joe Biden

He writes:

Talking Points Memo: by Joshua Micah Marshall: February 27, 2005 - March 05, 2005 Archives: "I'm a big fan of Sen. Joe Biden (D) of Delaware. But I usually figure him for a foreign policy and judiciary guy, rather than a big hitter on domestic policy. But take a look at his appearance today with Sen. Santorum (R) on Meet The Press (which you can see here and read here). He hits all the key points. Like: 'No matter how you cut it, this real debate on personal accounts is about the legitimacy of Social Security; it's not about the solvency of Social Security.'

Yes, just so.

Or this: 'And the presumption that Social Security can't meet its obligations rests on the notion that the federal government will default, something it's never done in 220 years, on an obligation, on Treasury notes, IOUs, just like the IOUs Japan has and other countries have in terms of buying our Treasury bonds. And so I don't think we'll default.'

So true!

Posted by DeLong at 09:24 AM | Comments (9) | TrackBack

Social Security Deals: Why They Are Not a Good Idea

Joshua Micah Marshall is worried about Senator Lieberman:

Talking Points Memo: by Joshua Micah Marshall: February 27, 2005 - March 05, 2005 Archives: "every sign I see tells me that Sen. Lieberman is looking to cut a deal of some sort with Sen. Lindsey Graham (R) of South Carolina and thus with the White House.... I think the probable deal involves raising the cap and using those new funds for private accounts, thus getting around the idea that it's a 'carve-out'.... [T]here's no limit to the policy creativity of a truly faint heart. Whether such a compromise would ever fly or not is another question. But I suspect it's largely beside the point because once you're to that point you're into a process of legislative horse-trading and conference committees.... You do have to wonder -- really, really wonder -- about the roots of the urge to split the difference on phase-out seeing as the public is against it and turning more against with time. The policy and the politics are both lined up on one side of the ledger on this one. This isn't about garnering lots of press as the dealmaker, invites to the chat shows or the yearned-for plaudits of an increasingly right-leaning dinner-party centrism. And it shouldn't be about angling for mentions in the Post's increasingly fatuous Social Security editorials. This is about saving Social Security and now about preserving it for a long time to come.

So, Lieberman's the weakpoint in the wall against Social Security phase-out. Sen. Carper too -- but, my gut tells me, not as much as Joe. So if there's a time to pull out all the stops to save Social Security, to mobilize pressure and exert coercive persuasion, now's the time and Lieberman's the guy. If anything, the press coverage has understated just had badly the Republicans got hammered out in those townhalls last week....

Let's be analytically clear, however:

  1. A Social Security reform bill that uncaps FICA, uses half the new FICA money for sweetening the pot for a well-implemented forced-savings private account program, and that uses the other half of FICA money plus some benefit cuts/retirement age increases to bring Social Security itself into seventy-five year actuarial balance in a well-implemented way--that's a reform bill that is good for the country.
  2. However, you cannot get there: whatever deals are struck between Graham and Lieberman will be undone in the conference committee.
  3. And even if you could get there in the sense of having a deal on the major outlines of the reform bill, the devil is in the details--and everything we know about the Bush administration tells us that it is incapable of implementing anything well: something always goes wrong (due either to incompetence or malevolence or both) to make Bush-implemented policy initiative a bad idea.
  4. So the only way to fix Social Security is to do so in a way that keeps the Bush administration's mitts off of the implementation, and the final form of the legislation out of the hands of a Republican-dominated conference committee.
  5. Therefore, if Lieberman is going to bargain, he needs to bargain first for a special rule to govern the legislative process, second for the removal of drafting details from Republican-controlled staffs, and third for a separate--and non-Bush controlled--bureaucracy to implement the program.

What Josh is saying is that all that is simply not going to happen, so that (1) is irrelevant. But it is important not to lose sight of the fact that (1) is true.

Posted by DeLong at 09:22 AM | Comments (26)

Peter Gosselin on Inequality and Risk

Kevin Drum wants to nominate the LA Times's Peter Gosselin for a Pulitzer Prize:

The Washington Monthly: Peter Gosselin wrote a 3-part series that tackled a subject that's probably the key economic story of the past 30 years: the steadily increasing risk and income volatility of the American middle class. In the years since 1970, quietly but inexorably, life has gotten increasingly precarious for an increasing number of people.

It's pretty widely understood that average incomes have stagnated during the past three decades, but as bad as that is in a country as rich as America, what's worse — and less widely understood — is how much riskier life has become: income volatility has skyrocketed, the minimum wage is down, the number of people with company pensions is down, average job tenure has dropped from 11 years to 7, and the number of people with health insurance has fallen seven percentage points.

This is not easy stuff to present and it's not easy to grasp, but it's an essential part of the economic story of America and it's an essential backdrop to our current debates over Social Security, Medicaid, and tax reform. Life is getting riskier every year, more and more people are living on the thin edge of disaster, and instead of working to ameliorate this the Republican party is working hard to make it riskier still.

Why do I mention this? Because Gosselin's series has now been collected in a single place and is available even if you aren't registered with the LA Times.... Believe me, this story is well worth the 20 or 30 minutes it takes to read, and if there's any justice you'll be seeing this series on a list of Pulitzer nominees in a few months. It's what print journalism was born to do...

I second the nomination. Go read it.

Posted by DeLong at 08:40 AM | Comments (16) | TrackBack

And Another Excellent WSJ Article--This Time by Mark Whitehouse

The Wall Street Journal cleans up. Here is Mark Whitehouse:

WSJ.com - Social Security Overhaul Plan Leans on a Bullish Market: In selling the idea of private Social Security accounts to Americans, President Bush has repeatedly made a bullish prediction: The stock market will help younger workers get a 'better deal' than they would from traditional Social Security. A number of prominent economists have two problems with Mr. Bush's pitch. First, they say it's too optimistic about the long-term prospects for stocks. Second, it ignores an irrefutable rule of finance: There is no free lunch. Or, put another way, greater returns bear greater risks. 'You can't just sort of invent free return,' says William Dudley, chief U.S. economist at Goldman Sachs Group Inc. in New York. 'If it was that easy, you wouldn't have a Social Security problem in the first place.'...

The program's actuaries predict that over the period of a typical American's career, or 44 years, stocks would return an average of 6.5%, corporate bonds 3.5% and government bonds 3%, all in 'real' terms -- that is, after inflation.... Problem is, the forecasts raise some serious doubts -- to say nothing of conflicts. For example, there is that assumption of a 6.5% annual return on stocks. By contrast, the actuaries' prediction that the Social Security system will become unable to pay full benefits in 2042 assumes that the economy will grow at a rate of 1.9% a year between now and then -- a tepid pace that would be unlikely to produce stock-market returns of nearly 6.5%. Many economists are critical of the idea that stock returns can be so high relative to gross domestic product growth. 'That stretches the imagination,' says David Rosenberg, chief U.S. economist at Merrill Lynch & Co. in New York.

The long-term return on stocks comes from two main sources: growth in corporate earnings and payouts to shareholders, which include dividends and share buybacks. Earnings tend to grow in line with the economy, which means that 1.9% GDP growth typically would produce 1.9% earnings growth. Add to that dividends, which in recent years have averaged about 1.7% of a stock's price, and buybacks, which have averaged about 1%, and the total real return for stocks comes to about 4.6%. Most economists who predict higher stock returns assume higher GDP growth as well.... [C]orporate earnings can't grow faster than the economy forever. If they did, 'then gradually income from the economy would be completely absorbed by the stock market,' says Ethan Harris, chief U.S. economist for Lehman Brothers in New York.... [A] P/E ratio of more than 20 means that the market expects stocks to yield less than 1/20 of their price, or less than 5%. That is easier to reconcile with the Social Security actuaries' GDP forecast, and comes very close to 4.81% -- the average estimate among 10 economists polled for this article....

Under the most recent Social Security-overhaul plan, people who invest in personal accounts will be forgoing a guaranteed 3% real return... the offset rate the government will use to reduce traditional benefit payments.... [U]nless the government lowers the offset rate or real interest rates increase significantly, personal accounts strike many economists as a poor deal on a risk-adjusted basis. 'Would a rational investor borrow funds at a 3% real rate to invest in order to earn a 1½%-2% real rate?' asked Mr. Dudley of Goldman Sachs in a recent research note. 'We doubt it.'

The most bizarre thing--no, it isn't the most bizarre thing, it is just one of many bizarre things that make me question the good faith or the competence--no, make that the good faith and the competence--of those designing and arguing for the Bush private accounts plan--is the 3% + inflation offset required for those who fund their private accounts. This is likely to generate a substantial increase in elderly poverty when a bunch of people reach 65 and find that their private accounts have not been worth the Social Security benefit reductions they cost.

Posted by DeLong at 08:30 AM | Comments (9) | TrackBack

The Wall Street Journal Comes Through Once Again

You know, newspapers like the Washington Post would do a *much* better job at informing their readers if they just had somebody summarize and rewrite the previous day's Wall Street Journal stories. Here it is Jackie Calmes who comes through:

WSJ.com - In Bush's 'Ownership Society,' Citizens Would Take More Risk: "No program better exemplifies the longstanding social compact than Social Security: Workers are taxed to pay benefits to current retirees and the disabled, and expect to be helped by future generations. But with fewer workers supporting swelling ranks of retirees, the program by midcentury won't be able to pay full promised benefits. That is the problem Mr. Bush wants to fix. He calls it 'reforming great institutions to serve the needs of our time.'

Yet the centerpiece of his fix -- letting workers divert a third of their 12.4% payroll tax to personal accounts, which they could invest, spend in retirement or pass on to heirs -- won't help Social Security's long-term solvency, the president acknowledges. That, he says, will require separate reductions in future benefits.

His private accounts have another purpose. 'When more people own something, the more they'll have a stake in the future of this country,' he said recently in a speech....

Critics say Mr. Bush's vision is blind to economic risks facing Americans, especially lower-income workers. William Gale, a Brookings Institution economist, dismisses the president's agenda as 'the Dismantling-the-Safety-Net Society.' Some applaud his rhetoric, but say the president's policies... favor the well-off. The poorest workers, exempt from income taxes, can't take advantage of tax breaks for savings. Eugene Steuerle, a Reagan-era Treasury official now at the Urban Institute, titled a recent analysis, 'An Ownership Society, Or A Society For Those Who Already Own?'....

The president's plan for individual accounts is a major departure.... Mr. Bush argues private accounts would allow workers to earn more through investments than they would receive from Social Security, especially after traditional benefits are reduced to make the system sustainable. His plan would limit choices to a small menu of stock and bond mutual funds....

Posted by DeLong at 08:22 AM | Comments (9) | TrackBack

February 27, 2005

Markdown: This Looks Truly Useful

I have been looking for something like this for quite a while:

Daring Fireball: Markdown Syntax Documentation: Philosophy: Markdown is intended to be as easy-to-read and easy-to-write as is feasible.

Readability, however, is emphasized above all else. A Markdown-formatted document should be publishable as-is, as plain text, without looking like it’s been marked up with tags or formatting instructions. While Markdown’s syntax has been influenced by several existing text-to-HTML filters — including Setext, atx, Textile, reStructuredText, Grutatext, and EtText — the single biggest source of inspiration for Markdown’s syntax is the format of plain text email.

To this end, Markdown’s syntax is comprised entirely of punctuation characters, which punctuation characters have been carefully chosen so as to look like what they mean. E.g., asterisks around a word actually look like *emphasis*. Markdown lists look like, well, lists. Even blockquotes look like quoted passages of text, assuming you’ve ever used email.

Markdown’s syntax is intended for one purpose: to be used as a format for writing for the web. Markdown is not a replacement for HTML, or even close to it. Its syntax is very small, corresponding only to a very small subset of HTML tags. The idea is not to create a syntax that makes it easier to insert HTML tags. In my opinion, HTML tags are already easy to insert. The idea for Markdown is to make it easy to read, write, and edit prose. HTML is a publishing format; Markdown is a writing format. Thus, Markdown’s formatting syntax only addresses issues that can be conveyed in plain text...

Posted by DeLong at 02:22 PM | Comments (15)


"We went to Chez Panisse for lunch last week."

"Ah! The rough life of a Berkeley professor."

"The dish they were pushing was chicken-under-a-brick. But i told them my wife had made it just a couple of weeks ago."

"Did you tell them that what I made was actually chicken-under-a-cast-iron-Le-Creuset-casserole weighted with three soup cans?"


"That would have given them their opening. 'Well, sir, be assured that at this restaurant, our chicken-under-a-brick is made with real bricks...'"

"Real bricks, made by hand by the artisan brickmakers of Sonoma County..."

"'Sonoma County? You jest, sir! Alameda County. Those who lose big at the local Indian casinos must work off their debt by gathering dung and straw from Shattuck Avenue to hand-make adobe Mission bricks...'"

Posted by DeLong at 01:50 PM | Comments (10)

Phasing Out Social Security

Joshua Micah Marshall reports:

Talking Points Memo: by Joshua Micah Marshall: February 27, 2005 - March 05, 2005 Archives: Longview (Texas) News-Journal, Feb. 26th: 'Former U.S. House Majority Leader Dick Armey said Friday that Social Security should be phased out rather than saved.' So there it is. Not only does Armey think Social Security should be 'phased out', he believes, as he is quoted as saying in the article, that the eventual effect of the Bush plan will be phase-out. (Read the whole article, which gives the context, but the exact quote in which he used this phase is when he says that: 'I think if you leave people free to choose, it will be phased out by competition.' This of course is another way of saying that if you let people pull their payroll taxes out of Social Security it will eventually cripple the program.)

Now, in case folks need a precise flow-chart of how to work this, Dick Armey is the head of FreedomWorks. And FreedomWorks is one of the three or four major groups funding and organizing the push for President Bush's privatization plan.

So the head of one of the main groups funded the PR blitz for President Bush's privatization plan says Social Security should be 'phased out' and that the eventual effect of the Bush plan will be phase out...

Posted by DeLong at 01:42 PM | Comments (6)

Why Oh Why Can't We Have a Better Press Corps? (The Washington Post Does It Again)

Jim VandeHei and Jonathan Weisman write that "...to help readers cut through the rhetoric, The Washington Post interviewed budget experts on both sides of aisle, who challenged some of the most important claims made by Bush and his Democratic critics in Congress...." But if they did, they don't tell us. The only person quoted by name who might be considered a budget expert is Chicago's Austan Goolsbee. And what VandeHei and Weisman write certainly doesn't enlighten. For example:

washingtonpost.com: Partisan Social Security Claims Questioned: Both sides have marshaled -- or twisted -- facts and figures to back up those seemingly irreconcilable views.... To help readers cut through the rhetoric, The Washington Post interviewed budget experts on both sides of aisle, who challenged some of the most important claims made by Bush and his Democratic critics in Congress....

There is no arguing that individual accounts alone will cost taxpayers a lot of money initially as the government transitions from the current pay-as-you-go system to a partially privatized one. But it is impossible to slap a realistic price tag on the Bush plan until the president shares with Americans the specific benefit cuts and other changes that will accompany the new accounts.

As a result, the Democrats' $4.9 trillion figure is as debatable and politically motivated as Bush's $754 billion estimate, budget experts say.... Bush says the accounts would cost about $754 billion over the next 10 years. This might be true, but only because it is based on the program starting in 2009 and being fully implemented in 2011. The costs skyrocket when the new accounts are open to all. Senate Minority Leader Harry M. Reid (D-Nev.) says that it will cost $4.9 trillion over a 20-year period, starting in 2009. Vice President Cheney recently said the accounts would cost 'trillions of dollars,' which is probably the most honest, if vague, estimate, budget experts said."

What Weisman and VandeHei miss is that you get from Bush's $754 billion over 10 years to Reid's $4.9 trillion over 20 years through simple arithmetic. It's 2005 now. The plan doesn't start being implemented until 2009. Bush has said that in the first years the diversion of revenue is capped at $1000 per worker, and that that cap is gradually lifted to a level equal to 4% of wages. With an average wage of $50,000, that's $2000 per worker. In the first years the diversion is limited to about 2/3 of the workforce--the relatively young--with that proportion rising over time. In Reid's calculation, you are counting up diversions of revenue for more people (as the private account system expands), counting up diversions per person that are twice as large per year, counting them up for twice as long a period. That gets you from $754 billion to $4.5 trillion. And a few technical details take care of the rest.


I can't stand this. I really cannot stand this.

Back in the Clinton administration, and in the Bush I administration, and in the Reagan administration, and in the Carter administration, and so on back time out of mind, there was a convention people used: discuss every program as if it were fully phased-in in the current year. That avoided confusion about windows and inflation and partial phase-ins and so forth. The Bush administration doesn't work this way: it wants to maximize confusion over the effects of its policies.

But it wouldn't matter that the Bush administration tries to confuse if we had a half-competent press corps on the job.

Posted by DeLong at 09:43 AM | Comments (40) | TrackBack

February 26, 2005

The Little Professor: Volumes

The Little Professor counts her novels by novelist:

The Little Professor: Volumes: "a rough count.... I had time to waste this afternoon, but not that much time.  (Ergo, I have many more novels by Alcott and Bulwer-Lytton than I've actually listed here, not to mention by William Carleton and James Fenimore Cooper--who don't make the list at all.).... 38: Anthony Trollope. 35: Emily Sarah Holt. 28: Wilkie Collins. 27: Sir Walter Scott. 22: Charles Dickens. 21: Thomas Hardy. 20: George Gissing/Reginald Hill. 17: Charles Reade. 16: Benjamin Disraeli. 15: Henry James/George Meredith/W. M. Thackeray/Emile Zola. 14: Honore de Balzac/Elizabeth Rundle Charles. 12: Deborah Alcock/Edward Bulwer-Lytton/George Eliot/George MacDonald Fraser...

Two things amaze me. The first is the "16" by Benjamin D'Israeli. Is it conceivable that any twentieth and twenty-first century American president or British Prime Minister would have *time* to write sixteen novels? What kind of wheaties were these Victorian politicans eating? Speed?

The second is the "12" by George MacDonald Fraser, who is definitely *not* a Victorian novelist. (Although he is, perhaps, an anti-Victorian novelist--and quite a good one.)

Posted by DeLong at 06:28 PM | Comments (27) | TrackBack

The Brad Conspiracy

There are more of us than I had realized:

Brad Choate
Brad Daily
Brad DeLong
Brad Feld
Brad Friedman
Brad Graham
Brad Heintz
Brad Neuberg
Brad Raulston
Brad Setser
Brad Plumer
Brad Wellington

Posted by DeLong at 05:55 PM | Comments (8)

Why Jacqueline Mackie Paisley Passey Is Not a Republican

It's not the best line ever, but it is very good:

Jacqueline Mackie Paisley Passey: Best. Line. Ever.: My friend Julie's description of the Republican Party coalition is hysterical:

Republican publicists have done a good job of getting that 'big tent party' meme to stick. Whenever I see it, to avoid gagging, I always think of a big circus tent full of animals that, in nature, would eat each other. And clowns. Scary, scary clowns.

Maybe that's the real reason why I remain a Libertarian Party hack instead of joining the libertarian wing of the Republican Party.  I can sense that in the wild, the conservative Christians would eat me.

Posted by DeLong at 12:45 PM | Comments (15) | TrackBack

February 25, 2005

Very Sad: The Death of David Bradford

He wrote the best book on the American tax system I have ever read: Untangling the Income Tax


He was killed by an incendiary Christmas tree.

I'm going to go check the pressure on our fire extiguisher.

Posted by DeLong at 03:45 PM | Comments (10) | TrackBack

Not Enough Time...

Not enough time to do more than cut, paste, and post:

John Berry at Bloomberg: "The dogged debate among Federal Reserve officials these days is not over whether to raise their target for the overnight lending rate again next month. They will, for the seventh meeting in a row, by a unanimous vote. Rather, the issue that has more or less split the policy makers down the middle is whether the Federal Open Market Committee should set an explicit inflation target, either a single number or a range."

Brad Setser: "The Saudis indicated that they really don't mind $50 a barrel oil. Shocking, I know. The Saudis do want the world to eventually buy all their oil, and thus don't want too rapid a move to alternative fuel sources. Consequently, they sometimes do start to worry if rising oil prices lead to a fall in demand for oil. This time around, though, high oil prices have not triggered much of a reduction in demand. Asian economies (huge oil importers: most Asian economies have higher oil imports as a share of GDP than the US) have generally resisted letting gasoline prices rise in line with rising oil prices. Remember, China is still a communist country. The state oil companies seem to have been told to keep retail prices low. That is one way to contain inflation."

The New York Times > Opinion > Editorial: Warning From the Markets: "Tuesday's sell-off of dollars did not precipitate a meltdown. But it sure gave a taste of one. The dollar suffered its worst single-day decline in two months against the yen and the euro. Stock markets in New York, London, Paris and Frankfurt dropped, and gold and oil prices, which tend to go up when the dollar goes down, spiked.... Tuesday's market episode has its roots in American structural imbalances that will be corrected only by new policies, not more of the same tax-cut-and-weak-dollar deficit-bloating ploys. If Mr. Bush were half the capitalist he claims he is, he would listen to what the markets are telling him."

Bob Herbert: "In the fall of 2002 Mr. Arar... attempting to change planes at Kennedy Airport... was seized by American authorities, interrogated and thrown into jail. He was not charged with anything, and he never would be charged with anything.... Mr. Arar was surreptitiously flown out of the United States to Jordan and then driven to Syria, where he was kept like a nocturnal animal in an unlit, underground, rat-infested cell that was the size of a grave. From time to time he was tortured. He wept. He begged not to be beaten anymore. He signed whatever confessions he was told to sign. He prayed. Among the worst moments, he said, were the times he could hear babies crying in a nearby cell where women were imprisoned. He recalled hearing one woman pleading with a guard for several days for milk for her child. He could hear other prisoners screaming as they were tortured.... The Justice Department has alleged, without disclosing any evidence whatsoever, that Mr. Arar is a member of, or somehow linked to, Al Qaeda. If that's so, how can the administration possibly allow him to roam free? The Syrians, who tortured him, have concluded that Mr. Arar is not linked in any way to terrorism. And the Royal Canadian Mounted Police, a sometimes-clownish outfit that seems to have helped set this entire fiasco in motion by forwarding bad information to American authorities, is being criticized heavily in Canada for failing to follow its own rules on the handling and dissemination of raw classified information.... One former Canadian official, commenting on the Arar case, was quoted in a local newspaper as saying 'accidents will happen' in the war on terror."

Chris Giles | Financial Times: "Remember these names. Toshihiko Fukui. Zhou Xiaochuan. Perng Fai-Nan. Park Seung. Joseph Yam. And Yaga Venugopal Reddy. They are the central bank governors of Japan, China, Taiwan, South Korea, Hong Kong and India respectively. They are also arguably more important for US monetary policy than Alan Greenspan.... When a Bank of Korea spokesman implied on Monday that Korea wanted gradually to shift its reserves away from the dollar... the Dow plunged by 174 points and the US dollar fell 1.4 per cent against the euro... if the mere hint that South Korea might stop buying US dollar assets can move edgy markets more than Mr Greenspan's most trenchant comments to date on US deficits, it signifies how far the balance of power in the global economy has changed.... The US must attract roughly $2bn capital a day to finance its current account deficit. This has to come either from private investors or foreign governments.... In the past two years, the reliance on official purchases of US assets from Asian central banks has been enormous.... Japan's official exchange reserves now exceed $800bn; China holds more than $600bn; Taiwan and South Korea each holds more than $200bn; and Hong Kong and India are not far behind."

The Washington Monthly: "AMERICAN STYLE....Via Ezra Klein, this is pretty funny. Apparently George Bush had planned an 'American style townhall meeting' as the centerpiece of his current trip to Germany, but it's been quietly dropped from the schedule. Why? Because his idea of 'American style' meant a scripted event in which all the questions were screened and approved in advance. As Ezra says, 'American style, in some ways, is a lot like Cuban style. Or North Korean style. It shares some threads with Russian and Iranian style too.'"

Jason Vest | Dumb intelligence: "Negroponte’s position on the list of preferred candidates may reflect a harsher reality. According to both political and intelligence-community sources familiar with the DNI search, Negroponte was approximately eighth on the White House’s list of candidates... Robert M. Gates... Sam Nunn... William P. Barr... Tommy Franks.. John McMahon... Bobby Ray Inman... William Studeman and William Odom.... [T]he prospective candidates were... true IC veterans... people who have publicly and privately made some of the most thoughtful and potentially useful recommendations on intelligence reform.... [I]t doesn’t seem unreasonable to think that any of those guys would welcome the once-in-a-lifetime chance to serve as the nation’s first intelligence czar.... So why take a pass?... '[R]eform' of the intelligence community... has created a dedicated DNI... that could make the hapless Department of Homeland Security look like a model of efficacy by comparison...

Posted by DeLong at 03:39 PM | Comments (15) | TrackBack

Speaking of Awards...

Let me point out that Belle Waring is still the winner for writing the best weblog post ever:

John & Belle Have A Blog: If Wishes Were Horses, Beggars Would Ride -- A Pony!:

she.jpgI think Matthew Yglesias' response to Josh Chafetz' exercise in wishful thinking was about right, even if Brad DeLong's is more nuanced. I'd like to note, though, that Chafetz is selling himself short. You see, wishes are totally free. It's like when you can't decide whether to daydream about being a famous Hollywood star or having amazing magical powers. Why not -- be a famous Hollywood star with amazing magical powers! Along these lines, John has developed an infallible way to improve any public policy wishes. You just wish for the thing, plus, wish that everyone would have their own pony! So, in Chafetz' case, he should not only wish that Bush would say a lot of good things about democracy-building and fighting terrorism in a speech written for him by a smart person, he should also wish that Bush should actually mean the things he says and enact policies which reflect this, and he should wish that everyone gets a pony. See?

John came up with this "and a pony" scheme during a discussion we were having about crazy libertarians. (He was bathing Zoë as I told him about the article I'd read, and Zoë chimed in that she wanted to get a pony too. Duly noted.) Reason recently published a debate held at its 35th anniversary banquet. The flavor of this discussion is indescribable. In its total estrangement from our political and social life today, its wilfull disregard of all known facts about human nature, it resembles nothing so much as a debate over some fine procedural point of end-stage communism, after the state has withered away. Child-care arrangements, let's say. Position A: there will be well run communal creches! Position B: nonsense! the amount of work required from each individual to maintain a perfectly functioning society will be so small that people can care for their own children and those of others on a spontaneous basis, as the need arises!

Allow me to summarize.

Richard A. Epstein: even in the libertarian utopia, some forms of state coercion will be required. If we must assemble 100 plots of land to build a railway which will benefit all, and only 99 owners will sell, then we may need to force a lone holdout to accept a fair price for his land. Similarly, the public enforcement of private rights and the creation of infrastructure will require money, so there will have to be some taxes. [Note to self: no shit, Sherlock.]

Randy Barnett: Not so fast! Let's cross that bridge when we come to it rather than restricting liberty in advance. We'll know a lot more about human liberty in the libertarian utopia, and private entrepreneurs will solve these problems somehow without our needing to grant to governments the dangerous ability to confiscate our property in the name of some nebulous "public good." And as for rights enforcement -- look it's Halley's Comet!

David Friedman: Epstein places too much confidence in his proposed restrictions on government power. Rights could be enforced privately, and imperfect but workable solutions to the holdouts in the railway case could also be found. "To justify taxation we need the additional assumption that rights enforcement cannot be done by the state at a profit, despite historical examples of societies where the right to enforce the law and collect the resulting fines was a marketable asset."

Now, everyone close your eyes and try to imagine a private, profit-making rights-enforcement organization which does not resemble the mafia, a street gang, those pesky fire-fighters/arsonists/looters who used to provide such "services" in old New York and Tokyo, medieval tax-farmers, or a Lendu militia. (In general, if thoughts of the Eastern Congo intrude, I suggest waving them away with the invisible hand and repeating "that's anarcho-capitalism" several times.) Nothing's happening but a buzzing noise, right?

Now try it the wishful thinking way. Just wish that we might all live in a state of perfect liberty, free of taxation and intrusive government, and that we should all be wealthier as well as freer. Now wish that people should, despite that lack of any restraint on their actions such as might be formed by policemen, functioning law courts, the SEC, and so on, not spend all their time screwing each other in predictable ways ranging from ordinary rape, through the selling of fraudulent stocks in non-existent ventures, up to the wholesale dumping of mercury in the public water supplies. (I mean, the general stock of water from which people privately draw.) Awesome huh? But it gets better. Now wish that everyone had a pony. Don't thank me, Thank John.

UPDATE: John wants me to point out that he got the idea from a Calvin and Hobbes strip in which little Susie first wishes that Calvin was nicer, then realizes she might just as well wish for a pony while she's at it. So, thank that Calvin and Hobbes guy, or something.

2ND UPDATE: Thanks to Ben Wolfson for alerting us to the miracle of searchable Calvin and Hobbes! (Now get to work on your abandoned wasteblog, Ben.) Here is the original 'might as well wish for a pony' strip. I humbly submit that it deserves to be a catch-phrase. Just say 'plus a pony' on suitable occasions and watch your opponents whither away like the state itself.

UPDATE: Not to denigrate the second-best weblog post ever: Atrios's Preznit Give Me Turkee.

Posted by DeLong at 11:53 AM | Comments (18) | TrackBack

Free Advice for the Wall Street Journal

Over at Wired, Adam Penenberg gives some free advice to the Wall Street Journal:

Wired News: Whither The Wall Street Journal?: "The Wall Street Journal is not only the best-written, most elegantly edited newspaper to cover business, it may be the best paper period. Because of its immense clout and vast resources -- the Journal might assign half a dozen reporters to the telecommunications beat while The New York Times and Washington Post each have one -- publicists feed it exclusives, sources leak it information and corporate chieftains plead for the privilege of having their cartoon portraits grace Page 1. All of this helps the Journal maintain its competitive edge. Given all of this, it might be hard to believe that The Wall Street Journal is in danger of becoming irrelevant, but it is....

Nevertheless, the Journal faces an intractable problem. Because you have to subscribe to access both current news articles and the archive, the Journal is leaving only a faint footprint in cyberspace. As with The New York Times, which insists that readers register to view news and pay $3 per article in the archive, the Journal barely shows up on Google or any other search engine. I googled 'Enron' -- an issue the Journal covered exhaustively, and which two of its reporters even wrote a book about -- and not one article appeared within the first 25 pages (250 results.)...

And in the rare event a Wall Street Journal article does pop up and you click on the link, you will likely encounter a message that informs you, 'The page you requested is available only to subscribers.' To access the article would cost you $79 a year, or $7 a month ($39 a year if you also subscribe to the print edition)....

As a result, there is a meme that has begun to take hold that questions the Journal's long-term relevancy. It began, I believe, last fall with John Battelle, founder of the defunct Industry Standard, who realized he couldn't remember the last time he had read The Wall Street Journal, even though he is a subscriber. Since he couldn't share links with his community (read: bloggers), he ended up passively boycotting it....

If I were running the Journal, I would open up the archives: that would build the online reputation of the Journal's (excellent) news reporters (and allow people to point out for the historical record all the past idiocies of the Journal's hack editorial writers) and still allow the Journal to make money online by making people pay for access to the most timely work of its news reporters.

Posted by DeLong at 11:42 AM | Comments (26) | TrackBack

February 24, 2005

When Links Are Chains...

Kevin Drum is surprised to find himself at the core of a privileged, smug, insular, thoughtless elite with undeserved privileges. And Upon This Rock reminds me that I used to have a plan for how to Subvert the Dominant Internet Link Hierarchy!, as outlined here:


So here are some links of relatively... relatively... relatively... let's just say high value:

Chez Nadezhda
super hanc petram
Prairie Weather
An Old Soul...
Vox Baby
It's the end of the world as we know it...
Barely tenured
Prometheus 6
Lawyers, Guns and Money
meg hourihan

Posted by DeLong at 05:02 PM | Comments (15)

The Rectification of Names

Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.
Rick Perlstein, author of Before the Storm.
Steve Pearlstein, columnist for the Washington Post.

Posted by DeLong at 04:01 PM | Comments (13)

The Health Care Funding Crisis Is a Health Care Opportunity

Bradford Plumer makes an important point: the coming funding crisis in Medicare and Medicaid is not a crisis, but an opportunity: not a bad thing, but a good thing:

Bradford Plumer: Reading [Robert] Samuelson's op-ed in the Post reminds me that much of the hand-wringing over escalating health care costs is rather silly. Health care costs, of course, aren't rising because of some insidious inflation mechanism that's making all our favorite treatments magically become more expensive. Nor are they really rising because we're aging as a population—that's a part of it, but only a small part. No, health care costs are rising primarily because new and new treatments are coming to the market, and people are choosing to spend a lot of money on them.

The way things are going, in the future people are going to be choosing to spend X percent of their income on health care. X will get larger and larger over time, by choice. So let's say X is 40 percent. From one standpoint, it really doesn't make a difference whether you pay 40 percent of your income for private health care, or 40 percent of your income in taxes that then go to government-administered health care. I mean, yes, in one sense it makes a difference: If you think the free market is a better way of delivering health care, you'll endorse option 1; otherwise, you'll endorse option 2. But in the end, you're still paying 40 percent of your income. We're in no sense 'controlling health care costs' by slashing programs like Medicare and letting people pay out-of-pocket. Now you could say that this is an imperfect point, and it is. I could argue that I shouldn't, for instance, have to pay 40 percent of my income for some retiree's health care now, when I'm still a healthy young buck, even though I would willingly pay 40 percent of my income later on for my own personal health care—be it via Medicare or private insurance. Fine. Then the appropriate thing to do is start pre-funding a health care system for our retirement. Still, there are lot of ways in which it's disingenuous to say, 'Oh no! America's doomed! We're going to have to raise taxes massively in the future in order to afford things we'd be spending a good chunk of our income on anyway!'

There are big important issues lurking out there in this. First, how skewed by class is medical care going to be in half a century--will new technologies be available to all (and paid for by public programs) or thus to the relatively rich? Second, are there things that could be done that could make the medical system more cost effective--and by "cost effective" I don't mean "cheaper because it treats fewer people in a necessary and appropriate way"?

But on the first-order point, Brad is absolutely right. (I like the way that sentence sounds: I wish *I* heard it more often from others.)

Posted by DeLong at 01:51 PM | Comments (49) | TrackBack

Friends Don't Let Friends Share Sweatshirts

At the Eleven-Year-Old's middle school, they are trying to keep the lice from spreading.

They are also trying to keep students from buying candy bars at Safeway and reselling them at inflated prices to other students at snack time. There seem to be two agency problems here: parents want their children to have money in their pockets to make emergency phone calls, not to spend on overpriced candy. And parents want to make sure their children eat a healthier diet than the children want to.

Posted by DeLong at 01:20 PM | Comments (18) | TrackBack

Rick Perlstein's Before the Storm

Kevin Drum raves about Rick Perlstein's extraordinarily good Before the Storm: Barry Goldwater and the Unmaking of the American Consensus:

The Washington Monthly: BEFORE THE STORM....Last year Rick Perlstein sent me a copy of his 2001 book Before the Storm, a look at the rise of Barry Goldwater and movement conservatism in the early 60s. I thanked him, and then put it aside and didn't pick it up again until last week.

What can I say? I'm an idiot. Before the Storm is one of the best political books I've ever read and one of the best descriptions of the roots of modern American conservatism anywhere. It's not just that it's deeply researched and meticulously written — though it is — it's that Perlstein has the rare gift of bringing the past to life. He gives you a sense of what it was really like to be alive during that era, something that few authors seriously try and even fewer ever accomplish.

I have one big analytical quarrel with Rick, however. Goldwaterism certainly did--in the long run--unmake Republican Party commitment to the New Deal Consensus. But in the short run Goldwaterism had other consequences: the damage it did to Republican congressional power were the only things that made the Great Society possible: the Johnson-era expansions of the social insurance state and the Nixon and post-Nixon-era expansions of the regulatory state were possible only on congressional foundations that had been created by Goldwater's Samson act directed against the Republican establishment.

To make possible the Great Society--and then to cheer when Ronald Reagan rolls back 10% of it--Goldwaterism was the greatest own-goal and act of political delusion by conservatives in the twentieth century.

Posted by DeLong at 12:35 PM | Comments (14) | TrackBack

That's Not What I Said. That's Not What He Said

Ross Douthat fails to accurately summarize what I said.

Even worse, he fails to accurately summarize what he said.

He writes now:

The American Scene: It's probably, no, definitely a bad idea to start responding to every criticism of my Atlantic article (and soon book) on Harvard, elite education etc. But I've heard a variant of Brad DeLong's argument from a lot of people -- namely, that my complaint that Harvard provides little or no institutional guidance to its students once they arrive makes me the equivalent of "a horse, led painstakingly and expensively to water, bitterly complaining that nobody forced it to drink."...

But then he wrote something different. If you go read the conclusion of Douthat's Atlantic Monthly article, the complaint is not that Harvard "provides little or no institutional guidance to its students," the complaint is that Harvard is too easy:

It was hard work to get into Harvard... competing for offices and honors and extracurriculars... swirling social world... fighting for law-school slots and investment-banking jobs.... But the academics... were another story.... [T]he moment happened over and over again at Harvard, when we said "This is going to be hard" and then realized "No, this is easy." Maybe it came when we boiled down a three-page syllabus to a hundred pages of exam-time reading, or saw that a paper could be turned in late... or handed in C-quality work and got a gleaming B+... it wasn't our sloth... or our pushing for higher grades, that made Harvard easy.

No, Harvard was easy because almost no one was pushing back.

I do think that Harvard (and Berkeley!) make it too easy for the Douthats to slide by, and that at the administrative level the universities do much too little to reward and encourage those teachers who do push back hard and demand much. But let me stand by what I said before: In my day--and, by all accounts, in Ross Douthat's day, and today--it is easy to find teachers who will push back hard: indeed, you have to work pretty hard to avoid them.

Ross Douthat claims now that his point was: "[at Harvard] the only academic guidance takes the form of a terrible, terrible Core Curriculum," and that as a result most students "didn't do a good job picking... (I don't know what the advising system was like in DeLong's era, but it's nearly nonexistent now), thirty-two classes out of the hundreds and hundreds of potential offerings that Harvard flings at you."

But as he wrote then, he and his peers were "studious primarily in our avoidance of academic work, and brilliant largely in our maneuverings to achieve a maximal GPA in return for minimal effort. It was easy to see the classroom as just another résumé-padding opportunity.... If that grade could be obtained while reading a tenth of the books on the syllabus, so much the better...." In such a situation, better advising and guidance--better information about courses and what they were like--would not have helped at all.

Damned if I know what can be done to keep those "studious primarily in... avoidance of academic work, and brilliant largely in... maneuverings to achieve a maximal GPA in return for minimal effort" from wasting their time. The smarter and more energetic they are, the harder the problem.

Posted by DeLong at 11:26 AM | Comments (31) | TrackBack

Market Volatility

The Economist reports. But I have one question: just who believes in the "consensus view" that "all is for the best in this best of all possible financial worlds"? I can't find anyone who does:

Economist.com: Spooked by fear of inflation, high oil prices and a revolt by Asia’s central banks, bonds, the dollar and shares all headed south, in that order. By the evening of Wednesday February 23rd, some poise had been regained. But the ease with which things went wrong—albeit just a bit—has left many wondering just how robust is the consensus view that all’s for the best in this best of all possible financial worlds.... Alan Greenspan, the chairman of the Federal Reserve, professed himself puzzled by the ‘conundrum’ presented by the flattening yield curve: the more he raised short-term rates (six times since June 2004, by 25 basis points on each occasion), the more already-low long-term rates fell. Markets don’t like it when the man who sets interest rates says he doesn’t understand them.... South Korea’s central bank, with most of its $200 billion of foreign reserves in dollars, said it planned to diversify away from the currency. Then... the price of a barrel of oil for April delivery rose back above $50. The scene was set for a sell-off, and on February 22nd the S&P 500 fell by 1.5%; the dollar lost 1.1% against the euro and the same against the yen; long-dated Treasuries continued to fall in price; oil futures rose still more and so did gold futures....

Investment analysts have two theories on volatility and market performance, and unfortunately they contradict each other. One lot believes that low volatility suggests share prices will fall, as it means that investors are too complacent.... The other group believes that low volatility suggests rising markets, as well-informed investors are rightly confident.... The reason for this week’s wobble is that America’s two greatest vulnerabilities—-its dependence on one set of foreigners to buy its bonds and on another to sell it oil—-were exposed side by side.

Posted by DeLong at 10:38 AM | Comments (26) | TrackBack

Matthew Yglesias Gives His Take on Discontent in Harvard Yard

He writes:

Matthew Yglesias: Why So Mad?: To a very large extent the faculty revolt against Summers is... about general discontent with his presidency. This has a lot of aspects....

  • The steadily declining number of senior job offers going to women since Summers took office....
  • [A]n effort to centralize the administration of the University (naturally enough stepping on more than a few toes)
  • [R]elocat[ing] several major units out of Cambridge and into Allston (more toes)
  • [G]enerally denigrated the importance of all scholarship outside the fields of natural science and economics...
  • [A] desire to change the nature of the College into something more like MIT where he was an undergraduate.

One could go on and on like this, but I'll just add that last, and by no means least in my estimation, some of us are a bit sick and tired of Summers' willingness to serve as a useful idiot for the right's ever-intensifying campaign against the American academy coming in the midst of what's really an unprecedented assault on the concepts of objective knowledge and disinterested scholarship from a rapacious but increasingly demented conservative movement....

Many of these appear, to me at least, to have considerable merit. Donors to the endowment who want to see Harvard do something with their money rather than sit on it are expecting the university to expand--and that means the move to Allston. "Centralizing" can mean "challenging the allocations of resources made by entrenched fiefdoms." "Denigrating" can mean "elevating the natural sciences to their appropriate position." "More like MIT" can mean "making it harder to slide by doing next to nothing."

But in all these, of course, the devil is in the details.

Posted by DeLong at 10:14 AM | Comments (13) | TrackBack

Daniel Froomkin Observes the Topkapi Palace

He writes:

White House Briefing: Bush yesterday promoted Harvey S. Rosen, an economist on leave from Princeton University who is already a member of the White House Council of Economic Advisers, to the position of chairman. But, as Edmund L. Andrews writes in the New York Times, 'White House officials indicated that Mr. Rosen will serve only as an interim chairman and plans to resume teaching at Princeton next fall. Mr. Bush's decision to name Mr. Rosen came as a surprise to some Republicans, who had been expecting the White House to nominate Ben S. Bernanke, a member of the Federal Reserve board of governors.

'And the way Mr. Bush announced Mr. Rosen's elevation was also a surprise: His name was mentioned at the bottom of a long list of personnel decisions that began with the nomination of a man to serve on the board of the Washington-area airport authority.'


Posted by DeLong at 09:57 AM | Comments (8) | TrackBack

February 23, 2005

Speech! Speech! Speech! Speech!

Wampum announces the 2004 Koufax Weblog Award Winners:

Wampum: 2004 Koufax Award Winners:

Best Blog – Non-Sponsored Division: Daily Kos.

Best Blog – Pro Division: Talking Points Memo by Josh Marshall.

Best Writing: Hullabaloo by Digby.

Best Post: l If American Were Iraq, What Would it be Like by Professor Juan Cole of Informed Comment.

Best Series: The Rise of Pseudo-Fascism by David Neiwert at Orcinus and Cheers and Jeers by Bill in Portland Maine at the Daily Kos.

Best Group Blog: Jerome Armstrong, Chris Bowers, and the many diarists at MyDD.

Most Humorous Blog: J.C. Christian’s Jesus’ General.

Most Humorous Post: the Poorman’s Poker with Dick Cheney.

Best Expert Blog: Informed Comment won the vote to become a two-time Koufax Award winner for Best Expert Blog.

Best Single Issue Blog: Jeralyn Merritt’s Talk Left and Scott Henson’s Grits for Breakfast.

Best New Blog: Amanda Marcotte of Mouse Words.

Most Deserving of Wider Recognition: Suburban Guerrilla.

Best Commenter: Meteor Blades is knonw for his guest blogging at Kos and for his writing at Liberal Street Fight.

Speech! Speech! Speech! Speech!

During the voting, Amanda of Mouse Words promised: "If I win, I will make a massive ass out myself, with drunken speechifying and boobies."

She delivers on the boobies:

But where is the speechifyin'?

Posted by DeLong at 04:32 PM | Comments (16)

Polluting the Web-Structure Information Commons...

David Sifry's Technorati is living in difficult times:

Sifry's Alerts: For the past few days, we've experienced a bit of a slowdown in the timeliness of our data. To give you an idea, our normal median time between being pinged by a blog and having the data available in our index is under 7 minutes. Recently it's been running around several hours.

Unfortunately, a good deal of this is attributable to the increase of spam that's coming at us. The growing number of link farms creates a much greater load on our spiders. Even worse, when spam makes it into our databases, we need to pause our spiders while take explicit steps to purge the spam. This is a time-consuming and complicated process. Also, some of our ancillary systems, like correctly updated link counts, have taken a hit as we work through these issues. I'm sorry if your blog counts haven't been updating recently, we're working on it diligently.

For an economist, this is absolutely fascinating. There is an underlying resource here: the decision of a human being that such-and-such a webpage was worth linking to is a valuable and useful piece of information. There are businesses (Google and Technorati) that grow up to harvest, repackage, and make money off this information. And then there are the people--comment spammers, link spammers, trackback spammers, link-farm creators, et cetera--who see an economic edge from setting up internet robots to pollute the underlying web-structure information stream.

The standard economist's way of dealing with all problems is to advise (i) setting up a system of property rights so that (ii) someone controls each resource of value and make sure that (iii) that someone has the incentives to properly husband the resource and ensure it finds its way to its most valuable use. But when the valuable commodity is the indicator of human attention that is the underlying structure of the web, it is not at all clear how this is to be accomplished.

I really wish I knew more about the internal procedures and thoughts of Google, Ask, MSN Search, and so forth--because they have the strongest incentive of all to clean the data flow from the web-structure information commons of pollution. Yet they are not doing as good a job as I would expect, even with all the incentive in the world.

Posted by DeLong at 04:23 PM | Comments (14) | TrackBack

Charlie Stross Announces That He Is of the Devil's Party

He writes:

Charlie's Diary: I've read a lot of extruded fantasy product in my time -- and I don't much like it. Fantasy and Science Fiction are co-marketed in most bookstores, but this conceals the fact that they're actually radically different genres in outlook. Loosely speaking, if Science Fiction is often a literature of disruption (in which change is, if not good, at least embraced), Fantasy is frequently a literature of consolation: a warm feather-bed of social conservativism disguised as nostalgic escapism, a longing for feudal certainties. While there's nothing intrinsically wrong with Fantasy, the marketing mechanism applied to it tends to promote those aspects of it that I really don't like: the hordes of marching sub-Tolkien clones.... If I was going to write extruded fantasy product, I'd have to write it from the point of view of the young lad growing up with poor but honest folks somewhere in middle earth who discovers that he's, er, destined to grow up to be the Dark Lord, overthrow the established order, and start a revolution....

I confess that I am of this party as well. I, too, am somewhat creeped out by those who are tall, blond, noble, graceful, born-to-command (even if they don't know it yet), in whose favor the game is rigged because they were born with talents and powers that no normal human can copy or match. My sympathies too are with those who are not so handsome, who build machines that anyone can copy (without being of the blood of Numenor), and who don't wind up in a leisured aristocracy that rests on the backs of many subservient and submissive peasants using hand labor to grow crops using the three-field system. Will someone please introduce the turnip to Gondor! (And, while you're at it, a big, honking, smelly chemical factory producing nitrogen fertilizers would be nice.)

There are more of us, I think, than Charlie Stross realizes. There's me. There's China Mieville. There's David Brin. There's Alexandre Dumas (who, after all, is the real hero of The Three Musketeers?). There's John Milton. And maybe there are more. Maybe there are enough of us to make the mass-market paperback of Non Serviam! a success. After all, the Middle Garth will never be free until the last half-elf is hanged by the guts of the last white wizard! Orcs of the world, unite! You have nothing to lose but your chains! You have a world to win!...

P.S.: I do recommend Stross's Family Trade heartily. But I find it interesting that he classifies it as Fantasy. I thought it was SF.

Posted by DeLong at 04:22 PM | Comments (65) | TrackBack

More Homework for Brad

I managed to thoroughly confuse myself this morning trying to think about the details of how population growth enters the standard infinite-horizon Ramsey Growth Model. Chad Jones suggests that I go back and reread:

Gary Becker and Robert Barro (1988), "A Reformulation of the Economic Theory of Fertility," Quarterly Journal of Economics (NBER Working Paper 1793: http://www.nber.org/papers/w1793).

Posted by DeLong at 12:21 PM | Comments (5) | TrackBack

Brad Setser Thinks About Foreign Central Bank Reserve Diversification

He writes:

Brad Setser's Web Log: Reserve Diversification: Taiwan, Korea, Russia and India added $152 billion to their reserves in 04. That is a bit behind China's $200 billion increase, but it not a small sum.... News about what any of these four central banks intend to do is hardly marginal news in my book.... Right now, I think it is fair to say that their continued willingness to add to their dollar reserves at the same pace as in 2003 and 2004 is somewhat in doubt -- though there ability to accept the consequences of not adding to their reserves and letting their currencies appreciate remains equally open to question....

2) Reserve diversification alone cannot protect a central bank's balance sheet all that much; the overall size of the central banks stock of reserves probably matters more. Shifting from dollar reserves to euro reserves back in 2002 certainly would have made a lot of sense.... But the past is the past.... Shifting into euros now only protects the central bank against future falls in the dollar against the euro. It won't necessarily cut the capital losses many Asian central banks face when their currencies are revalued.

Take the following example. Suppose China lets the [renminbi price] of [the dollar fall] by 20%, from 8.28 renminbi to the dollar to 6.62.... If the euro/ dollar exchange stays constant... the capital loss on its dollar and euro reserves will be identical... diversification may, or may not, help at this stage....

The surest way for Asian central banks to limit their future capital losses is simple. They need to stop adding to their stock of reserves. That at least keeps the central bank's aggregate currency mismatch (local currency liabilities v. foreign currency assets) from growing. If you are in a hole, stop digging! Of course, ending all intervention means letting your currency appreciate, and taking the capital loss on your existing stock of reserves today, rather than taking a potentially larger loss in the future....

Posted by DeLong at 12:04 PM | Comments (12) | TrackBack

Harvey Rosen to Chair CEA

Ah. Harvey Rosen is to Chair the Council of Economic Advisers. I hope it's a good thing for the country--someone who actually knows something about the tax system can be very valuable in that seat. I hope it's a good thing for Harvey Rosen.

Posted by DeLong at 11:45 AM | Comments (5) | TrackBack

What's Wrong with Resigning on Principle?

What's wrong with resigning on principle over this?

Jonathan Weisman reports:

Dropping Report's Iraq Chapter Was Unusual, Economists Say (washingtonpost.com): [T]he White House excised a full chapter on Iraq's economy from last week's Economic Report of the President, reasoning in part that the 'feel good' tone of the writing would ring hollow against the backdrop of continuing violence, according to White House officials. The decision to delete an entire chapter from the Council of Economic Advisers' annual report was highly unusual. Council members -- recruited from the top ranks of economic academia -- have long prided themselves on independence and intellectual integrity, and the Economic Report of the President is the council's primary showcase....

'This is extraordinary,' said William A. Niskanen, a CEA member in the Reagan White House and the chairman of the libertarian Cato Institute. 'The council has been unfortunately weakened.'... Administration officials and economists who read the chapter said that was only part of the story. Against a steady drumbeat of suicide bombings, assassinations, sabotage and mile-long gasoline lines, some White House staff members believed that such a positive take on the Iraqi reconstruction would undermine the White House's credibility.

There was also a basic turf battle. The National Security Council believed the Council of Economic Advisers strayed too far from its domain, according to officials who spoke on the condition of anonymity to avoid the appearance of dissent within the White House. In fact, the Economic Report of the President almost always addresses international trade issues and has often dealt with the economic policies of other countries. The 2001 report, the Clinton White House's last, contained two sections on raising the economic performance of other countries and bolstering incomes in the developing world. The 2003 report, a product of the Bush administration, contained a section on economic 'Developments in the Rest of the World.' A section on 'Economic Freedoms' discussed at length economic policymaking from Chile to Austria, from India to Cote d'Ivoire....

Suspicions about this year's report emerged even before the volume was released last Thursday. The release was later than usual, and it did not occur on the morning of Feb. 14 as initially planned. The 188-page analytical section was 76 pages shorter than last year's and 85 pages shorter than the average since 1990, according to Bruce Bartlett, a conservative economic commentator. Council members said they were striving for brevity even before the Iraq chapter was removed. But the White House intervention heightened concern among some economists that the Bush administration does not value lengthy, reasoned analyses of its policies.

'They just don't seem to show that serious study is an important part of politics,' Bartlett said. 'It's a very casual, hands-off, almost lackadaisical approach to the policy process."

Posted by DeLong at 11:09 AM | Comments (22) | TrackBack


The "Bush Boom" continues:

Real average weekly earnings fell by 0.2 percent from December 2004 to January 2005 after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor. A 0.2 percent increase in average hourly earnings was more than offset by a 0.3 percent decline in average weekly hours and a 0.1 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Data on average weekly earnings are collected from the payroll reports of private nonfarm establishments. Earnings of both full-time and part-time workers holding production or nonsupervisory jobs are included. Real average weekly earnings are calculated by adjusting earnings in current dollars for changes in the CPI-W.

Average weekly earnings rose by 2.3 percent, seasonally adjusted, from January 2004 to January 2005. After deflation by the CPI-W, average weekly earnings decreased by 0.7 percent. Before adjustment for seasonal change and inflation, average weekly earnings were $538.86 in January 2005, compared with $517.82 a year earlier.

We are still very, very far from full employment. If we were anywhere close to full employment, real wages would not still be falling.

Posted by DeLong at 10:57 AM | Comments (15) | TrackBack

Hey Hey, Ho-Ho! Social Security Has Got to Go!

Ah. Republicans:

MyDD :: Social Security Compromise Watch: Second, I'd like to talk a little about the Santorum Social security event that I attended today. It was quite eventful.... Local college Republicans... a chant that beautifully was captured live by CNN: 'hey-hey, ho-ho, Social Security has got to go!'

Posted by DeLong at 10:56 AM | Comments (9) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Robert Samuelson Edition)

Outsourced to Jesse Taylor:

Pandagon: The Blind Criticizing The Blind's Fashion Sense: When you're calling on journalists to be honest, it would help if you were, I don't know...honest? (It's amazing, because he's actually taking a position I support, but the evidence he uses to get there is all sorts of botched.)

Our central budget problem... is the coming spending explosion in Social Security, Medicare and Medicaid, driven by aging baby boomers and rising health spending. In 2004 these programs cost $965 billion, or 8.4 percent of the economy (gross domestic product). The Congressional Budget Office projects that by 2030 their costs will rise to 14 percent of GDP, or more than $1.6 trillion in today's dollars. Avoiding a (nearly) $700 billion annual increase in taxes or deficits would require comparable spending cuts in other government programs. It won't happen. The projected increase in retirement spending nearly equals all federal 'discretionary spending'...

Question - how much of this is due to Social Security?.... Doing the math is important, but actually reporting on the math you're doing is equally important - particularly when the math is so screwed up.

Bush hasn't yet offered a detailed proposal, but he is expected to build on 'Plan 2' of the President's Commission to Strengthen Social Security, issued in December 2001. Workers could divert as much as $1,000 annually of their payroll taxes into 'personal accounts' invested in stocks and bonds. Now, the CBO has evaluated Plan 2. In 2025 Plan 2 would reduce projected Social Security spending from 5.71 percent of gross domestic product to 5.27 percent of GDP, the agency estimates. This is a trivial cut of the combined spending of Social Security, Medicare and Medicaid. The effects of switching to personal accounts and diminishing 'traditional' Social Security benefits are gradual. Indeed, because Bush plans to borrow to pay for personal accounts, his plan would probably raise federal spending in 2025.

"Probably" in the sense that "it absolutely would." Why is brave truth-teller Samuelson softballing.... The plan, at its lowest estimate, would cost $4.5 trillion over its first twenty years.... And why, oh why, does Samuelson insist on lumping all three programs together, despite the fact that they have different purposes, different spending mandates, different issues facing them, and are dealt with separately?

He's got to add in Medicare and Medicaid, the actual problems, because otherwise he looks like an asshole.

The debate over the Medicare drug benefit in 2003 revealed the same failing. Bush's drug proposal had to cost a lot. In February 2003 the CBO estimated that all drug spending on people 65 and older would total $1.8 trillion from 2004 to 2013. Covering any significant share of that would raise Medicare spending sharply. Later, the CBO's director testified that the program's second decade would be much costlier than the first, because (among other reasons) more retirees would use it.

I wrote some columns reporting that the huge costs were probably underestimated. But the mainstream media mainly ignored the long-term costs....

Another common theme throughout the column - when it's bad information that helps Republicans, it's because the media isn't doing its job. When it's bad information that helps Democrats, it's because the media is echoing Democrats. Awesome.

Call this journalistic malpractice. Recently both the Times and Post ran front-page stories reporting -- in tones of shock -- that the costs of the Medicare drug benefit were rising rapidly. The stories were misleading; all that had changed about the estimates is that two early years (with little spending) had been dropped and two later years (with lots of spending) had been added. If the media had reported accurately two years ago, there would be no shock today.

Bush lies, and the media reports the lie. Samuelson writes a dishonest article calling for honesty, and for some reason, it's only the media's error for which blame is actually assigned. 'If only you'd reported that it was a lie earlier, nobody would be shocked by it, and we could move past it!' It's a brilliant standard of holding public officials accountable - sagely declaring that liars might be wrong while ranting that everyone else is supposed to be better than that"

Posted by DeLong at 10:56 AM | Comments (0) | TrackBack

IP Gone Mad

Ken Jarboe directs us to a Steve Pearlstein column:

Lawyers Scare Firms Away From Good Ideas (washingtonpost.com): [W]hat if, rather than requiring us to book such trips well in advance to get a reasonable fare, the airlines were to offer a Powderhound Fare: for 50 percent more than a typical discount fare, payable by Nov. 1, you get the right to fly to any domestic ski destination whenever you want, as long a seat is available. The promotions could read: 'Don't pray for snow. Chase it!' It is possible that this 'idea' is actually an 'invention' worthy of a 'business method' patent -- the lawyers I consulted this week were divided on that. But even if the idea was unworthy of patent protection, many state courts have ruled that I would be entitled to royalties if I could show that the idea was novel and my interests in compensation apparent.

This is the sort of vague and open-ended legal exposure that strikes fear in the hearts of businessmen already inclined to think of the legal system as hostile and irrational. And not without reason. Cartoonists Thomas Rinks and Joseph Shields won a $42 million judgment from Taco Bell after a jury found that they, not an outside ad agency, were the source for the talking Chihuahua in the company's TV commercials.... As it turns out, however, such judgments are rare and usually involve cases in which companies' files are chock full of evidence of meetings held and proposals exchanged. But like the scalding coffee cup at McDonald's and the obstetricians driven out of practice in Pennsylvania, these cases have now been enshrined in the Tort Reform Hall of Fame and etched into the imaginations of corporate general counsels everywhere...

Posted by DeLong at 10:56 AM | Comments (12)

Peter Gosselin on State-Level Private Accounts

He writes, in the LA Times:

States' Private Pensions Make a Weak Showing : President Bush believes Americans are so eager to join the 'ownership society' that, given a chance, two-thirds of those eligible would divert funds from Social Security into the personal investment accounts he proposes. But when public employees in seven states were offered the opportunity for similar accounts during the last decade, nowhere near two-thirds signed up for them. In many instances, the figure was closer to 5%.... Nebraska's state and county workers were given do-it-yourself accounts... made so many investment errors that they ended up making less than colleagues with fixed-benefit pensions — and less than what analysts have said is needed for old age. Their poor performance led the Nebraska Legislature two years ago to junk the accounts for new employees.

While Americans are just beginning to grapple with the president's proposal for private accounts, employees and retirement officials in Michigan, Montana, Washington, West Virginia and other states have discovered that the accounts can fall far short of their promise. Their experiences sound a cautionary note for Bush as well as for California Gov. Arnold Schwarzenegger.... The poor performance of many of the accounts leaves experts to wonder whether most people, even among those who want to make their own retirement investments, have the time or knowledge to do so successfully. 'If people have private accounts in Social Security and they're left to make the decisions themselves, the results likely will not be positive,' said Anna Sullivan, executive director of the Nebraska Public Employees Retirement Systems, which replaced its private account system with a centrally managed plan in 2003.

Joseph Jankowski, executive director of the West Virginia Consolidated Public Retirement Board, said: 'The vast majority of people don't have the inclination or comfort level to be responsible for their own retirements.' West Virginia board officials are debating whether to drop the state's private account plan as Nebraska did.

This is the reason that I am for very tightly constraining where privatized accounts go: one stock fund, one bond fund, and fix the percentage allocation to each according to a rule so that beneficiaries can't churn their accounts against themselves. But then the account is not very private or personal, is it?

Posted by DeLong at 10:53 AM | Comments (9)

February 22, 2005

No: It's a Job for Metafilter

I wrote:

It would be interesting to attempt a list of novels and ideal readingages -- maybe someone out there has done it. This seems like a jobfor... the internet! Unfortunately neither Google nor Ask is turningthis up.

Rebecca Blood replies:

no, for that, (specifically high schoolers) you need to ask metafilter.http://ask.metafilter.com/mefi/10678

question asked by kevin kelly, who featured ask metafilter in today in"cool tools" http://www.kk.org/cooltools/archives/000665.php

you might also enjoy this list by Marylaine Block, internet veteranand librarian of "Books Too Good to Put Down"http://marylaine.com/bookbyte/index.html#toogood

best regards,

the weblog handbook amazon best of 2002, digital culture

Posted by DeLong at 06:57 PM | Comments (11) | TrackBack

20050222: Econ 113: Lecture: Civil War and Gilded Age

20050222: Econ 113 Lecture: Civil War-Gilded Age

Part I: Civil War

Stephen Douglas

Douglas thinks that he is:

What Douglas actually does is:

The Civil War:

Cost of the Civil War:

South stuck at 60% or so of the per capita income of the rest of America for nearly a century.

Part II: Gilded Age

From 1860-1910:

Key Features of the Gilded Age:

Political Reactions:

Then comes Progressivism...

corruption malefactors of great wealth

Posted by DeLong at 06:56 PM | Comments (24)

Brad Setser Foams at the Mouth

He dislikes both the Bush administration's non-Social Security plan and the Washington Post:

Brad Setser's Web Log: The confused conservatives on the Washington Post oped page ...: The reform basically creates cash flow deficits in Social Security... where there were none from now until 2050 or so. In exchange, the reforms theoretically get rid of the gap between promised benefits and expected revenues after 2050.... The only certainty associated with the reform is that it will increase the amount of marketable debt in the near term, and that this increase will lead to a significant increase in the United States 'debt to GDP ratio', with debt here being 'debt sold to the public.' Any offsetting cost savings are purely hypothetical -- they are no more real that the CBO budget forecasts that assume the budget deficit will go away because the tax cuts expire. Any future benefit cut embedded in the reform could (and, if it is too draconian, almost certainly will) be reversed by future Congresses....

[T]he proposal effectively takes a government program that is now fully funded, indeed over-funded, on a cash flow basis, and creates a cash flow deficit in that program immediately. After all, if the rest of the government currently operates with cash flow deficits, why shouldn't Social Security too?

If you hold a 10 year bond, or even a 30 year bond with a residual maturity of 25 years, the cash flows of the proposed reform are negative until after your bond matures, and the reform would involve a substantial increase in Treasury issuance and the overall stock of Treasuries in the market while the bond you hold is outstanding....

Posted by DeLong at 06:56 PM | Comments (21)

20050222: Econ 113: Problem Set 2: Cotton Is King!

The second problem set for the spring 2005 version of Economics 115, American Economic History: Cotton Is King!

Posted by DeLong at 11:58 AM | Comments (2) | TrackBack

"Exorbitant Privilege"

Pierre-Olivier Gourinchas reports that it was not Charles de Gaulle but his then-lieutenant Valery Giscard d'Estaing who in the early 1960s first denounced the U.S.'s "exorbitant privilege" as the center of the international monetary system.

Posted by DeLong at 11:30 AM | Comments (6) | TrackBack

Economics 113 Assignments and Examinations: Spring 2005

Problem Set 2: Cotton Is King! (due March 3).

Problem Set 1: Interpreting Regressions (due February 22).

First Midterm Exam (February 15).

First short paper (due February 8).

Posted by DeLong at 06:23 AM | Comments (0)

February 21, 2005

The Math Test Score Upper Tail: Is There Reason to Believe That Sociology Swamps Biology?


In 1992, 2.8% of Asian-American women who took the Math SAT scored 750 or above.

In 1992, 2.1% of white men who took the Math SAT scored 750 or above.

In 1992, 0.4% of white women who took the Math SAT scored 750 or above.

In 1992, 0.2% of African-American men who took the Math SAT scored 750 or above.

Source: NSF, Science and Engineering Indicators 1993, http://www.nsf.gov/sbe/srs/seind93/.

Posted by DeLong at 05:16 PM | Comments (172) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Charles Krauthammer Edition)

Michael Kinsley once said that discovering Charles Krauthammer was one of his finest moments. God alone knows why.

PGL of Angry Bear has views:

PGL of Angry Bear: If there are Federal Reserve notes in your wallet, I’ll gladly buy you a cup of coffee if you give them to me. And why would he make this deal? Check this out:

Charles Krauthammer: What’s in Your Wallet?: 2042 is the fictional date for the fictional bankruptcy of a fictional trust fund. Let's start with basics. The Social Security system has no trust fund. No lock box. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65. The system is pay-as-you-go. The money goes to support that year's Social Security recipients. What's left over is ``loaned'' to the federal Treasury. And gets entirely spent. It vanishes. In return, a piece of paper gets deposited in a vault.... These pieces of paper might be useful for rolling cigars. They will not fund your retirement...

If [Krauthammer] really believe piece of paper called financial assets are worth nothing, I’ll gladly take all of your cash, funds in your bank accounts, and other financial assets. In turn, I’ll even buy a week’s worth of groceries. Of course, this pay-as-you-go claim is based on the premise that President Reagan and Alan Greenspan lied to us in 1983. Back then, the stated reason for increasing the payroll tax rates was that we would be pre-funding the Social Security Trust Fund.... I prefer to believe that President was telling us the truth in 1983. But if Mr. Krauthammer and other fans of George W. Bush prefer to say that President Reagan lied to us – so be it...

As does Noam Scheiber:

Noam Scheiber: The New Republic Online: etc.: I don't understand Charles Krauthammer's column in Friday's Washington Post. Krauthammer spends the first two-thirds of the column arguing that the Social Security trust fund is a fiction... and then claim[s]:

...[E]very year we allow to go by means that the reduction in benefits or the increase in taxes will have to be larger. If we had started this in the fat years of the 1990s, we could have done it at reasonably low cost in benefit cuts and/or tax increases. We now have 13 years rather than 20 or so before the system starts bleeding red...

[T]he logic of preemptively defusing the Social Security crisis only makes sense if you believe in the Social Security trust fund, whose existence he just spent all that ink refuting.... Social Security is going to run a surplus every year between today and 2018. Those surpluses accumulate in the trust fund. The only thing you'd accomplish by cutting benefits or raising taxes today is to increase the size of... the trust fund. Now, if you believed in the trust fund, you'd agree that this additional money could be used beginning in 2018 to keep paying full benefits to all retirees. But Krauthammer doesn't believe in it...

As does Matthew Yglesias:

Matthew Yglesias: Conservatives for Gold!: Let's also note Krauthammer's commitment to the rightwing doctine of Currency Fictionalism.... By this standard, not only is my bond porfolio not real, my bank account isn't real, and, in fact, the cash in my pocket isn't real. The only 'real' money, apparently, is stacks of gold bars. Now once upon a time, your U.S. currency was redeemable for gold bars and, thus, one might consider it real. Alternatively, perhaps U.S. currency in the gold standard days was a 'mere I.O.U.' Either way, we've been off the gold standard for some time now, and people would be alarmed to learn that this means their money is fake. Does the Post pay Krauthammer in dubloons?

Posted by DeLong at 03:05 PM | Comments (117) | TrackBack

Historical Mysteries

The Little Professor is unhappy with historical mysteries:

The Little Professor: Historical mysteries: Dismissing an entire genre or subgenre out of hand is, to say the least, unfair.  One never knows what literary miracle lurks on the next shelf.  Still, I suspect that all of us feel consistently dissatisfied with at least one genre--and, in my case, it happens to be the historical mystery... something about the historical mystery per se fails to click for me. 

Part of my dissatisfaction may derive from the historical limitations on mysteries as a genre.... The problem... is that while murder may spring eternal, the motives for same may not....  Most of the historical mysteries I've read do a much better job delineating historically accurate background than they do delineating historically accurate motives--and therein, I suspect, lies the rub.  It's not just that the criminals tend to feel modern, but that the detectives often feel that way as well.... Anachronism has always haunted the historical novel; one of Sir Walter Scott's reviewers argued that his female characters would be repulsive if they were really true to their times.... [N]ineteenth-century writers and readers always fetched up against certain pockets of resistance when it came to historical accuracy, and things haven't changed. Patricia Finney's Gloriana's Torch is an interesting example of this point.... My dissatisfaction-with-the-historical-mystery rule usually finds its exception in Finney, whose Gloriana's Torch is the third in a series of Elizabethan spy thrillers.... Finney's prose has real flair.... I'm not panning the novel, which I enjoyed a great deal.  But... Gloriana's Torch has some quite noticeable 'pockets of resistance' in and around its religious themes....

[For example,] the novel consistently puts sixteenth-century Catholic antisemitism in the equivalent of scare quotes.... As a result, the antisemitism is not so much disturbing--except in the most superficial of ways--as it is a clear marker of historical difference: this is how people in the sixteenth century thought, but we don't agree with them.  (You could write a novel in which the reader was forced to confront the antisemitism without the figurative scare quotes, in which case you'd have something far more demanding and, indeed, frightening--but also, I suspect, far less marketable.)  Whatever the characters think about religion, the narrator makes it clear which are to be blamed and which praised...

I, by contrast, am high on historical mysteries. The Fourteen-Year-Old has been working his way (and I have been following in his tracks) through Steven Saylor's books set in the last half-century of the Roman Republic: Roman Blood, Arms of Nemesis, A Mist Of Prophecies, The House of the Vestals, The Venus Throw, Catilina's Riddle, Rubicon, A Murder On The Appian Way, Last Seen in Massilia, The Judgment of Caesar, and the forthcoming A Gladiator Dies Only Once. Everything The Little Professor says is true: Gordianus the Finder is not a Roman, but a softer-hearted version of Philip Marlowe--someone who it is impossible to imagine surviving as a client of Cicero's and Pompey's in late-Republican Rome--and I find that somewhat jarring. But aside from the intrusion of a late-twentieth century Berkeley version of Marlowe into first century B.C. Rome, the stories are excellent and the achievement amazing. The density of information about late-Republican Rome--not just politics and war but high, low, and material culture--is absolutely wonderful.

So let me profoundly thank Steven Saylor: where else can you eat oysters with Marcus Licinius Crassus in one of his villas on the Bay of Naples, listen as Cicero tries his first big case:

I imagine that you, O judges, are marvelling why it is that when so many most eminent orators and most noble men are sitting still, I above all others should get up, who neither for age, nor for ability, nor for influence, am to be compared to those who are sitting still. For all these men whom you see present at this trial think that a man ought to be defended against all injury contrived against him by unrivalled wickedness; but through the sad state of the times they do not dare to defend him themselves. So it comes to pass that they are present here because they are attending to their business, but they are silent because they are afraid of danger. [2]  What then? Am I the boldest of all these men? By no means. Am I then so much more attentive to my duties than the rest? I am not so covetous of even that praise, as to wish to rob others of it. What is it then which has impelled me beyond all the rest to undertake the cause of Sextus Roscius? Because, if any one of those men, men of the greatest weight and dignity, whom you see present, had spoken, had said one word about public affairs, as must be done in this case, he would be thought to have said much more than he really had said. [3]  But if I should say all the things which must be said with ever so much freedom, yet my speech will never go forth or be diffused among the people in the same manner. Secondly, because anything said by the others cannot be obscure, because of their nobility and dignity, and cannot be excused as being spoken carelessly, on account of their age and prudence; but if I say anything with too much freedom, it may either be altogether concealed, because I have not yet mixed in public affairs, or pardoned on account of my youth; although not only the method of pardoning, but even the habit of examining into the truth is now eradicated from the State.

Or drink bad wine with Gaius Vallerius Catallus in the salax taberna:

Suns set and can rise again.
But once our brief light has set
Night is forever and must be slept out.


Posted by DeLong at 02:06 PM | Comments (31) | TrackBack

Mene, Mene, Tekel, Upharsin

Matthew Yglesias weighs George W. Bush in the balance and finds him wanting:

Matthew Yglesias: Closet Tolerants: Via Julie Saltman... the early days of the Bush 2000 campaign in which, among other things, George W. says he's not going to 'kick gays' for political advantage.... What's so especially disgusting about the president's opportunistic deployment of gay-bashing for political purposes is that, by all accounts and evidence, he doesn't believe a word of it... they're 'closet tolerants' who know perfectly well that what they're doing is wrong. When I meet people who, out of sincere conviction (usually religious) believe homosexuality is sinful and that public policy ought to be deployed to prevent this sinful behavior, I disagree with them, but understand that this sort of deep moral disagreement rooted in faith is a part of life.... When you see someone who knows perfectly well that the view he's adopted for political purposes is wrong, but who adopts it anyway out of cyncial thirst for power, well, then, that's just disgusting.

Posted by DeLong at 08:53 AM | Comments (26)

More AEI-Quality Research

Tim Lambert finds some more AEI-quality research:

Deltoid : The Great DDT Hoax: Anti-environmentalist writers frequently claim that after DDT had all but eliminated malaria from Sri Lanka, environmentalist pressure forced Sri Lanka to ban DDT, leading to a resurgence of malaria:

Roger Bate in Politicizing Science: The Alchemy of Policymaking writes:

Some developing countries imposed a complete ban on the pesticide, as Sri Lanka did in 1964, when officials believed the malaria problem was solved. By 1969 the number of cases had risen from the low of seventeen (when DDT was used) to over a half million.

Walter Williams in in Capitalism Magazine.... Ted Lapkin in Quadrant.... John Brignell.... Jim Norton....

The definitive history of malaria is Gordon Harrison’s Mosquitoes, Malaria and Man.... Harrison writes:

Sri Lanka went back to the spray guns, reducing malaria once more to 150,000 cases in 1972; but there the attack stalled. Anopheles culicifacies, completely susceptible to DDT when the spray stopped in 1964, was now found resistant presumably because of the use of DDT for crop protection in the interim. Within a couple of years, so many culicifacies survived that despite the spraying malaria spread in 1975 to more than 400,000 people. So in 1977 they switched to the more expensive malathion and were able to reduce the number of cases to about 50,000 by 1980. In 2004, the number was down to 3,000, without using DDT.

....The anti-environmentalist version of what happened is a hoax. That doesn’t mean that all the writers above were being deliberately misleading: they might be just repeating what another anti-environmentalist wrote and be unaware of the true story. AEI scholar Roger Bate, however, coauthored an entire book on DDT and Malaria which relies very heavily on Harrison’s history, citing him over twenty times. They conspicuously fail to mention that Sri Lanka resumed DDT spraying and that it failed because of resistance....

Posted by DeLong at 08:50 AM | Comments (18)

Why Do They Lie All the Time, About Everything?

Because the press doesn't dare call them on it.

Let me turn the mike over to Matthew Yglesias:

Matthew Yglesias: Ah, "Debunking": I see Cato's done a 'daily debunker' of the Schumer Social Security calculator that complains:

The calculator acknowledges that the President's proposals do not necessarily include a shift from wage- to price-indexing. It acknowledges that the President has not made any specific proposals to reduce Social Security's outstanding fiscal imbalance. It is well known that the President has called for open debate regarding such measures. Yet, the calculator proceeds to show estimates based on a particular method of reducing the fiscal imbalance--a shift from wage- to price-indexing--thereby incorrectly ascribing this feature to be a part of the President's proposals.

But of course the president's hand-picked commission on privatization recommended price indexing, the White House's official strategy memo on privatization said they were going to implement price indexing, unless I'm mistaken Cato supports price indexing, and even if the administration plan doesn't ultimately implement price indexing it will need to cut benefits by an equivalent amount. But if the White House really wants to debunk the view that they're proposing price indexing, they could easily say that they oppose it and take it off the table. Meanwhile, best as anyone can tell, price indexing is a part of the Republican Plan.

Posted by DeLong at 08:46 AM | Comments (12)

Search Engine Optimization

Jay Rosen writes about About and the New York Times:

PressThink: A Little Detail in the Sale of About.com to the New York Times: I couldn't tell you if this page has the proper meta-data-- or any. My method of search engine optimization is to get a lot of links by writing something original and useful that people will elect to recommend at their own sites. It works. But only because links to PressThink don't expire.

'Frankly, they bring a lot of competencies to us. They're the leaders in search-engine optimization.' That's from an interview with Martin Nisenholtz, Senior Vice President for Digital Operations at the New York Times, who spoke with Staci Kramer of Paid Content about his company's recent acquisition of About.com for $410 million. In a conference call with stock analysts, Nisenholtz again mentioned search. He talked about 'some very useful synergies such as cross marketing and search optimization expertise.'... [T]he logic of this portion of the transaction intrigued me. They know how to show up in search; we don't. Let's buy them. Then we'll know too. 'We own you now. Tell us what you know.'

About.com is a network of about 500 mini-sites where people who know a lot about a subject--they're called 'guides,' but they could also be called bloggers--write columns and offer links and resources about specialty topics from personal finance to parenting to fly-fishing. The mini-sites are surrounded by ads--including 'cost-per-click' advertising--and sponsored links; that's where the money comes from.... Search engine optimization means the business of getting your site noticed by Google, Yahoo and other engines. Some firms claim to know how it works and will 'boost' your site for a price. But About.com is not in that business (a very shady business.) What About.com, and it's competitor, iVillage, know how to do is design pages that find their way into search engines, and thus have a second life.

Say you write the definitive guide piece on 'Is Your Sick Kid Too Ill To Attend School?' Naturally you want it to show up when Web users query for information on that subject. And putting keywords 'sick child stay home school' into Google brings up that page from About.com in the top ten results. According to Susan Mernit, a majority of About.com's readers find the company's content this way. They aren't subscribers, members or regular visitors. They get there through what is called 'natural' search. By contrast: "The New York Times, like most media sites, uses a content management system and a dynamic, cookied URL structure that means that only some landing pages and the home page get the presence in search results--and of course, the URLs for the news stories expire and move into the archive where they are walled off."

You rarely find New York Times articles in the top ten results of any Google search. The reason is simple: Search works by counting the quantity and quality of links to a page. In most cases, links to the New York Times expire after a week, the url's (web addresses) change, and the content moves behind a pay wall.... The second life of content, made possible by search, is of critical importance to journalists whose work is on the Web. (That's almost all journalists.) The very phrase 'on' the Web tells us that things may land on the surface of the network and not get woven into it. These stand a very poor chance of surviving and having a second life, where there are probably more readers available than in the first....

I have direct experience with this as a blogger. In the beginning, I was writing 'on' the Web-- meaning on its surface. Over time, as PressThink has embedded itself more into the Web, and become inter-linked with other sites, it has gained more and more traffic from 'natural search,' visitors who went to Google and found PressThink because when they looked up, say... Ted Koppel, there it was: my post from May 1, 2004, after Sinclair Broadcasting refused to run 'The Fallen.' (The number two result on Google when I wrote this. For Eason Jordan, PressThink was number three when I wrote this.) You can generate significant traffic that way.

Martin Nisenholtz spoke of it as a competence his firm was buying (and knew how to value): getting your content found by search engines and then ranked so that users find it.... I e-mailed him for more details about the search knowledge at About that he found valuable enough to mention in a conference call with analysts. This is what he told me:

About.com has built a long standing institutional knowledge in building pages that are easily read by the spiders the search engines use to build their databases. These techniques evolve over time, but include accurately titling pages, use of metadata, proper syntax of key content, providing machine-readable links, page formatting that doesn't interfere with machine automation and other like details which allow spiders to be able to accurately understand the content of the article.

Additionally, About.com maintains long-term relationships with the major search engines to ensure compatibility and accessibility to their databases as they undergo constant change. All of this ensures that the content is read and placed into the databases, but in the end, it is the quality of the content and the relevancy of the article that is most important in search.

In addition, because the guides are solely writing for the Internet consumer, they write in a style that is focused on the medium (links, lists, images, forums, etc.) Of course, most print and broadcast media companies do not do this, as the content is created primarily for offline use.

...'Indeed, demand for Internet advertising has grown so quickly that many media companies are finding themselves without enough Web pages on which to sell ads,' wrote James Bandler of the Wall Street Journal Friday. And they're finding themselves without much knowledge of how to show up in search. I'm a blogger, not a company. I couldn't tell you if this page has the proper meta-data-- or any. My search engine optimization method is to get a lot of links by writing something original and useful that people will elect to recommend at their own sites. It works (sometimes.) But only because my links don't expire.

On January 19, I wrote 'Bloggers Are Missing in Action as Ketchum Tests the Conscience of PR.' Much of it was based on facts and impressions in Stuart Elliot's 'Advertising' column, published the same day in the New York Times ('Public Relations Industry Debates Payments to Commentator') which I linked to and discussed.

Today if you put Ketchum 'Armstrong Williams' payments into Google, Elliot's column is not there at all. Nowhere on the first ten pages. PressThink was the number 2 result on the first page when I tried it, Editor & Publisher number one. Change it to Ketchum payments 'Armstrong Williams'--switching only the order of two terms--and the Washington Post story is the first result, and again Stuart Elliot's column is nowhere to be found.... The Elliot column couldn't embed itself in the Web, and sink proper roots. It's effectively 'gone.' From Elliot's point of view, he loses a potentially huge readership for his work. Can he afford it?

Right now there is little in the way of 'search engine optimization' at the New York Times. For Stuart Elliot's colleagues, the reporters and writers at the flagship of the American fleet, this means that, in the main, their work is lost to Google, lost to online forums and conversation, lost to the long tail where value is built up-- and in many ways lost to cultural memory.

Do they know this? Do they care about all the lost readers, and the lack of stickiness even their best work has on the Web? What, if anything, do they plan to do about these losses? To me it is one of the mysteries about the editorial staff at that great institution....

Posted by DeLong at 08:41 AM | Comments (14) | TrackBack

February 19, 2005

Six Apart, Makers of TypePad and Movable Type

Paul Kedrosky reads AP:

Infectious Greed: Profile of the Six Apart Founders: The AP has out a worthwhile profile out of Ben and Mena Trott, the founders of blogging software provider Six Apart, the maker of Movable Type and TypePad, among other products. While it may not have been the intent, I was (re-)reminded how timing, not technology, is everything in business: Blogger (and Groksoup) started in 1999, two years before Six Apart, and despite having broader feature sets had nowhere near the early growth of Movable Type:

Six Apart now has 7 million users, including a substantial number who pay fees that range from $4.95 per month for TypePad's bare-bones package to thousands of dollars for licensing Movable Type to install on their own servers.

The revenue stream, which the Trotts declined to disclose, has enabled the privately held Six Apart to expand from just six employees in early 2004 to more than 70 with the LiveJournal acquisition, making the Trotts darlings of the blogosphere.

Posted by DeLong at 12:51 PM | Comments (12)

Why Oh Why Are We Ruled by These Criminals? (Abu Ghraib Edition)

Michael Froomkin reads things that depress me too much for me to read them:

Discourse.net: YATA (Coverup Dept.): "Pictures of mock executions destroyed, report says. Via AP:

Pictures of U.S. soldiers in Afghanistan posing with hooded and bound detainees during mock executions were destroyed after the Abu Ghraib prison scandal in Iraq to avoid another public outrage, Army documents released Friday by the American Civil Liberties Union show.

The results of an Army probe of the photographs were among hundreds of pages of documents released after the ACLU obtained a federal court order in Manhattan to let it see documents about U.S. treatment of detainees around the world.

Of course, this is small potatoes compared to the White House/Rumsfeld decision to put the General who ordered the abuse in charge of so-called investigation into it....

Posted by DeLong at 12:45 PM | Comments (19)

The Eighty-Hour Week

Professor B**** meditates on the eighty-hour week:

B**** Ph.D.: Now, the specific figure Summers apparently mentioned is 80 hours/week. I'm gonna go on record here and say that yes, in most cases, women with young children are not gonna want to work 80 hours/week. Then again, I assume that men with young children also do not want to work 80 hours/week. In fact, I'm gonna go out on a limb and say no one wants to work 80 hours/week. I would even argue that working 80 hours/week, week in and week out, is unhealthy and impossible.

There are 168 hours in a week. Let us say you work 80 of them. That leaves you with 88 hours of non-work time. If you sleep 8 hours/night, as you should--especially if you are doing 80 hours of productive thinking every week, which really would require you to get your rest--that is 56 hours/week of sleep, leaving you with 32 hours. Let's subtract 2 hours/day for meal preparation and eating, and an additional 2 hours for grocery shopping and putting groceries away.... That is 2.29 hours/day to do everything other than work, eat, and sleep.... Now, maybe if you are a single person and you are paid a lot of money, you can hire someone to clean your house and do your laundry, and you can cut back on your eating time by microwaving frozen dinners every night and eating while you relax in front of the tv. That might leave you enough time to shower every day and occasionally go out to buy new clothes. But to presume that this is a reasonable life to ask people to lead is completely insane.

Oh, there may be periods of extreme productivity or inspiration when people can work like that. But regular work on that scale? No. And let's be honest: because it is, in fact, physically impossible to work like that, people don't....

We women-with-kids, we who are so busy 'choosing' not to live this way, we are the goddamn canaries.... Most women do, sooner or later, have children. And so do most men. Any system that is set up so that more than half the population is presumptively disqualified from being part of it is not a reasonable system.

One caveat: without kids, without a significant other, it is possible--if you structure your entertainment and relaxation so that they are part of your work. (Going out to dinner with your fellow assistant professors to talk about the Equity Premium Puzzle, say; or relaxing by sitting in a coffee house with John Wallis and Barry Weingast trying to figure out why ace politician Stephen Douglas so fatally misjudged the mood of the North in the 1850s.) Otherwise... not. If you have kids, have a spouse, you need to have a spouse who enjoys being a "happily married single parent." And then the first and second words of that phrase are likely to drop away...

Posted by DeLong at 12:42 PM | Comments (71)

When Things Go Boom...

Fortunately, far away:

BBC NEWS | Science/Nature | Huge 'star-quake' rocks Milky Way: Astronomers say they have been stunned by the amount of energy released in a star explosion on the far side of our galaxy, 50,000 light-years away. The flash of radiation on 27 December was so powerful that it bounced off the Moon and lit up the Earth's atmosphere. The blast occurred on the surface of an exotic kind of star - a super-magnetic neutron star called SGR 1806-20. If the explosion had been within just 10 light-years, Earth could have suffered a mass extinction, it is said.

'We figure that it's probably the biggest explosion observed by humans within our galaxy since Johannes Kepler saw his supernova in 1604,' Dr Rob Fender, of Southampton University, UK, told the BBC News website. One calculation has the giant flare on SGR 1806-20 unleashing about 10,000 trillion trillion trillion watts. 'This is a once-in-a-lifetime event. We have observed an object only 20km across, on the other side of our galaxy, releasing more energy in a 10th of a second than the Sun emits in 100,000 years,' said Dr Fender.

The event overwhelmed detectors on space-borne telescopes, such as the recently launched Swift observatory.... Twenty institutes from around the world have joined the investigation and two teams are to report their findings in a forthcoming issue of the journal Nature.... Research teams say the event can be traced to the magnetar SGR 1806-20. This remarkable super-dense object is a neutron star - it is composed entirely of neutrons and is the remnant collapsed core of a once giant star. Now, though, this remnant is just 20km across and spins so fast it completes one revolution every 7.5 seconds.

'It has this super-strong magnetic field and this produces some kind of structure which has undergone a rearrangement - it's an event that is sometimes characterised as a 'star-quake', a neutron star equivalent of an earthquake,' explained Dr Fender. 'It's the only possible way we can think of releasing so much energy.' SGR 1806-20 is sited in the southern constellation Sagittarius. Its distance puts it beyond the centre of the Milky Way and a safe distance from Earth.

'Had this happened within 10 light-years of us, it would have severely damaged our atmosphere and would possibly have triggered a mass extinction,' said Dr Bryan Gaensler, of the Harvard-Smithsonian Center for Astrophysics, who is the lead author on one of the forthcoming Nature papers. 'Fortunately there are no magnetars anywhere near us.'...

Posted by DeLong at 10:00 AM | Comments (6)

Why Oh Why Can't We Have a Better Press Corps? (Is David Brooks Really this Big an Idiot? Department)

David Brooks says that he is shocked, shocked to discover that George W. Bush's budget policy is a clown show:

The New York Times > Opinion > Op-Ed Columnist: In the Midst of Budget Decadence, a Leader Will Arise: ...people who are worried about federal deficits, who are offended by the horrendous burden seniors are placing on the young and who are disgusted by a legislative process that sometimes suggests that the government has lost all capacity for self-control...what is happening right now with the Medicare prescription drug benefit. He's going to look at an event like that one, and he's not only going to be worried about the country's economic future - he's also going to be morally offended. He's going to sense that something fundamentally decadent is going on.

And he's going to be right.

In the past months we have learned that the prescription drug benefit passed last year is not going to cost $400 billion over 10 years. The projections now, over a slightly different period, are that it's going to cost over $700 billion. And these cost estimates are coming before the program is even operating. They are only going to go up.... Over the next few months we will be watching a government that may be millions-wise, but trillions-foolish. We will be watching a government that sometimes seems to have lost all perspective - like a lunatic who tries to dry himself with a hand towel while standing in a torrential downpour....

In Congress, some are taking a look at these new cost projections and figuring that maybe it's time to readjust the program.... But the White House is threatening to veto anything they do! President Bush, who hasn't vetoed a single thing during his presidency, now threatens to veto something - and it's something that might actually restrain the growth of government. He threatens to use his first veto against an idea he himself originally proposed!

Have we entered another world, where up is down and rationality is irrational?

I don't know which would be more depressing--for David Brooks's sudden discovery of the Bush budget clown show to be feigned, or for it to be real.

Posted by DeLong at 09:41 AM | Comments (40)

The Distribution of Political Power in the Future Iraq

Juan Cole reports:

Informed Comment : Gilbert Achcar kindly shares his translation of a recent article in al-Hayat:

Amer al-Husseini, a leader of al-Sadr's Current... the Current 'supports the designation of Ibrahim al-Jaafari to the post of Prime minister.'... Al-Husseini revealed that contacts were being held between the Coalition [the Unified Iraqi Coalition, backed by al-Sistani and the winner of the majority of seats in the Assembly] and the leadership of al-Sadr's Current in al-Najaf.... Al-Hayat has also learned that a security plan, which was mentioned earlier for the case where the Coalition would lead the new government, foresees the integration of large numbers of 'Al-Badr' and 'Al-Mahdi Army,' as well as the militias of Hizbullah and Al-Dawa, in the ranks of the new Iraqi army...

Posted by DeLong at 09:25 AM | Comments (6)

The 1921 Tulsa Riot

Crooked Timber points us to a Financial Times story on the 1921 Tulsa race riot: up to 300 African-Americans killed:

FT.com / Home UK - Burnt offerings: "Otis Granville Clark is a wonder. At 102, the former butler of Joan Crawford - who served Clark Gable and Charlie Chaplin - still drives, lives on his own and twice a week attends church in his home city of Tulsa, Oklahoma. He has been a church-goer for decades, ever since he heard the call and, surprising Crawford and himself, became an evangelist preacher. Today his blue eyes have gone milky but they still sparkle, his wiry frame remains agile, and his most painful memories are still fresh - even after 83 years.

Coiled on the edge of an understuffed sofa, Clark leans back and screws his eyes tight to summon up 'that day'. It remains the most vivid of his life. 'That was the day I saw blood,' he says. He was a young black man of 18, scarcely aware of the world beyond his neighbourhood on that warm spring morning in 1921 when 'the shooting and all' began....

Historians call the firestorm that convulsed Tulsa from the evening of May 31 into the afternoon of June 1 the single worst event in the history of American race relations. To most Tulsans it is simply 'the riot'. But the carnage had nothing in common with the mass protests of Chicago, Detroit and Newark in the 1960s or the urban violence that laid siege to Los Angeles in 1992 after the white police officers who assaulted Rodney King were acquitted. The 1921 Tulsa race riot owes its name to an older American tradition, to the days when white mobs, with the consent of local authorities, dared to rid themselves of their black neighbours. The endeavour was an opportunity 'to run the Negro out of Tulsa'....

When martial law finally brought quiet, 35 blocks of Tulsa's north side - with 1,256 houses and 23 churches - had burned to the ground. Hundreds of homes and shops had been looted. Black men had been shot, burned and dragged through the streets. At the time, Clark lived in his grandmother's house with his stepfather. His own father worked as a porter on the trains on the Frisco tracks that ran through Tulsa, carrying passengers from St Louis to San Francisco. During the riot, Clark's grandmother's house was burned down and his stepfather disappeared - Clark believes he was killed but he has not been able to prove it. Clark soon left town, jumping a cargo train to search for his father in California. Greenwood, by then, was in ashes.

Years later, white witnesses would be haunted by what they had seen as young boys: a black corpse hanging from a telephone pole and others stacked like cordwood on railroad flatcars. The true death toll will never be known. The confirmed count stopped at 39, but a Red Cross tally at the time ran as high as 300 dead - most of them black. Rumours still persist that the dead were buried in unmarked graves or dumped in the Arkansas River that runs across the city's west side....

The notion that reparations might be made for the victims of Tulsa's riot seemed fanciful for a long time. For 50 years, the destruction was barely even acknowledged. Descendants, black and white, spoke of it in whispers, in the halls of power there was no urge to dig into the past, and beyond the city limits the tragedy was hardly known. But in the summer of 1971, Ed Wheeler, a local history buff and radio personality, broke the silence. Wheeler was an unlikely candidate to excavate Tulsa's darkest secret - he is white and now a retired brigadier general in the Oklahoma National Guard.

In 1971, however, he was commissioned by the magazine of Tulsa's chamber of commerce to commemorate the 50th anniversary of the tragedy. Wheeler managed to interview nearly 60 black and white survivors. He drove across the Frisco tracks at night. 'Blacks were still scared to tell their stories,' he says. 'They'd meet only in their churches, with ministers present.' When the folks downtown read the expose - Wheeler had collected a trove of photographs of the damage and discovered that police, sheriffs and National Guard files on the riot were 'missing' - the chamber refused to run it.

He turned to Don Ross, a young black journalist and civil rights veteran trying to keep afloat a fledgling local magazine devoted to black issues, Impact. Ross, a Tulsa native, had only learned of the riot in high school. Later he would discover that his grandfather had lost his business in the violence. The Impact issue with Wheeler's 'Profile of a Race Riot' sold out, even after three printings. Wheeler received death threats. 'Not from the Klan,' he said, 'But from the guys who did it themselves. In 1971, more than a few were still alive.'...

Posted by DeLong at 07:03 AM | Comments (9)

February 18, 2005

Alan Greenspan Is Worried About the Mortgage Lending Agencies

The Economist reports:

Economist.com | Greenspan’s worries over America’s mortgage giants: FANNIE MAE and Freddie Mac, the twin titans of America’s mortgage markets, think of themselves as big, friendly giants. They stand behind the mortgages of around three-quarters of America’s households—they ‘make home possible,’ as Freddie Mac likes to put it. Their circle of friends does not, however, extend to the Federal Reserve and its chairman, Alan Greenspan. On Thursday February 17th, he told Congress that by letting these two agencies grow unchecked, ‘We are placing the total financial system of the future at a substantial risk.’ Very big but not so friendly, these giants could soon loom over America’s financial skyline like Godzilla and King Kong.

Fannie Mae—originally the Federal National Mortgage Association, it now calls itself by its chummy Wall Street nickname—traces its origins to the credit crunch of the Great Depression, and government efforts to help families borrow to buy a home. Fannie Mae, and its smaller cousin, Freddie Mac (the Federal Home Loan Mortgage Corporation), do not lend to budding homebuyers directly. Instead, they buy up the mortgages that other lenders offer, helping local banks and thrifts to distance themselves from the risks involved. Some of these mortgages are then bundled up and sold on: the agencies serve simply as middlemen. But a growing proportion are kept on the agencies’ balance sheets. Between 1997 and 2003, their combined holdings more than trebled, to over $1.5 trillion (see chart). The middlemen have got fatter and fatter.

Posted by DeLong at 07:30 PM | Comments (9)

Academic Filters...

Matthew Yglesias asks a good question: Why are people talking about what Larry Summers said were his "guesses" about gender, genetics, and math achievement? Why aren't people talking about the main point of Larry Summers's talk on the underrepresentation of women in high-prestige prize academic jobs?:

Matthew Yglesias: Summers Redux: Now that the full text of the speech is out, I'm surprised so much of the discussion has focused on the genetics issue to the [exclusion of the] number one [most important] item on the Summers list [of reasons for the underrepresentation of women] -- women's alleged unwillingness to work long hours because they're too busy having kids and taking care of them. This is, I think, undoubtedly a major factor...

I do think that Matt is too glib in characterizing what is Larry's main point. The process of climbing to the top of the professoriate is structured as a tournament, in which the big prizes go to those willing to work the hardest and the smartest from their mid-twenties to their late thirties. Given our society (and our biology), a man can enter this tournament this without foreclosing many life possibilities: they can marry someone who will bear the burden of being for a decade a "happily married single parent," or they can decompress in their late thirties, look around, marry someone five years younger, have their family, and then live the leisured life of the theory class--or not. But given our society (and our biology), a woman cannot enter this particular academic tournament without running substantial risks of foreclosing many life possibilities if she decides to postpone her family, and a woman cannot enter this particular academic tournament without feeling--and being--at a severe work intensity-related handicap if she does not postpone her family.

In order to make progress, you have to either alter society (and perhaps biology) substantially, or back away from the work-intensity tournament model of choosing people for the high-prestige prize academic slots. But everyone in the debate wants to hold onto the tournament model--either because it justifies their current high-prestige position or because they fear that calling for change will get them a reputation as not being intellectually serious. Few want to call for root-and-branch reorganizations of society for fear of being dismissed as utopian dreamers. And so there are few voices saying that the problem of the disparate impact of the tournament system is a dire and severe one. It's better not to talk about it. What good could come from rocking the boat, and making the senior faculty face the possibility that fixing things might actually disturb their lives somewhat? Instead, pretend that things can be fixed with a little more affirmative action at the assistant professor level, and perhaps some extra committee meetings.

I think it is greatly to Larry Summers's credit that he did say that there are real problems and dilemmas here--that he did not stand up in front of that audience and say that real progress was being made, and that everything would be fixed soon with a little more affirmative action at the assistant professor level and perhaps some extra committee meetings. University administrators willing to think about real problems and issues--rather than focusing on keeping the senior faculty quiet as matters drift--are rare, and are badly needed. And I say this as someone who thinks that Summers's views on gender, genetics, and math achievement are almost certainly wrong, are unsupported, and should not be pushed forward by somebody who is twenty years beyond the stage of his career where you throw out lots of unfiltered ideas in the belief that what matters is the quality of your best one.

I am, after all, the parent of a mathematically precocious daughter. I now have less than a decade to build a society that is properly open to her use of her talents. Put me down as demanding a backing-away from the work-intensity tournament model.

Posted by DeLong at 05:14 PM | Comments (68)

Fake Weblogs?

One of the Sifrys--David, I think--writes:

Sifry's Alerts: Web Spam Squashing Summit: 2/24/2005: Technorati is coordinating a Web Spam Squashing Summit in Sunnyvale next Thursday, February 24, and I would like to extend an invitation to all tool developers to attend. Many thanks to Yahoo! for hosting the event on their campus. The summit will focus on web spam -- not email spam. Web spam includes comment spam, link spam, TrackBack spam, tag spam, and fake weblogs...

Fake weblogs? What's a fake weblog? I mean... you put up posts and links on a regular basis, and that's a weblog, isn't it? How do you fake that?

Posted by DeLong at 03:51 PM | Comments (17)

Why Oh Why Can't We Have a Better Press Corps? (Slate Has a Quality Control Problem Department)

Outsourced to Matthew Yglesias:

TAPPED: February 2005 Archives: Steven Landsburg... [argues] what matters is what we do to get the national savings rate up.... Unfortunately, we end up here:

Which brings us to the president's proposal for private accounts. I like that proposal for three reasons. First, it will encourage people to save. Second, it will give people choices, and choices are good. And third, it will give more voters a stake in the capitalist system, making them more likely to vote for the sort of pro-growth policies that will improve the quality of life for us in our old age and our grandchildren.

...[T]he big, screaming, awful mistake here is that the president's proposal is good for savings. Private accounts will, of course, boost private savings. But since for every dollar saved in a private account the government is going to need to take on a new dollar of debt to finance those pesky transition costs, there will be no net effect on national savings. At least, that's what privatization advocate Alan Greenspan says. Privatization opponents point out that some people will probably look at their accounts growing and reduce contributions to 401 (k) plans, IRAs, or other savings vehicles. Thus, privatization could actually reduce the savings rate. But it certainly won't increase it.

Posted by DeLong at 01:37 PM | Comments (32)

20050217: Econ 113: Handout on Analyzing Who Profited From North American Slavery

Who profited from North American slavery before the Civil War?

Ask a historian, or a political scientist, or a politician the question, “Who benefited from North American slavery?” and the answer you will probably get is, “The slaveholders, of course. The slaveholders got to work their slaves hard, pay them little, sell what they made for healthy prices, and get rich."

We economists have a different view. We economists think seriously about the real long-run "incidence" of events and processes. We economists think historians, political scientists, historians, and all others should take microeconomics to learn about incidence--and then take it again.

What's our take on the beneficiaries of North American slavery before the Civil War? Three groups gained the most:

  1. Those slaveholders who owned slaves when it became clear that Cotton would be King--that the British industrial revolution was producing an extraordinary demand for this stuff and that Eli Whitney’s cotton gin meant that it could be produced cheaply--profited immensely as the prices of the slaves they owned rose.
  2. Consumers of machine-made cotton textiles, from peasants in Belgium able for the first time to buy a rug to London carters to Midwestern pioneers who found basic clothing the only cheap part of equipping a covered wagon, probably profited the most in aggregate.
  3. Northern and western Americans whose taxes were lower because of the tariffs collected on imports of goods financed by cotton exports profited as well.

Why were these the principal profiters from North American slavery? Here is the argument.

Posted by DeLong at 07:40 AM | Comments (48)

February 17, 2005

Problems in Undergraduate Education

Say that there are three big problems with undergraduate education in America today:

In the mass, how do we teach undergraduates things that they will find useful and beautiful--and what are those useful and beautiful things that we should teach them? Call this the "William Morris" problem.

For the elite, how do we get those potentially extremely talented to fulfill their potential--how do we get the thoroughbred horses that we have painstakingly and expensively led to water to actually drink deep from the Pierian spring? Call this the "No Ross Douthats!" problem.

For those who have difficulty learning to speak the language that is mathematics like a native, how to teach them science in a world where it is a fact that the underlying bones of reality are profoundly mathematical--for that is the conclusion Eugen Wigner's "The Unreasonable Effectiveness of Mathematics in the Natural Sciences" leads us to? Call this the "Friends of Wigner" problem.

Anyone with any answers to any of these please email me. I haven't a clue.

Right now I have the flu, and I'm trying to figure out whether we should give zero, one, or two points to someone who writes that the "Eerie Canal connects the Great Lakes with Hudson's Bay, and thus allows water transport from the Midwest to the Atlantic Ocean." Everything after the comma is 100% true...

UPDATE: The consensus is full credit: the part after the comma is right, we don't mark off for spelling mistakes under exam pressure, and from the viewpoint of San Francisco failing to distinguish between two bodies of water both named after Henry Hudson is excusable.

Posted by DeLong at 06:12 PM | Comments (89) | TrackBack

For the Record... A Little Growth Analysis

When the Bush administration Council of Economic Advisers writes:

Publications: CEA White Papers: "Three Questions About Social Security," February 2005: ...there is nonecessary connection between stock returns and economic growth in the long run. Longrun economic growth is determined by productivity growth and labor force growth here in the United States, while stock market returns are determined by the overall cost of capital in the global economy and by the return investors require to bear the risk that comes with equity ownership. There is no reason to believe that slowing population growth in the United States would significantly lower the cost of capital, as set by increasingly globalized capital markets, or the premium required by stock investors...

The implied conclusion that rates of return and rates of economic growth are unconnected is not in general correct. For example, if international net investment positions are small and bounded (as they have been since World War I), if (as it has been for nearly a century) the share of national income earned by capital is stable, and if (as many believe) national savings rates are not very responsive to changes in returns on capital, then the connection between the return on capital r and the rate of real GDP growth y is:

r = a(y + d)/s

Where s is the (gross) share of savings and investment in the economy, a is the share of national income earned by capital, and d is the rate of depreciation.

An assertion that returns and growth rates are unconnected--that economic growth can slow over the long run from an average of 3.4% per year to an average of 1.9% per year without reducing the interest rate--is an assertion that powerful counterbalacing changes are taking place elsewhere in the economy as the growth rate slows. It is an assertion that (a) the share of income going to capital is going to rise substantially (by about 25%), (b) the share of income saved and invested is going to fall (by about one-fifth), (c) the U.S. balance of payments will swing around and run a permanent international surplus of 6% of GDP or so, or (d) some combination of these effects.

Posted by DeLong at 05:18 PM | Comments (33)


One thing is clear: Unfogged has long been one of the gems of the internets, but now the men of Unfogged have met their master:

Unfogged: "You know, that last story I told you was stone cold depressing. I'm going to relate a, well, an only marginally less depressing story, but one that's a lot funnier. (This just reminds me of how in a high school writing class I was accused of pushing the Southern Gothic thing a little too hard, and I was like, 'I toned it down!')

My step-mother used to drink. I think the most wasted day I have ever spent.... This isn't the point of the story, though. I wasn't actually there that time Lonnie asked my step-mom to help...

What follows is not funny. Not funny at all--at least not to anyone with an ounce of compassion for domestic animals. But it is:

...put flea spray on their cat 'Lucky.' If I had been, maybe I'd have been the one to notice it was a spray bottle of 'Easy-Off' oven cleaner, and saved everybody a lot of trouble, but to be honest, I probably wouldn't have.

Strangely enough, he lived, all burnt up with lye, and all his hair fallen out. He hid under the trailer for a good long while, and only came out to be fed. Finally, bald, scarred, pink and fuzzy, he took to hiding behind the TV set, crooning to himself strangely during 'The Price Is Right.' They changed his name to 'Skeeter', because 'Lucky just didn't seem to suit him no more.'

Posted by DeLong at 02:41 PM | Comments (19)

A Very Odd Line in David Wessel's Column This Morning

He writes, of NYU economist Jason Furman's attempts to make sense of the Bush Social Security not-really-a-plan:

WSJ.com - Capital: Other senior administration officials, who spoke on condition that they wouldn't be named, challenged some of Mr. Furman's techniques for gauging the effect of Mr. Bush's proposals....

It used to be that there were only two reasons why White House officials would refuse to be quoted by name:

Neither of these reasons apply to the White House officials who use the cloak of anonymity to attack Jason Furman. For this White House has added two more reasons for White House officials would want to be cited but not by name:

It seems unfair for David Wessel to cite these criticisms without telling us why the criticizers are demanding anonymity. Are they afraid of what being known to have made such criticisms would do to their long-run reputation? Are they worried that if they were identified they would be dismissed as unqualified lightweights?

Inquiring minds would like to know...

Posted by DeLong at 02:41 PM | Comments (16)

February 16, 2005

Fox on Fire...

John Battelle reports:

John Battelle's Searchblog: Firefox, MSFT: Firefox hitting 25 million downloads is getting lots of notice, but this is my favorite, from Scoble, Microsoft's leading blogger, who posted something of a pained congratulations note: 'In just a few months your app has become one of the most used Windows applications in the world. My hat's off to you!'

Note the use of 'Windows application.' Winning by moving the goalposts, is what I think that's called.

PS - You've probably heard, but Gates and MSFT are now promising a new rev of IE by Summer.

Posted by DeLong at 10:21 AM | Comments (26) | TrackBack

Alan Greenspan Is Not a Happy Camper

It is, he says, imperative to have an administration whose budget policy is not a clown show:

FT.com / World / US - Greenspan warns on US fiscal discipline: Greenspan said it was ‘imperative to restore fiscal discipline’ in the United States to help narrow its huge current account deficit. He also said the country had to act before 2008 to prepare its finances for a coming wave of retiring ‘baby boomers’ and said if it failed to do so, there could be an adverse impact on bond markets...

And, he says, he doesn't understand why long bond rates are so low anymore than the rest of us do:

The Fed chief said it was hard to explain why long-term interest rates have declined in the face of the U.S. central bank’s short-term rate increases. He noted, however, that yields and risk spreads ‘have narrowed globally’ -- not just in the United States. ‘For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum,’ Greenspan said. ‘Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.’...

(Via .)

Posted by DeLong at 09:51 AM | Comments (76)

Kevin Drum Stars in "The Nanny State Chronicles"

He writes:

The Washington Monthly: THE NANNY STATE CHRONICLES....ChoicePoint, a credit reporting company, said yesterday that hackers had infiltrated its database and stolen personal information about thousands of consumers. California customers were urged to check their credit reports for suspicious activity. Why only California customers? Because no one else is being told:

A ChoicePoint spokesman said the number of victims nationwide could total 100,000, but the company could not be sure of the extent of the fraud and had no plans to contact people outside California.

There are about 65,000 of you elsewhere in the country who are at high risk of identify theft but don't have a clue. Your state laws don't require ChoicePoint to notify you, so they're not going to.

Remember this the next time some corporate lobbying group whines about excessive regulation. If you don't regulate them, they won't act like nice guys all on their own.

Posted by DeLong at 09:43 AM | Comments (12) | TrackBack

Ideal Reading Ages for Novels

Colin Danby writes:

Hemingway's sensibility was adolescent, so it's not like there are a lot of depths and subtleties that'll only be grasped by an adult.... And his kitschier stuff like _The Old Man and the Sea_ probably shouldn't be read by anyone *over* 14. Some books want to be read early. I didn't get to _On the Road_ 'til I was 30 by which point I no longer found that sort of thing charming. But at 15 I would've loved it. For Graham Greene or Ralph Ellison you need to have been out in the world a few years. It would be interesting to attempt a list of novels and ideal reading ages -- maybe someone out there has done it.

This seems like a job for... the internet! Unfortunately neither Google nor Ask is turning this up.

Posted by DeLong at 09:12 AM | Comments (53) | TrackBack

February 15, 2005

It Tolls for Thee...

The Fourteen-Year-Old asks if he should read Ernest Hemingway (1940), For Whom the Bell Tolls.

I cannot tell. He might be too young--and trying to read it now might spoil it for him for life. I know that I was at the perfect age--twenty-one--when I read The Magic Mountain, and that I would have been unable to get it if I had read it even three years earlier.

But he might not be too young.

Posted by DeLong at 08:22 PM | Comments (44) | TrackBack

The Economist Praises George Bush? (Department of "Huh?")

It starts off on the wrong foot, enthusiastic about Bush and having drunk the koolaid:

Economist.com | America's pensions : HE IS on the march again—this time, at home.... George Bush has tirelessly promoted his plan to reform... Social Security.... Meanwhile, just when you might have expected him to continue his first-term habit of enticing politicians to his side with generous hand-outs, he is proposing a budget that is tough on spending....

The only problem with this first paragraph is that the budget is not "tough on spending"--it's tough on a few small and quantitatively minor components of spending. The Economist's intellectual capital depreciates a little more.

It goes on:

Mr Bush says Social Security must be fixed now or else it will go bust—-a good sales pitch, though the pension system is currently in surplus and will not even go into deficit till 2018.... Social Security looks sound compared with Medicare, the public health-care system for the elderly, whose long-term deficit is several times bigger...

But never explains why it is a good thing to spend time and energy now on what ranks fourth in both size and urgency among America's fiscal problems. Why not tackle the bigger and more urgent problems?

It turns out that the Economist doesn't think that Social Security deserves such special attention:

...in his focus on Social Security [Bush] must not lose sight of the overall fiscal challenge—and the role his own policies have played in it. The long-term burden of Mr Bush's first-term tax cuts and spending increases is three times bigger than the looming Social Security shortfall. Pension reform is desirable; but it will not solve America's long-term fiscal problems, and if its political price is an out-of-control budget, that would be a serious mistake...

And then it goes on to say that everything about the Bush Social Security reform plan is wonderful except for, well, pretty much everything about the plan. Bush's ruling out of payroll tax increases is a mistake:

He has ruled out raising payroll taxes.... A good idea would be to combine the carve-out with additional contributions, or ‘add-ons’, as some Democrats advocate. Mr Bush should find a compromise whereby individuals could divert some share of payroll taxes into their retirement accounts in return for paying higher overall contributions...

Bush's plans will not raise national savings:

And it will do nothing to raise America's low savings rate, because the increase in private saving will be offset by higher public borrowing.... [Better] arrangements would make a rise in national saving far more likely...

And that's not all. Other parts of the Bush plan also, well, suck:

Other changes are needed too, and should be politically possible for a president who says that everything is on the table.... [Price indexation] would hurt many poor pensioners and arouse an eventual backlash (as in Britain).... Partial add-on accounts plus a financing strategy that does not rely exclusively on lower benefits...

But the article concludes with a paean to private accounts:

[D]elaying the retirement age, raising the payroll cap, and so on... stop Social Security going bust.... Mr Bush's new retirement accounts are no help. Yet this misses the point. Giving people greater control of their savings is desirable in itself: that is why private accounts deserve their place in this reform. It is wrong that in the world's most advanced economy so many retirees should rely so heavily on the state. That idea is at the heart of Mr Bush's “ownership society”—and it is worth supporting.

This makes me think the Economist's writers have broken into the stupid-pill locker again. Social Security is the basic, minimum tranche of retirement income. If you give people control over their savings, some who have few other resources will do badly with it. They will then either eat cat food and shiver in the cold in their old age, or their private accounts will be topped off to keep them from penury. But if we choose the second option, then we are creating grave moral hazard: people can speculate with their private accounts, playing the game of heads-I-win-tails-the-government-pays. To head off this moral hazard meltdown, a plan should--and the Bush plan appears to--very tightly constrain where the investments can go. In which case "control of their savings... [not] rely so heavily on the state" means nothing: a shell of rhetoric and talking points attempting to misdirect, to divert attention from the government's decisive continuing role.

The Economist needs to do a much better job than this.

Posted by DeLong at 07:49 PM | Comments (58)

Japan Is Back in Recession

From Reuters:

FT.com / World / Asia-Pacific - Japan’s GDP disappoints: Japan’s economy shrank 0.1 percent in the October-December quarter from the preceding three months, marking a third straight quarter of economic contraction, technically a recession.... Nominal GDP for the quarter was flat from the preceding three months, compared with a median market forecast of 0.1 percent growth.

Posted by DeLong at 05:05 PM | Comments (29)

20050215: Economics 113: First Midterm Exam

Yes, they've taken the first midterm exam.

More later...

Posted by DeLong at 04:22 PM | Comments (4)

Why Oh Why Are We Ruled by These Liars? (Truth and Consequences Department)

Matthew Yglesias writes:

Matthew Yglesias: The Trouble With Lying. . . : The White House seems to think that the government of Syria was behind today's assassination of former Lebanese Prime Minister Rafik Hariri.... [A]s the White House moves toward trying to build support for some sort of retaliation, I can't help but think that I would be 100 percent behind the president in this were I not 100 percent sure that this administration is being run by people who would think nothing of trying to manipulate the country into a military conflict with a middle eastern nation based on flawed, overblown intelligence and misleading presentation of that evidence. There's actually a reason that most presidents have chosen not to make dishonesty their main tool of policy advocacy....

In a completely unrelated development, Mark Schmitt is wondering where the liberal privatizers have gone off to. Certainly many hawks on the right have been wondering for some time now where all the liberal hawks have gone. Well, it's all mangled corpses for moderates of all stripes; we're hopping around on broken legs with various limps strewn about the various highways of the Iraq War, the Medicare bill, the 'budgets,' the NCLB implementation, and whatever other roads you care to examine. Gaining public support from members of the reality-based community for any sort of Bushian initiative is going to be very difficult. So chalk me down as wanting to hear it from someone I trust before I start gunning for Damascus.

Oppose everything this administration proposes root-and-branch. That's the only rational position that anyone can hold.

Posted by DeLong at 09:57 AM | Comments (34)

Brad Setser Examines America's Revealed Comparative Advantage

He writes:

Brad Setser's Web Log: A sobering set of statistics:

2004 US exports of debt securities: $890 billion
2004 US imports of debt securities: $2.3 billion
Balance of trade in debt securities: $888 billion

2004 US exports of goods and services : $1146 billion
2004 US exports of goods: $808 billion.

The US clearly has a comparative advantage selling debt to the world, and it is currently exploiting that comparative advantage to the maximum extent possible ..."

Ah. But why is U.S. debt so valuable to foreigners? Why is demand for U.S. debt securities so high? How much of it is central banks trying to buy high manufactured-goods exports because their State Councils are willing to pay any price for high employment and social peace in Shanghai? How much of it is foreign elites buying political risk insurance--that if the balloon goes up and if they have to flee in the Learjet or if they want their grandchildren to have the option to live in LA, they need to have a very large Citigroup account now? And how much of it is just one big mistake by the bond market--beliefs about the future that are not well thought-out and that are inconsistent?

And just how good will our central bankers turn out to be? It's not clear anyone should want to be Alan Greenspan's successor.

Posted by DeLong at 09:39 AM | Comments (14) | TrackBack

February 14, 2005

Whatever Happened to the Liberal Privatizers?

Mark Schmitt asks:

The Decembrist: Whatever Happened to the Liberal Privatizers?: It suddenly occurred to me that, in addition to the missing Democrats on the Hill, there was also a faction entirely missing from the public debate: the pro-privatization liberals.... Sam [Beard] had an exciting, 'everyone a millionaire' vision of Social Security, framing it in terms of opportunity, equality and wealth for the poor. I never thought that his numbers quite worked, but leaving that quaint concern aside, it was a hell of a more compelling vision for a low-income or African-American audience than Bush's offensive nonsense about how Social Security is a bad deal for black people because they die young. (A fact he seems to have no interest in changing.)...

If Bush were serious about passing something on Social Security, he would have started long ago with a list of not only the congressional potential 'faint-hearted faction,' but also liberals.... Why didn't they do it? One explanation is that more than actually enacting changes to Social Security, they wanted to set up the sharpest partisan contrast, even knowing that this was not something they could pass with only Republican votes. An alternative explanation: The Democrats who served on the Bush 2001 Social Security Commission were so offended at the way they were treated and in particular the way Senator Moynihan was treated that they know better than to get back into that bed with that crowd.

Well, consider me. As I have remarked, I ought to be a liberal privatizer. I genuinely believe that there is surplus to be gained by having Social Security invest in stocks, I think it is a scandal that the relatively poor don't have low-cost transparent equity savings vehicles available to them, I'm keenly interested in boosting national savings by any means possible, and I'm terrified of the long-run consequences of unbalanced federal budgets.

So why aren't I willing to be wooed by the Bushies?

It's because I have--finally--learned that no matter how good it sounds, what the Bushies deliver over and over again is another crock of s***. It's the Daniel Davies question:

Can anyone... give me one single example of something with the following three characteristics:

  1. It is a policy initiative of the current Bush administration
  2. It was significant enough in scale that I'd have heard of it (at a pinch, that I should have heard of it)
  3. It wasn't in some important way completely f***** up during the execution.

Posted by DeLong at 07:43 PM | Comments (7)

A Conversation About Infectious Disease at the Dermatologist's

Dad: "Hello."

Receptionist: "Hello."

Dad: "My son, Dr ****'s four o'clock, is outside. He woke up this morning with a fever of 101. Should I bring him in to infect you all?"

Receptionist (cowers): "No."

Nurse: "NO!! I'm going to Hawaii on Friday!"

Dermatologist: "Yes."

Receptionist: "Yes?"

Dermatologist (shrugs): "I'm already sick. I might as well see him."

Nurse: "That's fine for you to say. You aren't going to Hawaii. You're not seeing him in here."

Dermatologist: "I'll see him in the parking lot..."

Posted by DeLong at 05:18 PM | Comments (8) | TrackBack

A Conversation About Homework

Son: "Dad?"

Dad: "Yes?"

Son: "May I have two cans of fruit?"

Dad: "Cans of fruit? Why do you want cans of fruit?"

Son: "It's for my Health homework."

Dad: "Health homework?"

Son: "I'm supposed to compare the nutrition labels on cans of fruit."

Dad (roots in cupboard): "Honey?"

Spouse: "Yes?"

Dad: "Do we have any cans of fruit?"

Spouse: "I don't think so. Do you see any?"

Dad (roots some more): "No."

Spouse: "Remember, we're California yuppies! We don't buy canned fruit!"

Daughter: "I remember how grossed out you were by the canned fruit salad in O'Hare Airport."

Spouse: "We eat our fruit fresh! Home-grown in California! Or imported from Mexico! Or in exceptional circumstances from Chile!"

Dad: "Son."

Son: "Yes?"

Dad: "You're going to have to tell your Health teacher that your parents are California yuppies. And that you couldn't do your homework."

Son: "Couldn't do my homework?"

Dad: "No. You see, California yuppies don't buy canned fruit. He'll understand."

Spouse: "There might be a can of pineapple rings in the way back of the center cupboard."

Posted by DeLong at 05:15 PM | Comments (21) | TrackBack

Migration to TypePad

Old Internet Mountain Man Chuq Van Rospach is moving his weblogs to Typepad:

Teal Sunglasses: blogquake! (ch-ch-ch-changes....): I've finally decided on what I want to do. Really -- no, honest, this time I'm serious.

I've decided to move the blogs to Typepad.

Part of the reason to upgrade plaidworks and migrate it from in-house to a hosted solution was to stop spending all of my time working on server-level patches (maintenance, upgrades, etc, etc, etc), so I can (hopefully) focus more on content, and perhaps sleeping, or going to the gym, or... having a life. having made the decision to stop running my own server (for the first time since 1995 -- we've had IP in the house for ten years now), I started thinking about it, and outsourcing the blogs to Typepad just seemed to make sense; it's a major part of the system I won't have to maintain, just like I don't have to maintain the OS. So it simplifies my life even more. I spent some time playing with TypePad (30 day free tests are nice!) and decided I liked it.

Question: if Chuq Van Rospach is no longer maintaining his own weblog server, what business do I have maintaining one myself? Should I switch over to Typepad too?

Posted by DeLong at 05:07 PM | Comments (21)

White House Personnel

I was in favor of Ben Bernanke's taking the job of Chair of Bush's Council of Economic Advisers. Ben is very smart, very calm, very articulate, and very persuasive. Someone has to take the job: why not Ben? He would do some harm to the economic policy debate by flacking for his political masters, but he would do some good by helping to make better economic policies.

It has seemed to me that it would be good for the country (although probably not for Ben's reputation) if he were to take the job.

But now that Karl Rove is Deputy White House Chief of Staff with oversight over the National Economic Council, it's clear to me that Ben shouldn't. He should stay at the Fed. There's no upside to moving to the White House--none whatsoever.

Posted by DeLong at 05:03 PM | Comments (11)

Berkeley's Professor Yoo Strikes Again...

Michael Froomkin reports:

Discourse.net: A Reader Writes In About Yoo and Torture: A reader writes in to say, "You MUST read Jane Mayer’s ‘Outsourcing Torture’ in the New Yorker. Get a load of what Yoo’s saying now:"


Yoo also argued that the Constitution granted the President plenary powers to override the U.N. Convention Against Torture when he is acting in the nation¡’s defense—a position that has drawn dissent from many scholars. As Yoo saw it, Congress doesn’t have the power to ‘tie the President’s hands in regard to torture as an interrogation technique.’ He continued, ‘It’s the core of the Commander-in-Chief function. They can’t prevent the President from ordering torture.’ If the President were to abuse his powers as Commander-in-Chief, Yoo said, the constitutional remedy was impeachment. He went on to suggest that President Bush’s victory in the 2004 election, along with the relatively mild challenge to Gonzales mounted by the Democrats in Congress, was ‘proof that the debate is over.’ He said, ‘The issue is dying out. The public has had its referendum.’

In other words, ‘a vote for Bush is a vote for torture.’ Jesus H. Christ, he actually SAID it.

As Constitutional doctrine it’s not just offensive, it’s also fairly silly. Congress has several Article I powers, not least the power to regulate the armed forces, which make it clear that it has the power to prevent torture. And then there’s the power to implement treaties, which the Constitution itself says are the highest law, equivalent to the Constitution itself...

Posted by DeLong at 05:03 PM | Comments (21)

Warnings of Al Qaeda

Michael Froomkin writes:

Discourse.net: See Clarke's Memo for Yourself: [revised] The National Security Archive has put Richard Clarke’s prophetic memo about Al Qaeda and terrorism (January 25, 2001) (pdf) online. Also note the very important attachments.

The significance of these memos is that they contradict the claim made by Dr. Condoleezza Rice and others, that the Clinton administration did not leave a plan behind to confront Al Qaeda…although you do have to wonder why they waited so long themselves.

Note that the memo itself is addressed to… Condoleezza Rice.

Posted by DeLong at 05:03 PM | Comments (5)

Why Oh Why Are We Ruled by These Fools? (Long Run Budget Edition)

Josh Micah Marshall foams at the mouth:

Talking Points Memo: by Joshua Micah Marshall: February 13, 2005 - February 19, 2005 Archives: It's amazing how many times the president can lose the Social Security phase-out debate without some of Washington's worthies even noticing. Today on the Stephanopoulos show, George asked Sen. Judd Gregg (R) of New Hampshire about whether there should be any changes to the new Medicare prescription drug law. Gregg noted that 'over its lifetime, 75 years ... it's going to cost us $8.6 trillion, which we don't have.' So that's an $8.6 trillion shortfall, albeit spread out over the lengthy period of three-quarters of a century. The president has said that he'll veto any effort to trim those costs. So that amount of money is manageable.

And yet Social Security -- the program that President Bush thinks is swooning and flailing like some B-Movie damsel in distress -- faces a shortfall of only $3.7 trillion over the same period of time.

The price of keeping Social Security kicking for another 75 years is less than half of that it will take just for the bill President Bush pushed through last year. And because of that Social Security has to go and the drug bill is inviolate.

Why, oh why, must we have this debate on training wheels?

Posted by DeLong at 05:02 PM | Comments (0) | TrackBack

The Infernal Machine of Imre Lakatos

Kevin Drum pins Tom Maguire down behind a stone wall and snipes at him:

The Washington Monthly: "POST HOC BULLSHIT....Tom Maguire... his theory that... it's quite possible to have both a low-growth economy (meaning that Social Security finances are in bad shape) and high stock market returns (meaning private accounts would be great).... Brad DeLong... concluded that....it's possible for the low growth/high return scenario to be true, but it's not very probable....

However, there's an aspect to this whole thing that bothers me... Tom's argument is... a random post-hoc effort to explain away a problem... part of the genus bullshit.... real stock market returns have closely followed GDP growth. GDP growth is projected to decline in the future, and common sense dictates that lower growth leads to lower corporate profits which in turn leads to lower stock market growth. What resulted was a bizarre series of Rube Goldberg inventions.... Maybe corporations will suddenly become far more profitable.... Maybe they'll start paying out enormous dividends. Maybe overseas investment will skyrocket.... they just have to sound plausible enough to create a cloud of FUD...

While Matthew Yglesias wheels out and discharges the Infernal Machine of Imre Lakatos:

Matthew Yglesias: Thinking Things Through: [Y]ou can make the numbers add up by means of some heroic assumptions about the future. But... it's a degenerative research program where you're making up odd empirical predictions in order to save the theoretical assumptions. The degenerative research program problem arises once again... the eagerness of privatizers to throw the Efficient Markets Hypothesis overboard... assert that the equity premium is... an actual outgrowth of systematic market failure.... [T]he consequences of the EMH being wrong are large and severe... John Quiggin... believes that the EMH is wrong and spells out what follows... virtually nothing Quiggin has to say is anything a reputable conservative would agree with.... Someone who was seriously contemplating the case against the EMH as part of a progressive research program would be coming to all sorts of socialistic conclusions....

So I've now gone on for a very long time about this, but I think it's important. Not just for Social Security but because it tells us a lot about the operations of the contemporary right.... [N]o one has run the numbers. It's a systemic breakdown throughout the movement...

First, let me agree with Kevin's and Matthew's big point: ever since Irving Kristol decided to push supply-side economics not because it was true but because it was politically convenient:

Irving Kristol and the Coming of Supply-Side Economics: rather cavalier attitude toward the budget deficit and other monetary or fiscal problems... [because] the task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority--so political effectiveness was the priority, not the accounting deficiencies of government.

the quality of policy analysis--on economic policy, on social policy, on foreign policy--coming from Republicans has been on a steady decline. And the research programs--to the extent that there are research programs--are degenerative. Nearly all of the defenses of the SSA forecasts that we see--including those coming from the Council of Economic Advisers, which has shown no signs of even trying to think the issues through--are, as Kevin says, mud thrown against the wall in the hope that something will stick. That is a shame, and something about which people should be ashamed.

But make me also make two small and limited dissents:

First, let me provide covering fire for Tom Maguire, who as I understand it is engaged in a two-pronged project: (a) To get Dean Baker and Paul Krugman and me to admit that when we said "impossible" we meant "improbable and inconsistent according to standard neoclassical growth-model assumptions." Fine. I admit it. When we said "impossible," we meant "improbable and inconsistent according to standard neoclassical growth-model assumptions." (b) To try to figure out whether recent trends widening income inequality and raising the share of income going to capital could continue and so justify SSA's assumptions (even though SSA did not have any such process in mind when it originally made its forecasts by whatever process it makes its forecasts). Those are both not unreasonable objects to try to achieve.

Second, let me point out what economists do. We take a first cut at an issue by considering a very stripped-down and oversimplified model: one in which markets are efficient, expectations are accurate, and key macroeconomic ratios have had a chance to reach and stabilize at their steady-state values. Baker and Krugman do this standard constant capital-share steady-state growth path first cut. Economists then check the first cut by considering alternatives: suppose markets break down along dimension x; suppose expectations are flawed in aspect y; suppose disturbance z pushes the economy off its steady-state path; are the conclusions reached in the first-cut analysis still true?*

To a Lakatosian, this looks a lot like a degenerative research program: a lot of theoretically poorly-motivated tweaks are made to the basic framework for ad-hoc reasons. But I think it is something different: a process of incrementally checking the robustness of fundamental working assumptions and rules of thumb that we know are only crude approximations.

*Thus the major beef I have with the administration's mouthpieces is not that they perform the more complicated analysis, but that they do not perform the more complicated analysis--they simply make assertions they cannot know to be true about what the more complicated analysis would show if they were to do it. Assertions from the CEA that closed-econom calculations are seriously wrong because they "ignore global economic growth and investment in countries unaffected by the demographic slowdown" require that time paths for trade balances and overseas investment positions be calculated and their plausibility evaluated--which the CEA does not do.

Posted by DeLong at 10:51 AM | Comments (10) | TrackBack

Why Oh Why Are We Ruled by These Fools? (Foreign Policy Edition)

Max Sawicky provides the--100% accurate--Little Golden Book version of Bush administration foreign policy:

MaxSpeak, You Listen!: As any fool knows, the U.S. went to war in Iraq to combat the spread of anti-democratic Islamic fundamentalism, typified by that charter member of the Axis of Evil, Iran. We also went to war to bottle up a potential source of nuclear technology to fundamentalist-inspired terrorists. To that end, we destroyed a secular, tyrannical government and continue to do battle with its social base in the country, the Sunni Muslims, and we have sponsored an election that brings to power allies of Iran, an Islamic-fundamentalist dominated state with an active program to develop nuclear technology.

Posted by DeLong at 10:03 AM | Comments (20) | TrackBack

Sebastian Mallaby Sees Most of It

The big thing wrong with Bush's version of the private accounts proposal:

washingtonpost.com: The Flaw in Bush's Plan: The leading reform proposal in Bush's first term said that individuals could set aside 4 percent of their pay (up to the payroll tax cap, currently $90,000) in personal accounts, but that the maximum anyone could set aside per year was $1,000. In his new proposal, however, the president added a promise to phase out that $1,000 cap. This may sound like an innocent change. But it turns a plausible plan into a crazy one. The phaseout kills the progressivity in personal accounts. Under the old proposal... the opportunity to earn superior investment returns was to be concentrated among workers who most needed it. But if Bush phases out the $1,000 cap, that progressivity will ultimately be eliminated....

Why? In an uncapped system, high earners get big personal accounts; in return, they accept commensurately big cuts in their traditional benefits... by 2075 high earners' traditional benefits might be reduced -- get this! -- to zero. Fully 100 percent of their Social Security benefits would come from the new personal accounts....

Because high earners' traditional benefits would zero out, you can't push them down enough to compensate the Social Security trust fund for their diverted payroll taxes. Full compensation might require a high earner to accept a traditional benefit reduction of perhaps $32,000 per year. But if the traditional benefit is worth only $22,000, the high earner will pocket a subsidy of $10,000 a year at the expense of the budget and of poorer workers.

But the scariest implication... is political. If high earners were to draw nothing from the traditional Social Security program, it would not be sustainable. The high earners would be... shelling out a payroll tax of 8.4 percent to the government, which would be perceived to purchase nothing. How long would the residual Social Security system survive under these political conditions?... [T]he best fix for the $1,000 cap problem would be simply to put it back on the table. Junking the cap was a fateful mistake in an otherwise promising proposal.

What Sebastian Mallaby doesn't see--or pretends he doesn't see--is that the thing that changes the proposal from "plausible" to "crazy" isn't a mistake, isn't a bug. It's a feature--probably the feature. To theWest Wing, the point of the whole exercise is not to reform but to destroy Social Security. Eliminating the defined-benefit component, removing progressivity, and undermining political support for the remnants of the program are all things that the West Wing wants to see happen.

Posted by DeLong at 08:28 AM | Comments (33) | TrackBack

This Would Have Been a Nice Editorial 4 1/2 Years Ago

The New York Times arrives at the party, 4 1/2 years late:

The New York Times > Opinion > Editorial: The Importance of Being Earnest: It's not hard to see what brought the United States to this juncture. Mr. Bush's first-term tax cuts were too expensive and too skewed toward top earners to work as effective, self-correcting economic stimulus. Instead, predictably, they've driven the nation deep into the red. Having reduced tax revenue to a share of the economy not seen since 1959, the cuts are a huge factor in the swing from a budget surplus to a $412 billion deficit....

Lately, Mr. Bush has been talking the deficit reduction talk, but there's no sign that he is willing to walk the walk. In his 2006 budget, he pledges to slash spending, but largely in areas that would have only a small impact on the deficit and where cuts would be politically difficult, not to mention cruel, such as food stamps, veterans' medical care, child care and low-income housing. Meanwhile, he is pounding the table for more deficit-bloating measures - making his first-term tax cuts permanent, at a 10-year cost of as much as $2.1 trillion; putting into effect two high-income tax breaks that were enacted in 2001 but have been on hold, at a 10-year cost of $115 billion; and introducing new tax incentives to allow high earners to shift even more cash into tax shelters, at a cost that would ultimately work out to more than $30 billion a year when investors cashed in their accounts tax-free....

Congress can avert this crisis-in-waiting by forcing Mr. Bush to be serious about deficit reduction. The first-term tax cuts should be allowed to lapse. Cuts that are not yet in effect should not be allowed to begin. And no new programs should be started that require megaborrowing. If the president doesn't see that he has more important tasks than cutting taxes for the rich and undermining Social Security, Congress should set him straight.

Posted by DeLong at 08:11 AM | Comments (20)

February 13, 2005

Sean Carroll Thanks His Excellent College Teachers...

Maybe we can get a full-fledged meme going here:

Preposterous Universe: I was being constantly challenged and amazed by faculty in astronomy, physics, mathematics, biology, philosophy, English, sociology, religious studies, political science, history, and elsewhere. So, to Edward Guinan, Frank Maloney, Mike Burke, Jack Doody, Colleen Sheehan, Peter Knapp, Felix Beiduk, Tony Godzieba, Bill Werpehowski, Earl Bader, John Caputo, Bill Marks, Bill Fleishman, and many others who inspired me to be a better thinker and person -- thanks.

Posted by DeLong at 09:13 PM | Comments (5)

More Intellectual Garbage Pickup (Just How Bad Were We in Our Previous Lives to Deserve This? Department)

*Sigh*. It's time to lay down a marker: to say what is and what is not the case.

I complained about the Washington Post's taking another dive in misrepresenting yet another issue in a way favorable to the Bush administration:

Brad DeLong's Website: Opinions on Shape of Earth Differ (Why Oh Why Can't We Have a Better Press Corps? Department): Paul Krugman likes to say that if the White House were to announce tomorrow that the world is flat, our press is so disfunctional that the leads the following day would read 'opinions on shape of earth differ.' Here's our latest example... the Washington Post's Jonathan Weisman sees a 'heated debate' among economists between those who (like me) believe the Baker-Krugman argument that administration forecasts of 6.5% stock returns and 1.9% economic growth rates are inconsistent, and those who see no trouble....

On the side of the angels here, Weisman quotes Douglas Fore... Richard Jackson... Richard Berner... Edward Keon... Dean Baker... and me.

On the other side, Weisman cites... Bush's Council of Economic Advisers... unnamed 'White House economists [who] say such calculations are absurd.... If there really were a 'furious debate,' shouldn't Weisman have been able to find at least one White House economist who would agree to be quoted by name to say that... [the] calculations are 'absurd'? Shouldn't Weisman have been able to find one reputable economist not on the White House payroll willing to say that 1.9% per year future real GDP growth is not inconsistent with 6.5% real stock returns starting from our current price-dividend ratio of more than 60?

Weisman responded:

Against... are... the White House Council of Economic Advisers and a bunch of conservatives whom I didn't quote by maybe should have, including Kevin Hassett at the American Enterprise Institute and Donald Luskin, whom Prof. DeLong knows full well disagrees fiercely with him. Just because Prof. DeLong says Mr. Luskin is the stupidest man in the world doesn't mean I as a reporter have to ignore Luskin's writings on the subject. Indeed, when various economic bloggers start calling each other idiots over the subject, I think it qualifies as a fierce debate...

First, a correspondent writes to tell me that Weisman misrepresents Luskin. On this issue--mirabile visu--Luskin gets it right, and is on my side: he says 1.9% long-run real GDP growth is inconsistent with 6.5% long-run real stock returns:

Donald Luskin: Krugman does make one good point.... He states that stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates...

Second, Weisman cites Kevin Hassett as being happy with a 1.9% real GDP growth rate and a 6.5% long-run real return on the U.S. stock market. But Hassett has long been on record that stock returns are not holding steady at their historical 6.5% level but are instead declining--and declining by a lot:

Glassman and Hassett: [These] valuations are a rational response to the truth about stocks--that they provide high returns at risk levels about equal to bonds. Another way to say this is that investors have been bidding down the equity risk premium--the extra return that they demanded in the past because they believed (irrationally) that stocks were riskier than Treasuries...

That Hassett believes that expected equity returns are and will continue to decline from their historical 6.5% levels is no surprise. It is, after all, the entire point of Hassett's Dow 36000.

Third is Weisman's citation of unnamed "White House economists [who] say such calculations [that claim inconsistency between 1.9% real GDP growth rates and 6.5% real equity returns starting from today's price-dividend and price-earnings ratios] are absurd." Subcabinet rank officials in the Bush administration assure me that no professional economist on the White House staff would dismiss the Baker-Krugman argument as absurd--they would say that the arguments are wrong, but not that they are absurd. Weisman responds that that of "two of the economists [I talked to]... did use the word "absurd."

Really, what can one say? There's no furious debate. Weisman got what Luskin told him completely backwards. Either Hassett has reversed ground and repudiated a decade of his own work, or Weisman got him backwards too. The administration is anxious to make sure I know that while they "accept" the forecast combination of 1.9% real GDP growth and 6.5% stock market returns, it is not *their* forecast and they wish I would not characterize it as such. But I am inclined to credit Weisman's claim that he did not make up the word "absurd": administration officials hiding behind the anonymous source mask do say things they would be deeply ashamed to say in their own personae--but if I'm wrong, I expect to hear about it soon.

Michael Kinsley said some apposite things today about this kind of journalism:

The Meathead Proposition (washingtonpost.com): Bush might as well be proposing legislation that two plus two is five. And if that happened, there would be no shortage of Republicans prepared to endorse this view, experts on arithmetic to declare that it is a very difficult question, research to indicate that the answer may lie anywhere between 2.3 and 7.09, moderate Washington sages to urge caution, media to report both sides of the question...

Posted by DeLong at 08:55 PM | Comments (41) | TrackBack

Signs of the Apocalypse

Roger Ebert says:

The New York Times > Magazine > Domains: A Film Critic's Windy City Home: I make oatmeal in my rice cooker.... You can live your entire life never cooking with anything but a rice cooker. In fact, I've been threatening to write the rice-cooker cookbook. There's a warning on my machine that says, ''Do not cook anything in this but rice.'' But there's no reason for that warning. You can make stews, soups and pasta in it...

The Zojirushi across the kitchen is now looking at me. It somehow seems more sinister than it seemed a minute ago.

Posted by DeLong at 07:10 PM | Comments (17)


We went to see the tour of "Oklahoma!":

Oklahoma!: Winner Best Musical: It is, quite simply, the show that changed the American musical forever --Rodgers & Hammerstein’s landmark musical, OKLAHOMA! On the heels of the wildly-acclaimed London and Broadway revivals, this sparkling new touring production of OKLAHOMA! is adapted from the Cameron Mackintosh presentation of the Royal National Theatre production that won the hearts of a new generation of theatergoers. ‘Oh What a Beautiful Musical!’ - NY Post. Itinerary: Oklahoma! will be in San Francisco, CA on Tue, Feb 01, 05 - Sun, Feb 13, 05.

Now they are on to Schenectady...

It was very well done--and it is great material. The people who impressed us the most were Pat Sibley as Aunt Eller, and Daniel Robinson as Will Parker.

The only other time I saw "Oklahoma!" live, I seem to remember that they played Jud Fry as an embittered man with much to be embittered about, low man on the social totem poll who has lots of revenge fantasies but would never act on them--until he gets drunk, first at the box social and then at Curly and Laurey's wedding.

This time they played Jud Fry as a psychokiller.

I'm not sure what I think of this.

Posted by DeLong at 06:56 PM | Comments (12) | TrackBack

Thanks Guys, About Twenty-Two Years Late

Reading through this month's Atlantic I find an article by Ross Douthat: "The Truth About Harvard": "It maybe hard to get into Harvard, but it's easy to get out without learning much of enduring value at all. A recent graduate's report."

I need to confess that I am very, very skeptical of everything Douthat writes. Citing Harvey "if you leave your office door open, undergraduates will come in" Mansfield as a model undergraduate educator? And how am I to deal with the statement that "Economics was the only department at Harvard in which the faculty tilted to the right" when of all the Harvard Economics Faculty I can offhand think of only five who I would say "tilt to the right"--Bob Barro, Marty Feldstein, Greg Mankiw, Andrei Shleifer, and half each of Caroline Minter Hoxby and Ed Glaeser? For Douthat to then follow with "To tilt to the right is in some sense to assert a belief in absolute truth; and the only absolute truth that the upper class accepts these days is the truth of the market" is to convince me that he has no contact with reality whatsoever.

Plus the whole article is a weird exercise: it's a horse, led painstakingly and expensively to water, bitterly complaining that nobody forced it to drink.

Nevertheless, he does hit on something in his conclusion:

[A]fterward, when the perpetual motion of undergraduate life was behind me... I looked back and felt cheated.... I began chuckling inwardly when some older person... would nod gravely and ask, But wasn't it such hard work?

It was--but not in the way the questioner meant. It was hard work to get into Harvard... competing for offices and honors and extracurriculars... swirling social world... fighting for law-school slots and investment-banking jobs.... But the academics... were another story....

[T]he moment happened over and over again at Harvard, when we said This is going to be hard and then realized No, this is easy. Maybe it came when we boiled down a three-page syllabus to a hundred pages of exam-time reading, or saw that a paper could be turned in late... or handed in C-quality work and got a gleaming B+... it wasn't our sloth... or our pushing for higher grades, that made Harvard easy.

No, Harvard was easy because almost no one was pushing back.

What he has hit upon is that it was indeed possible to arrange your academic life at Harvard so that no one was pushing back.Fortunately, perhaps, I did not discover this in time. So I took courses in which teachers pushed back--and pushed back very hard.

There were professors I never knew--those who stood in front in large lectures. But some of them pushed back: David Herlihy, Albert Lord, Michael Walzer, Wallace McCaffrey, and Ed Purcell come to mind.

And then there were the smaller classes where I really got to know the teachers. Rick Ericson pushed back hard from the first week in economics 10 and kept pushing back the whole year. Others who pushed back really hard include... what was the name of that math 55 professor?... what was the name of that Straussian gov 106b section leader?... In my sophomore year John Geanakoplos and Roger Guesnerie in micro theory, Shannon Stimson and Jeffrey Weintraub in social theory, and most especially Marty Feldstein and Olivier Blanchard in macro theory blew my mind wide open. Peter Huber in statistics pushed back, as did Zvi Griliches and Mark Watson in econometrics, Richard Musgrave and Manuel Trajtenberg in economy and society, and William Thomson (visiting from Rochester) teaching advanced micro theory. In my senior year Bill Lazonick was a superb thesis supervisor. Because Karen Huang persuaded me that I needed to learn something about sociology, I landed in the company of Harrison White and Mark Granovetter, who tried very hard to teach me some (but it didn't stick).

Thus by the time I hit graduate school, and the truly extraordinary teachers and colleagues I found there and have continued to find since, I was more than ready. I had found undergraduate Harvard very hard indeed--not that my grades had been low, or that good grades had been hard to get, but a lot of people had been convinced that I could think hard and had made it their business to make very sure that I had done so.

It is, I think, extremely easy to have Ross Douthat's experience as a Harvard undergraduate--especially if you go looking for it. But I didn't have that experience. For that, I owe a lot of extraordinary teachers an enormous debt.

Thanks guys.

UPDATE: My brother raves about the "stupendous seminars from Bailyn, Bisson, May, and Ozment. All were incredibly dedicated, extremely knowledgeable, brilliant fully tenured professors..."

Posted by DeLong at 12:37 AM | Comments (70) | TrackBack

February 12, 2005

The Importance of Rebounding

In her five o'clock basketball game this afternoon, in the two quarters the Eleven-Year-Old was in her team outscored the other team 24-2.

In the two quarters in which she was out, the other team outscored her team 21-14.

Having someone who can rebound--both offensively and defensively--is very important in this game.

Posted by DeLong at 08:17 PM | Comments (9) | TrackBack

We're Certainly Getting Our Money's Worth From Senator Boxer

Joshua Micah Marshall also likes her speech on Social Security:

Talking Points Memo: by Joshua Micah Marshall: February 06, 2005 - February 12, 2005 Archives: "From Sen. Boxer's (D) speech yesterday on Social Security ...

So clearly, Social Security is not in crisis, is not bankrupt, and is not collapsing. Yes, there is a challenge we should address.

Have we ever faced a similar Social Security challenge before? Yes. During the Reagan presidency in 1983. Working together, Democrats and Republicans, we resolved the challenge then just as we can do now. So why would an otherwise optimistic George Bush turn into a prophet of pessimism on Social Security? Because, his initiative is not about meeting the challenges of Social Security to keep it sound; it is not about bringing together Democrats and Republicans as Ronald Reagan did to ensure that full benefits will be there for all Americans. It is about one thing and one thing only: destroying Social Security.

How do I know that? Am I being partisan? Am I being unfair by stating in a very clear way that I believe the true goal here is to destroy Social Security? Not at all. I am simply telling the truth as told by this very White House. On January 6, 2005, the White House wrote a Social Security memo. Although marked ‘not for attribution,’ fortunately, we have it. The most telling sentence in the entire memo is this: ‘For the first time in six decades the Social Security battle is one we can win – and in doing so, we can help transform the political and philosophical landscape of the country.’"

Thanks to an *extremely* *extremely* sharp-eyed correspondent, I'm also gratified at where she gets her briefing materials:

Posted by DeLong at 02:27 PM | Comments (31) | TrackBack

Attack on Website

Things seem to be back to normal. I haven't figured whether it was an incompetent attempt to load the website with trackback spam, or something more...

Posted by DeLong at 02:17 PM | Comments (2)

Nouriel Roubini Begs for Alan Greenspan to Save Us

However, the odds that Greenspan will do what Roubini wants him to do are very low:

Nouriel Roubini's Global Economics Blog: What did the Delphic Oracle mean on the current account? Reading Greenspan's Tea Leaves. And a modest appeal to the Chairman to speak up on our reckless fiscal policy.: Last Friday Greenspan gave a speech on the current account arguing that the US current account deficit.... [T]oday John Berry (leading Fed Watcher and Bloomberg columnist) says... that markets and commentators got it all wrong.... Berry's reinterprets Greenspan's speech in a way that is totally at odds with the most commentators' interpretation of it (see for example Brad's latest blog commenting on Greenspan's speech) and the market reaction to it.

Berry says that... in order not to trigger another dollar rout like the one following his November comments... Greenspan used a softer tone while still being seriously concerned about the US current account.... If he is right, the Fed has a really serious communication problem.... Since what happens to the US current account is crucial... the Fed and the Chairman may want to be more precise when they speak in public; at the very least, they now need to clarify their views in public, not indirectly via their semi-public leading Fed watcher....

Greenspan has been flip-flopping about his concerns on the US current account... speeches in 2003-2004 downplaying any risk... in November he sounded a serious alarm... on Friday a speech... interpreted in a way leading to a sharp dollar rally... corrected the next Monday by one of the few true Fed watching insiders - the authoritative John Berry....

Worse of all, the Chairman on Friday seemed to endorse publicly the view that the US fiscal deficit will shrink... this it totally at odds with what the administration is actually doing.... The Chairman already made the biggest mistake of his two-decade long tenure when he repeatedly endorsed the two Bush tax cuts of 2001 and 2003.... This is the most reckless change in US fiscal history ever and the Chairman fully endorsed it.... Everyone under the sun, including the Republicans in Congress and Greenspan, knows that spending cuts alone will not be sufficient to reduce the deficit and that the budget presented by Bush and his circus of cheerleading clowns is utter nonsense....

So, since he is by now a brilliant and very successful but effectively lame duck Fed Chairman... he owes... the country is to speak clearly for once... arguing.... 1. Let us control fiscal spending by reintroducing the PAYGO rules.... 2. We need to reverse a meaningful fraction of the tax cuts passed in 2001-2003, especially those that favor the wealthiest.... 3. Let us fix the current Social Security funding gap - the $3.4 trillion expected gap over the next 75 years - via a variant of the Greenspan 1983 solution or a variant of the Gale-Orszag solution. And let us dump any idea of carving existing payroll contributions to create private accounts.... 4. Let us create a commission to seriously address the long-run problems of Medicare....

Alan... give that speech.... [D]o a big favor to the country and close your successful two-decades long Fed leadership on a high note and tell to the country that the Emperor has no clothes.... most of your Fed fellow governors and Fed presidents - as well as your staff - are really really scared of this growing fiscal deficit and this growing... current account deficit... it is up to you to speak up. As the great leader of the only policy institution in Washington that has any credibility left (as the Treasury, CEA, NEC and West Wing are all a bunch of clowns, buffoons and cheerleaders for Bush's delusional fiscal dreams) it is your duty to speak.... This is your responsibility and you owe it to the country and the world....

Not going to happen. Still, it is interesting to contemplate what Greenspan would have long since been saying in public had a Democrat been following this particular set of policies (with tax cuts for the rich replaced by expanded social programs)...


Posted by DeLong at 01:55 PM | Comments (15)

Lies, [Fill in the Blank], and Statistics

Nouriel Roubini untangles the Bush budget forecast "statistics":

Nouriel Roubini's Global Economics Blog: Bush Damned Budget Lies and Voodoo Budget Magic: it will be a $600b deficit, not $233b by 2009...and over $1,100b by 2015!: How do they create the false $233b deficit by 2009?

  1. They assume spending cuts that are, by any historical and political standard, impossible to achieve.
  2. They assume revenue growth that is altogether wishful thinking and false based on current trends. And they do not consider the long-run costs of making all the Bush tax cuts permanent.
  3. They do not count the ongoing costs of the continued defense and homeland security spending and of future military and homeland security build-ups.
  4. They phase-in a budget busting social security privatization (that will cost alone $4.5 trillion in the next 20 years) only starting in 2009.

This is... the most squalid manipulation of budgets ever seen aimed at pretending to achieve a budget figure that is utterly unrealistic and false.... Realistic and sensible assumptions imply that the 2009 deficit will be close to $600b (or 4.0% of GDP)... and the deficit will reach over $1,100b (or about 5.5.% of GDP) by 2015.... So, how do we get the difference between the administration lies and the true figures?

First, note that the administration baseline assumes that all discretionary spending - apart from military and domestic security - will be frozen for the next five years.... How likely is it that such draconian spending cuts in non-defense discretionary spending will be passed even by a Republican Congress? Zero... historically, discretionary spending has grown close to nominal GDP (i.e. by a rate equal to the inflation rate plus real GDP growth)....

Second, note that the official objective of the administration is to make all the 2001-2003 tax cuts permanent.... Add to those costs, the cost of fixing the AMT.... [T]he overestimation of revenues is another farce... voodoo economics plus black magic... only a delirious mind could make such far-fetched forecasts...

Third, add sensible assumptions about the costs of the wars in Iraq, Afghanistan and other military spending....

Fourth, consider the transition costs of Social Security privatization...

[O]ne gets a budget deficit of about $600b (or 4.0% of GDP) by 2009, well above the 2004 level of $412 (3.5% of GDP), well above the fake administration target of $233b (1.5% of GDP) for 2009. Moreover, using again these realistic scenarios, by 2015 - counting the effects of the permanent tax cuts and of the phase-in of Social Security privatization - you get an explosive budget deficit of over $1,100b or 5.5% of GDP....

Posted by DeLong at 01:45 PM | Comments (7)

Why Oh Why Are We Ruled by These [Liars[?] Fools[?]] (The Administration Doesn't Understand Its Own Proposals Department)

Jason Furman is clearly near the breaking point as he looks at the analysis the White House has done about its own Social Security proposals. Mendacity? Simply incompetence? I bet on incompetence: The errors are so transparent that they could hardly be deliberate. Could they? They couldn't have so much contempt for the press corps that they would make false but easily checked claims--like that a typical worker choosing private accounts would thereby sacrifice only one-third of his or her defined-benefit Social Security annuity when the true share is two-thirds. Would they?:

Jason Furman: The White House plan allows people to... direct 4 percent of payroll... into individual accounts. Any individual who chooses this option... [sees] a reduction in... [the] traditional Social Security benefit.... The individual account exactly... [matches] the benefit cut if the account... [earned a] 3 percent real rate of return.... The White House fact sheet assumes that this plan will mean a one-third reduction in your traditional benefit... “you can choose to redirect one-third of your payroll taxes into an individual account, but then you have to accept a one-third benefit cut. That way long-run solvency is unaffected....”

(There are other important issues that I do not discuss in this memo, like the magnitude of the other benefit cuts required to restore solvency in the absence of any revenue measures, the administrative costs, potential problems with survivors and disability benefits, the additional up-front borrowing required for the accounts, the fact that the accounts appear to be designed in a way that reduces long-term solvency, and the political risk that the benefit offset would be reversed by a future Congress which would cause the plan to unravel.

Here’s the problem... right now you get a... return on your payroll tax contributions of about 2 percent.... The offset, however, is based on a 3 percent rate of return. Thus the offset amount accumulates more quickly than your benefit.... end[s] up... [costing] more than one-third of your Social Security benefit....

A Real Numerical Example: You Have to Give Up Two-thirds of Your Benefit: The White House fact sheet does not specify the age or earnings or work history of the worker, just that the worker would “get $15,000 annually in benefits from the traditional system, reformed to be permanently sustainable.” For my example, I will use an average earner born in 1990... the first person who can fully participate... he turns 21 in 2011 and starts contributing to his individual account in that year and retires at age 65 in 2055.

Under the current benefit schedule, this worker would get a retirement benefit of $21,700... (this number, like all numbers in this memo, is in inflation-adjusted 2004 dollars). The benefits payable through Social Security revenues under a system that, in the White House’s words, has been “reformed to be permanently sustainable” would be 73 percent of total benefits in 2055, or $15,934.... (By way of comparison, the benefit under [the White House's version of] price indexing... would be even lower, $13,596.) If this person contributes 4 percent of payroll to an individual account, then at retirement, this account would have $152,000 of assets... at 3 percent annually above inflation.... buy you an inflation-adjusted annuity of about $11,000 annually.... [T]he person would be left with a traditional benefit of about $5,000 annually – $15,934 minus the $11,000 offset for having opted for an individual account. This is about two-thirds lower than the person’s Social Security benefit otherwise would be....

By the use of faulty numbers that inaccurately present the offset as reducing Social Security benefits by only one-third, the White House dodges one of the important questions we should be debating: Is it sufficient to have the risk-free tier of retirement security replace only 8 percent of prior wages? Is $5,000 annually from a Social Security benefit enough for a person whose other assets may be invested in a more risky form?

But you cannot even start to have this debate when the White House will not provide the data... and... inaccurately claims that you get to keep $10,000 – or two-thirds – of your Social Security benefit....

Posted by DeLong at 12:35 PM | Comments (15) | TrackBack

Equity Returns and Economic Growth: Model-Building

As an exercise in clarification of thought--or is it procrastination? or p****** into the wind?--I've tried to set down all the analytically sustainable positions on the relationship between equity returns and economic growth.

The .pdf version.

The conclusions? That you can reconcile current 1.7% dividend yields, the SSA's 1.9% forecast GDP growth rate, and the SSA's 6.5% forecast stock-market return if and only if one of the following four scenarios is true:

  1. A substantial decline in the stock market in the near future to push dividend yields back up to the levels they need to be.
  2. Stagnant wages and a permanent jump in the profit share to push dividend yields up to the levels they need to be.
  3. A large jump in firm payouts, supported by the fact that accounting earnings are massively understated.
  4. A long-run trade surplus of 6% of GDP.

Now none of these are impossible exactly. But only the first is at all likely.

Posted by DeLong at 09:47 AM | Comments (26)

The Firebombing of Dresden

Over at Crooked Timber Chris Bertram is conflicted about the firebombing of Dresden:

Crooked Timber: Dresden, 60 years on : Tomorrow is the sixtieth anniversary of the bombing of Dresden.... The methodical slaughter perpetrated by the Nazis on Jews and others shouldn’t lead us to close our eyes to what happened in Dresden and in other German cities. What was done there was wrong, even though I, for one, would hesitate in blaming those who did it...

I understand why Chris Bertram wants to say that the firebombing of Dresden was not only bad--not only an atrocity--but also wrong--also evil. I also understand why he wants to say that he is reluctant to blame--or perhaps the word is "judge"--those who did it.

I am not sure, however, that both of these impulses can be consistently satisfied. It seems to me that one must raise the bar. I am willing to blame those who ordered the raid...

Posted by DeLong at 09:16 AM | Comments (63)

February 11, 2005

Website Appears to Be Under Attack...

More later...

Posted by DeLong at 11:10 PM | Comments (10)

The Decembrist Directs Us to the Center on Budget and Policy Priorities

Mark Schmitt writes:

The Decembrist: The Privatization Tax: I am in awe of the work that various analysts, but particularly Jason Furman of NYU and the Center on Budget and Policy Priorities have done to figure out exactly how the Bush Social Security plan would work, in the absence of any official details proposal, by just drawing on what's available and from on-background briefings by senior adminstration officials. (And speaking of the Center on Budget and Policy Priorities, congratulations on a new website and a new logo. It looks great. And how fitting that it should arrive at this moment when the Center's contribution is even more critical than usual.)

And I'm glad that the Senate Democrats could so quickly grab the import of Furman's work proving that the entire value of one's private account is likely to be taken away at retirement and dubbed it 'the privatization tax.' This isn't just a bit of clever pejorative framing... In the article I linked to a couple days ago... two Heritage Foundation staffers... discuss an 'opting-out tax' as part of the system...

Posted by DeLong at 04:15 PM | Comments (20)

The Economists' Voice

Let me remind everyone that here is where to find the Economists' Voice.

Posted by DeLong at 03:33 PM | Comments (0) | TrackBack

20050210: Economics 113 Lecture: Slavery: Cui Bono?

Charles of Windsor to marry Camilla Parker-Bowles

The Persistence of Southern Slavery the Result of:

  • Free land (which makes emancipatory bargains unworkable) (Marx: Swann River Colony)
  • Cotton gin (which gives you another staple crop you can grow for which monitoring is easy)

Geographical distribution of slavery:

  • Plantation south--slavery
  • Mountain south--not much slavery
  • North--no slavery
  • Border state antislavery--Cassius Clay--get rid of the "Peculiar Institution"--no desire to free African Americans

The northern desire to see slavery set on the "course of ultimate extinction"

Ulpian: Roman jurist: Cui Bono? Who Benefits?

Who benefitted from the crime of American slavery?

Do comparative statics with a counterfactual world in which cotton was grown using free labor rather than with slaves.

Handout for the cui bono? analysis of slavery...

Posted by DeLong at 02:05 PM | Comments (11) | TrackBack

Shame on the Washington Post (Why Oh Why Can't We Have a Better Press Corps? Department)

What seemed to me to be the two most egregious passages in a very misleading and shameful editorial:

washingtonpost.com: Mr. Bush's Personal Accounts: [C]ritics... argue that mass Social Security purchases of equities will drive their prices up.... But Social Security purchases of equities would not be big enough to trigger serious price moves in the nation's extremely deep and liquid capital markets. Goldman Sachs researchers recently noted that annual equity accumulation by personal account holders would peak at 0.6 percent of the value of the market. That modest spike in demand for equities would be swamped by potential swings in the supply. In some years over the past two decades, firms have issued new equity worth as much as 2.5 percent of the value of the market. In other years, share buybacks have reduced the supply of equity by as much as 4 percent.

But new issues and buybacks oscillate back and forth from year-to-year, while private account balances grow. And the Goldman-Sachs number of 0.6% of the market per year is low. Figure on personal account holdings amounting to 20-40% of the domestic stock market--that's enough to plausibly have a big impact on prices. The 0.6% per year number is not the relevant one. I'm not certain whether the Post editorial writers are too clueless to know that it is not the relevant number, or are too mendacious to care.

The Post continues:

In short, the equity premium is real even though its precise size is unknowable; it amounts to a strong argument in favor of personal accounts. But reform would also carry risks. It would transfer investment uncertainty to individuals, the poorest of whom may arguably be ill-placed to shoulder it.

"Arguably"? I've never heard anyone argue that the poorest of Social Security beneficiaries are not ill-placed to shoulder additional equity risk.

The equity premium is an argument not for private accounts for individuals, but for the government to invest part of prefunded Trust Fund balances in equities. This is a risk that the government--not guys living on $1,000 a month Social Security checks--is best-placed to bear.

Posted by DeLong at 11:46 AM | Comments (25) | TrackBack


Alan Greenspan appears to fall off the tightrope: a rare event, but it's hard to keep walking on the expectations-managing tightrope when all the fundamentals are against you.

The word from inside the Federal Reserve is that Alan Greenspan is *not* optimistic about the dollar and *not* unconcerned about the U.S. budget deficit: that he was trying to express concern without triggering a dollar sell-off: that his words have been misinterpreted by markets as being more optimistic than they were intended to be.

John Berry of Bloomberg reports:

: Federal Reserve Chairman Alan Greenspan, speaking in London last week, put the best face he could on the outlook for the burgeoning U.S. current account deficit. Currency markets, perhaps misled by the seemingly hopeful tone of Greenspan's remarks, responded by bidding up the value of the dollar. They should have listened more closely to all his carefully worded caveats and conditional phrases....

In his Feb. 4 speech, Greenspan ticked off several major reasons why the U.S trade deficit isn't likely to shrink anytime soon.... The first negative, a very big one, was the fact that U.S. imports are so much greater than exports that ``exports must grow half again as quickly as imports just to keep the trade deficit from widening -- a benchmark that has yet to be met,'' Greenspan said.... A second negative he cited is the U.S. tendency to import more than its trading partners do when their respective growth rates are the same. On top of that, of course, is the fact that the U.S. economy lately has been growing much faster than its industrial nation partners, he said. A third negative from Greenspan was that the surge in world oil prices has also helped deepen the trade deficit.

So what seemed upbeat in the speech?... European exporters have been willing to see their profit margins shrink rather than raise their prices and lose market share in the U.S., though that may be coming to an end. ``We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins,'' the Fed chairman said. Note the ``may be.''...

As positive developments, Greenspan also mentioned the possibility that the federal budget deficit may be about to decline and that household saving may turn up again as the huge wave of home mortgage refinancing begins to ebb... any noticeable reduction in the federal budget deficit appears to be a remote possibility for either fiscal 2005, which ends Sept. 30, or fiscal 2006, given the negative reaction in Congress to many of the spending cuts proposed this week by President George W. Bush in his 2006 budget....

``Numerous issues that have arisen with respect to the adjustment of the U.S. current account remain unresolved,'' Greenspan concluded. ``One is the effect of Asian official purchases of dollars in support of their currencies. Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down.'' Pin it down or not, Chinese authorities have shown no willingness to stop interventions to keep their currency tightly pegged to the dollar....

Posted by DeLong at 10:04 AM | Comments (17)

Keeping the Yuan Down...

John Berry delivers the rest of the conference report on last Friday's Federal Reserve Bank of San Francisco dollar-yuan conference. Berry believes that the yuan will stay low for quite a while: that China's State Council doesn't realize what the long-run costs of its policy are, and even if ti did realize them might think the money well-spent:

Bloomberg Columnists: Federal Reserve officials aren't optimistic that China will drop its currency peg against the dollar anytime soon because that decision is in the hands of a State Council focused primarily on political stability rather than financial issues... believes that China's political stability hinges on continued strong economic growth that will provide the tens of millions of new jobs needed by workers moving out of agriculture and into the industrial economy. And that growth in turn is seen as dependent on keeping the yuan pegged tightly to the dollar.

Fed Chairman Alan Greenspan has said that keeping the yuan pegged to the dollar means that the People's Bank of China, the country's central bank, can't control the nation's money supply. As a result, mounting inflationary pressures eventually will force a revaluation of the yuan, he has said. At the same time, keeping the peg has forced the central bank to accumulate well over half a trillion dollars worth of foreign exchange reserves, mostly U.S. dollars....

In a speech in Washington on Feb. 9, Timothy F. Geithner, president of the New York Federal Reserve Bank, cited two major risks to world economic growth. One is the increasing government debt-to-GDP ratios in most of the major economies. ``At the same time,'' Geithner said, ``external imbalances have reached unprecedented levels, most dramatically in the case of the U.S. current account deficit, which is on a path to exceed 6 percent of GDP. These imbalances -- fiscal and external -- cannot be sustained indefinitely. Each magnifies the risk in the other.... The present system, where the major currencies adjust against each other, but many large emerging market economies tie their currencies to the dollar or shadow it closely, creates an awkward asymmetry. This system carries with it the seeds of future stress for the global economy,'' Geithner warned.

At a symposium at the San Francisco Federal Reserve Bank last week, more than 30 economists, mostly from universities and international institutions, tackled the issue of China's currency peg. Most of them argued that the Chinese would be forced to adopt a more flexible exchange rate regime, and some said that would come no later than next year.... [T]he symposium... discuss[ed] a series of papers by economists who maintain that the Chinese have such an overriding interest in strong growth that the peg will last at least for another five years.... Peter Garber... told the group, ``I don't think anybody disagrees that this eventually will come to an end.'' That probably will only happen ``when the labor supply is absorbed,'' he said.... The heart of the Dooley and Garber analysis, in which David Folkerts-Landau, another Deutsche Bank economist, has participated, is that the current situation in China and other East Asian nations resembles that of Western Europe in the 1950s after much of it was devastated by World War II.... ``If the price to be paid for this (industrialization) strategy includes financing a large U.S. current account deficit, governments in the periphery will see it in their interest to provide financing even in circumstances where private international investors would not....

No one [else] at the symposium expressed support for the notion that the Chinese would be able to maintain their peg nearly as long as Dooley and Garber said they could. Nouriel Roubini of New York University was the most vociferous among those attacking Dooley and Garber's view. ``It's not sustainable and will unravel,'' Roubini said. ``Once central banks signal less willingness to finance,'' that will trigger a massive private investor rush out of the dollar. Edwin M. (Ted) Truman, a senior fellow at the Institute for International Economics and former head of the Fed Board's Division of International Finance, referred to the papers as ``musings'' and said their ``view is incorrect and their framework does not provide a useful guide for analysis or policy. A continuation of a U.S. current account deficit of 6 percent of GDP is neither economically, financially nor politically sustainable,'' Truman said. ``The large economies with more or less firm pegs to the dollar inevitably will have to be part of the adjustment process.''...

Posted by DeLong at 09:58 AM | Comments (15) | TrackBack

The State of the Trade Deficit

Brad Setser reports on the numbers:

Brad Setser's Web Log: December trade: "We now know the trade deficit hit $618 billion for the year (5.35% of GDP):

Exports: $1146 billion
Imports: $1764 billion

The good news in December was the uptick in exports; the bad news was that the fall in oil imports did not produce a fall in overall imports -- non-oil import growth continues to be strong. Imports from China ($197 billion) exceeded imports of petroleum and related products ($175.5 billion)....

What about 2005? First, assume imports and exports stay at their q4 levels through the entire year. Exports rise to $1181b; imports to $1868b, producing a deficit of $687 billion (5.6% of GDP). That produces import growth of 6%, export growth of about 3%. Second, let's assume that non-oil imports and exports grow at their 2004 annual rate, i.e. exports grow a bit faster than 12%, and non-oil imports grow a bit less than 15%. Further assume that oil import volumes grow by 5%, and oil averages $45 a barrel rather than $41 a barrel, increasing the US oil import bill by about $20b. That implies exports of $1287b, imports of $2020b, and an overall trade balance of -733 billion (6% of GDP).

Exports recently have been growing a rate closer to 10%, and non-oil imports should slow somewhat, so just projecting out 2004 growth rates is probably misleading. It seems to me more likely that, at least at the beginning of 2005, export growth may slow more than non-oil import growth, widening the overall deficit. But barring a major change in US economic conditions, or a big fall in oil, there is little doubt the trade deficit will keep on growing in 2005.

Posted by DeLong at 09:43 AM | Comments (7) | TrackBack

February 10, 2005

Why Oh Why Can't We Have a Better Press Corps? (Yet Another National Review Edition)

Now it is Jesse Taylor who is reduced to gibbering madness by National Review:

Pandagon: It Works, You Jerks!: In a yearly ritual, Republicans and libertarians rush to the holy temple of lower taxes and defend the battery of tax cuts as growers of tax revenues. Revenues are growing!, they say. Revenues are showing!, they say. Oh, those revenues, flowing and mowing, knowing and towing!

After a Seussian venture into linguistic delusion, however, they sober up and write the same claptrap they've been writing since Reagan was in office.

Alan Reynolds:

The Washington Post thus called the 2001-2003 tax cuts "unaffordable," claiming revenues would be $192 billion higher without them (about 1.5 percent of GDP). But that rosy figure depends entirely on the hidden assumption that the economy would be just as strong with higher tax rates as with lower tax rates. I am aware of no economic theory or evidence that suggests that might be true. Besides, the Congressional Budget Office estimates that federal tax revenues will rise by $177 billion this year alone -- an increase of 9.4 percent.

Stephen Moore:

The Democrats continue to argue that the budget deficit explosion is a result of the Bush tax cut. Nice try, but that's inconsistent with the facts. In fact, the 2003 reduction in the capital gains and dividend taxes has led to an increase in revenues, because it has led to an increase in economic growth and stock values....

Now, here's the issue - not a single one of them ever references tax revenues by year. You would think with all this talk of supply-side tax cuts growing tax revenues, they would be proudly putting forth all those growing revenue figures each year, proudly stating how much more money lower tax rates were bringing in.

Oh, right, that's because there are no such figures.

Tax revenues fell year over year from 2000-on. In fact, all projections for rising year-over-year revenues presume that there are no more new tax cuts coming down the pike. Even if there was a $177 billion rise in tax revenues in 2005, you would still need around another $100 billion in revenue growth to match 2000's revenue in non-inflation adjusted dollars.

The way I like to put it is that in 2010 real individual income tax revenue per capita will *still* be eight percent lower than it was in 2000.

Posted by DeLong at 06:42 PM | Comments (36) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Mad Scientist Edition)

Mild-mannered liberal-arts college physics professor Chad Orzel falls victim to shrill unholy madness after reading Gregg Easterbrook. Oh no! He's turning green! The seams of his tweed jacket are ripping! He's growing in size! Hulk SMASH!!

Uncertain Principles: The writer in question is Gregg Easterbrook, who many wrongly persist in thinking of as a general-purpose public intellectual. "He's a senior editor of The New Republic," these people say, "How can you belittle him as merely a football commentator?" The answer is simple: his football commentary is excellent. But every time he puts fingers to keyboard to write about any other subject that I know anything about, he reveals himself to be a complete and utter chowderhead. Thus, I feel that I'm not belittling him by referring to him as a football commentator, but rather pointing out his strengths....

His Super Bowl column, which contains this summary of recent results from the ATRAP collaboration at CERN:

...the CERN research accelerator in Switzerland has just created anti-hydrogen in extremely small quantities. Anti-hydrogen is the antimatter mirror image of hydrogen. If an anti-hydrogen atom met a hydrogen atom, each would release all its energy in a total-annihilation reaction far more potent than the nuclear fusion that powers the sun and thermonuclear bombs.... CERN's achievement is to create entire anti-atoms and hold them in a stable condition using pressure from lasers. "The ultimate goal is to make a goodly supply of anti-atoms, store them and then probe their internal structure," CERN reports.

This appears to have been generated... by having a ten-year-old with ADD read that press release, and summarize it for him. This isn't even a physics problem, so much as a reading comprehension problem: any literate adult reading the press release for themselves would surely notice that this is not the first experiment to produce antihydrogen... and that the lasers are not used to trap the atoms, but as part of the production reaction.... Of course, it doesn't really matter to Easterbrook that he's mangled the description of the experiment, as it's really just a springboard for some Luddite windbaggery about antimatter bombs. "In theory an antimatter bomb the size of a baseball could obliterate a city." Sure, and when we've worked out how to make 1,000,000,000,000,000,000,000 times as many antihydrogen atoms as we've made to date (at the rate of a couple thousand a year, last I heard), this will be a real dilemma. Of course, the clone armies will have taken over by then.... Of course, that's not even close to the levels of fatuousness he achieves when he attempts to talk about cosmology:

Both the donut and soccer-ball camps hold that when astronomers scan deep space, the infinity they think they see is an illusion. In some doughnut-shaped or soccer-inspired or bagel-sliced way, the cosmos appears much larger than it is. Cosmologists estimate there are at least 100 billion galaxies; actually, these researchers contend, what we observe is reflections of a much smaller number of galaxies: a traveler moving at super-speed straight out into the universe would eventually end up back at the starting point, not continue forever. The universe is an illusion? Well, this seems easier to swallow than the idea that all material for the entire cosmos popped out of a single point with no content, as Big Bang theory maintains.

Just... stop. You're hurting America. Take your cue from John Madden, and just disappear until August.

Posted by DeLong at 06:33 PM | Comments (25)

Why Oh Why Can't We Have a Better Press Corps? (National Review Edition)

The National Review enters the Black Hole of total and irreversible stupidity:

The Editors on Social Security on National Review Online: The press is not making his job any easier. The Washington Post ran a misleading story.... Paul Krugman then repeated the original misstatements. Under Bush's proposal, workers will have a choice about whether to open a personal account.... In return for the opportunity to build a nest egg in the account, in other words, workers would have to accept smaller checks from the government. People who choose the accounts will come out ahead if their investments get a return that averages above 3 percent a year. From this fact, the Post somehow concluded that Bush was going to let workers get only the returns above 3 percent, while the government would take everything up to 3 percent. That would make the proposal a very bad deal for workers. But it's not true....

So: the National Review agrees that you come out behind if your personal account makes less than inflation + 3%, and come out exactly the same if your personal account makes inflation + 3%. Your personal account is "yours" only in the sense that a highly-mortgaged house is yours. When you sell the house, you get the money--but the mortgage-holding bank snarfs it back before you leave the closing room. When you retire, you get your entire 3%-earning personal account--but the government snarfs back the exact same sum by deducting it from your defined-benefit Social Security annuity. So what, exactly, is "not true"? Nothing. We have left the logic zone entirely.

Where I disagree with the National Review is its claim that the system it (correctly) describes is "a very bad deal for workers." It is, I think, a bad deal for older workers, and a bad deal for poor workers who have no business running risks with their baseline retirement income tranche, but it can be quite a good deal for young rich workers.

But who needs to be told that you don't go to National Review for financial advice or economic wisdom?

Posted by DeLong at 06:28 PM | Comments (14) | TrackBack

20050208: Econ 113 Lecture: Slavery 1

The Slave Trade:

Adam Smith expected slavery to come to a rapid end after 1776; Adam Smith was wrong.

Why slavery should come to an end:

What maintains slavery?

Caesar; classical Roman slavery; Arabic slavery; mamelukes

The American South

Still slavery persisted; Domar's argument; free land made it impossible to strike the emancipatory bargain--hence the coming of the Civil War

Posted by DeLong at 12:38 PM | Comments (22) | TrackBack

20050203 Econ 113 Lecture: Industrializing America Before the Civil War

Megasthenes: the coming of cotton to the Mediterranean...

Format of the first midterm exam...

David Ricardo: Why didn't the U.S. become one big unindustralized Canada?

Answer: the tariff

Could the tariff have been good for the country?

Answer--yes, if the infant industry argument holds.

What is the infant industry argument? There has to be some benefit--external to the firm and to the worker--from production. Future productivity has to be positively influenced by past production in order to make it beneficial in the long run to upset the Ricardian pattern of comparative advantage.

The infant industry argument is plausible, but not certain, for the case of U.S. textile manufacture.

Even so, it's not good for the cotton-exporting tariff-paying south.

The history of the cotton textile business: Samuel Slater, Francis Cabot Lowell, Lowell Massachusetts, et cetera...

Peter Temin's article: the American system

The Crystal Palace exhibition
What is special about American industry
Eli Whitney
Interchangeable parts
The "American System"
Resource-using technological style.

Consequences for post-Civil War industrialization...

Posted by DeLong at 12:31 PM | Comments (4) | TrackBack

Jo Walton's Tooth and Claw Once Again

Michael Froomkin likes it:

Discourse.net: A Literary Note: Dragons | Jane Austin > Jo Walton, Tooth and Claw.

[English translation: Dragons Jane Austinified results in Jo Walton’s delightful Tooth and Claw. Slight, yes, but lots more fun than “Little Women”.]

Posted by DeLong at 12:06 PM | Comments (5) | TrackBack

Econ 113 Lecture Notes Page

So far we have run through the first three weeks of lectures--up to 1860 (with the big exception of slavery). My transcribed (but cryptic and highly abbreviated) lecture notes are here: http://www.j-bradford-delong.net/movable_type/2005-3_archives/cat_Notes_Econ_113_Spring_2005.html

Posted by DeLong at 11:19 AM | Comments (1)

20050210: Econ 113 Regression Handouts

Marit Rahavi's version

Richard Halkett's version

Posted by DeLong at 10:50 AM | Comments (2) | TrackBack

20050210 Econ 113 First Midterm: Practice Exam

Here is a practice exam for the Econ 113 first midterm to be given on February 15, 2005, in LeConte 4 at 2 PM. Bring bluebooks! The format is the same as the format of the real exam. The questions are different. Well, most of the questions are different. Some of the questions are the same.

Posted by DeLong at 10:43 AM | Comments (2) | TrackBack

February 09, 2005


Jueman Zhang, formerly a reporter in Shanghai and now a graduate student in journalism at the University of Missouri-Columbia, is trying to collect data for his thesis on why people read politically-oriented weblogs that are written by non-journalists.

If you have free time and want to help, you can go to http://freeonlinesurveys.com/rendersurvey.asp?id=80229

Posted by DeLong at 09:48 PM | Comments (6) | TrackBack

Opinions on Shape of Earth Differ (Why Oh Why Can't We Have a Better Press Corps? Department)

Paul Krugman likes to say that if the White House were to announce tomorrow that the world is flat, our press is so disfunctional that the leads the following day would read "opinions on shape of earth differ."

Here's our latest example of this phenomenon: the Washington Post'sJonathan Weisman sees a "heated debate" among economists between those who (like me) believe that administration forecasts of 6.5% stock returns and 1.9% economic growth rates are inconsistent, and those who see no trouble:

washingtonpost.com: Bush's Social Security Plan Assumes Much From Stocks: President Bush is relying on projections that an aging society will drag down economic growth. Yet his proposal to establish personal accounts is counting on strong investment gains in financial markets that would be coping with the same demographic head wind. That seeming contradiction has become fodder for a heated debate among economists, who divide sharply between those who believe the stock market cannot meet the president's expectations and those who say investor demand from a faster-growing developing world will keep stock prices rising...

On my side, Weisman quotes "Douglas Fore, director of investment analytics for TIAA-CREF," "Richard Jackson, director of the Center for Strategic and International Studies' global aging initiative," "Germany's Mannheim Research Institute," "Richard Berner, senior U.S. economist at Morgan Stanley," "Prudential Equity Group strategist Edward Keon," Dean Baker (who owns this issue), and me.

On the other side, Weisman cites... well, it sounds like he's citing Jeremy Siegel from Wharton:

"The only way to save the financial markets is very rapid growth in the developing world."... Growth in China, India and other parts Asia will help, Siegel said, because the growing middle class in those countries will want to invest in the West, creating demand for the stocks and bonds that retirees will sell. But if the economic laggards in Africa, the Middle East and Latin America don't speed up fast, the pool of capital from the developing world will not be large enough to make up for the West's decline. He gives future workers an 84 percent chance of beating the White House's 3 percent threshold. That might seem like good odds, he said, but, "if you're going to miss it, that's going to hurt a lot more than if you exceed it."

But Weisman has a problem: Siegel isn't on the other side, he's on my side. He's not saying that stock market returns will average 6.5%, he's saying that there's an 84% chance that they'll average more than 3%. That's a wide gap. (IIRC, at current dividend yields Jeremy's forecast of long-run stock returns is roughly 5% per year.)

So who is he citing on the other side? "Bush's Council of Economic Advisers... predicted that gains from the stock market, over the long term, will continue to be healthy," and unnamed "White House economists [who] say such calculations are absurd because they ignore global economic growth and investment in countries unaffected by the demographic slowdown."

If there really were a "furious debate," shouldn't Weisman have been able to find at least one White House economist who would agree to be quoted by name to say that my (well, actually Dean Baker's and Paul Krugman's) calculations are "absurd"? Shouldn't Weisman have been able to find one reputable economist not on the White House payroll willing to say that 1.9% per year future real GDP growth is not inconsistent with 6.5% real stock returns starting from our current price-dividend ratio of more than 60?

The fact is that there is no furious debate among economists. Among reputable economists, there are those who expect stocks to fall significantly in the short run from their current heights, there are those who expect U.S. economic growth in the long run to be a lot faster than 1.9% per year, there are those who expect stock returns to be less than 6.5% real in the long run, there are those who bounce around between those positions, and there are those who haven't thought the issues through.

Whatever it is when one side consists of unnamed White House functionaries who hide their identities, it's certainly not a "furious debate" among economists. Weisman does those of his readers who don't read beyond the fold no good service when he tells them that it is.

UPDATE: Jonathan Weisman responds (to another correspondent):

Alas, I fear you have been reading Brad DeLong's website. I suppose he is very persuasive to his readers, but I think the story is more complicated than he makes it out to be. There is a fierce debate, but it is not neat and simple and it is not necessarily left vesus right. Richard Jackson at CSIS and the Mannheim Research Institute for the Economics of Aging believe that global aging will impact financial markets, but not terribly, certainly not as terribly as Prof. DeLong and Dean Baker maintain. A recent Mannheim paper by Axel Börsch-Supan, Alexander Ludwig and Mathias Sommer concluded that the hit to the return on capital would be 100 basis points, 1 percent -- a finding they presented as "comforting." Jeremy Siegel also would not put himself into the DeLong-Baker-Krugman camp. He is concerned, but he believes investors in the developing world could indeed soak up much if not all of the selling in the developed world. Indeed, he specifically told me he would counsel younger workers to take their chances on private accounts if given the chance. The McKinsey Global Institute, which has also studied the matter, concluded we just can't know what will happen to the stock market in the future because we can't know how investment in and investors from the developing world will impact western markets. This is a recurring theme, and not just from a few crackpots.

On DeLong's side is Richard Berner at Morgan Stanley, Edward Keon at Prudential and Douglas Fore at TIAA-CREF. Against him are Steve Goss, Social Security's chief actuary, who made the disputed projections, the White House Council of Economic Advisers and a bunch of conservatives whom I didn't quote by maybe should have, including Kevin Hassett at the American Enterprise Institute and Donald Luskin, whom Prof. DeLong knows full well disagrees fiercely with him. Just because Prof. DeLong says Mr. Luskin is the stupidest man in the world doesn't mean I as a reporter have to ignore Luskin's writings on the subject. Indeed, when various economic bloggers start calling each other idiots over the subject, I think it qualifies as a fierce debate.

As always when encountering Weisman, it's terribly depressing because it's hard to know where to start. For example, Weisman writes that "Jeremy Siegel also would not put himself into the DeLong-Baker-Krugman camp.... Indeed, he specifically told me he would counsel younger workers to take their chances on private accounts if given the chance." Well, I would tell younger workers who have succeeded in college to take their chances on private accounts (for those who haven't gone to or been successful in college the risks are much more serious). It's not that I--or Dean Baker, or Paul Krugman--thinks that properly-diversified, unchurned, low-fee private accounts are a bad investment vehicle for those with a sufficient retirement income floor to afford the risks. It's that the Bush administration's assumptions about stock returns require rapid projected future economic growth in the background, while the claims that Social Security is in dire crisis require slow projected future economic growth. We're saying that the Bush administration should not be allowed to have it both ways: starting from current dividend yields, you can forecast a 1.9% long-run economic growth rate or a 6.5% long-run real stock return, but not both.

Weisman seems--genuinely--to not know this. Which leads me to the natural question: why is he writing on a subject about which he knows so little?

Let me bring up one more point--one more tree of misconception out of Weisman's forest. Weisman claims that Kevin Hassett is happy forecasting future real GDP growth rates of 1.9% per year and future equity returns of 6.5% per year. I very much doubt it. The point of Hassett's _Dow 36,000_ after all, was that (a) the market would jump in the 3-5 years after its publication to a point where (b) expected stock returns would be 3.5% per year: no higher than bond returns, and remain equal to bond returns thereafter.

The claim that equity returns will average 3.5% per year is one of Hassett's core intellectual commitments. If Hassett is indeed throwing that over the side because it is inconvenient to the White House this week, that is a remarkable thing indeed.

But I see no sign that Weisman asked Hassett about the consistency of what he was saying yesterday with _Dow 36,000_, or indeed knows that Kevin Hassett has a longstanding commitment to the position that equity returns will be relatively low in the future.

Why, as one senior press hand was telling me only this morning, "Jonathan's big problem is that he's not that deep into the issues, and he has no backup. There's nobody that he can go to in that building to tell him 'this was how X was trying to mislead you' or 'this is Y's history' or 'be very careful here: if you get this detail Z wrong, they'll come down on you extremely hard.' (As indeed, the White House did to him last week, when Weisman wrote "If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700" instead of "If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the effect on the worker's retirement income would be the same as if the government kept $78,700".)

Posted by DeLong at 03:52 PM | Comments (66)

Growth/Macro Luncheon Seminar: 20050209

I just gave a talk on:

Marc Melitz (2003), "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica 71:6 (November).

It's a very nice and well-done paper. It's also a paper at war with itself. Melitz tries to be:

The problem is that the first requirement is at war with the rest, so at the end of the day Melitz has not made as much progress as I would wish he had.

"And this is different from every other macro/growth paper how, exactly?" asks a Labor graduate student. Good question.

Chang-Tai Hsieh recommends:

Alwyn Young (1993), "Substitution and Complementarity in Endogenous Innovation," Quarterly Journal of Economics 108:3 (August), pp. 775-807.

Posted by DeLong at 01:32 PM | Comments (5)

The Minuteman Asks: Who Would Like To Bet On Paul Krugman?

Tom Maguire asks:

JustOneMinute: Who Would Like To Bet On Paul Krugman?: However, my point stands in direct contradiction of a column written by Paul Krugman.... So, my proposition - I will pick out a couple of key phrases that summarize the Krugman argument, and put my money where my mouth is. If a consensus emerges that I am correct, you pay; if, OTOH, I am wrong, I pay.  The technical term for this is "wager".... Now, frankly, I ought to be the underdog here - we are talking about macroeconomic forecasts, and Paul Krugman is who he is (I am who I am, too, but what is that?) And, as regular readers know, there is a certain "stopped clock" quality to my criticism of Paul Krugman.  Oh, I may think I score the odd success, but frankly, if Krugman said "Good morning", I would probably put up a post saying it's nighttime in Tokyo, and wondering how a guy with a reputation as an international economist could possibly overlook that trivial and obvious fact.

Well.  The wagers.  Despite my heavy underdog status, I will put these up at even money.  $100 on this one: "the numbers the privatizers use just don't add up."

Let me take the bet--or, rather, propose my version of the bet. I will give Tom Maguire 4-1 odds. I will bet that twenty years from now--February 9, 2025--it will be the case that at least one of:

will turn out to be true. (I think all three of them will turn out to be true; but I like to make bets that I think I have a very good chance of winning.)

I will bet a case of the products of the Bonny Doon winery against three bottles.

And I would caution Tom (or anyone) against accepting bets specified by others. As the old story goes, "Someday, someone is going to come up to you with an unopened deck of cards, and bet that he can tap the deck and the jack of spades will jump out and squirt cider in your ear. Son, do not accept this bet."

Posted by DeLong at 10:18 AM | Comments (25)

Private Accounts as a Loan from the Government to the Worker...

Peter Orszag's view of the Bush private accounts proposal: the financial effects of private accounts are the same as if the government loaned you a chunk of your future benefit at 3% real interest so that you could try to do better in the market. The underlying idea behind private accounts could be quite good: the bottom half of the American income distribution has essentially no equities, and that can't be good. America's national savings rate is too low, and effective incentives that increase national savings (as the Bush plan does not) would be very welcome. But there are much better ways to make equity investments easy for the non-rich than making them mortgage their defined-benefit Social Security wealth to do it:

Borrowing from Future Social Security Benefits: The Administration’s Proposal for Individual Accounts (pdf version)

Peter R. Orszag
Joseph A. Pechman Senior Fellow
The Brookings Institution

House Committee on the Budget
February 9, 2005

Mr. Chairman, thank you for inviting me to testify before you this morning. On February 2, the Bush Administration released some details about its proposal to replace part of Social Security with individual accounts. Even with these admittedly incomplete details, several points now appear clear:

• Under the Administration’s plan, payroll taxes deposited into an individual account are essentially a loan from the government to the worker. The Administration’s proposal is the equivalent of a loan that mortgages future Social Security benefits: Workers opting to divert payroll taxes into an account today would pay back those funds, plus interest, through reductions in Social Security benefits at retirement. In other words, just as with a loan, the worker receives cash up front and then owes money back, with interest, later. Someone who borrows money to make an investment benefits if the assets purchased with the borrowed funds grow faster than the debt; the person is worse off if the debt grows faster than the investment. Similarly, under the Administration’s plan, workers wind up with higher retirement income if the income from their accounts exceeds the benefit reductions that pay off the loan, and vice versa.

• The accounts not only fail to reduce the Social Security deficit, but will likely increase it. Even an Administration official has acknowledged that the accounts proposed by the President would have a “net neutral effect” on Social Security’s financial condition over the long term. The reality is likely to be even worse, however: The accounts will likely harm Social Security’s long-term deficit. The reason is that not all the “loans” from diverted revenue will be repaid in full; in several situations, which I will describe below, subsequent benefit reductions will be insufficient to offset the cost of the diverted revenue plus interest. As a result, even over the “infinite horizon” that the Administration favors, the accounts not only fail to reduce the deficit in Social Security; they make it worse. Over the traditional 75-year horizon used to evaluate Social Security solvency, this conclusion is only strengthened.

• The accounts by themselves entail a significant and sustained increase in public debt. By themselves, the individual accounts would increase public debt by more than $1 trillion during the first decade they were in effect and by more than $3.5 trillion during their second decade. The increase in public debt, moreover, would be permanent: Even if each individual “loan” were eventually repaid in full, public debt would remain higher than in the absence of the accounts over the long term. The reason is that even if each loan were eventually repaid, some loans will always be outstanding. As a result, the government will never, at any point in time, yet have been paid back for all the revenue diverted into accounts – and therefore public debt will always be higher than without the accounts. The bottom line is that the Administration’s account proposal would raise public debt by more than 30 percent of GDP over the very long term. And even if the account proposal were combined with other measures that (unlike the accounts) would reduce the deficit in Social Security, public debt would remain higher than in the absence of the plan for several decades. Such higher levels of public debt are problematic because they increase the exposure of the government to a collapse in financial market confidence.

• The Administration’s ultimate plan will have to rely on severe benefit reductions to eliminate the Social Security deficit. Since by the Administration’s own admission the accounts do not reduce Social Security’s deficit, and since the Administration is opposed to dedicating additional payroll taxes to the program, the Administration’s plan to eliminate the long-term deficit in Social Security must involve severe reductions in benefits (or introduce some new revenue source for the program). In particular, any plan that closes the deficit, includes the accounts the Administration has already proposed, and fails to dedicate additional revenue to Social Security must involve substantial cuts in traditional benefits beyond those required to pay back the loans to workers opting for individual accounts. The combined effect would be a stunning decline in the defined benefit component of Social Security over time. For example, if one prominent type of benefit reduction (often referred to as “price indexation”) were combined with the loan repayments necessary under the Administration’s accounts, traditional benefits for a young average earner today could decline drastically – instead of replacing more than a third of the worker’s previous wages, Social Security’s defined benefits would replace well under a tenth.

Building ownership and wealth should not come at the expense of mortgaging future Social Security benefits. Nor should Social Security reform be associated with a significant increase in public debt: such an increase is not necessary to reform Social Security or even to create individual accounts. Furthermore, the accounts in the Administration’s plan by themselves would not increase national savings, and could end up reducing it (if individuals decide to contribute less to their 401(k)s and IRAs because they see other money accumulating in their individual account).

A better approach would shore up the existing Social Security system while raising saving in addition to Social Security. Several common-sense steps could substantially boost saving outside of Social Security.

The loan analogy

Under the Administration’s proposal, the individual account system would involve two components: the individual account assets, which would contain a worker’s deposits and the accumulated earnings on them, and a “liability account.” If a worker chose to participate in the individual account system, 4 percent of payroll taxes (initially up to a limit of $1,000, with the limit gradually eased over time) would be diverted into the account, accumulate during the worker’s career, and be available to the worker upon retirement. Since the revenue diverted to this account would reduce the financing available to the traditional Social Security system, a “liability account” would also be created. This liability account would track the amounts diverted, and accumulate them at a 3 percent real interest rate. The liability account would determine the debt owed back to Social Security at retirement because of the diverted funds.

Upon retirement, the worker’s debt to the Social Security system would be repaid by reducing his or her traditional Social Security benefits – that is, the monthly check paid to a retiree. Specifically, the monthly benefit reduction would be computed so that the present value of the reduction would equal the accumulated balance in the liability account. In other words, the reduction in monthly benefits would be just enough, in expected present value, to pay off the accumulated debt to the Social Security system.

This system is quite similar to a loan: As under a loan, the worker receives cash up-front and can invest the money. The worker pays back the borrowed funds, with interest, later. The specific form of the repayment, through a reduction in traditional Social Security benefits, does not alter the underlying nature of the transaction.

To take a specific example, consider a medium-earning worker aged 21 at the beginning of 2011 who elects to participate in the accounts. In inflation-adjusted dollars, the worker would divert about $500 in payroll taxes into his or her account in 2011, about $1,000 in 2015, about $1,500 in 2020, and so on. Those funds would build, along with the investment returns on them, and be available to the worker upon retirement. This worker would also, however, incur a debt to Social Security that would accumulate to more than $150,000 by the end of 2054, when the worker would be 65. Repayment of the $150,000 debt to Social Security would consume roughly half of the worker’s retirement benefit under the current benefit formula.

If the assets in the worker’s account upon retirement exceed $150,000, the worker would experience a net increase in retirement income, and vice versa, compared to not participating in the account. Thus the worker’s retirement income, on net, increases if the account yields 3 percentage points per year above administrative costs and inflation. The worker’s retirement income declines if the account yields less than that.

Note that because of administrative costs, it is impossible for the worker to break even while holding government bonds and for the government to be held harmless on the transaction. The reason is that one party or the other must bear the administrative costs of the investment. Under the Administration’s assumptions, for example, the real interest rate on government bonds is 3 percent per year. Under that assumption, the system would hold the government harmless as long as the worker reached retirement and paid back the loan (the government would be held harmless since the loan carries the same real interest rate as the projected government borrowing rate). The worker, however, would be worse off if she opted for an account and held government bonds in it. Such an account would have a net real yield of 2.7 percent per year (the 3 percent real return on government bonds minus the assumed 0.3 percent per year in administrative costs), leaving the worker with a net reduction in retirement income. The worker’s account in this case would grow to only about $142,000, or almost $10,000 less than the worker’s debt of more than $150,000 back to Social Security.

Although the loan analogy is insightful in understanding the basic effects of the proposal, there are some important distinctions between a conventional loan and the proposed system. For example, under the Administration’s proposal, workers must make a one-time decision to participate in the accounts; after that initial decision, they are required to continue diverting revenue over the rest of their careers. (The ability to invest the additional borrowing in Treasury bonds does not necessarily insulate the worker from the effects of the borrowing, given administrative costs and the possibility that the realized interest rate on government bonds may in the future diverge from the interest rate on the “loan.”) Conventional loans do not typically require the borrower to continue borrowing over time. In addition, the proposed accounts carry restrictions that are not typical of conventional loans: The Social Security loan can only be used for purchasing assets such as stocks held until retirement, and can only be repaid in a specific form (through a reduction in future Social Security benefits). Finally, unlike a conventional loan, this transaction would presumably not involve a contract. Despite these important distinctions, the loan analogy is useful in evaluating the impact of the proposal.

Accounts do not improve solvency and likely harm it

The loans to workers opting for the accounts carry a 3 percent real interest rate. This rate is equal to the expected real interest rate on government bonds projected by the Social Security trustees in their intermediate cost assumptions. Since the interest rate on the loans is equal to the interest rate that the Social Security system is assumed to earn on its own funds, the system is held harmless on each individual loan, under the trustees’ assumptions, as long as the loans are repaid in full. This is why a senior Administration official was quoted on February 2 as saying, “So in a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government.” A reporter than asked: “And am I right in assuming that in the way you describe this, because it's a wash in terms of the net effect on Social Security from the accounts by themselves, that it would be fair to describe this as having -- the personal accounts by themselves as having no effect whatsoever on the solvency issue?” The senior Administration official replied: “That’s a fair inference.”

Two crucial points are worth noting about this statement. First, even the Administration now acknowledges that the accounts do nothing to reduce the long-term deficit in Social Security. In other words, according to the Administration itself, individual accounts are simply a non-answer to the question of how the deficit in Social Security will be addressed.

Second, the statement by the Administration official is likely to be incorrect: The accounts are likely to harm Social Security’s solvency. The reason is simply that there are several likely situations in which the loan repayment back to Social Security (through reduced Social Security benefits) would be insufficient to offset the cost of the diverted revenue. Only if repayment is always made in full will the Administration official’s statement prove to be correct. If repayment is incomplete in some circumstances, the accounts not only fail to reduce the Social Security deficit, they actually widen it.

Several likely scenarios suggest that at least some of the loans will not be repaid in full, and therefore the accounts will harm the system’s long-term finances:

• Pre-retirement deaths. If a worker dies before retirement without a living spouse, the amount in the individual asset account may be distributed to heirs, but the amount in the individual liability account could be extinguished. This is how the system worked under the proposals put forward by the President’s Commission to Strengthen Social Security in 2001; the Administration has apparently not clarified whether the same approach would be adopted now. Under this approach, some loans are not paid off – and the system is thus made financially worse off. The effect may be significant, since roughly one-seventh of workers die before retirement. (The alternative is to have the debt inherited along with the account. In that case, the Administration should clarify that the pre-retirement bequests facilitated by the accounts may be a decidedly mixed blessing: the heirs will inherit both an account and a debt.)

• Backsliding on loan repayments. The benefit reductions necessary to pay off the “loans” from Social Security -- especially if combined with additional benefit reductions to improve solvency -- may be so large that they could prove politically untenable over time. For example, retirees may pressure the government to reduce the loan repayments during periods of weak stock market performance. If such pressures were accommodated and full loan repayments not enforced, the actuarial effect of the accounts could be negative over an infinite horizon.

• Traditional benefits insufficient to finance loan repayment. Even without political pressure to reduce loan repayments, some repayments may be curtailed simply because the traditional defined benefit component of Social Security is too small to pay back the loan in full. In other words, for some workers, the required benefit reductions may exceed the size of the traditional defined benefit part of Social Security that is supposed to provide the repayment financing. In such a situation, the loan would apparently not be repaid in full; in other words, workers would apparently not be forced to repay debts back to Social Security that exceed their traditional benefits. An extreme version of this could arise for workers with less than 10 years of covered earnings, who do not even qualify for Social Security retirement benefits. Such workers would have no traditional benefit against which to apply the loan repayment. If someone working for, say, 5 years were allowed to keep his or her account, the loan may never be repaid, since the worker would not have any traditional benefits with which to repay it. Again, the net result from these types of situations would be that the accounts harm Social Security solvency over the long term.

• Interest rate on Trust Fund more than 3 percentage points above inflation. The interest rate on the loan to workers is apparently specified as 3 percentage points above inflation. That holds the Social Security system harmless on each individual loan, assuming each is repaid in full, as long as the interest rate actually turns out to be 3 percentage points above inflation. But if real interest rates turn out to be higher than 3 percent, the system would not be compensated sufficiently for the diverted funds, and the accounts would widen the Social Security deficit. It is therefore noteworthy that the Congressional Budget Office assumes a long-term real interest rate on government bonds of 3.3 percent. In other words, under CBO assumptions, the Administration’s proposal (with a 3 percent real rate charged on the loans to workers) would harm solvency even over an infinite horizon. If real interest rates on government bonds turn out to be lower than the 3 percent rate applied to the loans, the opposite would be true.

These effects mean that even over the problematic infinite horizon preferred by the Administration, the accounts may harm solvency. That conclusion is only strengthened over the 75-year horizon traditionally used to evaluate Social Security solvency. Over that 75-year horizon, the accounts unambiguously widen the deficit even if all loans are ultimately repaid in full. (The reason is that some loans issued over the next 75 years will not have been repaid by the end of the 75th year.)

Accounts entail a significant increase in public debt

According to a memorandum from the Office of the Chief Actuary, the Administration’s accounts would raise debt held by the public by $743 billion as of the end of Fiscal Year 2015. The increase in debt, moreover, would not subside thereafter: If the accounts were continued past 2015, they would raise debt by more than $3.5 trillion by 2025. Over the first ten years that they were in existence (2009-2018), the accounts would raise debt by more than $1 trillion; during their second decade (2019-2028), they would raise debt by more than $3.5 trillion. (There has been some confusion over $743 billion figure and the more than $1 trillion figure. The $743 billion figure applies to the next ten years. The more than $1 trillion figure applies to the first ten years the accounts would be in existence, from 2009 through 2018.)

The loan analogy helps to explain this increase in debt, and it also provides insight into a surprising result: The debt increase would be permanent. To finance a loan to a worker (provided in the form of revenue deposited into an individual account) under the Administration’s proposal, the government borrows funds. If the worker repays the loan, the additional government debt on that transaction is extinguished, so public debt returns to the same level as if that worker had not opted for an account. But note that at any point in time, even if all loans were eventually repaid, some loans would always be outstanding. As a result, public debt at any point in time would forever remain higher with the accounts than without them.

Figure 1 illustrates the impact of the Administration’s accounts on debt held by the public. Three aspects of the figure are noteworthy. First, debt increases sharply as a share of Gross Domestic Product (GDP) for roughly five to six decades. Second, the higher level of debt is perpetuated, rather than eliminated, in the long term. Finally, the additional, ongoing higher level of debt in the long term is substantial – the increase in debt outstanding of more than 30 percent of GDP is only somewhat smaller than today’s level of publicly held debt relative to GDP (38 percent).

Figure 1: Increase in debt held by the public due to Administration’s accounts

Even if the accounts were combined with proposals to eliminate the underlying deficit in Social Security, the increase in debt is likely to be extended and substantial. For example, the leading proposal from the President’s Commission to Strengthen Social Security in 2001 would have changed the determination of individual benefits to incorporate what is commonly -- but somewhat misleadingly -- referred to as “price indexing.” The change may sound innocuous, but as explained below, it would dramatically reduce benefits over time. For the immediate purpose, note that price indexation is sufficient by itself to more than eliminate the long-term deficit in Social Security. Yet even if the accounts proposed by the Administration were combined with this price indexing proposal, debt held by the public would remain higher than in the absence of the combined proposal for roughly five decades.

Some advocates of the Administration’s plan argue that the debt shown in Figure 1 merely creates “explicit debt” in exchange for “implicit debt” that the government has already incurred (in the form of future Social Security benefits). From this perspective, advocates argue that the loan transactions merely trade more explicit debt for a reduction in implicit debt (since the loan repayments will reduce future Social Security benefits). The argument is then put forward that these two types of debt -- “implicit debt” and “explicit debt” -- are essentially the same, so that converting one into the other does not represent an increase in federal liabilities and should not raise concerns. This argument is, however, flawed. The two types of debt are not equivalent. The explicit debt that the government would incur as a result of the Administration’s proposal for individual accounts would have to be purchased by creditors in financial markets. When the additional debt matured, it would have to be paid off or rolled over. By contrast, the implicit debt associated with future Social Security benefit promises does not have to be financed in financial markets now. A government with a large explicit debt thus has less room for maneuver and is more vulnerable to a lessening of confidence on the part of the financial markets than a government with a large implicit debt. Converting implicit debt into explicit debt is thus problematic. Substantial benefit reductions necessary to eliminate long-term deficit

Since the accounts do not reduce Social Security’s deficit (and may expand it), and since the Administration appears to be opposed to dedicating additional payroll tax revenue to the program, the Administration’s approach to eliminating the long-term deficit in Social Security must involve some new source of revenue dedicated to the program or rely on severe reductions in benefits beyond the loan repayments linked to the accounts. In other words, any plan from the Administration that closes the deficit, includes the accounts it has already proposed, and fails to dedicate additional revenue to Social Security must entail two types of benefit reductions. The first type of benefit reductions would repay the loans to workers opting for the accounts. The second type would be intended to eliminate the long-term deficit in Social Security. The combined effect of these two types of benefit reductions would be a stunning decline in the defined benefit component of Social Security over time.

To examine the impact of relying solely on benefit reductions to eliminate the underlying deficit in Social Security, consider the proposal from Model 2 of the President’s Commission in 2001. This proposal would have changed the determination of individual benefits to incorporate “price indexing,” instead of the wage indexing that is currently used to determine initial benefits. Had this “price indexing” rule been fully in effect by 1983, at the time of the last major reform to Social Security, benefits for newly eligible retirees and disabled workers now would be almost 20 percent lower and continuing to decline relative to current law. These benefit reductions would apply regardless of whether a worker elected to participate in the individual accounts.

Under current law, benefits for new retirees roughly keep pace with wage growth. Successive generations of retirees thus receive higher benefits because they had higher earnings -- and paid higher payroll taxes -- during their careers. This feature of the Social Security system makes sense, since a goal of Social Security is to ensure that a worker’s income does not drop too precipitously when the worker retires and ceases to have earnings. A focus on how much of previous earnings are replaced by benefits (which is called the “replacement rate”) recognizes the real-world phenomenon by which families, having become accustomed to a given level of consumption, experience difficult adjustment problems with substantial declines in income during retirement.

Under what is called price indexing, by contrast, initial benefit levels upon retirement would increasingly lag behind wage growth. In particular, real benefit levels would be constant over time, rather than increasing in line with real wages. Since real wage growth is positive on average, the change would reduce initial benefit levels and the size of the reduction would increase over time.

Under this proposal, if average real wages were ten percent higher after ten years, the roughly ten percent benefit growth to keep pace with this wage growth would simply be removed. The provision thus is more accurately described as “real wage growth negating” than as “price indexing,” since it simply cancels the benefit increases from real wage growth.

Several commentators have underscored the troubling consequences that would result from “price indexing.” Edward Gramlich, a leading economist who chaired the Advisory Commission on Social Security in the mid-1990s and who is now a governor of the Federal Reserve System, has been quoted as saying that if this methodology had been adopted when Social Security was created, [retirees] “would be living today at 1940 living standards.” An earlier analysis of the proposal underscored that: “This is like saying retirees who could afford indoor plumbing when they were working should, in retirement, not be able to afford indoor plumbing because their parents' generation could not afford it.” Even some leading proponents of the Administration’s broad approach have acknowledged this point. For example, John Goodman, president of the National Center for Policy Analysis, recently commented about the price-indexing proposal: “What people are forgetting is why the system is there in the first place. The reason is that people don’t want to reach retirement age and have their standard of living cut in half.”

Two implications of reducing benefits to cancel out real wage growth are immediately obvious. First, the longer the “price indexing” provision stays in effect, the larger the benefit cuts, assuming ongoing real wage gains. Second, the more rapid real wage growth, the larger the benefit cuts.

The bottom line is that under “price indexing,” the role of the Social Security system in allowing the elderly to maintain their standard of living after retirement would decline sharply over time.

Consider the effect of the price indexing proposal combined with the loan repayment for workers opting for the accounts put forward by the Administration. Specifically, as above, consider a medium earner who is 21 in 2011, and assume the worker claims benefits at age 65 in 2054. Given the economic assumptions used by the Congressional Budget Office, price indexing would first reduce this worker’s retirement benefit by more than 35 percent. Then the loan repayment for the revenue diverted into the worker’s account would consume about half of the benefit provided by the current benefit formula. As a result, the worker would have a traditional benefit equal to less than one-fifth of the benefit provided by the current benefit formula.

Figure 2: Initial replacement rates at retirement for medium-earning worker claiming benefits at age 65 in 2054

To be sure, the worker would also have an individual account. But the Congressional Budget Office has correctly emphasized that the projected income from such accounts must be adjusted for its riskiness. With the type of risk adjustment adopted by the Congressional Budget Office, the income from the individual account would make up about half of the initial benefit under the current formula. The net result would leave the worker with total combined benefits that were roughly 35 percent lower than under the current benefit formula.

Perhaps more surprisingly, the reduction in benefits even including the account income is roughly twice as large as would be required if benefits in 2054 were simply reduced to match incoming payroll revenue in that year. This level of “payable benefits” is about 20 percent higher than the income from the account plus the remaining traditional benefit after price indexing and the loan repayment, under the type of assumptions used by the Congressional Budget Office.

Figure 2 illustrates these effects in terms of the replacement rate at retirement in 2054. Financial planners suggest that a comfortable retirement requires income during retirement equal to about 70 percent of pre-retirement earnings. The current benefit formula would provide about half the necessary amount, requiring the worker to save enough in addition to Social Security to replace roughly 35 percent of pre-retirement earnings. If benefits were reduced to match incoming payroll revenue in 2054, traditional benefits would replace a little under 30 percent of pre-retirement wages, requiring the worker to save a little more than 40 percent of previous earnings. If the Administration’s accounts were combined with price indexing, however, the traditional benefit after both price indexation and the loan repayment were applied would replace less than 10 percent of previous wages. The income from the individual account would replace a little under 20 percent of previous wages. The net result would be that the worker would have to save substantially more in addition to Social Security; such savings would have to be enough to replace almost half of pre-retirement earnings.

Figure 2 shows that combining price indexing with the loan repayments on individual accounts would cause the traditional benefit to wither on the vine over time.


Individual accounts that mortgage future Social Security benefits raise a number of troubling questions, as this testimony has highlighted. A better approach involves raising saving above and beyond Social Security. As illustrated in Figure 2, individual accounts -- in the form of the 401(k)s and IRAs -- have a critical role to play in filling the hole between the foundation provided by Social Security and a comfortable retirement. Many Americans, however, have not accumulated enough financial assets on top of Social Security. Half of households on the verge of retirement have only $10,000 or less in a 401(k) or IRA. Yet we now know what works to get people to save in 401(k)s and IRAs, and we're not doing it.

Individual accounts can and should be strengthened outside Social Security, where they belong. Social Security itself can then be shored up through a combination of benefit and revenue changes that would retain the program’s critical role in delivering a solid foundation of financial security.

Posted by DeLong at 09:15 AM | Comments (10)

A Conference I Missed Last Friday

I unfortunately missed last Friday's Federal Reserve Bank of San Francisco conference on the dollar and the international monetary system. Here's one conference report:

Mike Dooley and Peter Garber clearly have a point [in their belief that the current situation in convenient for both Asian and American governments, and could persist for quite a while], which they clearly push too far. They are articulate and convincing. But many people argued that their model did not fit non-China Asia... while Nick Lardy argued that their model did not fit China. So what's left?...

Two highlights were when Nouriel [Roubini] got very excited over [claims of Ricardian eqivalence] and other statements and loudly dismissed their view as "b*******," and when Steve Kamin asked, insightfully, what evidence if any would suffice to invalidate the Dooley-Folkerts-Landau-Garber model. (Alas, Steve is not as quick on his feet and quickly got stomped on.)

John Berry was there that and everything was on the record.

So now I'm waiting for a second conference report to come from John Berry at Bloomberg...

Posted by DeLong at 08:59 AM | Comments (6) | TrackBack

Allan Sloan of Newsweek Adopts the Democratic Position on Social Security Reform

He writes:

MSNBC - Social Security: A Daring Leap : "I'm in favor of private accounts constructed along the lines that Bush suggested. But the accounts ought to be in addition to the basic benefit, not as a replacement for about half of it.... If the president really wants to fix Social Security rather than pick a political fight—and the Democrats feel the same—it wouldn't be difficult. They'd compromise by putting more money into the system by raising wage taxes a tad, taking less out by increasing the retirement age and trimming benefit formulas and setting up private accounts funded by wage earners, not by government borrowings. Put a few willing negotiators in a room and a deal's done in a month. I won't hold my breath, though."

The curious thing is that Sloan pretends that his position is in some way different from that of the Democratic mainstream as found in, say, Diamond-Orszag. Sloan writes things like "Democrats are crazy to oppose private accounts.... FDR's been dead for 60 years. The world has changed." But I haven't met a Democrat who is opposed to private accounts. Democrats are opposed to private accounts funded by diverting payroll taxes from the defined-benefit system. And, indeed, many Republicans are opposed--at least in private--to payroll tax diversion too.

Posted by DeLong at 07:48 AM | Comments (16) | TrackBack

February 08, 2005

Why Oh Why Can't We Have a Better Press Corps? (Mark Schmitt Tells Nick Kristof Where to Get Off Edition)

Nick Kristof says more stupid things, which make unbiased observers wonder why he holds onto his New York Times real estate. What pictures does he have of whom, when, doing what?

In response, Mark Schmitt says a bunch of very smart things:

The Decembrist: Does What Democrats Said About Social Security in 2000 Matter?: It's obvious that Nick Kristof pilfered the special stupid pills from Robert Samuelson's medicine cabinet, the ones that make you type 'both sides are equally irresponsible,' or 'neither party is willing to confront the real issues' over and over again.... Kristof makes much of the fact that Democrats of the late 1990s expressed greater concern about Social Security's future solvency and had more concrete proposals. The fact that 'even Bill Clinton' thought there was a problem in the long-term financing of Social Security is a rhetorical staple of the Samuelson/Kristof axis....

It is true that five years ago, the idea that the long-term financing problems of Social Security were a relatively minor concern was a distinctly out-of-the-mainstream view.... History has been kind to Mark [Weisbrot's] and Dean [Baker]'s view that the midrange assumptions of the Social Security trustees were unduly pessimistic.

Going back to that period, around 2000, what were those Democrats thinking?... [T]he problem did seem worse at the time.... And the problem was then much worse relative to other problems.... But there was another reason.... They worried that the hard-won budget surplus would be quickly squandered on new promises. They knew that the budget surplus was a tentative, doubtful thing. They knew that demographics would catch up with it, and they knew that both the Congressional Budget Office and OMB projections were based, as they are today on unrealistic assumptions, such as that Congress would restrain discretionary spending or that the Alternative Minimum Tax would continue to bring in ever-growing revenues.... These are the cautions that reached Clinton's ears... please please don't treat the whole surplus like free money.

An important point about these warnings: They were absolutely equal opportunity, non-partisan warnings. They were targetted at Bush's assumption that the surplus could be given away in tax cuts, but they were equally directed at Democrats such as Bill Bradley, in his presidential campaign that year, who were stretching to be able to pay for an ambitous health care plan.... [T]he most responsible outside analysts, as well as those inside the Clinton administration like Gene Sperling and Bob Rubin, understood the risk,

Posted by DeLong at 07:34 PM | Comments (15) | TrackBack

20050208: Econ 113: Announcements

1. Postpone the due date of the problem set to the 17th of February (Thursday).

2. In the textbook, focus on chapters 5 and 9-11 for purposes of the exam.

Posted by DeLong at 11:33 AM | Comments (2) | TrackBack

Why Capital Gains Are Likely to Lag Economy-Wide Growth

Why stock-index earnings growth lags economy-wide profit growth--and why, with a constant P/E ratio and a constant profit share in income, real GDP growth is likely to average 1% per year more than the (non buyback-induced) capital gains on a diversified stock portfolio.

Assume that the stock market is at its equilibrium price-earnings and price-dividend ratios, so that you don't expect P/E and P/D ratios to either rise or fall. What capital gains can you then expect on a diversified stock portfolio? Neglecting the effect of stock buybacks, your capital gains will be the the rate of growth of stock prices, which will be the same as the rate of growth of earnings of the stocks in your portfolio.

Suppose you could buy up all of the economy's stocks. The earnings on your portfolio this year would then be total publicly-traded corporate profits. But the earnings on your portfolio next year will be less than next year's publicly-traded corporate profits. Some profits next year will be earned by companies that did not exist or weren't publicly traded this year. So earnings growth for your portfolio will tend to be lower than profit growth for the economy as a whole.

Think of it this way: Profits are a return to two things--capital and entrepreneurship. Buying stocks this year gives you ownership of future returns to capital and ownership of returns to past entrepreneurship that have been capitalized into the current stock prices of public corporations. It doesn't give you ownership of future returns to future entrepreneurship. Thus the more entrepreneurial the economy, the more that you would expect capital gains to lag behind economy-wide profit growth.

How big is this wedge?

I have a simple and embarrassingly crude calculation.

If, as I said before, you buy up all the companies in the economy, your return is dividends plus stock buybacks (since you own all 100%, your selling stock in buybacks doesn't dilute your ownership stake) plus changes in the price-earnings ratio plus growth in the earnings of those companies. But economy-wide profits growth overestimates the growth of earnings of the companies in a widely-diversified portfolio. By how much? We calculated real GDP growth and S&P Earnings Growth from 1960-2000, and found the first averaging 3.46% per year and the second averaging 2.41% per year--a 1% per year wedge.

There are lots of things wrong with this calculation:

Real GDP Growth S&P Real Earnings Growth
1960-70 4.18% 1.61%
1970-80 3.25% 2.87%
1980-90 3.08% -0.74%
1990-2000 3.34% 5.89%
Average 3.46% 2.41%

But it does have the virtue of being an empirically-based estimate of the relationship between economy-wide profits growth and non buyback-induced capital gains *if* the price-earnings and price-dividend ratios are not expected to change.

Posted by DeLong at 10:48 AM | Comments (38) | TrackBack

Worst OMB Director Ever

Atrios channels It Affects You:

Eschaton: Josh Bolten! From It Affects You:

Describing why costly items were left off the budget:

'The budget went to bed . . . before the president's proposals were announced.'

Or sometimes:

'But, it wouldn't be responsible for us to take a guess at what those costs are.'

In the same briefing, describing why proposals which add revenue or reduce costs were added to the budget (and the amounts guessed):

'Well, the budget is the right place to present the entirety of the president's policies, so all of his proposals are reflected in there.'"

From everything I've heard, Josh Bolten is the worst OMB Director in the history of the office--worse than David Stockman, worse than Mitch Daniels. Stockman and Daniels at least understood that the OMB Director was supposed to be the voice in the government for fiscal responsibility, even if they decided to ignore their proper role. Bolten doesn't even understand what the job is.

Posted by DeLong at 10:46 AM | Comments (5) | TrackBack

Bad Reviews for the Bush Budget Clown Show

Stan Collender is surprised at how negative the reaction of Congressional Republicans is to the latest act by the guys with the multicolored hair and the floppy shoes:

Did They Really Say That About Bush's Budget?

By Stan Collender, NationalJournal.com © National Journal Group Inc. Tuesday, Feb. 8, 2005

It's hard to believe, but a phrase that hasn't been used since Bill Clinton was sending his proposed budgets to a GOP-controlled House and Senate was actually used by a number of Republicans yesterday, just hours after President Bush's 2006 budget was sent to Capitol Hill: "dead on arrival." While the mix of members will shift on each issue, the president may very well have lost his clear-cut majority on budget matters. There were two primary Republican objections.

First, there was widespread disagreement with many of the president's proposed spending changes in domestic programs....

Second, the federal deficit remains extremely high. The 2006 deficit is projected to fall to $390 billion, but that does not take into account the expected additional spending for Iraq- and Afghanistan.... the 2006 deficit is very likely to set another record and could approach $450 billion....

In the meantime, however, the politics of the Bush 2006 budget defy logic... the president may very well have lost his clear-cut majority on budget matters.... [T]he Bush proposals so raise the political stakes for a number of representatives and senators that they just might be willing to do something they have not been willing to do before: vote against an omnibus appropriation....

Fourth, the president appears to have seriously hurt the prospects for his Social Security plan.... The reaction the Bush budget is receiving from Republicans is so negative.... Republicans may already be starting to see their political survival as their own responsibility -- and more important to them than the president's legacy....

[F]iscal policy still does not appear to be a high priority for the Bush administration....

Posted by DeLong at 10:45 AM | Comments (20) | TrackBack

February 07, 2005

Get a Mac!

From Owen Thomas's Ditherati:

D I T H E R A T I: "I shut down my Tablet PC most evenings and start it up from a fresh boot. Why do I do that? Because I've been using computers for 20 years and have learned that's the best way to work."

Microsoft spokesblogger Robert Scoble, on how he copes with his employer's buggy software, The Register, 4 February 2005"

Snort. Guffaw. Chortle.

The idea that one dare not try to save the state of one's system overnight...

It is indeed the best way to work if you have an operating system with nine fives of reliability. For those of us whose operating systems have five nines of reliability, however...

bradford% uptime
22:13 up 14 days, 10:2

delong% uptime
22:14 up 4 days, 8:54

Posted by DeLong at 10:16 PM | Comments (42)

Beginning a Novel...

Jordan Kare shoots and scores:

Making Light: More on the Atlanta Nights story: An enthusiastic teacher of creative writing was lecturing his students: 'Your characters must come alive on the page! If you are to be a great writer, you must bring your characters to life in your first paragraph... nay! in your very first sentence!'

And from the back of the room, a deep voice intoned, 'Marley was dead, to begin with.'

Posted by DeLong at 09:23 PM | Comments (6) | TrackBack

Max Sawicky Finds Another Churchill Outrage

This one's from 1919:

MaxSpeak, You Listen!: ANOTHER CHURCHILL OUTRAGE: "I do not understand this squeamishness about the use of gas. I am strongly in favour of using [it] against uncivilised tribes..."

Winston Churchill, Secretary of State, 1919

Posted by DeLong at 08:27 PM | Comments (25) | TrackBack

Bill Niskanen Is Not a Happy Camper

He is quoted in the Wall Street Journal:

Bush Budget Plan: "this is not a serious budget if the objective is to reduce the deficit and constrain budget growth," said William Niskanen, chairman of the libertarian Cato Institute and a former Reagan administration economic adviser.

Posted by DeLong at 08:25 PM | Comments (22) | TrackBack

Lazear vs. Hassett: Ants and Grasshoppers

Eddie Lazear approves of Social Security considered as a forced saving plan:

To begin, the legitimate goal of Social Security is to ensure that everyonehas sufficient income to support some basic standard of living throughoutretirement. Thus, forced saving is at the heart of the system.Were individuals not forced to save, some would engage in moral hazard,over-consuming when young and allowing themselves to be destitute when old,knowing that they could then count on relatives, churches or communities to carefor them. Others would be less strategic, but might end up in the same situationsimply for lack of foresight...

Kevin Hassett does not. He writes that the inability to tap your Social Security account when young is a problem:

WSJ.com - Ants and Grasshoppers: Since you cannot touch the money until you retire, you no longer have a rainy-day fund, or a down payment for a house...

Since Kevin Hassett is considerably closer to the Bush administration than Eddie Lazear is, this is scary. It's a sign that the Bush plan--whatever it is--won't do a good job at what Lazear thinks is the principle legitimate goal of Social Security.

Posted by DeLong at 08:23 PM | Comments (5) | TrackBack

My Bad

I have misquoted Cicero in writing:

Brad DeLong's Website: Eddie Lazear on Principled Social Security Reform: As Cicero wrote to his friend Atticus, Cato believed that the Romans lived in rei publicae Platonis while they actually lived in cloacae Romuli--believed that they lived in the Republic of Plato while they actually lived in the sewer of Romulus.

Jahoulih gives the true Latin:

"nam Catonem nostrum non tu amas plus quam ego; sed tamen ille optimo animo utens et summa fide nocet interdum rei publicae; dicit enim tamquam in Platonis *politeiai*, non tamquam in Romuli faece sententiam."

Cicero wrote the word *politeiai* in Greek, in the dative case, since Greek has no ablative.

Posted by DeLong at 07:17 PM | Comments (9)

Eddie Lazear on Principled Social Security Reform

Writing in the Economists' Voice, (hint! hint!) Eddie Lazear makes a very nice case for partial privatization of Social Security:

Eddie Lazear: ...the current [Social Security] system has some desirable features, but... [p]rivate accounts accomplish the desired goals... [and] eliminate most of the undesired consequences... none of the advantages of the Government-administered program would be lost with a properly-run system of private accounts.

First, the Social Security system forces saving.... Second, the current system provides insurance.... Third, Social Security redistributes income.... [T]he legitimate goal of Social Security is to ensure that everyone has sufficient income to support some basic standard of living throughout retirement... forced saving is at the heart of the system. Were individuals not forced to save, some would engage in moral hazard, over-consuming when young and allowing themselves to be destitute when old, knowing that they could then count on relatives, churches or communities to care for them. Others would... end up in the same situation simply for lack of foresight....

The current system accomplishes forced saving, but it is unnecessary to have the government administer the system.... [P]rivate accounts, properly administered, can provide adequate minimum income.... Social Security redistributes income and this is more problematic... its redistribution can lack rhyme or reason: Do we really intend low income African Americans who die young to redistribute income to affluent whites who live long lives?...

First, private accounts are more consistent... with... the principle that we ought to honor consumer sovereignty, and keep the market free of significant distortions. Second, private accounts enhance, rather than reduce, the likelihood that contributors will receive what they expect.... Third, private accounts reduce government moral hazard.... John Cogan has shown that for every dollar of unanticipated increase in government funds through the payroll tax, there is a corresponding increase of one dollar in government expenditures....

These advantages of private accounts are attractive, but do private accounts achieve Social Security’s legitimate goals? Yes, they do. The primary goal of Social Security is to force individuals to save. Private accounts... accomplish this goal.... How about Social Security’s second goal... income insurance?... [T]he government might be forced to bail out those who make bad investments, or to bail out a large segment of society if even safe investments turn out to yield very low returns. But there are at least two solutions....

The first solution is... to provide a base level of benefits from government run pension programs, namely Social Security.... An alternative solution is to insure the private accounts... [and] regulate the kinds of investments that can be part of the private accounts...

The big problem that I have with Lazear's position is the same problem that Cicero had with Marcus Porcius Cato. As Cicero wrote to his friend Atticus, Cato believed that the Romans lived in rei publicae Platonis while they actually lived in cloacae Romuli--believed that they lived in the Republic of Plato while they actually lived in the sewer of Romulus. Eddie Lazear could design a private-accounts system that would be a significant improvement over what we have. But that's not what's coming through the pipe.

Lazear wants to see a system that will force saving: my fear is that ten or twenty years down the road Congress will amend the system to allow people to borrow against their private accounts or use them to buy a house or whatever--and such pressure will be very hard to resist for, after all, it is their money. Why shouldn't they be able to do with it what they like?

Lazear wants to see a system that provides substantial social insurance. The Bush implementation of price indexing lowers the guaranteed benefit as a share of income at retirement generation after generation without limit. It means the return of elderly relative poverty over the next century--not old ladies eating cat food, but old ladies with incomes that are grossly disproportionate to those of the broader society.

Lazear wants to honor consumer sovereignty, and here I disagree. Consumers are lousy choosers among long-run investment vehicles, for the normal process of learning that makes us good consumers of DVD players and lamb shanks doesn't have scope to operate.

Lazear wants to guard against government moral hazard--the government's undoing of Social Security's forced saving by using Social Security revenues for spending increases or tax cuts for the rich and so erasing the desired impact of Social Security forced saving on national saving as a whole. This is a real and a huge concern. But I cannot help snarking that an easier solution than reorganizing the whole system is simply to elect Democratic presidents like Bill Clinton, who understand and care about the long run national savings issue. That Republican presidents are feckless is indeed a problem, but one should not immediately jump to the conclusion that the cure is to pass whatever initiatives they propose.

There is one point where I have no quarrel with Lazear: his pointing out that private accounts are the beneficiaries by Right of property, which will be enforced by the courts, while legislated benefits are the beneficiaries' only by Grace of Congress. I'm not certain how much of a difference this is (for Congress has unlimited powers to tax incomes and to distinguish among different income streams as it taxes them), but it is a real difference.

Posted by DeLong at 11:38 AM | Comments (55)

February 06, 2005

Oh. By the Way. Ward Churchill Is a Liar

As of February 2005:

Ward Churchill Statement: I am not a 'defender' of the September 11 attacks, but simply pointing out that if U.S. foreign policy results in massive death and destruction abroad, we cannot feign innocence when some of that destruction is returned. I have never said that people 'should' engage in armed attacks on the United States, but that such attacks are a natural and unavoidable consequence of unlawful U.S. policy."

As of September 2001:

Some People Push Back: "As to those in the World Trade Center . . .  Well, really. Let's get a grip here, shall we? True enough, they were civilians of a sort. But innocent? Gimme a break. They formed a technocratic corps at the very heart of America's global financial empire – the 'mighty engine of profit' to which the military dimension of U.S. policy has always been enslaved – and they did so both willingly and knowingly.... If there was a better, more effective, or in fact any other way of visiting some penalty befitting their participation upon the little Eichmanns inhabiting the sterile sanctuary of the twin towers, I'd really be interested in hearing about it.

Ward Churchill's saying that those in the WTC were "little Eichmanns," that their death in the WTC was a "befitting penalty," and that he cannot think of a "better, more effective, or... any other way" of imposing such a penalty--if that isn't an endorsement of the September 11 attacks, I confess I cannot imagine what an endorsement of the September 11 attacks would be.

Posted by DeLong at 05:16 PM | Comments (110) | TrackBack

Democracy in Jordan

Abu Aardvark wishes that the U.S. were a little more serious about democracy in the Middle East. He (she? it?) quotes Matthew Yglesias:

Matt Yglesias for TAP Online: Naturally enough, Jordanians are less than thrilled by this situation, so now and again they venture into the town square to complain. And then they get arrested. The government of the United States, newly recommitted to freedom, had nothing whatsoever to say about this until an intrepid White House reporter asked the president about it on January 26. Bush punted, pleading ignorance of the facts and noting that 'His Majesty is making progress' toward democracy. In fact, His Majesty is doing no such thing. Recent years have seen cosmetic proposals put forward while, in practice, Jordan moves backward -- gerrymandering an unrepresentative but compliant parliament; cracking down on the press, professional associations, and other civil-society groups; restricting public assembly; and relying on ad hoc decrees promulgated while the parliament is out of session. There's no indication that Bush decided to familiarize himself with the facts of the case -- or even with the general political situation in Jordan -- as neither he nor any of his subordinates has mentioned it since. Nor has he been asked about it again.

And then Abu Aardvark says:

Needless to say, I agree. It helps to keep pointing it out, if only in the vain hope that pointing out inconsistencies with highly publicized rhetoric might force Bush to live up to the rhetoric, as (I think it was praktike) argued the other day.

I wonder if the democracy-promotion efforts of the U.S. government ought to be split off from the realist-dominated government entirely. Set up--with an extremely healthy funding base, and lots of independence from the realists in the U.S. and other governments--a Democratic International to train, support, lobby, and propagandize for democracy worldwide.

As far as democracy is concerned, the peoples of the world have nothing to lose but their chains. And we have a world to win.

Posted by DeLong at 03:23 PM | Comments (18) | TrackBack

Why Oh Why Are We Ruled by These Fools?

Ezra Klein bangs his head against the wall:

"I Actually Voted For the Farm Subsidies Before I Voted Against Them":

5/13/2002: President Bush on Monday signed a 10-year, $190 billion farm bill that promises to expand subsidies to growers. 'This bill is generous and will provide a safety net for farmers, and it will do so without encouraging overproduction and depressing prices,' Bush said at a signing ceremony. 'It will allow farmers and ranchers to plan and operate based on market realities, not government dictates.'

2/5/2005: President Bush will seek deep cuts in farm and commodity programs in his new budget and in a major policy shift will propose overall limits on subsidy payments to farmers, administration officials said Saturday.

Ezra goes on to say that it is the second Bush that he approves of:

The bill, by the way, is a good one aimed at ending one of America's most disgraceful economic policies. But it really should end the discussion on whether or not Bush is a man of principle. It reverses legislation he supported and signed three years ago in the name of political expediency, and that shouldn't be forgotten.

I'm not so optimistic. I think that what is being started is another game of Dingbat Kabuki. Let me turn the mike over to Mark Schmitt:

The Decembrist: How to Read a Bush Budget -- A Rerun: ...the second type of 'cut' in the budget will be proposals for cuts that will simply never happen and everyone knows it. No one even gets that worked up when the president proposes them. This category usually comprises the largest portion of the cuts in any president's budget. Here the secret is to go after strong clients, clients so strong that everyone knows no one will ever touch them.... [I]f you're OMB, and you need your numbers to add up today, there's no reason not to put it in. It saves a few hundred million on paper, and your job is done. Proposing to cut a defense project whose prime sponsor chairs the defense appropriations subcommittee is another good way to get some savings on paper. And the affected congressman probably doesn't even mind. It gives him a way to announce that he 'saved' the project....

And praktike is of the same mind:

Let the Kabuki Begin!: I am soooo not falling for this: "President Bush will seek deep cuts in farm and commodity programs in his new budget and in a major policy shift will propose overall limits on subsidy payments to farmers, administration officials said Saturday. Such limits would help reduce the federal budget deficit and would inject market forces into the farm economy.... The proposal puts Mr. Bush at odds with some of his most ardent supporters in the rural South, including cotton and rice growers in Alabama, Arkansas, Georgia, Louisiana and Mississippi. The new chairman of the Senate Appropriations Committee, Thad Cochran of Mississippi, and more than 100 farm groups are gearing up to fight the White House proposal. The administration's willingness to push the proposal, despite such protests, suggests how tight the new budget will be...."

I would be overjoyed if something like this actually happened, but I'm confident that the welfare-staters in Congress will put them back in. As is, I suspect, the White House.

Posted by DeLong at 03:23 PM | Comments (18) | TrackBack

More Stock Returns

Andrew Samwick wonders:

Vox Baby: Krugman's Unhappy Returns: "The critical assumption in the Baker/Krugman example is that the dividend yield doesn't rise above a number like 3 percent, forcing the capital gains to cover the other 3.5 percent and be reinvested in the corporate sector. What if the payout ratio increased dramatically, so that capital gains accounted for only the same 1.9 percent return that matched the growth rate in profits and the economy as a whole? The inconsistency goes away, as the P/E ratio is stable. So one could rephrase the Baker/Krugman critique as, 'Because of the low rate of economic growth, those holding to a 6.5 percent return are assuming an unrealistically high dividend yield.' But is a high payout ratio (e.g., 50% larger than what Krugman is positing) so unrealistic? I don't believe that economists as yet have a solid answer to this question, largely because they don't have robust models of what determines the dividend payout ratio."

Well, let's put GDP growth at 1.9% per year, earnings of companies in the index growing at GDP growth minus one percentage point, so we have 0.9% annual returns coming from there. If we are to have a total return of 6.5% per year, that leaves us 5.6% per year to come from dividends and stock buybacks. At current earnings yields of 3.8% per year, that means that corporate net investment would have to be negative: businesses would have to be spending almost 150% of their net earnings on cash flowing to shareholders, and running down their capital stocks. That can't be done--not if you want to maintain the profitability of the businesses. Failing to replace your capital that wears out and becomes obsolete is a really bad idea.

Posted by DeLong at 07:51 AM | Comments (32) | TrackBack

February 05, 2005

Kepler on the Origins of the Craters of the Moon

From Doing Things with Words:

Doing Things With Words: Failed design inferences: People are bad at discerning design. From Carl Sagan's Cosmos, p. 66:

Most curious is [Kepler's] view of the origin of the lunar craters, which make the moon, he says, "not dissimilar to the face of a boy disfigured by smallpox." He argued correctly that the craters are depressions rather than mounds. From his own observations he noted the ramparts surrounding many craters and the existence of central peaks. But he thought that their regular circular shape implied such a degree of order that only intelligent life could explain them. He did not realize that great rocks falling out of the sky would produce a local explosion, perfectly symmetric in all directions, that would carve out a circular cavity—the origin of the bulk of the craters on the moon and the other terrestrial planets. He deduced instead "the existence of some race rationally capable of constructing those hollows on the surface of the moon. This race must have many individuals, so that one group puts one hollow to use while another group constructs another hollow."

Posted by DeLong at 01:12 PM | Comments (37) | TrackBack

February 04, 2005

The CEA Forecasts a *Big* Stock Market Crash

For the past several years U.S. stock prices have averaged something like 60 times dividends--a very high multiple compared to the normal 25-30 or so found in U.S. experience. There are three theories as to what is going on: (i) the equity premium has fallen substantially, and so returns on stocks will average significantly less than the 6.5% per year of the past; (ii) economic growth is about to accelerate, and be noticeably faster than standard models suggest; and (iii) the stock market is about to crash.

The fact that economists are forced to choose from among these three options--for there is no fourth way out--has interesting implications for Council of Economic Advisors, "Three Questions About Social Security," February 4, 2005. That memo denies that the equity premium has fallen. It denies that future growth will be fast. And so we have the CEA forecasting a stock market crash.

The forecast is implicit. But it is very real. With a bounded price-earnings ratio and a bounded share of profits in GDP, stock market capital gains over the long run are equal on average to earnings growth, and the earnings growth on a stock index averages one annual percentage point less than real GDP growth.

The CEA assumes the Social Security Administration's long-run forecast of real GDP growth:

economic growth will average only 1.9% per year in the future

And it states that this rate of real GDP growth is not incompatible with real stock returns of 6.5% per year:

The Social Security Trustees estimate future stock returns of 6.5% per year.... This premium [return] is consistent with long-run historical experience and is low relative to the experience of the last seventy-five years.... The Actuaries’ projection of a 6.5% real stock return is thus consistent both with other professional assessments and with historical investment returns. The Trustees predict that economic growth will slow primarily because of slower population growth. Slower population growth need not imply lower stock returns....

Although short-run movements in growth can affect stock market returns, there is no necessary connection between stock returns and economic growth in the long run. Long-run economic growth is determined by productivity growth and labor force growth here in the United States, while stock market returns are determined by the overall cost of capital in the global economy and by the return investors require to bear the risk that comes with equity ownership. There is no reason to believe that slowing population growth in the United States would significantly lower the cost of capital... or the premium required by stock investors.

But how do you make up this 6.5% per year real return? We know that overall growth in corporate earnings for the companies whose stocks make up the index will get us 0.9% per year (1.9% GDP and profit growth minus a 1% wedge because a goodly share of profits are earned by young companies not yet in the index). We know that stock buybacks by companies will get us an extra 1.0% per year or so. That leaves 4.6% per year required by "the cost of capital... [and] the premium required by stock investors." That 4.6% per year must come from dividends, and that means that stock prices must on average be 1/4.6%, or 21.7 times dividends.

What are stocks today? They are priced at 60 times dividends.

When the CEA writes that "the stock return and economic growth assumptions [of the Bush administration] are not inconsistent," it is leaving out the logical next sentence. The logical next sentence is: "They are consistent if stock prices fall by more than three-fifths: from 60 down to 22 times current dividend levels."

I know that if I were working at the CEA, I would tell my political masters to reconsider if they instructed me to produce an analysis that had as an implication a 60 percent fall in the stock market. I don't know whether the CEA didn't think through what a 6.5% per year long-run return means for average price-dividend multiples; thought it through, went back to its political masters, and was unable to influence them; or is once again engaged in passive resistance.

Posted by DeLong at 04:16 PM | Comments (74) | TrackBack

Passive Resistance from the President's Council of Economic Advisors

The President's Council of Economic Advisors is ordered to write that faster productivity growth will not improve the outlook for Social Security. And they do what they are told:

...While [faster] economic growth makes it easier to sustain some government spending programs, this does not apply to Social Security... (Council of Economic Advisors, "Three Questions About Social Security," February 4, 2005.)

But they engage in a form of passive resistance to the demands of their political masters. For three paragraphs further down, the CEA writes that:

Simulations in the [2004] Report [of the Social Security Trustees] indicate that an 0.5 percentage point increase in real wage growth would improve the 75-year actuarial balance... mean a 75-year deficit of 1.35... instead of... 1.89 percent of taxable payroll.... The date of Trust Fund exhaustion would be pushed back from 2042 to 2048.

On the normal definition of "easier to sustain," pushing back the date of required benefit cuts or tax increases by six years and reducing the long-run deficit by 0.54 percent of taxable payroll would qualify as making Social Security "easier to sustain."

Posted by DeLong at 03:45 PM | Comments (12) | TrackBack

Apocalypse Now

Billmon notes a certain convergence between U.S. military doctrine and Apocalypse Now:

From Apocalypse Now:

Col. Walter E. Kurtz: "What did they tell you?"

Capt. Willard: "They told me that you had gone totally insane, and, uh, that your methods were... unsound."

Col. Walter E. Kurtz: "And are my methods unsound?"

Capt. Willard: "Uh, I don't see any method at all, Sir."

Whiskey Bar: Unsound Methods:

"Actually, it's a lot of fun to fight. You know, it's a hell of a hoot. It's fun to shoot some people. I'll be right upfront with you, I like brawling . . . You go into Afghanistan, you got guys who slap women around for five years because they didn't wear a veil. You know, guys like that ain't got no manhood left anyway. So it's a hell of a lot of fun to shoot them."

Lt. Gen. James N. Mattis, USMC
Speech on Strategies for the War on Terrorism
February 1, 2005

"While I understand that some people may take issue with the comments made by him, I also know he intended to reflect the unfortunate and harsh realities of war," [Marine Corp Commandant Mike] Hagee said. "Lt. Gen. Mattis often speaks with a great deal of candor." Hagee also praised Mattis, calling him "one of this country's bravest and most experienced military leaders."

Associated Press
Marine General Counseled for Comments
February 3, 2005

Posted by DeLong at 01:36 PM | Comments (40)

Iraqi Election results

The religious Shia do well:

The Washington Monthly: EARLY ELECTION RESULTS FROM IRAQ....The New York Times reports that early returns in the Iraq vote show that the UIA, the Shiite slate dominated by religious groups, has won 72% of the vote so far, compared to 18% for Prime Minister Ayad Allawi's more secular Shiite coalition.

These results aren't meaningful on a broad basis because they come from strongly Shiite precincts. When the full vote is counted the Kurds will have a larger share than they do now, and possibly the Sunnis as well. Still, the religious slate so far has won 80% of the Shiite vote. If that holds, and if Shiites win 70% of the overall vote, it means that the UIA will win about 56% of the total vote. If the Kurdish slate wins 23% of the vote (as I estimated here), a UIA/Kurd alliance would have a comfortable two-thirds majority all by itself and have no need for any further coalition....

Posted by DeLong at 01:16 PM | Comments (13) | TrackBack

The Employment Report

The BLS reports:

Total nonfarm payroll employment increased by 146,000 in January to 132.6 million, seasonally adjusted. The January increase followed job gains averaging 181,000 per month in 2004. Since reaching a trough in May 2003, payroll employment has risen by 2.7 million. Over the month, there were gains in several service-providing industries including education and health services, transportation and warehousing, and financial activities.

Education and health services continued to add jobs in January, increasing by 35,000. Within the sector, health care employment rose by 15,000 over the month, and was up by 258,000 over the year. Employment in educational services edged up in January and the industry added 86,000 jobs over the year.

In transportation and warehousing, employment increased by 34,000 in January. Since its most recent low in July 2003, employment in this sector has grown by 166,000, with trucking accounting for about a third of the growth. Within transportation and warehousing, employment in the couriers and messengers industry grew by 17,000 in January after a loss of 9,000 in December.

Employment in financial activities rose by 21,000 in January. Both credit intermediation and securities, commodities, and investments contributed to the gain. Over the year, employment in financial activities increased by 159,000, with most of the gain occurring during the last 6 months.

Although employment was flat in January, wholesale trade has added 99,000 jobs since its most recent low in August 2003. Retail trade employment edged up over the month and has expanded by 200,000 since June 2003.

Employment in professional and business services edged up in January. Over the year, the sector gained 537,000 jobs. Within the sector, employment in temporary help services continued to trend up. Employment in architectural and engineering services and in computer systems design had been showing strength in recent months, but was flat in January.

In January, manufacturing employment declined by 25,000, with widespread, though mostly small, losses among its component industries....

Posted by DeLong at 01:12 PM | Comments (10)

Praktike Reports that Christopher Dodd Is a Senator

Praktike writes:

What Dodd said | Liberals Against Terrorism: Connecticut's best Senator on the Gonzales nomination:

Mr. President, as I said earlier, the outcome of this nomination is in little doubt at this hour. I do not expect that the nominee in question is paying attention to these proceedings. But I hope he will pay heed to the lessons of history. In his second State of the Union address, Lincoln said that, in giving or denying freedom to slaves, "We shall nobly save or meanly lose the last, best hope of earth."

The issue then was how our nation treats the enslaved. The issue today is in some respects no less profound: how our nation treats its enemies and its captives, including those in places like Abu Ghraib prison and Guantanamo Bay.

By treating them according to our standards -- not theirs - we feed the flame of liberty and justice that has rightly led our nation on its journey for these past two and a quarter centuries....

As for the other guy (who voted yes to Gonzales with seemingly great enthusiasm), tough question. There are strong arguments in favor of mounting a primary challenge, just as there is a strong case for keeping him around. I haven't made up my mind, but I'm leaning against a real challenge. The Democrats don't need to be shrinking the tent right now, so maybe someone just needs to convince him to be less of a goober. Just scare him a little?

Posted by DeLong at 01:08 PM | Comments (20) | TrackBack

Unemployment in Germany

In the middle of the Economist's article there is an interesting statement I had forgotten from a Berkeley economist:

Economist.com: More than 5m Germans were unemployed last month, the agency revealed.... On January 1st, after parliamentary tussles and street protests, the government’s controversial reform of unemployment benefits came into effect. This reform, driven forward by Gerhard Schröder, the chancellor, is supposed to prod the jobless back into work. But its first effect was to prod many who had dropped out of the labour market back on to the unemployment rolls. Under the “Hartz IV” reform, named after Peter Hartz, the man who proposed it, those who have been unemployed for over a year receive a flat-rate benefit, means-tested and paid only to those who seek work seriously. Previously, not everyone on long-term aid had to sign on at job agencies. Now they do. The labour office reckons that at least 222,000 people not counted as unemployed under the previous system are now registered as such....

The longer they remain out of work, the less the unemployed make their presence felt in the labour market. Writing about the Great Depression, Brad DeLong, an economic historian at the University of California, noted that the long-term unemployed become “discouraged and distraught”. After a year without work, “a job must arrive at his or her door, grab him or her by the scruff of the neck, and throw him or her back into the nine-to-five routine if he or she is to be employed again.”...

Opponents of these reforms argue that there is simply not enough work to go round.... [But t]he demand for labour is not a fixed lump. Employers will keep hiring until it ceases to be profitable to do so. The ultimate limits on an economy are on the supply-side: eventually, the labour market will tighten and inflationary pressures will emerge.... Unfortunately, the German economy is still far from testing those limits. Inflation is low, leaving plenty of room for the economy to expand. But the animal spirits of households and firms are falling short. Indeed, some economists worry that efforts to resolve Germany’s supply-side problems may be worsening the economy’s demand-side difficulties....

Posted by DeLong at 12:05 PM | Comments (10)

The Budget Deficit and the Current Account

The number I have in my head is 0.3-0.4: a $1 increase in the government budget deficit increases the trade deficit by between thirty and forty cents. The links are there, but they are slippery and erratic. Greg Ip writes:

WSJ.com - Cuts in the U.S. Budget Deficit May Not Help Close Trade Gap:

The Fed study, by economists Christopher Erceg, Luca Guerrieri and Christopher Gust and recently published on the Fed's Web site, says the budget deficit does play a role in the trade deficit, but far less than some previous estimates have found. (Fed staff members don't necessarily share the views of Fed policy makers like Mr. Greenspan.)

They found an increase in the budget deficit of 1% of GDP, whether via a spending increase or income tax cut, boosts the trade deficit by less than 0.2% of GDP. The reason is that lower taxes and higher government spending cause Americans to spend more but mostly on domestic, not imported, goods and services. It also finds that the deficit raises long-term interest rates, and, as a result, the private sector invests less, reducing demand for imported capital goods.

The study says the trade deficit is far larger today than can be explained by the swing in the budget from surplus to deficit in the past five years. That means other factors may be at play, such as increasing foreign demand for U.S. assets and strong worker productivity growth in the U.S., the study suggests.

Posted by DeLong at 11:45 AM | Comments (16)

Daniel Froomkin Writes About Social Security

In his morning White House briefing:

Avoiding the Tough Questions (washingtonpost.com): One overarching issue is that the White House is talking about Social Security as if it were one big underperforming 401(k) program. In other words, they're implying that workers right now get back what they put in plus interest -- and that the interest rate they're getting is not so hot.

But it's not that way, not by a long shot. Social Security is a complex social insurance program that uses payroll taxes from current workers to pay benefits to the elderly, the disabled and their families in a progressive manner that guarantees an income floor below which the least fortunate are not allowed to sink.

Where this becomes really important is in trying to make sense of the brief and somewhat enigmatic comments that a senior administration official made on Wednesday (here's the transcript) about how the government would reduce guaranteed benefits for the people who opt for personal accounts.

The official said, in essence, that Social Security would:

A) Calculate what the contributions to the private account would have earned if the money had been invested at 3 percent on top of inflation,

B) Estimate what that amount would provide monthly if annuitized, and then

C) Subtract that amount from what the monthly benefit they otherwise would have gotten.

Therefore, the official said, if your investment makes more than 3 percent after inflation (minus administrative fees) you'll come out ahead (not including whatever additional across-the-board benefit reductions are approved.)

That's pretty complicated.

But even worse, the formula is based on two very misleading premises.

One is that people's payroll taxes are now being invested at 3 percent. They aren't. Most of the money people pay in today is going right back out again. Only a small amount is, temporarily, being invested in federal bonds, and even that won't be the case in a little over a decade.

The other is that Social Security benefits are a direct function of how much people put in through their payroll taxes. The way Social Security is now set up, for instance, a single wealthy person gets a vastly lower "rate of return" upon retirement than a poor person with a stay-at-home spouse. Someone who lives to 100 gets a much better rate of return than someone who dies at 65. Those are just some of the progressive, insurance-like aspects of Social Security that are really at the program's heart -- and that are being downplayed in the current debate.

And I'm afraid that any hypothetical case that tries to simplify this should be considered highly suspect.

Another issue that Bush is not necessarily being up front about is the "nest egg" he says private accounts will provide. In a nutshell, that may only be the case for the rich. Many lower-income people would be forced by the government to purchase annuities with their accounts, to keep themselves out of destitution as long as they live.

But annuities expire upon death.

In fact, if survivor benefits -- which now are pegged to the worker's benefit amount -- are reduced because of the private accounts, survivors would be considerably worse off.

Furthermore, when Bush uses the much-admired Thrift Savings Plan as an example of how personal accounts would work, it is worth noting that the TSP is an "add-on" on top of Social Security for federal workers. It's not a replacement; it doesn't divert payroll taxes from Social Security....

Posted by DeLong at 11:06 AM | Comments (9) | TrackBack

Bush's Social Security Tour (Why Oh Why Can't We Have a Better Press Corps?)

Josh Micah Marshall and Atrios notice a big story that the press is not really covering:

p> Talking Points Memo: by Joshua Micah Marshall: January 30, 2005 - February 05, 2005 Archives: This isn't about Democrats: The President Is Hunting for Republicans Who Will Go On The Record In Support of His Plan.... Rep. Ginny Brown-Waite.... Rep. Bill Young.... Rep. Katherine Harris.... Rep. Bilirakis.... Rep. Adam Putnam (R).... These Floridians all to one degree or another have their fingers in the wind. And if you can't say much else for them they're good weather vanes, especially Rep. Brown-Waite. So if you hear them chatting on the radio or get quoted in the papers or if they get up on stage with the president to testify to their phase-out conversion experience, do let us know.

So basically the president is finding hardly any Republicans in any of these states who are willing to go on the record in support of his plan. This is why I would never make it in the news business. I woulda thought that'd be a big story.

Posted by DeLong at 10:57 AM | Comments (5) | TrackBack

20050204: Problem Set 1: Interpreting Regressions: Econ 113

The first problem set: on the interpretation of regressions; due at the start of class on February 15 17.

Posted by DeLong at 10:47 AM | Comments (2) | TrackBack

20050204: Growth Accounting Handout: Econ 113

A handout on growth accounting, natural resources, and American pre-Civil War growth

Posted by DeLong at 10:45 AM | Comments (2) | TrackBack

Well, Well, Well... We May Have a Press Corps... UPDATE: We May Not After All...

Jonathan Weisman reports on how Bush administration personal accounts would work. Think of it this way: the government is not contributing to a 401(k) for you, the government is letting you borrow some of your future regular Social Security benefits so that you can try to earn higher returns. But it's a loan--you have to pay it back:

washingtonpost.com: Participants Would Forfeit Part of Accounts' Profits: Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately get to keep only the investment returns that exceed the rate of return that the money would have accrued in the traditional system.... [This] could come as a surprise to lawmakers and voters who have thought of these accounts as akin to an individual retirement account or a 401(k) that they could use fully upon retirement. "You'll be able to pass along the money that accumulates in your personal account, if you wish, to your children . . . or grandchildren," Bush said last night. "And best of all, the money in the account is yours, and the government can never take it away."...

"I believe you should be able to set aside part of that money in your own retirement account so you can build a nest egg for your own future," Bush said in his speech.

Orszag retorted: "It's not a nest egg. It's a loan."...

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's....

If instead, workers decide to stay in the traditional system, they would receive the benefit that Social Security could pay out of payroll taxes still flowing into the system.... "In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system," the official told reporters. "Basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase."...

But critics of the Bush plan said the proposed "claw back" renders the whole idea of "personal retirement accounts" virtually meaningless. Indeed, the system would ultimately look something like a proposal made by President Bill Clinton, in which the government would have invested Social Security taxes in the stock market.... Individuals would get a limited choice, and the government would still keep most of the returns.

"They hope people will think they will take on these accounts and after 40 years, they'll have this huge windfall, but that won't happen," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "I think they're trying to confuse people."...

Weisman is, however, wrong, in his claim that the Bush plan looks like the Clinton administration idea to invest the Trust Fund in the stock market. Under the Clinton plan, the government insures individuals against the possibility that the assets in their private account will tank. Under the Bush plan, that risk lies on individual beneficiaries--which is a profoundly stupid place for the risk to lie, and something that will in all likelihood make the Bush plan a bad idea.

UPDATE: Ah. It seems that the White House has squawked and the Post has buckled. A key paragraph has been edited:

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's... All of that money would be the worker's upon retirement. But guaranteed benefits over the worker's lifetime would be reduced by approximately $78,700 -- the amount the worker would have contributed to Social Security but instead contributed to his private account, plus 3 percent interest above inflation. The remainder, $21,100, would be the increase in benefit the worker would receive over his lifetime above the level he would have received if he stayed in the traditional system.

The point the White House is claiming, you see, is that the government isn't recapturing $78,700 of your private account, the government is giving you the entire private account and just incidentally reducing another pool of money that pays you benefits by $78,700. You say, "Huh?" Yes, you're right, there's no difference--it's just that the rewritten paragraph is confusing enough that a bunch of readers won't understand it.

Glad to see such spine...

UPDATE: Paul Krugman tries to clearly explain the clawback:

Free usage for anyone who wants to post it.... This may be a better explanation of how the clawback works:

Suppose you invested $1000 a year (constant dollars) in a fund that pays 3 percent real interest. Then after 40 years you would have about $77,000. Suppose that your life expectancy is 20 years at retirement, and that you can buy an annuity with present value equal to that lump sum. Then you would get about $5,000 annually.

The Bush plan, as far as we can tell, is that if you elect to take the private account, your conventional benefits are cut by $5,000 per year. So investing in bonds gets you right back where you started. If you buy risky assets, and do better than 3 percent, you may end up with, say, $7,000 per year; in that case you have a net gain of $2,000. But if you do worse, and end up with a lump sum only large enough to buy, say, a $3,000 annuity, your benefits are still cut by $5,000, and you're $2,000 a year worse off.

So what's really happening with the private accounts is that people will be encouraged to take a mortgage on their Social Security benefits, and to speculate in the stock market.

And, of course, all of this has zero bearing, at best, on long-term government finances. In practice, whoever is running America in 2050 will probably end up bailing out the unlucky, so it's a major net negative....

One thing I haven't seen pointed out about the apparent Bush plan is that they have inverted Feldstein-Samwick.... The F-S plan was that the government would guarantee the scheduled benefits, while [clawing back] 75 percent of any return in the private accounts over and above that level. So the government would, in effect, be doing the speculating. But the new plan says that the government deducts [with interest] what you put into private accounts [from your scheduled benefits]. So the risk is all passed on to retirees.

Posted by DeLong at 10:34 AM | Comments (41) | TrackBack

February 03, 2005

The Bush Social Security Plan Explained

Courtesy of Matthew Yglesias:

Matthew Yglesias: Understanding The Bush Plan: Several people I've communicated with seemed not to entirely understand Jonathan Weisman's decription of the Bush administration's "clawback" plan, and since the article is now the subject of a White House counterinsurgency, the meaning of all this deserves to be spelled out in some detail.

The Bush actually operates in three distinct phases, and it's important to understand all three, and to understand them as separate, because only phase two is even remotely construable as an effort to improve Social Security's finances. The first phase is to default on the General Fund's debt to the Social Security Trust Fund in order to make room in the budget (sort of) to make the Bush tax cuts permanent.

Once that's done, Social Security doesn't have nearly enough revenue to cover currently promised benefits. The White House wants to resolve this through some unspecified level of benefit cuts. The idea is that promised benefits will now be brought into line with the (reduced) quantity of funds available. From here on out, Social Security's accounts will be balanced in a cash flow sense. The amount of money paid out each year will be equal to the amount of FICA collected. That's phase two.

Phase three is the proposal to allow workers to divert one third of their payroll taxes into something resembling an account under the Thrift Savings Plan. Once a worker -- call him "Matt" -- chooses to do this, Social Security's cash flow will be messed up. Four percentage points of my wage income that were supposed to be going to pay grandma's Social Security benefits are now sitting in my private account. As a result, the government will need to borrow some money to pay grandma's benefits. The administration believes that that money can be borrowed at a 3 percent rate of interest. When Matt retires, his guaranteed benefits -- already substantially cut during phase two -- will be cut a second time. The size of this cut will be equivalent to the value of Matt's total contributions to his private account, plus 3 percent interest per year. Thus, once Matt retires, he will have access to all of the money in his private account, but his guaranteed benefits will have been cut twice. His little brother, meanwhile, who didn't put money into his private account, will only have his benefits cut once.

Now this is all very complicated. The way Weisman tried to explain it was this: Instead of saying that 4 percentage points of my FICA were diverted into a private account and then the government borrows an equivalent amount of money in order to pay grandma's benefits, say that all of my FICA goes to pay for grandma, but the government lends me an amount of money equal to 4 percentage points of my FICA. When I retire, I get the money in my private account, but I need to repay all those loans with an interest rate of 3 percent. In addition to my private account (with the loan repaid) I then get to collect guaranteed benefits that have only been cut one time. My little brother just gets the once-cut guaranteed benefits.

These two alternative descriptions are absolutely equivalent in all respects. The only difference is that the White House thinks the second description (the one Weisman used) casts their program in a negative light. I actually think it makes their program look better than the first one does. But I'm not paid to work such things out. I also think the second explanation is easier to understand, and I am paid to figure out ways of writing that are easy to understand.

Now, the upshot. The White House says the average worker can expect a 4.6 percent real rate of return on his private account. Under explanation two, this makes borrowing the money at a 3 percent rate turn out to be a smart investment move. You get a 1.6 percent net return. Under explanation two, it's a little hard to see why taking the private account is the right move, but the math comes out the same way, a 1.6 percent net return. Thus, having already implemented phases one and two, the private accounts are a good deal for workers. Phase two and -- especially -- phase one, however, are terrible deals for workers. The cuts undertaken in step two (and made necessary by phase one) are bigger than the gains you can make by starting your account. The important thing, as the chart at the bottom of this page indicates, is that what you're being promised by the Bush administration is worse, on average, not only than what you're being promised right now, but worse than what currently scheduled benefits can afford.

If you are in the top one or two percent of the income pyramid, this may be a good deal for you anyway since phase one allows you to keep your income taxes lower. The other 99-98 percent of us are getting the shaft. Note also that this plan will make Social Security's benefit structure less progressive, though how much less progressive depends on the nature of the unspecified benefit cuts. This is also good for you if you are a manager or major stockholder in a company that will be managing the private accounts. It also might be good for you if you own a great deal of stock already (i.e., you're rich!) and this program winds up increasing the share of national wealth invested in the stock market. The plan will also reduce the national savings rate (new private savings will be 100 percent offset by new public dissavings, but the new accounts will crowd out some non-account private savings) and reduce economic growth.

Posted by DeLong at 09:27 PM | Comments (65) | TrackBack

Cheney's Olive-Drab Parka

A correspondent writes:

The Kremlinologist explanation is one that is akin to figuring out who is up/down/sick by how they are standing during the May day parade.

The Kremlinologist explanation is that Cheney is really, really ill because someone (probably his spouse) clearly decided to call a sartorial audible and dress is him in a staffer's jacket and staffer's hat because they were all afraid he could not take the cold. He is Kremlin sick.

Posted by DeLong at 09:17 PM | Comments (28)

20050201 Econ 113 Lecture: The Pre Civil War United States--Growth of an Agrarian Civilization

National Population:

1790: 3.9M people, $1100
1840 17.1M people, $1800
1860 31.4M people, $2000

% urban:
5% 1790,
11% 1840,
20% 1860.

"Urban" means "2500 or more"...

City sizes: 1790: NY 33, PH 29, BO 18; 1840: NY 313, Balt 102, NO 102, PH 93; 1860 NY+Brooklyn 1081, PH 565, Balt 212.

Why this pattern? Transport: Erie Canal, C&O Canal, Mississippi-Missouri-Ohio river system. The coming of the railroad to keep NO from surpassing NY... New York Central RR, Pennsylvania RR...

SF in 1860: 15th among American cities with 57K people...

Conquest: Northwest territories, inland southeast and War of 1812, Louisiana Purchase, Florida, Texas, Mexican Cession, Oregon Territory, Alaska "Seward's Folly", Hawaii. Conquest keeps land abundant, hence keeps wages high.

Relatively fast increase in output per capita in the U.S. before 1860. A puzzle that growth was so fast. The puzzle set out for your inspection... Implication: an enormous increase in effective land and natural resources per worker from 1790 to 1860. Population grows. Accessible natural resources grow significantly faster... A handout on growth accounting, resources, and the pre-Civil War U.S.

Alexander Hamilton: Debt, Banks, and Manufactures.

U.S. Revolutionary War hyperinflation: $241 million continental dollars worth $1 million gold dollars by the end of the war.

Value of Revolutionary War debt tripled as debt assumption was discussed and debated.

Posted by DeLong at 03:50 PM | Comments (14)

20050203 Econ 113 Fall 2005 First Midterm--Tuesday February 15

A few notes on the first midterm...

The midterm will be a mix of identifications (one sentence response) and short answers (one paragraph response). There will be no multiple-choice questions. There will be no extended essays.

The purpose of this midterm is twofold:

The split of material will be roughly 40% lecture, 30% textbook (chapters 1-12), and 30% article readings. (Note, however, that there is considerable overlap.)

(We'll announce which textbook chapters to focus on next week.)

In addition:

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A Key Invention

And the cotton gin also gave American slavery an enormous boost: here was something else--something very profitable given England's enormous demand for fibers for the factories--that you could make the slaves do:

The Cotton Gin - Eli Whitney: Eli Whitney's machine was the first to clean short-staple cotton. His cotton engine consisted of spiked teeth mounted on a boxed revolving cylinder which, when turned by a crank, pulled the cotton fiber through small slotted openings so as to separate the seeds from the lint -- a rotating brush, operated via a belt and pulleys, removed the fibrous lint from the projecting spikes.

The gins later became horse-drawn and water-powered gins and cotton production increased, along with lowered costs. Cotton soon became the number one selling textile.

After the invention of the cotton gin, the yield of raw cotton doubled each decade after 1800. Demand was fueled by other inventions of the Industrial Revolution, such as the machines to spin and weave it and the steamboat to transport it. By mid-century America was growing three-quarters of the world's supply of cotton, most of it shipped to England or New England where it was manufactured into cloth.

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February 02, 2005

The Economist Seems to Be Composed of Unhappy Campers

It writes:

...the gap between Mr Bush's rhetoric and what is actually happening, or is likely to happen, is embarrassingly wide. The day after his “freedom speech” his officials fanned out to explain that he didn't really mean anything specific. In Iraq things are not going according to plan—if indeed the administration actually has a plan. Tax reform has been sidelined to a commission, with action this year, next year, sometime. His attempt to privatise part of the Social Security system is in trouble even before it starts.... Neo-conservatives, who loved the inauguration speech, claim that Mr Bush is undermining it through the people he has appointed....

There is often a gap between promise and achievement in politics—and nearly always one in inauguration speeches, which are supposed to be aspirational. What is unusual about Mr Bush's ambition is the way it is centred on what might be called “discretionary policies”. Social Security privatisation, tax reform, the overthrow of Saddam Hussein and the “war on tyranny” are all causes Mr Bush chose to espouse. He was not forced to take them on by events, and no one would have censured him (much) had he not mounted these hobby-horses.... The discretionary element makes Mr Bush's job much harder.., his “discretionary” wish-list is not popular (most people oppose Social Security privatisation). And it is dividing his own party while uniting Democrats.

Mr Bush has already had trouble with supporters in the House of Representatives who held up a bill on intelligence reform. Now, several Republican congressmen have begun to ask pointedly why the president is in such a hurry to reform Social Security, whose solvency problems are not as bad as Medicare's. And the opposition has rallied around the cause of stopping “privatisation”...

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I found that I couldn't watch the relatives of our war dead. It was too heartbreaking.

We could have held these just-past elections in June of 2003. We would--in the fresh glow of the overthrow of Saddam Hussein--have gotten a more pro-US Iraqi assembly than we have now. But we didn't. We have dinked around for nineteen months. We haven't spent it rebuilding Iraq. We haven't spent it maintaining civil order. We have demonstrated that 150,000 non-Arabic speaking American soldiers cannot suppress an insurgency. And over the past nineteen months we have lost 1300 dead and 7000 permanently maimed.

For what? The first 100 of our war dead died to overthrow a brutal dictator whom some in the Bush administration appear to have genuinely (but falsely) thought to be on the verge of developing nuclear weapons. The next 1300 died... for what, exactly? For what reason did we not announce the moment we entered Baghdad that the first elections would be held in two months?

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Andrew Samwick Shows That He Is a Kinder, Gentler, Better Person

...than me, anyway. He writes (or, rather, wrote last December):

Vox Baby: Greg Ip Earns a Voxy: Brad DeLong often titles his posts "Why Oh Why Can't We Have a Better Press Corps?", and Andrew Sullivan often names his posts after and gives awards in (dis)honor of journalists who make outlandish statements. I would like to introduce my own award--the Voxy--to be bestowed occasionally on journalists in the mainstream media who make exceptionally lucid and thoughtful contributions to the public discussion. Feel free to e-mail me with nominations.

The inaugural award goes to Greg Ip, for his article in [December 14's] Wall Street Journal, Medicare Ills Make Social Security Look Fit. Read the whole thing...

Now I'm depressed. I can't find any signs on Google that Andrew has awarded any other Voxies...

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Festival of the Stock Returns!

Yet another contribution to the ongoing internet festival of the stock returns in response to Paul Krugman's New York Times column of yesterday:

Consider this: from 1871 to 2003, the average one-year-ahead real return on stocks--the Cowles index linked to the S&P Composite--averaged 8.39% per year. The reported accounting earnings yield on stocks--annual reported earnings divided by the start-of-the-year stock price--averaged 7.67% per year. Of the difference, 0.56 percentage points is due to the fact that the price-earnings ratio more than doubled from 12 to 25 between 1871 and 2003, and 0.16 percentage points are due to the fact that reported accounting earnings understate true economic earnings by a little bit. But all in all, current earnings yields have for a century and a third been a good guide to very long-run expected returns.

Today the stock market's earnings yield is 4%.

It's very hard to get a high projected real stock return of 6.5%-7.0% for the future out of that 4% number. You could argue--unconvincingly--that even though accounting earnings have been a good guide to true earnings in the past, they are massively understating earnings today. You could argue--unconvincingly--that American firms' profitability is about to massively boosted via some side-effect of globalization. Or you could argue that the stock market is about to crash by 33% to 50%, and so return earnings yields to the 6%-8% range that have supported the healthy stock returns of the past.

Previous worthwhile contributions include Krugman, Samwick, and Baker channeled by Sawicky.

Posted by DeLong at 02:02 PM | Comments (27)

Why Oh Why Can't We Have a Press Corps? (Was the Post Ever a Newspaper? Edition)

Max Sawicky finds the Washington Post's Michael Fletcher writing:

Bush Speech to Focus on Budget (washingtonpost.com): The budget, to be announced Monday, will propose a virtual freeze in discretionary spending unrelated to defense or homeland security, as part of Bush's plan to cut the deficit in half by 2009 from a 2004 deficit of $521 billion...

The problem is that the fiscal 2004 deficit was $412 billion. $521 billion was a highballed forecast made in January to lay the groundwork later on in the year for (false) claims that the deficit had improved.

A newspaper cares about getting things right.

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February 01, 2005

Oh No! Not Again!

So I surf on over to the Project for Social Security Choice (which hasn't yet gotten the memo that Bushies are supposed to say not "Social Security choice" but "Social Security personalization") and find myself once again confronted by the Stupidest Man Alive:

Donald Luskin: Krugman betrays a fundamental misunderstanding of the economics of Social Security itself. He write, "we don't need to worry about Social Security's future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come." Krugman has forgotten -- or chosen to ignore -- that under current law Social Security benefits are indexed to wage growth. If the economy grows like Krugman is talking about, yes, payroll tax revenues will grow too -- but so will benefits, nearly perfectly proportionately. The sensitivity tables given by the Trustees of the Social Security Trust Funds don't show this -- because they arbitrarily cut off the calculation after 75 years. But the reality is that the early benefits of increased tax revenues are eventually offset by the higher cost of benefits. Gee -- think how good Krugman could make that look if he reduced the window of analysis to just 10 years...

Merciful God in Heaven! Is there no end to the stupidity?

Needless to say, Donald Luskin is wrong--completely wrong. Faster productivity growth improves the finances of the Social Security system. And the 75-year horizon has nothing to do with it: the financial benefits to the trust fund from faster productivity growth are in fact much smaller in the next decade than they are further out.

Once again, it's a mistake that only a real idiot could make.

I've already analyzed it--in my defense of Irwin Stelzer:

Brad DeLong's Semi-Daily Journal: A Weblog: Why Oh Why Can't We Have a Better Press Corps? (Why Haven't National Review's Funders Pulled the Plug? Edition): Irwin Stelzer knows what he is talking about. He is a real economist. He is correct when he says that faster economic growth has a powerful positive effect on the finances of the current Social Security system over any horizon, and that with sufficiently faster growth it might prove capable of meeting all of its obligations.

Consider a person who retires at 62 under the current system and lives to age 84. Her initial benefit payment is tied to the general trend in wages in the economy. Thereafter, under the current system, her benefit payment is indexed by the growth in prices.

Let's think about the resources available to the Social Security system to pay these price-indexed post-retirement benefits. The Social Security system has at its disposal pay-as-you-go taxes which rise with wages. And the difference between the growth of wages and the growth of prices is the growth of productivity.

Now let's consider two alternative worlds--one with zero and one with two percent per year productivity growth--and look at the situation halfway through her retirement, when she reaches 73. And let's suppose that in alternative world 1, the world with zero percent productivity growth, her share of the taxes that Social Security collects cover only 90% of her benefits: with zero percent productivity growth, the Social Security system is running a deficit.

Now let's look at what happens in alternative world 2, the world with two percent per year productivity growth. The economy has been growing 2% faster for 11 years. That means that wages and the Social Security tax base are 22% (actually 24%--compound interest you know) higher than in alternative world 1. Instead of collecting revenues that cover only 90% of her benefits, the Social Security system collects revenues that cover 112% of her benefits: no Social Security deficit. No Social Security problem. Faster productivity growth affects the cost of Social Security (initial benefits go up faster the faster is productivity growth) and it affects the revenues of Social Security (a richer economy pays more in Social Security taxes) but it affects revenues more.

The key is that the current price indexation of benefits after retirement adds a wedge between Social Security's costs and its resources roughly equal to half of life expectancy at retirement times the trend productivity growth rate...

I can't say that the Club for Growth is on the fast track to the laugh track because it arrived there long ago. But things like this remind us of why it is such a laughingstock.

Posted by DeLong at 04:12 PM | Comments (75) | TrackBack

Paul Krugman on Social Security Returns

He writes:

The New York Times &#62; Opinion &#62; Op-Ed Columnist: Many Unhappy Returns: The fight over Social Security is, above all, about what kind of society we want to have. But it's also about numbers. And the numbers the privatizers use just don't add up. Let me inflict some of those numbers on you. Sorry, but this is important.

Schemes for Social Security privatization, like the one described in the 2004 Economic Report of the President, invariably assume that investing in stocks will yield a high annual rate of return, 6.5 or 7 percent after inflation, for at least the next 75 years. Without that assumption, these schemes can't deliver on their promises. Yet a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting.

To explain why, I need to talk about stock returns. The yield on a stock comes from two components: cash that the company pays out in the form of dividends and stock buybacks, and capital gains. Right now, if dividends and buybacks were the whole story, the rate of return on stocks would be only 3 percent. To get a 6.5 percent rate of return, you need capital gains: if dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn't sound too unreasonable if you're thinking only a few years ahead.

But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible. The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years. In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.

The price-earnings ratio - the value of a company's stock, divided by its profits - is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it's about 20. Where would it have to go to yield a 6.5 percent rate of return? I asked Dean Baker, of the Center for Economic and Policy Research, to help me out with that calculation (there are some technical details I won't get into). Here's what we found: by 2050, the price-earnings ratio would have to rise to about 70. By 2060, it would have to be more than 100...

UPDATE: Paul Krugman writes:

...here are the "technical details" for today's column.

1. Rate of return: the CPI consistently rises a bit faster than the GDP deflator, because tech-intensive goods with falling relative prices are a higher share of investment spending than of consumer spending. So a 6.5 percent real rate of return in terms of the CPI is 6.8 percent in terms of the GDP deflator, which is the number I used.

2. The dividend yield falls as the price-earnings ratio rises. The calculation assumes that 60 percent of profits are used for dividends and buybacks. That's a 3 percent dividend yield at a PE of 20, but only 1.5 percent at a PE of 40.

3. I assumed thar profit growth exactly matches GDP growth, and used SSA projections from the 2004 Trustees' Report: annual from 2004 to 2010, then their growth rates from 2010 to 2015 and 2015 to 2080.

This calculation gives one major hostage to the other side: it ignores the fact that a significant fraction of aggregate profits in 2050 will be earned by companies not now in the indexes, so profit growth for existing companies will actually be smaller than GDP growth.

Basically, what I did today was invert Dean Baker's test: instead of trying to find a rate of return consistent with growth, I asked what the rate of return assumed by privatizers implies; the point is that saying "the PE must go to 100 to give the return they say" is, I hope, more comprehensible to readers than trying to explain the Gordon model of returns ....

Posted by DeLong at 07:40 AM | Comments (69)

20050201 Econ 113 Class Opening Question

Alexander Hamilton believed that an America which owed lots of rich merchants lots of money--an America that "assumed" the debts the states had run up during the Revolutionary War and were not likely to pay--would be a stronger and better America. Why did he believe this?

Posted by DeLong at 06:11 AM | Comments (19)

Office Hours This Week

Will be 1-3 on Wednesdays. (I may not be able to make the Friday time.)

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